UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
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 - 02/28/06
Item 1 - Report to Stockholders
Annual Report
February 28, 2006
Senior High Income
Portfolio, Inc.
(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 1-800-637-3863; (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
(GO PAPERLESS LOGO)
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Senior High Income Portfolio, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected
to close in the third quarter of 2006, at which time the new company will
operate under the BlackRock name. If approved by the Fund's Board of Directors
and Fund shareholders, the combined company that results from the transaction
is expected to become the investment adviser of the Fund.
The Benefits and Risks of Leveraging
Senior High Income Portfolio, Inc. (the "Fund") utilizes 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 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 February 28, 2006, Senior High Income
Portfolio, Inc.'s shareholders voted on the following proposal. Proposal 2 was
withdrawn at a shareholders' meeting on October 21, 2005. A description of the
proposal and number of shares voted were as follows:
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. 24,032,437 870,490 849,857
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to
4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in
January, a month after the central bank removed the critical word "measured"
from the description of its rate-hiking program. Still, most observers expect
at least one more interest rate hike before the Fed pauses in its tightening
campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending
by businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust dividend-
distribution, share-buyback and merger-and-acquisition activity in 2005, a
trend that has continued in 2006. This, as well as reasonably good company
earnings and low core inflation, has been supportive of U.S. stocks despite
the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts
of inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the
curve at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage
you to review your goals periodically with your financial advisor and
to make portfolio changes, as needed. For timely "food for thought" for
investors, we also invite you to visit Shareholder magazine at
www.mlim.ml.com/shareholdermagazine. As always, we thank you for
trusting Merrill Lynch Investment Managers with your investment assets,
and we look forward to continuing to serve your investment needs.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
A Discussion With Your Fund's Portfolio Manager
The Fund provided competitive returns and an attractive yield during the
fiscal year as we continued to use our credit-driven investment process to
maintain a well-diversified portfolio.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended February 28, 2006, the Common Stock of Senior
High Income Portfolio, Inc. had net annualized yields of 9.40% and 9.59%,
based on a year-end per share net asset value of $6.00 and a per share market
price of $5.88, respectively, and $.564 per share income dividends. Over the
same period, the total investment return on the Fund's Common Stock was
+5.07%, based on a change in per share net asset value from $6.28 to $6.00,
and assuming reinvestment of all distributions. The Fund's total return for
the period outpaced the +4.62% return of its benchmark, which is an equal
blend of the Credit Suisse High Yield Index and the Credit Suisse Leveraged
Loan Index.
For the six-month period ended February 28, 2006, the total investment return
on the Fund's Common Stock was +3.88%, based on a change in per share net
asset value from $6.06 to $6.00, and assuming reinvestment of all
distributions. The blended benchmark returned +2.46% for the same period.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund'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 Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Fund's net asset value.
The high yield market was quite volatile during the 12 months ended February
28, 2006. In spring 2005, we saw the downgrades of both Ford Motor Co.'s and
General Motors Corp.'s debt to junk bond status. Uncertainty regarding the
absolute volume of bonds that would constitute "fallen angels" (that is, bonds
that move from investment grade to junk bond status) and the impact of the
downgrades on the high yield index caused some investors in the asset class
to head for the sidelines. This led to price weakness and spread widening,
particularly among the lower-rated junk bond categories. The market gained
perspective on the auto downgrades, rallied through late spring and summer,
but retreated in the fall following the bankruptcy filing of auto-parts maker
Delphi Corp. For this 12-month period ended February 28, 2006, the Credit
Suisse High Yield Index returned a relatively modest +3.27%.
In contrast, the bank loan market, as represented by the Credit Suisse
Leveraged Loan Index, remained solid during the fiscal year, posting a return
of +5.96% for the 12 months ended February 28, 2006. This is primarily
attributable to the senior secured status of bank loans, which made them less
vulnerable to credit concerns when compared to high yield bonds. Another
factor contributing to the strong performance of leveraged loans is
collateralized loan obligations (CLOs), which now hold more than 60% of the
leveraged loan market. As the financing for these structured products has
become less expensive, so too has the spread required in the leveraged loan
space to make this model work. We are seeing leveraged loan spreads at
historically tight levels. The prospect for further spread tightening relies
primarily on the cost of CLO financing going forward.
What factors most influenced Fund performance?
Specific investments that contributed most to performance during the past year
included Winstar Communications, Telewest Global, Inc. and Highland Legacy.
The Fund had participated in a DIP (debtor-in-possession) financing for
Winstar back in 2001. We wrote off $1.7 million that went unpaid following the
conversion of the case from a Chapter 11 reorganization to a Chapter 7
liquidation. However, there was an open litigation proceeding against Lucent
Technologies, Inc. wherein the judge recently (in January 2006) ruled in favor
of Winstar. We reinstated this position in the fund at $2.2 million, which
represents the market bid for the DIP loan plus accrued interest.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
The Fund received 342,000 shares of U.K. cable company Telewest Global in July
2004 in a financial restructuring. We sold the stock after the share price ran
from $17.79 to $19.32 during this period based on the prospects of a merger
with another U.K. cable company, NTL.
Regarding Highland Legacy, our $4 million investment in the subordinated
tranche of this collateralized bond obligation (CBO, vintage 1999) rallied
during the year from 81 to 99. (This position's price was 22.8 in July 2003.)
This price movement reflects both the benefit of the 2003 - 2004 high yield
market rally on portfolio valuation and the expiration of various ill-advised
floating-for-fixed swap contracts that were overlaid on the portfolios.
Investments that detracted most from Fund performance during the period
included Pliant Corp., GEO Specialty Chemicals, Inc. and Refco Finance
Holdings LLC. Our $3.3 million position in Pliant Corp., a flexible plastic
packaging corporation, collapsed from 98 to 27 during the year. An already
difficult financial position arising from high resin prices worsened following
the August and September hurricanes. Resin suppliers put Pliant on order
allocation (that is, rationing), and then subsequently withdrew trade support.
Pliant's liquidity position became untenable, leading to a Chapter 11 filing
on January 4, 2006.
The Fund holds $4.4 million in bonds and 142,000 shares of common stock of
GEO, a specialty chemicals company that services niche markets in electronics,
paints and coatings, construction, water treatment and rubber additives. In
2005, high energy costs and raw material inflation hurt the company's profit
margins as costs rose faster than prices. This caused the bonds to decline in
price from $106.75 to $87.00, while the share price of the equity declined
from $15.00 to $4.50. This trend has abated recently, and we believe 2006
should prove to be a key turnaround year for the company.
Financial services company Refco filed for Chapter 11 reorganization following
the announcement that the company had discovered that it was owed a debt of
approximately $430 million by an entity controlled by the company's CEO. The
value of our Refco bonds, which were marked at $108.75 on September 30, 2005,
plunged sharply. We liquidated our $3.9 million position at an average price
of $50.00.
What changes were made to the Fund during the period?
We continued to shorten the Fund's duration, thereby limiting the price
sensitivity to rising long-term interest rates, by investing in floating rate
notes and bank loans. The Fund is currently at a roughly 50% fixed rate/50%
floating rate composition. We think this makes sense given the flat yield
curve and our conviction that the probability of rising long-term interest
rates far outweighs that of declining long-term rates.
