SENIOR
STRATEGIC
INCOME
FUND,
INC.
Semi-Annual Report August 31, 1994
This report, including the financial information herein,is
transmitted to the shareholders of Senior Strategic Income Fund,
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.
Senior Strategic Income
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
SENIOR STRATEGIC INCOME FUND, INC.
The Benefits and
Risks of Leveraging
Senior Strategic Income Fund, Inc. has the ability to utilize
leverage through borrowings or issuance of short-term debt
securities or shares of Preferred Stock. The concept of leveraging
is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally
will be lower than the return earned by the Fund on its longer-term
portfolio investments. Since the total assets of the Fund (including
the assets obtained from leverage) are invested in higher-yielding
portfolio investments, the Fund's Common Stock shareholders are the
beneficiaries of the incremental yield. Should the differential
between the underlying interest rates narrow, the incremental yield
"pick up" will be reduced. Furthermore, if long-term interest rates
rise, the Common Stock's net asset value will reflect the full
decline in the entire portfolio holdings resulting therefrom since
the assets obtained from leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue the Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the Fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the Fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report to
shareholders for Senior Strategic Income Fund, Inc. In this and
future shareholder reports, we will highlight the Fund's per-
formance, describe recent investment activities, and examine some
of the important market developments that helped shape our
investment strategy for the period under review.
Senior Strategic Income Fund, 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.
Since inception (April 8, 1994) through August 31, 1994, the Fund's
total investment return was +2.89%, based on a change in per share
net asset value from $9.50 to $9.52, and assuming reinvestment of
$0.242 per share income dividends. During the same period, the net
annualized yield of the Fund's Common Stock was 8.37%. At the end of
the August period, the Fund was 26% leveraged, having borrowed $26
million of its $35 million line of credit available at an average
borrowing cost of 5.68%. (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 Fund paid out a fixed dividend of 9.0% in
order to permit the Fund to maintain a more stable level of
distributions. For Federal income tax purposes, the Fund 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 Fund'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 6.28% since inception of the Fund.
<PAGE>
The Environment
The five months ended August 31, 1994 were characterized by an
interest rate environment that proved a mixed blessing for the
Fund'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 Fund, 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.
Portfolio Strategy
In light of the current market environment, our focus over the last
six months has been on weighting the Fund more toward senior secured
floating rate bank loans in order to take advantage of the rise in
short-term interest rates. More than 99% of the Fund'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 Fund's floating rate investments is 47 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 49% of the Fund's investments, with an additional
49% invested in fixed-rate high-yield bonds. Approximately $9
million in availability remains under the leverage facility.
<PAGE>
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 in the current
environment. 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
today's high-yield bond market. At a yield spread over LIBOR without
call protection, bank loans are a 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 Fund. 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.
We continue to focus on buying higher-yielding, improving-quality
cyclical credits. This is reflected in the Fund's large holdings of
names, such as Jefferson Smurfit/Container Corp. of America and
American Standard, Inc., while the healthcare and energy industries
also reflect higher industry concentrations.
At August 31, 1994, cash equivalents totaled 0.4% of net assets. The
Fund's average stated maturity was 7.1 years but has a shorter
average life as a result of the shorter average life of bank loans
which are freely prepayable without call protection. The Fund is
diversified in the floating rate portion in 13 investments across 8
industries, and in the fixed-rate portion in 31 investments across
20 industries.
Both the bond and loan markets continue to be characterized by
improving credit quality as the economy expands improving 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
bond markets. We believe that low default rates will continue
through the remainder of 1994.
