-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NfJCYUkp+l/wd2RxnfEDmLes2T4qK2ilNl78Ug/FpUHuCjtWT9j42co0OdfZJ0WO R3Azs0MJOGc9aYbNu06W2A== 0000900092-96-000265.txt : 19961028 0000900092-96-000265.hdr.sgml : 19961028 ACCESSION NUMBER: 0000900092-96-000265 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961025 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HIGH INCOME PORTFOLIO INC CENTRAL INDEX KEY: 0000896665 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-07456 FILM NUMBER: 96647871 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: PO BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-30D 1 SEMI-ANNUAL REPORT SENIOR HIGH INCOME PORTFOLIO, INC. FUND LOGO Semi-Annual Report August 31, 1996 This report, including the financial information herein, is transmitted to the shareholders of Senior High Income Portfolio, 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 High Income Portfolio, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper Senior High Income Portfolio, Inc. DEAR SHAREHOLDER On April 19, 1996, Senior High Income Portfolio, Inc. merged with Senior High Income Portfolio II, Inc. and Senior Strategic Income Fund, Inc. The purpose of the merger was to spread the operating costs of similar funds over a larger asset base, thereby reducing the expense ratio of the funds. The investment objective of the Portfolio remains unchanged: to seek 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 publicly offered and privately placed corporate bonds and notes. The securities by and large are rated in the lower rating categories of the established agencies or are unrated, as is commonly the case with bank loans. For the six months ended August 31, 1996, the Portfolio's total investment return was +3.53%, based on a change in per share net asset value from $9.21 to $9.06, and assuming reinvestment of $0.461 per share income dividends. During the same period, the net annualized yield of the Portfolio's Common Stock was 10.21%. Since inception (April 30, 1993) through August 31, 1996, the total investment return on the Portfolio's Common Stock was +31.40%, based on a change in per share net asset value from $9.50 to $9.06, and assuming reinvestment of $2.922 per share income dividends. At the end of the August period, the Portfolio was 17.7% leveraged, having borrowed $97 million of its $220 million line of credit available at an average borrowing cost of 5.93%. (For a complete explanation of the benefits and risks of leveraging, see page 4 of this report to shareholders.) As of August 31, 1996, the Portfolio paid out a regular monthly dividend at an annualized rate of 9.25% so that the Portfolio 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 Portfolio. For Federal income tax purposes, the Portfolio is required to distribute substantially all of its net investment income for each calendar year. All net realized long-term and short-term capital gains, if any, will be distributed to the Portfolio's shareholders annually. The targeted monthly dividend rate has increased from an annualized rate of 8.0% since September 1993. The Environment The Federal Reserve Board has held short-term interest rates steady since the 25 basis point (0.25%) easing in January 1996. Strong gross domestic product and employment growth have failed to significantly increase inflation, prompting the Federal Reserve Board to maintain a neutral stance regarding interest rates. Fixed- income investors, on the other hand, continue to fear inflation and greet any signs of inflation with additional selling. The ten-year US Treasury bond yield rose from 5.6% in mid-February to over 7.0% by mid-July. Concerns about higher interest rates and disappointing earnings reports by technology companies negatively impacted the stock market, with technology stocks leading the slump from early summer record levels. (However, after the close of the August reporting period, US stock prices rose to new historic high levels.) Economic growth positively impacts most of the issuers in the leveraged loan and bond markets, leading to improved credit quality. Investors attracted by the higher yields available in these asset classes are willing to accept higher risk premiums when the outlook for financial performance is good and default rates are