UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-7456
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: Terry K. Glenn, President,
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: 02/29/04
Date of reporting period: 03/01/04 - 08/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Senior High
Income
Portfolio, Inc.
Semi-Annual Report
August 31, 2004
Senior High Income Portfolio, Inc. seeks to provide shareholders
with as high a level of current income as is consistent with its
investment policies and prudent investment management by investing
principally in senior debt obligations of companies, including
corporate loans made by banks and other financial institutions and
both privately placed and publicly offered corporate bonds and
notes. 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 investments of comparable
quality.
This report, including the financial information herein, is
transmitted to shareholders of Senior High Income Portfolio, Inc.
for their information. It is not a prospectus. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund leverages its Common
Stock to provide Common Stock shareholders with a potentially higher
rate of return. Leverage creates risk for Common Stock shareholders,
including the likelihood of greater volatility of net asset value
and market price of Common Stock shares, and the risk that
fluctuations in short-term interest rates may reduce the Common
Stock's yield. Statements and other information herein are as dated
and are subject to change.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities
is available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Senior High Income Portfolio, Inc.
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
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Senior High Income Portfolio, Inc.
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.
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 website
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., AUGUST 31, 2004
A Letter From the President
Dear Shareholder
In recent months, the Federal Reserve Board (the Fed) has taken
center stage as it shifts away from its long-accommodative monetary
stance. The Fed raised the Federal Funds rate 75 basis points (.75%)
in three separate moves since June, bringing the target short-term
interest rate to 1.75% - still low by historical standards. The Fed
has been deliberate in telegraphing its intention to take a
"measured" approach to interest rate increases in order to avoid
upsetting the economy or the financial markets, while still leaving
room to move more aggressively if inflation and economic growth
accelerate more than anticipated. The forward curve currently
projects further increases in short-term interest rates before year-
end. In addition to the Fed policy change, the financial markets
recently have had to grapple with a tense geopolitical environment,
higher oil prices and the worry and anticipation that accompanies a
presidential election.
The transition to higher rates can cause concern among equity
and fixed income investors alike. For bond investors, rising
interest rates means the value of older issues declines because they
bear the former lower interest rates. In addition, increasing
inflation erodes the purchasing power of fixed income securities.
Nevertheless, for the six-month and 12-month periods ended August
31, 2004, fixed income markets provided positive results. For
example, the Lehman Brothers Aggregate Bond Index returned +1.15%
and +6.13%; the Credit Suisse First Boston High Yield Index returned
+3.42% and +14.68%; and the Citigroup Mortgage Index returned +1.79%
and +6.07% for the six-month and 12-month periods, respectively.
As always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. Our
goal is to provide shareholders with competitive returns, while
always keeping one eye on managing the unavoidable risk inherent in
investing.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
A Discussion With Your Portfolio Manager
The Portfolio provided positive returns for the period,
outperforming its blended benchmark due to an overweight
position in high yield bonds and our ample use of leverage.
How did the Portfolio perform during the period in light of the
existing market conditions?
For the six-month period ended August 31, 2004, the Common Stock of
Senior High Income Portfolio, Inc. had net annualized yields of
8.88% and 9.23%, based on a period-end per share net asset value of
$6.10 and a per share market price of $5.87, respectively, and
$0.273 per share income dividends. Over the same period, the total
investment return on the Portfolio's Common Stock was +4.84%, based
on a beginning and ending net asset value of $6.10, and assuming
reinvestment of $0.276 per share ordinary income dividends. The
Portfolio's benchmark, which is an equal blend of the Credit Suisse
First Boston (CSFB) High Yield Index and the CSFB Leveraged Loan
Index, returned +2.85% for the same period.
For a description of the Portfolio's total investment return based
on a change in the per share market value of the Portfolio's Common
Stock (as measured by the trading price of the Portfolio's shares on
the New York Stock Exchange), and assuming reinvestment of
dividends, please refer to the Financial Highlights section of the
Financial Statements included in this report. As a closed-end fund,
the Portfolio's shares may trade in the secondary market at a
premium or discount to the Portfolio's net asset value. As a result,
total investment returns based on changes in the market value of the
Portfolio's Common Stock can vary significantly from total
investment returns based on changes in the Portfolio's net asset
value.
The rate of high yield bond issuance has kept pace with that of
2003, with high yield proceeds of $66 billion in the first half of
2004 versus $68 billion in the first half of 2003. As in 2003, this
year's issuance has consisted primarily of refinancing activity
(75%), as corporate treasurers capitalized on the relatively low
interest rate environment. During this period, there was a
troublesome trend whereby companies were issuing zero-coupon debt at
the holding company to finance dividends to equity sponsors. This
activity had a "double-barreled" impact on leverage - increasing
debt while decreasing equity - and often stretched credit parameters
beyond reasonable limits. However, the market eventually pushed back
and we have seen this trend subside. Nevertheless, the high yield
market's risk appetite has been steadily increasing. The percentage
of transactions rated B or lower has risen from 45% in 2001 to 54%
in 2002, 63% in 2003 and 68% in the first half of 2004. This trend
may persist as the forecast default rate continues to decline.
Moody's Investors Service is predicting a 2004 default rate of 2.3%,
compared to 4.13% in 2003.
Technicals in the leveraged bank loan market were similar to those
of the high yield market. Refinancing accounted for 81% of bank loan
issuance in the first half of 2004, while investor demand for bank
loans soared. The resulting supply/demand imbalance prompted tighter
spreads, smaller allocations and transaction upsizing. For example,
the average spread on B-rated loans compressed from 350 basis points
(3.5%) in September 2003 to 291 basis points in August 2004.
What were the reasons for the Portfolio's outperformance of its
benchmark?
The Portfolio's outperformance was driven primarily by our
overweight position in high yield bonds. We rebalanced the Portfolio
toward fixed rate investments after the events of September 11,
2001, as the Federal Reserve Board (the Fed) cut the Federal Funds
rate from 3.5% to 1.0% by June 2003. The interest rate cuts had
dramatically reduced the yield on the LIBOR-based bank loan
component of the portfolio. (LIBOR refers to the London Interbank
Offer Rate. The three-month LIBOR is the base upon which nearly all
our bank loans and floating rate notes are set.)
Also contributing to the Portfolio's outperformance was our ample
use of the permissible leverage lines. We use commercial paper-based
borrowings for leverage up to 33% of the Portfolio's total assets.
