-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lY5FoYo0AR460YAhhD+Wzx4Dxq10B3NdLfMMSpPz2FPX/KFODbIOhG1Zq5AlDu68 HMk014tRJkq2vBEz5CexEw== 0000900092-94-000486.txt : 19941027 0000900092-94-000486.hdr.sgml : 19941027 ACCESSION NUMBER: 0000900092-94-000486 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940831 FILED AS OF DATE: 19941026 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HIGH INCOME PORTFOLIO INC CENTRAL INDEX KEY: 0000896665 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94555314 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. Semi-Annual Report August 31,1994 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 repre- sentation of future performance. The Fund has leveraged its Common Stock to provide Common Stock shareholders with a potentially higher rate of return. Leverage creates risk for Common Stock shareholders, including the likelihood of greater volatility of net asset value and market price of Common Stock shares, and the risk that fluctuations in short-term interest rates may reduce the Common Stock's yield. Senior High Income Portfolio, Inc. Box 9011 Princeton, NJ 08543-9011 SENIOR HIGH INCOME PORTFOLIO, INC. 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. Officers and Directors Arthur Zeikel, President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Charles C. Reilly, Director Kevin A. Ryan, Director Richard R. West, Director Terry K. Glenn, Executive Vice President N. John Hewitt, Senior Vice President Donald C. Burke, Vice President R. Douglas Henderson, Vice President Gerald M. Richard, Treasurer Patrick D. Sweeney, Secretary Custodian and Transfer Agent The Bank of New York 110 Washington Street New York, New York 10286 NYSE Symbol ARK DEAR SHAREHOLDER Senior High Income Portfolio, Inc. seeks to provide shareholders with high current income by investing primarily in senior debt obligations of companies, including portions of corporate loans made by banks and other financial institutions and both privately placed and publicly offered corporate bonds and notes. These securities by and large are rated in the lower rating categories of the established rating agencies or are unrated, as is commonly the case with bank loans. For the six-month period ended August 31, 1994, the Portfolio's total investment return was -2.53%, based on a change in per share net asset value from $9.82 to $9.15, and assuming reinvestment of $0.409 per share income dividends. During the same period, the net annualized yield of the Portfolio's Common Stock was 9.11%. Since inception (April 30, 1993) through August 31, 1994, the total investment return on the Portfolio's Common Stock was 7.50%, based on a change in per share net asset value from $9.50 to $9.15, and assuming reinvestment of $1.037 per share income dividends. At the end of the August period, the Portfolio was 25.7% leveraged, having borrowed $80 million of its $120 million line of credit available at an average borrowing cost of 5.28%. (For a complete explanation of the benefits and risks of leveraging, see page 1 of this report to shareholders.) As of August 31, 1994, the Portfolio paid out a fixed dividend of 8.50% in order to permit the Portfolio to maintain a more stable level of distributions. For Federal income tax purposes, the Portfolio will be required to distribute substantially all of its net investment income for each calendar year. All net realized long-term and short- term capital gains, if any, will be distributed to the Portfolio's shareholders annually. If the increase in short-term interest rates - --including the London Interbank Offered Rate (LIBOR)--is sustained, we would expect the fixed dividend to be increased over time. The dividend has increased from 8% since inception of the Portfolio. The Environment The six months ended August 31, 1994 were characterized by an interest rate environment that proved a mixed blessing for the Portfolio's investments. The steady rise in interest rates that began in February, and has been the overriding factor in the volatility in the US financial markets and the poor performance of the fixed-income sector in general, has had a positive effect on the floating rate portion of the Portfolio, while eroding the high-yield market further in sympathy with intermediate-term and long-term US Treasury securities. On August 16, 1994, the Federal Reserve Board raised short-term interest rates for the fifth time this year by increasing the discount rate it charges on loans to its member banks by 50 basis points (0.50%) to 4% and by pushing the Federal Funds