-----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, Ljd20vufUMDna0G0qLjLubIoGwYIDHhO/ev44FO7tSYUT2HZ9u0nGdN85QoPBOdK hUcFmIoP7eX6L9S/fn4sdw== 0000900092-99-000186.txt : 19991027 0000900092-99-000186.hdr.sgml : 19991027 ACCESSION NUMBER: 0000900092-99-000186 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991026 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: 99733983 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: PO BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-30D 1 SEMI-ANNUAL REPORT SENIOR HIGH INCOME PORTFOLIO, INC. FUND LOGO Semi-Annual Report August 31, 1999 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 six-month period ended August 31, 1999, Senior High Income Portfolio, Inc.'s total investment return was +0.89%, based on a change in per share net asset value from $8.40 to $8.03, and assuming reinvestment of $0.430 per share income dividends. During the same six-month period, the net annualized yield of the Portfolio's Common Stock was 10.82%. Since inception (April 30, 1993) through August 31, 1999, the total investment return on the Portfolio's Common Stock was +57.42%, based on a change in per share net asset value from $9.50 to $8.03, and assuming reinvestment of $5.612 per share income dividends. At the end of the August period, the Portfolio was 29.9% leveraged as a percentage of total assets. (For a complete explanation of the benefits and risks of leverage, see page 4 of this report to shareholders.) Investment Approach The Portfolio's performance reflects the ongoing difficulties experienced since 1998 in the markets in which the Portfolio invests. We would like to remind shareholders that Senior High Income Portfolio, Inc. is a non-diversified, closed-end fund that seeks to provide current income by investing primarily in senior debt obligations, including leveraged bank loans and high-yield bonds that are rated in the lower rating categories of the established rating services, or unrated debt obligations of comparable quality. The debt obligations in which the Portfolio invests will, in many instances, hold the most senior position in the capital structure of the borrower (i.e. not subordinated in right of payment to other debt obligations). These senior debt obligations include leverged bank loans which, in addition to being senior debt, are often secured obligations, thus generally offering investors greater principal protection than unsecured bonds. In addition, 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. The senior debt obligations in which the Portfolio may invest also includes high-yield bonds, which are often unsecured debt securities with a fixed rate of interest. Market Review Late in the summer of 1998, the high-yield bond market was pressured by disruptions in the equity and emerging markets, which resulted in a marked decrease in liquidity and, in turn, a decrease in prices in all three markets virtually across the board. These events negatively impacted the leveraged bank loan market as well. After a brief period in early 1999 when the high-yield bond and bank loan markets had begun to stabilize, a combination of rising interest rates and widening credit spreads (that is, the spread over a risk-free investment that an investor requires to invest in high- yield bonds or leveraged loans) pushed the price of existing high- yield bond issues and bank loans (which were issued at narrower spreads) down. In addition, certain sectors experienced extreme difficulties. During the latter half of the six-month period ended August 31, 1999, the interest rate environment dominated the US capital markets. Investors were concerned that the ongoing strength in the economy would prompt the Federal Reserve Board into a round of increasing of the Federal Funds rate. At the end of June, there was relief when the Federal Reserve Board only raised interest rates by 25 basis points (0.25%). However, there were continued signs of strength in the economy, and the Federal Reserve Board raised short- term interest rates another 0.25% on August 24, 1999. During the six- month period ended August 31, 1999, the bellwether ten-year Treasury yield increased 0.68% to 5.97%, while credit spreads in both the high-yield bond and bank loan markets increased throughout the period to near historic highs. During the same period, a number of cyclical industries including paper, steel, and energy began to show signs of improvement. However, certain sectors such as healthcare and mining continued to experience difficulties, resulting in credit deterioration and principal losses (realized and unrealized) for some of the Fund's holdings. The healthcare situation is particularly problematic in the long-term care sector (for example, nursing homes) as a result of Federal legislation that effectively cut Medicaid/Medicare reimbursement payments to these service providers by as much as 40%. The mining industry is suffering through cyclical troughs in a number of commodities. This difficult market environment resulted in high-yield market outflows rather consistently since July, which, in turn, dampened investor interest in new issues. Despite a strong US economy, a rebound in the equity markets and default rates at near historic averages, the high-yield bond sector (as measured by the unmanaged Donaldson, Lufkin and Jenrette High Yield Index) generated a total return for the six-month period ended August 31, 1999 of +1.31%. Bank loans (as measured by the unmanaged Donaldson, Lufkin and Jenrette Leveraged Loan Index) faired better, given the floating rate nature of the asset class, and generated a total return of +3.86% for the same period. There is a growing correlation between the leveraged loan market and the high-yield bond market. Senior High Income Portfolio, Inc. August 31, 1999 Correlation Between Markets This correlation can be explained by the fact that 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. In fact, an analysis by Donaldson, Lufkin and Jenrette suggests that the correlation is approximately 25% and that over time the loan market has produced 80% of the return of the high-yield bond market with only 30% of the volatility. That same study suggests that the leveraged loan market has virtually no correlation to any other major asset class (equities, investment-grade corporate bonds, government securities or emerging market bonds), thus providing investors with an