-----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, MfM/B411G6HRzOMuHkMBlmiOY8hmS/nnYFvDmsEjLFXx+OZYBhy1sUaq++7nFMAa 9u2zEXttZOtmuSFDQfzphg== 0000900092-00-000072.txt : 20000421 0000900092-00-000072.hdr.sgml : 20000421 ACCESSION NUMBER: 0000900092-00-000072 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HIGH INCOME PORTFOLIO INC CENTRAL INDEX KEY: 0000896665 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 223226962 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07456 FILM NUMBER: 606029 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 ANNUAL REPORT SENIOR HIGH INCOME PORTFOLIO, INC. FUND LOGO Annual Report February 29, 2000 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 For the year ended February 29, 2000, Senior High Income Portfolio, Inc.'s total investment return was +1.11%, based on a change in per share net asset value from $8.40 to $7.54, and assuming reinvestment of $0.877 per share income dividends. During the same 12-month period, the net annualized yield of the Portfolio's Common Stock was 11.72%. For the six-month period ended February 29, 2000, the total investment return on the Portfolio's Common Stock was +0.22%, based on a change in per share net asset value from $8.03 to $7.54, and assuming reinvestment of $0.447 per share income dividends. During the same period, the net annualized yield of the Portfolio's Common Stock was 11.86%. At the end of the period, the Portfolio was 23.7% leveraged as a percent of total assets, having borrowed $127.0 million of its $235.0 million credit facility at an average rate of 5.70%. (For a complete explanation of the benefits and risks of leverage, see page 5 of this report to shareholders.) Investment Approach Senior High Income Portfolio, Inc. consists largely of high-yield bonds and participations in leveraged bank loans. The high-yield bond and bank loan markets are comprised of similar industry sectors and often contain overlapping issuers. As a result, general economic events and trends tend to move the two markets in the same direction, although the bonds typically move to a greater degree than the bank loans. This is driven usually by two factors. First, bank loans are typically senior secured obligations, thus generally offering investors greater principal protection than unsecured bonds. Second, bank loans are floating rate instruments whose principal value generally does not move conversely with interest rate fluctuations, as is the case with fixed-income bonds. Market Review Market conditions were difficult for high-yield securities during 1999. While benefiting from a strong economy, the high-yield market suffered from a rise in Treasury interest rates resulting from inflationary fears and an increase in default rates. The yield on the ten-year Treasury note rose from 4.65% at the beginning of 1999 to 6.44% at year-end, producing a return of -8.25% for the year. To keep the economy from overheating and igniting inflation, the Federal Reserve Board raised the Federal Funds rate (the rate US banks charge each other for overnight loans) 100 basis points (1.00%) to 5.75% during the Portfolio's fiscal year. This sharp spike in interest rates resulted in the high-yield market posting its second consecutive year of declining prices. The average price of a bond in the high-yield market fell to 86% of par from 91% at the beginning of the year. The risk premium, measured by the spread between the yield on the average high-yield bond and the comparable Treasury bond, narrowed to 5.73% at year-end as compared to 6.57% at the beginning of the year. The reduction in the credit risk premium reflects the high-yield market's recovery from its overreaction to the global financial crisis in the third quarter of 1998. In 1999, there was approximately $91 billion of new high-yield debt issued compared to $123 billion in 1998 and $137 billion in 1997. The new-issue market was not as active as prior years in response to investors' concerns about higher interest rates and the crowding out effect of the equity market, whose sky-high returns attracted capital from the high-yield market. In addition, capital deployed by investment banks and dealers to support secondary market trading in high-yield bonds dissipated throughout the year because of uncertainty about how liquid the market would be at year-end over concerns surrounding Year 2000 readiness. Senior High Income Portfolio, Inc. February 29, 2000 Another major factor affecting the high-yield market in 1999 was the higher default rate. High-yield bond defaults rose during the year to a 5.5% annual rate, the highest level in almost a decade, as 86 domestic issuers defaulted in 1999, representing $22 billion in par amount, compared to 46 issuers and $7.9 billion in 1998. Ironically, the high level of defaults occurred during a period of strong economic growth. This was the result of several factors. First, lower commodity prices, especially in energy and chemicals, from global overcapacity derived from the 1998 Asian financial crisis drove smaller companies to lose access to capital at a time when business prospects were pressured. Second, in response to huge demand, heavy issuance of high-yield debt from 1996 to 1998 strained underwriting standards and lower-quality transactions entered the marketplace. In addition, pricing power vanished in the global competitive arena, unfavorably positioning producers of low value- added products. Finally, the healthcare industry was specifically damaged by governmental change in reimbursement rates. Going forward into 2000 and 2001, these trends have already shifted direction. In general, the global markets have turned around and demand for commodities should improve, raising prices. In addition, new issuance has been subdued and healthcare issuance has been almost non-existent. Therefore, we believe there will be a reduction in the default rate over the near term. The loan market also experienced more volatility in 1999 than its historical norm because of the higher default rate. Loan investors, seeking to prevent the anticipated problems associated with financial restructurings, sold loans that reported weaker-than- expected financial results faster to avoid potential problems. This increased trading activity heightened volatility, as dealers became less optimistic about providing