UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-07456
Name of Fund: Senior High Income Portfolio, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Senior High Income Portfolio, Inc., 800 Scudders Mill Road,
Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton,
NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 02/28/06
Date of reporting period: 03/01/05 - 08/31/05
Item 1 - Report to Stockholders
Senior High Income
Portfolio, Inc.
Semi-Annual Report
August 31, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Senior High Income Portfolio, Inc. seeks to provide shareholders with high
current income by investing at least 80% of its net assets plus any borrowings
for investment purposes in senior debt obligations, including corporate loans
and both privately placed and publicly offered corporate bonds and notes.
Senior debt obligations generally include debt obligations of a company that
have a contractual right to repayment in the event of a default or bankruptcy
of the company with priority over existing or future subordinated debt (if
any), preferred stock or common stock of the same company. Senior debt ranks
equally in right of payment to all other debt of the company other than debt
that is contractually subordinated in right of payment to such senior debt.
Senior debt in which the Fund invests may be secured by collateral or may be
unsecured. Certain senior debt obligations may be effectively junior to other
debt obligations of the company that are secured by collateral, as well as to
any indebtedness of such company's subsidiaries or affiliates. The Fund
invests primarily in debt obligations that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's
Investors Service, Inc. or BBB or lower by Standard & Poor's) or unrated debt
obligations of comparable quality. The Fund will generally not invest in
securities rated at the time of purchase, Caa/CCC or below by each of the
major ratings agencies that rate the securities.
This report, including the financial information herein, is transmitted to
shareholders of Senior High Income Portfolio, Inc. for their information. It
is not a prospectus. Past performance results shown in this report should not
be considered a representation of future performance. The Fund leverages 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.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863);
(2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange
Commission's Web site at http://www.sec.gov. Information about how the
Fund voted proxies relating to securities held in the Fund's portfolio
during the most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Senior High Income Portfolio, Inc.
Box 9011
Princeton, NJ 08543-9011
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Senior High Income Portfolio, Inc.
The Benefits and Risks of Leveraging
Senior High Income Portfolio, Inc. (the "Fund") utilizes leveraging 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 income earned by the Fund on its
longer-term portfolio investments. To the extent that 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 will be
the beneficiaries of the incremental yield.
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 net asset value
and 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.
Proxy Results
During the six-month period ended August 31, 2005, Senior High Income
Portfolio, Inc.'s shareholders voted on the following proposals. Proposal 1
was approved at a shareholders' meeting on August 23, 2005. With respect to
Proposal 2, the meeting was adjourned until October 21, 2005. A description of
the proposals and number of shares voted were as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Portfolio's Board of Directors: Robert C. Doll, Jr. 37,385,993 923,783
Ronald W. Forbes 37,380,814 928,962
Cynthia A. Montgomery 37,389,344 920,432
Jean Margo Reid 37,400,094 909,682
Roscoe S. Suddarth 37,381,334 928,442
Richard R. West 37,392,686 917,090
Edward D. Zinbarg 37,354,547 955,229
Shares Voted Shares Voted Shares Voted
For Against Abstain
2. To consider and act upon a proposal to amend a fundamental
investment restriction of the Fund with respect to investment
in other investment companies. Adjourned Adjourned Adjourned
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
A Letter From the President
Dear Shareholder
Amid what we've coined a "muddle through" year for the financial markets, the
major market benchmarks managed to post positive results for the current
reporting period:
Total Returns as of August 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) +2.33% +12.56%
Small-cap U.S. equities (Russell 2000 Index) +5.75% +23.10%
International equities (MSCI Europe Australasia Far East Index) +1.98% +23.58%
Fixed income (Lehman Brothers Aggregate Bond Index) +2.85% + 4.15%
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.85% + 5.31%
High yield bonds (Credit Suisse First Boston High Yield Index) +1.35% + 8.98%
Since June 2004, the Federal Reserve Board (the Fed) has tirelessly advanced
its interest rate-hiking program, bringing the federal funds rate to 3.5% by
August 31 (and to 3.75% on September 20). Economists and investors have
struggled to project the Fed's future moves, vacillating from expectations for
an impending end to monetary tightening to fears that the central bank may
increase interest rates more than is necessary to moderate economic growth and
keep inflation in check. Most recently, the devastation of Hurricane Katrina
added a new element of ambiguity in terms of its impact on the economy and Fed
sentiment. Many now believe the Fed will suspend its interest rate-hiking
campaign at some point this year.
Equity market returns over the past several months have reflected a degree of
investor uncertainty. After a strong finish to 2004, the S&P 500 Index posted
gains in four of the first eight months of 2005. Up to this point, strong
corporate earnings reports and low long-term bond yields have worked in favor
of equities. Factors that pose the greatest risks to stocks include record-
high oil prices, continued interest rate hikes and the possibility for
disappointing earnings for the remainder of the year.
Fixed income markets have fared relatively well in the face of monetary
tightening. As the short end of the yield curve moved in concert with Fed
interest rate hikes, long-term bond yields remained low, perpetuating the
yield curve flattening trend. Because bond prices move in the opposite
direction of yields, the result has been that longer-term bonds have
outperformed short-term bonds. At period end, the spread between two-year
and 10-year Treasury yields was just 18 basis points (.18%).
Financial markets are likely to face continued crosscurrents for the remainder
of 2005, particularly as the economy digests the impact of Hurricane Katrina.
Nevertheless, opportunities do exist and we encourage you to work with your
financial advisor to diversify your portfolio among a variety of asset types.
This can help to diffuse risk while also tapping into the potential benefits
of a broader range of investment alternatives. As always, we thank you for
trusting Merrill Lynch Investment Managers with your investment assets.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
A Discussion With Your Portfolio Manager
We continued our efforts to build a well-diversified portfolio and to protect
the Portfolio's underlying value in the case of rising long-term interest
rates.
How did the Portfolio perform during the period in light of the existing
market conditions?
For the six-month period ended August 31, 2005, the Common Stock of Senior
High Income Portfolio, Inc. had net annualized yields of 9.23% and 9.25%,
based on a period-end per share net asset value of $6.06 and a per share
market price of $6.05, respectively, and $.282 per share income dividends.
Over the same period, the total investment return on the Portfolio's Common
Stock was +1.15%, based on a change in per share net asset value from $6.28 to
$6.06, and assuming reinvestment of all distributions. The Portfolio's total
return for the period lagged the +2.11% return of its benchmark, which is an
equal blend of the Credit Suisse First Boston (CSFB) High Yield Index and the
CSFB Leveraged Loan Index.
For a description of the Portfolio's total investment return based on a change
in the per share market value of the Portfolio's Common Stock (as measured by
the trading price of the Portfolio's shares on the New York Stock Exchange),
and assuming reinvestment of dividends, please refer to the Financial
Highlights section of this report. As a closed-end fund, the Portfolio's
shares may trade in the secondary market at a premium or discount to the
Portfolio's net asset value. As a result, total investment returns based on
changes in the market value of the Portfolio's Common Stock can vary
significantly from total investment returns based on changes in the
Portfolio's net asset value.