target rate to 4.75% from 4.25% in its effort to remove some uncertainty in the financial markets and keep inflation at bay. However, selected higher-than-expected economic indicators subsequent to the end of the period have reflected continued strong growth in the economy and the likelihood of further increases in short-term interest rates. Portfolio Strategy In light of the current market environment, our focus over the last six months has been weighting the Portfolio more toward senior secured floating rate bank loans in order to take advantage of the rise in short-term interest rates. More than 99% of the Portfolio's investments in corporate loans are currently accruing interest at a yield spread above LIBOR, the rate that major international banks charge each other for US dollar-denominated deposits out- side of the United States. LIBOR has historically tracked very closely with other short-term interest rates in the United States, particularly the Federal Funds rate. Since the first tightening of monetary policy by the Federal Reserve Board in February, three-month LIBOR has risen from 3.25% to 5.25%, an increase of 200 basis points. Since the average reset on the Portfolio's floating rate investments is 49 days, their yields are likely to continue to benefit from the latest interest rate increase as they move through their resets during the next quarter. At the end of the period under review, floating rate securities made up 54% of the Portfolio's investments, with an additional 46% invested in fixed-rate high-yield bonds. Approximately $40 million in availability remains under the leverage facility. In the senior secured bank loan market, secondary issues continue to be well bid as banks, insurance companies and non-bank funds aggressively look to book floating rate assets in the current environment. At the same time, there has been a substantial increase in leveraged primary bank loan transactions as corporate borrowers have tapped the bank loan market rather than pay the higher yields demanded in the high-yield bond market. At a yield spread over LIBOR and no call protection, bank loans are a more attractive alternative than they were during the "hot" public markets of one year ago. The high-yield bond market, on the other hand, continued to suffer from the overhang from the battered US Treasury market, even though overall credit quality in many sectors is improving with the strengthening economy. This environment of soft bond prices created buying opportunities for the Portfolio. During the later part of the August period, we focused on selectively trading out of lower- yielding coupons into higher-yielding new issues or secondary names trading at attractive relative spreads. New-issue placement overall was down for the first eight months of 1994 compared to 1993 for two reasons. First, there was a perceived reluctance on the part of issuers to tap the market in advance of expected Federal Reserve Board interest rate action, and second, there was a significant slowdown of cash inflows into high-yield mutual funds. We expect this environment to continue for the remainder of the year with some week-to-week volatility based on supply pressures from the new-issue calendar. However, overall fundamentals remain positive for this asset class as favorable quarterly earnings comparisons occur with increasing regularity. We continue to focus on buying higher-yielding, improving-quality cyclical credits. This is reflected in the Portfolio's large holdings of names, such as Jefferson Smurfit/Container Corp. of America and Stone Container Corp. in the recovering linerboard industry, while the steel and homebuilding industries also reflect higher cyclical concentrations. At August 31, 1994, cash equivalents totaled 1.1% of net assets. The Portfolio's average stated maturity was 6.1 years but had a real average life of approximately 2 years--3 years as a result of the shorter average life of bank loans which are freely prepayable without call protection. The Portfolio is diversified in the floating rate portion in 22 investments across 13 industries, and in the fixed-rate portion in 59 investments across 31 industries. Stronger companies are taking advantage of attractive public debt and equity markets to improve their balance sheets and reduce debt. These trends have translated into lower default rates in both the bank loan and high-yield bond markets. We believe that low default rates will continue through the remainder of 1994. Looking forward, we expect to continue to emphasize senior secured floating rate bank loans in order to take advantage of the rising interest rate environment while being opportunistic in our high- yield bond purchases. We believe the Portfolio is well positioned to provide shareholders with the benefit of an increase in short-term interest rates. In Conclusion We appreciate your ongoing investment in Senior High Income Portfolio, Inc., and we look forward to reviewing our strategy with you again in our next report to shareholders. Sincerely, (Arthur Zeikel) Arthur Zeikel President (R. Douglas Henderson) R. Douglas Henderson Vice President and Portfolio Manager October 10, 1994 SCHEDULE OF INVESTMENTS