attractive investment diversification alternative. The "Risk/Reward of Various Assets" graph that appears on page 3 of this report to shareholders plots the annualized return and volatility experienced by several asset classes averaged over the last seven years, eight months. Asset classes resting on the line experienced a proportionate amount of return for the corresponding amount of risk. Asset classes falling below the capital markets 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 and high-yield bonds are the only asset classes to fall above the line, which illustrates that, compared to other asset classes, the bank loan and high-yield bond markets provide superior risk/reward characteristics. Investment Strategy Throughout the six months ended August 31, 1999, 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. It is these characteristics that we believe provide optimal downside protection to the Fund's net asset value. During the six months ended August 31, 1999, we focused on the new- issue market. These new issues were clearing the market at spreads higher than those required by investors earlier in the year. The new- issue transactions were also much more conservatively structured, with lower leverage and higher interest coverage as investors became more demanding. We continuously monitor our positions and manage the Portfolio's composition to reflect our views on industries and specific issuers. At August 31, 1999, 55% of the Portfolio's assets were allocated to bonds and 45% to bank loans. This position reflected our belief that bonds were very compelling given the wide credit spreads. 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 August 31, 1999, but based on our experience, the Portfolio's holdings can be expected to have an actual average life of approximately 3 years--4 years in response to the freely prepayable nature of the bank loans. The Portfolio was approximately 29% leveraged as of August 31, 1999. While we have the ability to adjust leverage to react to market conditions, we believe the current level is appropriate given our strategy, and we expect leverage to remain at present levels. The Portfolio's investments were spread across 230 issuers in 52 industries. See the "Portfolio Information" section on page 21 of this report to shareholders, which provides listings of the Portfolio's ten largest holdings and five largest industries at August 31, 1999. While we expect that the Federal Reserve Board may increase short- term interest rates by another 0.25% 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 Portfolio as we enter the year 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. Senior High Income Portfolio, Inc. August 31, 1999 In Conclusion As difficult as the months of July and August 1999 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 over 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 October 14, 1999 ML Senior High Income Portfolio, Inc. Risk/Return of Various Assets A line graph depicting the annualized return and volatility for various assets from 1992 to July 1999 Volatility Return Broad Equity Market 14.68% 19.94% Emerging Market Bonds 20.61% 14.08% High Yield Bonds 5.78% 10.56% Leveraged Loans 1.92% 8.44% U.S. Long-Term Treasury Bonds 9.17% 8.81% Investment Grade Bonds 5.13% 7.73% U.S. Intermediate Treasury Bonds 4.81% 6.25% Mortgage Secs 3.27% 6.85% Money Market Secs .30% 4.46% U.S. Inflation .56% 2.57% Source: Calculated by Merrill Lynch using information and data presented in Ibbotson Investment Analysis Software, c1999 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. LTIndex (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). Senior High Income Portfolio, Inc. August 31, 1999 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. PROXY RESULTS
During the six-month period ended August 31, 1999, Senior High Income Portfolio, Inc.'s shareholders voted on the following proposals. The proposals were approved at a shareholders' meeting on May 26, 1999. The description of each proposal and number of shares voted are as follows: Shares Shares Voted Voted For Without Authority 1. To elect the Portfolio's Board Terry K. Glenn 41,859,599 1,038,373 of Directors: Ronald W. Forbes 41,810,586 1,087,386 Cynthia A. Montgomery 41,800,090 1,097,882 Charles C. Reilly 41,841,667 1,058,305 Kevin A. Ryan 41,809,764 1,088,208 Richard R. West 41,807,050 1,090,922 Arthur Zeikel 41,865,513 1,032,459 Shares Shares Voted Shares Voted Voted For Against Abstain 2. To select Deloitte & Touche LLP as the Portfolio's independent auditors. 41,616,280 324,824 956,867
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Advertising--1.2% B B1 $ 1,000,000 Outdoor Systems Inc., 8.875% due 6/15/2007 $ 993,072 $ 1,027,500 NR* NR* 4,125,000 Petry Media, Term, due 3/31/2002+++ 4,112,456 4,021,875 ------------ ------------ 5,105,528 5,049,375 Agricultural B B2 2,000,000 Sun World International, Inc., 11.25% Products--0.5% due 4/15/2004 2,000,000 2,060,000 Air Trans- NR* Ba3 4,100,000 Atlas Freighter Leasing II, Term, portation--1.0% due 5/29/2004+++ 4,092,448 4,093,165 Aircraft & BB Ba2 2,000,000 Airplanes Pass Through Trust, Parts--1.0% 10.875% due 3/15/2019 (d) 2,000,000 1,906,360 B+ B3 2,500,000 Derlan Manufacturing, 10% due 1/15/2007 2,479,084 2,425,000 ------------ ------------ 4,479,084 4,331,360 Amusement & AMC Entertainment Inc.: Recreational B- B3 500,000 9.50% due 3/15/2009 (b) 497,675 430,000 Services--3.8% B- B3 1,475,000 9.50% due 2/01/2011 1,475,000 1,253,750 B B1 1,725,000 AMF Group, Inc., Term, due 3/31/2002+++ 1,722,261 1,619,344 B B2 800,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 803,000 740,000 B- B3 2,000,000 Hollywood Entertainment, 10.625% due 8/15/2004 (b) 2,000,000 1,930,000 B+ B1 800,000 Intrawest Corp., 9.75% due 8/15/2008 824,000 776,000 Metro Goldwyn Mayer Co. (MGM)+++: NR* NR* 615,000 Revolving Credit, due 9/30/2003 615,000 591,746 NR* NR* 4,000,000 Term A, due 12/31/2005 3,926,736 3,865,000 B B2 2,500,000 Riddell Sports, Inc., 10.50% due 7/15/2007 2,358,917 2,112,500 NR* NR* 3,000,000 SFX Entertainment, Term B, due 6/30/2006+++ 2,981,277 2,979,375 ------------ ------------ 17,203,866 16,297,715 Apparel--2.0% Arena Brands, Inc.