The high yield market was highly volatile during the six-month reporting
period. General Motors Corporation (GM) announced higher-than-expected losses
on March 16. This exacerbated concerns that both GM and Ford Motor Co. would
be lowered to junk bond status and exert significant downward pressure on the
entire high yield market. Concurrent with this development, the 10-year
Treasury rate shot up to 4.6% in the last week of March, adding yet more
downward price pressure on the high yield market. The Merrill Lynch High Yield
Index declined 2.72% in March and 1.04% in April. The market subsequently
gained some perspective on the GM and Ford downgrades and staged a four-month
rally totaling approximately 4.9% by August 31. This high yield upturn was
complemented by a rally in the 10-year Treasury rate, which finished the
period at 4.02%, 58 basis points (.58%) off its peak for the reporting period.
The later part of this Treasury rally was fueled by an investor flight to
quality in the aftermath of Hurricane Katrina.
Conditions in the leveraged loan market were much less unsettled than those in
the high yield bond market. Three primary factors account for this. First,
credit concerns have less of an impact on leveraged loans compared to high
yield bonds due to the senior secured status of most leveraged bank loans.
Second, leveraged bank loans are set off of the London InterBank Offered Rate
(LIBOR), and are less affected by moves in long-term interest rates. Third,
demand for bank loans has been greatly boosted by the influx of collateralized
loan obligations (CLOs) into the market. For the eight months ended August 31,
2005, we saw $26.2 billion in CLO issuance. Generally speaking, bank loans
lack call protection, and corporate treasurers have exploited this robust
demand to refinance at increasingly tighter spreads to LIBOR.
Despite increasing leverage and greater high yield issuance at the lower end
of the credit rating spectrum, default rates continued to decline, reaching
their lowest levels since 1994 at .45% for leveraged loans and .91% for high
yield bonds, as of June 30, 2005, according to CSFB. While strong market
liquidity and gross domestic product growth projections in the 3% - 4% range
have enabled companies to stretch their credit parameters, it must be noted
that default rates are a lagging indicator. The average incubation period for
a high yield credit default is roughly 36 months. Consequently, current rates
are more reflective of the underwriting standards of 2002 - 2003 than those of
today.
What factors most influenced Portfolio performance?
The Portfolio's underperformance of the benchmark is attributable to two
factors. First, although the Portfolio's composition currently consists of 50%
floating rate and 50% fixed rate investments, much of the floating exposure is
in the form of floating rate notes as opposed to bank debt. Considering the
narrow spreads available with bank loans, we believed that floating rate notes
represented a superior risk/return proposition. Unfortunately, these securities
exhibited volatility more similar to the high yield bond market than the
leveraged loan market. This relative price weakness was magnified by the
Portfolio's use of leverage, the second factor in the short-term
underperformance. The Portfolio's maximum leverage is 33%; we maintained
leverage in the 25% - 30% range during this reporting period.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Specific credits that detracted from performance during the past six months
included Anchor Glass Container Corporation, GEO Specialty Chemicals, Inc. and
Pliant Corporation. A common theme among these three investments is the
meaningful impact that high energy prices are having on U.S. manufacturers.
In terms of Anchor Glass, we owned $5.2 million in bonds of this glass bottle
manufacturer priced at 101 as of February 28, 2005. We purchased additional
bonds on price weakness, leaving the Portfolio with a $6.2 million position
priced at 67 at period-end. Anchor's financial performance continued to weaken
in the midst of high natural gas and soda ash prices, culminating in a Chapter
11 filing on August 8, 2005.
The price of our 142,466 share GEO equity position retreated from $15 per
share to $8.25 per share following weaker-than-expected profit margins. It
appears that the significantly higher raw material prices had not been fully
reflected in sales prices. GEO manufactures functional chemicals for a variety
of markets, including industrial water treatment, paints and coatings,
construction and electronics. We received this equity following the company's
emergence from Chapter 11 bankruptcy in November 2004.
The Portfolio's $3.3 million bond position in Pliant Corporation, a flexible
plastic manufacturing company, slid 25 points to 72 during the period. The
company's difficulty in passing along rising raw material costs, namely oil-
based resins, is a challenge facing the entire industry.
Investments that contributed meaningfully to performance during the six-month
period included Telewest Communications Plc, Highland Legacy Ltd. and High
Voltage Engineering Corporation (HVE). The Portfolio received 342,000 shares of
U.K. cable company Telewest Communications in July 2004 via a financial
restructuring. We sold the stock after the share price increased from $17.79 to
$19.32, based on the prospect for a merger with another U.K. cable company,
NTL.
In terms of Highland Legacy, we had a $4 million investment in the subordinated
tranche of this collateralized bond obligation, which was formed in 1999. This
position's price, which was just 22.8 in July 2003, rallied from 81 to 99
during the six-month reporting period. The tranche continues to climb in value,
reflecting the positive impact of the high yield market rally on the
portfolio's valuation as well as the expiration of various ill-advised
floating-for-fixed swap contracts which were overlaid on the portfolio.
Finally, the Portfolio's 187,000 shares of common equity in HVE rallied from
$1.50 per share to $9.04 per share during the period. The price of this
equity, received in an earlier restructuring of the company, had collapsed
last year as the company faced daunting liquidity issues arising from
overextended working capital positions. Since then, the company's principal
division, Robicon, was sold to Siemens AG at a surprisingly strong multiple.
This has propelled the stock upward.
What changes were made to the Portfolio during the period?
We continued to increase the Portfolio's exposure to floating rate notes
during the period, culminating in a 50% fixed rate/50% floating rate
composition at period-end. A primary concern has been the potential for a
negative price impact on the Portfolio's net asset value if long-term interest
rates were to rise. Long-term interest rates actually declined during the
period (with the 10-year Treasury yield falling from 4.38% on February 28,
2005, to 4.02% at August 31, 2005), and the Portfolio paid the cost for our
defensive shift in the form of foregone interest. That cost, however, has been
reduced as the underlying LIBOR base for the floating rate investments has
risen in lockstep with the federal funds rate increases. At August 31, 2005,
the three-month LIBOR was 3.87%, compared to 2.92% at February 28, 2005, and
it should continue to rise with future Federal Reserve Board (the Fed)
interest rate increases. Since June 2004, the Fed has increased the target
short-term interest rate 11 consecutive times, from 1% to 3.75% as of
September 20, 2005.
How would you characterize the Portfolio's position at the close of the
period?
Going forward, we plan to continue to maintain the Portfolio's 50% fixed
rate/50% floating rate composition, relying on floating rate notes as opposed
to bank loans, where we have seen further spread compression. Our investment
approach will continue to be credit-driven, with the aim of maintaining a
well-diversified investment portfolio. We also intend to maintain our use of
leverage within a target range of 25% - 30%.
Kevin J. Booth
Vice President and Portfolio Manager
September 20, 2005
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Portfolio Information
As of August 31, 2005
Percent of
Ten Largest Holdings Net Assets
Wellman, Inc. First Lien Term Loan, 7.71%
due 2/10/2009 2.4%
PolyOne Corp., 10.625% due 5/15/2010 2.4
Charter Communications Operating LLC
Tranche B Term Loan, 6.83% - 6.93%
due 4/07/2011 2.3
Bowater, Inc., 6.87% due 3/15/2010 2.2
Advanced Accessory Systems LLC, 10.75%
due 6/15/2011 2.0
Felcor Lodging LP, 7.78% due 6/01/2011 1.8
CCM Merger, Inc., 8% due 8/01/2013 1.8
US Can Corp., 10.875% due 7/15/2010 1.7
Rainbow National Services LLC, 8.75%
due 9/01/2012 1.7
Omnova Solutions, Inc., 11.25% due 6/01/2010 1.7
Percent of
Five Largest Industries Net Assets
Chemicals 19.2%
Cable--U.S. 15.9
Paper 10.5
Service 8.5
Manufacturing 8.3
For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Fund management. This definition
may not apply for purposes of this report, which may combine
industry sub-classifications for reporting ease.
