SENIOR STRATEGIC
INCOME FUND, INC.
FUND LOGO
Annual Report
February 28, 1995
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>
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
The Bank of New York
90 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
DEAR SHAREHOLDER
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 February 28, 1995, the total
investment return on the Fund's Common Stock was +5.73%, based on a
change in per share net asset value from $9.50 to $9.27, and
assuming reinvestment of $0.727 per share income dividends. During
the same period, the net annualized yield of the Fund's Common Stock
was 9.62%. At the end of the February period, the Fund was 22.6%
leveraged, having borrowed $21 million of its $35 million line of
credit available at an average borrowing cost of 6.17%. (For a
complete explanation of the benefits and risks of leveraging, see
page 1 of this report to shareholders.)
<PAGE>
As of February 28, 1995 the Fund paid out a regular monthly dividend
at an annualized rate of 9.40% in order to permit the Fund to
maintain a more stable level of distributions. For Federal income
tax purposes, the Fund 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 Fund's shareholders annually. The regular monthly
dividend has increased from an annualized rate of 8.00% since
inception of the Fund.
The Environment
The year ended February 28, 1995 was characterized by an interest
rate environment that proved to be a mixed blessing for the Fund's
investments. The steady rise in interest rates throughout 1994 had a
positive effect on the floating rate portion of the Fund, while
eroding the values in the fixed-rate high-yield bond portion of the
Fund. The high-yield bond market was particularly impacted during
the three months ended December 31 as outflows from high-yield
mutual funds exacerbated the price declines already occurring in
sympathy with the fall in intermediate-term and long-term US
Treasury securities.
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 gross domestic product
growth of 4%. At the same time, inflation remained at low levels.
However, the Federal Reserve Board continues to be pre-emptive 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,
our focus continues to be 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. As we begin to 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 when investing the Fund's assets.
<PAGE>
Today, more than 99% of the Fund'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 Fund's floating rate
investments is currently 59 days, the potential impact of a LIBOR
increase on the yield of the Fund'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 50% of the market value of the Fund's investments, with an
additional 49% invested in fixed-rate high-yield bonds.
Approximately $14.0 million remains available under the leverage
facility.
The leveraged loan market continued to be strong, particularly
during the last half of 1994. 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 we have
seen in over 18 months. The volume of leveraged loans (those at a
spread of at least 1.50% over LIBOR) increased 187% last year, to
$81.0 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 the coupons and call protection
demanded in the high-yield bond market.
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 have begun 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 corporates and
governments. The market rallied and remained firm through the end of
the Fund's fiscal year as mutual funds continued to benefit from
solid inflows and the new-issue calendar remained light. Demand for
BB-rated credits driven by cross-over investment-grade buyers and
quality conscious mutual funds resulted in BB spreads to Treasuries
narrowing by as much as 50 basis points. Most industry sectors fared
well during this rally, with healthcare and paper products showing
particular strength. Carrying over a common theme from 1994,
investors treated issuers reporting disappointing earnings harshly.
<PAGE>
Overall fundamentals for both the bank loan and high-yield bond
market remain positive as favorable quarterly earnings reports have
occurred over the last nine months. Defaults, although expected to
increase this year, continue to be at historically low levels. Our
focus will continue to be to invest in those companies that we
believe are undervalued by the market or are generating improved
earnings trends. The industry focus has been on those companies that
have leading market shares, strong management and improving cash
flows. The best performing industry sectors included paper, building
materials, 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., S.D.
Warren Co., and Harvard Industries, Inc. 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 their respective industries.
We reduced the Fund's holdings in each of these sectors during the
last six months.
At February 28, 1995, cash equivalents totaled 0.18% of assets. The
Fund's average stated maturity was 6.5 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 Fund
is diversified in the floating rate portion with 14 borrowers across
10 industries and in the fixed-rate portion with 30 borrowers across
19 industries. The largest industry concentrations are in paper
(27.9% of net assets), diversified manufacturing (13.3%), energy
(8.4%), health services (7.7%) and retail specialty (5.7%).