<PAGE>
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 Fund 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 Strategic Income
Fund, 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 7, 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--3.3% BB- Ba3 $2,500,000 BE Aerospace Inc., Senior Notes, 9.75%
due 3/01/2003 $ 2,400,000 $ 2,412,500
Apparel--2.7% NR NR 2,000,000 London Fog Industries, Term Loan C, due
6/30/2002, 8.19% to 9/27/1994* 2,000,000 2,000,000
Automotive B B3 1,000,000 Doehler Jarvis, Inc., Senior Notes,
Products--4.8% 11.875% due 6/01/2002 998,125 995,000
B B2 1,500,000 Harvard Industries, Inc., Senior Notes,
12.00% due 7/15/2004 1,500,000 1,511,250
B B2 1,000,000 JPS Automotive Products Corp., Senior
Notes, 11.125% due 6/15/2001 1,000,000 1,000,000
----------- -----------
3,498,125 3,506,250
<PAGE>
Broadcast/ B Caa 2,650,000 Marcus Cable, Senior Debentures, 11.875%
Media--3.4% due 10/01/2005 2,630,125 2,477,750
Building & B B2 1,000,000 NVR, Inc., Senior Notes, 11.00% due
Construction--5.1% 4/15/2003 990,000 920,000
B- B2 2,000,000 Presley Companies, Senior Notes, 12.50%
due 7/01/2001 2,000,000 1,950,000
B+ Ba3 1,000,000 US Home Corp., Senior Notes, 9.75% due
6/15/2003 950,000 902,500
----------- -----------
3,940,000 3,772,500
Building BB- B1 3,500,000 USG Corp., Senior Secured Notes, 10.25%
Products--4.8% due 12/15/2002 3,482,500 3,574,375
Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes,
Products--2.8% 11.50% due 9/01/2003 2,080,000 2,035,000
Chemicals--2.8% BB- B1 2,000,000 Huntsman Chemical, Senior Notes, 11.00%
due 4/15/2004 2,000,000 2,085,000
Computers--2.1% BB- B1 1,500,000 Dell Computer Corp., Senior Notes, 11.00%
due 8/15/2000 1,528,125 1,575,000
Consumer Food Specialty Foods Corp., Term Loan B,
Products--4.0% due 8/31/1999:
NR NR 17,760 9.75% (1) 17,760 17,760
NR NR 1,488,000 7.69% to 10/18/1994* 1,488,000 1,488,000
NR NR 1,448,320 8.19% to 10/18/1994* 1,448,320 1,448,320
----------- -----------
2,954,080 2,954,080
Consumer B+ B2 1,000,000 Drypers Corp., Senior Notes, 12.50% due
Products--1.4% 11/01/2002 1,055,000 1,055,000
<PAGE>
Diversified--25.8% American Standard, Inc., Term Loan A,
due 6/01/2000:
NR NR 4,444,444 8.00% to 12/02/94* 4,444,444 4,444,444
NR NR 494,407 8.0625% to 12/02/94* 494,407 494,407
NR NR 4,420,697 Interco, Term Loan B, due 8/03/2004,
9.50% (1) to 9/01/1994 4,420,697 4,420,697
NR NR 814,815 Intermetro Industries, Term Loan B, due
6/30/2001, 8.32% to 1/03/1995* 814,815 814,815
NR NR 1,185,185 Intermetro Industries, Term Loan C, due
12/31/2001, 8.82% to 1/03/1995* 1,185,185 1,185,185
B B2 1,000,000 JB Poindexter & Co., Inc., Senior Notes,
12.50% due 5/15/2004 995,000 985,000
TDII Company, Term Loan B, due 2/01/2001:
NR NR 17,786 9.50% (1) 17,786 17,786
NR NR 5,836,598 6.937% to 9/02/1994* 5,836,598 5,836,598
NR NR 828,866 7.812% to 11/03/1994* 828,866 828,866
----------- -----------
19,037,798 19,027,798
Electrical Berg Electronics Inc., Term Loan B, due
Instruments--4.1% 6/30/2001:
NR NR 12,500 9.50% (1) 12,500 12,500
NR NR 2,987,500 7.875% to 11/25/1994* 2,987,500 2,987,500
----------- -----------
3,000,000 3,000,000
Energy--8.9% BB- B1 2,500,000 Ferrellgas Partners, L.P., Series B Senior
Notes, 7.875% due 8/01/2001*** 2,487,706 2,475,000
B B2 2,500,000 Gerrity Oil & Gas Corp., Senior Sub Notes,