Percent of
Total
Quality Ratings by S&P/Moody's Investments
BB/Ba 17.1%
B/B 71.1
CCC/Caa 8.2
CC/Ca 0.3
D 0.9
NR (Not Rated) 1.9
Other* 0.5
* Includes portfolio holdings in common stocks, preferred stocks,
warrants, other interests and short-term investments.
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Kevin J. Booth, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street - 11 East
New York, NY 10286
NYSE Symbol
ARK
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (in U.S. dollars)
Face
Amount Corporate Bonds Value
Aerospace & Defense--1.3%
$ 4,510,000 Vought Aircraft Industries, Inc., 8%
due 7/15/2011 $ 4,442,350
Automotive--3.9%
7,550,000 Advanced Accessory Systems LLC,10.75%
due 6/15/2011 6,606,250
2,175,000 Cooper-Standard Automotive, Inc., 8.375%
due 12/15/2014 1,979,250
1,350,000 Delco Remy International, Inc., 7.599%
due 4/15/2009 (f) 1,336,500
2,575,000 Exide Technologies, 10.50% due 3/15/2013 (i) 1,982,750
1,175,000 Metaldyne Corp., 11% due 6/15/2012 904,750
475,000 Tenneco Automotive, Inc. Series B,10.25%
due 7/15/2013 539,125
Venture Holdings Co. LLC (c):
700,000 12% due 6/01/2009 0
3,325,000 Series B, 9.50% due 7/01/2005 4,156
--------------
13,352,781
Broadcasting--1.3%
1,525,000 Emmis Communications Corp., 9.745%
due 6/15/2012 (f) 1,544,063
3,000,000 Granite Broadcasting Corp., 9.75%
due 12/01/2010 2,831,250
--------------
4,375,313
Cable--International--0.1%
350,000 NTL Cable Plc, 8.75% due 4/15/2014 369,250
Cable--U.S.--8.7%
1,800,000 CSC Holdings, Inc., 7.25% due 7/15/2008 1,820,250
2,275,000 Cablevision Systems Corp. Series B, 7.88%
due 4/01/2009 (f) 2,348,938
Charter Communications Holdings LLC:
1,750,000 10% due 4/01/2009 1,498,438
1,000,000 11.75% due 1/15/2010 850,000
2,000,000 11.125% due 1/15/2011 1,535,000
1,500,000 9.92% due 4/01/2011 1,125,000
1,000,000 10% due 5/15/2011 747,500
Intelsat Bermuda Ltd. (i):
1,925,000 8.695% due 1/15/2012 (f) 1,958,687
1,675,000 8.25% due 1/15/2013 1,704,313
2,400,000 8.625% due 1/15/2015 2,490,000
1,400,000 Mediacom Broadband LLC, 11% due 7/15/2013 1,527,750
1,875,000 Mediacom LLC, 9.50% due 1/15/2013 1,907,812
New Skies Satellites NV:
1,550,000 8.539% due 11/01/2011 (f) 1,608,125
2,450,000 9.125% due 11/01/2012 2,541,875
5,250,000 Rainbow National Services LLC, 8.75%
due 9/01/2012 5,715,938
--------------
29,379,626
Face
Amount Corporate Bonds Value
Chemicals--12.5%
$ 1,350,000 ArCo Chemical Co., 9.80% due 2/01/2020 $ 1,525,500
555,000 BCP Caylux Holdings Luxembourg SCA,
9.625% due 6/15/2014 629,231
2,250,000 Compass Minerals International, Inc. Series B,
12% due 6/01/2013 (g) 1,923,750
4,382,000 GEO Specialty Chemicals, Inc.,12.016%
due 12/31/2009 (h) 4,601,100
Huntsman International, LLC:
1,000,000 9.875% due 3/01/2009 1,065,000
1,219,000 10.125% due 7/01/2009 1,255,570
1,750,000 ISP Holdings, Inc. Series B,10.625%
due 12/15/2009 1,855,000
3,000,000 Invista B.V., 9.25% due 5/01/2012 (i) 3,300,000
2,500,000 Koppers, Inc., 9.875% due 10/15/2013 2,775,000
1,650,000 Lyondell Chemical Co.,11.125%
due 7/15/2012 1,876,875
1,200,000 Millennium America, Inc., 7.625%
due 11/15/2026 1,128,000
5,350,000 Omnova Solutions, Inc.,11.25%
due 6/01/2010 5,697,750
7,475,000 PolyOne Corp.,10.625% due 5/15/2010 8,026,281
Rockwood Specialties Group, Inc.:
1,825,000 10.625% due 5/15/2011 2,007,500
250,000 7.50% due 11/15/2014 (i) 255,000
Terra Capital, Inc.:
2,500,000 12.875% due 10/15/2008 2,950,000
832,000 11.50% due 6/01/2010 952,640
361,000 United Agri Products, Inc., 8.25%
due 12/15/2011 382,660
--------------
42,206,857
Consumer--Durables--1.3%
4,450,000 Simmons Co., 7.875% due 1/15/2014 4,272,000
Consumer--Non-Durables--3.1%
1,675,000 Chattem, Inc., 6.87% due 3/01/2010 (f) 1,687,562
1,000,000 General Binding Corp., 9.375%
due 6/01/2008 1,017,500
2,725,000 Hines Nurseries, Inc.,10.25%
due 10/01/2011 2,799,937
2,125,000 North Atlantic Trading Co., 9.25%
due 3/01/2012 1,567,188
3,525,000 Quiksilver, Inc., 6.875% due 4/15/2015 (i) 3,520,594
--------------
10,592,781
Diversified Media--0.9%
325,000 Houghton Mifflin Co., 9.875% due 2/01/2013 351,000
Universal City Florida Holding Co. I:
175,000 8.375% due 5/01/2010 184,188
2,450,000 8.443% due 5/01/2010 (f) 2,566,375
--------------
3,101,563
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Energy--Other--2.4%
$ 1,000,000 Dresser, Inc., 9.375% due 4/15/2011 $ 1,055,000
1,100,000 Dresser-Rand Group, Inc., 7.375%
due 11/01/2014 1,138,500
2,536,000 Giant Industries, Inc., 11% due 5/15/2012 2,865,680
3,350,000 Star Gas Partners LP, 10.25% due 2/15/2013 2,981,500
--------------
8,040,680
Financial--3.0%
4,000,000 Highland Legacy Ltd., 9.943%
due 6/01/2011 (f)(i) 3,999,600
500,000 Investcorp SA, 7.54% due 10/21/2008 506,727
1,000,000 Pennant CBO Ltd.,13.43% due 3/14/2011 770,000
3,925,000 Refco Finance Holdings LLC, 9%
due 8/01/2012 4,278,250
SKM-LibertyView CBO Ltd. Series 1A (c)(i)(l):
1,500,000 Class C1, 8.71% due 4/10/2011 525,000
1,000,000 Class D, 11.91% due 4/10/2011 15,000
--------------
10,094,577
Food & Drug--0.2%
