SENIOR STRATEGIC
INCOME FUND, INC.
FUND LOGO
Annual Report
February 29, 1996
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, NY 10286
<PAGE>
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
SSN
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. Statements and other information herein are as dated
and are subject to change.
Senior Strategic Income
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
SENIOR STRATEGIC INCOME FUND, INC.
The Benefits and
Risks of
Leveraging
<PAGE>
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.
DEAR SHAREHOLDER
For the six months ended February 29, 1996, Senior Strategic Income
Fund, Inc.'s total investment return was +6.56%, based on a change
in per share net asset value from $9.26 to $9.35, and assuming
reinvestment of $0.498 per share income dividends. During the same
period, the net annualized yield of the Fund's Common Stock was
10.58%. Since inception (April 8, 1994) through February 29, 1996,
the total investment return on the Fund's Common Stock was +18.55%,
based on a change in per share net asset value from $9.50 to $9.35,
and assuming reinvestment of $1.691 per share income dividends. At
the end of the February period, the Fund was 23.8% leveraged, having
borrowed $23 million of its $35 million line of credit available at
an average borrowing cost of 6.72%. (For further explanation of the
benefits and risks of leveraging, see page 1 of this report to
shareholders.)
<PAGE>
As of February 29, 1996, the Fund paid out a regular monthly
dividend at an annualized rate of 9.40% so that the Fund could
maintain a more stable level of distributions. Monthly dividends are
limited to the lesser of the targeted monthly dividend rate in
effect and the amount of previously undistributed net investment
income held by the Fund. 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 targeted monthly dividend rate has
increased from an annualized rate of 8.0% since the Fund's
inception.
The Environment
On January 31, 1996, the Federal Reserve Board lowered short-term
interest rates for the third time since mid-1995, decreasing the
discount rate it charges on loans to its member banks by 25 basis
points (0.25%) to 5.25% and by pushing the Federal Funds target rate
to 5.25% from 5.50%. The economy ended 1995 with moderate growth
while inflation remained at low levels. However, the Federal Reserve
Board continues to be preemptive in its efforts to head off any
sustained economic slowdown.
Portfolio Strategy
At February 29, 1996, more than 99% of the Fund's investments in
corporate loans was accruing interest at a yield spread above the
London Interbank Offered Rate (LIBOR). LIBOR is the rate that major
international banks charge each other for US dollar-denominated
deposits outside the United States. LIBOR has historically tracked
very closely with other US short-term interest rates, particularly
the Federal Funds rate. Since the first easing of monetary policy by
the Federal Reserve Board in July 1995, the three-month LIBOR has
fallen from 5.8438% to 5.25%, a decrease of approximately 59 basis
points. Since the average reset on the Fund's floating rate
investments is 30 days, the yield on the bank loan portion of the
Fund should move up or down within a one-month--two-month period
after any interest rate increase or decrease. At the end of the
February period, floating rate securities made up 46% of the market
value of the Fund's investments, with an additional 54% invested in
fixed-rate high-yield bonds. Approximately $17 million remains
available under the leverage facility.
The leveraged loan market continued to be strong, particularly
during the last half of 1995. Demand for bank loans was robust, as
banks and other institutional investors competed for the fees and
high spreads available in this sector.
<PAGE>
Both the high-yield loan and bond markets experienced strong rallies
after the first of the year. The high-yield market continued to
benefit from healthy inflows, interest rate declines and a rallying
equity market. Very strong market technical factors helped to
absorb new issues and still drive up prices in the secondary
market. The market has offered increasingly attractive
spreads compared to the Treasury market and other fixed-income
assets, resulting in substantial cross-over interest that has
exacerbated an already acute supply/demand imbalance.
Since January 1, 1996, the spread between a ten-year A-rated
corporate bond and the Merrill Lynch High Yield Master Index has
widened by over 110 basis points. With such a strong secondary
market, new issues are not only priced aggressively, but the size of
issues is often increased. New issues during the latter half of the
February period were typically priced at spreads tighter than the
secondary market. The spread between the Merrill Lynch High Yield
Master Index and ten-year Treasury securities narrowed from 400
basis points in the prior period to as little as 362 basis points by
the end of January, as price gains were seen in all industry, groups
and particularly the lower-rated tiers. Growth sectors, such as the
communications industry, continued to benefit from the positive
reaction to the passage of the telecommunications reform bill.