low. Demand for bank loans continued to be fueled by mutual fund inflows and increased participation by insurance companies, hedge funds and structured institutional funds. This demand has outpaced supply, despite first half 1996 leveraged loan (defined as the London Interbank Offered Rate +1.50% or more) new-issue volume growth of more than 50% over the first half of 1995. Insufficient new-issue supply forced loan buyers to turn to the secondary market, pushing bids for many leveraged term loans consistently above par and contributing to very strong secondary market liquidity. High-yield bonds experienced a similar excess of demand during the period ended August 31, 1996. Mutual fund inflows reached record levels, while insurance companies and pension advisers increased allocations to the asset class. Receding fears of recession have also forced portfolio managers to reassess often large cash positions, adding additional liquidity to the market. Despite compression of the spread between the Merrill Lynch High Yield Master Index and the ten-year Treasury bond from a high of 379 basis points in early March to 338 basis points by the end of August, investors find the premium attached to high-yield bonds attractive, particularly in light of improving financial performance and low default rates. Issuers proved eager to satisfy this demand, selling $50.3 billion in new issues during the first eight months of 1996, an 80.3% increase over 1995. Most new issues have been well oversubscribed, resulting in pricing at or below the low end of price estimates and in secondary market premiums shortly after issuance. Most industry groups benefited from high-yield loan and bond market strength. Media and communications issues proved particularly active in response to ongoing consolidation driven by deregulation and the introduction of new technologies. Investors did exhibit discrimination towards some issues by communications issuers with no track record, limited equity backing and unproven technology, forcing restructuring or cancellation of these issues. Basic commodities industries, such as paper and metals manufacturing, outperformed as late 1995/early 1996 product pricing pressures eased, allowing price stability or, in some cases, price increases. Retailing issues produced mixed results. Specialty retailers performed quite well while home improvement and discount chains suffered under the weight of competition from better capitalized, more efficient rivals. Portfolio Strategy At August 31, 1996, floating rate investments totaled 43.8% of the Portfolio's net assets, primarily corporate loans, and fixed-rate high-yield bonds totaled 56.2%. Approximately $86 million was available for additional borrowing under the Portfolio's leverage facility, based on the Portfolio's August 31, 1996 borrowing base. We did not aggressively use the Portfolio's leverage facility during the period because of the limited supply of new floating rate investments and the relatively fully priced nature of many fixed- rate investments. During the six-month period ended August 31, 1996, we continued to focus on increasing the Portfolio's floating rate exposure. Several factors served to limit our success in achieving a greater floating rate weighting. First, demand for new floating rate issues resulted in price competition among underwriting banks, forcing down borrowing spreads to unattractive levels. Demand also reduced allocations of new issues. Third, refinancings of existing investments often occurred at lower spreads, reflecting demand and improved credit quality, thereby eliminating existing investments without providing new investment opportunities. Finally, the secondary market provided few opportunities to invest in issues to which the Portfolio does not already have exposure. Consequently, we centered on attractive high-yield bond investments. During the period, we invested in several new issues of companies with solid market positions that exhibit long-term growth potential. Examples include Chiquita Brands International Inc., the leading banana distributor in the world; Hayes Wheels International, Inc., a leading manufacturer of wheels and other components for vehicles, and K&F Industries, Inc., a leading manufacturer of aerospace components. We also invested