liquidity for borrowers that were not meeting projected budgets. In addition, loan investors dynamically shifted their portfolios, increasing exposure to less volatile sectors or adding exposure to sectors with greater potential for credit improvement. In essence, the loan market appears to be assuming portfolio management practices similar to other markets, substantiating our view that loans do have prices, actively trade, and should be valued on the basis of available market quotations, rather than being marked at face value for the life of the loan. The technical and fundamental problems of the high-yield market have resulted in high-yield market outflows rather consistently for the past ten months. Because of fund redemptions and higher interest rates, the high-yield bond sector (as measured by the unmanaged Donaldson, Lufkin and Jenrette High Yield Index) generated a poor total return of +1.60% for the six-month period ended February 29, 2000. Bank loans (as measured by the unmanaged Donaldson, Lufkin and Jenrette Leveraged Loan Index) fared better, given the floating rate nature of the asset class, and generated a total return of +2.27% for the same period. Senior High Income Portfolio, Inc. underperformed the Indexes as a result of defaults in the portfolio, limited exposure to emerging markets that performed strongly in 1999 and its leverage, which amplifies losses in a declining market. Investment Activities At February 29, 2000, 63% of the Portfolio's assets were allocated to bonds and 37% to bank loans. More than 97% of the Portfolio's bank loan holdings were accruing interest at a yield spread above the London Interbank Offered Rate (LIBOR), the rate that major banks charge each other for US dollar-denominated deposits outside of the United States. LIBOR tracks very closely with other short-term interest rates, such as the Federal Funds rate. Since the average interest rate reset across the bank loan portion of the Portfolio is about 45 days, the yield on that portion of the Portfolio will move within a two-month period of any change in the Federal Funds rate. The Portfolio's stated average maturity was approximately 6.8 years at February 29, 2000, but based on our experience, the Portfolio's holdings can be expected to have an actual average life of about 3 years - 4 years in response to the freely prepayable nature of the bank loans. By period-end, the Portfolio was approximately 24% leveraged and spread across 215 issuers in 50 industries. (See the "Portfolio Profile" on page 23 of this report to shareholders, which provides listings of the Portfolio's ten largest holdings and five largest industries as of February 29, 2000.) Investment Strategy Throughout the six months ended February 29, 2000, the Portfolio's investment philosophy remained unchanged: to invest in leveraged transactions in which borrowers have strong market shares, experienced managements, consistent cash flows and appropriate risk/reward characteristics. In addition, we look for companies with significant underlying asset and franchise value, strong capital structures and equity sponsors that support their investments. Senior High Income Portfolio, Inc. February 29, 2000 During the six-month period, we focused on the better-priced new- issue market. New-issue transactions were also much more conservatively structured, with lower leverage and higher interest coverage as investors became more demanding. Looking ahead, we expect to emphasize growth sectors, such as wireless telecommunications, that are exhibiting improving credit trends and have access to equity capital. Substantial merger and acquisition activity and better-than-expected subscriber growth have attracted equity capital to the wireless telecommunications sector. The Portfolio's largest holding in this sector is Nextel Communications, Inc. In 1999, Nextel Communications entered the Standard & Poor's 500 Index, a tribute to its success in meeting investors' high expectations for growth and profitability. While a potential acquisition by MCI WorldCom Inc. fell through in 1999, it highlighted the strategic value of the company and since that time the stock has tripled. Nextel Communications remains a core holding of the Portfolio, and we expect its credit profile to continue to improve. While we expect that the Federal Reserve Board may increase short- term interest rates by another 0.50% before year-end, and we acknowledge that this may put pressure on high-yield bond prices over the next few months, we are optimistic about the prospects for the Portfolio in 2000. This is based on our expectations for a continuation of the strong economy in the United States with a relatively stable interest rate environment, a gradual improvement in the Asian economies and a gradual decline in credit spreads to a more normal range. In Conclusion As difficult as the past six months were for the high-yield bond and leveraged loan markets and the Portfolio, their performances illustrate the bank loan market's ability to weather market fluctuations with less volatility than the high-yield bond market. This is what differentiates the Portfolio from a pure high-yield bond fund. This attribute continues to draw many new institutional buyers to the bank loan market. We believe that both the technical and fundamental aspects are improving in both the high-yield bond and bank loan sectors. We also believe we have positively positioned the Portfolio to follow further expected improvements in the marketplace in an effort to seek to enhance total return potential in the coming months. We thank you for your investment in Senior High Income Portfolio, Inc., and we look forward to reviewing our outlook and strategy with you again in our next report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Richard C. Kilbride) Richard C. Kilbride Vice President and Co-Portfolio Manager (Gilles Marchand) Gilles Marchand Vice President and Co-Portfolio Manager (Paul Travers) Paul Travers Vice President and Co-Portfolio Manager April 11, 2000 Senior High Income Portfolio, Inc. February 29, 2000 RISK/REWARD OF VARIOUS ASSETS The graph below plots the annualized return and volatility experienced by several asset classes averaged over the last eight years. The annualized returns represent the annualization of the monthly series of returns for each