How would you characterize the Fund's position at the close of the period?
We plan to maintain the Fund's 50% fixed rate/50% floating rate composition in
2006. 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% of total
assets.
Kevin J. Booth
Vice President and Portfolio Manager
March 8, 2006
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Portfolio Information
As of February 28, 2006
Percent of
Ten Largest Holdings Net Assets
Wellman, Inc. First Lien Term Loan, 8.68%
due 2/10/2009 2.4%
Charter Communications Operating LLC
Tranche B Term Loan, 7.86% - 7.92%
due 4/07/2011 2.4
Bowater, Inc., 7.491% due 3/15/2010 2.2
PolyOne Corp., 10.625% due 5/15/2010 2.1
Felcor Lodging LP, 8.83% due 6/01/2011 1.9
US Can Corp., 10.875% due 7/15/2010 1.9
Nova Chemicals Corp., 7.561%
due 11/15/2013 1.8
Advanced Accessory Systems LLC, 10.75%
due 6/15/2011 1.8
CCM Merger, Inc., 8% due 8/01/2013 1.8
Rainbow National Services LLC, 8.75%
due 9/01/2012 1.7
Percent of
Five Largest Industries Net Assets
Chemicals 18.6%
Cable--U.S. 15.7
Paper 9.7
Service 8.0
Gaming 7.5
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
A/A 0.2%
BBB/Baa 0.5
BB/Ba 14.9
B/B 67.3
CCC/Caa 10.8
CC/Ca 0.2
D 1.2
NR (Not Rated) 4.6
Other* 0.3
* Includes portfolio holdings in common stocks, preferred stocks,
warrants and other interests.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
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 $ 4,228,125
Automotive--4.9%
7,550,000 Advanced Accessory Systems LLC, 10.75%
due 6/15/2011 6,002,250
1,300,000 Cooper-Standard Automotive, Inc., 8.375%
due 12/15/2014 1,007,500
1,350,000 Delco Remy International, Inc., 8.60%
due 4/15/2009 (f) 1,269,000
2,425,000 Exide Technologies, 10.50% due 3/15/2013 (i) 1,921,812
5,000,000 General Motors Acceptance Corporation, 5.50%
due 1/16/2007 (f) 4,868,070
1,175,000 Metaldyne Corp., 11% due 6/15/2012 916,500
475,000 Tenneco Automotive, Inc. Series B, 10.25%
due 7/15/2013 526,063
Venture Holdings Co. LLC:
700,000 12% due 6/01/2009 (c) 0
3,325,000 Series B, 9.50% due 7/01/2005 (b) 4,156
---------------
16,515,351
Broadcasting--2.3%
522,857 Emmis Communications Corp., 10.366%
due 6/15/2012 (f) 522,857
3,000,000 Granite Broadcasting Corp., 9.75%
due 12/01/2010 2,715,000
500,000 LIN Television Corp. Series B, 6.50%
due 5/15/2013 474,375
Paxson Communications Corp. (f)(i):
1,325,000 7.777% due 1/15/2012 1,325,000
2,625,000 10.777% due 1/15/2013 2,539,687
---------------
7,576,919
Cable--International--1.4%
350,000 NTL Cable Plc, 8.75% due 4/15/2014 357,000
New Skies Satellites NV:
1,550,000 9.573% due 11/01/2011 (f)(i) 1,600,375
2,450,000 9.125% due 11/01/2012 2,633,750
---------------
4,591,125
Cable--U.S.--8.6%
1,800,000 CSC Holdings, Inc., 7.25% due 7/15/2008 1,822,500
2,275,000 Cablevision Systems Corp. Series B, 8.716%
due 4/01/2009 (f) 2,351,781
Charter Communications Holdings LLC:
1,750,000 10% due 4/01/2009 1,347,500
1,000,000 11.75% due 1/15/2010 700,000
2,000,000 11.125% due 1/15/2011 1,070,000
1,500,000 9.92% due 4/01/2011 765,000
1,000,000 10% due 5/15/2011 500,000
5,000,000 EchoStar DBS Corp., 4.85% due 10/01/2008 (f) 5,100,000
Intelsat Bermuda Ltd. (i):
1,925,000 9.609% due 1/15/2012 (f) 1,963,500
1,675,000 8.25% due 1/15/2013 1,712,687
2,400,000 8.625% due 1/15/2015 2,490,000
1,400,000 Mediacom Broadband LLC, 11% due 7/15/2013 1,498,000
1,875,000 Mediacom LLC, 9.50% due 1/15/2013 1,875,000
5,250,000 Rainbow National Services LLC, 8.75%
due 9/01/2012 (i) 5,656,875
---------------
28,852,843
Face
Amount Corporate Bonds Value
Chemicals--13.4%
$ 1,350,000 ArCo Chemical Co., 9.80% due 2/01/2020 $ 1,485,000
2,250,000 Compass Minerals International, Inc. Series B,
12%** due 6/01/2013 2,002,500
4,382,000 GEO Specialty Chemicals, Inc., 13.036%
due 12/31/2009 (h) 3,768,520
Huntsman International, LLC:
1,000,000 9.875% due 3/01/2009 1,047,500
1,219,000 10.125% due 7/01/2009 1,249,475
3,000,000 Invista B.V., 9.25% due 5/01/2012 (i) 3,187,500
2,500,000 Koppers, Inc., 9.875% due 10/15/2013 2,700,000
1,650,000 Lyondell Chemical Co., 11.125% due 7/15/2012 1,823,250
1,200,000 Millennium America, Inc., 7.625%
due 11/15/2026 1,080,000
6,000,000 Nova Chemicals Corp., 7.561%
due 11/15/2013 (f) 6,120,000
5,350,000 Omnova Solutions, Inc., 11.25% due 6/01/2010 5,630,875
PolyOne Corp.:
1,000,000 6.89% due 9/22/2008 957,500
6,475,000 10.625% due 5/15/2010 6,944,438
Rockwood Specialties Group, Inc.:
1,322,000 10.625% due 5/15/2011 1,454,200
250,000 7.50% due 11/15/2014 252,500
3,000,000 Tronox Worldwide LLC, 9.50%
due 12/01/2012 (i) 3,135,000
2,000,000 VeraSun Energy Corp., 9.875%
due 12/15/2012 (i) 2,130,000
---------------
44,968,258
Consumer--Durables--1.3%
4,450,000 Simmons Bedding Co., 7.875% due 1/15/2014 4,272,000
Consumer--Non-Durables--2.8%
4,725,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 4,719,094
2,125,000 North Atlantic Trading Co., 9.25%
due 3/01/2012 1,296,250
3,525,000 Quiksilver, Inc., 6.875% due 4/15/2015 3,401,625
---------------
9,416,969
Diversified Media--1.9%
1,000,000 AMC Entertainment, Inc., 11%
due 2/01/2016 (i) 1,006,250
RH Donnelley Corp. (i):
500,000 6.875% due 1/15/2013 470,000
1,175,000 8.875% due 1/15/2016 1,226,406