The high-yield bank loan market remained extremely strong throughout
the six-month period ended February 29, 1996, with demand continuing
to outstrip supply. The fourth quarter of 1995 capped a year of
explosive growth for the secondary loan market. The $9.7 billion in
volume brought the year's total to $33.8 billion, an increase of
more than 60% from 1994. Several factors contributed to this growth
including a 25% rise in leveraged loan issuance to $101 billion. At
the same time, demand from institutional investors continues to
grow. Banks are also increasing their trading activity, using the
secondary market to adjust exposure to sectors and specific credits.
However, contrary to expectations, there was not much overhang in
early 1996 on the origination side, although new-issue demand
remains strong, as banks continue to compete for the fees and high
spreads on agenting and investing in leveraged credits. Loan funds
continued to see substantial inflows, enhancing already solid demand
for funded term loans.
<PAGE>
The credit fundamentals for both the high-yield market and the loan
market remain generally favorable. However, with a 2.1% gross
national product growth rate in 1995, down from 3.5% in 1994, and an
anemic 0.9% rate for the fourth quarter, we remain cautious in both
markets. If a slowing economy pushes the default rate above 5%,
the present market trading levels may not be sustained, as
investors demand higher yield premiums to compensate them for
the risk of default. In general, earnings continue to improve
and issues continue to focus on improving balance sheets. In some
cyclical industries, such as paper, prices appear to have peaked,
at least for the near term. Most of these borrowers used the cash
flow generated by record prices to upgrade plants and pay down debt,
thereby better positioning themselves for the next downturn. These
borrowers appear in much better shape than at the end of their
respective previous downturns, and are capable of generating
operating cash flows at or below previous trough prices. In light
of generating positive prospects for most high-yield issuers,
our primary strategy for the Fund's portfolio was to focus
investments in the new-issue sector where issues come at market
clearing prices and the prices hold up relatively well.
We also selectively sold lower-coupon issues and weaker single B
credits as prices rallied and upside potential diminished. This
freed up assets for floating rate paper, which provides cushion
against interest rate and credit surprises, and for select secondary
high-yield issues which may see "event" upside in the form of an
upgrade, refinancing, or stock offering. Rather than stretch for
yield in either market, we will consider lower-coupon issues that we
expect to become investment grade relatively quickly and prove
liquid in the interim. When neither attractive bank loan nor high-
yield bond opportunities were available, excess cash was used to
reduce outstanding debt under the Fund's leverage facilities.
At February 29, 1996, cash equivalents totaled less than 0.30% of
net assets. The Fund is diversified in the floating rate portion
with 13 borrowers across 9 industries and in the fixed-rate portion
with 43 borrowers across 25 industries. The largest industry
concentrations are: paper (17.6% of total assets); diversified
manufacturing (10.0%); broadcast/media (7.8%); metals (6.4%); and
health services (6.6%).
In Conclusion
We appreciate your investment in Senior Strategic Income Fund, Inc.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(R. Douglas Henderson)
R. Douglas Henderson
Vice President and Portfolio Manager
April 9, 1996
Shareholders of Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc. and Senior Strategic Income Fund, Inc.
recently approved an Agreement and Plan of Merger. Effective April
15, 1996, Senior High Income Portfolio, Inc. will acquire
substantially all of the assets and liabilities of Senior High
Income Port-folio II, Inc. and Senior Strategic Income Fund, Inc.