asset class over the time period indicated. The annualized volatility represents the annualization of the monthly series of standard deviation for each asset class over the time period indicated. Asset classes resting on the capital markets line, linking the risk/return data points for money market securities and the broad equity market, experienced a proportionate amount of return for the corresponding amount of risk. Asset classes falling below the line endured a disproportionate amount of risk relative to the return they achieved. Finally, asset classes lying above the line achieved higher returns than justified by the risk they experienced. Leveraged bank loans fall above the line, which illustrates that, compared to other asset classes, the bank loan market provided superior risk/reward characteristics over the period. Scatter Chart Referenced Above Appears Here. Source: Calculated by Merrill Lynch using information and data presented in Ibbotson Investment Analysis Software, c2000 Ibbotson Associates, Inc. All rights reserved. Used with permission. The assets used in the above analysis are represented by the following indexes: US 30-day Treasury Bill Index (Money Market Securities); Merrill Lynch Mortgage Index (Mortgage Securities); Ibbotson's U.S. IT (Intermediate Treasuries); Ibbotson's U.S. LT Index (Long-Term Treasuries); Merrill Lynch Corporate Index (Investment-Grade Bonds); Donaldson, Lufkin & Jenrette HY Index (High Yield Bonds); Donaldson Lufkin & Jenrette Leveraged Loan Index (Leveraged Loans); EMBI Fixed Rate Index (Emerging Market Bonds); and Standard & Poor's 500 Index (Broad Equity Market). Money market securities are managed to maintain stable net asset values and are highly liquid. US long-term Treasury bonds and US intermediate Treasury bonds are guaranteed by the US government, and, if held at maturity, offer both a fixed investment return and a fixed principal value. Investment-grade bonds, although not guaranteed by the US government, also offer both fixed principal value and investment return if held at maturity. High-yield bonds, emerging market bonds and leveraged loans entail greater risk than investment-grade bonds or loans. Certain leveraged bank loans may be considered illiquid. Past performance is not a guarantee of future results. The Portfolio's performance is not represented in the above chart. Senior High Income Portfolio, Inc. February 29, 2000 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. Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Advertising-- B B1 $ 1,000,000 Outdoor Systems Inc., 8.875% due 6/15/2007 $ 1,020,000 1.1% NR* NR* 3,683,333 Petry Media, Term, due 3/31/2002+++ 3,609,667 -------------- 4,629,667 Agricultural B B2 2,000,000 Sun World International, Inc., 11.25% due 4/15/2004 2,025,000 Products--0.5% Aircraft & BB Ba2 1,980,400 Airplanes Pass Through Trust, 10.875% due 3/15/2012 (d) 1,699,302 Parts--0.4% Amusement & AMC Entertainment Inc.: Recreational B- B3 1,275,000 9.50% due 3/15/2009 (b) 975,375 Services--3.2% B- B3 700,000 9.50% due 2/01/2011 528,500 B B2 800,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 600,000 B+ B1 2,000,000 Hollywood Entertainment, 10.625% due 8/15/2004 (b) 1,810,000 BBB- Baa3 4,000,000 Metro Goldwyn Mayer Co. (MGM), Term A, due 12/15/2005+++ 3,926,668 B B2 2,500,000 Riddell Sports, Inc., 10.50% due 7/15/2007 2,100,000 B+ B1 3,000,000 SFX Entertainment, Term B, due 6/30/2006+++ 3,002,625 -------------- 12,943,168 Apparel--1.0% Arena Brands, Inc.+++: NR* NR* 753,541 Revolving Credit, due 6/01/2002 697,026 NR* NR* 829,163 Term A, due 6/01/2002 768,012 NR* NR* 1,976,776 Term B, due 6/01/2002 1,833,460 B- Ba3 1,500,000 GFSI Inc., 9.625% due 3/01/2007 900,000 -------------- 4,198,498 Automotive CC Caa1 4,000,000 Cambridge Industries Inc., 10.25% due 7/15/2007 720,000 Equipment-- BB- Ba3 3,737,500 Collins & Aikman, Term A, due 12/31/2003+++ 3,683,773 4.2% B+ B2 1,000,000 Delco Remy International Inc., 10.625% due 8/01/2006 985,000 BB- Ba3 800,000 Hayes Lemmerz International Inc., 8.25% due 12/15/2008 698,000 CCC+ Caa2 3,635,000 Key Plastics, Inc., 10.25% due 3/15/2007 1,163,200 CCC+ Caa1 1,500,000 Newcor Inc., 9.875% due 3/01/2008 885,000 Safelite Glass Corp.+++: B+ B1 2,051,122 Term B, due 12/23/2004 1,119,912 B+ B1 2,051,122 Term C, due 12/23/2005 1,119,912 B- B3 1,600,000 Special Devices Inc., 11.375% due 12/15/2008 1,088,000 BB B2 1,875,000 Tenneco Inc., 11.625% due 10/15/2009 (b) 1,905,469 Venture Holdings Trust: B B2 3,325,000 9.50% due 7/01/2005 3,025,750 B- B3 700,000 12% due 6/01/2009 595,000 -------------- 16,989,016 Broadcast B B2 2,875,000 Ackerley Group Inc., 9% due 1/15/2009 2,713,281 Radio & TV-- B- B3 1,000,000 ++Acme Television/Finance, 10.875% due 9/30/2004 881,250 5.0% B- B3 3,000,000 Albritton Communications, 9.75% due 11/30/2007 2,910,000 NR* NR* 3,200,000 Gocom Communications, Term B, due 12/31/2007+++ 3,192,000 NR* Caa1 5,000,000 ++Radio Unica Corp., 11.75% due 8/01/2006 3,200,000 B- B3 3,775,000 Spanish Broadcasting System, 9.625% due 11/01/2009 3,708,938 Young Broadcasting Corporation: B B2 2,000,000 10.125% due 2/15/2005 1,960,000 B B2 2,000,000 9% due 1/15/2006 1,825,000 -------------- 20,390,469
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Building & B- B2 $ 1,525,000 Webb (Del E.) Corp., 10.25% due 2/15/2010 $ 1,330,563 Construction-- 0.3% Building Dal Tile International, Inc.+++: Materials--1.4% NR* NR* 1,069,519 Revolving Credit, due 12/31/2002 1,037,433 NR* NR* 1,764,706 Term, due 12/31/2002 1,720,588 Paint Sundry+++: NR* NR* 886,076 Term, due 8/11/2008 841,772 NR* NR* 604,494 Term B, due 8/11/2005 595,426 NR* NR* 503,228 Term C, due 8/11/2006 495,679 B B2 1,000,000 Republic Group Inc., 9.50% due 7/15/2008 900,000 -------------- 5,590,898 Cable CSC Holdings Inc.: Television BB+ Ba2 800,000 7.25% due 7/15/2008 746,840 Services--9.8% BB+ Ba2 1,000,000 7.625% due 7/15/2018 920,855 Charter Communications Holdings LLC: B+ B2 2,500,000 8.625% due 4/01/2009 2,275,000 B+ B2 5,000,000 10% due 4/01/2009 4,968,750 Classic Cable Inc.: B- B3 800,000 9.375% due 8/01/2009 750,000 B- B3 2,250,000 10.50% due 3/01/2010 (b) 2,252,813 BB B1 2,605,263 Term C, due 1/31/2008+++ 2,608,520 CCC+ B3 3,000,000 Coaxial Communications/Phoenix, 10% due 8/15/2006 2,868,750 BB+ Baa2 3,000,000 Lenfest Communications, Inc., 8.375% due 11/01/2005 3,072,570 NR* B1 1,500,000 Multicanal SA, 10.50% due 4/15/2018 1,211,250 CCC+ B3 500,000 Park N View Inc., 13% due 5/15/2008 350,000 B- B3 1,000,000 RCN Corporation, 10.125% due 1/15/2010 930,000 D Caa3 1,575,000 Supercanal Holdings SA, 11.50% due 5/15/2005 (b)(e) 929,250 Telewest Communications PLC: B+ B1 5,000,000 9.625% due 10/01/2006 5,025,000 B+ B1 2,900,000 9.875% due 2/01/2010 (b) 2,903,625 United Pan-European Communications NV (b): B- B2 3,000,000 ++10.875% due 8/01/2009 2,970,000 B+ B2 5,000,000 11.25% due 2/01/2010 5,037,500 -------------- 39,820,723 Chemicals-- BB- B3 3,000,000 Acetex Corp., 9.75% due 10/01/2003 2,835,000 8.1% NR* NR* 4,945,652 Epsilon Products, Term B, due 12/31/2005+++ 4,911,873 BBB- Baa3 2,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 1,949,520 Huntsman Corp.: B+ B2 6,000,000 9.38% due 7/01/2007 (b) 5,460,000 NR* NR* 3,477,209 Term, due 12/31/2002+++ 3,456,927 Lyondell Petrochemical Co.