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 market are likely to 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 Fund
is well-positioned to provide shareholders with the benefit of
another increase in rates or a stable rate environment.
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.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
April 12, 1995
PER SHARE INFORMATION (unaudited)
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Capital
For the Period Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
April 8, 1994++ to May 31, 1994 $.09 --+++ --+++ $.09 --
June 1, 1994 to August 31, 1994 .24 $.01 $(.05) .23 --
September 1, 1994 to November 30, 1994 .24 .01 (.25) .23 --
December 1, 1994 to February 28, 1995 .24 (.11) .10 .16 $.02
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
April 8, 1994++ to May 31, 1994 $9.57 $9.47 $9.875 $9.50 819
June 1, 1994 to August 31, 1994 9.65 9.44 9.50 8.75 210
September 1, 1994 to November 30, 1994 9.55 9.30 9.00 8.00 1,142
December 1, 1994 to February 28, 1995 9.28 9.14 9.25 8.375 905
<FN>
*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.
++Commencement of Operations.
+++The amount is less than $0.01 per share.
</TABLE>
<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--2.7% BB- Ba3 $2,000,000 BE Aerospace Inc., Senior Notes, 9.75% due
3/01/2003 $ 1,934,331 $ 1,940,000
Automotive B B3 1,000,000 Doehler Jarvis, Inc., Senior Notes, 11.875%
Products-- due 6/01/2002 998,223 1,025,000
5.0% B B2 1,500,000 Harvard Industries, Inc., Senior Notes, 12.00%
due 7/15/2004 1,500,000 1,541,250
B B2 1,000,000 JPS Automotive Products Corp., Senior Notes,
11.125% due 6/15/2001 1,000,000 987,500
----------- -----------
3,498,223 3,553,750
Broadcast/ B Caa 2,650,000 Marcus Cable, Senior Debentures, 11.875% due
Media-- 10/01/2005 2,630,813 2,610,250
3.6%
Building & B B2 1,000,000 NVR, Inc., Senior Notes, 11.00% due 4/15/2003 990,602 895,000
Construction-- B- B2 2,000,000 Presley Companies, Senior Notes, 12.50% due
4.9% 7/01/2001 2,000,000 1,720,000
B+ Ba3 1,000,000 US Homes Corp., Senior Notes, 9.75% due
6/15/2003 952,639 910,000
----------- -----------
3,943,241 3,525,000
Building BB- Ba3 1,000,000 Schuller International Group, Senior Notes,
Products-- 10.875% due 12/15/2004 1,000,000 1,056,250
1.5%
Chemicals--5.0% NR+++ NR+++ 1,500,000 Freedom Chemical, Term Loan B, due 6/30/2002,
9.625% to 4/27/1995* 1,500,000 1,500,000
BB- B1 2,000,000 Huntsman Chemical, Senior Notes, 11.00% due
4/l5/2004 2,000,000 2,130,000
----------- -----------
3,500,000 3,630,000
<PAGE>
Computers--2.2% BB- B1 1,500,000 Dell Computer Corp., Senior Notes, 11.00%
due 8/15/2000 1,528,125 1,593,750
Consumer B+ B2 1,000,000 Drypers Corp., Senior Notes, 12.50% due