<TABLE>
PROXY RESULTS
<CAPTION>
During the six-month period ended February 29, 1996, Senior
Strategic Income Fund, Inc. shareholders voted on the following
proposals. The proposals were approved at a special shareholders'
meeting on March 14, 1996. The description of each proposal and
number of shares voted are as follows:
Shares Voted Shares Voted Shares Voted Broker
For Against Abstain No-Vote
<S> <C> <C> <C> <C>
1. To consider and act upon a proposal to approve the
Agreement and Plan of Merger among the Fund, Senior
High Income Portfolio, Inc. and Senior High Income
Portfolio II, Inc. 4,132,609 52,808 185,527 3,407,315
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
2. To elect the Fund's Board of Directors: Ronald W. Forbes 7,606,803 171,456
Cynthia A. Montgomery 7,606,603 171,656
Charles C. Reilly 7,622,809 155,450
Kevin A. Ryan 7,622,947 155,312
Richard R. West 7,623,309 154,950
Arthur Zeikel 7,607,249 171,010
<PAGE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
3. To select Deloitte & Touche LLP as the Fund's independent auditors. 7,545,338 38,670 194,251
</TABLE>
<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--2.8% BB- Ba3 $ 2,000,000 BE Aerospace Inc., 9.75% due 3/01/2003 $ 1,939,940 $ 2,075,000
Automotive Collins & Aikman Corp., Term Loan B,
Products--7.7% due 12/31/2002:*
NR+++ NR+++ 1,015,228 7.875% to 3/04/1996 1,015,228 1,015,228
NR+++ NR+++ 984,772 7.875% to 4/01/1996 984,772 984,772
B B2 1,500,000 Harvard Industries, Inc., 12% due 7/15/2004 1,500,000 1,612,500
B B2 1,000,000 JPS Automotive Products Corp., 11.125% due
6/15/2001 1,000,000 1,000,000
NR+++ NR+++ 1,000,000 Walbro Corp., 9.875% due 7/15/2005 996,627 1,035,000
----------- -----------
5,496,627 5,647,500
Broadcast/ BB- B3 1,000,000 CAI Wireless Systems Inc., 12.25%
Media--9.8% due 9/15/2002 1,000,000 1,085,000
B- B3 1,000,000 Granite Broadcasting Corp., Senior
Sub Notes, 10.375% due 5/15/2005 1,000,000 1,035,000
BB+ Ba3 1,000,000 Lenfest Communications Inc., 8.375%
due 11/01/2005 997,117 993,750
Marcus Cable Co., Term Loan B,
due 4/30/2004:*
B Caa 133,333 8.13% to 3/05/1996 133,333 133,333
B Caa 1,000,000 8.57% to 3/06/1996 1,000,000 1,000,000
B Caa 866,667 8.13% to 5/02/1996 866,667 866,667
BB B1 1,000,000 Telewest Communications PLC, 9.625%
due 10/01/2006 1,000,000 1,015,000
NR+++ B2 1,000,000 Young Broadcasting Corp., 10.125%
due 2/15/2005 1,000,000 1,040,000
----------- -----------
6,997,117 7,168,750
<PAGE>
Building & B- B2 2,000,000 Presley Companies, 12.50% due 7/01/2001 2,000,000 1,840,000
Construction--
2.5%
Building BB- Ba3 1,000,000 Schuller International Group, 10.875%
Products--1.5% due 12/15/2004 1,000,000 1,116,250
Casinos--1.3% BB Ba3 1,000,000 Players International Inc., 10.875%
due 4/15/2005 1,000,000 967,500
Chemicals--4.2% NR+++ Baa1 1,000,000 ++Acetex Corporation, 9.75% due 10/01/2003 995,782 1,030,000
BB+ Ba2 500,000 Borden Chemicals and Plastic, L.P.,
9.50% due 5/01/2005 500,000 517,500
NR+++ NR+++ 1,500,000 Freedom Chemical Co., Term Loan B, due
6/30/2002, 8.75% to 5/16/1996* 1,500,000 1,500,000
----------- -----------
2,995,782 3,047,500
Computers--2.2% BB- Ba3 1,500,000 Dell Computer Corp., 11% due 8/15/2000 1,528,125 1,635,000
Consumer B+ Ba3 1,000,000 Coty Inc., Senior Sub Notes, 10.25%