The average amount of Portfolio leverage during the six-month period
was 27.8%. (For a complete discussion of the benefits and risk of
leverage, refer to page 2 of this report to shareholders.)
Top-performing portfolio holdings during the past six months
included Mission Energy Holding Company, Highland Legacy Limited Co.
and GEO Specialty Chemicals Inc. In Mission Energy, the Portfolio
holds $6.5 million in bonds with a 13.5% coupon. The bonds, which
are due on July 15, 2008, appreciated in price from 103 to 123
during the period. The company is selling a portfolio of
international assets and has received much higher-than-expected
bids. This has led to speculation that the company will tender for
this issue somewhere in the high 120s range.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Regarding Highland Legacy, our $4 million investment in this
collateralized debt obligation continued to rally during the period
from 55 to 75. This price action reflects the favorable impact of
the high yield rally on the portfolio's valuation.
Our $3.6 million bond position in GEO appreciated from 30 to 50
during the period. GEO, which filed for bankruptcy in March 2004,
has a portfolio of niche businesses that supply functional chemicals
to the industrial water treatment, paints and coatings, construction
and electronics markets. During the past several months, all of the
market segments in which the company operated benefited from a
strong U.S. economy.
Investments that detracted from results during the period included
Telewest Global, Inc., Advanced Accessory Systems and Calpine
Corporation. Our $7.9 million bond position in Telewest, which was
priced at 64.5 on March 1, 2004, was converted into equity through a
U.K. court reorganization. Our August 31, 2004 equity value equates
to a price of about 47 on the bond position. We suspect that this is
due to technical pressures arising from bondholders liquidating
their equity positions. Telewest management continues to make
significant operating progress.
The Portfolio's $7.5 million bond investment in automotive supplier
Advanced Accessory Systems declined in price from 106 to 95 during
the period. The company's prospects continue to be impaired by its
higher steel costs and pricing concession demands from the original
equipment manufacturers.
The Portfolio owns $4 million in bank debt and $3 million in bonds
of merchant power company Calpine. During the period, the prices of
both securities were volatile, but ultimately declined about 10
points. Calpine's electrical generation capacity consists of gas
turbines. The company continues to feel the impact of a low-spark
spread environment (that is, high natural gas prices and soft
wholesale electrical prices), coupled with the higher operating
expenses associated with a larger plant fleet. As Calpine has now
almost completed it expansion program, forward funding requirements
will subside. In the meantime, we believe the company's liquidity is
sufficient to see it through an eventual recovery in market prices.
What changes were made to the Portfolio during the period?
We continued to reposition the Portfolio during the period, shifting
to an allocation of 60% fixed rate and 40% floating rate
investments. This compared to a composition of 80% fixed rate and
20% floating rate last year. Given the robust demand for bank loans,
allocations were usually a small percentage of our original order.
To achieve our 60% fixed/40% floating rate target, we purchased
$33 million in floating rate notes during the six-month period.
We continue to believe that the downside risk associated with rising
interest rates outweighs the benefits we may see from a bond rally.
At period-end, the Fed had already initiated two interest rate hikes
of 25 basis points. There was a third quarter-point increase in
September, bringing the target short-term interest rate to 1.75%.
This, and the prospect of additional interest rate hikes, served to
raise the three-month LIBOR rate from 1.12% at August 31, 2003, to
1.80% at August 31, 2004.
How would you characterize the Portfolio's position at the close of
the period?
We would characterize our position at period-end as defensive while
still focused on maintaining the Portfolio's attractive yield. We
also continue to be cautious and selective in adding new positions,
and 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
September 22, 2004
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Portfolio Information
As of August 31, 2004
Percent of
Ten Largest Bank Loan Holdings Net Assets
Wellman, Inc., First Lien Term, 8.75%
due 2/04/2009 2.4%
Charter Communications, Term B, 4.92%
due 4/27/2011 2.3
Sealy Mattress Company, Term, 5.972%
due 4/06/2013 1.8
TransWestern Publishing Company, LLC,
Term B, 3.875% due 2/25/2011 1.7
The Goodyear Tire & Rubber Company, Term,
6.059% due 3/31/2006 1.5
American Safety Razor Company, Term B,
4.95% due 4/01/2011 1.5
High Voltage Engineering Corporation, Term A,