850,000 Duane Reade, Inc., 7.91% due 12/15/2010 (f) 820,250
Food & Tobacco--2.3%
Commonwealth Brands, Inc. (i):
2,250,000 9.75% due 4/15/2008 2,373,750
2,825,000 10.625% due 9/01/2008 2,980,375
641,000 Dole Food Co., Inc., 8.875% due 3/15/2011 682,665
1,442,000 Gold Kist Inc., 10.25% due 3/15/2014 1,640,275
--------------
7,677,065
Gaming--2.9%
5,925,000 CCM Merger, Inc., 8% due 8/01/2013 (i) 6,043,500
2,000,000 Jacobs Entertainment, Inc., 11.875%
due 2/01/2009 2,145,000
925,000 Majestic Star Casino LLC, 9.50%
due 10/15/2010 931,938
675,000 Penn National Gaming, Inc., 6.75%
due 3/01/2015 668,250
--------------
9,788,688
Health Care--2.6%
3,000,000 CDRV Investors, Inc., 9.75% due 1/01/2015 (g) 1,740,000
Elan Finance Plc (i):
1,650,000 7.75% due 11/15/2011 1,452,000
2,325,000 7.79% due 11/15/2011 (f) 2,057,625
3,000,000 Tenet Healthcare Corp., 7.375%
due 2/01/2013 2,925,000
700,000 VWR International, Inc., 8% due 4/15/2014 694,750
--------------
8,869,375
Face
Amount Corporate Bonds Value
Housing--2.5%
$ 500,000 Compression Polymers Corp.,10.50%
due 7/01/2013 (i) $ 505,000
226,860 Formica Holdings Corp., 8.76%
due 6/10/2011 215,517
Goodman Global Holding Co., Inc. (i):
2,555,000 6.41% due 6/15/2012 (f) 2,542,225
4,750,000 7.875% due 12/15/2012 4,488,750
700,000 US Concrete, Inc., 8.375% due 4/01/2014 700,000
--------------
8,451,492
Information Technology--4.7%
3,800,000 Amkor Technology, Inc., 9.25% due 2/15/2008 3,572,000
2,450,000 Freescale Semiconductor, Inc., 6.349%
due 7/15/2009 (f) 2,529,625
1,375,000 MagnaChip Semiconductor SA, 7.12%
due 12/15/2011 (f) 1,381,875
5,250,000 Solar Capital Corp., 9.125% due 8/15/2013 (i) 5,512,500
1,750,000 Sungard Data Systems, Inc., 8.525%
due 8/15/2013 (f)(i) 1,811,250
1,075,000 Telcordia Technologies Inc.,10%
due 3/15/2013 (i) 1,021,250
--------------
15,828,500
Leisure--2.4%
6,000,000 Felcor Lodging LP, 7.78% due 6/01/2011 (f) 6,255,000
91,000 Host Marriott Corp. Series B, 7.875%
due 8/01/2008 92,251
2,000,000 True Temper Sports, Inc., 8.375%
due 9/15/2011 1,940,000
--------------
8,287,251
Manufacturing--5.1%
275,000 Aearo Co., 8.25% due 4/15/2012 277,062
1,750,000 Columbus McKinnon Corp., 8.875%
due 11/01/2013 (i) 1,771,875
3,000,000 Communications & Power Industries, Inc.,
8% due 2/01/2012 3,097,500
2,250,000 EaglePicher Inc., 9.75% due 9/01/2013 (c) 1,687,500
2,825,000 Invensys Plc, 9.875% due 3/15/2011 (i) 2,839,125
Mueller Group, Inc.:
2,250,000 7.96% due 11/01/2011 (f) 2,314,688
3,000,000 10% due 5/01/2012 3,213,750
300,000 NMHG Holding Co.,10% due 5/15/2009 321,000
1 NSP Holdings LLC, 11.75% due 1/01/2012 (k) 1
2,000,000 Propex Fabrics, Inc., 10% due 12/01/2012 1,930,000
--------------
17,452,501
Metal--Other--1.3%
500,000 Aleris International, Inc., 9%
due 11/15/2014 527,500
3,500,000 James River Coal Co., 9.375%
due 6/01/2012 3,701,250
--------------
4,228,750
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Packaging--5.7%
$ 6,200,000 Anchor Glass Container Corp.,11%
due 2/15/2013 (c) $ 4,154,000
1,900,000 Consolidated Container Co. LLC, 10.75%
due 6/15/2009 (g) 1,577,000
2,300,000 Crown European Holdings SA, 9.50%
due 3/01/2011 2,535,750
3,300,000 Pliant Corp., 13% due 6/01/2010 2,376,000
Tekni-Plex, Inc. (i):
500,000 10.875% due 8/15/2012 543,750
650,000 8.75% due 11/15/2013 568,750
5,550,000 US Can Corp.,10.875% due 7/15/2010 5,827,500
2,250,000 Wise Metals Group LLC,10.25%
due 5/15/2012 1,850,625
--------------
19,433,375
Paper--10.5%
3,275,000 Abitibi-Consolidated, Inc., 7.37%
due 6/15/2011 (f) 3,275,000
2,975,000 Ainsworth Lumber Co. Ltd., 7.24%
due 10/01/2010 (f) 2,945,250
Boise Cascade LLC:
1,100,000 6.474% due 10/15/2012 (f) 1,108,250
350,000 7.125% due 10/15/2014 340,375
7,475,000 Bowater, Inc., 6.87% due 3/15/2010 (f) 7,549,750
1,775,000 Domtar, Inc., 7.125% due 8/15/2015 1,769,648
4,325,000 Georgia-Pacific Corp., 9.375% due 2/01/2013 4,833,187
625,000 Graphic Packaging International Corp., 9.50%
due 8/15/2013 640,625
JSG Funding Plc:
3,000,000 9.625% due 10/01/2012 3,067,500
3,150,000 7.75% due 4/01/2015 2,772,000
5,175,000 NewPage Corp., 9.943% due 5/01/2012 (f)(i) 5,149,125
800,000 Smurfit-Stone Container Enterprises, Inc.,
8.375% due 7/01/2012 796,000
1,725,000 Tembec Industries, Inc., 8.625% due 6/30/2009 1,388,625
--------------
35,635,335
Service--6.2%
2,700,000 Ahern Rentals, Inc., 9.25% due 8/15/2013 (i) 2,760,750
Allied Waste North America, Inc.:
720,000 7.875% due 4/15/2013 741,600
3,125,000 Series B, 7.375% due 4/15/2014 2,937,500
4,000,000 HydroChem Industrial Services, Inc., 9.25%
due 2/15/2013 (i) 3,920,000
3,000,000 MSW Energy Holdings LLC, 8.50%
due 9/01/2010 3,225,000
2,000,000 Neff Rental LLC,11.25% due 6/15/2012 (i) 2,130,000
5,450,000 United Rentals North America, Inc., 7.75%
due 11/15/2013 (i) 5,327,375
--------------
21,042,225
Face
Amount Corporate Bonds Value
Telecommunications--4.1%
$ 2,045,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 $ 2,065,450
4,000,000 Qwest Communications International, Inc.,
7.29% due 2/15/2009 (f) 3,980,000