+++: NR* NR* 651,180 Revolving Credit, due 6/01/2002 651,887 632,459 NR* NR* 926,212 Term A, due 6/01/2002 927,370 912,898 NR* NR* 1,998,216 Term B, due 6/01/2002 2,000,714 1,970,741 B- B3 1,500,000 GFSI Inc., 9.625% due 3/01/2007 1,500,000 1,198,125 NR* NR* 3,970,000 Norcross Safety, Term, due 12/31/2005+++ 3,937,528 3,890,600 ------------ ------------ 9,017,499 8,604,823 Automotive CCC+ B3 4,000,000 Cambridge Industries Inc., 10.25% Equipment-- due 7/15/2007 3,405,386 2,880,000 4.3% B B2 1,000,000 Delco Remy International Inc., 10.625% due 8/01/2006 1,000,000 992,500 B B2 800,000 Hayes Lemmerz International Inc., 8.25% due 12/15/2008 800,000 744,000 B- B3 3,635,000 Key Plastics, Inc., 10.25% due 3/15/2007 3,613,018 3,435,075 B- B3 1,500,000 Newcor Inc., 9.875% due 3/01/2008 1,500,000 1,342,500 Safelite Glass Corp.+++: BB- B1 2,061,429 Term B, due 12/23/2003 2,022,612 2,051,121 BB- B1 2,061,429 Term C, due 12/23/2004 2,021,572 2,051,121 B- B3 1,600,000 Special Devices Inc., 11.375% due 12/15/2008 1,600,000 1,320,000 Venture Holdings Trust: B B2 3,325,000 9.50% due 7/01/2005 3,330,000 3,092,250 B B2 700,000 11% due 6/01/2007 (b) 700,000 693,000 ------------ ------------ 19,992,588 18,601,567 Broadcast-- B B2 2,875,000 Ackerley Group Inc., 9% due 1/15/2009 2,960,500 2,817,500 Radio & TV-- B- B3 1,000,000 ++Acme Television/Finance, 10.875% due 3.2% 9/30/2004 891,786 825,000 B- B3 3,000,000 Albritton Communications, 9.75% due 11/30/2007 2,931,199 2,985,000 NR* Caa1 5,000,000 ++Radio Unica Corp., 14.636% due 8/01/2006 3,073,501 3,025,000
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Broadcast-- Young Broadcasting Corporation: Radio & TV B B2 $ 2,000,000 10.125% due 2/15/2005 $ 2,000,000 $ 2,060,000 (concluded) B B2 2,000,000 9% due 1/15/2006 1,952,938 1,970,000 ------------ ------------ 13,809,924 13,682,500 Building & B- B2 1,525,000 Webb (Del E.) Corp., 10.25% due Construction-- 2/15/2010 1,501,112 1,433,500 0.3% Building Dal Tile International, Inc.+++: Materials--2.7% NR* NR* 1,283,422 Revolving Credit, due 12/31/2002 1,259,289 1,238,503 NR* NR* 1,978,610 Term, due 12/31/2002 1,950,249 1,922,550 B+ B1 5,468,391 Falcon, Term, due 6/30/2005+++ 5,468,391 5,431,933 Paint Sundry+++: NR* NR* 886,076 Term, due 8/11/2008 882,968 859,494 NR* NR* 604,494 Term B, due 8/11/2005 602,491 602,227 NR* NR* 503,228 Term C, due 8/11/2006 501,523 501,341 B B2 1,000,000 Republic Group Inc., 9.50% due 7/15/2008 1,000,000 960,000 ------------ ------------ 11,664,911 11,516,048 Cable Television B B3 2,000,000 ++@Entertainment Inc., 17.50% due Services--6.0% 2/01/2009 920,544 1,192,500 B+ Ba3 2,000,000 Avalon Cable, Term B, due 10/31/2006+++ 1,986,088 2,010,000 CSC Holdings Inc.: BB+ Ba2 800,000 7.25% due 7/15/2008 800,000 741,432 BB+ Ba2 1,000,000 7.625% due 7/15/2018 999,035 889,140 Charter Communications Holdings LLC (b): B+ B2 2,500,000 8.625% due 4/01/2009 2,492,599 2,343,750 B+ B2 2,250,000 ++9.922% due 4/01/2011 1,443,759 1,350,000 B- B3 800,000 Classic Cable Inc., 9.375% due 8/01/2009 (b) 800,000 776,000 B B3 1,000,000 Coaxial Communications/Phoenix, 10% due 8/15/2006 1,052,500 1,000,000 BB+ Ba2 3,000,000 Lenfest Communications, Inc., 8.375% due 11/01/2005 2,993,724 3,096,060 BB+ Ba3 1,500,000 Multicanal SA, 10.50% due 4/15/2018 1,507,500 1,050,000 CCC+ B3 500,000 Park N View Inc., 13% due 5/15/2008 470,266 151,250 B- B3 1,225,000 ++RCN Corp., 11% due 7/01/2008 812,496 765,625 D Caa3 1,575,000 Supercanal Holdings SA, 11.50% due 5/15/2005 (b)(e) 1,575,000 803,250 Telewest Communications PLC: B+ B1 5,000,000 9.625% due 10/01/2006 5,000,000 5,050,000 B+ B1 2,875,000 ++8.97% due 4/15/2009 (b) 1,935,639 1,757,344 B- B2 3,000,000 United Pan-European Communications NV, 10.875% due 8/01/2009 (b) 3,000,000 3,026,250 ------------ ------------ 27,789,150 26,002,601 Chemicals--7.6% BB- B3 3,000,000 Acetex Corp., 9.75% due 10/01/2003 2,992,065 2,670,000 NR* NR* 5,000,000 Epsilon Products, Term B, due 12/31/2005+++ 4,989,523 4,989,523 BBB- Baa3 2,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 (b) 1,994,557 1,965,004 Huntsman Corp.: B+ B2 6,000,000 8.873% due 7/01/2007 (b) 6,000,000 5,460,000 NR* NR* 3,477,209 Term, due 12/31/2002+++ 3,473,751 3,468,516 Lyondell Petrochemical Co.+++: NR* Ba3 8,138,679 Term B, due 6/30/2005 8,151,972 8,107,434 NR* Ba3 1,995,000 Term E, due 5/17/2006 1,992,578 2,002,896 NR* NR* 4,049,864 Vinings Industries, Term B, due 3/31/2005+++ 4,046,413 4,025,820 ------------ ------------ 33,640,859 32,689,193
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Computer- NR* NR* $ 5,000,000 Bridge Information, Term B, Related due 5/29/2005+++ $ 4,989,241 $ 5,003,125 Products--1.6% B- B3 2,000,000 Federal Data Corp., 10.125% due 8/01/2005 2,000,000 1,800,000 ------------ ------------ 6,989,241 6,803,125 Consumer B+ B2 1,000,000 Evenflo Company Inc., 11.75% due Products--1.8% 8/15/2006 1,000,000 991,250 B B3 1,050,000 Home Products International Inc., 9.625% due 5/15/2008 1,050,000 924,000 B Ba3 4,455,000 Samsonite Corporation, Term, due 6/24/2005+++ 4,450,098 4,313,924 B+ B2 1,490,000 Scotts Company, 8.625% due 1/15/2009 (b) 1,490,000 1,445,300 ------------ ------------ 7,990,098 7,674,474 Drilling--2.3% BB- B1 4,000,000 Cliffs Drilling, 10.25% due 5/15/2003 4,325,000 3,910,000 BBB- NR* 2,000,000 Falcon Drilling Co. Inc., 9.75% due 1/15/2001 2,115,000 1,937,500 B+ B1 2,475,000 Parker Drilling Co., 9.75% due 11/15/2006 2,137,939 2,369,813 NR* NR* 1,727,718 Rigco North America, Term, due 9/30/1999+++ 1,727,718 1,684,525 ------------ ------------ 10,305,657 9,901,838 Educational B- B3 1,050,000 La Petite Academy/LPA Holdings, Services--0.2% 10% due 5/15/2008 1,050,000 937,125 Electronics/ B B2 3,232,000 Advanced Glassfiber Yarn, 9.875% Electrical due 1/15/2009 3,169,744 3,106,760 Components-- B B2 1,613,000 BGF Industries Inc., 10.25% due 3.6% 1/15/2009 1,581,906 1,443,635 Dynatech Corp.