8.68% due 7/31/2006 1.5
Century Cable Holdings LLC, Term, 6.50%
due 6/30/2009 1.4
Insight Midwest Holdings, LLC, Term B,
3.937% due 12/31/2009 1.2
Polymer Group, Inc., First Lien Term, 4.84%
due 4/01/2010 1.2
Percent of
Five Largest Industries* Net Assets
Chemicals 20.3%
Cable--U.S. 13.4
Utilities 9.1
Packaging 7.8
Automotive 7.2
*For Fund compliance purposes, "Industries" means 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 Portfolio 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
AAA/Aaa 0.1%
BB/Ba 18.9
B/B 66.9
CCC/Caa 6.7
CC/Ca 0.1
C/C 0.4
D/D 0.2
NR (Not Rated) 3.6
Other* 3.1
*Includes portfolio holdings in common stocks, preferred stocks,
other interests, warrants and short-term investments.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Obligations Value
Aerospace & The Titan Corporation:
Defense--2.1% B B2 $1,000,000 8% due 5/15/2011 $ 1,032,500
BB- Ba3 2,992,366 Term B, due 6/30/2009++++ 3,006,706
B B2 2,960,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 2,937,800
-------------
6,977,006
Airlines--0.2% CCC- Ca 900,000 Evergreen International Aviation, Inc., 12% due 5/15/2010 531,000
Automotive-- B- B2 3,184,000 Accuride Corporation, Term B, due 6/30/2007++++ 3,262,607
7.2% CCC+ B3 7,550,000 Advanced Accessory Systems, 10.75% due 6/15/2011 7,172,500
NR* NR* 5,000,000 The Goodyear Tire & Rubber Company, Term, due 3/31/2006++++ 5,065,625
B Caa1 1,800,000 Metaldyne Corporation, 11% due 6/15/2012 1,566,000
B+ B1 1,436,719 NFIL Holdings Inc., Term B, due 2/27/2010++++ 1,456,025
B- B1 1,350,000 Remy International, Inc., 5.60% due 4/15/2009 (d) 1,370,250
Tenneco Automotive Inc.:
B- B3 1,875,000 11.625% due 10/15/2009 2,001,563
B- B2 475,000 10.25% due 7/15/2013 549,813
B B1 1,235,172 Tranche B, due 12/12/2010++++ 1,258,332
B B1 558,621 Tranche B-1, Credit Link, due 12/12/2010++++ 570,142
Venture Holdings Company LLC (g):
NR* NR* 3,325,000 9.50% due 7/01/2005 133,000
NR* NR* 700,000 12% due 6/01/2009 875
-------------
24,406,732
Broadcasting-- CCC B3 3,000,000 Granite Broadcasting Corporation, 9.75% due12/01/2010 2,827,500
0.8%
Cable-- B B3 4,650,000 Kabel Deutschland GmbH, 10.625% due 7/01/2014 (b) 4,766,250
International-- NTL Cable PLC (b):
2.2% B- B3 2,350,000 6.61% due 10/15/2012 (d) 2,397,000
B- B3 350,000 8.75% due 4/15/2014 364,000
-------------
7,527,250
Cable--U.S.-- BB- B1 1,800,000 CSC Holdings, Inc., 7.25% due 7/15/2008 1,872,000
13.4% Century Cable Holdings, LLC:++++
NR* Caa1 3,000,000 Discretionary Term, due 12/31/2009 2,925,624
NR* NR* 5,000,000 Term, due 6/30/2009 4,885,270
Charter Communications Holdings, LLC:
CCC- Ca 1,750,000 10% due 4/01/2009 1,443,750
CCC- Ca 1,000,000 11.75%** due 1/15/2010 805,000
CCC- Ca 2,000,000 11.125% due 1/15/2011 1,670,000
CCC- Ca 1,500,000 9.92% due 4/01/2011 1,185,000
CCC- Ca 1,000,000 10% due 5/15/2011 790,000
B B2 8,000,000 Charter Communications, Term B, due 4/27/2011++++ 7,905,832
Inmarsat Investments Limited:++++
BB- Ba3 2,500,000 Term B, due 1/23/2017 2,512,265
NR* NR* 2,500,000 Term C, due 1/23/2012 2,521,640
BB+ Ba3 3,980,000 Insight Midwest Holdings, LLC, Term B, due 12/31/2009++++ 4,042,498
NR* NR* 2,363,981 Mallard Cablevision LLC & Sun Tel Communications, Term B,
due 9/30/2008++++ (g) 23,640
B+ B2 3,000,000 Mediacom Broadband LLC, 11% due 7/15/2013 3,247,500
D B2 4,000,000 Olympus Cable Holdings LLC, Term B, due 9/30/2010++++ 3,910,000
NR* NR* 550,040 Pegasus Media & Communications, Inc., Term, due 4/30/2005++++ 550,814
CCC+ B3 5,250,000 Rainbow National Services LLC, 8.75% due 9/01/2012 (b) 5,394,375
-------------
45,685,208
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Obligations Value
Chemicals-- B+ B1 $3,000,000 Arteva Specialties Sarl, 9.25% due 5/01/2012 (b) $ 3,195,000
20.3% B- B3 875,000 BCP Caylux Holdings Luxembourg SCA, 9.625% due 6/15/2014 (b) 939,531
B- B3 2,250,000 Compass Minerals International, Inc., 12%** due 6/01/2013 1,755,000
Crompton Corporation (b):
B B1 3,000,000 7.67% due 8/01/2010 (d) 3,067,500
B B1 3,000,000 9.875% due 8/01/2012 3,120,000
D C 3,600,000 GEO Specialty Chemicals, Inc., 10.125% due 8/01/2008 (g) 1,800,000
Huntsman International LLC:
B- B3 1,000,000 9.875% due 3/01/2009 1,080,000
CCC+ Caa1 2,000,000 10.125% due 7/01/2009 2,060,000
B B1 2,000,000 Term, due 12/31/2010++++ 2,030,000
B+ B2 1,750,000 ISP Holdings, Inc., 10.625% due 12/15/2009 1,925,000
B B3 925,000 KRATON Polymers LLC, 8.125% due 1/15/2014 (b) 915,750
B B2 2,500,000 Koppers Inc., 9.875% due 10/15/2013 2,750,000
BB Ba3 2,500,000 KoSa B/INVISTA, Term due 4/29/2011++++ 2,515,625
B+ B1 1,650,000 Lyondell Chemical Company, 11.125% due 7/15/2012 1,876,875
B+ B1 1,350,000 Lyondell Chemical Worldwide, Inc., 9.80% due 2/01/2020 1,363,500
BB- B1 1,200,000 Millennium America Inc., 7.625% due 11/15/2026 1,086,000
BB- B2 5,350,000 Omnova Solutions Inc., 11.25% due 6/01/2010 5,885,000
NR* NR* 1,671,088 Pinnacle Polymers Term, due 12/15/2006++++ 1,692,059
NR* NR* 2,500,000 Pioneer Companies, Inc., 5.086% due 12/31/2006 (d) 2,362,500