S&P Moody's Face Value INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b) Advertising--2.1% B B2 $ 5,000,000 Lamar Advertising Co., Senior Secured Notes, 11% due 5/15/2003 $ 5,056,250 $ 4,900,000 Aerospace--6.5% Aviall Inc., Term Loan, Tranche B, due 11/30/2000*: NR NR 882,353 7.75% to 9/07/1994 882,353 882,353 NR NR 1,176,471 7.69% to 10/07/1994 1,176,471 1,176,471 NR NR 2,941,176 8.19% to 12/07/1994 2,941,176 2,941,176 BB- Ba3 1,000,000 BE Aerospace Inc., Senior Notes, 9.75% due 3/01/2003 940,000 965,000 NR NR 4,500,000 Gulfstream Delaware Corp., Term Loan, due 3/31/1998, 7.57% to 9/08/1994* 4,500,000 4,500,000 B B2 2,000,000 Talley Manufacturing & Technology, Inc., Senior Discount Debentures, 10.75% due 10/15/2003 2,030,000 1,850,000 BB B1 3,000,000 UNC, Inc., Senior Notes, 9.125% due 7/15/2003 3,000,000 2,715,000 ------------ ------------ 15,470,000 15,030,000 Agricultural BB- B1 2,000,000 Chiquita Brands International, Inc., Products--2.0% Senior Notes, 9.125% due 3/01/2004 2,000,000 1,870,000 BB- B1 3,000,000 Fresh Del Monte Produce N.V., Series A, Senior Notes, 10% due 5/01/2003 3,037,500 2,730,000 ------------ ------------ 5,037,500 4,600,000 Automotive B B2 1,500,000 Harvard Industries, Inc., Senior Notes, Products--0.6% 12% due 7/15/2004 1,500,000 1,511,250 Broadcast/Media-- BB- Ba2 2,500,000 Continental Cablevision, Inc., Senior 1.0% Notes, 8.625% due 8/15/2003 2,500,000 2,262,500 Building & B- B2 2,500,000 Baldwin Co., Senior Notes, 10.375% due Construction--4.7% 8/01/2003 2,500,000 2,050,000 B+ B1 4,000,000 Beazer Homes USA, Inc., Senior Notes, 9% due 3/01/2004 4,000,000 3,440,000 B- B2 2,000,000 Del Webb Corp., Senior Notes, 9% due 2/15/2006 2,000,000 1,680,000 B Ba3 4,250,000 U.S. Home Corp., Senior Notes, 9.75% due 6/15/2003 4,250,000 3,835,625 ------------ ------------ 12,750,000 11,005,625 Building BB- B1 6,000,000 USG Corp., Senior Secured Notes, 10.25% Products--2.6% due 12/15/2002 6,015,000 6,127,500 Carbon & Graphite B+ B3 2,000,000 Carbide/Graphite Group, Senior Notes, Products--0.9% 11.50% due 9/01/2003 2,000,000 2,035,000 Chemicals--5.2% BB- B1 1,000,000 Huntsman Chemical Corp., Senior Notes, 11% due 4/15/2004 1,015,000 1,042,500 NR NR 5,000,000 Indspec Chemical Corp., Term Loan B, due 12/02/2000, 7.4375% to 9/30/1994* 5,000,000 5,000,000 OSI Specialties, Inc., Term Loan B, due 6/30/2000*: NR NR 1,590,909 7.34% to 9/15/1994 1,590,909 1,590,909 NR NR 1,504,132 7.57% to 9/22/1994 1,504,132 1,504,132 B+ B1 3,000,000 Uniroyal Chemical Company, Inc., 9% due 9/01/2000 3,000,000 2,865,000 ------------ ------------ 12,110,041 12,002,541 Computers--0.9% BB- B1 2,100,000 Dell Computer Corp., Senior Notes, 11% due 8/15/2000 2,118,375 2,205,000 Consumer Food B+ B1 5,000,000 Royal Crown Corp., Senior Secured Notes, Products--6.3% 9.75% due 8/01/2000 5,000,000 4,700,000 Specialty Foods Corp., Term Loan B, due 8/31/1999*: NR NR 59,200 9.75% (1) 59,200 59,200 NR NR 4,960,000 7.69% to 10/18/1994 4,960,000 4,960,000 NR NR 4,827,733 8.19% to 10/18/1994 4,827,733 4,827,733 ------------ ------------ 14,846,933 14,546,933 Consumer B+ B2 2,000,000 Drypers Corp., Series B, Senior Notes, Products--0.9% 12.50% due 11/01/2002 2,105,000 2,110,000 Containers--3.8% Silgan Corp., Term Loan B, due 9/15/1996*: NR NR 2,500,000 8.188% to 12/07/1994 2,500,000 2,500,000 NR NR 2,500,000 8.125% to 12/09/1994 2,500,000 2,500,000 B+ Ba3 4,000,000 Sweetheart Cup Co., Senior Secured Notes, 9.625% due 9/01/2000 4,000,000 3,820,000 ------------ ------------ 9,000,000 8,820,000 Diversified American Standard, Inc., Term Loan, Tranche Manufacturing-- A, due 6/01/2000*: 9.8% NR NR 8,888,889 8% to 12/02/1994 8,888,889 8,888,889 NR NR 988,815 8.0625% to 12/02/1994 988,815 988,815 B+ B1 3,000,000 Essex Group Inc., 10% due 5/01/2003 3,041,250 2,917,500 Joy Technologies, Inc., Term Loan, Tranche B, due 12/31/1997*: NR NR 3,855,255 7.8125% to 9/29/1994 3,855,255 3,855,255 NR NR 1,144,745 8% to 11/28/1994 