Products-- 11/01/2002 1,055,000 1,005,000
1.4%
Diversified NR+++ NR+++ 785,976 Intermetro Industries, Term Loan B, due
Manufacturing 6/30/2001, 10.00% to 7/03/1995* 785,976 785,976
- --13.3% NR+++ NR+++ 1,143,578 Intermetro Industries, Term Loan C, due
6/30/2002, 10.50% to 7/03/1995* 1,143,578 1,143,578
B B2 1,000,000 JB Poindexter & Co.,Inc., Senior Notes,
12.50% due 5/15/2004 995,177 950,000
Thermadyne Company, Term Loan B, due
2/01/2001:*
NR+++ NR+++ 1,036 10.75% to 3/31/1995 1,036 1,036
NR+++ NR+++ 5,836,598 8.3125% to 4/03/1995 5,836,598 5,836,598
NR+++ NR+++ 828,866 9.3125% to 5/03/1995 828,866 828,866
----------- -----------
9,591,231 9,546,054
Electrical Berg Electronics Inc., Term Loan B, due
Instruments-- 6/30/2001:*
4.2% NR+++ NR+++ 12,500 9.07% to 3/30/1995 12,500 12,500
NR+++ NR+++ 2,975,000 9.375% to 5/25/1995 2,975,000 2,975,000
----------- -----------
2,987,500 2,987,500
</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>
Energy--8.4% BB- B1 $2,500,000 Ferrellgas Partners, L.P., Series B,
Floating Rate Notes, 9.4375% due 8/01/2001*** $ 2,488,332 $ 2,487,500
B B2 2,500,000 Gerrity Oil & Gas Corp., Senior Sub Notes,
11.75% due 7/15/2004 2,500,000 2,100,000
B- B3 1,725,000 Presidio Oil Company, Senior Secured Notes,
11.50% due 9/15/2000 1,727,156 1,431,750
----------- -----------
6,715,488 6,019,250
<PAGE>
Food & Specialty Foods Corp., Term Loan B, due
Beverage-- 8/31/1999:*
4.0% NR+++ NR+++ 1,367,211 9.13% to 4/18/1995 1,367,211 1,367,211
NR+++ NR+++ 1,514,818 10.00% to 7/18/1995 1,514,818 1,514,818
----------- -----------
2,882,029 2,882,029
Forest BB Ba3 1,000,000 Rainy River Forest Products, Senior Notes,
Products-- 10.75% due 10/15/2001 997,661 1,022,500
1.4%
Fuel Petrolane Inc., Term Loan, due 3/20/1996:*
Distribution NR+++ NR+++ 2,727,829 8.312% to 3/30/1995 2,727,829 2,727,829
- --4.0% NR+++ NR+++ 104,298 8.312% to 4/03/1995 104,298 104,298
----------- -----------
2,832,127 2,832,127
Grocery--3.5% B+ NR+++ 2,500,000 Homeland Stores, Inc., Floating Rate
Notes, 9.0625% due 2/28/1997*** 2,462,969 2,512,708
Health B B2 2,000,000 Charter Medical Corp., Senior Sub Notes,
Services-- 11.25% due 4/15/2004 2,000,000 2,080,000
7.7% B- B2 1,000,000 Integrated Health Services, 10.75% due
7/15/2004 1,000,000 1,030,000
B+ B1 2,650,000 MEDIQ/PRN Life Support Services Inc.,
Senior Secured Notes, 11.125% due 7/01/1999 2,659,125 2,438,000
----------- -----------
5,659,125 5,548,000
Leisure & Enter- B B3 1,000,000 Plitt Theatres, Inc., Senior Sub Notes,
tainment--1.3% 10.875% due 6/15/2004 1,000,000 950,000
Metals--5.3% B1 B3 2,000,000 Federal Industries Ltd., 10.25% due
6/15/2000 1,966,349 1,880,000
B B2 2,000,000 Weirton Steel Corp., Senior Notes, 10.875%