+++: NR* Ba3 8,105,809 Term B, due 6/30/2005 8,201,465 NR* Ba3 1,985,000 Term E, due 5/17/2006 2,037,982 NR* NR* 4,029,810 Vinings Industries, Term B, due 3/31/2005+++ 4,005,885 -------------- 32,858,652 Computer- NR* NR* 4,225,983 Bridge Information, Term B, due 5/29/2005+++ 4,072,204 Related B- B3 2,000,000 Federal Data Corp., 10.125% due 8/01/2005 1,300,000 Products--1.3% -------------- 5,372,204 Consumer B+ B2 1,000,000 Evenflo Company Inc., 11.75% due 8/15/2006 970,000 Products--0.5% BB B1 1,050,000 Home Products International Inc., 9.625% due 5/15/2008 945,000 -------------- 1,915,000
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Diversified B+ Ba1 $ 2,992,500 Blount Inc., Term B, due 6/30/2006+++ $ 3,011,203 - --0.7% Drilling--2.5% BB- B1 4,000,000 Cliffs Drilling, 10.25% due 5/15/2003 3,980,000 BBB- NR* 2,000,000 Falcon Drilling Co. Inc., 9.75% due 1/15/2001 2,000,000 B+ B1 2,475,000 Parker Drilling Co., 9.75% due 11/15/2006 2,357,438 NR* NR* 1,727,718 Rigco North America, Term, due 9/30/2000+++ 1,684,525 -------------- 10,021,963 Educational B- B3 1,050,000 La Petite Academy/LPA Holdings, 10% due 5/15/2008 693,000 Services--0.2% Electronics/ B B2 3,232,000 Advanced Glassfiber Yarn, 9.875% due 1/15/2009 2,973,440 Electrical BB- Ba3 3,000,000 Amkor Technologies Inc., 9.25% due 5/01/2006 2,910,000 Components-- B B2 1,613,000 BGF Industries Inc., 10.25% due 1/15/2009 1,475,895 2.0% B+ B3 1,000,000 High Voltage Engineering, 10.50% due 8/15/2004 817,500 -------------- 8,176,835 Energy--5.7% B Ba2 2,000,000 Belco Oil & Gas Corp., 8.875% due 9/15/2007 1,860,000 B- B3 2,500,000 Bellwether Exploration, 10.875% due 4/01/2007 2,262,500 BBB B3 2,000,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 1,890,000 CCC Caa1 1,000,000 Continental Resources, 10.25% due 8/01/2008 950,000 BBB+ Ba3 1,000,000 Cross Timbers Oil Company, 8.75% due 11/01/2009 917,500 B- Caa1 1,500,000 Energy Corp. of America, 9.50% due 5/15/2007 1,065,000 NR* Ba2 5,000,000 Ferrell Companies, Inc., Term C, due 6/17/2006+++ 4,943,750 B B2 2,000,000 Forest Oil Corporation, 10.50% due 1/15/2006 2,020,000 CCC+ B3 1,850,000 Gothic Production Corp., 11.125% due 5/01/2005 1,540,125 BB- Ba2 2,000,000 Gulf Canada Resources Ltd., 9.25% due 1/15/2004 2,008,360 CC Ca 2,000,000 Kelly Oil & Gas Corp., 10.375% due 10/15/2006 945,000 B+ B1 3,000,000 Nuevo Energy Company, 9.50% due 6/01/2008 2,925,000 -------------- 23,327,235 Environmental-- B+ B3 3,200,000 IT Group Inc., 11.25% due 4/01/2009 3,044,000 0.8% Financial NR* NR* 2,422,081 Blackstone Capital, Term, due 11/30/2000+++ 2,403,915 Services--3.8% NR* Ba3 4,000,000 Highland Legacy Limited Co., 12.29875% due 6/01/2011 (b) 3,960,000 NR* NR* 500,000 Investcorp SA, Term, due 10/21/2008+++ 496,915 NR* Ba3 1,000,000 Pennant CBO Limited, 13.43% due 9/14/2011 (b) 990,000 SKM-Libertyview CBO Limited (b): NR* Baa2 1,500,000 8.71% due 4/10/2011 1,314,585 NR* Ba3 1,000,000 11.91% due 4/10/2011 877,031 BB+ Ba3 3,000,000 Sovereign Bank, Term, due 11/17/2003+++ 3,013,125 NR* NR* 2,378,830 Wasserstein, Term, due 11/30/2000+++ 2,360,988 -------------- 15,416,559 Food & Kindred B B2 3,000,000 SC International Services, Inc., 9.25% due 9/01/2007 2,760,000 Products--0.7% Forest B B2 4,500,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (c) 4,848,750 Products--3.3% B+ B3 550,000 Millar Western Forest, 9.875% due 5/15/2008 543,125 BB+ Ba2 6,000,000 Tembec Finance Corporation, 9.875% due 9/30/2005 6,060,000 CCC+ Caa1 4,000,000 Uniforet Inc., 11.125% due 10/15/2006 1,800,000 -------------- 13,251,875
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Furniture & B+ Ba3 $ 3,150,000 Formica Corporation, 10.875% due 3/01/2009 $ 2,787,750 Fixtures--0.7% Gaming--6.7% B- B1 1,375,000 Argosy Gaming Company, 10.75% due 6/01/2009 1,412,813 B- Ba3 1,350,000 Coast Hotels & Casino, 9.50% due 4/01/2009 1,265,625 B B2 1,500,000 Harvey Casino Resorts, 10.625% due 6/01/2006 1,541,250 Hollywood Park Inc.: BB- Ba2 5,275,000 9.25% due 2/15/2007 5,103,563 B B2 2,000,000 9.50% due 8/01/2007 1,940,000 BB+ Ba2 1,150,000 Horseshoe Gaming Holdings, 8.625% due 5/15/2009 1,060,875 BB Ba2 2,360,000 Isle of Capri Casinos, 8.75% due 4/15/2009 2,091,550 NR* NR* 735,488 Jazz Casino Co. LLC, 8% due 5/15/2010 (c) 69,871 B B2 5,000,000 Majestic Star LLC, 10.875% due 7/01/2006 4,800,000 BB- Ba3 3,000,000 Mohegan Tribal Gaming, 8.75% due 1/01/2009 2,872,500 B B2 3,850,000 Peninsula Gaming LLC, 12.25% due 7/01/2006 (b)(g) 4,004,000 B B2 1,700,000 Trump Atlantic City Associates/Funding Inc., 11.25% due 5/01/2006 1,156,000 -------------- 27,318,047 Grocery B B2 5,000,000 Grand Union Co., Term, due 8/17/2003+++ 4,975,000 Stores--1.2% Healthcare B+ NR* 4,825,000 Iasis Health, Term B, due 9/30/2006+++ 4,728,500 Providers--1.8% D Caa2 3,000,000 Integrated Health Services, Inc., 9.50% due 9/15/2007 60,000 BB- Ba3 2,500,000 Tenet Healthcare Corp., 8.625% due 1/15/2007 2,375,000 -------------- 7,163,500 Hotels & B- Ba3 6,000,000 Extended Stay America, 9.15% due 3/15/2008 5,355,000 Motels--4.9% HMH Properties, Inc.: BB Ba2 1,600,000 8.45% due 12/01/2008 1,436,000 BB Ba2 1,075,000 Series B, 7.875% due 8/01/2008 932,563 B B3 4,520,000 Lodgian Financing Corporation, 12.25% due 7/15/2009 4,248,800 BB Ba2 3,000,000 Prime Hospitality Corporation, 9.25% due 1/15/2006 2,910,000 Wyndam International, Term+++: B+ B3 2,000,000 due 6/30/2006 1,974,062 B+ B3 3,000,000 due 6/30/2006 2,921,667 -------------- 19,778,092 Industrial BB- Ba3 1,750,000 American Plumbing & Mechanic, 11.625% due 10/15/2008 1,592,500 Consumer B B2 3,450,000 Building One Services, 10.50% due 5/01/2009 (b) 3,174,000 Services--1.2% -------------- 4,766,500 Insurance--0.5% B+ Ba3 2,475,000 Willis Corroon Corporation, 9% due 2/01/2009 1,980,000 Leasing Avis Rent A Car+++: & Rental BB+ Ba3 2,500,000 Term B, due 6/30/2006 2,516,537 Services--3.3% BB+ Ba3 2,500,000 Term C, due 6/30/2007 2,518,125 CCC B1 4,975,000 MEDIQ Life Support Services, Inc., Term, due 6/30/2006+++ 3,258,625 National Equipment Services: B B3 1,000,000 10% due 11/30/2004 965,000 B B3 500,000 10% due 11/30/2004 482,500 B B3 500,000 Neff Corp., 10.25% due 6/01/2008 450,000 BB+ Ba2 2,500,000 United Rental, Term C, due 8/12/2006+++ 2,497,265 B B3 1,000,000 Universal Hospital Services, 10.25% due 3/01/2008 680,000 -------------- 13,368,052