+++: B+ NR* 1,648,556 Term B, due 3/31/2005 1,648,556 1,650,617 B+ NR* 1,648,556 Term C, due 3/31/2006 1,648,556 1,650,617 B+ NR* 1,648,556 Term D, due 3/31/2007 1,648,556 1,650,617 B- B3 2,000,000 Global Imaging Systems, 10.75% due 2/15/2007 1,975,167 1,970,000 B+ B3 1,000,000 High Voltage Engineering, 10.50% due 8/15/2004 1,000,000 930,000 B B3 3,000,000 Intersil Corporation, 13.25% due 8/15/2009 (b)(g) 3,000,000 3,045,000 ------------ ------------ 15,672,485 15,447,246 Energy--7.6% B B1 2,000,000 Belco Oil & Gas Corp., 8.875% due 9/15/2007 2,000,000 1,920,000 B- B3 2,500,000 Bellwether Exploration, 10.875% due 4/01/2007 2,500,000 2,303,125 BB Ba3 5,000,000 Clark Refining & Marketing, Term, due 11/15/2004+++ 5,000,000 4,750,000 CCC Caa1 1,000,000 Continental Resources, 10.25% due 8/01/2008 1,000,000 755,000 B B2 1,000,000 Cross Timbers Oil Company, 8.75% due 11/01/2009 1,000,000 960,000 B B2 1,500,000 Energy Corp. of America, 9.50% due 5/15/2007 1,500,000 1,331,250 NR* Ba2 5,000,000 Ferrell Companies, Inc., Term C, due 6/17/2006+++ 5,000,000 5,006,250 NR* Ca 1,000,000 Forcenergy, Inc., 8.50% due 2/15/2007 987,689 820,000 B B2 2,000,000 Forest Oil Corporation, 10.50% due 1/15/2006 1,977,588 2,060,000 CCC+ B3 1,850,000 Gothic Production Corp., 11.125% due 5/01/2005 1,850,000 1,572,500 BB- Ba2 2,000,000 Gulf Canada Resources Ltd., 9.25% due 1/15/2004 2,105,000 2,004,420 CC Ca 2,000,000 Kelly Oil & Gas Corp., 10.375% due 10/15/2006 1,995,955 1,160,000 B+ B1 2,000,000 Nuevo Energy Co., 9.50% due 6/01/2008 (b) 1,913,334 1,995,000 BB+ Ba1 1,000,000 Santa Fe, 8.75% due 6/15/2007 1,002,500 987,500 BB- B1 2,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008 1,989,449 1,960,000 B- B3 2,000,000 United Refining Co., 10.75% due 6/15/2007 2,000,000 1,340,000 B+ B1 2,000,000 Vintage Petroleum, Inc., 8.625% due 2/01/2009 1,985,475 1,930,000 ------------ ------------ 35,806,990 32,855,045 Environmental-- B+ B3 3,200,000 IT Group Inc., 11.25% due 4/01/2009 (b) 3,200,000 3,072,000 0.7%
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Financial NR* Ba3 $ 4,000,000 Highland Legacy Limited Co., Services--3.2% 12.139% due 6/01/2011 (b) $ 3,956,539 $ 3,956,800 NR* NR* 500,000 Investcorp SA, Term, due 10/21/2008+++ 500,000 500,000 BB- B2 4,849,944 Outsourcing, Term B, due 10/15/2003+++ 4,740,402 4,734,758 SKM-Libertyview CBO Limited (b): NR* NR* 1,500,000 8.71% due 4/10/2011 1,500,000 1,363,845 NR* NR* 1,000,000 11.91% due 4/10/2011 984,960 931,562 B+ Ba3 2,475,000 Willis Corroon Corporation, 9% due 2/01/2009 (b) 2,475,000 2,301,750 ------------ ------------ 14,156,901 13,788,715 Food & Kindred B+ B1 3,000,000 Nebco Evans, 10.125% due 7/15/2007 3,000,000 2,295,000 Products--2.8% BB- Ba3 4,500,000 Pabst Brewing, Term B, due 4/30/2003+++ 4,500,135 4,500,000 B B2 3,000,000 SC International Services, Inc., 9.25% due 9/01/2007 3,053,858 2,981,250 Snapple+++: NR* NR* 724,927 Term B, due 2/25/2006 720,634 727,193 NR* NR* 1,768,823 Term C, due 2/25/2007 1,758,247 1,774,718 ------------ ------------ 13,032,874 12,278,161 Forest B B2 4,500,000 Ainsworth Lumber Company, 12.50% due Products--4.5% 7/15/2007 (c) 4,489,020 4,950,000 B+ B3 550,000 Millar Western Forest, 9.875% due 5/15/2008 550,000 523,875 NR* NR* 5,000,000 Strategic Timber Inc., Bridge Loan, due 10/27/1999+++ 4,995,068 4,995,068 BB+ Ba3 6,000,000 Tembec Finance Corporation, 9.875% due 9/30/2005 6,110,000 6,120,000 B B3 4,000,000 Uniforet Inc., 11.125% due 10/15/2006 4,000,000 2,760,000 ------------ ------------ 20,144,088 19,348,943 Furniture & B- B3 3,150,000 Formica Corp., 10.875% due Fixtures--0.9% 3/01/2009 (b) 3,150,000 2,964,938 Sealy Mattress+++: B+ Ba3 369,629 Term B, due 12/15/2004 374,711 369,860 B+ Ba3 263,245 Term C, due 12/15/2005 266,865 263,410 B+ Ba3 340,291 Term D, due 12/15/2006 344,970 340,450 ------------ ------------ 4,136,546 3,938,658 Gaming--4.5% B- B3 1,375,000 Argosy Gaming Co., 10.75% due 6/01/2009 (b) 1,375,000 1,405,938 B B2 1,500,000 Harvey Casino Resorts, 10.625% due 6/01/2006 1,500,000 1,545,000 B B2 1,275,000 Hollywood Park Inc., 9.25% due 2/15/2007 1,275,000 1,230,375 B B3 2,360,000 Isle of Capri Casinos, 8.75% due 4/15/2009 (b) 2,378,806 2,171,200 NR* NR* 707,200 Jazz Casino Co. LLC, 8% due 5/15/2010 (c) 687,397 236,912 B B2 5,000,000 Majestic Star Casino LLC, 10.875% due 7/01/2006 (b) 4,963,024 4,950,000 BB+ Ba2 2,550,000 Park Place Entertainment, 7.875% due 12/15/2005 2,550,000 2,422,500 B B2 3,850,000 Peninsula Gaming LLC, 12.25% due 7/01/2006 (b)(h) 3,968,272 3,955,875 B B2 1,700,000 Trump Atlantic City Associates/Funding Inc., 11.25% due 5/01/2006 1,468,483 1,445,000 ------------ ------------ 20,165,982 19,362,800 Grocery B B2 5,000,000 Grand Union Co., Term, due 8/17/2003+++ 4,978,153 4,987,500 Stores--1.2% Healthcare B- B3 1,500,000 Alliance Imaging Inc., 9.54% due Providers--4.0% 12/15/2005 1,500,000 1,350,000 Community Health Care Inc.+++: NR* NR* 1,760,274 Term B, due 12/31/2003 1,754,500 1,755,873 NR* NR* 1,760,274 Term C, due 12/31/2004 1,753,984 1,755,873 NR* NR* 1,315,068 Term D, due 12/31/2005 1,310,075 1,312,329
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Healthcare Integrated Health Services, Inc.: Providers CCC B2 $ 3,000,000 9.50% due 9/15/2007 $ 3,000,000 $ 1,050,000 (concluded) NR* NR* 4,925,000 Term B, due 9/15/2003+++ 4,915,395 4,145,210 Mariner Post+++: B+ Caa2 2,383,049 Term B, due 3/31/2005 2,381,111 1,176,630 B+ Caa2 2,383,049 Term C, due 3/31/2006 2,381,035 1,176,630 NR* B1 1,300,444 Paracelsus Healthcare Corp., Term A, due 3/31/2003+++ 1,295,350 1,235,422 BB- Ba3 2,500,000 Tenet Healthcare Corp., 8.625% due 1/15/2007 2,497,840 2,375,000 ------------ ------------ 22,789,290 17,332,967 Hotels & B- B2 6,000,000 Extended Stay America, 9.15% due Motels--7.2% 3/15/2008 6,000,000 5,700,000 HMH Properties, Inc.: BB Ba2 1,075,000 7.875% due 8/01/2008 1,068,548 959,438 BB Ba2 1,600,000 8.45% due 12/01/2008 1,594,880 1,476,000 BB Ba2 3,000,000 Prime Hospitality Corporation, 9.25% due 1/15/2006 2,992,788 2,970,000 NR* Ba1 15,000,000 Starwood Hotels & Resorts, Bridge Loan, due 2/23/2003+++ 14,991,555 15,003,120 Wyndam International, Term+++: B+ B3 2,000,000 due 3/30/2004 1,990,267 1,988,126 B+ B3 3,000,000 due 6/30/2006 2,992,629 2,984,532 ------------ ------------ 31,630,667 31,081,216 Industrial-- B- B3 1,750,000 American Plumbing & Mechanic Inc., Consumer 11.625% due 10/15/2008 (b) 1,714,456 1,662,500 Services--0.7% B B2 1,450,000 Building One Services, 10.50% due 5/01/2009 1,417,942 1,348,500 ------------ ------------ 3,132,398 3,011,000 Leasing & Rental Avis Rent A Car+++: Services--3.9% BB+ Ba3 2,500,000 Term B, due 6/30/2006 2,500,000 2,481,250 BB+ Ba3 2,500,000 Term C, due 6/30/2007 2,500,000 2,482,812 B B1 5,000,000 MEDIQ Life Support Services, Inc., Term, due 6/30/2006+++ 5,025,000 4,937,500 National Equipment Services: B B3 1,000,000 10% due 11/30/2004 990,014 1,000,000 B B3 500,000 10% due 11/30/2004 490,139 500,000 B B3 500,000 Neff Corp., 10.25% due 6/01/2008 492,930 505,000 Renters Choice Inc.+++: NR* Ba3 1,865,625 Term B, due 1/31/2006 1,863,965 1,855,909 NR* Ba3 2,280,208 Term C, due 1/31/2007 2,278,238 2,268,333 B B3 1,000,000 Universal Hospital Services, 10.25% due 3/01/2008 855,378 740,000 ------------ ------------ 16,995,664 16,770,804 Manufacturing-- B- B2 1,932,000 Fairfield Manufacturing Company 3.2% Inc., 9.625% due 10/15/2008 1,932,000 1,832,985 CCC- Ca 1,500,000 Morris Materials Handling, 9.50% due 4/01/2008 839,679 600,000 B- B3 1,250,000 Russell-Stanley Holdings Inc., 10.875% due 2/15/2009 (b) 1,240,901 1,243,750 NR* B1 4,924,623 Terex Corp., Term B, due 3/06/2005+++ 4,902,172 4,904,102 B B2 5,000,000 WEC Company Inc., 12% due 7/15/2009 (b) 5,000,000 4,950,000 ------------ ------------ 13,914,752 13,530,837 Measuring, NR* NR* 3,687,502 Chronograph Ltd., Term B, due Analyzing & 9/30/2001+++ 3,660,820 3,660,820 Controlling Instruments--0.8%