B+ B2 4,000,000 Polymer Group, Inc., First Lien Term, due 4/01/2010++++ 4,029,168
B+ B3 6,375,000 PolyOne Corporation, 10.625% due 5/15/2010 6,932,812
Rockwood Specialties Group, Inc.:
B- B3 1,825,000 10.625% due 5/15/2011 1,989,250
B+ B1 1,600,000 Term B, due 7/30/2012++++ 1,613,286
Terra Industries:
B+ B3 2,500,000 12.875% due 10/15/2008 3,075,000
B- Caa1 1,250,000 11.50% due 6/01/2010 1,393,750
B- B3 400,000 United Agri Products, Inc., 8.25% due 12/15/2011 (b) 432,000
BB- B1 8,000,000 Wellman, Inc., First Lien Term, due 2/04/2009++++ 8,140,000
-------------
69,024,606
Consumer B+ B1 6,000,000 Sealy Mattress Company, Term, due 4/06/2013++++ 6,135,000
Durables--2.8% Simmons Company:
B- Caa1 450,000 7.875% due 1/15/2014 463,500
B+ B3 3,000,000 Term B, due 6/19/2011++++ 3,027,657
-------------
9,626,157
Consumer B B2 4,987,500 American Safety Razor Company, Term B, due 4/01/2011++++ 5,049,844
Non-Durables-- B+ Ba3 1,675,000 Chattem, Inc., 4.79% due 3/01/2010 (d) 1,721,063
4.0% B- Caa1 1,000,000 General Binding Corporation, 9.375% due 6/01/2008 1,022,500
B B3 1,975,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 2,073,750
B+ B2 2,125,000 North Atlantic Trading Company, Inc., 9.25% due 3/01/2012 2,071,875
B+ B1 1,492,500 Solo Cup Company, Term, due 2/27/2011++++ 1,509,601
-------------
13,448,633
Diversified B B3 325,000 Houghton Mifflin Company, 9.875% due 2/01/2013 339,219
Media--2.4% TransWestern Publishing Company, LLC:++++
B B2 2,000,000 Term, due 4/30/2009 2,018,334
BB- B1 5,730,000 Term B, due 2/25/2011 5,778,350
-------------
8,135,903
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Obligations Value
Energy-- CCC+ Caa1 $1,000,000 Continental Resources, Inc., 10.25% due 8/01/2008 $ 1,033,750
Exploration & Quest Cherokee, LLC:++++
Production-- B B2 222,222 Revolving Credit, due 7/25/2010 223,889
0.9% B B2 1,777,778 Term B, due 7/25/2010 1,791,111
-------------
3,048,750
Energy--Other-- Dresser, Inc.:
3.8% B B2 1,000,000 9.375% due 4/15/2011 1,075,000
BB- Ba3 1,250,000 Term, due 2/25/2010++++ 1,281,250
BB- Ba3 736,934 Term B, due 4/10/2009++++ 748,103
NR* Caa3 1,035,000 Energy Corporation of America, 9.50% due 5/15/2007 983,250
B- NR* 3,656,000 Giant Industries, Inc., 11% due 5/15/2012 4,140,420
Star Gas Partners, LP:
B B3 2,750,000 10.25% due 2/15/2013 2,970,000
B B3 1,750,000 10.25% due 2/15/2013 (b) 1,890,000
-------------
13,088,023
Financial--2.6% NR* Ba3 4,000,000 Highland Legacy Limited Co., 7.429% due 6/01/2011 (b)(d) 3,000,000
D NR* 500,000 Investcorp SA, 7.54%, due 10/21/2008 499,173
NR* Ca 1,138,809 Pennant CBO Limited, 13.43% due 3/14/2011 (b) 569,404
B B3 3,925,000 Refco Finance Holdings LLC, 9% due 8/01/2012 (b) 4,062,375
SKM-Libertyview CBO I Limited (b)(g):
NR* Ca 1,500,000 8.71% due 4/10/2011 675,000
NR* C 1,000,000 11.91% due 4/10/2011 80,000
-------------
8,885,952
Food/Tobacco-- Atkins Nutritionals, Inc.:++++
6.0% B+ B2 1,447,500 First Lien, due 11/26/2009 1,288,275
B+ B2 1,500,000 Second Lien Term, due 11/26/2009 1,295,000
Commonwealth Brands, Inc. (b):
B- B2 2,250,000 9.75% due 4/15/2008 2,379,375
B- B3 2,825,000 10.625% due 9/01/2008 2,987,437
B+ B2 1,800,000 Dole Food Company, Inc., 8.875% due 3/15/2011 1,926,000
BB- B1 1,880,411 Dr Pepper Bottling, Term B, due 12/19/2010++++ 1,901,859
B- B2 2,200,000 Gold Kist Inc., 10.25% due 3/15/2014 (b) 2,420,000
B+ B1 1,246,875 Luigino's, Inc., Term, due 4/02/2011++++ 1,259,344
B- B3 3,000,000 Merisant Company, 9.50% due 7/15/2013 (b) 3,000,000
B- B1 2,000,000 Pierre Foods, Inc., Term B, due 6/30/2010++++ 2,016,250
-------------
20,473,540
Gaming--2.2% B B2 2,000,000 Jacobs Entertainment, Inc., 11.875% due 2/01/2009 2,245,000
B B2 925,000 The Majestic Star Casino, LLC, 9.50% due 10/15/2010 945,812
B+ B2 1,632,046 Marina District Finance Co., Term B, due 5/31/2007++++ 1,641,226
CCC+ Caa1 311,000 Pinnacle Entertainment, Inc., 9.25% due 2/15/2007 (b) 319,941
B- B2 2,000,000 Venetian Casino Resort, LLC, 11% due 6/15/2010 2,277,500
-------------
7,429,479
Health Care-- B+ B1 1,717,234 MedPointe Inc., Term B, due 9/30/2008++++ 1,724,211
3.9% BB- Ba3 2,375,000 Orthofix International NV, Term B, due 12/15/2008++++ 2,400,978
B- B3 3,000,000 Tenet Healthcare Corporation, 7.375% due 2/01/2013 2,775,000
VWR International, Inc.:
B B3 700,000 8% due 4/15/2014 (b) 722,750
B+ B1 3,661,334 Term B, due 4/07/2011++++ 3,720,373
CCC+ B3 1,675,000 Vanguard Health Systems, Inc., 9.75% due 8/01/2011 1,943,000
-------------
13,286,312
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Obligations Value
Housing--0.9% NR* NR* $ 226,860 Formica Corporation, 7.86% due 6/10/2011 $ 215,517
BB Ba1 2,000,000 Lone Star Industries Inc., 8.85% due 6/15/2005 (b) 2,058,076
B- B3 700,000 U.S. Concrete, Inc., 8.375% due 4/01/2014 717,500
-------------
2,991,093
Information BB+ Ba2 2,450,000 Freescale Semiconductor, Inc., 4.38% due 7/15/2009 (b)(d) 2,492,875
Technology-- B+ B1 3,875,000 VUTEk Inc., Term, due 6/25/2010++++ 3,865,313
1.9% -------------
6,358,188