Products--1.5% due 5/01/2005 1,000,000 1,065,000
Diversified InterMetro Industries, Term Loan B,
Manufacturing-- due 6/30/2001:*
12.5% NR+++ NR+++ 612,072 8.4375% to 3/04/1996 612,072 612,072
NR+++ NR+++ 124,144 8.375% to 3/08/1996 124,144 124,144
InterMetro Industries, Term Loan C,
due 12/31/2001:*
NR+++ NR+++ 890,552 8.9375% to 3/04/1996 890,552 890,552
NR+++ NR+++ 180,627 8.875% to 3/08/1996 180,627 180,627
B+ B2 1,000,000 JB Poindexter & Co., Inc., 12.50%
due 5/15/2004 995,478 805,000
NR+++ NR+++ 6,539,291 Thermadyne Company, Term Loan B,
due 2/01/2001, 8.375% to 3/12/1996* 6,539,291 6,539,291
----------- -----------
9,342,164 9,151,686
<PAGE>
Electrical NR+++ NR+++ 2,937,500 Berg Electronics Inc., Term Loan B,
Instruments-- due 6/30/2001, 10% to 3/29/1996* 2,937,500 2,937,500
4.0%
Energy--6.7% BB- B1 2,500,000 Ferrellgas Partners, L.P., Series B,
8.55% due 8/01/2001* 2,489,781 2,475,000
B B3 2,500,000 Gerrity Oil & Gas Corp., Senior Sub Notes,
11.75% due 7/15/2004 2,500,000 2,450,000
----------- -----------
4,989,781 4,925,000
Food & SC International Services, Inc.,
Beverage--2.7% Term Loan B, due 9/15/2001:*
NR+++ NR+++ 8,085 8.3125% to 3/15/1996 8,085 8,085
NR+++ NR+++ 290,211 8.5625% to 3/19/1996 290,211 290,211
NR+++ NR+++ 342,800 8.8125% to 3/19/1996 342,800 342,800
NR+++ NR+++ 151,631 8.5625% to 4/19/1996 151,631 151,631
SC International Services, Inc.,
Term Loan B, due 9/15/2002:*
NR+++ NR+++ 9,832 8.3125% to 3/15/1996 9,832 9,832
NR+++ NR+++ 361,669 8.5625% to 3/19/1996 361,669 361,669
NR+++ NR+++ 527,514 8.8125% to 3/19/1996 527,514 527,514
NR+++ NR+++ 88,903 8.5625% to 4/19/1996 88,903 88,903
SC International Services, Inc.,
Term Loan C, due 9/15/2002:*
NR+++ NR+++ 2,368 8.5625% to 3/15/1996 2,368 2,368
NR+++ NR+++ 116,364 9.0625% to 3/19/1996 116,364 116,364
NR+++ NR+++ 79,780 8.8125% to 3/19/1996 79,780 79,780
NR+++ NR+++ 19,411 8.8125% to 4/19/1996 19,411 19,411
----------- -----------
1,998,568 1,998,568
Forest BB B1 1,000,000 Tembec Finance Corp., Senior Sub
Products--1.3% Notes, 9.875% due 9/30/2005 1,000,000 950,000
Health B B1 1,000,000 Integrated Health Services, Inc.,
Services--8.3% 10.75% due 7/15/2004 1,000,000 1,060,000
B B1 2,650,000 MEDIQ/PRN Life Support Services Inc.,
12.125% due 7/01/1999 2,659,125 2,769,250
B B2 2,000,000 Magellan Health Services, Inc., 11.25%
due 4/15/2004 2,000,000 2,240,000
----------- -----------
5,659,125 6,069,250
<PAGE>
Hotels &Motels-- B+ Ba3 1,000,000 Prime Hospitality Corp., 9.25%
1.4% due 1/15/2006 996,760 1,000,000
Leisure & B B3 1,000,000 Plitt Theatres, Inc., Senior Sub
Entertainment-- Notes, 10.875% due 6/15/2004 1,000,000 1,005,000
1.4%
Manufacturing-- B- B3 1,000,000 ++Crain Industries, Inc., Senior Sub Notes,
1.5% 13.50% due 8/15/2005 1,000,000 1,040,000
Marking B+ B2 1,000,000 Monarch Acquisitions Corp., 12.50%
Devices--1.5% due 7/01/2003 1,000,000 1,080,000
</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>
Materials, NR+++ NR+++ $ 1,892,308 Pierce Leahy Corp., Term Loan B,
Handling due 10/25/2002, 8.75% to 3/29/1996* $ 1,892,308 $ 1,892,308
& Storage--4.1% NR+++ NR+++ 1,107,692 Pierce Leahy Corp., Term Loan C,
due 10/25//2003, 9% to 3/29/1996* 1,107,692 1,107,692
----------- -----------