in secondary market purchases of bonds of companies that may have experienced short-term earnings disappointments, but whose long-term prospects represented attractive total return potential. Examples of this include Grand Union Co., a grocery store chain that recently received a significant equity infusion. The Portfolio remained focused on cash pay bonds of issuers with current cash flow and avoided deferred payment or zero-coupon bonds of companies with no cash flow and massive capital spending needs. We also took advantage of strong markets to take profits in issues that may have traded ahead of their underlying credit fundamentals. Looking forward, we will continue to emphasize floating rate investments as well as look for both buy and sell bond opportunities that we expect to enhance the return of the Portfolio. As always, credit quality will remain a high priority. At August 31, 1996, the Portfolio's floating rate investments were diversified across 37 borrowers in 22 industries, and fixed-rate investments were diversified across 101 borrowers in 32 industries. The largest industry concentrations were: paper (11.1% of total assets); health services (7.8%); broadcast--radio & TV (7.7%); metals & mining (6.7%); and food & kindred products (7.3%). In Conclusion We appreciate your ongoing investment in Senior High Income Portfolio, Inc., and welcome our newest shareholders. We look forward to reviewing our strategy with you again in our upcoming annual report to shareholders. Sincerely, (Arthur Zeikel) Arthur Zeikel President (John W. Fraser) John W. Fraser Vice President and Portfolio Manager (R. Douglas Henderson) R. Douglas Henderson Vice President and Portfolio Manager October 16, 1996 THE BENEFITS AND RISKS OF LEVERAGING Senior High Income Portfolio, 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. SCHEDULE OF INVESTMENTS (In Thousands)
Face Loan Moody's Stated Value Industries Amount Corporate Debt Obligations+++ Type Rating Maturity** (Note 1b) Advertising-- $ 2,000 Adams Outdoor Adventure LP -- B2 3/15/06 $ 2,055 2.7% 5,000 Lamar Advertising Co. -- B2 5/15/03 5,225 2,500 Outdoor Systems, Inc. Term B NR* 12/31/02 2,503 2,500 Outdoor Systems, Inc. Term C NR* 12/31/03 2,504 Total Advertising (Cost--$11,944) 12,287 Agricultural 2,000 Fresh Del Monte Produce N.V. -- Caa 5/01/03 1,870 Products-- 0.4% Total Agricultural Products (Cost--$2,025) 1,870 Aircraft & 2,000 Airplanes Pass Through Trust -- Ba2 3/15/19 2,115 Parts--5.3% 5,000 BE Aerospace, Inc. -- Ba3 3/01/03 5,100 2,240 Gulfstream Delaware Corp. Term NR* 3/31/98 2,241 1,117 Gulfstream Delaware Corp. Term A NR* 3/31/98 1,118 4,500 Gulfstream Delaware Corp. Term B NR* 3/31/98 4,501 1,000 ++K&F Industries, Inc., Senior Sub Notes -- B2 9/01/04 1,014 4,000 Talley Manufacturing & Technology, Inc. -- B2 10/15/03 4,165 3,000 UNC, Inc. -- B1 7/15/03 2,940 1,000 ++UNC, Inc. -- B3 6/01/06 1,040 Total Aircraft & Parts (Cost--$23,837) 24,234 Amusement & 4,912 AMF Group, Inc. Term Ba3 3/31/01 4,925 Recreational 1,500 ++Cobb Theatres LLC -- B2 3/01/03 1,552 Services--1.6% 1,000 Plitt Theaters, Inc. -- B3 6/15/04 1,016 Total Amusement & Recreational Services (Cost--$7,462) 7,493 Automotive & 11,848 Collins & Aikman Corp. Term B B1 12/31/02 11,840 Equipment-- 1,000 ++Delco Remy International Inc. -- B2 8/01/06 1,017 5.1% 2,000 Harvard Industries, Inc. -- B2 7/15/04 1,800 1,000 Harvard Industries, Inc. -- B3 8/01/05 870 2,000 Hayes Wheels International, Inc., Senior Sub Notes -- B3 7/15/06 2,055 2,000 JPS Automotive Products Corp. -- B2 6/15/01 2,050 4,000 Walbro Corp. -- Ba3 7/15/05 4,000 Total Automotive & Equipment (Cost--$23,783) 23,632 Broadcast-- 4,910 American Media, Inc. Term B NR* 9/30/02 4,885 Radio & TV 1,000 American Radio Systems Corp., Senior - --9.4% Sub Notes -- B2 2/01/06 965 5,000 CAI Wireless Systems, Inc. -- B3 9/15/02 5,150 1,000 Continental Cablevision, Inc. -- Ba2 9/15/01 1,035 2,500 Continental Cablevision, Inc. -- Ba2 8/15/03 2,610 4,000 Granite Broadcasting Corp., Senior Sub Notes -- B3 5/15/05 4,000 3,000 Lenfest Communications Inc. -- Ba3 11/01/05 2,775 5,000 Mobilemedia Communications, Inc. Term B B1 6/30/03 5,015 5,000 Rifkin Acquisition Partners LP, Senior Sub Notes -- B3 1/15/06 5,000 3,000 Sinclair Broadcasting Group, Inc. Term B Ba3 11/30/03 3,019 5,000 Telewest Communications PLC -- B1 10/01/06 4,950 4,000 Young Broadcasting Corp., Senior Sub Notes -- B2 2/15/05 3,960 Total Broadcast--Radio & TV (Cost--$43,497) 43,364 Building 9,992 National Gypsum Term B Ba3 9/20/03 10,029 Materials--2.9% 3,000 Schuller International Group -- Ba3 12/15/04 3,255 Total Building Materials (Cost--$12,972) 13,284