Leisure--5.1% B- B1 6,000,000 FelCor Lodging LP, 5.84% due 6/01/2011 (b)(d) 6,030,000
B+ Ba3 274,000 HMH Properties, Inc., 7.875% due 8/01/2008 282,220
B+ B1 5,050,000 Intrawest Corporation, 10.50% due 2/01/2010 5,435,062
Wyndham International, Inc.:++++
NR* NR* 4,861,796 Term 1, due 6/30/2006 4,763,549
NR* NR* 987,061 Term 2, due 4/01/2006 979,164
-------------
17,489,995
Manufacturing-- B- B3 275,000 Aearo Company, 8.25% due 4/15/2012 281,875
6.9% B- B3 3,000,000 Communications & Power Industries, Inc., 8% due 2/01/2012 3,022,500
B- B2 1,250,000 Da-Lite Screen Company, Inc., 9.50% due 5/15/2011 (b) 1,312,500
B- B3 2,000,000 EaglePicher Incorporated, 9.75% due 9/01/2013 2,155,000
BB- Ba3 5,000,000 High Voltage Engineering Corporation, Term A, due 7/31/2006++++ 4,975,000
B+ Ba3 4,989,614 Invensys International Holdings Ltd., Term, due 8/26/2009++++ 5,058,221
B- B3 2,825,000 Invensys plc, 9.875% due 3/15/2011(b) 2,867,375
B- B3 3,500,000 MetoKote Corporation, Term, due 2/13/2011++++ 3,543,750
B+ B3 300,000 NMHG Holding Company, 10% due 5/15/2009 330,000
-------------
23,546,221
Metals--Other-- B+ B1 5,500,000 Massey Energy Company, 6.95% due 3/01/2007 5,775,000
1.7%
Packaging-- B+ B2 5,200,000 Anchor Glass Container Corporation, 11% due 2/15/2013 5,928,000
7.8% CCC B3 1,900,000 Consolidated Container Company LLC, 10.75%** due 6/15/2009 (b) 1,520,000
B B2 2,300,000 Crown Euro Holdings SA, 10.875% due 3/01/2013 2,673,750
BB- B1 5,142,857 Owens-Illinois Inc., Term C, due 4/01/2008++++ 5,210,357
B- Caa2 3,300,000 Pliant Corporation 13% due 6/01/2010 3,036,000
CCC+ Caa1 1,000,000 Radnor Holdings Corporation, 11% due 3/15/2010 840,000
B- B2 650,000 Tekni-Plex, Inc., 8.75% due 11/15/2013 (b) 624,000
CCC+ Caa1 5,550,000 U.S. Can Corporation, 10.875% due 7/15/2010 5,772,000
B B2 900,000 Wise Metals Group LLC, 10.25% due 5/15/2012 (b) 904,500
-------------
26,508,607
Paper--5.2% BB Ba2 3,275,000 Abitibi-Consolidated Inc., 5.02% due 6/15/2011 (b)(d) 3,340,500
BB Ba2 4,625,000 Bowater Incorporated, 4.52% due 3/15/2010 (d) 4,601,875
BB+ Ba2 4,325,000 Georgia-Pacific Corporation, 9.375% due 2/01/2013 5,092,687
B- B3 625,000 Graphic Packaging International Inc., 9.50% due 8/15/2013 700,000
SP Newsprint Co.:++++
B+ B1 525,833 Tranche B, due 1/09/2010 533,064
B+ B1 966,667 Tranche B L/C, due 1/09/2010 981,167
B B2 800,000 Stone Container Corporation, 8.375% due 7/01/2012 880,000
BB- Ba3 1,500,000 Tembec Industries, Inc., 8.625% due 6/30/2009 1,563,750
-------------
17,693,043
Retail--0.3% B+ B1 895,500 General Nutrition Center, Inc., Term B, due 12/05/2009++++ 905,798
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Obligations Value
Services--6.9% BB Ba3 $2,000,000 Allied Waste Industries, Inc., Tranche A--Credit Linked
Deposit, due 1/15/2010++++ $ 2,030,500
Allied Waste North America, Inc.:
BB- Ba3 720,000 7.875% due 4/15/2013 759,600
B+ B2 3,125,000 7.375% due 4/15/2014 3,035,156
B B1 1,600,000 Corrections Corporation of America, 9.875% due 5/01/2009 1,786,000
B+ B1 995,000 FTD, Inc., Term, due 2/28/2011++++ 1,004,950
CCC Caa2 250,000 Great Lakes Dredge & Dock Corporation, 7.75% due 12/15/2013 207,187
NR* NR* 3,200,000 IT Group Inc., 11.25% due 4/01/2009 (g) 32
BB Ba1 3,000,000 MSW Energy Holdings LLC, 8.50% due 9/01/2010 3,270,000
United Rentals, Inc.:++++
BB Ba3 1,662,500 Initial Term, due 2/14/2011 1,681,827
NR* NR* 333,333 Tranche B Term Link Deposit, due 2/14/2011 338,472
B+ B2 3,750,000 United Rentals North America, Inc., 7.75% due 11/15/2013 (b) 3,487,500
B+ B1 3,990,000 Waste Services, Inc., Term B, due 3/31/2011++++ 3,885,263
B- B3 2,075,000 Williams Scotsman, Inc., 9.875% due 6/01/2007 2,043,875
-------------
23,530,362
Telecommunica- B- B3 2,045,000 Cincinnati Bell Inc., 8.375% due 1/15/2014 1,809,825
tions--5.9% B+ B1 2,200,000 Consolidated Communications Acquisition of TXU, Inc., Term B,
due 10/14/2011++++ 2,230,250
B- Caa1 5,550,000 FairPoint Communications, Inc., 12.50% due 5/01/2010 5,938,500
CCC B3 500,000 Horizon PCS, Inc., 11.375% due 7/15/2012 (b) 512,500
B B3 4,000,000 Qwest Communications International Inc., 5.211% due
2/15/2009 (b)(d) 3,720,000
B B1 3,500,000 Time Warner Telecom Holdings, Inc., 5.711% due 2/15/2011 (d) 3,412,500
CCC+ B3 2,500,000 Time Warner Telecom, Inc., 9.75% due 7/15/2008 2,425,000
-------------
20,048,575
Transporta- B+ B2 1,325,000 Laidlaw International, Inc., 10.75% due 6/15/2011 1,510,500
tion--1.1% B+ Ba3 2,197,059 North American Van Lines, Inc., Term, due 10/29/2010++++ 2,218,344
-------------
3,728,844
Utilities-- B- B3 2,250,000 The AES Corporation, 8.50% due 11/01/2007 2,300,625
9.1% CCC+ Caa1 1,500,000 Calpine Canada Energy Finance ULC, 8.50% due 5/01/2008 956,250
Calpine Corporation:
CCC+ Caa1 1,300,000 8.50% due 2/15/2011 802,750
B+ B1 3,960,000 Term B, due 7/15/2007++++ 3,366,000
D NR* 1,000,000 Mirant Americas Generation LLC, 7.625% due 5/01/2006 (g) 832,500
Mission Energy Holding Company:
CCC B3 5,300,000 13.50% due 7/15/2008 6,664,750