1,000,000 Series A2, 6.875% due 1/15/2013 940,000
Universal City Florida Holding Co. I:
175,000 8.375% due 5/01/2010 174,562
2,450,000 9.43% due 5/01/2010 (f) 2,486,750
---------------
6,303,968
Energy--Exploration & Production--1.4%
1,500,000 Chaparral Energy, Inc., 8.50%
due 12/01/2015 (i) 1,586,250
3,000,000 Compton Petroleum Finance Corp., 7.625%
due 12/01/2013 3,067,500
---------------
4,653,750
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Energy--Other--2.6%
$ 1,000,000 Dresser, Inc., 9.375% due 4/15/2011 $ 1,050,000
974,000 Dresser-Rand Group, Inc., 7.375%
due 11/01/2014 (i) 1,012,960
3,325,000 SemGroup LP, 8.75% due 11/15/2015 (i) 3,441,375
3,350,000 Star Gas Partners LP, 10.25% due 2/15/2013 3,391,875
---------------
8,896,210
Financial--1.7%
4,000,000 Highland Legacy Ltd. CLO, 9.943%
due 6/01/2011 (f)(i) 3,975,600
500,000 Investcorp SA, 7.54% due 10/21/2008 507,009
1,000,000 Pennant CBO Ltd., 13.43% due 3/14/2011 (i) 620,000
SKM-LibertyView CBO Ltd. Series 1A (c)(i):
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
---------------
5,642,609
Food & Drug--0.4%
850,000 Duane Reade, Inc., 8.991% due 12/15/2010 (f) 835,125
500,000 Stripes Acquisition LLC, 10.625%
due 12/15/2013 (i) 522,500
---------------
1,357,625
Gaming--6.0%
5,925,000 CCM Merger, Inc., 8% due 8/01/2013 (i) 5,895,375
Galaxy Entertainment Finance Co. Ltd. (i):
5,450,000 9.655% due 12/15/2010 (f) 5,627,125
550,000 9.875% due 12/15/2012 569,250
2,000,000 Inn of the Mountain Gods Resort & Casino,
12% due 11/15/2010 2,112,500
2,000,000 Jacobs Entertainment, Inc., 11.875%
due 2/01/2009 2,110,000
1,550,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (i) 1,530,625
675,000 Penn National Gaming, Inc., 6.75%
due 3/01/2015 678,375
1,500,000 Tunica-Biloxi Gaming Authority, 9%
due 11/15/2015 (i) 1,537,500
---------------
20,060,750
Health Care--2.5%
1,875,000 CDRV Investors, Inc., 9.75%** due 1/01/2015 1,284,375
Elan Finance Plc:
1,650,000 7.75% due 11/15/2011 1,534,500
2,325,000 8.749% due 11/15/2011 (f) 2,249,437
3,000,000 Tenet Healthcare Corp., 7.375% due 2/01/2013 2,752,500
700,000 VWR International, Inc., 8% due 4/15/2014 700,000
---------------
8,520,812
Housing--2.5%
500,000 Compression Polymers Corp., 10.50%
due 7/01/2013 (i) 502,500
247,700 Formica Holdings Corp., 8.76% due 6/10/2011 235,314
Goodman Global Holding Co., Inc.:
2,555,000 7.491% due 6/15/2012 (f) 2,599,712
4,750,000 7.875% due 12/15/2012 4,643,125
550,000 US Concrete, Inc., 8.375% due 4/01/2014 563,750
---------------
8,544,401
Face
Amount Corporate Bonds Value
Information Technology--5.1%
$ 1,000,000 Activant Solutions, Inc., 10.53%
due 4/01/2010 (f)(i) $ 1,025,000
3,800,000 Amkor Technology, Inc., 9.25% due 2/15/2008 3,857,000
2,450,000 Freescale Semiconductor, Inc., 7.35%
due 7/15/2009 (f) 2,511,250
1,375,000 MagnaChip Semiconductor SA, 7.741%
due 12/15/2011 (f) 1,395,625
Sungard Data Systems, Inc. (i):
5,250,000 9.125% due 8/15/2013 5,584,688
1,750,000 9.431% due 8/15/2013 (f) 1,846,250
1,075,000 Telcordia Technologies Inc., 10%
due 3/15/2013 (i) 989,000
---------------
17,208,813
Leisure--2.4%
6,000,000 Felcor Lodging LP, 8.83% due 6/01/2011 (f) 6,240,000
91,000 Host Marriott Corp. Series B, 7.875%
due 8/01/2008 91,570
2,000,000 True Temper Sports, Inc., 8.375%
due 9/15/2011 1,800,000
---------------
8,131,570
Manufacturing--4.4%
1,000,000 Chart Industries, Inc., 9.125%
due 10/15/2015 (i) 1,035,000
1,750,000 Columbus McKinnon Corp., 8.875%
due 11/01/2013 1,841,875
3,000,000 Communications & Power Industries, Inc.,
8% due 2/01/2012 3,082,500
2,250,000 EaglePicher Inc., 9.75% due 9/01/2013 (c) 1,563,750
2,825,000 Invensys Plc, 9.875% due 3/15/2011 (i) 2,923,875
2,750,000 Mueller Group, Inc., 10% due 5/01/2012 3,011,250
300,000 NMHG Holding Co., 10% due 5/15/2009 316,500
1,000,000 Propex Fabrics, Inc., 10% due 12/01/2012 890,000
---------------
14,664,750
Metal--Other--3.2%
500,000 Aleris International, Inc., 9% due 11/15/2014 527,500
2,950,000 Indalex Holding Corp., 11.50%
due 2/01/2014 (i) 2,891,000
5,000,000 James River Coal Co., 9.375% due 6/01/2012 5,212,500
2,225,000 RathGibson, Inc., 11.25% due 2/15/2014 (i) 2,252,813
---------------
10,883,813
Packaging--5.5%
Anchor Glass Container Corp.:
4,715,000 11.491% due 9/30/2006 4,809,300
6,200,000 11.497% due 2/15/2013 (c) 4,960,000
3,100,000 Pliant Corp., 13% due 6/01/2010 (c) 759,500
5,550,000 US Can Corp., 10.875% due 7/15/2010 6,236,812
2,250,000 Wise Metals Group LLC, 10.25%
due 5/15/2012 1,721,250
---------------
18,486,862
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Paper--9.0%
$ 3,275,000 Abitibi-Consolidated, Inc., 7.991%
due 6/15/2011 (f) $ 3,184,937
2,975,000 Ainsworth Lumber Co. Ltd., 8.277%
due 10/01/2010 (f) 2,945,250
Boise Cascade LLC:
1,100,000 7.475% due 10/15/2012 (f) 1,094,500
350,000 7.125% due 10/15/2014 332,500
7,475,000 Bowater, Inc., 7.491% due 3/15/2010 (f) 7,475,000
1,775,000 Domtar, Inc., 7.125% due 8/15/2015 1,486,562
625,000 Graphic Packaging International Corp., 9.50%
due 8/15/2013 593,750
JSG Funding Plc:
3,000,000 9.625% due 10/01/2012 3,142,500
3,150,000 7.75% due 4/01/2015 2,866,500
5,175,000 NewPage Corp., 10.93% due 5/01/2012 (f) 5,433,750