11.75% due 7/15/2004 2,500,000 2,450,000
B- B3 1,725,000 Presidio Oil Company, Senior Secured Notes,
11.50% due 9/15/2000 1,727,156 1,638,750
----------- -----------
6,714,862 6,563,750
Fuel Petrolane Inc., Term Loan, due 12/31/1999*:
Distribution--3.9% NR NR 37,429 6.812% to 9/28/1994 37,429 37,429
NR NR 146,463 6.937% to 9/30/1994 146,463 146,463
NR NR 2,727,829 6.937% to 10/28/1994 2,727,829 2,727,829
----------- -----------
2,911,721 2,911,721
<PAGE>
Grocery--3.4% B+ NA 2,500,000 Homeland Stores, Inc., Floating Rate
Notes, 7.625% due 2/28/1997*** 2,450,000 2,512,708
Health B B2 2,000,000 Charter Medical Corp., Senior Sub Notes,
Services--7.7% 11.25% due 4/15/2004++ 2,000,000 2,060,000
B B2 1,000,000 Integrated Health Services, 10.75% due
7/15/2004 1,000,000 1,000,000
B+ B1 2,650,000 MEDIQ/PRN Life Support Services Inc.,
Senior Secured Notes, 11.125% due 7/01/1999 2,659,125 2,650,000
----------- -----------
5,659,125 5,710,000
Leisure & Enter- B B3 1,000,000 Plitt Theatres, Inc., Senior Sub Notes,
tainment--1.4% 10.875% due 6/15/2004 1,000,000 995,000
Paper--19.8% NR NR 5,000,000 Container Corp. of America, Term Loan B,
due 4/30/2002, 7.875% to 10/24/1994* 5,000,000 5,000,000
NR NR 5,000,000 Fort Howard, Term Loan B, due 5/01/1997,
7.63% to 10/21/1994* 5,000,000 5,000,000
B B3 2,000,000 Gaylord Container Corp., Senior Notes,
11.50% due 5/15/2001 2,042,500 2,045,000
B Bl 2,500,000 Riverwood International Corp., Senior Sub
Notes, 10.375% due 6/30/2004 2,500,000 2,550,000
----------- -----------
14,542,500 14,595,000
Retail B B2 2,000,000 Color Tile, Inc., Senior Notes, 10.75% due
Specialty--5.9% 12/15/2001 1,970,000 1,880,000
NR NR 2,500,000 Saks & Co., Term Loan B, due 6/30/2000,
7.88% to 11/09/1994* 2,500,000 2,500,000
----------- -----------
4,470,000 4,380,000
Shipping--1.0% B B2 800,000 OMI Corp., Senior Notes, 10.25% due 11/01/2003 754,000 728,000
</TABLE>
<PAGE>
<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>
Steel--5.3% B- B3 $2,000,000 Federal Industries Ltd., 10.25% due 6/15/2000 $ 1,962,500 $ 1,875,000
B B2 2,000,000 Weirton Steel Corp., Senior Notes, 10.875%
due 10/15/1999 2,050,000 2,020,000
----------- -----------
4,012,500 3,895,000
Utilities--2.7% B Ba3 1,000,000 First PV Funding Corp., 10.30% due 1/15/2014 982,500 970,000
B Bl 1,000,000 Texas--New Mexico Power Company, Secured
Debentures, 10.75% due 9/15/2003 1,010,000 1,000,000
----------- -----------
1,992,500 1,970,000
Warehousing & B+ Bl 1,500,000 Americold Corp., First Mortgage Bonds,
Storage--5.9% Series B, 11.50% due 3/01/2005 1,357,500 1,372,500
NR NR 3,000,000 Pierce Leahy Corp., Term Loan B, due
6/30/2001, 7.75% to 9/01/1994* 3,000,000 3,000,000
----------- -----------
4,357,500 4,372,500
Total Investments in Corporate Debt
Obligations--133.0% 98,470,461 98,108,932
<CAPTION>
Short-Term Securities
<S> <C> <S> <C> <C>
Commercial 325,000 General Electric Capital Corp., 4.75% due
Paper**--0.4% 9/01/1994 325,000 325,000
Total Investments in Short-Term Securities--
0.4% 325,000 325,000
Total Investments--133.4% $98,795,461 98,433,932
===========
Liabilities in Excess of Other
Assets--(33.4%) (24,611,202)
-----------
Net Assets--100.0% $73,822,730
===========
<PAGE>
<FN>
(1)Index is based on the prime rate of a US bank, which is subject
to change daily.