1,144,745 1,144,745 TDII Company, Term Loan B, due 2/01/2001*: NR NR 12,875 9.50% (1) 12,875 12,875 NR NR 4,225,000 6.9375% to 9/02/1994 4,225,000 4,225,000 NR NR 600,000 7.8125% to 11/03/1994 600,000 600,000 ------------ ------------ 22,756,829 22,633,079 Drug Stores--3.5% Duane Reade Co., Term Loan A, due 9/30/1997*: NR NR 268,911 7.8125% to 9/30/1994 268,911 268,911 NR NR 6,332,848 8% to 11/30/1994 6,332,848 6,332,848 NR NR 1,500,000 Duane Reade Co., Term Loan B, due 9/30/1999, 8.50% to 11/30/1994* 1,500,000 1,500,000 ------------ ------------ 8,101,759 8,101,759 Educational B B3 5,000,000 La Petite Holdings Corp., Senior Secured Services--2.1% Notes, 9.625% due 8/01/2001 5,000,000 4,850,000 Electrical Berg Electronics, Inc., Term Loan B, due Instruments--0.9% 6/30/2001*: NR NR 8,333 9.50% (1) 8,333 8,333 NR NR 1,991,667 7.875% to 11/25/1994 1,991,667 1,991,667 ------------ ------------ 2,000,000 2,000,000
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b) Energy--2.9% BB- B1 $ 2,500,000 Ferrellgas L.P., Series B, Floating Rate Senior Notes, 7.875% due 8/01/2001 (2) $ 2,487,500 $ 2,475,000 B- B3 4,500,000 Presidio Oil Company, Senior Secured Notes, 11.50% due 9/15/2000 4,540,000 4,275,000 ------------ ------------ 7,027,500 6,750,000 Fertilizer--3.8% B B3 4,000,000 IMC Fertilizer Group, Inc., Senior Notes, 10.75% due 6/15/2003 4,000,000 4,140,000 BB- B1 3,750,000 Sherritt Gordon Ltd., Senior Notes, 9.75% due 4/01/2003 3,762,500 3,637,500 BB- B1 1,000,000 Sherritt, Inc., USD Debentures, 10.50% due 3/31/2014 1,000,000 990,000 ------------ ------------ 8,762,500 8,767,500 Forest BB- Ba3 1,000,000 Malette Inc., Senior Secured Notes, 12.25% Products--0.4% due 7/15/2004 1,000,000 1,010,000 Grocery--14.9% NR NR 5,000,000 CK Aquisitions Corp., Term Loan B, due 7/31/2001, 6.8125% to 9/29/1994* 5,000,000 5,000,000 Grand Union Co., Term Loan B, due 6/30/1998*: NR NR 24,062 9.75% (1) 24,062 24,062 NR NR 3,166,667 8.125% to 9/06/1994 3,166,667 3,166,667 NR NR 3,333,333 7.625% to 9/09/1994 3,333,333 3,333,333 B+ NR 2,500,000 Homeland Stores Inc., Series D, Floating Rate Senior Secured Notes, 7.625% due 2/28/1997 (3) 2,450,000 2,512,707 BB1 Ba1 2,000,000 Kroger Co., Senior Secured Notes, 9.25% due 1/01/2005 2,085,000 1,990,000 D Caa 1,500,000 Mega Warehouse Foods, Inc., Senior Notes, 10.25% due 10/15/2000 (a) 1,515,000 375,000 NR NR 5,000,000 Pathmark Stores, Inc., Term Loan B, due 10/31/1999, 7.8125% to 9/26/1994* 5,000,000 5,000,000 BB- Ba3 1,000,000 The Penn Traffic Company, Senior Notes, 8.625% due 12/15/2003 1,000,000 910,000 B- B2 2,000,000 Pueblo Xtra International, Inc., Senior Notes, 9.50% due 8/01/2003 2,000,000 1,640,000 Ralph's Grocery Co., Primary Term Loan, due 6/30/1998*: NR NR 4,051,521 7.375% to 9/07/1994 4,051,521 4,051,521 NR NR 158,263 7.625% to 9/14/1994 158,263 158,263 NR NR 158,263 7.50% to 9/19/1994 158,263 158,263 NR NR 1,028,707 7.5625% to 9/29/1994 1,028,707 1,028,707 NR NR 272,211 7.4375% to 10/04/1994 272,211 272,211 NR NR 158,263 7.625% to 10/24/1994 158,263 158,263 NR NR 2,798,082 7.5625% to 11/09/1994 2,798,082 2,798,082 B+ B3 2,000,000 Stater Brothers Holdings, Inc., Senior Notes, 11% due 3/01/2001 2,000,000 1,960,000 ------------ ------------ 36,199,372 34,537,079 Health B B2 2,500,000 ++Charter Medical Corp., Senior Subordin- Services--3.8% ated Notes, 11.25% due 4/15/2004 2,500,000 2,575,000 B- B2 1,000,000 Integrated Health Services, Inc., Senior Subordinated Notes, 10.75% due 7/15/2004 1,000,000 1,000,000 B+ B1 5,200,000 MEDIQ/PRN Life Support Services, Inc., Senior Secured Notes, 11.125% due 7/01/1999 5,409,000 5,200,000 ------------ ------------ 8,909,000 8,775,000 Hotels & BB- B1 2,000,000 ++Four Seasons Hotels Inc., Notes, 9.125% Motels--2.3% due 7/01/2000 1,918,200 1,820,000 B+ B2 4,500,000 GB Property Funding Corp., First Mortgage Notes, 10.875% due l/15/2004 4,500,000 3,420,000 ------------ ------------ 6,418,200 5,240,000 Leasing & Rental B- B2 2,000,000 Cort Furniture Rental Corp., Senior Notes, Services--1.6% 12% due 9/01/2000 2,000,000 1,940,000 BB- B1 2,000,000 The Scotsman Group, Inc., Senior Secured Notes, 9.50% due 12/15/2000 2,000,000 1,870,000 ------------ ------------ 4,000,000 3,810,000 Manufacturing-- B+ B1 3,623,000 Foamex L.P., Senior Secured Notes, 9.50% 1.5% due 6/01/2000 3,643,000 3,432,793 Office B+ B1 5,000,000 Bell & Howell Co., 9.25% due 7/15/2000 5,025,000 4,600,000 Machines--4.1% Lexmark Holdings, US, Term Loan, due 3/27/1998*: NR NR 2,611,276 7.2813% to 9/30/1994 2,611,276 2,611,276 NR NR 2,178,287 7.3125% to 10/31/1994 2,178,287 2,178,287 ------------ ------------ 9,8l4,563 9,389,563 Paper--15.2% NR NR 14,125,000 Fort Howard Corp., Primary Term Loan, due 5/01/1997, 7.63% to 10/21/1994* 14,125,000 14,125,000 B B3 5,000,000 Gaylord Container Corp., Senior Notes, 11.50% due 5/15/2001 5,000,000 5,112,500 NR NR 10,000,000 Jefferson Smurfit/Container Corp. of America, Term Loan, due 4/30/2002, 7.875% to 10/24/1994* 10,000,000 10,000,000 Stone Container Corp., Canadian Tender Loan, due 3/01/1997*: NR NR 424,009 7.5625% to 9/12/1994 424,009 424,009 NR NR 2,157,944 7.75% to 9/19/1994 2,157,944 2,157,944 NR NR 365,219 7.8125% to 9/29/1994 365,219 365,219 NR NR 287,197 Stone Container Corp., Canadian Term Loan, due 3/01/1997, 7.8125% to 9/29/1994* 287,197 287,197 Stone Container Corp., US Term Loan, due 3/01/1997*: NR NR 2,382,162 7.75% to 9/19/1994 2,382,162 2,382,162 NR NR 342,100 7.8125% to 9/29/1994 342,100 342,100 ------------ ------------ 35,083,631 35,196,131
SCHEDULE OF INVESTMENTS (concluded)
S&P Moody's Face Value INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b) Retail-- B B2 $ 4,000,000 Color Tile, Inc., Senior Notes, 10.75% Specialty--8.9% due 12/15/2001 $ 4,000,000 $ 3,760,000 Music Acquisition Corp., Term Loan B, due 8/31/2001*: NR NR 3,125,000 7.6875% to 9/16/1994 3,125,000 3,125,000 NR NR 1,843,750 8.375% to 2/17/1995 1,843,750 1,843,750 NR NR 9,961,400 Saks & Co., Term Loan, Tranche B, due 6/30/2000, 7.88% to 11/09/1994* 9,961,400 9,961,400 B+ B1 2,000,000 Specialty Retailers, Inc., Series A, Senior Notes, 10% due 8/15/2000 2,000,000 1,920,000 ------------ ------------ 20,930,150 20,610,150 Steel--8.8% B B2 1,000,000 A.K. Steel Corp., Senior Notes, 10.75% due 4/1/2004 1,000,000 1,020,000 B B2 3,000,000 Bayou Steel Corp., First Mortgage Notes, 10.25% due 3/01/2001 3,000,000 2,857,500 B- B3 5,000,000 Federal Industries Ltd., 10.25% due 6/15/2000 5,011,250 4,687,500 B+ B1 3,000,000 Geneva Steel, Senior Notes, 9.50% due 1/15/2004 3,000,000 2,730,000 B B2 2,000,000 Republic Engineered Steel, Inc., First Mortgage Notes, 9.875% due 12/15/2001 2,000,000 1,890,000 B+ B1 3,000,000 WCI Steel, Inc., Senior Notes, 10.50% due 3/01/2002 3,000,000 3,000,000 Weirton Steel Corp., Senior Notes: B B2 2,000,000 11.50% due 3/01/1998 2,100,000 2,070,000 B B2 2,000,000 10.875% due 10/15/1999 2,070,000 2,020,000 ------------ ------------ 21,181,250 20,275,000 Textiles--1.4% BB Ba3 3,500,000 Dominion Textile (USA) Inc., Senior Notes, 8.875% due 11/01/2003 3,482,780 3,255,000 Transportation-- B B2 2,500,000 OMI Corp., Senior Notes, 10.25% due 3.1% 11/01/2003 2,500,000 2,275,000 B+ Ba3 5,000,000 Southern Pacific Rail Corp., Senior Notes, 9.375% due 8/15/2005 5,000,000 4,875,000 ------------ ------------ 7,500,000 7,150,000 Utilities--2.6% B Ba3 2,000,000 First PV Funding Corp., 10.30% due 1/15/2014 2,020,000 1,940,000 B1 B1 4,000,000 Texas-New Mexico Power Company, Secured Debentures, 10.75% due 9/15/2003 4,000,000 4,000,000 ------------ ------------ 6,020,000 5,940,000 Warehousing & B+ B2 2,000,000 Americold Corp., First Mortgage Bonds, Storage--2.8% Series B, 11.50% due 3/01/2005 2,045,000 1,830,000 NR NR 4,581,250 Pierce Leahy Corp., Term Loan, Tranche B, due 6/30/2001, 7.75% to 9/01/1994* 4,581,250 4,581,250 ------------ ------------ 6,626,250 6,411,250 Total Investments in Corporate Debt Obligations--131.9% 314,965,883 305,290,653 Shares Held Warrants Leasing & Rental NR NR 66,000 Cort Furniture Rental Corp. (b) (c) 0 66,000 Services--0.0% Total Investments in Warrants--0.0% 0 66,000 Face Amount Short-Term Securities Commercial $ 2,519,000 General Electric Capital Corp., 4.75% Paper**--1.1% due 9/01/1994 2,519,000 2,519,000 Total Investments in Short-Term Securities--1.1% 2,519,000 2,519,000 Total Investments--133.0% $317,484,883 307,875,653 ============ Liabilities in Excess of Other Assets--(33.0%) (76,380,588) ------------ Net Assets--100.0% $231,495,065 ============ *Floating or Variable Rate Corporate Loans--The interest rates on floating or variable rate corporate loans are subject to change periodically, based on the change in the prime rate of a US Bank, LIBOR (London Interbank Offered Rate), or, in some cases, another base lending rate. The interest rates shown are those in effect at August 31, 1994. **Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of purchase by the fund. (a) Security has filed Chapter 11 for reorganization under bankruptcy protection. Interest is in default. (b) Warrants entitle the fund 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. (c) Non-income producing security. (1) Interest rate is based on the