due 10/15/1999 2,050,000 1,962,500
----------- -----------
4,016,349 3,842,500
<PAGE>
Paper--27.9% NR+++ NR+++ 5,000,000 Fort Howard Corp., Term Loan B, due 5/01/1997,
10.75%* 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 2,090,000
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+++ 3,000,000 S.D. Warren Co., Term Loan B, due 12/19/2002,
9.50% to 8/23/1995* 3,000,000 3,000,000
Stone Container Corp., Term Loan B, due
4/01/2000:*
NR+++ NR+++ 2,500,000 9.25% to 3/17/1995 2,500,000 2,500,000
NR+++ NR+++ 2,500,000 9.3125% to 4/14/1995 2,500,000 2,500,000
----------- -----------
20,042,500 20,090,000
Publishing--4.2% NR+++ NR+++ 1,544,118 Ziff Davis Holding Corp., Term Loan B, due
12/31/2001, 9.38% to 3/28/1995* 1,544,118 1,544,118
NR+++ NR+++ 1,455,882 Ziff Davis Holding Corp., Term Loan C, due
12/31/2002, 9.88% to 3/28/1995* 1,455,882 1,455,882
----------- -----------
3,000,000 3,000,000
Retail B B2 2,000,000 Color Tile, Inc., Senior Notes, 10.75% due
Specialty-- 12/15/2001 1,972,327 1,620,000
5.7% NR+++ NR+++ 2,487,778 Saks & Co., Term Loan B, due 6/30/2000, 9.13%
to 5/09/1995* 2,487,778 2,487,778
----------- -----------
4,460,105 4,107,778
Security NR+++ NR+++ 948,142 Alert Centre Inc., Term Loan, due 8/1/2001,
Systems--1.3% 8.375% to 8/05/1995* 948,142 948,142
Shipping--2.3% BB- Ba2 1,000,000 Eleston Holdings, Senior Notes, 9.25% due
11/15/2003 917,692 937,500
B B2 800,000 OMI Corp., Senior Notes, 10.25% due 11/01/2003 756,511 688,000
----------- -----------
1,674,203 1,625,500
Utilities--2.8% B Ba3 1,000,000 First PV Funding Corp., 10.30% due 1/15/2014 982,752 995,000
B B1 1,000,000 Texas--New Mexico Power Company, Secured
Debentures, 10.75% due 9/15/2003 1,010,000 1,014,160
----------- -----------
1,992,752 2,009,160
<PAGE>
Warehousing & Pierce Leahy Corp., Term Loan B, due
Storage--4.2% 6/30/2001:*
NR+++ NR+++ 1,909,091 9.562% to 4/28/1995 1,909,091 1,909,091
NR+++ NR+++ 1,090,909 9.937% to 7/31/1995 1,090,909 1,090,909
----------- -----------
3,000,000 3,000,000
Total Investments in Corporate Debt
Obligations--127.8% 93,351,914 91,837,248
<CAPTION>
Short-Term Securities
<S> <C> <S> <C> <C>
Commercial 165,000 General Electric Capital Corp., 6.00% due
Paper**--0.2% 3/01/1995 165,000 165,000
Total Investments in Short-Term Securities--0.2% 165,000 165,000
Total Investments--128.0% $93,516,914 92,002,248
===========
Liabilities in Excess of Other Assets--(28.0%) (20,150,682)
-----------
Net Assets--100.0% $71,851,566
===========
<FN>
*Floating or Variable Rate Corporate Loans--The interest rates on float-
ing 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 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
February 28, 1995.