800,000 Smurfit-Stone Container Enterprises, Inc.,
8.375% due 7/01/2012 784,000
1,725,000 Tembec Industries, Inc., 8.625% due 6/30/2009 957,375
---------------
30,296,624
Retail--1.3%
Neiman-Marcus Group, Inc. (i):
2,250,000 9% due 10/15/2015 2,376,562
2,000,000 10.375% due 10/15/2015 2,105,000
---------------
4,481,562
Service--5.4%
2,700,000 Ahern Rentals, Inc., 9.25% due 8/15/2013 (i) 2,835,000
720,000 Allied Waste North America, Inc., 7.875%
due 4/15/2013 748,800
500,000 Corrections Corp. of America, 6.75%
due 1/31/2014 508,750
4,000,000 HydroChem Industrial Services, Inc., 9.25%
due 2/15/2013 (i) 3,960,000
2,325,000 MSW Energy Holdings LLC, 8.50%
due 9/01/2010 2,476,125
2,000,000 Neff Rental LLC, 11.25% due 6/15/2012 (i) 2,170,000
5,450,000 United Rentals North America, Inc., 7.75%
due 11/15/2013 (i) 5,470,437
---------------
18,169,112
Telecommunications--3.9%
2,045,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 2,065,450
4,000,000 Qwest Communications International, Inc.,
8.249% due 2/15/2009 (f) 4,085,000
1,025,000 Qwest Corp., 7.741% due 6/15/2013 (f) 1,119,813
Time Warner Telecom Holdings, Inc.:
3,500,000 8.749% due 2/15/2011 (f) 3,574,375
2,000,000 9.25% due 2/15/2014 2,157,500
---------------
13,002,138
Transportation--0.5%
1,500,000 Progress Rail Services Corp., 7.75%
due 4/01/2012 (i) 1,535,625
Face
Amount Corporate Bonds Value
Utility--2.1%
NRG Energy, Inc.:
$ 2,100,000 7.25% due 2/01/2014 $ 2,152,500
1,975,000 7.375% due 2/01/2016 2,034,250
2,000,000 Northwest Pipeline Corp., 6.625%
due 12/01/2007 2,025,000
725,000 Williams Cos., Inc., 8.625% due 6/01/2010 767,594
---------------
6,979,344
Wireless Communications--2.0%
1,550,000 Digicel Ltd., 9.25% due 9/01/2012 (i) 1,627,500
Dobson Cellular Systems:
1,000,000 8.375% due 11/01/2011 1,060,000
2,200,000 9.43% due 11/01/2011 (f) 2,288,000
1,000,000 Rural Cellular Corp., 8.991% due 3/15/2010 (f) 1,020,000
800,000 US Unwired, Inc., 8.741% due 6/15/2010 (f) 824,000
---------------
6,819,500
Total Corporate Bonds
(Cost--$346,383,251)--99.8% 335,061,428
Floating Rate Loan Interests (a)
Aerospace & Defense--1.5%
5,092,593 Standard Aero Holdings Term Loan,
6.83% - 6.96% due 8/24/2012 5,062,358
Airlines--0.2%
500,000 Delta Air Lines, Inc. Term Loan B, 11.01%
due 3/27/2008 519,875
Automotive--1.8%
Intermet Corp.:
1,851,852 First Lien Term Loan, 9.09% due 11/08/2010 1,833,333
648,148 Letter of Credit, 9.09% due 11/08/2010 641,667
Metaldyne Corp.:
1,852,550 Term Loan D, 9.044% due 12/31/2009 1,888,443
270,000 Term Loan D-2, 11.25% due 12/31/2009 273,628
Tenneco Automotive, Inc.:
1,092,618 Term Loan B, 7.02% due 12/12/2010 1,109,690
479,968 Tranche B-1 Credit Linked Deposit, 6.635%
due 12/12/2010 487,467
---------------
6,234,228
Cable--International--0.4%
333,826 New Skies Satellites, BV Term Loan, 6.75%
due 5/04/2011 336,121
Telewest Communications Networks Ltd.:
566,667 Term Loan B, 6.565% due 12/21/2012 566,490
433,333 Term Loan C, 7.315% due 12/21/2013 434,643
---------------
1,337,254
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (a) Value
Cable--U.S.--7.1%
Century Cable Holdings LLC:
$ 3,000,000 Discretionary Term Loan, 9.50%
due 12/31/2009 $ 2,940,000
5,000,000 Term Loan, 9.50% due 6/30/2009 4,914,585
7,870,215 Charter Communications Operating LLC
Tranche B Term Loan, 7.86% - 7.92%
due 4/07/2011 7,969,750
3,920,000 Insight Midwest Holdings LLC Term Loan C,
6.60% due 12/31/2009 3,979,247
4,000,000 Olympus Cable Holdings LLC Term Loan B,
9.50% due 9/30/2010 3,940,356
---------------
23,743,938
Chemicals--5.0%
2,686,500 Cll Carbon Term Loan B, 6.563%
due 8/23/2012 2,718,402
2,582,808 Celanese Holdings LLC Term Loan B, 6.527%
due 4/06/2011 2,616,384
1,616,071 Huntsman ICI Holdings Term Loan B, 6.32%
due 8/16/2012 1,627,433
1,592,000 Rockwood Specialties Group, Inc. Tranche D
Term Loan, 6.466% due 12/10/2012 1,614,388
8,000,000 Wellman, Inc. First Lien Term Loan, 8.68%
due 2/10/2009 8,140,000
---------------
16,716,607
Consumer--Durables--0.9%
3,000,000 Simmons Co. Term Loan, 8.50% due 6/19/2012 3,040,782
Consumer--Non-Durables--2.3%
4,640,278 American Safety Razor Co. Tranche B Term Loan,
7.56% due 2/28/2012 4,709,882
1,485,000 Culligan International Co. Term Loan, 7.07%
due 9/30/2011 1,506,347
1,470,000 Solo Cup Co. Term Loan, 6.02% - 6.72%
due 2/27/2011 1,485,619
---------------
7,701,848
Energy--Other--2.7%
2,992,500 Cheniere Energy, Inc. Term Loan B, 6.95%
due 8/31/2012 3,031,777
Dresser, Inc.:
236,197 Term Loan C, 7.11% due 4/10/2009 240,330
1,250,000 Term Loan Unsecured, 7.99%
due 2/25/2010 1,284,375
2,500,000 Key Energy Services, Inc. Term Loan B,
7.52% - 7.78% due 6/30/2012 2,539,063
2,000,000 Scorpion Drilling Ltd. Second Lien Term Loan,
12.07% due 5/05/2015 2,065,000
---------------
9,160,545
Face
Amount Floating Rate Loan Interests (a) Value
Financial--0.5%
$ 1,810,873 LNR Property Corp. Tranche B Term Loan,
7.57% due 2/03/2008 $ 1,829,549
Food & Tobacco--1.8%
750,000 Bolthouse Farms, Inc. Second Lien Term Loan,
10.07% due 12/01/2013 769,688
1,978,333 Commonwealth Brands Term Loan, 7%
due 12/22/2012 2,004,299
1,657,726 Dr. Pepper/Seven Up Bottling Group, Inc.