NR* NR* 4,000,000 Term, due 12/11/2006++++ 4,020,000
B+ B1 2,000,000 Northwest Pipeline Corporation, 6.625% due 12/01/2007 2,125,000
Sierra Pacific Resources:
NR* B2 2,100,000 8.75% due 5/15/2005 2,152,500
B- B2 2,750,000 8.625% due 3/15/2014 (b) 2,887,500
BB+ Ba1 792,000 TNP Enterprises, Inc., Term, due 12/31/2006++++ 806,850
B+ Ba3 3,222,308 Teton Power Funding LLC, Term, due 3/12/2011++++ 3,254,531
B+ B3 725,000 The Williams Companies, Inc., 8.625% due 6/01/2010 841,000
-------------
31,010,256
Wireless CCC Caa1 4,000,000 American Tower Systems Corporation, 9.375% due 2/01/2009 4,270,000
Communica- B- B2 2,985,000 Centennial Cellular, Term A, due 2/09/2011++++ 2,995,495
tions--6.6% CCC B3 5,000,000 Crown Castle International Corporation., 7.50% due 12/01/2013 5,000,000
B- B1 1,191,000 Dobson Cellular Systems, Inc., Term, due 3/31/2010++++ 1,190,553
B- B2 1,000,000 Rural Cellular Corporation, 6.02% due 3/15/2010 (b)(d) 1,015,000
CCC+ B2 3,123,077 SBA Senior Finance, Inc., Term B, due 10/31/2008++++ 3,150,891
CCC+ B3 3,700,000 SpectraSite, Inc., 8.25% due 5/15/2010 3,866,500
CCC+ B2 800,000 US Unwired Inc., 5.791% due 6/15/2010 (d) 812,000
-------------
22,300,439
Total Investments in Corporate Debt Obligations
(Cost--$455,860,152)--134.2% 456,288,472
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (continued)
Shares
Industry++ Held Preferred Stocks Value
Cable--U.S.--0.0% 2,500 Adelphia Communications Corporation (c) $ 15,000
Diversified Media--1.1% 150,000 Newscorp Overseas Limited 3,754,500
Total Investments in Preferred Stocks
(Cost--$2,925,000)--1.1% 3,769,500
Common Stocks
Cable--International--1.1% 323,90 Telewest Global, Inc. (c) 3,741,114
Consumer--Non-durables--0.0% 1,000 Galey & Lord, Inc. (c) 0
Leisure--0.1% 41,866 Lodgian, Inc. (c) 436,244
Manufacturing--0.2% 62,581 High Voltage Engineering Corporation (c) 510,003
Telecommunications--0.1% 14,246 IDT Corporation (c) 182,000
17,811 IDT Corporation (Class B) (c) 267,699
-------------
449,699
Wireless Communications--0.2% 126 Microcell Telecommunications Inc. (Class A) (c) 2,961
30,314 Microcell Telecommunications Inc. (Class B) (c) 713,216
-------------
716,177
Total Investments in Common Stocks
(Cost--$14,677,888)--1.7% 5,853,237
Beneficial
Interest Other Interests (f)
$ 4,130,972 Cambridge Industries, Inc. (Litigation Trust Certificates) 41,338
10,284 MEDIQ Incorporated (Preferred Stock Escrow due 2/01/2006) 0
10,284 MEDIQ Incorporated (Preferred Stock Escrow due 4/01/2004) 0
2,750,000 WilTel Communications Group, Inc. (Litigation Trust Certificates) 0
Total Investments in Other Interests
(Cost--$0)--0.0% 41,338
Shares
Held Warrants (a)
Consumer--Non-durables--0.0% 5,262 Galey & Lord, Inc., Series A 0
5,538 Galey & Lord, Inc., Series B 0
-------------
0
Gaming--0.0% 27,111 Peninsula Gaming Company, LLC 162,670
Paper--0.0% 3,500 JSG Funding PLC 35,000
Wireless Communications--0.1% 600 American Tower Escrow Corporation 111,000
5,613 Microcell Telecommunications Inc. 48,436
9,355 Microcell Telecommunications Inc. 75,047
-------------
234,483
Total Investments in Warrants
(Cost--$2,422,075)--0.1% 432,153
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Schedule of Investments (concluded)
Beneficial
Interest Short-Term Securities Value
$ 4,332,776 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (e) $ 4,332,776
Total Short-Term Securities
(Cost--$4,332,776)--1.3% 4,332,776
Total Investments (Cost--$480,217,891***)--138.4% 470,717,476
Liabilities in Excess of Other Assets--(38.4%) (130,646,465)
-------------
Net Assets--100.0% $ 340,071,011
=============
*Not Rated.
**Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
***The cost and unrealized appreciation/depreciation of investments
as of August 31, 2004, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 479,950,867
=============
Gross unrealized appreciation $ 21,117,969
Gross unrealized depreciation (30,351,360)
-------------
Net unrealized depreciation $ (9,233,391)
=============
++For Fund compliance purposes, "Industry" means 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. Breakdown is a percent of
net assets.
++++Floating Rate Corporate Debt in which the Portfolio invests
generally pays interest at rates that are periodically redetermined
by reference to a base lending rate plus a premium. These 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. Corporate loans
represent 50.5% of the Portfolio's net assets.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under certain
conditions until the expiration date.
(b)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c)Non-income producing security.
(d)Floating rate note.
(e)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
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 $(487,170) $25,939
(f)Other interests represent beneficial interest in liquidation
trusts and other reorganization entities and are non-income
producing.
(g)Non-income producing-issuer filed for bankruptcy or is in default
of interest payments.