SCHEDULE OF INVESTMENTS (continued) (In Thousands)
Face Loan Moody's Stated Value Industries Amount Corporate Debt Obligations+++ Type Rating Maturity** (Note 1b) Building & $ 3,000 Presley Companies -- B3 7/01/01 $ 2,872 Construction-- 0.6% Total Building & Construction (Cost--$3,000) 2,872 Cable--2.6% 12,000 Marcus Cable Co. Term B NR* 4/30/04 12,068 Total Cable (Cost--$11,917) 12,068 Casinos--1.7% 3,500 GB Property Funding Corp. -- B2 1/15/04 3,045 1,500 Harvey Casinos Resorts, Senior Sub Notes -- B2 6/01/06 1,545 1,000 Players International, Inc. -- Ba3 4/15/05 980 2,500 Trump Atlantic City Association/ Funding Inc. -- B1 5/01/06 2,388 Total Casinos (Cost--$8,500) 7,958 Chemicals--2.5% 3,000 Acetex Corp. -- B1 10/01/03 2,872 1,500 Borden Chemicals and Plastics LP -- Ba2 5/01/05 1,492 1,481 Freedom Chemical Company Term B Ba3 6/30/02 1,478 5,816 Inspec Chemical Corp. Term B NR* 12/02/00 5,836 Total Chemicals (Cost--$11,724) 11,678 Consumer 4,000 Coty, Inc., Senior Sub Notes -- Ba3 5/01/05 4,240 Products--1.5% 3,000 ++Remington Arms Company, Inc., Senior Sub Notes -- B3 12/01/03 2,753 Total Consumer Products (Cost--$6,752) 6,993 Diversified-- 3,000 Essex Group Inc. -- B1 5/01/03 3,037 2.5% 1,687 Intermetro Acquisition Term B NR* 6/30/03 1,691 1,313 Intermetro Acquisition Term C NR* 6/30/04 1,316 3,000 J.B. Poindexter & Co., Inc. -- B2 5/15/04 2,857 3,000 Valcor Inc. -- B1 11/01/03 2,700 Total Diversified (Cost--$11,988) 11,601 Drug/Proprietary 6,040 Duane Reade Co. Term A NR* 9/30/97 5,851 Stores--2.7% 1,500 Duane Reade Co. Term B NR* 9/30/99 1,453 1,663 Smith Food & Drug Centers, Inc. Term B Ba3 11/30/03 1,675 1,663 Smith Food & Drug Centers, Inc. Term C Ba3 11/30/04 1,676 1,663 Smith Food & Drug Centers, Inc. Term D Ba3 8/31/05 1,677 Total Drug/Proprietary Stores (Cost--$12,481) 12,332 Educational 5,000 La Petite Holdings Corp. -- B3 8/01/2001 4,550 Services--1.0% Total Educational Services (Cost--$5,000) 4,550 Electronics/ 2,000 Advanced Micro Devices Inc. -- Ba1 8/01/03 2,025 Electrical 3,000 Exide Electronics Corp., Senior Components-- Sub Notes -- B3 3/15/06 3,157 3.0% 3,994 International Wire Group, Inc. Term B NR* 9/30/02 4,000 1,865 Tracor Inc. Term B Ba3 10/31/00 1,871 2,860 Tracor Inc. Term C Ba3 4/30/01 2,869 Total Electronics/Electrical Components (Cost--$13,635) 13,922 Energy--1.5% 2,000 Maxus Energy Corp. -- B1 11/01/03 1,950 4,000 Mesa Operating Co., Senior Sub Notes -- B2 7/01/06 4,180 1,000 Plains Resources, Inc., Senior Sub Notes -- B2 3/15/06 1,020 Total Energy (Cost--$6,918) 7,150
SCHEDULE OF INVESTMENTS (Continued) (In Thousands)
Face Loan Moody's Stated Value Industries Amount Corporate Debt Obligations+++ Type Rating Maturity** (Note 1b) Fertilizer-- $ 7,500 Viridian Corp. -- Ba3 4/01/03 $ 7,772 1.9% 1,000 Viridian Corp. -- Ba3 3/31/14 1,080 Total Fertilizer (Cost--$8,525) 8,852 Financial--1.1% 5,000 Continental AG -- NR* 7/31/02 5,003 Total Financial (Cost--$5,000) 5,003 Food & Kindred 2,992 American Italian Pasta Company Term C NR* 2/28/04 2,966 Products--8.8% 3,000 Chiquita Brands International Inc. -- B1 11/01/06 3,090 3,000 Eagle Food Centers Inc. -- Ba3 4/15/00 2,760 4,907 President Baking Company Term B NR* 9/30/00 4,895 4,721 SC International Services, Inc. Caterair B2 9/15/01 4,745 5,887 SC International Services, Inc. SCIB B2 9/15/02 5,916 1,296 SC International Services, Inc. SCIB B2 9/15/03 1,303 9,971 Specialty Foods Inc. Term B B3 4/30/01 9,946 3,077 Van De Kamps Inc. Term B Ba3 4/30/03 3,085 1,923 Van De Kamps Inc. Term C Ba3 9/30/03 1,928 Total Food & Kindred Products (Cost--$40,254) 40,634 Forest 1,000 Malette Inc. -- Ba3 7/15/04 1,060 Products--1.0% 4,000 Tembec Finance Corp. -- B1 9/30/05 3,770 Total Forest Products (Cost--$5,000) 4,830 General 4,750 Camelot Music Acquisition Corp. Term B NR* 8/31/01 1,711 Merchandise-- 7,323 Federated Department Stores, Inc. Term Ba1 3/31/00 7,304 Stores--2.8% 4,000 Specialty Retailers, Inc., Series A -- B1 