Term Loan B, 6.57% due 12/19/2010 1,682,592
1,588,333 Pierre Foods, Inc. Term Loan B, 6.56%
due 6/30/2010 1,609,677
---------------
6,066,256
Gaming--1.5%
5,000,000 Resorts International First Lien Term Loan,
7.53% due 4/26/2012 4,993,750
Health Care--1.7%
335,227 Colgate Medical Ltd. Term Loan B, 6.60%
due 12/15/2008 337,113
1,516,102 Medpointe Healthcare Inc. Tranche B Term Loan,
9.86% due 9/30/2008 1,516,102
3,661,334 VWR International, Inc. Tranche B Term Loan,
7.12% due 4/07/2011 3,718,542
---------------
5,571,757
Housing--2.4%
2,336,169 Headwaters, Inc. Term Loan B-1, 6.86%
due 4/30/2011 2,355,636
1,943,421 LIONS Gables Realty Term Loan B, 6.32%
due 9/30/2006 1,955,898
4,000,000 Stile U.S. Acquisition Corp. Bridge Loan,
10.884% due 4/06/2015 3,700,000
---------------
8,011,534
Information Technology--1.0%
1,760,000 Fidelity National Information Solutions, Inc.
Term Loan B, 6.32% due 3/09/2013 1,774,506
1,674,844 Telcordia Technologies, Inc. Term Loan,
7.22% - 7.31% due 9/15/2012 1,659,142
---------------
3,433,648
Manufacturing--1.9%
2,801,295 Invensys International Holdings Ltd. First Lien
Term Loan, 7.791% due 9/04/2009 2,843,315
3,473,750 Metokote Corp. Second Lien Term Loan,
7.53% - 7.67% due 11/27/2011 3,493,290
---------------
6,336,605
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (a) Value
Metal--Other--1.4%
Euramax International Plc:
$ 994,737 Second Lien Term Loan, 11.544%
due 6/29/2013 $ 957,434
1,700,843 Tranche 3 Term Loan B, 7.241%
due 6/29/2012 1,705,096
2,005,263 Tranche 4 Second Lien Term Loan,
11.544% due 6/29/2013 1,930,066
---------------
4,592,596
Packaging--1.1%
3,534,686 Owens-Illinois Group, Inc. Tranche Term
Loan C, 6.39% due 4/01/2008 3,557,884
Paper--0.7%
2,500,000 Georgia Pacific Corp. Second Lien Term Loan,
7.56% due 2/14/2014 2,500,000
Retail--0.1%
303,691 General Nutrition Centers, Inc. Tranche B
Term Loan, 7.61% - 7.80% due 12/05/2009 307,961
Service--2.6%
Allied Waste North America, Inc.:
1,206,051 Term Loan, 6.09% - 6.97%
due 1/15/2012 1,219,933
468,243 Tranche A Credit Linked Deposit, 4.39%
due 1/15/2012 473,950
United Rentals, Inc.:
1,637,500 Term Loan, 6.86% due 2/14/2011 1,658,652
333,333 Tranche B Credit Linked Deposit, 4.57%
due 2/14/2011 337,639
Waste Services, Inc. Term Loan B:
1,125,000 7.83% due 3/31/2011 1,139,063
3,940,000 7.82% - 9.75% due 3/31/2011 3,991,713
---------------
8,820,950
Telecommunications--0.7%
1,702,542 Winstar Communications Debtor In Possession,
6.366% due 12/31/2006 (c) 2,234,586
Utility--1.1%
1,700,000 Covanta Energy Corp. Second Lien Term Loan,
10.019% - 10.081% due 6/24/2013 1,731,875
El Paso Corp.:
750,000 Deposit Account, 4.29% due 11/23/2009 758,021
1,225,000 Term Loan, 7.313% due 11/23/2009 1,240,738
---------------
3,730,634
Wireless Communications--0.8%
2,750,000 Centennial Cellular Operating Co. Term Loan,
6.45% - 7.23% due 2/09/2011 2,790,486
Total Floating Rate Loan Interests
(Cost--$135,326,500)--41.2% 138,295,631
Shares
Held Common Stocks Value
Chemicals--0.2%
142,466 GEO Specialty Chemicals, Inc. (e) $ 641,097
Leisure--0.2%
41,866 Lodgian, Inc. (e) 525,000
Total Common Stocks
(Cost--$2,818,936)--0.4% 1,166,097
Preferred Stocks
Cable--U.S.--0.0%
2,500 Adelphia Communications Corp. Series B,
13% (e) 625
Total Preferred Stocks
(Cost--$225,000)--0.0% 625
Warrants (g)
Paper--0.0%
3,500 MDP Acquisitions Plc (expires 10/01/2013) 35,000
Wireless Communications--0.1%
600 American Tower Corp. (expires 8/01/2008) 268,938
Total Warrants
(Cost--$39,036)--0.1% 303,938
Beneficial
Interest Other Interests (d)
Automotive--0.0%
$ 4,130,972 Cambridge Industries, Inc. (Litigation Trust
Certificates) 41,310
Health Care--0.0%
10,283 MEDIQ Inc. (Preferred Stock Escrow
due 2/01/2006) 0
Total Other Interests
(Cost--$0)--0.0% 41,310
Total Investments (Cost--$484,792,723*)--141.5% 474,869,029
Liabilities in Excess of Other Assets--(41.5%) (139,178,959)
---------------
Net Assets--100.0% $ 335,690,070
===============
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments
as of February 28, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 484,462,385
================
Gross unrealized appreciation $ 13,502,399
Gross unrealized depreciation (23,095,755)
----------------
Net unrealized depreciation $ (9,593,356)
================
** Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase.
(a) Floating rate loan interests in which the Fund invests generally pay
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) As a result of bankruptcy proceedings, the company did not repay the
principal amount of the security upon maturity and is non-income
producing.
(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) 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.
(h) Convertible security.
(i) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
o 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. These
industry classifications are unaudited.