prime rate of a US bank, which is subject to change daily. (2) Interest rate resets quarterly and is based on the three-month LIBOR (London Interbank Offered Rate), plus an interest rate spread of three hundred twelve and one half basis points. (3) Interest rate resets quarterly and is based on the three-month LIBOR (London Interbank Offered Rate), plus an interest rate spread of three hundred basis points. ++Restricted securities. The value of the fund's investments in restricted securities was approximately $4,395,000, representing 1.9% of net assets. Value Issue Acquisition Date Cost (Note 1b) Charter Medical Corp., Senior Subordinated Notes, 11.25% due 4/15/2004 4/22/1994 $2,500,000 $2,575,000 Four Seasons Hotels, Inc., Notes, 9.125% due 7/01/2000 1/25/1994 1,918,200 1,820,000 ---------- ---------- Total $4,418,200 $4,395,000 ========== ========== Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of August 31, 1994 Assets: Investments, at value (identified cost--$317,484,883) (Note 1b) $307,875,653 Cash 99,007 Receivables: Interest $ 4,630,505 Commitment fees 1,199,720 5,830,225 ------------ Deferred facility expenses (Note 1d) 142,158 Deferred organization expense (Note 1e) 98,151 Prepaid expenses and other assets 1,881 ------------ Total assets 314,047,075 ------------ Liabilities: Payables: Loans (Note 5) 80,000,000 Dividends to shareholders (Note 1f) 746,942 Interest on loans (Note 5) 12,879 Investment adviser (Note 2) 136,682 80,896,503 ------------ Deferred income (Note 1d) 1,546,128 Accrued expenses and other liabilities 109,379 ------------ Total liabilities 82,552,010 ------------ Net Assets: Net assets $231,495,065 ============ Capital: Common stock, par value $.10 per share; 200,000,000 shares authorized (25,300,482 shares issued and outstanding) $ 2,530,048 Paid-in capital in excess of par 237,601,317 Undistributed investment income--net 3,176,838 Accumulated realized capital losses--net (2,203,908) Unrealized depreciation on investments--net (Note 3) (9,609,230) ------------ Total Capital--Equivalent to $9.15 net asset value per share of Common Stock (market price--$8.875) $231,495,065 ============
STATEMENT OF OPERATIONS
For the Six Months Ended August 31, 1994 Investment Income Interest and discount earned $ 14,516,856 (Note 1d): Facility and other fees 750,608 ------------ Total income 15,267,464 Expenses: Loan interest expense and commitment fees (Note 5) $ 2,548,219 Investment advisory fees (Note 2) 833,816 Facility fee amortization (Note 5) 320,259 Professional fees 88,002 Accounting services (Note 2) 43,028 Printing and shareholder reports 26,273 Amortization of organization expenses (Note 1e) 14,201 Custodian fees 13,532 Listing fees 12,924 Pricing services 12,224 Registration fees (Note 1e) 10,521 Transfer agent fees (Note 2) 9,731 Directors' fees and expenses 6,203 Other 3,558 ------------ Total expenses 3,942,491 ------------ Investment income--net 11,324,973 ------------ Realized & Realized loss on investments--net (4,142,598) Unrealized Change in unrealized appreciation/depreciation on investments--net (13,673,303) Gain (Loss) on ------------ Investments--Net Net Decrease in Net Assets Resulting from Operations $ (6,490,928) (Notes 1d & 3): ============
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the Period Months Ended April 30,1993++ Increase (Decrease) in Net Assets: August 31, 1994 to Feb. 28, 1994 Operations: Investment income--net $ 11,324,973 $ 17,533,097 Realized gain (loss) on investments--net (4,142,598) 2,392,226 Change in unrealized appreciation/depreciation on investments--net (13,673,303) 4,064,073 ------------ ------------ Net increase (decrease) in net assets resulting from operations (6,490,928) 23,989,396 ------------ ------------ Dividends & Investment income--net (10,355,841) (15,325,391) Distributions to Realized gain on investments--net -- (453,536) Shareholders ------------ ------------ (Note 1f): Net decrease in net assets resulting from dividends and distributions to shareholders (10,355,841) (15,778,927) ------------ ------------ Capital Share Value of shares issued to Common Stock shareholders in Transctions reinvestment of dividends -- 240,254,573 (Note 4): Offering costs resulting from the issuance of Common Stock -- (223,215) ------------ ------------ Net increase in net assets resulting from capital share transactions -- 240,031,358 ------------ ------------ Net Assets: Total increase (decrease) in net assets (16,846,769) 248,241,827 Beginning of period 248,341,834 100,007 ------------ ------------ End of period* $231,495,065 $248,341,834 ============ ============ *Undistributed investment income--net $ 3,176,838 $ 2,207,706 ============ ============ ++Commencement of Operations. See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