1,025,000 Qwest Corp., 7.12% due 6/15/2013 (f)(i) 1,073,688
Time Warner Telecom Holdings, Inc.:
3,500,000 7.79% due 2/15/2011 (f) 3,587,500
2,000,000 9.25% due 2/15/2014 2,030,000
1,276,000 Time Warner Telecom, Inc., 9.75%
due 7/15/2008 1,295,140
--------------
14,031,778
Transportation--0.5%
1,500,000 Progress Rail Services Corp., 7.75%
due 4/01/2012 (i) 1,524,375
Utility--2.8%
2,900,000 Mission Energy Holding Co.,13.50%
due 7/15/2008 3,451,000
2,000,000 Northwest Pipeline Corp., 6.625%
due 12/01/2007 2,060,000
2,750,000 Sierra Pacific Resources, 8.625%
due 3/15/2014 3,038,750
725,000 Williams Cos., Inc., 8.625% due 6/01/2010 783,906
--------------
9,333,656
Wireless Communications--2.3%
355,000 American Tower Corp., 9.375% due 2/01/2009 372,306
1,550,000 Digicel Ltd., 9.25% due 9/01/2012 (i) 1,619,750
Dobson Cellular Systems:
1,000,000 8.375% due 11/01/2011 1,060,000
2,200,000 8.443% due 11/01/2011 (f) 2,288,000
500,000 Horizon PCS, Inc.,11.375% due 7/15/2012 580,000
1,000,000 Rural Cellular Corp., 8.37% due 3/15/2010 (f) 1,035,000
800,000 US Unwired, Inc., 7.66% due 6/15/2010 (f) 832,000
--------------
7,787,056
Total Corporate Bonds
(Cost--$325,407,365)--94.6% 320,419,450
Floating Rate Loan Interests (a)
Automotive--1.0%
1,997,484 Metaldyne Corp. Term Loan D, 8.016%
due 12/31/2009 1,989,371
Tenneco Automotive, Inc.:
1,092,618 Term Loan B, 6.08% due 12/12/2010 1,111,739
479,968 Tranche B-1 Credit Linked Deposit, 5.76%
due 12/12/2010 488,367
--------------
3,589,477
Cable--International--0.3%
Telewest Communications Networks Ltd.:
566,667 Term Loan B, 7.17% due 11/30/2012 566,301
433,333 Term Loan C, 7.67% due 11/30/2013 435,404
--------------
1,001,705
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (a) Value
Cable--U.S.--7.2%
Century Cable Holdings, LLC:
$ 3,000,000 Discretionary Term Loan, 8.50%
due 12/31/2009 $ 2,981,625
5,000,000 Term Loan B, 8.50% due 6/30/2009 4,971,875
7,910,166 Charter Communications Operating LLC
Tranche B Term Loan, 6.83% - 6.93%
due 4/07/2011 7,945,833
3,940,000 Insight Midwest Holdings LLC Term Loan C,
5.625% due 12/31/2009 3,998,363
496,869 New Skies Satellites, BV Term Loan, 5.875%
due 5/04/2011 503,923
4,000,000 Olympus Cable Holdings LLC Term Loan B,
8.50% due 9/30/2010 3,978,216
--------------
24,379,835
Chemicals--6.3%
2,595,770 Celanese Holdings LLC Term Loan B, 5.74%
due 4/06/2011 2,646,063
1,700,000 Huntsman International LLC Term Loan B,
5.323% due 8/12/2012 1,724,970
Kosa, New Tranche:
1,682,206 B-1 Term Loan, 5.75% due 4/29/2011 1,710,593
729,853 B-2 Term Loan, 5.75% due 4/29/2011 742,169
758,229 Pinnacle Polymers Term Loan, 6.109%
due 12/15/2006 768,926
3,733,333 Polymer Group, Inc. First Lien Term Loan, 6.73%
due 4/01/2010 3,806,443
1,592,000 Rockwood Specialties Group, Inc., Tranche B
Term Loan, 5.93% due 12/10/2012 1,621,519
8,000,000 Wellman, Inc. First Lien Term Loan, 7.71%
due 2/10/2009 8,163,336
--------------
21,184,019
Consumer--Durables--0.9%
3,000,000 Simmons Co. Term Loan, 7% due 6/19/2012 3,046,251
Consumer--Non-Durables--2.4%
4,975,000 American Safety Razor Co. Tranche B Term Loan,
6.61% due 2/28/2012 5,037,188
1,500,000 Culligan International Co. Term Loan, 6.071%
due 9/30/2011 1,523,438
1,477,500 Solo Cup Co. Term Loan, 5.49% - 5.86%
due 2/27/2011 1,495,045
--------------
8,055,671
Energy--Exploration & Production--1.0%
Quest Cherokee LLC:
222,222 Line of Credit, 8.325% due 12/31/2008 222,222
1,500,000 Revolving Credit, 8.25% due 7/22/2009 1,451,250
1,764,444 Term Loan B, 8.61% - 10.25%
due 7/22/2010 1,764,444
--------------
3,437,916
Face
Amount Floating Rate Loan Interests (a) Value
Energy--Other--2.5%
Dresser, Inc.:
$ 718,038 Term Loan C, 5.99% due 4/10/2009 $ 725,816
1,250,000 Term Loan Unsecured, 6.91%
due 3/01/2010 1,271,875
1,000,000 EPCO Holdings, Inc. Term Loan B, 5.84%
due 8/18/2010 1,017,656
Regency Gas Services LLC:
1,500,000 Second Lien Term Loan, 9.49%
due 12/01/2010 1,507,500
3,482,500 Term Loan, 6.24% - 6.33%
due 6/01/2010 3,499,912
416,667 Term Loan B, 6.33% due 6/01/2010 421,875
--------------
8,444,634
Food & Tobacco--1.0%
1,718,000 Dr Pepper/Seven Up Bottling Group, Inc.
Term Loan B, 5.339% - 5.609%
due 12/19/2010 1,745,058
1,721,667 Pierre Foods, Inc. Term Loan B, 5.69%
due 6/30/2010 1,748,567
--------------
3,493,625
Health Care--2.0%
1,380,682 Colgate Medical Term Loan B,
5.48% - 5.49% due 12/15/2008 1,395,352
1,699,576 Medpointe Healthcare Inc. Tranche B Term Loan,
8.99% due 9/30/2008 1,720,821
3,661,334 VWR International, Inc., Tranche B Term Loan,
6.14% due 4/07/2011 3,716,254
--------------
6,832,427
Housing--3.2%
2,289,104 General Growth Properties, Inc. Term Loan B,
5.67% due 11/12/2008 2,318,766
2,490,033 Headwaters, Inc. First Lien Term Loan,
5.87% - 7.75% due 4/30/2011 2,525,309
1,959,940 LNR Property Corp. Tranche B Term Loan,
6.53% - 6.71% due 2/03/2008 1,981,464
4,000,000 Stile U.S. Acquisition Corp. Bridge Loan, 9.384%
due 4/06/2015 4,000,000
--------------
10,825,539
Information Technology--1.0%
1,770,000 Fidelity National Information Solutions, Inc.