o 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 $(4,343,454) $36,585
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Statement of Assets, Liabilities and Capital
As of February 28, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$484,792,723) $ 474,869,029
Unfunded loan commitment 14,063
Receivables:
Interest $ 7,321,977
Securities sold 1,111,875
Commitment fees 3,055 8,436,907
---------------
Prepaid expenses and other assets 4,524
---------------
Total assets 483,324,523
---------------
Liabilities
Loans 141,700,000
Bank overdraft 196,675
Payables:
Securities purchased 5,229,171
Dividends to shareholders 182,409
Investment adviser 147,854
Interest on loans 74,125
Other affiliates 2,860 5,636,419
---------------
Accrued expenses 101,359
---------------
Total liabilities 147,634,453
---------------
Net Assets
Net assets $ 335,690,070
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(55,941,308 shares issued and outstanding) $ 5,594,131
Paid-in capital in excess of par 493,342,630
Undistributed investment income--net $ 2,276,358
Accumulated realized capital losses--net (155,613,418)
Unrealized depreciation--net (9,909,631)
---------------
Total accumulated losses--net (163,246,691)
---------------
Total capital--Equivalent to $6.00 net asset value per share of Common Stock
(market price--$5.88) $ 335,690,070
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Statement of Operations
For the Year Ended February 28, 2006
Investment Income
Interest (including $36,585 from affiliates) $ 38,341,282
Facility and other fees 269,823
---------------
Total income 38,611,105
---------------
Expenses
Loan interest expense $ 4,930,376
Investment advisory fees 2,303,441
Borrowing costs 188,109
Accounting services 124,539
Transfer agent fees 117,175
Professional fees 73,808
Directors' fees and expenses 44,400
Printing and shareholder reports 41,280
Listing fees 40,137
Custodian fees 33,422
Pricing services 20,616
Other 28,852
---------------
Total expenses 7,946,155
---------------
Investment income--net 30,664,950
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on investments--net 246,957
Change in unrealized appreciation/depreciation on:
Investments--net (14,729,860)
Unfunded corporate loans--net 6,860 (14,723,000)
--------------- ---------------
Total realized and unrealized loss--net (14,476,043)
---------------
Net Increase in Net Assets Resulting from Operations $ 16,188,907
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Statements of Changes in Net Assets
For the Year Ended
February 28,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 30,664,950 $ 31,730,444
Realized gain--net 246,957 2,619,920
Change in unrealized appreciation/depreciation--net (14,723,000) 5,910,284
--------------- ---------------
Net increase in net assets resulting from operations 16,188,907 40,260,648
--------------- ---------------
Dividends to Shareholders
Dividends to shareholders from investment income--net (31,484,794) (30,760,697)
--------------- ---------------
Capital Share Transactions
Value of shares issued to Common Stock shareholders in reinvestment of dividends 1,195,046 341,044
--------------- ---------------
Net increase in net assets resulting from capital share transactions 1,195,046 341,044
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (14,100,841) 9,840,995
Beginning of year 349,790,911 339,949,916
--------------- ---------------
End of year* $ 335,690,070 $ 349,790,911
=============== ===============
* Undistributed investment income--net $ 2,276,358 $ 3,094,503
=============== ===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Statement of Cash Flows
For the Year Ended February 28, 2006
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 16,188,907
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in other receivables (80,896)
Increase in other assets (1,196)
Decrease in other liabilities (273,621)
Realized and unrealized loss--net 14,476,043
Amortization of premium and discount--net (1,031,141)
Proceeds from sales and paydowns of long-term investments 223,021,795
Other investment-related transactions 376,777
Purchases of long-term investments (221,512,977)
Proceeds from sales of short-term investments--net 4,343,454
---------------
Net cash provided by operating activities 35,507,145
===============
Cash Used for Financing Activities
Cash receipts from borrowings 215,600,000
Cash payments on borrowings (221,400,000)
Dividends paid to shareholders (30,302,647)
Increase in bank overdraft 196,675
---------------
Net cash used for financing activities (35,905,972)
===============
Cash
Net decrease in cash (398,827)
Cash at beginning of year 398,827
---------------
Cash at end of year $ --
===============
Cash Flow Information
Cash paid for interest $ 4,902,237
===============
Non-Cash Financing Activities
Capital shares issued on reinvestment of dividends to shareholders $ 1,195,046
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Financial Highlights
For the
For the Year Ended Year Ended For the Year Ended
The following per share data and ratios have been derived February 28, February 29, February 28,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of year $ 6.28 $ 6.10 $ 4.82 $ 5.40 $ 6.63
---------- ---------- ---------- ---------- ----------
Investment income--net** .55 .57 .62 .63 .70
Realized and unrealized gain (loss)--net (.27) .16 1.30 (.59) (1.22)
---------- ---------- ---------- ---------- ----------
Total from investment operations .28 .73 1.92 .04 (.52)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.56) (.55) (.64) (.62) (.71)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 6.00 $ 6.28 $ 6.10 $ 4.82 $ 5.40
========== ========== ========== ========== ==========
Market price per share, end of year $ 5.88 $ 6.21 $ 6.11 $ 5.45 $ 5.89
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 5.07% 12.88% 41.49% 1.18% (8.03%)
========== ========== ========== ========== ==========
Based on market price per share 4.13% 11.44% 25.34% 4.88% .16%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding interest expense .91% .91% .90% .97% .95%
========== ========== ========== ========== ==========
Expenses 2.39% 1.69% 1.42% 1.78% 2.46%
========== ========== ========== ========== ==========
Investment income--net 9.23% 9.28% 11.23% 12.75% 11.83%
========== ========== ========== ========== ==========
Leverage
Amount of borrowings, end of year (in thousands) $ 141,700 $ 147,500 $ 132,297 $ 104,600 $ 127,600
========== ========== ========== ========== ==========
Average amount of borrowings outstanding during
the year (in thousands) $ 128,461 $ 137,934 $ 112,037 $ 110,348 $ 128,203
========== ========== ========== ========== ==========
Average amount of borrowings outstanding per share
during the year** $ 2.30 $ 2.48 $ 2.02 $ 2.02 $ 2.37
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 335,690 $ 349,791 $ 339,950 $ 265,423 $ 293,988
========== ========== ========== ========== ==========
Portfolio turnover 48.41% 54.18% 63.78% 74.70% 47.93%
========== ========== ========== ========== ==========
* 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.
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
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. 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, Fund
Asset Management, L.P. ("FAM") will value the floating rate loan at fair
value, which is intended to approximate market value.
Debt securities are traded primarily in the over-the-counter ("OTC") markets
and are valued at the last available bid price in the OTC markets or on the
basis of values as obtained by a pricing service. Pricing services use
valuation matrixes that incorporate both dealer-supplied valuations and
valuation models. The procedures of the pricing service and its valuations are
reviewed by the officers of the Fund under the general direction of the Board
of Directors. Such valuations and procedures will be reviewed periodically by
the Board of Directors of the Fund.
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 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
counterparty. 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 FAM believes that this
method no longer produces fair valuations. Repurchase agreements will be
valued at cost plus accrued interest.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, 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 FAM using a pricing service
and/or procedures approved by the Board of Directors.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(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.
(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.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(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.
(h) Bank overdraft--The Fund recorded a bank overdraft, which resulted from
management estimates of available cash.
(i) Reclassification--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $1,699 has been reclassified between accumulated net realized
capital losses and undistributed net investment income as a result of
permanent differences attributable to securities in default and amortization
methods on fixed income securities. This reclassification has no effect on net
assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 year ended February 28, 2006, the Fund reimbursed FAM $7,998 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.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the year ended February 28, 2006 were $223,537,148 and
$222,321,931, respectively.
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 years ended February 28, 2006 and
February 28, 2005 increased by 200,735 and 55,635, respectively, as a result
of dividend reinvestment.
5. Unfunded Corporate Loans:
As of February 28, 2006, the Fund had an unfunded loan commitment of
$1,125,000, which would be extended at the option of the borrower, pursuant to
the following loan agreement:
(in Thousands)
Unfunded
Borrower Commitment Value
Waste Services, Inc. $1,125 $1,139
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. ("Citigroup") 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 Citigroup 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 3.84% and the average borrowing
was approximately $128,461,000 for the year ended February 28, 2006.