3,000,000 3,000,000
Metals--8.0% B B1 1,000,000 Algoma Steel Inc., 12.375% due 7/15/2005 904,557 966,250
B B1 1,000,000 Gulf States Steel Corp., 13.50% due 4/15/2003 989,703 915,000
B+ B3 1,000,000 Renco Metals Inc., 12% due 7/15/2000 987,079 1,090,000
B- B3 2,000,000 Russel Metals Inc., 10.25% due 6/15/2000 1,971,381 1,940,000
B B2 1,000,000 Weirton Steel Corp., 10.75% due 6/01/2005 985,626 967,500
----------- -----------
5,838,346 5,878,750
Musical NR+++ B1 1,000,000 Selmer Co., Inc., 11% due 5/15/2005 1,000,000 1,060,000
Instruments--
1.5%
<PAGE>
Paper--22.1% Fort Howard Corp., Term Loan B,
due 12/31/2002:*
NR+++ NR+++ 1,500,000 8.82% to 3/19/1996 1,500,000 1,500,000
NR+++ NR+++ 1,500,000 8.66% to 6/19/1996 1,500,000 1,500,000
B B3 1,000,000 Gaylord Container Corp., 11.50%
due 5/15/2001 1,022,500 1,040,000
Jefferson Smurfit/Container Corp. of America,
Term Loan B, due 4/30/2002:*
NR+++ NR+++ 816,667 8.3125% to 3/20/1996 816,667 816,667
NR+++ NR+++ 2,900,000 8.3125% to 3/22/1996 2,900,000 2,900,000
BB- Ba3 1,000,000 Repap New Brunswick, 9.875% due 7/15/2000 1,000,000 1,010,000
NR+++ NR+++ 2,646,035 S.D. Warren Co., Term Loan B, due
12/19/2002, 8.32% to 3/27/1996* 2,646,035 2,646,035
Stone Container Corp., Term Loan B,
due 4/01/2000:*
NR+++ NR+++ 2,475,000 8.75% to 3/18/1996 2,475,000 2,475,000
NR+++ NR+++ 2,275,000 8.4375% to 4/22/1996 2,275,000 2,275,000
----------- -----------
16,135,202 16,162,702
Restaurants-- BB- B1 1,000,000 Host Marriott Corp., 9.50% due 5/15/2005 965,084 1,000,000
1.4%
Retail NR+++ NR+++ 2,487,778 Saks & Co., Term Loan B, due 6/30/2000,
Specialty--3.4% 8.75% to 5/09/1996* 2,487,778 2,487,778
Shipping--3.5% BB- Ba2 1,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 923,806 1,000,000
BB- Ba2 1,000,000 Stena Line AB, 10.50% due 12/15/2005 1,000,000 1,025,000
BB Ba2 500,000 Teekay Shipping Corp., 8.32% due 2/01/2008 500,000 498,125
----------- -----------
2,423,806 2,523,125
Transportation-- NR+++ B3 500,000 Ameritruck Distribution Corp., 12.25%
0.7% due 11/15/2005 496,281 490,000
Utilities--2.1% BB Ba2 1,000,000 Cleveland Electric Illuminating Company,
First Mortgage Notes, 9.50% due 5/15/2005 998,175 1,040,000
BB- B1 460,000 First PV Funding Corp., 10.30% due 1/15/2014 452,211 483,000
----------- -----------
1,450,386 1,523,000
<PAGE>
Waste BB- B3 1,000,000 ++Norcal Waste Systems Inc., 12.50%
Management-- due 11/16/1997 975,795 1,045,000
1.4%
Total Investments in
Corporate Debt Obligations--123.0% 88,654,167 89,889,859
Shares
Held Warrants
Metals--0.0% NR+++ NR+++ 1,000 ++Gulf States Steel Corp. (a) 11,000 250
Total Investments in Warrants--0.0% 11,000 250
Face
Amount Short-Term Securities
Commercial $ 179,000 General Electric Capital Corp., 5.42%
Paper**--0.3% due 3/01/1996 179,000 179,000
Total Investments in
Short-Term Securities--0.3% 179,000 179,000
Total Investments--123.3% $88,844,167 90,069,109
===========
Liabilities in Excess of Other Assets--(23.3%) (16,997,467)
-----------
Net Assets--100.0% $73,071,642
===========
<FN>
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock/face amount of bonds. The purchase price and
the number of shares/face amount are subject to adjustment under
certain conditions until the expiration date.