8/15/00 3,960 Total General Merchandise--Stores (Cost--$15,961) 12,975 Grocery Stores-- 2,500 Grand Union Co. -- B3 9/01/04 2,481 2.4% 5,000 The Penn Traffic Company -- Ba3 12/15/03 4,150 2,000 Pueblo Xtra International, Inc. -- B2 8/01/03 1,790 905 Ralph's Grocery Co. Term B Ba3 6/15/02 909 905 Ralph's Grocery Co. Term C Ba3 6/15/03 909 905 Ralph's Grocery Co. Term D Ba3 2/15/04 914 Total Grocery Stores (Cost--$12,075) 11,153 Health 1,500 ++Aetna Industries, Inc. -- B3 10/01/06 1,500 Services--9.4% 1,815 Community Health Care Inc. Term B NR* 12/31/03 1,820 1,815 Community Health Care Inc. Term C NR* 12/31/04 1,820 1,370 Community Health Care Inc. Term D NR* 12/31/05 1,373 1,636 Dade International Inc. Term B B1 12/31/02 1,647 1,636 Dade International Inc. Term C B1 12/31/03 1,649 1,727 Dade International Inc. Term D B1 12/31/04 1,743 1,500 Dynacare, Inc. -- B2 1/15/06 1,511 3,000 Grancare Inc., Senior Sub Notes -- B2 9/15/05 2,947 3,000 Integrated Health Services, Inc., Senior Sub Notes -- B2 7/15/04 3,135 8,890 MEDIQ/PRN Life Support Services, Inc. -- B1 7/01/99 9,601 5,500 Magellan Health Services, Inc., Senior Sub Notes -- B2 4/15/04 5,885 5,000 Medco Behavioral Care Term A B2 6/01/03 4,980 3,000 Paracelsus Healthcare, Inc., Senior Sub Notes -- B1 8/15/06 3,030 1,000 Regency Health Service, Inc., Senior Sub Notes -- B2 10/15/02 992 Total Health Services (Cost--$42,587) 43,633
SCHEDULE OF INVESTMENTS (continued) (In Thousands)
Face Loan Moody's Stated Value Industries Amount Corporate Debt Obligations+++ Type Rating Maturity** (Note 1b) Hotels & $ 2,000 ++Four Seasons Hotels Inc. -- B1 7/01/00 $ 2,010 Motels--1.5% 3,000 Prime Hospitality Corp. -- Ba3 1/15/06 2,962 2,000 Wyndham Hotel Corp., Senior Sub Notes -- B2 5/15/06 2,050 Total Hotels & Motels (Cost--$6,936) 7,022 Leasing & Rental 1,200 Cort Furniture Rental Corp. -- B2 9/01/00 1,254 Services--2.2% 4,940 Prime Acquisition Term B1 12/31/00 4,943 4,000 The Scotsman Group, Inc. -- B1 12/15/00 4,040 Total Leasing & Rental Services (Cost--$10,111) 10,237 Manufacturing-- 3,000 Crain Industries Inc., Senior 1.8% Sub Notes -- B3 8/15/05 3,225 3,623 Foamex LP -- B1 6/01/00 3,605 1,500 ++Tokheim Corp., Senior Sub Notes -- B3 8/01/06 1,526 Total Manufacturing (Cost--$8,143) 8,356 Marking Devices-- 3,000 Monarch Acquisition Corp. -- B2 7/01/03 3,232 0.7% Total Marking Devices (Cost--$3,000) 3,232 Materials Handling 1,500 Alvey Systems, Inc., Senior Sub Notes -- NR* 1/31/03 1,560 & Storage--1.4% 5,000 Americold Corp. -- B2 3/01/05 5,012 Total Materials Handling & Storage (Cost--$6,613) 6,572 Measuring, 4,651 CHF/Ebel USA Inc. Term B NR* 9/30/01 4,578 Analyzing & Controlling Instruments--1.0% Total Measuring, Analyzing & Controlling Instruments (Cost--$4,578) 4,578 Metals & 3,000 Bayou Steel Corp. -- B2 3/01/01 2,805 Mining--8.1% 1,000 GS Technologies Operating Co. -- B2 9/01/04 1,034 1,000 GS Technologies Operating Co. -- B2 10/01/05 1,035 3,000 Gulf States Steel Corp. -- B1 4/15/03 2,715 2,000 Jorgensen (Earle M.) Co. -- B2 3/01/00 2,000 3,000 Renco Metals, Inc. -- B2 7/01/03 3,157 2,000 Republic Engineered Steel, Inc. -- B2 12/15/01 1,870 2,000 ++Royal Oak Mines Inc. -- NR* 8/15/06 2,000 7,000 Russell Metals Inc. -- B3 6/15/00 6,843 3,857 UCAR International, Inc. Term B Ba3 1/31/03 3,862 5,000 WCI Steel, Inc. -- B1 3/01/02 5,175 5,190 Weirton Steel Corp. -- B2 6/01/05 4,853 Total Metals & Mining (Cost--$37,987) 37,349 Musical 3,000 Selmer Co., Inc., Senior Sub Notes -- B3 5/15/05 3,165 Instruments--0.7% Total Musical Instruments (Cost--$3,000) 3,165 Packaging--1.8% 2,000 ++Packaging Resources Group -- B2 5/01/03 2,035 2,000 ++Printpack, Inc. -- B2 8/15/04 2,030 4,000 Sweetheart Cup Co. -- Ba3 9/01/00 4,060 Total Packaging (Cost--$8,000) 8,125
SCHEDULE OF INVESTMENTS (continued) (In Thousands)