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Manufacturing B+ B1 $ 1,500,000 Citation Corporation, Term B, due 12/01/2007+++ $ 1,485,469 - --4.3% B- B2 1,932,000 Fairfield Manufacturing Company Inc., 9.625% due 10/15/2008 1,758,120 CCC- Ca 1,500,000 Morris Materials Handling, 9.50% due 4/01/2008 285,000 B- B3 1,250,000 Russell-Stanley Holding Inc, 10.875% due 2/15/2009 1,087,500 NR* B1 4,924,623 Terex Corp., Term B, due 3/06/2005+++ 4,931,660 BB- Ba3 3,500,000 TransTechnology, Term, due 8/31/2009+++ 3,447,500 B B2 5,000,000 Woods Equipment Company, 12% due 7/15/2009 4,550,000 -------------- 17,545,249 Medical Alaris Medical Systems, Inc.+++: Equipment--0.9% B+ B1 1,246,400 Term B, due 11/01/2003 1,241,726 B+ B1 1,246,400 Term C, due 11/01/2004 1,241,726 B+ B1 1,173,141 Term D, due 5/01/2005 1,168,742 -------------- 3,652,194 Metals & CC Ca 3,000,000 Anker Coal Group, Inc., 9.75% due 10/01/2007 2,100,000 Mining--6.4% BB NR* 596,695 Asarco Incorporated, Term B, due 5/18/2001+++ 595,576 B B1 850,000 Bayou Steel Corp., 9.50% due 5/15/2008 784,125 BB- B2 2,000,000 CSN Iron SA, 9.125% due 6/01/2007 (b) 1,680,000 GS Technologies Operating Co.: B Caa1 1,000,000 12% due 9/01/2004 560,000 B Caa1 1,000,000 12.25% due 10/01/2005 560,000 D C 1,000,000 Geneva Steel, 9.50% due 1/15/2004 (e) 190,000 Ispat International N.V.+++: BB Ba3 1,822,250 Term B, due 7/15/2005 1,812,126 BB Ba3 1,822,250 Term C, due 7/15/2006 1,812,126 B+ Aaa 3,500,000 Ivaco, Inc., 11.50% due 9/15/2005 3,753,750 CCC+ Caa2 1,600,000 Metal Management Inc., 10% due 5/15/2008 1,200,000 B+ B2 875,000 Pen Holdings Inc., 9.875% due 6/15/2008 796,250 B B3 3,000,000 Renco Metals Inc., 11.50% due 7/01/2003 2,557,500 B+ B1 2,000,000 Russel Metals Inc., 10% due 6/01/2009 2,040,000 B+ B2 6,000,000 Wheeling-Pittsburg Steel Corp., Term, due 11/15/2006+++ 5,730,000 -------------- 26,171,453 Online B- B3 1,150,000 PSINet Inc., 11% due 8/01/2009 1,152,875 Services--0.5% B- B3 750,000 Verio Inc., 11.25% due 12/01/2008 768,750 -------------- 1,921,625 Packaging--1.9% B B2 4,000,000 Anchor Glass, 11.25% due 4/01/2005 3,200,000 B- Caa1 675,000 Consumers Packaging Inc., 9.75% due 2/01/2007 384,750 B- B3 1,000,000 Fonda Group Inc., 9.50% due 3/01/2007 835,000 B B3 4,000,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 3,200,000 -------------- 7,619,750 Paper--5.6% B B3 1,150,000 American Tissue Inc., 12.50% due 7/15/2006 (b) 1,178,750 BB Ba2 4,975,000 Pacifica, Term B, due 12/31/2006+++ 4,999,875 B+ B2 5,000,000 Repap New Brunswick, Inc., Term B, due 6/01/2004+++ 4,896,875 Riverwood International, Inc.+++: B+ B1 8,359,962 Term B, due 2/28/2004 8,394,364 B+ B1 3,343,002 Term C, due 8/28/2004 3,357,628 -------------- 22,827,492
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Petroleum BB Ba3 $ 5,000,000 Clark Refining & Marketing, Term, due 11/15/2004+++ $ 3,125,000 Refineries BB- B1 2,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008 1,845,000 - --1.5% B- B3 2,000,000 United Refining Co., 10.75% due 6/15/2007 1,200,000 -------------- 6,170,000 Printing & B- Caa3 800,000 Premier Graphics Inc., 11.50% due 12/01/2005 360,000 Publishing B- B3 900,000 Regional Independent Media, 10.50% due 7/01/2008 900,000 - --0.8% B- B3 1,500,000 T/SF Communications Corp., 10.375% due 11/01/2007 1,428,750 BBB- Baa3 750,000 World Color Press Inc., 8.375% due 11/15/2008 733,325 -------------- 3,422,075 Property NR* Ba3 3,000,000 NRT Incorporated, Term, due 7/31/2004+++ 2,987,814 Management-- B- B1 600,000 Prison Realty Trust Inc., 12% due 6/01/2006 576,000 0.9% -------------- 3,563,814 Restaurants-- Domino & Bluefence+++: 1.2% B+ B1 904,914 Term B, due 12/21/2006 909,721 B+ B1 905,857 Term C, due 12/21/2007 910,872 NR* B1 2,957,627 Shoney's Inc., Term B, due 4/30/2002+++ 2,834,392 -------------- 4,654,985 Retail NR* NR* 3,960,000 Asbury Automotive, Senior Note, due 3/31/2005+++ 3,910,500 Specialty--1.8% B B3 1,575,000 TM Group Holdings, 11% due 5/15/2008 1,559,250 B- Caa1 2,000,000 United Auto Group, Inc., 11% due 7/15/2007 1,900,000 -------------- 7,369,750 Satellite Echostar DBS Corporation: Telecom- B B2 700,000 9.25% due 2/01/2006 682,500 munications B B2 3,275,000 9.375% due 2/01/2009 3,201,313 Distribution Pegasus Communications: Systems--2.1% CCC+ B3 350,000 9.75% due 12/01/2006 337,750 NR* NR* 2,000,000 Term, due 4/30/2005+++ 2,005,834 B+ B1 2,425,000 Satelites Mexicanos SA, 9.75% due 6/30/2004 (b) 2,303,750 -------------- 8,531,147 Shipbuilding BB Ba1 4,000,000 Newport News Shipbuilding, Inc., 9.25% due 12/01/2006 3,920,000 & Repairing - --1.0% Shipping--1.8% BB- Ba3 4,500,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 3,757,500 CCC+ B2 1,525,000 Enterprises Shipholding, 8.875% due 5/01/2008 930,250 BB Ba2 3,000,000 Stena AB, 10.50% due 12/15/2005 2,760,000 -------------- 7,447,750 Textile Mill B Caa3 3,000,000 Galey & Lord, Inc., 9.125% due 3/01/2008 930,000 Products--0.8% B- Caa1 900,000 Globe Manufacturing Corp., 10% due 8/01/2008 378,000 BB Ba3 2,050,000 Westpoint Stevens Inc., 7.875% due 6/15/2008 (f) 1,722,000 -------------- 3,030,000 Tower BB- B1 4,000,000 American Tower, Term B, due 12/31/2007+++ 4,030,832 Construction Crown Castle International Corporation: & Leasing--1.8% B+ B1 500,000 9% due 5/15/2011 472,500 B B1 3,000,000 9.50% due 8/01/2011 2,917,500 -------------- 7,420,832 Transportation D Ca 4,000,000 AmeriTruck Distribution Corp., 12.25% due 11/15/2005 (e) 85,000 Services--0.5% BB- NR* 2,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (b) 1,650,000 NR* NR* 556,651 Trism, 12% due 2/09/2005 (e) 333,991 -------------- 2,068,991