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Medical Alaris Medical Systems, Inc.+++: Equipment-- B+ B1 $ 1,277,989 Term B, due 11/01/2003 $ 1,277,989 $ 1,279,586 0.9% B+ B1 1,277,989 Term C, due 11/01/2004 1,277,989 1,279,586 B+ B1 1,202,873 Term D, due 5/01/2005 1,202,873 1,204,377 CC Caa1 550,000 GrahamField Health Products, Inc., 9.75% due 8/15/2007 (b) 578,750 341,000 ------------ ------------ 4,337,601 4,104,549 Metals & CC Ca 3,000,000 Anker Coal Group, Inc., 9.75% due Mining--8.1% 10/01/2007 3,015,000 1,342,500 B B1 850,000 Bayou Steel Corp., 9.50% due 5/15/2008 842,569 799,000 BB- B2 2,000,000 CSN Iron SA, 9.125% due 6/01/2007 (b) 1,992,351 1,460,000 B- B3 2,000,000 Continental Global Group, 11% due 4/01/2007 2,000,000 1,345,000 GS Technologies Operating Co.: B B2 1,000,000 12% due 9/01/2004 994,865 822,500 B B2 1,000,000 12.25% due 10/01/2005 1,000,000 770,000 D C 1,000,000 Geneva Steel, 9.50% due 1/15/2004 (e) 945,522 220,000 Ispat International N.V.+++: BB Ba3 1,831,500 Term B, due 7/15/2005 1,829,497 1,818,337 BB Ba3 1,831,500 Term C, due 7/15/2006 1,829,451 1,818,337 B+ B1 3,500,000 Ivaco, Inc., 11.50% due 9/15/2005 3,444,641 3,692,500 CCC+ Caa2 1,600,000 Metal Management Inc., 10% due 5/15/2008 1,600,000 1,216,000 B+ B2 875,000 Pen Holdings Inc., 9.875% due 6/15/2008 868,667 831,250 B B3 3,000,000 Renco Metals Inc., 11.50% due 7/01/2003 3,007,500 2,790,000 B+ B1 2,000,000 Russel Metals Inc., 10% due 6/01/2009 2,000,000 2,027,500 UCAR International, Inc.+++: NR* Ba3 3,385,714 Term B, due 12/31/2003 3,383,548 3,394,179 NR* Ba3 4,986,476 Term C, due 12/31/2003 4,975,253 4,997,387 Wheeling-Pittsburg Steel Corp., Term+++: NR* NR* 2,500,000 due 11/15/2006 2,489,212 2,418,750 NR* NR* 3,500,000 due 11/15/2006 3,526,250 3,386,250 ------------ ------------ 39,744,326 35,149,490 Online B- B3 1,150,000 PSINet Inc., 11% due 8/01/2009 (b) 1,150,000 1,138,500 Services--0.3% B- B3 750,000 Verio Inc., 11.25% due 12/01/2008 750,000 761,250 ------------ ------------ 1,900,000 1,899,750 Packaging--2.0% B+ B2 4,000,000 Anchor Glass, 11.25% due 4/01/2005 4,000,000 3,980,000 B B1 675,000 Consumers Packaging Inc., 9.75% due 2/01/2007 675,000 627,750 B- B3 1,000,000 Fonda Group Inc., 9.50% due 3/01/2007 1,000,000 870,000 B B3 4,000,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 3,386,405 3,000,000 ------------ ------------ 9,061,405 8,477,750 Paper--6.2% B B3 1,150,000 American Tissue Inc., 12.50% due 7/15/2006 (b) 1,111,786 1,095,375 CCC Caa2 1,500,000 Four M Corp., 12% due 6/01/2006 1,500,000 1,335,000 B- Caa1 3,000,000 Gaylord Container Corp., 9.75% due 6/15/2007 3,000,000 2,812,500 NR* Ba2 5,000,000 Pacifica, Term B, due 12/31/2006+++ 4,994,017 5,012,500 NR* NR* 5,000,000 Repap New Brunswick, Inc., Term B, due 6/01/2004+++ 5,000,000 4,837,500 Riverwood International, Inc.+++: B+ B1 8,402,256 Term B, due 2/28/2004 8,320,556 8,424,312 B+ B1 3,360,144 Term C, due 8/28/2004 3,325,788 3,369,805 ------------ ------------ 27,252,147 26,886,992
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Printing & Big Flower Press Holdings: Publishing--1.7% B+ B2 $ 1,000,000 8.875% due 7/01/2007 $ 993,025 $ 961,250 B+ B2 1,375,000 8.625% due 12/01/2008 1,375,000 1,294,219 B+ B1 1,325,000 Mail-Well I Corp., 8.75% due 12/15/2008 1,322,317 1,272,000 B B3 800,000 Premier Graphics Inc., 11.50% due 12/01/2005 800,000 728,000 B- B3 900,000 Regional Independent Media, 10.50% due 7/01/2008 900,000 897,750 B- B3 1,500,000 T/SF Communications Corp., 10.375% due 11/01/2007 1,479,992 1,447,500 BB- Baa3 750,000 World Color Press Inc., 8.375% due 11/15/2008 750,000 727,500 ------------ ------------ 7,620,334 7,328,219 Property BB- Ba3 2,000,000 Forest City Enterprises Inc., Management-- 8.50% due 3/15/2008 2,000,000 1,945,000 0.6% B+ Ba2 600,000 Prison Realty Trust Inc., 12% due 6/01/2006 600,000 606,000 ------------ ------------ 2,600,000 2,551,000 Restaurants-- Domino & Bluefence+++: 2.9% B+ B1 909,495 Term B, due 12/21/2006 900,955 911,769 B+ B1 909,495 Term C, due 12/21/2007 900,864 911,769 NR* Ba3 7,000,000 Host Marriott Travel Plaza, 9.50% due 5/15/2005 6,865,423 7,210,000 NR* B1 3,448,254 Shoney's Inc., Term B, due 4/30/2002+++ 3,434,118 3,318,945 ------------ ------------ 12,101,360 12,352,483 Retail NR* NR* 4,000,000 Asbury Automotive, due 3/31/2005+++ 3,970,127 3,950,000 Specialty--1.7% B B3 1,575,000 TM Group Holdings, 11% due 5/15/2008 1,575,000 1,547,437 B- Caa1 2,000,000 United Auto Group, Inc., 11% due 7/15/2007 1,974,431 1,800,000 ------------ ------------ 7,519,558 7,297,437 Satellite Echostar DBS Corporation: Telecommuni- B B2 700,000 9.25% due 2/01/2006 700,000 686,000 cations B B2 3,275,000 9.375% due 2/01/2009 3,275,000 3,225,875 Distribution B- B3 350,000 Pegasus Communications, 9.75% Systems--2.0% due 12/01/2006 350,000 348,250 NR* B1 4,428,000 Satelites Mexicanos SA, 9.08% due 6/30/2004 (b) 4,419,005 4,184,460 ------------ ------------ 8,744,005 8,444,585 Shipbuilding & B+ B1 4,000,000 Newport News Shipbuilding, Inc., Repairing--1.0% 9.25% due 12/01/2006 4,000,000 4,080,000 Shipping--1.9% BB- Ba3 4,500,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 4,424,032 4,263,750 B+ B2 1,525,000 Enterprises Shipholding, 8.875% due 5/01/2008 1,521,791 1,037,000 BB Ba2 3,000,000 Stena AB, 10.50% due 12/15/2005 3,000,000 2,985,000 ------------ ------------ 8,945,823 8,285,750 Textile Mill B Caa3 3,000,000 Galey & Lord, Inc., 9.125% due Products--0.9% 3/01/2008 3,030,000 1,560,000 B- Caa1 900,000 Globe Manufacturing Corp., 10% due 8/01/2008 900,000 603,000 BB Ba3 2,050,000 Westpoint Stevens Inc., 7.875% due 6/15/2008 (f) 2,025,128 1,927,000 ------------ ------------ 5,955,128 4,090,000 Tower NR* NR* 4,000,000 American Tower Systems Co., Construction & Term, due 12/16/2006+++ 3,991,007 3,991,668 Leasing--2.0% Crown Castle International Corporation: B B3 500,000 9% due 5/15/2011 500,000 465,000 B B3 1,150,000 ++10.375% due 5/15/2011 714,413 638,250 B B3 3,000,000 9.50% due 8/01/2011 (b) 3,000,000 2,872,500 NR* NR* 2,050,000 ++Spectrasite Holdings Inc., 11.25% due 4/15/2009 (b) 1,236,003 1,035,250 ------------ ------------ 9,441,423 9,002,668