Term Loan B, 5.10% due 3/09/2013 1,774,425
1,683,281 Telcordia Technologies, Inc. Term Loan,
6.51% - 6.61% due 9/15/2012 1,683,281
--------------
3,457,706
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (a) Value
Manufacturing--3.2%
$ 3,057,865 EaglePicher Holdings, Inc. Tranche B Term Loan,
10% due 8/07/2009 (c) $ 3,038,753
4,119,342 Invensys International Holdings Ltd. First Lien
Term Loan, 6.881% due 9/04/2009 4,175,983
3,491,250 Metokote Corp. Second Lien Term Loan,
6.49% - 6.68% due 11/27/2011 3,513,070
--------------
10,727,806
Metal--Other--1.2%
Euramax International Plc.:
2,000,000 Tranche 3 Term Loan B, 6.125%
due 6/29/2012 2,015,416
2,000,000 Tranche 4 Second Lien Term Loan, 10.55%
due 6/29/2013 2,030,000
--------------
4,045,416
Packaging--1.1%
3,534,686 Owens-Illinois Group, Inc. French Tranche C-1,
5.45% due 4/01/2008 3,572,242
Retail--1.0%
3,000,000 American Reprographics Co. LLC Second Lien
Term Loan, 10.235% due 12/18/2009 3,120,000
305,240 General Nutrition Centers, Inc. Tranche B
Term Loan, 6.51% - 6.67% due 12/05/2009 309,056
--------------
3,429,056
Service--2.3%
Allied Waste North America, Inc.:
1,239,159 Term Loan, 5.37% - 5.67%
due 1/15/2012 1,251,692
472,973 Tranche A Credit Linked Deposit, 5.34%
due 1/15/2012 477,801
United Rentals, Inc.:
1,645,833 Initial Term Loan, 5.92% due 2/14/2011 1,665,378
333,333 Tranche B Credit Linked Deposit, 5.59%
due 2/14/2011 337,292
3,950,000 Waste Services, Inc. Tranche B Term Loan,
8.02% - 8.53% due 3/31/2011 4,019,125
--------------
7,751,288
Utility--2.0%
3,920,000 Calpine Corp. Second Lien Term Loan, 9.349%
due 7/15/2007 3,208,520
1,700,000 Covanta Energy Corp. Second Lien Term Loan,
8.96% - 9.141% due 6/24/2013 1,712,750
El Paso Corp.:
750,000 Deposit Account, 2.77% due 11/23/2009 760,052
1,235,000 Term Loan, 6.438% due 11/23/2009 1,254,897
--------------
6,936,219
Wireless Communications--0.9%
2,955,000 Centennial Cellular Operating Co. Term Loan,
5.63 - 6.11% due 2/09/2011 3,005,658
Total Floating Rate Loan Interests
(Cost--$136,644,844)--40.5% 137,216,490
Shares
Held Common Stocks Value
Chemicals--0.4%
142,466 GEO Specialty Chemicals, Inc. (e) $ 1,210,961
Leisure--0.1%
41,866 Lodgian, Inc. (e) 438,337
Telecommunications--0.1%
32,057 IDT Corp. Class B (e) 424,114
Total Common Stocks
(Cost--$3,488,548)--0.6% 2,073,412
Preferred Stocks
Cable--U.S.--0.0%
2,500 Adelphia Communications Corp. Series B, 13% (e) 500
Total Preferred Stocks
(Cost--$225,000)--0.0% 500
Warrants (j)
Paper--0.0%
3,500 MDP Acquisitions Plc (expires 10/01/2013) 17,500
Wireless Communications--0.1%
600 American Tower Corp. (expires 8/01/2008) 202,296
Total Warrants
(Cost--$39,036)--0.1% 219,796
Beneficial
Interest Other Interests (d)
Automotive--0.0%
$ 4,130,972 Cambridge Industries, Inc.
(Litigation Trust Certificates) 41,310
Health Care--0.0%
10,284 MEDIQ Inc. (Preferred Stock Escrow
due 2/01/2006) 0
Total Other Interests (Cost--$0)--0.0% 41,310
Short-Term Securities
$ 176,748 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (b) 176,748
Total Short-Term Securities
(Cost--$176,748)--0.1% 176,748
Total Investments (Cost--$465,981,541*)--135.9% 460,147,706
Liabilities in Excess of Other Assets--(35.9%) (121,591,904)
--------------
Net Assets--100.0% $ 338,555,802
==============
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
August 31, 2005, as computed for federal income tax purposes, were
as follows:
Aggregate cost $ 465,607,285
================
Gross unrealized appreciation $ 13,671,735
Gross unrealized depreciation (19,131,314)
----------------
Net unrealized depreciation $ (5,459,579)
================
(a) Floating rate loan interests in which the Fund invests generally pays
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally
(i) the lending rate offered by one or more major European banks, such as
London InterBank Offered Rate ("LIBOR"), (ii) the prime rate offered by
one or more major U.S banks, or (iii) the certificate of deposit rate.
(b) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were
as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(4,166,706) $17,754
(c) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(d) Other interests represent beneficial interest in liquidation trusts
and other reorganization entities and are non-income producing.
(e) Non-income producing security.
(f) Floating rate note.
(g) Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase by the Fund.
(h) Convertible security.
(i) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(j) Warrants entitle the Fund to purchase a predetermined number of shares
of common stock and are non-income producing. The purchase price and
number of shares are subject to adjustment under certain conditions
until the expiration date.
(k) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(l) Mortgage-Backed Securities are subject to principle paydowns as a result
of pre-payments or refinancing of the underlying mortgage instruments.
As a result, the average life may be substantially less than the
original maturity.
For Fund compliance purposes, the Fund's industry classifications refer
to any one or more of the industry sub-classifications used by one or
more widely recognized market indexes or ratings group indexes, and/or
as defined by Fund management. This definition may not apply for purposes
of this report, which may combine industry sub-classifications for
reporting ease. Industries are shown as a percent of net assets.