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries Rating Rating Amount Corporate Debt Obligations Value Utilities--1.0% BB Ba1 $ 4,500,000 AES Corporation, 8.50% due 11/01/2007 $ 4,106,250 Waste Allied Waste+++: Management-- BB Ba3 2,272,727 Term B, due 6/30/2006 2,194,095 3.5% BB Ba3 2,727,273 Term C, due 6/30/2007 2,634,496 B+ B2 3,000,000 Allied Waste North America, 10% due 8/01/2009 2,475,000 BB- B3 5,000,000 ++Norcal Waste Systems, 13.50% due 11/15/2005 5,262,500 B+ Ca 1,350,000 Safety-Kleen Corporation, 9.25% due 5/15/2009 1,161,000 B B3 575,000 Stericycle Inc., 12.375% due 11/15/2009 587,938 -------------- 14,315,029 Wired B B3 3,375,000 Caprock Communications Corporation, 11.50% due 5/01/2009 3,425,625 Telecommun- NR* NR* 3,350,000 ++E.Spire Communications, 10.521% due 7/01/2008 1,641,500 ications--7.7% B B3 500,000 Hermes Europe RailTel BV, 10.375% due 1/15/2009 468,750 B B3 2,850,000 Level 3 Communications Inc., 9.125% due 5/01/2008 2,579,250 B+ B2 750,000 Metromedia Fiber Network, 10% due 11/15/2008 736,875 BBB Baa3 1,675,000 ++Metronet Communications, 9.95% due 6/15/2008 1,317,384 Nextlink Communications Inc.: B B2 2,500,000 9% due 3/15/2008 2,325,000 B B2 3,000,000 ++12.25% due 6/01/2009 1,815,000 NR* NR* 2,500,000 Pacific Cross, Term B, due 7/28/2006+++ 2,443,750 Primus Telecommunications Group: B- B3 800,000 11.75% due 8/01/2004 792,000 B- B3 1,475,000 11.25% due 1/15/2009 1,401,250 RSL Communications PLC: B- B2 3,000,000 9.125% due 3/01/2008 2,445,000 B- B2 3,000,000 ++11.965% due 3/01/2008 1,627,500 B- B3 3,333,333 Teligent Inc., Term, due 7/01/2002+++ 3,272,917 NR* NR* 500,000 Versatel Telecom BV, 11.875% due 7/15/2009 (b) 510,000 Williams Communication Group Inc.: BB- B2 1,250,000 10.70% due 10/01/2007 1,284,375 BB- B2 1,250,000 10.875% due 10/01/2009 1,275,000 Worldwide Fiber Inc.: B+ B3 1,500,000 12.50% due 12/15/2005 1,571,250 B+ B3 500,000 12% due 8/01/2009 520,000 -------------- 31,452,426 Wireless B- Caa1 3,000,000 ++McCaw International Ltd., 13.355% due 4/15/2007 2,175,000 Telecommun- B- B3 1,650,000 ++Microcell Telecommunications, 12% due 6/01/2009 1,076,625 ications--5.8% Nextel Communications, Inc.+++: BB- Ba2 2,500,000 Term B, due 6/30/2008 2,527,232 BB- Ba2 2,500,000 Term C, due 12/31/2008 2,527,232 NR* NR* 1,000,000 ++PTC International Finance BV, 10.269% due 7/01/2007 680,000 B+ B2 750,000 PTC International Finance II SA, 11.25% due 12/01/2009 (b) 757,500 NR* B2 5,000,000 Telecorp PCS, Inc., Term B, due 1/15/2008+++ 4,989,585 CCC+ Caa1 2,000,000 ++Telesystem International Wireless Inc., 16.147% due 6/30/2007 1,280,000 VoiceStream Wireless Corporation/VoiceStream Wireless Holding Company: B- B2 575,000 10.375% due 11/15/2009 (b) 594,406 B+ B1 7,000,000 Term B, due 1/15/2009+++ 7,041,013 -------------- 23,648,593 Total Investments in Corporate Debt Obligations (Cost--$576,093,123)--128.6% 522,462,176
Senior High Income Portfolio, Inc. February 29, 2000 SCHEDULE OF INVESTMENTS (continued)
Shares Industries Held Equity Investments Value Cable Television 500 Park N View Inc. (Warrants) (a) $ 500 Services--0.0% 615,733 Supercanal Holdings SA (Warrants) (a) 6 -------------- 506 Energy--0.2% 55,766 Forcenergy Inc. (e) 780,724 Financial Services--0.0% 1,500 Olympic Financial Limited (Warrants) (a) 1,500 Metals & Mining--0.0% 3,000 Gulf States Steel (Warrants) (a)(b) 30 Telephone 1,000 Unifi Communications (Warrants) (a)(b) 10 Communications--0.0% Transportation Services--0.0% 35,255 Trism (e) 17,628 Wired Telecommunications--0.1% 2,000 Metronet Communications (Warrants) (a)(b) 411,000 Wireless Telecommunications--0.0% 3,000 McCaw International Ltd. (Warrants) (a)(b) 6,750 Total Equity Investments (Cost--$1,277,731)--0.3% 1,218,148 Face Amount Short-Term Investments Commercial Paper**--0.1% $ 312,000 General Motors Acceptance Corp., 5.94% due 3/01/20003 12,000 Total Short-Term Investments (Cost--$312,000)--0.1% 312,000 Total Investments (Cost--$577,682,854)--129.0% 523,992,324 Liabilities in Excess of Other Assets--(29.0%) (117,947,810) -------------- Net Assets--100.0% $ 406,044,514 ============== *Not Rated. **Commercial Paper is traded on a discount basis; the interest rate shown reflects the discount rate paid at the time of purchase by the Fund. ++Represents a zero coupon or step bond; the interest rate shown reflects the effective yield at the time of purchase by the Fund. +++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. Corporate loans represent 47.7% of the Fund's net assets. (a)Warrants entitle the Fund to purchase a predetermined number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. (b)The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (c)Represents a pay-in-kind security which may pay interest/dividends in additional face/shares. (d)Pass-through security is subject to principal paydowns. (e)Non-income producing security. (f)Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $1,722,000, representing 0.4% of net assets. Acquisition Issue Date Cost Value Westpoint Stevens Inc., 7.875% due 6/15/2008 6/03/1998 $2,026,121 $1,722,000 Total $2,026,121 $1,722,000 ========== ========== (g)Each $1,000 face amount contains 7.042 convertible preferred membership interests of Peninsula Gaming LLC. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 FINANCIAL INFORMATION Statement of Assets, Liabilities and Capital as of February 29, 2000 Assets: Investments, at value (identified cost--$577,682,854) $ 523,992,324 Cash 718,445 Interest receivable 11,647,304 Deferred facility fees 2,476 Prepaid expenses and other assets 39,148 ------------- Total assets 536,399,697 ------------- Liabilities: Loans 127,000,000 Payables: Interest on loans $ 1,952,227 Dividends to shareholders 662,596 Investment adviser 174,072 Commitment fees 17,675 Securities purchased 8,487 2,815,057 ------------- Deferred income 158,286 Accrued expenses and other liabilities 381,840 ------------- Total liabilities 130,355,183 ------------- Net Assets: Net assets $ 406,044,514 ============= Capital: Common Stock, par value $.10 per share; 200,000,000 shares authorized (53,870,134 shares issued and outstanding) $ 5,387,013 Paid-in capital in excess of par 501,426,423 Undistributed investment income--net 3,918,292 Accumulated realized capital losses on investments--net (50,839,209) Unrealized depreciation on investments--net (53,848,005) ------------- Total Capital--Equivalent to $7.54 net asset value per share of Common Stock (market price--$6.5625) $ 406,044,514 ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 FINANCIAL INFORMATION (continued) Statement of Operations