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Transportation D Ca $ 4,000,000 AmeriTruck Distribution Corp., Services--0.1% 12.25% due 11/15/2005 (e) $ 3,964,991 $ 200,000 BB- NR* 2,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (b) 2,035,000 1,300,000 D Caa3 1,600,000 Trism Inc., 10.75% due 12/15/2000 (e) 1,499,687 408,000 ------------ ------------ 7,499,678 1,908,000 Utilities--1.0% B+ Ba3 4,500,000 AES Corporation, 8.50% due 11/01/2007 4,468,975 4,151,250 Waste Manage- Allied Waste+++: ment--3.4% BBB- Ba3 2,272,727 Term B, due 6/30/2006 2,259,849 2,256,984 BBB- Ba3 2,727,273 Term C, due 6/30/2007 2,711,790 2,708,806 B+ B2 3,000,000 Allied Waste North America, 10% due 8/01/2009 (b) 2,990,091 2,895,000 BB- B3 5,000,000 ++Norcal Waste Systems, 13.50% due 11/15/2005 5,144,014 5,375,000 B+ B3 1,350,000 Safety-Kleen Corporation, 9.25% due 5/15/2009 (b) 1,350,000 1,333,125 ------------ ------------ 14,455,744 14,568,915 Wired B B3 3,375,000 Caprock Communications, 11.50% due Telecommuni- 5/01/2009 (b) 3,326,529 3,375,000 cations--7.0% NR* NR* 3,350,000 ++E. Spire Communications, 10.521% due 7/01/2008 2,267,363 1,344,187 BB Ba2 1,500,000 Global Cross, Term B, due 7/02/2007+++ 1,496,263 1,491,562 B B3 500,000 Hermes Europe RailTel BV, 10.375% due 1/15/2009 500,000 501,250 Level 3 Communications Inc.: B B3 2,850,000 9.125% due 5/01/2008 2,839,054 2,650,500 B B3 1,225,000 ++10.50% due 12/01/2008 792,850 704,375 B+ B2 2,500,000 McLeodUSA Inc., 10.50% due 3/01/2007 1,935,146 1,900,000 B B2 750,000 Metromedia Fiber Network, 10% due 11/15/2008 750,000 742,500 B B3 1,675,000 ++Metronet Communications, 9.95% due 6/15/2008 1,159,302 1,273,000 Nextlink Communications Inc.: B B3 2,500,000 9% due 3/15/2008 2,495,449 2,356,250 B B3 3,000,000 ++12.25% due 6/01/2009 1,705,221 1,755,000 Primus Telecommunications Group: B- B3 800,000 11.75% due 8/01/2004 828,000 780,000 B- B3 1,475,000 11.25% due 1/15/2009 1,475,000 1,408,625 RSL Communications PLC: B- B2 3,000,000 9.125% due 3/01/2008 3,000,000 2,520,000 B- B2 3,000,000 ++11.965% due 3/01/2008 2,153,614 1,620,000 NR* B3 3,333,333 Teligent Inc., Term, due 7/01/2002+++ 3,315,467 3,187,500 NR* NR* 500,000 Versatel Telecom BV, 11.875% due 7/15/2009 (b) 496,383 479,130 Worldwide Fiber Inc.: B B3 1,500,000 12.50% due 12/15/2005 1,500,000 1,530,000 B B3 500,000 12% due 8/01/2009 (b) 500,000 501,250 ------------ ------------ 32,535,641 30,120,129 Wireless American Cellular+++: Telecommuni- NR* B2 2,493,750 Term B, due 6/30/2007 2,476,106 2,488,451 cations--9.4% NR* B2 2,493,750 Term C, due 9/30/2007 2,476,053 2,488,451 Cellular Finance Inc.+++: NR* B1 586,527 Term B, due 9/30/2006 584,754 587,187 NR* B1 1,161,440 Term C, due 3/31/2007 1,157,882 1,162,747 NR* B1 3,252,033 Term D, due 9/30/2007 3,241,940 3,257,724 NR* B3 2,800,000 ++ClearNet Communications, 10.125% due 5/01/2009 1,765,623 1,638,000 NR* NR* 5,000,000 Iridium Operating LLC, Term, due 12/29/2000+++ (e) 4,952,755 1,487,500 B- Caa1 3,000,000 ++McCaw International Ltd., 13.355% due 4/15/2007 2,112,784 1,770,000 B- B3 1,650,000 ++Microcell Telecommunications, 12% due 6/01/2009 948,705 981,750
Senior High Income Portfolio, Inc. August 31, 1999 SCHEDULE OF INVESTMENTS (concluded)
S&P Moody's Face Value Industries Rating Rating Amount Corporate Debt Obligations Cost (Note 1B) Wireless Omnipoint Communications Corp.+++: Telecommuni- NR* B2 $ 5,742,064 Term A, due 2/17/2006 $ 5,737,128 $ 5,687,037 cations NR* B2 1,922,276 Term B, due 2/17/2006 1,920,624 1,903,855 (concluded) NR* B2 3,088,252 Term C, due 2/17/2006 3,075,042 3,058,657 NR* B2 1,000,000 ++PTC International Finance BV, 10.269% due 7/01/2007 760,546 680,000 NR* B2 5,000,000 Telecorp PCS, Inc., Term B, due 1/15/2008+++ 4,990,806 4,956,250 CCC+ Caa1 2,000,000 ++Telesystem International Wireless Inc., 16.147% due 6/30/2007 1,390,948 980,000 NR* NR* 7,500,000 VoiceStream PCS, Term B, due 6/30/2007+++ 7,468,978 7,478,122 ------------ ------------ 45,060,674 40,605,731 Total Corporate Debt Obligations--141.4% 653,293,397 611,449,819 Shares Held Equity Investments Cable Television Services--0.0% 500 Park N View (Warrants)(a) 31,000 500 615,733 Supercanal Holdings SA (Warrants)(a) 0 6 ------------ ------------ 31,000 506 Financial Services--0.0% 1,500 Olympic Financial Limited (Warrants)(a) 25,650 1,500 Leasing & Rental Services--0.1% 13,398 CORT Business Services Corporation (e) 3,037 335,787 Metals & Mining--0.0% 3,000 Gulf States Steel (Warrants)(a)(b) 33,000 750 Telephone Communications--0.0% 1,000 Unifi Communications Inc. (Warrants)(a)(b) 56,590 10 Wired Telecommunications--0.0% 2,000 Metronet Communications (Warrants)(a)(b) 20,500 209,169 Wireless Telecommunications--0.0% 3,000 McCaw International Ltd. (Warrants)(a)(b) 46,799 6,750 Total Equity Investments--0.1% 216,576 554,472 Face Amount Short-Term Investments Commercial Paper**--0.2% $ 749,000 General Motors Acceptance Corp., 5.56% due 9/01/1999 749,000 749,000 Total Short-Term Investments--0.2% 749,000 749,000 Total Investments--141.7% $654,258,973 612,753,291 ============ Liabilities in Excess of Other Assets--(41.7%) (180,179,176) ------------ Net Assets--100.0% $432,574,115 ============ *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 61.9% of the Fund's net assets. (a)Warrants entitle the Fund to purchase a predetermined number of shares of common share/face amount of bonds and are non-income producing. The purchase price and number of shares/face amount are subject to adjustments 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/share. (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 $1,927,000, representing 0.4% of net assets. Acquisition Value Issue Date Cost (Note 1b) Westpoint Stevens Inc., 7.875% due 6/15/2008 6/03/1998 $2,025,128 $1,927,000 Total $2,025,128 $1,927,000 ========== ========== (g)Each $1,000 face amount contains one warrant Intersil Corporation. (h)Each $1,000 face amount contains 7.042 convertible preferred membership interests of Peninsula Gaming LLC. See Notes to Financial Statements.