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.047000 per share
on March 31, 2006 to shareholders of record on March 14, 2006.
The tax character of distributions paid during the fiscal years ended February
28, 2006 and February 28, 2005 was as follows:
2/28/2006 2/28/2005
Distributions paid from:
Ordinary income $ 31,484,794 $ 30,760,697
--------------- ---------------
Total taxable distributions $ 31,484,794 $ 30,760,697
=============== ===============
As of February 28, 2006, the components of accumulated losses on a tax
basis were as follows:
Undistributed ordinary income--net $ 2,264,487
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net 2,264,487
Capital loss carryforward (155,613,418)*
Unrealized losses--net (9,897,760)**
---------------
Total accumulated losses--net $ (163,246,691)
===============
* On February 28, 2006, the Fund had a net capital loss carryforward
of $155,613,418, 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,
$22,345,071 expires in 2012 and $4,906,362 expires in 2014.
This amount will be available to offset like amounts of any future
taxable gains.
** The difference between book-basis and tax-basis net unrealized
losses is attributable primarily to the book/tax differences in the
accrual of income on securities in default and differences between
book and tax amortization methods for premiums and discounts
on fixed income securities.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Senior High Income Portfolio, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Senior High Income Portfolio, Inc.
as of February 28, 2006, and the related statements of operations and cash
flows for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and financial highlights for
each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Portfolio's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Portfolio is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Portfolio's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of February 28, 2006,
by correspondence with the custodian and financial intermediaries; where
replies were not received from financial intermediaries, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Senior High Income Portfolio, Inc. as of February 28, 2006, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 24, 2006
Fund Certification (unaudited)
In September 2005, the Fund filed its Chief Executive Officer Certification
for the prior year with the New York Stock Exchange pursuant to Section
303A.12(a) of the New York Stock Exchange Corporate Governance Listing
Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid by Senior High Income Portfolio, Inc. for the fiscal year
ended February 28, 2006:
Interest-Related Dividends for Non-U.S. Residents
Month Paid: March 2005 0.00%*
April 2005 91.19%*
May 2005 - January 2006 94.82%*
February 2006 68.43%*
* Represents the portion of the taxable ordinary income dividends
eligible for exemption from U.S. withholding tax for nonresident
aliens and foreign corporations.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York
(the "Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized
shares of the Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market on the New York Stock Exchange or
elsewhere. If, on the dividend payment date, the Fund's net asset value per
share is equal to or less than the market price per share plus estimated
brokerage commissions (a condition often referred to as a "market premium"),
the Plan Agent will invest the dividend amount in newly issued shares. If the
Fund's net asset value per share is greater than the market price per share (a
condition often referred to as a "market discount"), the Plan Agent will
invest the dividend amount by purchasing on the open market additional shares.
If the Plan Agent is unable to invest the full dividend amount in open market
purchases, or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the
dividend by either (i) when the shares are newly issued, the net asset value
per share on the date the shares are issued or (ii) when shares are purchased
in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders, who elect not to participate,
will receive all dividend distributions in cash. Shareholders, who do not wish
to participate in the Plan, must advise the Plan Agent in writing (at the
address set forth below) that they elect not to participate in the Plan.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, if the
market price plus commissions of the Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Fund for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. Participation in the Plan generally will not effect the tax-
exempt status of exempt interest dividends paid by the Fund. If, when the
Fund's shares are trading at a market premium, the Fund issues shares pursuant
to the Plan that have a greater fair market value than the amount of cash
reinvested, it is possible that all or a portion of the discount from the
market value (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed
as a taxable distribution, it is also possible that the taxable character of
this discount would be allocable to all the shareholders, including
shareholders who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Contact Information--All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 131 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 177 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 51 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc.
in 1999 and Executive Vice President thereof
from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll is an
"interested person," as defined in the Investment Company Act, of the Fund based on his
positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors
serve until their resignation, removal or death, or until December 31 of the year in
which they turn 72. As Fund President, Mr. Doll serves at the pleasure of the Board of
Directors.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
Ronald W. Forbes** Director 1993 to Professor Emeritus of Finance, School of 49 Funds None
P.O. Box 9095 present Business, State University of New York at 50 Portfolios
Princeton, Albany since 2000 and Professor thereof from
NJ 08543-9095 1989 to 2000; International Consultant,
Age: 65 Urban Institute, Washington, D.C. from 1995
to 1999.
Cynthia A. Montgomery Director 1994 to Professor, Harvard Business School since 1989; 49 Funds Newell
P.O. Box 9095 present Associate Professor, J.L. Kellogg Graduate 50 Portfolios Rubbermaid,
Princeton, School of Management, Northwestern University Inc.
NJ 08543-9095 from 1985 to 1989; Associate Professor, Graduate (manufacturing).
Age: 53 School of Business Administration, University of
Michigan from 1979 to 1985; Director, Harvard
Business School Publishing since 2005; Director,
McLean Hospital since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 49 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 50 Portfolios
Princeton, adviser) in 2000; General Counsel, Director and
NJ 08543-9095 Secretary of Sanford C. Bernstein & Co., Inc.
Age: 60 (investment adviser/broker-dealer) from 1997
to 2000; Secretary, Sanford C. Bernstein Fund,
Inc. from 1994 to 2000; Director and Secretary
of SCB, Inc. since 1998; Director and Secretary
of SCB Partners, Inc. since 2000; and Director of
Covenant House from 2001 to 2004.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute, from 1995 to 49 Funds None
P.O. Box 9095 present 2001; Foreign Service Officer, United States 50 Portfolios
Princeton, Foreign Service, from 1961 to 1995 and Career
NJ 08543-9095 Minister from 1989 to 1995; Deputy Inspector
Age: 70 General, U.S. Department of State, from 1991
to 1994; U.S. Ambassador to the Hashemite
Kingdom of Jordan from 1987 to 1990.
Richard R. West Director 1993 to Professor of Finance from 1984 to 1995, 49 Funds Bowne & Co.,
P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 50 Portfolios Inc. (financial
Princeton, Dean Emeritus of New York University's Leonard printers);
NJ 08543-9095 N. Stern School of Business Administration. Vornado Realty
Age: 68 Trust (real estate
company);
Alexander's, Inc.
(real estate
company).
Edward D. Zinbarg Director 2000 to Self-employed financial consultant since 1994; 49 Funds None
P.O. Box 9095 present Executive Vice President of the Prudential 50 Portfolios
Princeton, Insurance Company of America from 1988 to
NJ 08543-9095 1994; Former Director of Prudential Reinsurance
Age: 71 Company and former Trustee of the Prudential
Foundation.
* Directors serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and
NJ 08543-9011 Treasurer 1999 to Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director of
Age: 45 present Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of the
IQ Funds since 2004.
Kevin J. Booth Vice 2001 to Managing Director (Global Fixed Income) of MLIM since 2006; Director of MLIM from
P.O. Box 9011 President present 1998 to 2005; Vice President of MLIM from 1991 to 1998.