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Statement of Assets, Liabilities and Capital
As of August 31, 2004
Assets
Investments in unaffiliated securities, at value (identified cost--$475,885,115) $ 466,384,700
Investments in affiliated securities, at value (identified cost--$4,332,776) 4,332,776
Cash 57,038
Receivables:
Interest (including $150 from affiliates) $ 6,833,489
Securities sold 3,619,886
Principal paydowns 28,897 10,482,272
---------------
Deferred facility fees 7,167
Prepaid expenses 2,955
---------------
Total assets 481,266,908
---------------
Liabilities
Loans 139,264,000
Payables:
Securities purchased 1,294,124
Dividends to shareholders 218,607
Interest on loans 50,119
Investment adviser 13,129
Commitment fees 4,152
Other affiliates 2,926 1,583,057
---------------
Deferred income 21,474
Accrued expenses and other liabilities 327,366
---------------
Total liabilities 141,195,897
---------------
Net Assets
Net assets $ 340,071,011
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(55,727,331 shares issued and outstanding) $ 5,572,733
Paid-in capital in excess of par 492,361,406
Undistributed investment income--net $ 3,157,453
Accumulated realized capital losses--net (151,522,479)
Unrealized depreciation--net (9,498,102)
---------------
Total accumulated losses--net (157,863,128)
---------------
Total capital--Equivalent to $6.10 net asset value per share of Common Stock
(market price--$5.87) $ 340,071,011
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Statement of Operations
For the Six Months Ended August 31, 2004
Investment Income
Interest (including $25,939 from affiliates) $ 18,329,923
Dividends 588,098
Facility and other fees 11,810
---------------
Total income 18,929,831
---------------
Expenses
Investment advisory fees $ 1,197,142
Loan interest expense 1,024,204
Borrowing costs 85,303
Accounting services 59,895
Professional fees 55,633
Transfer agent fees 35,904
Printing and shareholder reports 28,350
Listing fees 22,192
Directors' fees and expenses 20,879
Custodian fees 18,312
Pricing services 10,293
Other 14,806
---------------
Total expenses 2,572,913
---------------
Investment income--net 16,356,918
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on investments--net 7,286,319
Change in unrealized depreciation on:
Investments--net (8,401,199)
Foreign currency transactions--net 12 (8,401,187)
--------------- ---------------
Total realized and unrealized loss--net (1,114,868)
---------------
Net Increase in Net Assets Resulting from Operations $ 15,242,050
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
August 31, February 29,
Increase (Decrease) in Net Assets: 2004 2004
Operations
Investment income--net $ 16,356,918 $ 34,591,358
Realized gain (loss)--net 7,286,319 (24,537,705)
Change in unrealized depreciation--net (8,401,187) 96,591,178
--------------- ---------------
Net increase in net assets resulting from operations 15,242,050 106,644,831
--------------- ---------------
Dividends to Shareholders
Dividends to shareholders from investment income--net (15,378,708) (35,624,986)
--------------- ---------------
Capital Share Transactions
Value of shares issued to Common Stock shareholders in reinvestment
of dividends 257,753 3,507,088
--------------- ---------------
Net increase in net assets resulting from capital share transactions 257,753 3,507,088
--------------- ---------------
Net Assets
Total increasein net assets 121,095 74,526,933
Beginning of period 339,949,916 265,422,983
--------------- ---------------
End of period* $ 340,071,011 $ 339,949,916
=============== ===============
*Undistributed investment income--net $ 3,157,453 $ 2,179,243
=============== ===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Statement of Cash Flows
For the Six Months Ended August 31, 2004
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 15,242,050
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables 578,969
Increase in other assets and deferred facility fees (3,633)
Increase in other liabilities 184,238
Realized and unrealized loss--net 1,114,868
Amortization of premium and discount--net (605,971)
Proceeds from sales and paydowns of long-term investments 169,805,443
Purchases of long-term investments (178,938,840)
Net proceeds from sales and maturities of short-term investments 487,170
---------------
Net cash provided by operating activities 7,864,294
===============
Cash Used for Financing Activities
Cash receipts of borrowings 107,967,000
Cash payments on borrowings (101,000,000)
Dividends paid to shareholders (14,902,348)
---------------
Net cash used for financing activities (7,935,348)
===============
Cash
Net decrease in cash (71,054)
Cash at beginning of period 128,092
---------------
Cash at end of period $ 57,038
===============
Cash Flow Information
Cash paid for interest $ 996,538
===============
Non-Cash Financing Activities
Capital shares issued on reinvestment of dividends paid to shareholders $ 257,753
===============
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Financial Highlights
The following per share data and ratios have been derived For the Six For the
from information provided in the financial statements. Months Ended Year Ended For the Year Ended
August 31, February 29, February 28,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 6.10 $ 4.82 $ 5.40 $ 6.63 $ 7.54
---------- ---------- ---------- ---------- ----------
Investment income--net*** .29 .62 .63 .70 .82
Realized and unrealized gain (loss)--net (.01) 1.30 (.59) (1.22) (.89)
---------- ---------- ---------- ---------- ----------
Total from investment operations .28 1.92 .04 (.52) (.07)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.28) (.64) (.62) (.71) (.84)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 6.10 $ 6.10 $ 4.82 $ 5.40 $ 6.63
========== ========== ========== ========== ==========
Market price per share, end of period $ 5.87 $ 6.11 $ 5.45 $ 5.89 $ 6.64
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 4.84%++ 41.49% 1.18% (8.03%) .28%
========== ========== ========== ========== ==========
Based on market price per share .72%++ 25.34% 4.88% .16% 15.39%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding interest expense .65%* .90% .97% .95% .90%
========== ========== ========== ========== ==========
Expenses 1.07%* 1.42% 1.78% 2.46% 3.59%
========== ========== ========== ========== ==========
Investment income--net 6.83%* 11.23% 12.75% 11.83% 11.92%
========== ========== ========== ========== ==========
Leverage
Amount of borrowings (in thousands) $ 139,264 $ 132,297 $ 104,600 $ 127,600 $ 141,200
========== ========== ========== ========== ==========
Average amount of borrowings outstanding
during the period (in thousands) $ 137,454 $ 112,037 $ 110,348 $ 128,203 $ 146,163
========== ========== ========== ========== ==========
Average amount of borrowings outstanding per
share during the period $ 2.47 $ 2.02 $ 2.02 $ 2.37 $ 2.71
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 340,071 $ 339,950 $ 265,423 $ 293,988 $ 357,345
========== ========== ========== ========== ==========
Portfolio turnover 35.41% 63.78% 74.70% 47.93% 30.15%
========== ========== ========== ========== ==========
*Annualized.
**Total investment returns based on market price, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges.
***Based on average shares outstanding.
++Aggregate total investment return.