*Floating or Variable Rate Corporate Debt--The interest rates on
floating or variable rate corporate debt are subject to change
periodically based on thechange 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 29, 1996.
**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.
+++Not Rated.
++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $3,115,000,
representing 4.3% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1b)
<S> <C> <C> <C>
Acetex Corporation,
Senior Notes, 9.75% due 10/01/2003 10/02/1995 $ 995,782 $1,030,000
Crain Industries, Inc.,
Senior Sub Notes, 13.50% due 8/15/2005 8/22/1995 1,000,000 1,040,000
Gulf States Steel Corp. 9/21/1995 11,000 250
Norcal Waste Systems, Inc.,
12.50% due 11/16/1997 11/21/1995 975,795 1,045,000
Total $2,982,577 $3,115,250
========== ==========
++++Corporate loans represent 52.5% of the Fund's net assets.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$88,844,167) (Note 1b) $ 90,069,109
Cash 315
Receivables:
Interest $ 1,556,218
Securities sold 151 1,556,369
------------
Deferred facility expense (Note 5) 6,520
Deferred organization expense (Note 1f) 63,193
Prepaid registration fees and other assets 15,782
------------
Total assets 91,711,288
------------
<PAGE>
Liabilities: Payables:
Loans (Note 5) 18,000,000
Dividends to shareholders (Note 1g) 168,375
Investment adviser (Note 2) 38,054
Commitment fees 6,512
Interest on loans (Note 5) 301 18,213,242
------------
Deferred income (Note 1e) 361,626
Accrued expenses and other liabilities 64,778
------------
Total liabilities 18,639,646
------------
Net Assets: Net assets $ 73,071,642
============
Capital: Common Stock, par value $.10 per share; 200,000,000 shares
authorized (7,818,379 shares issued and outstanding) $ 781,838
Paid-in capital in excess of par 73,290,243
Undistributed investment income--net 863,714
Accumulated realized capital losses on investments--net
(Note 6) (2,899,090)
Accumulated distributions in excess of realized gains on
investments--net (190,005)
Unrealized appreciation on investments--net 1,224,942
------------
Total capital--Equivalent to $9.35 net asset value per share
of Common Stock (market price--$9.25) $ 73,071,642
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended February 29, 1996
<S> <S> <C>
Investment Income Interest and discount earned $ 9,879,728
(Note 1e): ------------
<PAGE>
Expenses: Loan interest expense (Note 5) 1,608,608
Investment advisory fees (Note 2) 481,180
Professional fees 111,719
Printing and shareholder reports 59,824
Accounting services (Note 2) 59,601
Borrowing costs (Note 5) 48,917
Directors' fees and expenses 24,285
Transfer agent fees (Note 2) 21,858
Amortization of organization expenses (Note 1f) 20,358
Custodian fees 13,990
Pricing services 3,670
Listing fees 375
Other 20,870
------------
Total expenses 2,475,255
------------
Investment income--net 7,404,473
------------
Realized & Realized loss on investments--net (2,055,470)
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net 2,739,608
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,088,611
(Notes 1c, 1e & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
For the Period
Year Ended April 8, 1994++
February 29, to February 28,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 7,404,473 $ 6,262,806
Realized loss on investments--net (2,055,470) (706,692)
Change in unrealized appreciation/depreciation on
investments--net 2,739,608 (1,514,666)
------------ ------------
Net increase in net assets resulting from operations 8,088,611 4,041,448
------------ ------------
Dividends & Investment income--net (7,305,172) (5,498,954)
Distributions to Realized gain on investments--net -- (136,928)
Shareholders In excess of realized gains on investments--net (190,005) --
(Note 1g): ------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (7,495,177) (5,635,882)
------------ ------------
<PAGE>
Capital Share Net proceeds from issuance of Common Stock -- 73,530,000
Transactions Value of shares issued to Common Stock shareholders in
(Note 4): reinvestment of dividends 626,642 --
Offering costs resulting from the issuance of Common Stock -- (184,007)
------------ ------------
Net increase in net assets resulting from capital share
transactions 626,642 73,345,993
------------ ------------
Net Assets: Total increase in net assets 1,220,076 71,751,559
Beginning of period 71,851,566 100,007
------------ ------------
End of period* $ 73,071,642 $ 71,851,566
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 863,714 $ 763,852
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended February 29, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 8,088,611