For the Six Months Ended August 31, 1994 Cash Provided Net decrease in net assets resulting from operations $ (6,490,928) by Operating Adjustments to reconcile net increase (decrease) in net assets Activities: resulting from operations to net cash provided by operating activities: Increase in receivables (1,074,913) Decrease in other assets 177,948 Decrease in other liabilities (596,070) Realized and unrealized gain (loss) on investments--net 17,815,901 Amortization of discount (63,327) ------------ Net cash provided by operating activities 9,768,611 ------------ Cash Provided by Proceeds from sales of long-term investments 70,731,972 Investing Activities: Purchases of long-term investments (63,971,879) Purchases of short-term investments--net (2,207,769) ------------ Net cash provided by investing activities 4,552,324 ------------ Cash Used for Dividends paid to shareholders (10,394,280) Financing Activities: Short-term borrowings (4,000,000) ------------ Net cash used for financing activities (14,394,280) ------------ Cash: Net decrease in cash (73,345) Cash at beginning of period 172,352 ------------ Cash at end of period $ 99,007 ============ Cash Flow Cash paid for interest $ 2,770,748 Information: ============ See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information provided in the financial statements. For the Six For the Period Months Ended April 30, 1993++ Increase (Decrease) in Net Asset Value: August 31, 1994 to Feb. 28, 1994 Per Share Net asset value, beginning of period $ 9.82 $ 9.50 Operating ------------ ------------ Performance: Investment income (loss)--net .45 .70 Realized and unrealized gain (loss) on investments--net (.71) .26 ------------ ------------ Total from investment operations (.26) .96 ------------ ------------ Less dividends and distributions: Investment income--net (.41) (.61) Realized gain on investments--net -- (.02) ------------ ------------ Total dividends and distributions (.41) (.63) ------------ ------------ Capital charge resulting from the issuance of Common Stock -- (.01) ------------ ------------ Net asset value, end of period $ 9.15 $ 9.82 ============ ============ Market price per share, end of period $ 8.875 $ 9.375 ============ ============ Total Investment Based on net asset value per share (2.53%)+++ 10.28%+++ Return:** ============ ============ Based on market price per share (0.97%)+++ 0.02%+++ ============ ============ Ratios to Average Expenses, net of reimbursement 2.47%* 1.61%* Net Assets: ============ ============ Expenses 2.47%* 1.75%* ============ ============ Investment income--net 7.11%* 7.33%* ============ ============ Supplemental Net assets, end of period (in thousands) $ 231,495 $ 248,342 Data: ============ ============ Portfolio turnover 16.66% 52.73% ============ ============ ++Commencement of Operations. +++Aggregate total investment return. *Annualized. **Total investment returns based on market value, which can be significantly greater or lesser than the net asset value, result in substantially different returns. Total investment returns exclude the effects of sales loads. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Senior 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 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 placed and publicly offered corporate bonds and notes. (b) Valuation of investments--Portfolio securities are valued on the basis of prices furnished by one or more pricing services, which determines prices for normal, institutional-size trading units. In certain circumstances, portfolio securities are valued at the last sale price on the exchange that is the primary market for such securities, or the last quoted bid price for those securities for which the over-the-counter market is the primary market or for listed securities in which there were no sales during the day. Positions in options are valued at the last sale price on the market where any such option is principally traded. Securities for which there exist no price quotations or valuations and all other assets are valued at fair value as determined in good faith by or on behalf of the Board of Directors of the Fund. Since corporate loans are purchased and sold primarily at par value, the Fund values the loans at par, unless Fund Asset Management, L.P. ("FAM") determines par does not represent fair value. In the event such a determination is made, fair value will be determined in accordance with guidelines approved by the Fund's Board of Directors. Obligations with remaining maturities of sixty days or less are valued at amortized cost unless this method no longer produces fair valuations. (c) 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. (d) 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. (e) Deferred organization expenses--Deferred organization expenses are amortized on a straight-line basis over a five-year period. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The Fund may at times pay out less than the entire amount of net investment income earned in any particular period and may at times pay out such accumulated undistributed income in other periods to permit the Fund to maintain a more stable level of distributions. 2. Investment Advisory Agreement with Affiliates: The Fund has entered into an Investment Advisory Agreement with FAM. The general partner of FAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of Merrill Lynch & Co. ("ML & Co."). The limited partners are ML & Co. and Merrill Lynch Investment Management, Inc. ("MLIM"), which is also an indirect wholly-owned subsidiary of ML & Co. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to 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. During the period May 25, 1994 to August 31, 1994, Merrill Lynch Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S"), provided security price quotations to compute the net asset value of the Fund. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, MLIM, MLPF&S, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the period ended August 31, 1994 were $53,971,879 and $70,731,972. Net realized and unrealized gain (losses) as of August 31, 1994 were as follows: Realized Unrealized Losses Losses Long-term investments $(4,142,598) $ (9,609,230) ----------- ------------ Total $(4,142,598) $ (9,609,230) =========== ============ As of August 31, 1994, net unrealized depreciation for financial reporting and Federal income tax purposes aggregated $9,609,230, of which $789,082 related to appreciated securities and $10,398,312 related to depreciated securities. The aggregate cost of investments at August 31, 1994 for Federal income tax purposes was $317,484,883. 4. Capital Share Transaction: The Fund is authorized to issue 200,000 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 holder of Common Stock. For the six months ended August 31, 1994, shares issued and outstanding remained the same. At August 31, 1994, total paid-in capital amounted to $240,131,365. 5. Short-Term Borrowings: On June 16, 1993, the Fund entered into a one-year revolving credit facility in the amount of $55 million and a two-year term loan facility in the amount of $25 million bearing interest at the Federal Funds rate plus 1%--3% on the outstanding balance. Effective June 10, 1994, the credit agreement with the Bank of New York was amended to eliminate the revolving credit facility and to reflect an increase in the term loan commitment to $120 million from $80 million, the maximum amount borrowed was $106 million, the average amount borrowed was approximately $93.5 million, and the daily weighted average interest rate was 5.28%. For the period to August 31, 1994, facility and commitment fees aggregated approximately $2,697,970. PER SHARE INFORMATION Per Share Selected Quarterly Financial Data*
Net Dividends/Distributions Investment Realized Unrealized Net Investment Income Capital For the Period Income Gains Gains Common Gains April 30, 1993++ to May 31, 1993 $.04 -- $ .01 -- -- June 1, 1993 to August 31, 1993 .20 $ .02 .02 $.17 -- September 1, 1993 to November 30, 1993 .22 .04 .06 .20 -- December 1, 1993 to February 28, 1994 .24 .04 .06 .24 $.02 March 1, 1994 to May 31, 1994 .22 (.04) (.49) .20 -- June 1, 1994 to August 31, 1994 .23 (.13) (.05) .21 -- Net Asset Value Market Price** For the Period High Low High Low Volume*** April 30, 1993++ to May 31, 1993 $9.54 $9.48 $10.125 $10.00 179 June 1, 1993 to August 31, 1993 9.70 9.56 10.125 9.50 1,347 September 1, 1993 to November 30, 1993 9.77 9.54 10.125 9.375 1,881 December 1, 1993 to February 28, 1994 9.89 9.70 9.875 9.125 1,990 March 1, 1994 to May 31, 1994 9.80 9.29 9.625 8.75 2,557 June 1, 1994 to August 31, 1994 9.89 9.13 9.29 8.25 3,034 *Calculations are based upon Common Stock outstanding at the end of each period. **As reported in the consolidated transaction reporting system. ***In thousands. ++Commencement of Operations.
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