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Statement of Assets, Liabilities and Capital
As of August 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$465,804,793) $ 459,970,958
Investments in affiliated securities, at value (identified cost--$176,748) 176,748
Cash 19,277
Unfunded loan commitment 25,216
Receivables:
Interest (including $3,298 from affiliates) $ 7,427,655
Commitment fees 2,995 7,430,650
---------------
Prepaid expenses 3,328
---------------
Total assets 467,626,177
---------------
Liabilities
Loans 127,000,000
Deferred income 18,973
Payables:
Securities purchased 1,750,000
Investment adviser 151,632
Interest on loans 92,244
Other affiliates 2,954 1,996,830
---------------
Accrued expenses 54,572
---------------
Total liabilities 129,070,375
---------------
Net Assets
Net assets $ 338,555,802
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(55,834,828 shares issued and outstanding) $ 5,583,483
Paid-in capital in excess of par 492,728,798
Undistributed investment income--net $ 2,907,220
Accumulated realized capital losses--net (156,855,080)
Unrealized depreciation--net (5,808,619)
---------------
Total accumulated losses--net (159,756,479)
---------------
Total capital--Equivalent to $6.06 net asset value per share of Common Stock
(market price--$6.05) $ 338,555,802
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Statement of Operations
For the Six Months Ended August 31, 2005
Investment Income
Interest (including $17,754 from affiliates) $ 19,113,343
Facility and other fees 101,847
---------------
Total income 19,215,190
---------------
Expenses
Loan interest expense $ 2,163,271
Investment advisory fees 1,172,182
Borrowing costs 95,013
Accounting services 61,562
Professional fees 46,486
Transfer agent fees 37,817
Printing and shareholder reports 22,702
Directors' fees and expenses 21,789
Listing fees 19,884
Custodian fees 17,000
Pricing services 10,066
Other 11,442
---------------
Total expenses 3,679,214
---------------
Investment income--net 15,535,976
---------------
Realized & Unrealized Gain (Loss)--Net
Realized loss on investments--net (996,404)
Change in unrealized appreciation/depreciation on:
Investments--net (10,640,001)
Unfunded corporate loans--net 18,013 (10,621,988)
--------------- ---------------
Total realized and unrealized loss--net (11,618,392)
---------------
Net Increase in Net Assets Resulting from Operations $ 3,917,584
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
August 31, February 28,
Increase (Decrease) in Net Assets: 2005 2005
Operations
Investment income--net $ 15,535,976 $ 31,730,444
Realized gain (loss)--net (996,404) 2,619,920
Change in unrealized appreciation/depreciation--net (10,621,988) 5,910,284
--------------- ---------------
Net increase in net assets resulting from operations 3,917,584 40,260,648
--------------- ---------------
Dividends to Shareholders
Dividends to shareholders from investment income--net (15,723,259) (30,760,697)
--------------- ---------------
Capital Share Transactions
Value of shares issued to Common Stock shareholders in reinvestment of dividends 570,566 341,044
--------------- ---------------
Net increase in net assets resulting from capital share transactions 570,566 341,044
--------------- ---------------
Net Assets
Total increase (decrease)in net assets (11,235,109) 9,840,995
Beginning of period 349,790,911 339,949,916
--------------- ---------------
End of period* $ 338,555,802 $ 349,790,911
=============== ===============
* Undistributed investment income--net $ 2,907,220 $ 3,094,503
=============== ===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Statement of Cash Flows
For the Six Months Ended August 31, 2005
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 3,917,584
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (186,514)
Decrease in other liabilities (298,417)
Realized and unrealized loss--net 11,618,392
Amortization of premium and discount--net (643,775)
Proceeds from sales and paydowns of long-term investments 128,656,936
Proceeds on other investment related transactions 211,251
Purchases of long-term investments (111,973,712)
Proceeds from sales of short-term investments--net 4,166,706
---------------
Net cash provided by operating activities 35,468,451
===============
Cash Used for Financing Activities
Cash receipts from borrowings 106,300,000
Cash payments on borrowings (126,800,000)
Dividends paid to shareholders (15,348,001)
---------------
Net cash used for financing activities (35,848,001)
===============
Cash
Net decrease in cash (379,550)
Cash at beginning of period 398,827
---------------
Cash at end of period $ 19,277
===============
Cash Flow Information
Cash paid for interest $ 2,117,013
===============
Non-Cash Financing Activities
Capital shares issued on reinvestment of dividends to shareholders $ 570,566
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Financial Highlights
For the Six For the For the
Months Ended Year Ended Year Ended For the Year Ended
The following per share data and ratios have been derived August 31, February 28, February 29, February 28,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 6.28 $ 6.10 $ 4.82 $ 5.40 $ 6.63
---------- ---------- ---------- ---------- ----------
Investment income--net*** .28 .57 .62 .63 .70
Realized and unrealized gain (loss)--net (.22) .16 1.30 (.59) (1.22)
---------- ---------- ---------- ---------- ----------
Total from investment operations .06 .73 1.92 .04 (.52)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.28) (.55) (.64) (.62) (.71)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 6.06 $ 6.28 $ 6.10 $ 4.82 $ 5.40
========== ========== ========== ========== ==========
Market price per share, end of period $ 6.05 $ 6.21 $ 6.11 $ 5.45 $ 5.89
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 1.15%++ 12.88% 41.49% 1.18% (8.03%)
========== ========== ========== ========== ==========
Based on market price per share 2.12%++ 11.44% 25.34% 4.88% .16%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding interest expense .89%* .91% .90% .97% .95%
========== ========== ========== ========== ==========
Expenses 2.17%* 1.69% 1.42% 1.78% 2.46%
========== ========== ========== ========== ==========
Investment income--net 9.15%* 9.28% 11.23% 12.75% 11.83%
========== ========== ========== ========== ==========
Leverage
Amount of borrowings, end of period
(in thousands) $ 127,000 $ 147,500 $ 132,297 $ 104,600 $ 127,600
========== ========== ========== ========== ==========
Average amount of borrowings outstanding during
the period (in thousands) $ 128,245 $ 137,934 $ 112,037 $ 110,348 $ 128,203
========== ========== ========== ========== ==========
Average amount of borrowings outstanding per
share during the period*** $ 2.30 $ 2.48 $ 2.02 $ 2.02 $ 2.37
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 338,556 $ 349,791 $ 339,950 $ 265,423 $ 293,988
========== ========== ========== ========== ==========
Portfolio turnover 23.85% 54.18% 63.78% 74.70% 47.93%
========== ========== ========== ========== ==========
* 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.
++ Aggregate total investment return.
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
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 amended, as a non-diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. 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 daily basis. The
Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE")
under the symbol ARK.
(a) Corporate debt obligations--The Fund invests principally in senior debt
obligations of companies, including floating rate 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 or other financial institutions, the Fund's investment in floating rate
loans could be considered concentrated in financial institutions.
(b) Valuation of investments--Floating rate loans are valued in accordance
with guidelines established by the Fund's Board of Directors. Floating rate
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 the limited number of floating rate loans for which no reliable price
quotes are available, such floating rate loans will be valued by Loan Pricing
Corporation through the use of pricing matrices to determine valuations. If
the pricing service does not provide a value for a floating rate loan, the
Investment Adviser will value the floating rate loan at fair value, which is
intended to approximate market value.
Securities that are held by the Fund that are traded on stock exchanges or the
Nasdaq National Market are valued at the last sale price or official close
price on the exchange on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the
Fund. Long positions in securities traded in the over-the-counter ("OTC")
market, Nasdaq Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Directors of the Fund. Short positions in
securities traded in the OTC market are valued at the last available asked
price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. When the Fund writes an option, the amount of the premium received is
recorded on the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based on the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last asked price. Options purchased by the Fund are valued at their last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last bid price. Swap agreements are valued based
upon quoted fair valuations received daily by the Fund from a pricing service
or counterpaty. Other investments, including futures contracts and related
options, are stated at market value. Obligations with remaining maturities of
60 days or less are valued at amortized cost unless the Investment Adviser
believes that this method no longer produces fair valuations. Repurchase
agreements will be valued at cost plus accrued interest. The Fund employs
certain pricing services to provide securities prices for the Fund. 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, including valuations furnished by the pricing
services retained by the Fund, which may use a matrix system for valuations.
The procedures of a pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Board of Directors.
Such valuations and procedures will be reviewed periodically by the Board of
Directors.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Board of Directors or
by the Investment Adviser using a pricing service and/or procedures approved
by the Board of Directors.
(c) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities 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.
* Options--The Fund may 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.
* Swaps--The Fund may enter into swap agreements, which are OTC contracts in
which the Fund and a counterparty agree to make periodic net payments on a
specified notional amount. The net payments can be made for a set period of
time or may be triggered by a pre-determined credit event. The net periodic
payments may be based on a fixed or variable interest rate; the change in
market value of a specified security, basket of securities, or index; or the
return generated by a security. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as realized
gains or losses, respectively. Gains or losses are also realized upon
termination of the swap agreements. Swaps are marked-to-market daily and
changes in value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
(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.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Notes to Financial Statements (continued)
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(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.