For the Year Ended February 29, 2000 Investment Interest and discount earned $ 61,134,966 Income: Facility and other fees 485,404 ------------- Total income 61,620,370 ------------- Expenses: Loan interest expense $ 10,022,004 Investment advisory fees 3,054,718 Borrowing costs 343,935 Professional fees 125,793 Accounting services 122,200 Transfer agent fees 101,655 Custodian fees 58,794 Printing and shareholder reports 50,499 Listing fees 44,108 Directors' fees and expenses 27,058 Pricing services 15,606 Other 36,247 ------------- Total expenses 14,002,617 ------------- Investment income--net 47,617,753 ------------- Realized & Realized loss on investments--net (21,692,813) Unrealized Change in unrealized depreciation on investments--net (25,209,528) Loss on ------------- Investments Net Increase in Net Assets Resulting from Operations $ 715,412 - --Net: ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the For the Year Ended Year Ended February 29, February 28, Increase (Decrease) in Net Assets: 2000 1999 Operations: Investment income--net $ 47,617,753 $ 46,706,030 Realized loss on investments--net (21,692,813) (9,257,432) Change in unrealized appreciation/depreciation on investments--net (25,209,528) (42,080,592) ------------- ------------- Net increase (decrease) in net assets resulting from operations 715,412 (4,631,994) ------------- ------------- Dividends to Dividends to shareholders from investment income--net (47,229,886) (47,373,187) Shareholders: ------------- ------------- Capital Share Value of shares issued to Common Stock shareholders in Transactions: reinvestment of dividends -- 8,087,161 ------------- ------------- Net increase in net assets resulting from capital share transactions -- 8,087,161 ------------- ------------- Net Assets: Total decreasein net assets (46,514,474) (43,918,020) Beginning of year 452,558,988 496,477,008 ------------- ------------- End of year* $ 406,044,514 $ 452,558,988 ============= ============= *Undistributed investment income--net $ 3,918,292 $ 3,530,425 ============= ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 FINANCIAL INFORMATION (continued) Statement of Cash Flows
For the Year Ended February 29, 2000 Cash Provided Net increase in net assets resulting from operations $ 715,412 by Operating Adjustments to reconcile net increase in net assets resulting from Activities: operations to net cash provided by operating activities: Increase in receivables (1,170,612) Decrease in other assets 29,929 Increase in other liabilities 179,645 Realized and unrealized loss on investments--net 46,902,341 Amortization of discount--net (3,277,399) ------------- Net cash provided by operating activities 43,379,316 ------------- Cash Provided Proceeds from sales of long-term investments 355,870,725 by Investing Purchases of long-term investments (280,086,126) Activities: Purchases of short-term investments (125,263,688) Proceeds from sales and maturities of short-term investments 125,874,000 ------------- Net cash provided by investing activities 76,394,911 ------------- Cash Used for Cash receipts of borrowings 229,000,000 Financing Cash payments on borrowings (301,000,000) Activities: Dividends paid to shareholders (47,357,937) ------------- Net cash used for financing activities (119,357,937) ------------- Cash: Net increase in cash 416,290 Cash at beginning of year 302,155 ------------- Cash at end of year $ 718,445 ============= Cash Flow Cash paid for interest $ 9,924,542 Information: ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 FINANCIAL INFORMATION (concluded) Financial Highlights
For the For the The following per share data and ratios have been derived Year Year from information provided in the financial statements. Ended For the Year Ended Ended Feb. 29, February 28, Feb. 29, Increase (Decrease) in Net Asset Value: 2000++ 1999++ 1998++ 1997++ 1996++ Per Share Net asset value, beginning of year $ 8.40 $ 9.37 $ 9.22 $ 9.21 $ 8.94 Operating -------- -------- -------- -------- -------- Performance: Investment income--net .88 .87 .92 .89 .92 Realized and unrealized gain (loss) on investments--net (.86) (.95) .14 .04 .27 -------- -------- -------- -------- -------- Total from investment operations .02 (.08) 1.06 .93 1.19 -------- -------- -------- -------- -------- Less dividends from investment income--net (.88) (.89) (.91) (.92) (.92) -------- -------- -------- -------- -------- Net asset value, end of year $ 7.54 $ 8.40 $ 9.37 $ 9.22 $ 9.21 ======== ======== ======== ======== ======== Market price per share, end of year $ 6.5625 $ 8.125 $ 10.125 $ 9.50 $ 9.25 ======== ======== ======== ======== ======== Total Investment Based on net asset value per share 1.11% (.87%) 11.95% 10.80% 14.14% Return:* ======== ======== ======== ======== ======== Based on market price per share (9.02%) (11.26%) 17.41% 13.67% 18.82% ======== ======== ======== ======== ======== Ratios to Average Expenses, excluding interest expense .98% .90% .83% .75% .92% Net Assets: ======== ======== ======== ======== ======== Expenses 3.45% 2.99% 2.66% 1.84% 2.92% ======== ======== ======== ======== ======== Investment income--net 11.73% 9.87% 9.98% 9.45% 10.14% ======== ======== ======== ======== ======== Leverage: Amount of borrowings (in thousands) $127,000 $199,000 $181,200 $ 81,000 $ 47,000 ======== ======== ======== ======== ======== Average amount of borrowings outstanding during the year (in thousands) $175,899 $174,240 $149,166 $ 82,384 $ 68,473 ======== ======== ======== ======== ======== Average amount of borrowings outstanding per share during the year $ 3.26 $ 3.26 $ 2.85 $ 2.13 $ 2.68 ======== ======== ======== ======== ======== Supplemental Net assets, end of year (in thousands) $406,045 $452,559 $496,477 $477,170 $236,136 Data: ======== ======== ======== ======== ======== Portfolio turnover 46.11% 68.52% 58.60% 98.51% 50.76% ======== ======== ======== ======== ======== *Total investment returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.