+++Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
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--$93,516,914) (Note 1b) $ 92,002,248
Cash 47,064
Interest receivable 1,729,790
Deferred facility expense (Note 5) 6,247
Deferred organization expense (Note 1f) 83,551
Prepaid expenses and other assets 1,016
------------
Total assets 93,869,916
------------
Liabilities: Payables:
Loans (Note 5) 21,000,000
Dividends to shareholders (Note 1g) 224,300
Interest on loans (Note 5) 113,900
Investment adviser (Note 2) 36,720
Commitment fees 2,383 21,377,303
------------
Deferred income (Note 1e) 557,497
Accrued expenses and other liabilities 83,550
------------
Total liabilities 22,018,350
------------
Net Assets: Net assets $ 71,851,566
============
Capital: Common stock, par value $.10 per share; 200,000,000 shares
authorized (7,750,527 shares issued and outstanding) $ 775,053
Paid-in capital in excess of par 72,670,947
Undistributed investment income--net 763,852
Accumulated realized capital losses on investments--net (843,620)
Unrealized depreciation on investments--net (Note 3) (1,514,666)
------------
Total Capital--Equivalent to $9.27 net asset value per share of
Common Stock (market price--$9.125) $ 71,851,566
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period April 8, 1994++ to February 28, 1995
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 7,843,533
(Note 1e): Facility and other fees 21,499
------------
Total income 7,865,032
Expenses: Loan interest expenses (Note 5) $ 1,122,572
Investment advisory fees (Note 2) 415,168
Accounting services (Note 2) 56,391
Facility fee amortization (Note 5) 53,753
Professional fees 42,664
Directors' fees and expenses 26,694
Amortization of organization expenses (Note 1f) 18,238
Borrowing costs (Note 5) 17,928
Transfer agent fees (Note 2) 13,129
Printing and shareholder reports 12,337
Custodian fees 11,977
Pricing services 1,255
Other 21,033
------------
Total expenses before reimbursement 1,813,139
Reimbursement of expenses (Note 2) (210,913)
------------
Total expenses after reimbursement 1,602,226
------------
Investment income--net 6,262,806
------------
Realized Realized loss on investments--net (706,692)
& Unrealized Unrealized depreciation on investments--net (1,514,666)
Gain (Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 4,041,448
(Notes 1c, ============
1e & 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: February 28, 1995
<S> <S> <C>
Operations: Investment income--net $ 6,262,806
Realized loss on investments--net (706,692)
Unrealized depreciation on investments--net (1,514,666)
------------
Net increase in net assets resulting from operations 4,041,448
------------
Dividends & Investment income--net (5,498,954)
Distributions to Realized gain on investments--net (136,928)
Shareholders ------------
(Note 1g): Net decrease in net assets resulting from dividends and distributions to
shareholders (5,635,882)
------------
Capital Share Net proceeds from issuance of Common Stock 73,530,000
Transactions Offering costs resulting from the issuance of Common Stock (184,007)
(Note 4): ------------
Net increase in net assets resulting from capital share transactions 73,345,993
Net Assets: Total increase in net assets 71,751,559
Beginning of period 100,007
------------
End of period* $ 71,851,566
============
<FN>
*Undistributed investment income--net $ 763,852
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period April 8, 1994++ to February 28, 1995
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 4,041,448
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Increase in receivables (1,729,790)
Increase in other assets (90,814)
Increase in other liabilities 794,050
Realized and unrealized loss on investments--net 2,221,358
Amortization of premium and discount--net 85,944
------------
Net cash provided by operating activities 5,322,196
------------
Cash Used for Proceeds from sales of long-term investments 27,559,187
Investing Purchases of long-term investments (121,911,967)
Activities: Purchases of short-term investments (353,821,336)
Proceeds from sales and maturities of short-term investments 353,864,566
------------
Net cash used for investing activities (94,309,550)
------------
Cash Provided by Cash receipts on capital shares sold 73,345,993
Financing Dividends paid to shareholders (5,411,582)
Activities: Short-term borrowings--net 21,000,000
------------
Net cash provided by financing activities 88,934,411
------------
Cash: Net decrease in cash (52,943)
Cash at beginning of period 100,007
------------
Cash at end of period $ 47,064
============
Cash Flow Cash paid for interest $ 1,008,672
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: February 28, 1995
<S> <S> <C>
Per Share Net asset value, beginning of period $ 9.50
Operating ------------
Performance: Investment income--net .81
Realized and unrealized loss on investments--net (.29)
------------
Total from investment operations .52
------------
Less dividends and distributions from:
Investment income--net (.71)
Realized gain on investments--net (.02)
------------
Total dividends and distributions (.73)
------------
Capital charge resulting from the issuance of Common Stock (.02)
------------
Net asset value, end of period $ 9.27
============
Market price per share, end of period $ 9.125
============
Total Investment Based on net asset value per share 5.73%+++
Return:** ============
Based on market price per share (1.13%)+++
============
Ratios to Expenses, net of reimbursement and excluding interest expense .65%*
Average ============
Net Assets: Expenses, net of reimbursement 2.15%*
============
Expenses 2.44%*
============
Investment income--net 8.42%*
============
Supplemental Net assets, end of period (in thousands) $ 71,852
Data: ============
Portfolio turnover 33.38%
============
<PAGE>
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns based on market value, 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.
