-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MdYl4+GRMX0P2pxbzIVNaNklxwWxRWVnYq5EBd8pxFpaVOquscnm+HQ+oPtWCemg hFPvnwBgRmsMEJRh+HV9Og== 0000900092-02-000058.txt : 20020422 0000900092-02-000058.hdr.sgml : 20020422 ACCESSION NUMBER: 0000900092-02-000058 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HIGH INCOME PORTFOLIO INC CENTRAL INDEX KEY: 0000896665 IRS NUMBER: 223226962 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-07456 FILM NUMBER: 02617049 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: PO BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-30D 1 ml6826.txt SENIOR HIGH INCOME PORTFOLIO (BULL LOGO) Merrill Lynch Investment Managers Annual Report February 28, 2002 Senior High Income Portfolio, Inc. www.mlim.ml.com 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. 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. Senior High Income Portfolio, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper Senior High Income Portfolio, Inc. DEAR SHAREHOLDER Investment Approach Senior High Income Portfolio, Inc. consists of high-yield bonds and participations in leveraged bank loans. The high-yield bond and bank loan markets contain similar industry sectors and often have overlapping issuers. As a result, general economic events and trends tend to move the two markets in the same direction, although bonds typically experience greater volatility than bank loans. This can be attributed to two factors. First, bank loans are usually senior secured obligations, thus generally offering investors greater principal protection than unsecured bonds. Second, bank loans are typically floating rate instruments whose principal value generally does not move inversely with interest rate movements, as is the case with fixed-income bonds. Market Review Following a promising start in the first quarter of 2001, the much- hoped-for high-yield rally faded. The second and third quarters posted negative returns before returning to the black in the fourth quarter. High-yield market issuance is presently being supported more by institutional collateralized debt obligation (CDO) demand than by retail mutual funds. We expect this situation to persist in the short and medium term. A noteworthy development in both the leveraged loan and high-yield markets is a sharp improvement in terms of new transactions. For example, we are seeing lower allowed leverage ratios with an attendant improvement in interest coverage ratios. With bank loans, investors are enjoying the benefits of more credible collateral packages and more formalized seniority positions. This tightening of credit terms is in reaction to the high default rates the market is experiencing, as reflected by the Moody's Investors Service bond default rate, which broke through 10% in August and hit an astounding 12.8% in December. More recently, the default rate has been slowing, and we believe that it is very close to the peak. Another reason to believe we are near the peak is that the default rate is an extremely lagging indicator, basically reflecting the lax underwriting standards we saw in the market in 1997 and 1998 up until the Russian default crisis in August 1998. We have gauged that it takes about 3.5 years for a bond issue to default. This again would suggest that we are near the top in default rates as the 1998 vintage works its way through the financial markets. This view is further supported by Moody's Investors Service forecast that the default rate should be 6.8% by December 2002. Portfolio Performance For the 12 months ended February 28, 2002, Senior High Income Portfolio, Inc. had a total return of -8.03%, based on a change in per share net asset value from $6.63 to $5.40, and assuming reinvestment of $0.711 per share income dividends. For the same period, 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, had a return of +0.37%. For the year ended February 28, 2002, the net annualized yield of the Portfolio's Common Stock was 13.17%. The most important factor contributing to the Portfolio's underperformance was its exposure to the telecommunications sector. We experienced pervasive weakness in telecommunications companies, both wired and wireless. The industry was characterized by extremely optimistic and aggressive growth strategies, conceived in the late 1990s, which required extensive capital expenditure programs. These were disproportionately debt- funded, including leveraged bank loans, high-yield bonds and extensive vendor financing. This was especially true for the wired sector, which has greater physical and capital demands. The telecommunications sector is characterized by a severe overcapacity situation exacerbated by technical advances, which improved efficiency of existing capacity. Accordingly, we believe this situation will take considerable time to correct itself and that the wired telecommunications sector in particular will continue to weigh upon the market. During the year, we aggressively pared down the Portfolio's exposure to telecommunications from 6.7% to 1.2%, as a percent of net assets in the wired group, and from 9.8% to 3.8% in the wireless area. Senior High Income Portfolio, Inc., February 28, 2002 Investment Activity Our investment strategy in 2001 aimed at positioning the Portfolio toward bonds in an attempt to recapture net asset value and maintain the Portfolio's yield. Defending the yield became the principal focus following the rapid succession of Federal interest rate cuts, which ensued after