++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $2,060,000,
representing 2.79% of net assets.
Value
Issue Acquisition Date Cost (Note 1b)
Charter Medical Corp. 4/22/1994 $2,000,000 $2,060,000
*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 rate
shown is the discount rate paid at the time of purchase by the Fund.
***Floating or Variable Rate Corporate Bonds--The interest rates on
floating or variable rate corporate bonds 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.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$98,795,461) (Note 1b) $ 98,433,932
Cash 10,741
Receivables:
Interest $ 2,004,759
Investment adviser (Note 2) 40,467 2,045,226
------------
Deferred organization expenses (Note 1e) 91,000
Prepaid expenses and other assets 60,100
Total assets 100,640,999
------------
Liabilities: Payables:
Loans (Note 5) 26,000,000
Dividends to shareholders (Note 1f) 259,326
Interest on loans (Note 5) 4,185 26,263,511
------------
Deferred income (Note 1d) 386,921
Accrued expenses and other liabilities 167,837
------------
Total liabilities 26,818,269
------------
Net Assets: Net assets $ 73,822,730
============
Capital: Common stock, par value $.10 per share; 200,000,000 shares
authorized (7,750,527 shares issued and outstanding) $ 775,052
Paid-in capital in excess of par 72,681,054
Undistributed investment income--net 695,344
Undistributed realized capital gains--net 32,809
Unrealized depreciation on investments--net (Note 3) (361,529)
------------
Total Capital--Equivalent to $9.52 net asset value per share
of Common Stock (market price--$8.75) $ 73,822,730
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period
April 8, 1994++ to
August 31, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 2,871,271
(Note 1d): Facility and other fees 57,222
------------
Total income 2,928,493
Expenses: Loan interest expenses (Note 5) $ 273,946
Investment advisory fees (Note 2) 170,447
Facility fee amortization (Note 5) 24,595
Accounting services (Note 2) 24,494
Professional fees 18,373
Directors' fees and expenses 12,241
Amortization of organization expenses (Note 1e) 7,468
Transfer agent fees (Note 2) 5,469
Custodian fees 5,088
Printing and shareholder reports 4,223
Pricing services 472
Registration fees (Note 1e) 112
Other 19,043
------------
Total expenses before reimbursement 565,971
------------
Reimbursement of expenses (Note 2) (210,914)
------------
Total expenses after reimbursement 355,057
------------
Investment income--net 2,573,436
------------
Realized & Realized gain on investments--net 32,809
Unrealized Gain Unrealized depreciation on investments--net (361,529)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 2,244,716
(Notes 1d & 3): ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
April 8, 1994++ to
Increase (Decrease) in Net Assets: August 31, 1994
<S> <S> <C>
Operations: Investment income--net $ 2,573,436
Realized gain on investments--net 32,809
Unrealized depreciation on investments--net (361,529)
------------
Net increase in net assets resulting from operations 2,244,716
------------
Dividends to Investment income--net (1,878,092)
Shareholders: ------------
Net decrease in net assets resulting from dividends to shareholders (1,878,092)
------------
Capital Share Value of shares issued to Common Stock shareholders in reinvestment of dividends 73,530,000
Transactions Offering costs resulting from the issuance of Common Stock (173,901)
(Note 4): ------------
Net increase in net assets resulting from capital share transactions 73,356,099
------------
Net Assets: Total increase in net assets 73,722,723
Beginning of period 100,007
------------
End of period* $ 73,822,730
============
*Undistributed investment income--net $ 695,344
============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
April 8, 1994++ to
August 31, 1994
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 2,244,716
Operating Activities: Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables (2,045,226)
Increase in other assets (151,100)
Increase in other liabilities 558,943
Realized and unrealized loss on investments--net 328,720
Amortization of discount (191,588)
------------
Net cash provided by operating activities 744,465
------------
Cash Used for Proceeds from sales of long-term investments 2,109,900
Investing Activities: Purchases of long-term investments (100,545,606)
Purchases of short-term investments--net (135,358)
------------
Net cash used for investing activities (98,571,064)
------------
Cash Provided by Cash receipts on capital shares sold 73,356,099
Financing Activities: Dividends paid to shareholders (1,618,766)
Short-term borrowings 26,000,000
------------
Net cash provided by financing activities 97,737,333
------------
Cash: Net decrease in cash (89,266)
Cash at beginning of period 100,007
------------
Cash at end of period $ 10,741
============
Cash Flow Cash paid for interest $ 269,761
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