Senior High Income Portfolio, Inc. August 31, 1999 FINANCIAL INFORMATION Statement of Assets, Liabilities and Capital as of August 31, 1999 Assets: Investments, at value (identified cost--$654,258,973) (Note 1b) $ 612,753,291 Cash 163,218 Receivables: Interest $ 10,949,059 Securities sold 4,796,667 15,745,726 ------------- Deferred facility fees 21,955 Prepaid expenses and other assets 64,231 ------------- Total assets 628,748,421 ------------- Liabilities: Payables: Loans (Note 6) 188,000,000 Securities purchased 4,796,667 Interest on loans (Note 6) 2,101,452 Dividends to shareholders (Note 1f) 699,382 Investment adviser (Note 2) 255,324 Commitment fees 12,956 195,865,781 ------------- Deferred income (Note 1e) 2,147 Accrued expenses and other liabilities 306,378 ------------- Total liabilities 196,174,306 ------------- Net Assets: Net assets $ 432,574,115 ============= 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 3,851,279 Accumulated realized capital losses on investments--net (Note 7) (36,584,918) Unrealized depreciation on investments--net (41,505,682) ------------- Total Capital--Equivalent to $8.03 net asset value per share of Common Stock (market price--$7.4375) $ 432,574,115 ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. August 31, 1999 FINANCIAL INFORMATION (continued) Statement of Operations
For the Six Months Ended August 31, 1999 Investment Income Interest and discount earned $ 30,382,180 (Note 1e): Facility and other fees 208,175 ------------- Total income 30,590,355 ------------- Expenses: Loan interest expense (Note 6) $ 5,027,127 Investment advisory fees (Note 2) 1,595,334 Borrowing costs (Note 6) 201,522 Professional fees 73,116 Accounting services (Note 2) 68,840 Transfer agent fees (Note 2) 48,248 Custodian fees 35,755 Printing and shareholder reports 27,120 Listing fees 23,267 Directors' fees and expenses 14,247 Pricing services 7,602 Other 7,084 ------------- Total expenses 7,129,262 ------------- Investment income--net 23,461,093 ------------- Realized & Realized loss on investments--net (7,438,522) Unrealized Loss on Change in unrealized depreciation on investments--net (12,867,205) Investments--Net ------------- (Notes 1c, Net Increase in Net Assets Resulting from Operations $ 3,155,366 1e & 3): ============= See Notes to Financial Statements.
Statements of Changes in Net Assets
For the Six For the Months Ended Year Ended Increase (Decrease) in Net Assets: Aug. 31, 1999 Feb. 28, 1999 Operations: Investment income--net $ 23,461,093 $ 46,706,030 Realized loss on investments--net (7,438,522) (9,257,432) Change in unrealized appreciation/depreciation on investments--net (12,867,205) (42,080,592) ------------- ------------- Net increase (decrease) in net assets resulting from operations 3,155,366 (4,631,994) ------------- ------------- Dividends to Investment income--net (23,140,239) (47,373,187) Shareholders ------------- ------------- (Note 1f): Net decrease in net assets resulting from dividends to shareholders (23,140,239) (47,373,187) ------------- ------------- Capital Share Value of shares issued to Common Stock shareholders in Transactions reinvestment of dividends -- 8,087,161 (Note 4): ------------- ------------- Net increase in net assets resulting from capital share transactions -- 8,087,161 ------------- ------------- Net Assets: Total decrease in net assets (19,984,873) (43,918,020) Beginning of period 452,558,988 496,477,008 ------------- ------------- End of period* $ 432,574,115 $ 452,558,988 ============= ============= *Undistributed investment income--net $ 3,851,279 $ 3,530,425 ============= ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. August 31, 1999 FINANCIAL INFORMATION (continued) Statement of Cash Flows
For the Six Months Ended August 31, 1999 Cash Provided by Net increase in net assets resulting from operations $ 3,155,366 Operating Adjustments to reconcile net increase in net assets resulting Activities: from operations to net cash provided by operating activities: Decrease in receivables (472,367) Decrease in other assets (14,633) Increase in other liabilities 173,803 Realized and unrealized loss on investments--net 20,305,727 Amortization of discount--net (1,378,705) ------------- Net cash provided by operating activities 21,769,191 ------------- Cash Provided by Proceeds from sales of long-term investments 163,077,968 Investing Purchases of long-term investments (150,914,389) Activities: Purchases of short-term investments (62,471,203) Proceeds from sales and maturities of short-term investments 62,631,000 ------------- Net cash provided by investing activities 12,323,376 ------------- Cash Used for Cash receipts of borrowings 127,000,000 Financing Cash payments on borrowings (138,000,000) Activities: Dividends paid to shareholders (23,231,504) ------------- Net cash used for financing activities (34,231,504) ------------- Cash: Net decrease in cash (138,937) Cash at beginning of period 302,155 ------------- Cash at end of period $ 163,218 ============= Cash Flow Cash paid for interest $ 4,780,440 ============= See Notes to Financial Statements.