See Notes to Financial Statements.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Senior High Income Portfolio, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a non-
diversified, closed-end management investment company. The Fund's
financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value
of its Common Stock on a daily basis. The Fund's Common Stock is
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 Corporate Loans made
by banks and other financial institutions and both privately and
publicly offered corporate bonds and notes. Because agents and
intermediaries are primarily commercial banks or other financial
institutions, the Fund's investment in Corporate Loans could be
considered concentrated in financial institutions.
(b) Valuation of investments--Corporate Loans are valued in
accordance with guidelines established by the Fund's Board of
Directors. Corporate Loans are valued at the mean between the last
available bid and asked prices from one or more brokers or dealers
as obtained from Loan Pricing Corporation. For the limited number of
Corporate Loans for which no reliable price quotes are available,
such Corporate 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 Corporate Loan, the
Investment Adviser will value the Corporate Loan at fair value,
which is intended to approximate market value.
Securities that are held by the Fund that are traded on stock
exchanges or the Nasdaq National Market are valued at the last sale
price or official close price on the exchange on which such
securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available
ask price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the
Board of Directors of the Fund. Long positions in securities traded
in the over-the-counter ("OTC") market, Nasdaq Small Cap or Bulletin
Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by
the Board of Directors of the Fund. Short positions in securities
traded in the OTC market are valued at the last available ask 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 ask 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.
The value of swaps, including interest rate swaps, caps and floors,
will be determined by obtaining dealer quotations. Other
investments, including futures contracts and related options, are
stated at market value. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus
accrued interest. The Fund employs certain pricing services to
provide securities prices for the Fund. Securities and assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by
the pricing services retained by the Fund, which may use a matrix
system for valuations. The procedures of a pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors. Such valuations and
procedures will be reviewed periodically by the Board of Directors.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed
each day at various times prior to the close of business on the
NYSE. The values of such securities used in computing the net asset
value of the Fund's shares are determined as of such times. Foreign
currency exchange rates also are generally determined prior to the
close of business on the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between
the times at which they are determined and the close of business on
the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement,
market volatility or a natural disaster) occur during such periods
that are expected to materially affect the value of such securities,
those securities may be valued at their fair value as determined in
good faith by the Board of Directors or by the Investment Adviser
using a pricing service and/or procedures approved by the Board of
Directors.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the returns 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.
(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.
(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.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
(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 collects a fee from the borrower. The
Fund typically receives the income on the loaned securities but does
not receive the income on the collateral. Where the Fund receives
cash collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access
to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .50% of
the Fund's average weekly net assets plus the proceeds of any
outstanding borrowings used for leverage.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
subsidiary of ML & Co., or its affiliates. Pursuant to that order,
the Fund also has retained Merrill Lynch Investment Managers, LLC
("MLIM, LLC"), an affiliate of FAM, as the securities lending agent
for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash
collateral received by the Fund for such loans, among other things,
in a private investment company managed by MLIM, LLC or in
registered money market funds advised by FAM or its affiliates.
For the six months ended August 31, 2004, the Fund reimbursed FAM
$3,586 for certain accounting services.
In addition, MLPF&S received $1,250 in commissions on the execution
of Portfolio security transactions for the Portfolio for the six
months ended August 31, 2004.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended August 31, 2004 were $174,485,311 and
$164,832,346, 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 six months ended August 31,
2004 and for the year ended February 28, 2003 increased by 42,393
and 614,404, respectively, as a result of dividend reinvestment.
5. Unfunded Corporate Loans:
As of August 31, 2004, the Fund had unfunded loan commitments of
$1,343,590, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
SP Newsprint $967
SBA Communications $377
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Notes to Financial Statements (concluded)
6. Short-Term Borrowings:
On May 26, 2004, the Fund renewed its $151,000,000 revolving credit
and security agreement with Citibank, N.A. and other lenders (the
"Lenders"). The Fund may borrow money through (i) a line of credit
from certain Lenders at the Eurodollar rate plus .75%, or the
highest of the Federal Funds rate plus .50%, a base rate as
determined by Citibank, N.A. and the latest three-week moving
average of secondary market morning offering rates in the U.S. for
three-month certificates of deposit of major U.S. money market banks
plus .50%, or (ii) the issuance of commercial paper notes by certain
Lenders at rates of interest derived from the weighted average of
the per annum rates paid or payable by such Lenders in respect of
those commercial notes. As security for its obligations to the
Lenders under the revolving credit and security agreement, the Fund
has granted a security interest in substantially all of its assets
to and in favor of the Lenders. The Fund also pays additional
borrowing costs which includes a commitment fee for this facility at
an annual rate of .10% and a program fee of .24% on the borrowings
outstanding.
For the six months ended August 31, 2004, the average amount
borrowed was approximately $137,454,000 and the daily weighted
average interest rate was 1.48%.
7. Capital Loss Carryforward:
On February 29, 2004, the Fund had a capital loss carryforward of
$151,440,900 of which $733,844 expires in 2005; $4,282,847 expires
in 2007; $12,755,214 expires in 2008; $25,658,795 expires in 2009;
$54,958,583 expires in 2010; $30,706,546 expires in 2011 and
$22,345,071 expires in 2012. This amount will be available to offset
like amounts on any future taxable gains.
8. Subsequent Event:
The Portfolio paid an ordinary income dividend in the amount of
$.045000 per share on September 30, 2004 to shareholders of record
on September 14, 2004.
Proxy Results
During the six-month period ended August 31, 2004, Senior High
Income Portfolio, Inc.'s shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on
August 25, 2004. A description of the proposal and number of shares
voted are as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Portfolio's Board of Directors: Terry K. Glenn 53,331,253 1,108,032
Ronald W. Forbes 53,348,369 1,090,916
Cynthia A. Montgomery 53,326,648 1,112,637
Kevin A. Ryan 53,290,759 1,148,526
Roscoe S. Suddarth 53,296,600 1,142,685
Richard R. West 53,307,610 1,131,675
Edward D. Zinbarg 53,304,264 1,135,021
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Kevin J. Booth, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
ARK
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
SENIOR HIGH INCOME PORTFOLIO, INC., AUGUST 31, 2004
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to
this semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable to this
semi-annual report
Item 8 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(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.
10(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(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/ Terry K. Glenn_______
Terry K. Glenn,
President of
Senior High Income Portfolio, Inc.
Date: October 18, 2004
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/ Terry K. Glenn________
Terry K. Glenn,
President of
Senior High Income Portfolio, Inc.
Date: October 18, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Senior High Income Portfolio, Inc.
Date: October 18, 2004