Face Loan Moody's Stated Value Industries Amount Corporate Debt Obligations+++ Type Rating Maturity** (Note 1b) Paper--13.4% $ 3,103 Fort Howard Corp. Term B Ba3 12/31/02 $ 3,123 1,500 ++Four M Corp. -- B2 6/01/06 1,549 3,000 Gaylord Container Corp. -- Ba3 5/15/01 3,105 13,177 Jefferson Smurfit/Container Corp. of America Term B Ba3 4/30/02 13,260 5,000 Repap New Brunswick, Inc. -- B1 7/15/00 4,945 8,571 Riverwood International, Inc. Term B Ba3 2/28/04 8,609 3,429 Riverwood International, Inc. Term C Ba3 8/28/04 3,444 4,965 S.D. Warren Co. Term B Ba2 6/30/02 4,982 18,900 Stone Container Corp. Term B Ba3 4/01/00 18,983 Total Paper (Cost--$60,977) 62,000 Printing & 1,750 ++National Fiberstock Corp. -- B3 6/15/02 1,776 Publishing--1.0% 3,000 Treasure Chest Advertising Co. Term Ba3 12/31/02 3,008 Total Printing & Publishing (Cost--$4,740) 4,784 Restaurant--1.7% 8,000 Host Marriott Corp. -- B1 5/15/05 7,800 Total Restaurant (Cost--$7,786) 7,800 Shipping--2.4% 4,500 Eletson Holdings, Inc. -- Ba2 11/15/03 4,320 3,000 Stena Line AB -- Ba2 12/15/05 3,030 2,000 Teekay Shipping Inc. -- Ba2 2/01/08 1,920 2,000 Viking Star Shipping Inc. -- Ba2 7/15/03 2,040 Total Shipping (Cost--$11,387) 11,310 Telephone 4,964 Shared Technology Inc. Term B NR* 3/31/03 4,946 Communications-- 1.1% Total Telephone Communications (Cost--$4,935) 4,946 Textile Mills 3,000 ++Avondale Mills Inc., Senior Sub Notes -- B2 5/01/06 3,000 Products--1.2% 2,500 Dominion Textile USA, Inc. -- Ba2 4/01/06 2,500 Total Textile Mills Products (Cost--$5,455) 5,500 Transportation-- 4,000 Ameritruck Distribution Corp., Senior 1.3% Sub Notes -- B3 11/15/05 3,810 2,100 Trism, Inc., Senior Sub Notes -- B2 12/15/00 1,974 Total Transportation (Cost--$5,965) 5,784 Utilities--2.2% 1,605 Beaver Valley Funding Corp. -- B1 6/01/07 1,394 4,000 Cleveland Electric Illuminating Co. -- Ba2 5/15/05 3,870 1,000 El Paso Electric Co. -- Ba3 2/01/06 997 1,000 El Paso Electric Co. -- Ba3 5/01/11 1,006 2,920 Public Service of New Mexico -- Ba3 1/15/14 3,088 Total Utilities (Cost--$10,276) 10,355 Waste 3,000 ++Norcal Waste Systems, Inc. -- B3 11/15/05 3,173 Management--0.7% Total Waste Management (Cost--$2,947) 3,173 Total Corporate Debt Obligations (Cost--$549,673)--118.6% 548,656
SCHEDULE OF INVESTMENTS (concluded) (In Thousands)
Shares Value Industries Held Warrants (a) (Note 1b) Electrical 3 ++Exide Electronics Corp. $ 60 Instruments--0.0% Leasing & 66 Cort Furniture Rental Corp. 165 Rental Services-- 0.0% Steel--0.0% 3 ++Gulf States Steel Corp. 1 Total Warrants (Cost--$119)--0.0% 226 Short-Term Investments Commercial General Electric Capital Corp. ($381,000 Paper***--0.1% par, maturing 9/03/1996, yielding 5.30%) 381 Total Short-Term Investments (Cost--$381)--0.1% 381 Total Investments (Cost--$550,173)--118.7% 549,263 Liabilities in Excess of Other Assets--(18.7%) (86,488) --------- Net Assets (Equivalent to $9.06 per share based on 51,070 shares outstanding)--100.0% $ 462,775 ========= *Not Rated. **Floating or Variable Rate Corporate Debt--The interest rates on floating or variable rate corporate debt 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. ***Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the Portfolio. (a)Warrants entitle the Portfolio to purchase a predetermined number of shares of common stock/face amount of bonds. The purchase price and number of shares/face amount are subject to adjustments under certain conditions until the expiration date. ++Restricted securities as to resale. The value (in thousands) of the Portfolio's investment in restricted securities was approximately $28,036 (in thousands), representing 6.1% of net assets. Acquisition Value Issue Date(s) Cost (Note 1b) Aetna Industries, Inc. due 10/01/06 8/08/96 $ 1,500 $ 1,500 Avondale Mills Inc., Senior Sub Notes due 5/01/06 4/23/96 2,955 3,000 Cobb Theatres LLC, Senior Secured Notes due 3/01/03 2/29/96 1,500 1,552 Delco Remy International Inc. due 8/01/06 7/26/96 1,000 1,017 Exide Electronics Corp. (Warrants) 3/07/96 85 60 Four M Corp. due 6/01/06 5/23/96 1,500 1,549 Four Seasons Hotels Inc. due 7/01/00 1/25/94 1,945 2,010 Gulf States Steel Corp. (Warrants) 4/12/95 33 1 K & F Industries, Inc. due 9/01/04 8/12/96 1,000 1,014 National Fiberstock Corp. due 6/15/02 6/21/96 1,750 1,776 Norcal Waste Systems, Inc. due 11/15/05 11/15/95 2,947 3,173 Packaging Resources Group due 5/01/03 5/10/96 2,000 2,035 Printpack, Inc. due 8/15/04 8/15/96 2,000 2,030 Remington Arms Company, Inc., Senior Sub Notes 6/20/96- due 12/01/03 6/21/96 2,752 2,753 Royal Oak Mines Inc. due 8/15/06 8/05/96 2,000 2,000 Tokheim Corp. due 8/01/06 8/16/96 1,500 1,526 UNC, Inc. due 6/01/06 5/23/96 1,000 1,040 Total $27,467 $28,036 ======= ======= +++Corporate loans represent 50.1% of the Portfolio's net assets. See Notes to Financial Statements.