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 and publicly offered corporate bonds and notes.
(b) Valuation of investments--Portfolio securities are valued on the
basis of prices furnished by one or more pricing services, which
determine prices for normal, institutional-size trading units. In
certain circumstances, portfolio securities are valued at the last
sale price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. 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. Since corporate loans are purchased and sold primarily
at par value, the Fund values the loans at par, unless Fund Asset
Management, L.P. ("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, which approximates
market, 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 equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell stock
index futures contracts and options on such futures contracts. 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.
* Options--The Fund can 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 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.
* 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).
<PAGE>
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Facility fees are accreted
to income over the term of the related loan.
(f) 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 FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee at an annual rate of
0.50% of the Fund's average weekly net assets plus the proceeds of
any outstanding borrowings used for leverage. For the year ended
February 28, 1995, FAM earned fees of $415,168, of which $210,913
was voluntarily waived.
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, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.,
and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period April 8, 1994 to February 28, 1995 were $121,354,470
and $27,559,187, respectively.
Net realized and unrealized losses as of February 28, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (705,996) $(1,514,666)
Short-term investments (696) --
---------- -----------
Total $ (706,692) $(1,514,666)
========== ===========
As of February 28, 1995, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $1,514,666, of
which $593,866 related to appreciated securities and $2,108,532
related to depreciated securities. The aggregate cost of investments
at February 28, 1995 for Federal income tax purposes was
$93,516,914.
4. Capital Share Transaction:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value $.10, all of which are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify
and reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.
For the period April 8, 1994 to February 28, 1995, shares issued and
outstanding was 7,750,527. At February 28, 1995, total paid-in
capital amounted to $73,446,000.
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 with a syndicate of banks led
by The Bank of New York bearing interest on the outstanding balance
at Federal Funds rate plus 1.125%, and/or at an alternate base rate
plus 0.125% and/or at LIBOR plus 1.125%. The maximum amount borrowed
was $32,000,000, the average amount borrowed was approximately
$15,000,000, and the daily weighted average interest rate was
6.165%. For the period April 8, 1994 to February 28, 1995, facility
and commitment fees aggregated approximately $72,000.
6. Subsequent Event:
On March 13, 1995, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $0.072110 per share,
payable on March 31, 1995 to shareholders of record as of March 24,
1995.
<PAGE>
<AUDIT REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Senior Strategic Income Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Senior
Strategic Income Fund, Inc. as of February 28, 1995, the related
statements of operations, changes in net assets, and cash flows for
the period April 8, 1994 (commencement of operations) to February
28, 1995 and the financial highlights for the period April 8, 1994
(commencement of operations) to February 28, 1995. These financial
statements and the financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at February
28, 1995 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, such financial statements and the financial
highlights present fairly, in all material respects, the financial
position of Senior Strategic Income Fund, Inc. as of February 28,
1995, the results of its operations, the changes in its net assets,
its cash flows, and the financial highlights for the period April 8,
1994 to February 28, 1995 in conformity with generally accepted
accounting principles.
<PAGE>
As discussed in Notes 1a and 1b, the financial statements include
corporate loans valued at $46,233,630 (64% of total net assets and
50% of total investments of the Fund), whose values are fair values
as determined by or under the direction of the Board of Directors in
the absence of actual market values. Determination of fair value
involves subjective judgement, as the actual market value of
particular corporate loans can be established only by negotiation
between the parties in a sales transaction. We have reviewed the
procedures established by the Board of Directors and used by the
Fund's investment adviser in determining the fair values of such
corporate loans and have inspected underlying documentation, and
under the circumstances, we believe that the procedures are
reasonable and the documentation appropriate.
Deloitte & Touche LLP
Princeton, New Jersey
April 14, 1995
</AUDIT-REPORT>
</TABLE>