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 173,572
Decrease in other assets 5,319
Decrease in other liabilities (126,908)
Realized and unrealized gain on investments--net (684,138)
Amortization of premium and discount (149,362)
------------
Net cash provided by operating activities 7,307,094
------------
Cash Provided by Proceeds from sales of long-term investments 53,299,055
Investing Purchases of long-term investments (50,752,351)
Activities: Purchases of short-term investments (163,215,087)
Proceeds from sales and maturities of short-term investments 163,239,000
------------
Net cash provided by investing activities 2,570,617
------------
<PAGE>
Cash Used for Cash receipts from borrowings 41,000,000
Financing Cash payments on borrowings (44,000,000)
Activities: Dividends paid to shareholders (6,924,460)
------------
Net cash used for financing activities (9,924,460)
------------
Cash: Net decrease in cash (46,749)
Cash at beginning of year 47,064
------------
Cash at end of year $ 315
============
Cash Flow Cash paid for interest $ 1,722,207
Information: ============
Non-cash Financing Capital shares issued in reinvestment of dividends paid to shareholders $ 626,642
Activities: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Year Ended April 8, 1994++
February 29, to February 28,
Increase (Decrease) in Net Asset Value: 1996 1995
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.27 $ 9.50
Operating ------------ ------------
Performance: Investment income--net .95 .81
Realized and unrealized gain (loss) on investments--net .09 (.29)
------------ ------------
Total from investment operations 1.04 .52
------------ ------------
Less dividends and distributions from:
Investment income--net (.94) (.71)
Realized gain on investments--net -- (.02)
In excess of capital gains on investments--net (.02) --
------------ ------------
Total dividends and distributions (.96) (.73)
------------ ------------
Capital charge resulting from the issuance of Common Stock -- (.02)
------------ ------------
Net asset value, end of period $ 9.35 $ 9.27
============ ============
Market price per share, end of period $ 9.25 $ 9.125
============ ============
<PAGE>
Total Investment Based on net asset value per share 12.12% 5.73%+++
Return:** ============ ============
Based on market price per share 12.69% (1.13%)+++
============ ============
Ratios to Average Expenses, net of reimbursement and excluding interest expense .90% .65%*
Net Assets: ============ ============
Expenses, net of reimbursement 2.57% 2.15%*
============ ============
Expenses 2.57% 2.44%*
============ ============
Investment income--net 7.68% 8.42%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 73,072 $ 71,849
Data: ============ ============
Portfolio turnover 54.09% 33.38%
============ ============
Leverage: Amount of borrowings (in thousands) $ 18,000 $ 21,000
============ ============
Asset coverage per $1,000 $ 5,060 $ 4,421
============ ============
<FN>
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
<PAGE>
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. 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
determines prices for normal, institutional-size trading units. In
certain circumstances, portfolio securities are valued at the last
sale price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. 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. Futures contracts and options thereon are stated at market
value. Obligations with remaining maturities of sixty days or less
are valued at amortized cost, which approximates market value,
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. 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.
Determination of fair value involves subjective judgement, as the
actual market value of particular corporate loans can be established
only by negotiation between parties in a sales transaction.
(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.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell stock
index futures contracts and options on such 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 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).
NOTES TO FINANCIAL STATEMENTS (concluded)
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).
(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.
<PAGE>
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date. 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. Distributions in excess of
realized gains are due primarily to differing tax treatments for
futures transactions and post-October losses. 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.