Princeton,
NJ 08543-9011
Age: 51
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
P.O. Box 9011 Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
Princeton, Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
NJ 08543-9011 Investment Management from 2002 to 2004; Managing Director and Global Director
Age: 54 of Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Securities and
Exchange Division of Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 45
* Officers of the Fund serve at the pleasure of the Board of Directors.
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. FEBRUARY 28, 2006
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.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
SENIOR HIGH INCOME PORTFOLIO, INC. FEBRUARY 28, 2006
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of
the end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge upon request by calling toll-free 1-800-MER-FUND
(1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee
and (ii) each audit committee financial expert is independent: (1)
Ronald W. Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending February 28, 2006 - $41,300
Fiscal Year Ending February 28, 2005 - $39,000
(b) Audit-Related Fees -
Fiscal Year Ending February 28, 2006 - $8,000
Fiscal Year Ending February 28, 2005 - $7,500
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending February 28, 2006 - $6,000
Fiscal Year Ending February 28, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending February 28, 2006 - $0
Fiscal Year Ending February 28, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services
provided to the registrant on an annual basis require specific pre-
approval by the Committee. The Committee also must approve other
non-audit services provided to the registrant and those non-audit
services provided to the registrant's affiliated service providers
that relate directly to the operations and the financial reporting
of the registrant. Certain of these non-audit services that the
Committee believes are a) consistent with the SEC's auditor
independence rules and b) routine and recurring services that will
not impair the independence of the independent accountants may be
approved by the Committee without consideration on a specific case-
by-case basis ("general pre-approval"). However, such services
will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any
proposed services exceeding the pre-approved cost levels will
require specific pre-approval by the Committee, as will any other
services not subject to general pre-approval (e.g., unanticipated
but permissible services). The Committee is informed of each
service approved subject to general pre-approval at the next
regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending February 28, 2006 - $4,944,454
Fiscal Year Ending February 28, 2005 - $11,046,527
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals
are members of the registrant's separately-designated standing
audit committee established in accordance with Section 3(a)(58)(A)
of the Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Ronald W. Forbes
Cynthia A. Montgomery
Jean Margo Reid
Roscoe S. Suddarth
Richard R. West
Edward D. Zinbarg
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating
to the Fund's portfolio securities. The Investment Adviser has
adopted policies and procedures ("Proxy Voting Procedures") with
respect to the voting of proxies related to the portfolio
securities held in the account of one or more of its clients,
including a Fund. Pursuant to these Proxy Voting Procedures, the
Investment Adviser's primary objective when voting proxies is to
make proxy voting decisions solely in the best interests of each
Fund and its shareholders, and to act in a manner that the
Investment Adviser believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser
considers the interests of its clients, including the Funds, and
not the interests of the Investment Adviser, when voting proxies
and that real (or perceived) material conflicts that may arise
between the Investment Adviser's interest and those of the
Investment Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel
the CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and
requires a case-by-case determination. In such cases, the
Committee may elect not to adopt a specific voting policy
applicable to that issue. The Investment Adviser believes that
certain proxy voting issues require investment analysis - such as
approval of mergers and other significant corporate transactions -
akin to investment decisions, and are, therefore, not suitable for
general guidelines. The Committee may elect to adopt a common
position for the Investment Adviser on certain proxy votes that are
akin to investment decisions, or determine to permit the portfolio
manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected
that the Investment Adviser will generally seek to vote proxies
over which the Investment Adviser exercises voting authority in a
uniform manner for all the Investment Adviser's clients, the
Committee, in conjunction with a Fund's portfolio manager, may
determine that the Fund's specific circumstances require that its
proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on
a best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or
if the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary
to advise the Committee on how to vote or to cast votes on behalf of the
Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting
guidelines or, on matters where the Investment Adviser's policy is
case-by-case, does not follow the voting recommendation of any
proxy voting service or other independent fiduciary that may be
retained to provide research or advice to the Investment Adviser on
that matter, no proxies relating to the Client may be voted unless
the Secretary, or in the Secretary's absence, the Assistant
Secretary of the Committee concurs that the subcommittee's
determination is consistent with the Investment Adviser's fiduciary
duties
In addition to the general principles outlined above, the
Investment Adviser has adopted voting guidelines with respect to
certain recurring proxy issues that are not expected to involve
unusual circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon
the vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's compensation
and benefit policies and opposes excessive compensation, but believes that
compensation matters are normally best determined by an issuer's board of
directors, rather than shareholders. Proposals to "micro-manage" an
issuer's compensation practices or to set arbitrary restrictions on
compensation or benefits will, therefore, generally not be supported.
o Proposals related to requests, principally from management, for approval of
amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders) is
best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by shareholders.
o Proposals related to limiting corporate conduct in some manner that relates
to the shareholder's environmental or social concerns. The Committee
generally believes that annual shareholder meetings are inappropriate
forums for discussion of larger social issues, and opposes shareholder
resolutions "micromanaging" corporate conduct or requesting release of
information that would not help a shareholder evaluate an investment in the
corporation as an economic matter. While the Committee is generally
supportive of proposals to require corporate disclosure of matters that
seem relevant and material to the economic interests of shareholders, the
Committee is generally not supportive of proposals to require disclosure of
corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of February 28, 2006.
(a)(1) Mr. Kevin J. Booth is primarily responsible for the day-to-
day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Booth has been a Managing Director of the
Investment Adviser since 2006 and was previously a Director
at the Investment Adviser. He has been a portfolio manager
and Vice President of the Fund since 2001. He has more than
eleven years of investment experience, including the
analysis and management of senior floating rate loans and
the use of leverage techniques to manage portfolios. Mr.
Booth joined MLIM in 1991 and has core experience in bank
loans, high yield and distressed investing.
(a)(2) As of February 28, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Kevin J.
Booth 2 1 0 0 0 0
$ 930,601,777 $ 1,660,762,375 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving
their respective investment objectives and after consideration of such factors
as their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for
more than one but less than all clients. Likewise, because clients of the
Investment Adviser and its affiliates may have differing investment strategies,
a particular security may be bought for one or more clients when one or more
other clients are selling the security. The investment results for the Fund may
differ from the results achieved by other clients of the Investment Adviser and
its affiliates and results among clients may differ. In addition, purchases or
sales of the same security may be made for two or more clients on the same day.
In such event, such transactions will be allocated among the clients in a
manner believed by the Investment Adviser and its affiliates to be equitable to
each. The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of February 28, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a
fixed base salary, annual performance-based cash and stock compensation (cash
and stock bonus) and other benefits. MLIM has balanced these components of pay
to provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate--both up and down--with the relative investment performance of
the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance
the motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance
relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-,
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. A discretionary element of portfolio manager compensation
may include consideration of: financial results of MLIM, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in
a combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The
ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company shareholders and encourages a balance
between short-term goals and long-term strategic objectives. Management
strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to the Company's employees, including broad-based
retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of February 28, 2006,
Mr. Booth beneficially owns stock issued by the Fund in the
range of $100,001-$500,000.
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 second 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 - See Item 2
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: April 20, 2006
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: April 20, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Senior High Income Portfolio, Inc.
Date: April 20, 2006