Senior High Income Portfolio, Inc. August 31, 1999 FINANCIAL INFORMATION (concluded) Financial Highlights
For the Six For the The following per share data and ratios have been derived Months Year from information provided in the financial statements. Ended For the Year Ended Ended Aug. 31, February 28, Feb. 29, Increase (Decrease) in Net Asset Value: 1999++ 1999++ 1998++ 1997++ 1996++ Per Share Net asset value, beginning of period $ 8.40 $ 9.37 $ 9.22 $ 9.21 $ 8.94 Operating -------- -------- -------- -------- -------- Performance: Investment income--net .44 .87 .92 .89 .92 Realized and unrealized gain (loss) on investments--net (.38) (.95) .14 .04 .27 -------- -------- -------- -------- -------- Total from investment operations .06 (.08) 1.06 .93 1.19 -------- -------- -------- -------- -------- Less dividends from investment income--net (.43) (.89) (.91) (.92) (.92) -------- -------- -------- -------- -------- Net asset value, end of period $ 8.03 $ 8.40 $ 9.37 $ 9.22 $ 9.21 ======== ======== ======== ======== ======== Market price per share, end of period $ 7.4375 $ 8.125 $ 10.125 $ 9.50 $ 9.25 ======== ======== ======== ======== ======== Total Investment Based on net asset value per share .89%+++ (.87%) 11.95% 10.80% 14.14% Return:** ======== ======== ======== ======== ======== Based on market price per share (3.40%)+++(11.26%) 17.41% 13.67% 18.82% ======== ======== ======== ======== ======== Ratios to Expenses, excluding interest expense .93%* .90% .83% .75% .92% Average ======== ======== ======== ======== ======== Net Assets: Expenses 3.14%* 2.99% 2.66% 1.84% 2.92% ======== ======== ======== ======== ======== Investment income--net 10.33%* 9.87% 9.98% 9.45% 10.14% ======== ======== ======== ======== ======== Leverage: Amount of borrowings (in thousands) $188,000 $199,000 $181,200 $ 81,000 $ 47,000 ======== ======== ======== ======== ======== Average amount of borrowings outstanding during the period (in thousands) $184,364 $174,240 $149,166 $ 82,384 $ 68,473 ======== ======== ======== ======== ======== Average amount of borrowings outstanding per share during the period $ 4.09 $ 3.26 $ 2.85 $ 2.13 $ 2.68 ======== ======== ======== ======== ======== Supplemental Net assets, end of period (in thousands) $432,574 $452,559 $496,477 $477,170 $236,136 Data: ======== ======== ======== ======== ======== Portfolio turnover 24.27% 68.52% 58.60% 98.51% 50.76% ======== ======== ======== ======== ======== *Annualized. **Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregrate total investment return. See Notes to Financial Statements.
Senior High Income Portfolio, Inc. August 31, 1999 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. These unaudited financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol ARK. (a) Corporate debt obligations--The Fund invests principally in senior debt obligations ("Senior Debt") of companies, including corporate loans made by banks and other financial institutions and both privately and publicly offered corporate bonds and notes. Because agents and intermediaries are primarily commercial banks, the Fund's investment in corporate loans could be considered concentrated in financial institutions. (b) Valuation of investments--Corporate loans will be valued in accordance with guidelines established by the Board of Directors. Until July 9, 1999, Corporate Loans for which an active secondary market exists and for which the Investment Advisor 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 will be 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. August 31, 1999 * 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 six months ended August 31, 1999, the Fund paid Merrill Lynch Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, $1,196 for security price quotations to compute the net asset value of the Fund. Senior High Income Portfolio, Inc. August 31, 1999 NOTES TO FINANCIAL STATEMENTS (concluded) 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 six months ended August 31, 1999 were $152,211,056 and $166,997,492, respectively. Net realized losses for the six months ended August 31, 1999 and net unrealized losses as of August 31, 1999 were as follows: Realized Unrealized Losses Losses Long-term investments $(7,438,522) $(41,505,682) ----------- ------------ Total $(7,438,522) $(41,505,682) =========== ============ As of August 31, 1999, net unrealized depreciation for Federal income tax purposes aggregated $41,505,682, of which $3,899,598 related to appreciated securities and $45,405,280 related to depreciated securities. The aggregate cost of investments at August 31, 1999 for Federal income tax purposes was $654,258,973. 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 six months ended August 31, 1999 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 August 31, 1999, the Fund had unfunded loan commitments of $7,570,020, which would be extended at the option of the borrower, pursuant to the following loan agreements: Unfunded Commitment Borrower (in thousands) Arena Brands, Inc. $1,085 Dal Tile International, Inc. 1,283 Metro Goldwyn Mayer Co. 202 Patriot American 5,000 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 $245,000,000 credit facility bearing interest at the Prime rate, the Federal Funds rate plus .55%, and/or the Eurodollar rate plus .55%. For the six months ended August 31, 1999, the average amount borrowed was approximately $184,364,130, and the daily weighted average interest rate was 5.41%. For the six months ended August 31, 1999, facility and commitment fees aggregated $201,522. 7. Capital Loss Carryforward: At February 28, 1999, the Fund had a net capital loss carryforward of approximately $24,172,000, of which $7,098,000 expires in 2003, $12,057,000 expires in 2004, $734,000 expires in 2005 and $4,283,000 expires in 2007. This amount will be available to offset like amounts of any future taxable gains. 8. Subsequent Event: On September 8, 1999, the Board of Directors of the Fund declared an ordinary income dividend in the amount of $.074162 per share, payable on September 30, 1999 to shareholders of record as of September 22, 1999. Senior High Income Portfolio, Inc. August 31, 1999 PORTFOLIO INFORMATION As of August 31, 1999 Quality Ratings Percent of S&P/Moody's Long-Term Investments BBB/Baa 1.6% BB/Ba 25.5 B/B 54.9 CCC/Caa 1.6 CC/Ca 0.6 NR (Not Rated) 15.8 Breakdown of Investments Percent of by Country Long-Term Investments United States 87.6% Canada 5.5 United Kingdom 3.2 Greece 0.9 Mexico 0.7 Argentina 0.5 Sweden 0.5 Australia 0.4 Poland 0.3 Brazil 0.2 Belgium 0.1 Netherlands 0.1 Percent of Ten Largest Holdings Total Assets Starwood Hotels & Resorts 2.4% Riverwood International, Inc. 1.9 Omnipoint Communications Corp. 1.7 Lyondell Petrochemical Co. 1.6 UCARInternational, Inc. 1.4 Allied Waste North America, Inc. 1.3 VoiceStream PCS 1.2 Host Marriott Travel Plaza 1.2 Tembec Finance Corporation 1.0 Wheeling-Pittsburg Steel Corp. 0.9 Percent of Five Largest Industries Total Assets Wireless Telecommunications 6.5% Metals & Mining 5.6 Energy 5.2 Chemicals 5.2 Hotels & Motels 4.9 Senior High Income Portfolio, Inc. August 31, 1999 YEAR 2000 ISSUES Many computer systems were designed using only two digits to designate years. These systems may not be able to distinguish the Year 2000 from the Year 1900 (commonly known as the "Year 2000 Problem"). The Portfolio could be adversely affected if the computer systems used by the Portfolio's management or other Portfolio service providers do not properly address this problem before January 1, 2000. The Portfolio's management expects to have addressed this problem before then, and does not anticipate that the services it provides will be adversely affected. The Portfolio's other service providers have told the Portfolio's management that they also expect to resolve the Year 2000 Problem, and the Portfolio's management will continue to monitor the situation as the Year 2000 approaches. However, if the problem has not been fully addressed, the Portfolio could be negatively affected. The Year 2000 Problem could also have a negative impact on the issuers of securities in which the Portfolio invests. This negative impact may be greater for companies in foreign markets, particularly emerging markets, since they may be less prepared for the Year 2000 Problem than domestic companies and markets. If the companies in which the Fund invests have Year 2000 Problems, the Fund's returns could be adversely affected. Senior High Income Portfolio, Inc. August 31, 1999 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 Patrick D. Sweeney, Secretary Custodian and Transfer Agent The Bank of New York 110 Washington Street New York, NY 10286 NYSE Symbol ARK -----END PRIVACY-ENHANCED MESSAGE-----