(h) Reclassification--Generally accepted accounting priniciples
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting andtax
purposes. Accordingly, current year's permanent book/tax differences
of $561 have been reclassified from paid-in capital in excess of par
to undistributed net investment income. These reclassifications have
no effect on net assets or net asset value per share.
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.
Accounting services are provided to the Fund by FAM at cost.
During the year ended February 29, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $835 for security price quotations
to compute the net asset value of the Fund.
<PAGE>
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended February 29, 1996, were $50,752,351 and
$53,299,206, respectively.
Net realized and unrealized gains (losses) as of February 29, 1996
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(2,055,470) $ 1,224,942
----------- -----------
Total $(2,055,470) $ 1,224,942
=========== ===========
As of February 29, 1996, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $1,224,942, of
which $1,869,184 related to appreciated securities and $644,242
related to depreciated securities. The aggregate cost of investments
at February 29, 1996 for Federal income tax purposes was $88,844,167.
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 year ended February 29, 1996, shares issued and outstanding
increased by 67,852 to 7,818,379 as a result of dividend
reinvestment. At February 29, 1996, total paid-in capital amounted
to $74,072,081.
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 the Federal Funds rate plus 1.125% and/or at an alternate base
rate plus 0.125% and/or at LIBOR plus 1.125%. On May 24, 1995 this
facility was extended for one additional year and amended to reduce
applicable interest rates on outstanding balances to Federal Funds
rate plus 0.75%, alternate base rate plus 0%, and/or LIBOR plus
0.75%. For the year ended February 29, 1996, the maximum amount
borrowed was $28,000,000, the average amount borrowed was
approximately $23,932,000, and the daily weighted average interest
rate was 6.72%. For the year ended February 29, 1996, facility and
commitment fees aggregated approximately $49,000.
<PAGE>
6. Capital Loss Carryforward:
At February 29, 1996, the Fund had a net capital loss carryforward
of approximately $2,899,000, all of which expires in 2004. This
amount will be available to offset like amounts of any future
taxable gains.
7. Subsequent Events:
On March 8, 1996, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $0.074685 per share,
payable on March 29, 1996 to shareholders of record as of March 19,
1996. Additionally, on April 8, 1996, the Board of Directors of the
Fund declared an ordinary income dividend in the amount of $0.101657
per share, payable on April 19, 1996to shareholders of record as of
April 12, 1996.
8. Reorganization Plan:
On April 15, 1996, Senior High Income Portfolio, Inc. acquired
substantially all of the assets and liabilities of the Fund and
Senior High Income Portfolio II, Inc. in exchange for newly issued
shares of Senior High Income Portfolio, Inc. Senior High Income
Portfolio, Inc. and Senior High Income Portfolio II, Inc. are
registered, non-diversified, closed-end management investment
companies. All three entities have a similar investment objective
and are managed by FAM. On April 15, 1996, the total net assets of
the merged Fund was $449,986,715.
<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 29, 1996, the related
statements of operations for the year then ended, changes in net
assets for the year then ended and for the period April 8, 1994
(commencement of operations) to February 28, 1995, and cash flows
for the year then ended, and the financial highlights for the year
then ended and 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
audits.
<PAGE>
We conducted our audits 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
29, 1996 by correspondence with the custodian and financial
intermediaries. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide 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 29,
1996, the results of its operations, the changes in its net assets,
its cash flows, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 15, 1996
</AUDIT-REPORT>
PER SHARE INFORMATION (unaudited)
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Income Capital
For the Period Income (Losses) (Losses) Common Gains
<S> <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
March 1, 1995 to May 31, 1995 .24 --+++ .14 .23 --
June 1, 1995 to August 31, 1995 .25 .01 (.18) .24 --
September 1, 1995 to November 30, 1995 .23 (.33) .23 .23 --
December 1, 1995 to February 29, 1996 .23 .06 .16 .24 .02
<PAGE>
<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
March 1, 1995 to May 31, 1995 9.46 9.25 9.125 8.375 984
June 1, 1995 to August 31, 1995 9.44 9.25 9.125 8.675 1,219
September 1, 1995 to November 30, 1995 9.35 9.15 9.50 9.00 1,027
December 1, 1995 to February 29, 1996 9.43 9.12 9.625 8.75 1,223
<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>