April 8, 1994++ to
Increase (Decrease) in Net Asset Value: August 31, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 9.50
Operating ------------
Performance: Investment income--net .33
Realized and unrealized gain on investments--net (.05)
------------
Total from investment operations .28
------------
Less dividends:
Investment income--net (.24)
------------
Capital charge resulting from the issuance of Common Stock (.02)
------------
Net asset value, end of period $ 9.52
============
Market price per share, end of period $ 8.75
============
Total Investment Based on net asset value per share 2.89%+++
Return:** ============
Based on market price per share (10.16%)+++
============
Ratios to Average Expenses, net of reimbursement 1.16%*
Net Assets: ============
Expenses 1.85%*
============
Investment income--net 8.40%*
============
Supplemental Net assets, end of period (in thousands) $ 73,823
Data: ============
Portfolio turnover 3.07%
============
<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 Strategic Income Fund, 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 April 8, 1994, 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 SSN.
(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 placed and publicly offered corporate bonds and
notes.
(b) Valuation of investments--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 for which there were no sales during the day.
Other 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. Obligations with remaining maturities
of sixty days or less are valued at amortized cost unless this
method no longer produces fair valuations. 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.
<PAGE>
(c) lncome 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 recog-
nized as 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
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. ("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 perform the investment advisory
function.
For such services, the Fund pays a monthly fee at an annual rate of
0.50% of the Fund's average weekly net assets plus the proceeds of
any outstanding borrowings used for leverage. For the period April
8, 1994 to August 31, 1994, FAM earned fees of $170,447, all of
which was voluntarily waived. FAM also reimbursed the Fund $40,467
of additional expenses.
<PAGE>
During the period June 13, 1994 to August 31, 1994, Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith, Inc. ("MLPF&S"), provided security price quotations
to compute the net asset value of the Fund.
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, FAMI, PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period April 8, 1994 to August 31, 1994 were $100,545,606
and $2,109,900, respectively.
Net realized and unrealized gains (losses) as of August 31, 1994
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ 33,505 $ (361,529)
Short-term investments (696) --
---------- -----------
Total $ 32,809 $ (361,529)
========== ===========
As of August 31, 1994, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $361,529, of
which $437,708 related to appreciated securities and $799,237
related to depreciated securities. The aggregate cost of investments
at August 31, 1994 for Federal income tax purposes was $98,795,461.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value $.10, all of which are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify
and reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.
For the period of April 8, 1994 to August 31, 1994, 7,740,000 shares
were sold. At August 31, 1994, total paid-in capital amounted to
$73,456,106.
<PAGE>
5. Short-Term Borrowings:
On May 25, 1994, the Fund entered into a one-year revolving credit
facility in the amount of $35,000,000 bearing interest at the
Federal Funds rate plus 1%--3% on the outstanding balance. From May
25, 1994 to August 31, 1994, the maximum amount borrowed was
$31,000,000, the average amount borrowed was approximately
$12,737,374, and the daily weighted average interest rate was 5.44%.
For the period April 8, 1994 to August 31, 1994, facility and
commitment fees aggregated approximately $23,619.
PER SHARE INFORMATION
<TABLE>
Per Share
Selected
Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends Net
Investment Gains Gains Investments
For the Period Income (Losses) (Losses) Income
<S> <C> <C> <C> <C>
April 8, 1994++ to May 31, 1994 $.09 -- -- $.09
June 1, 1994 to August 31, 1994 .24 -- $(.05) .15
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C>
April 8, 1994++ to May 31, 1994 -- -- $9.875 $9.50 819
June 1, 1994 to August 31, 1994 $9.65 $9.44 9.50 8.75 210
<FN>
++Commencement of Operations.
*Calculations are based upon shares of Common Stock outstanding at
the end of each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
<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
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, New York 10286
NYSE Symbol
SSN