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of August 31, 1996 Assets: Investments, at value (identified cost--$550,173,010) (Note 1b) $ 549,262,533 Interest receivable 10,920,972 Deferred facility fees 14,837 Deferred organization expenses (Note 1f) 41,347 Prepaid expenses and other assets 6,002 --------------- Total assets 560,245,691 --------------- Liabilities: Payables: Loans (Note 5) $ 97,000,000 Investment adviser (Note 2) 249,477 Interest on loans (Note 5) 56,109 Commitment fees 29,095 97,334,681 --------------- Accrued expenses and other liabilities 135,955 --------------- Total liabilities 97,470,636 --------------- Net Assets: Net assets $ 462,775,055 =============== Capital: Common Stock, par value $.10 per share; 200,000,000 shares authorized (51,069,842 shares issued and outstanding) $ 5,106,984 Paid-in capital in excess of par 476,316,565 Undistributed investment income--net 5,307,410 Accumulated realized capital losses on investments --net (Note 6) (23,045,427) Unrealized depreciation on investments--net (910,477) --------------- Total Capital--Equivalent to $9.06 net asset value per share of Common Stock (market price--$9.25) $ 462,775,055 =============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statement of Operations
For the Six Months Ended August 31, 1996 Investment Income Interest and discount earned $ 23,701,051 (Note 1e): Facility and other fees 529,618 --------------- Total income 24,230,669 --------------- Expenses: Loan interest expense (Note 5) $ 2,586,100 Investment advisory fees (Note 2) 1,245,435 Borrowing costs (Note 5) 122,665 Printing and shareholder reports 62,947 Custodian fees 48,758 Professional fees 33,773 Transfer agent fees (Note 2) 29,557 Directors' fees and expenses 18,069 Amortization of organization expenses (Note 1f) 10,153 Pricing services 8,676 Listing fees 392 Other 39,174 --------------- Total expenses 4,205,699 --------------- Investment income--net 20,024,970 --------------- Realized & Realized loss on investments--net (1,000,272) Unrealized Change in unrealized appreciation/depreciation Loss on on investments--net (2,756,025) Investments--Net --------------- (Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $ 16,268,673 =============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Six For the Months Ended Year Ended Increase (Decrease) in Net Assets: August 31, 1996 February 29, 1996 Operations: Investment income--net $ 20,024,970 $ 23,524,388 Realized loss on investments--net (1,000,272) (4,045,820) Change in unrealized appreciation/depreciation on investments--net (2,756,025) 10,795,412 --------------- --------------- Net increase in net assets resulting from operations 16,268,673 30,273,980 --------------- --------------- Dividends to Investment income--net (18,733,988) (23,431,545) Shareholders --------------- --------------- (Note 1g): Net decrease in net assets resulting from dividends to shareholders (18,733,988) (23,431,545) --------------- --------------- Capital Share Net proceeds from issuance of Common Stock resulting Transactions from reorganization 222,966,255 -- (Note 4): Value of shares issued to Common Stock shareholders in reinvestment of dividends 6,138,419 2,286,227 --------------- --------------- Net increase in net assets resulting from capital share transactions 229,104,674 2,286,227 --------------- --------------- Net Assets: Total increase in net assets 226,639,359 9,128,662 Beginning of period 236,135,696 227,007,034 --------------- --------------- End of period* $ 462,775,055 $ 236,135,696 =============== =============== *Undistributed investment income--net $ 5,307,410 $ 4,016,428 =============== =============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statement of Cash Flows
For the Six Months Ended August 31, 1996 Cash Provided by Net increase in net assets resulting from operations $ 16,268,673 Operating Adjustments to reconcile net increase in net assets resulting Activities: from operations to net cash used for operating activities: Increase in receivables (4,517,437) Decrease in other assets 121,784 Increase in other liabilities 217,958 Realized and unrealized loss on investments--net 3,756,297 Amortization of discount--net (255,538) --------------- Net cash provided by operating activities 15,591,737 --------------- Cash Used for Proceeds from sales of long-term investments 292,110,129 Investing Purchases of long-term investments (298,126,756) Activities: Purchases of short-term investments (127,176,665) Proceeds from sales and maturities of short-term investments 128,818,000 --------------- Net cash used for investing activities (4,375,292) --------------- Cash Used for Cash receipts from borrowings 136,000,000 Financing Cash payments on borrowings (134,000,000) Activities: Dividends paid to shareholders (13,217,003) --------------- Net cash used for financing activities (11,217,003) --------------- Cash: Net decrease in cash (558) Cash at beginning of period 558 --------------- Cash at end of period $ 0 =============== Cash Flow Cash paid for interest $ 2,536,905 Information: =============== Noncash Capital shares issued in reinvestment of dividends paid Financing to shareholders $ 6,138,419 Activities: =============== See Notes to Financial Statements.
FINANCIAL INFORMATION (concluded) Financial Highlights
For the For the For the For the Period The following per share data and ratios have been derived Six Months Year Year April 30, from information provided in the financial statements. Ended Ended Ended 1993++ to Aug. 31, Feb. 29, Feb. 28, Feb. 28, Increase (Decrease) in Net Asset Value: 1996++++ 1996++++ 1995++++ 1994 Per Share Net asset value, beginning of period $ 9.21 $ 8.94 $ 9.82 $ 9.50 Operating -------- -------- -------- -------- Performance: Investment income--net .46 .92 .90 .70 Realized and unrealized gain (loss) on investments--net (.15) .27 (.87) .25 -------- -------- -------- -------- Total from investment operations .31 1.19 .03 .95 -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.46) (.92) (.84) (.61) Realized gain on investments--net -- -- (.07) (.02) -------- -------- -------- -------- Total dividends and distributions (.46) (.92) (.91) (.63) -------- -------- -------- -------- Net asset value, end of period $ 9.06 $ 9.21 $ 8.94 $ 9.82 ======== ======== ======== ======== Market price per share, end of period $ 9.25 $ 9.25 $ 8.625 $ 9.375 ======== ======== ======== ======== Total Investment Based on net asset value per share 3.53%+++ 14.14% .82% 10.28%+++ Return:** ======== ======== ======== ======== Based on market price per share 5.25%+++ 18.82% 1.87% .02%+++ ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement and excluding Net Assets: interest expense .62%* .92% .80% .67%* ======== ======== ======== ======== Expenses, net of reimbursement 1.62%* 2.92% 2.46% 1.61%* ======== ======== ======== ======== Expenses 1.62%* 2.92% 2.46% 1.75%* ======== ======== ======== ======== Investment income--net 7.71%* 10.14% 7.07% 7.33%* ======== ======== ======== ======== Supplemental Net assets, end of period (in thousands) $462,775 $236,136 $227,007 $248,342 Data: ======== ======== ======== ======== Portfolio turnover 62.12% 50.76% 44.81% 52.73% ======== ======== ======== ======== Leverage: Amount of borrowings (in thousands) $ 97,000 $ 47,000 $ 82,000 $ 84,000 ======== ======== ======== ======== Asset coverage per $1,000 $ 5,760 $ 6,024 $ 3,768 $ 3,956 ======== ======== ======== ======== *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. ++++Based on average shares outstanding during the period. +++Aggregrate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Senior High Income Portfolio, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company. These unaudited financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol ARK. (a) Corporate debt obligations--The Fund invests principally in senior debt obligations ("Senior Debt") of companies, including corporate loans made by banks and other financial institutions and both privately and publicly offered corporate bonds and notes. Because agents and intermediaries are primarily commercial banks, the Fund's investment in corporate loans could be considered concentrated in financial institutions. (b) Valuation of investments--Until June 17, 1996, corporate loans were valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. As of June 17, 1996, the Board of Directors enhanced their policy for valuing corporate loans whereby the corporate loans would be valued at the average of the mean between the bid and asked quotes received from one or more brokers, if available. Other portfolio securities may be valued on the basis of prices furnished by one or more pricing services which determine prices for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. 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. Short-term securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (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. * Financial futures contracts--The Fund may purchase or sell interest rate 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 market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction is less than or exceeds the premiums 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). (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 Fund Asset Management ("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 six months ended August 31, 1996, the Fund paid Merrill Lynch Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), $3,271 for security price quotations to compute the net asset value of the Fund. 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 six months ended August 31, 1996 were $296,618,670 and $292,110,129, respectively. Net realized and unrealized losses as of August 31, 1996 were as follows: Realized Unrealized Losses Losses Long-term investment $(1,000,272) $ (910,477) ----------- ---------- Total $(1,000,272) $ (910,477) =========== ========== As of August 31, 1996, net unrealized depreciation for financial reporting and Federal income tax purposes aggregated $910,477, of which $8,113,128 related to appreciated securities and $9,023,605 related to depreciated securities. The aggregate cost of investments at August 31, 1996 for Federal income tax purposes was $550,173,010. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) 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 six months ended August 31, 1996, shares issued and outstanding increased by 25,430,250, of which 24,749,374 resulted from a reorganization and 680,876 resulted from reinvestment of dividends, to 51,069,842. At August 31, 1996, total paid-in capital amounted to $481,423,549. 5. Short-Term Borrowings: On April 15, 1996, the Fund extended its credit agreement with a syndicate of banks led by The Bank of New York. The agreement is a $225,000,000 credit facility bearing interest at the Federal Funds Rate plus 0.50% and/or the Prime Rate plus 0% and/or the Eurodollar Rate plus 0.50%. For the six months ended August 31, 1996, the maximum amount borrowed was $119,000,000, the average amount borrowed was approximately $86,038,000, and the daily weighted average interest rate was 5.93%. For the six months ended August 31, 1996, facility and commitment fees aggregated $122,665. 6. Capital Loss Carryforward: At February 29, 1996, the Fund had a net capital loss carryforward of approximately $12,363,000, of which $5,318,000 expires in 2003 and $7,045,000 expires in 2004. This amount will be available to offset like amounts of any future taxable gains. 7. Subsequent Event: On September 6, 1996, the Board of Directors of the Fund declared an ordinary income dividend in the amount of $.078561 per share, payable on September 30, 1996 to shareholders of record as of September 17, 1996. 8. Acquisition of Senior High Income Portfolio II, Inc. and Senior Strategic Income Fund, Inc.: On April 15, 1996, pursuant to an agreement and plan of reorganization approved by shareholders, the Fund acquired all the assets and liabilities of Senior High Income Portfolio II, Inc. and Senior Strategic Income Fund, Inc. The acquisition was accomplished by a tax-free exchange of 24,749,374 Common Stock shares of the Fund for 16,710,754 and 7,818,379 Common Stock shares for Senior High Income Portfolio II, Inc. and Senior Strategic Income Fund, Inc., respectively. As of that date, Senior High Income Portfolio II, Inc.'s net assets of $148,924,064, including $3,140,213 of unrealized depreciation and $6,443,907 of accumulated net realized capital losses and Senior Strategic Income Fund, Inc.'s net assets of $71,458,384, including $150,877 unrealized appreciation and $2,762,085 accumulated net realized capital losses, were combined with those of the Fund. The aggregate net assets of the Fund immediately after the acquisition amounted to $449,986,715. OFFICERS AND DIRECTORS Arthur Zeikel, President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Charles C. Reilly, Director Kevin A. Ryan, Director Richard R. West, Director Terry K. Glenn, Executive Vice President N. John Hewitt, Senior Vice President Donald C. Burke, Vice President John W. Fraser, Vice President R. Douglas Henderson, Vice President Gerald M. Richard, Treasurer Patrick D. Sweeney, Secretary Custodian and Transfer Agent The Bank of New York 110 Washington Street New York, New York 10286 NYSE Symbol ARK -----END PRIVACY-ENHANCED MESSAGE-----