Senior High Income Portfolio, Inc. February 29, 2000 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. The Fund's financial statements are prepared in accordance with generally accepted accounting principles, which may require the use of management accruals and estimates. 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--Corporate Loans are valued in accordance with guidelines established by the Fund's Board of Directors. Until July 9, 1999, Corporate Loans for which an active secondary market exists and for which the Investment Adviser can obtain at least two quotations from banks or dealers in Corporate Loans were valued by calculating the mean of the last available bid and asked prices in the markets for such Corporate Loans, and then using the mean of those two means. If only one quote for a particular Corporate Loan was available, such Corporate Loan was valued on the basis of the mean of the last available bid and asked prices in the market. As of July 12, 1999, pursuant to the approval of the Board of Directors, the Corporate Loans are valued at the mean between the last available bid and asked prices from one or more brokers or dealers as obtained from Loan Pricing Corporation. For Corporate Loans for which an active secondary market does not exist to a reliable degree in the opinion of the Investment Adviser, such Corporate Loans will be valued by the Investment Adviser at fair value, which is intended to approximate market value. 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 that 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 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 financial 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. Senior High Income Portfolio, Inc. February 29, 2000 NOTES TO FINANCIAL STATEMENTS (concluded) * 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) 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 dividends. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .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, 2000, the Fund paid Merrill Lynch Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, $2,448 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, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended February 29, 2000 were $276,594,613 and $354,993,582, respectively. Senior High Income Portfolio, Inc. February 29, 2000 Net realized losses for the year ended February 29, 2000 and net unrealized losses as of February 29, 2000 were as follows: Realized Unrealized Losses Losses Long-term investments $(21,692,813) $(53,690,530) Unfunded corporate loans -- (157,475) ------------ ------------ Total $(21,692,813) $(53,848,005) ============ ============ As of February 29, 2000, net unrealized depreciation for Federal income tax purposes aggregated $53,734,594, of which $3,274,688 related to appreciated securities and $57,009,282 related to depreciated securities. The aggregate cost of investments at February 29, 2000 for Federal income tax purposes was $577,726,918. 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. Shares issued and outstanding during the year ended February 29, 2000 remained constant and for the year ended February 28, 1999 increased by 909,410 as a result of dividend reinvestment. 5. Unfunded Corporate Loans: As of February 29, 2000, the Fund had unfunded loan commitments of $3,586,848, which would be extended at the option of the borrower, pursuant to the following loan agreements: Unfunded Commitment Borrower (in thousands) Arena Brands, Inc. $ 983 Dal Tile International, Inc. 1,604 Metro Goldwyn Mayer Co. 1,000 6. Short-Term Borrowings: On April 29, 1999, the Fund extended its one-year credit agreement with a syndicate of banks led by The Bank of New York. The agreement is a $235,000,000 credit facility bearing interest at the Prime rate, the Federal Funds rate plus .55%, and/or the Eurodollar rate plus .55%. For the year ended February 29, 2000 the average amount borrowed was approximately $175,899,000 and the daily weighted average interest rate was 5.70%. For the year ended February 29, 2000, facility and commitment fees aggregated $343,935. 7. Capital Loss Carryforward: At February 29, 2000, the Fund had a net capital loss carryforward of approximately $36,927,000, of which $7,098,000 expires in 2003, $12,057,000 expires in 2004, $734,000 expires in 2005, $4,283,000 expires in 2007 and $12,755,000 expires in 2008. This amount will be available to offset like amounts of any future taxable gains. 8. Subsequent Event: On March 7, 2000, the Board of Directors of the Fund declared an ordinary income dividend in the amount of $.072735 per share, payable on March 31, 2000 to shareholders of record as of March 17, 2000. Senior High Income Portfolio, Inc. February 29, 2000 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Senior High Income Portfolio, Inc.: We have audited the accompanying statement of assets, liabilities and capital, including the schedule of investments, of Senior High Income Portfolio, Inc. as of February 29, 2000, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two- year period then ended, and the financial highlights for each of the years in the five-year period then ended. 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. 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, 2000 by correspondence with the custodian and financial intermediaries; where replies were not received from financial intermediaries, we performed other auditing procedures. 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 financial highlights present fairly, in all material respects, the financial position of Senior High Income Portfolio, Inc. as of February 29, 2000, the results of its operations, its cash flows, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey April 17, 2000 Senior High Income Portfolio, Inc. February 29, 2000 PORTFOLIO PROFILE (unaudited) AS OF FEBRUARY 29, 2000 Percent of Ten Largest Holdings Total Assets Riverwood International, Inc. 2.2% Lyondell Petrochemical Co. 1.9 United Pan-European Communications NV 1.5 VoiceStream Wireless Corporation/VoiceStream Wireless Holding Company 1.4 Allied Waste North America, Inc. 1.4 Charter Communications Holdings LLC 1.4 Hollywood Park Inc. 1.3 Tembec Finance Corporation 1.1 Classic Cable Inc. 1.1 WHX Corporation 1.1 Percent of Five Largest Industries Total Assets Cable Television Services 8.6% Chemicals 6.1 Wired Telecommunications 5.8 Gaming 5.1 Metals & Mining 5.0 Percent of Quality Ratings Long-Term S&P/Moody's Investments AAA/Aaa 0.7% BBB/Baa 3.3 BB/Ba 31.0 B/B 51.8 CCC/Caa 2.4 CC/Ca 0.6 NR (Not Rated) 10.2 Percent of Breakdown of Investments Long-Term by Country Investments United States 85.5% Canada 5.5 United Kingdom 2.8 Netherlands 2.3 Greece 0.9 Argentina 0.7 Cayman Islands 0.6 Sweden 0.5 Mexico 0.4 Panama 0.3 Luxembourg 0.3 Belgium 0.1 OFFICERS AND DIRECTORS Terry K. Glenn, President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Charles C. Reilly, Director Kevin A. Ryan, Director Richard R. West, Director Arthur Zeikel, Director Joseph T. Monagle Jr., Senior Vice President Richard C. Kilbride, Vice President Gilles Marchand, Vice President Paul Travers, Vice President Donald C. Burke, Vice President and Treasurer Bradley J. Lucido, Secretary Custodian and Transfer Agent The Bank of New York 110 Washington Street New York, NY 10286 NYSE Symbol ARK -----END PRIVACY-ENHANCED MESSAGE-----