(g) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it receives a fee from the borrower. The Fund typically
receives the income on the loaned securities, but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
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.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates.
For the six months ended August 31, 2005, the Fund reimbursed FAM $3,816 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended August 31, 2005 were $110,518,712 and
$126,845,197, respectively.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Notes to Financial Statements (concluded)
4. Capital Share Transaction:
The Fund is authorized to issue 200,000,000 shares of capital stock par value
$.10, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued
shares of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the six months ended August 31, 2005 and
the year ended February 28, 2005 increased by 94,255 and 55,635, respectively,
as a result of dividend reinvestment.
5. Unfunded Corporate Loans:
As of August 31, 2005, the Fund had unfunded loan commitments of approximately
$4,083,000, which would be extended at the option of the borrower, pursuant to
the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Key Energy $2,500
Quest Cherokee LLC $1,000
Regency Gas Services LLC $ 583
6. Short-Term Borrowings:
On May 24, 2005, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citigroup North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The
agreement was renewed for one year and has a maximum limit of $175,000,000.
Under the Citicorp program, the conduits will fund advances to the Fund
through the issuance of highly rated commercial paper. As security for its
obligations to the Lenders under the revolving securitization facility, the
Fund has granted a security interest in substantially all of its assets to and
in favor of the Lenders. The interest rate on the Fund's borrowings is based
on the interest rate carried by the commercial paper plus a program fee. The
Fund pays additional borrowing costs including a backstop commitment fee.
The weighted average annual interest rate was 3.37% and the average borrowing
was approximately $128,245,000 for the six months ended August 31, 2005.
7. Capital Loss Carryforward:
On February 28, 2005, the Fund had a net capital loss carryforward of
$150,707,056, of which $4,282,847 expires in 2007, $12,755,214 expires in
2008, $25,658,795 expires in 2009, $54,958,583 expires in 2010, $30,706,546
expires in 2011 and $22,345,071 expires in 2012. This amount will be available
to offset like amounts of any future taxable gains.
8. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.047000 per share
on September 30, 2005 to shareholders of record on September 14, 2005.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser")
or other Merrill Lynch affiliates is as a director of the Fund and certain
other funds advised by the Investment Adviser or its affiliates. The Chairman
of the Board is also an independent director. New director nominees are chosen
as nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board
meeting. The Board and the Audit Committee meet in person for at least two
days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal board meetings, and some of
which are informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings and other
meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the
nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are:
(a) fees (in addition to management fees) paid to the Investment Adviser and
its affiliates by the Fund, such as transfer agency fees; (b) Fund operating
expenses paid to third parties; (c) the resources devoted to and compliance
reports relating to the Fund's investment objective, policies and restrictions,
and its compliance with its Code of Ethics and the Investment Adviser's
compliance policies and procedures; and (d) the nature, cost and character
of non-investment management services provided by the Investment Adviser
and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be generally of high quality. The Board also
believes that the Investment Adviser is financially sound and well managed and
notes that the Investment Adviser is affiliated with one of America's largest
financial firms. The Board works closely with the Investment Adviser in
overseeing the Investment Adviser's efforts to achieve good performance. As
part of this effort, the Board discusses portfolio manager effectiveness and,
when performance is not satisfactory, discusses with the Investment Adviser
taking steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requested and received materials specifically
relating to the Fund's Investment Advisory Agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) information comparing the Fund's market
price with its net asset value per share; (c) a discussion by the Fund's
portfolio management team of investment strategies used by the Fund during its
most recent fiscal year; (d) information on the profitability to the
Investment Adviser and its affiliates of the Investment Advisory Agreement and
other relationships with the Fund; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to other
clients, such as offshore funds under similar investment mandates and
generally to institutional clients. The Board also considers other matters it
deems important to the approval process such as services related to the
valuation and pricing of Fund portfolio holdings, allocation of Fund brokerage
fees (including the related benefits to the Investment Adviser of "soft
dollars"), the Fund's portfolio turnover statistics, and direct and indirect
benefits to the Investment Adviser and its affiliates from their relationship
with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement in August 2005, the independent directors' and Board's review
included the following:
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund.
The Board focused primarily on the Investment Adviser's investment advisory
services and the Fund's investment performance, having concluded that the
other services provided to the Fund by the Investment Adviser were
satisfactory. The Board compared Fund performance - both including and
excluding the effects of the Fund's fees and expenses - to the performance of
a comparable group of mutual funds, and the performance of a relevant index
or combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the
Board attached more importance to performance over relatively long periods of
time, typically three to five years. The Fund's performance after fees and
expenses ranked in the fourth quintile compared to its peers for the one-year
period ended May 31, 2005 and in the second quintile compared to its peers for
the three- and five-year periods ended May 31, 2005. Considering these factors,
the Board concluded that the Fund's performance supported the continuation of
the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviewed
the Fund's investment objectives and strategies. The Board discussed with
senior management of the Investment Adviser responsible for investment
operations and the senior management of the Investment Adviser's taxable fixed-
income investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considered the size, education and
experience of the Investment Adviser's investment staff, its use of
technology, and the Investment Adviser's approach to training and retaining
portfolio managers and other research, advisory and management personnel.
The Board also reviewed the Investment Adviser's compensation policies and
practices with respect to the Fund's portfolio manager. The Board also
considered the experience of the Fund's portfolio manager and noted that
Mr. Booth has more than twenty years experience in the financial industry.
The Board noted that the Investment Adviser and its investment staff have
extensive experience in analyzing and managing the types of investments used
by the Fund. The Board concluded that the Fund benefits from that expertise.
Management Fees and Other Expenses--The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compared the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients, such as offshore funds, with similar investment mandates and noted
that the fees charged by the Investment Adviser in those cases typically
exceeded those being charged to the Fund. The Board also noted that, as a
general matter, fees charged to institutional clients were lower than the fees
charged to the Fund, but believed that less extensive services were being
provided to such clients. The Fund's contractual and actual management fee
rates were lower than the median fees charged by comparable funds, as
determined by Lipper. The Board has concluded that the Fund's management fee
and fee rate and overall expense ratio are acceptable compared to those of
other comparable funds.
Profitability--The Board considered the cost of the services provided to
the Fund by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits in relation to the management of the Fund and the MLIM/
FAM-advised funds. As part of its analysis, the Board reviewed the Investment
Adviser's methodology in allocating its costs to the management of the Fund
and concluded that there was a reasonable basis for the allocation. The Board
believes the Investment Adviser's profits are acceptable in relation to the
nature and quality of services provided and given the level of fees and
expenses overall.
Economies of Scale--The Board considered whether there have been economies of
scale in respect of the management of MLIM/FAM-advised funds, whether the
MLIM/FAM-advised funds (including the Fund) have appropriately benefited from
any economies of scale, and whether there is potential for realization of any
further economies of scale. The Board considered economies of scale to the
extent applicable to the Fund's closed-end structure and determined that no
changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal
was in the best interests of the shareholders.
SENIOR HIGH INCOME PORTFOLIO, INC. AUGUST 31, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-
annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-
annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Senior High Income Portfolio, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Senior High Income Portfolio, Inc.
Date: October 19, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Senior High Income Portfolio, Inc.
Date: October 19, 2005
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Senior High Income Portfolio, Inc.
Date: October 19, 2005