the September 11, 2001 terrorist attacks and pushed the three-month LIBOR rate under 2%. The vast majority of our loans price off the three-month LIBOR. While our efforts at reestablishing the net asset value were hampered by the large amounts of defaults occurring in the high-yield market, our attempt to maintain the yield was relatively successful. In Conclusion For the year ended February 28, 2002, the Portfolio's activities focused on exiting telecommunications, leaning toward bonds and dealing with an extraordinarily high default rate. Looking ahead, we anticipate the following: resumed economic growth in the second half of 2002; a rapidly declining default rate; and conservatively underwritten transactions. Consequently, we are optimistic regarding the investment environment and the relative opportunities that this Portfolio, as a hybrid, can enjoy going forward. We thank you for your investment in Senior High Income Portfolio, Inc., and we look forward to serving your investment needs in the months and years ahead. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Kevin J. Booth) Kevin J. Booth Vice President and Portfolio Manager (Joseph Matteo) Joseph Matteo Vice President and Portfolio Manager April 4, 2002 Senior High Income Portfolio, Inc., February 28, 2002 THE BENEFITS AND RISKS OF LEVERAGING Senior High Income Portfolio, Inc. (the "Fund") has the ability to utilize leverage through borrowings or issuance of short-term debt securities or shares of Preferred Stock. The concept of leveraging is based on the premise that the cost of assets to be obtained from leverage will be based on short-term interest rates, which normally will be lower than the return earned by the Fund on its longer-term portfolio investments. 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 market price. If the income derived from securities purchased with assets received from leverage exceeds the cost of leverage, the Fund's net income will be greater than if leverage had not been used. Conversely, if the income from the securities purchased is not sufficient to cover the cost of leverage, the Fund's net income will be less than if leverage had not been used, and therefore the amount available for distribution to Common Stock shareholders will be reduced. In this case, the Fund may nevertheless decide to maintain its leveraged position in order to avoid capital losses on securities purchased with leverage. However, the Fund will not generally utilize leverage if it anticipates that its leveraged capital structure would result in a lower rate of return for its Common Stock than would be obtained if the Common Stock were unleveraged for any significant amount of time. Senior High Income Portfolio, Inc., February 28, 2002 PORTFOLIO PROFILE (unaudited) As Of February 28, 2002 Percent of Ten Largest Debt Holdings Total Assets Mission Energy Holdings, 13.50% due 7/15/2008 2.9% Wyndham International Inc., Term, due 6/30/2006 2.1 Muzak Audio, Term B, due 12/31/2006 1.9 Nextel Communications, Inc., 9.50% due 2/01/2011 1.7 Albecca Inc., 10.75% due 8/15/2008 1.6 Ainsworth Lumber Company, 12.50% due 7/15/2007 1.5 Tembec Finance Corporation, 9.875% due 9/30/2005 1.5 Extended Stay America, 9.15% due 3/15/2008 1.4 US Industries Inc., 7.125% due 10/15/2003 1.4 Lin Holdings Corporation, 0/10% due 3/01/2008 1.3 Percent of Five Largest Industries Total Assets Cable Television Services 12.8% Gaming 9.4 Utilities 5.8 Hotels & Motels 5.7 Energy 4.9 Percent of Quality Ratings Long-Term S&P/Moody's Investments BBB/Baa 1.7% BB/Ba 32.0 B/B 45.2 CCC/Caa 4.7 CC/Ca 0.8 C/C 0.8 D/D 0.7 NR (Not Rated) 14.1 Percent of Breakdown of Investments Long-Term by Country Investments United States 89.4% Canada 7.2 United Kingdom 1.1 Kyrguzstan 0.7 Mexico 0.5 Poland 0.4 Netherlands 0.3 Bahamas 0.2 Cayman Islands 0.2 Argentina 0.2 Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Advertising-- Petry Media Corporation:+++++ 0.7% NR* NR* $ 2,273,041 Term A, due 8/09/2004 $ 1,829,798 NR* NR* 1,706,492 Term B, due 8/09/2004 170,649 -------------- 2,000,447 Aircraft & BB B2 1,975,400 Airplanes Pass Through Trust, 10.875% due 3/15/2012 (d) 345,695 Parts--0.1% Amusement & B+ B1 4,000,000 Intrawest Corporation, 10.50% due 2/01/2010 4,140,000 Recreational NR* NR* 3,700,000 Metro-Goldwyn-Mayer Co. (MGM), Term A, due 3/31/2005+++++ 3,679,957 Services--3.5% B- B2 2,500,000 Riddell Sports, Inc., 10.50% due 7/15/2007 2,018,750 B B2 550,000 Vail Resorts Inc., 8.75% due 5/15/2009 (b) 558,250 -------------- 10,396,957 Apparel--1.2% Arena Brands, Inc.:+++++ NR* NR* 1,439,513 Revolving Credit, due 6/01/2002 1,331,550 NR* NR* 434,665 Term A, due 6/01/2002 402,065 NR* NR* 1,891,016 Term B, due 6/01/2002 1,749,190 -------------- 3,482,805 Automotive B+ B1 1,432,845 Citation Corporation, Term B, due 12/01/2007+++++ 1,210,754 Equipment--3.4% B B3 5,000,000 Delco Remy International Inc., 10.625% due 8/01/2006 4,575,000 NR* NR* 3,635,000 Key Plastics, Inc., 10.25% due 3/15/2007 (e) 364 B- Caa1 1,875,000 Tenneco Automotive Inc., 11.625% due 10/15/2009 1,087,500 Venture Holdings Trust: B B2 3,325,000 9.50% due 7/01/2005 2,801,313 B- B3 700,000 12% due 6/01/2009 413,000 -------------- 10,087,931 Broadcast / NR* NR* 3,168,000 Gocom Communications, Term B, due 12/31/2007+++++ 3,041,280 Radio & B- Caa1 6,500,000 ++Lin Holdings Corporation, 0/10% due 3/01/2008 5,525,000 TV--6.2% B- B3 1,000,000 Nexstar Finance Inc. LLC, 12% due 4/01/2008 1,035,000 NR* Caa3 5,000,000 ++Radio Unica Corp., 0/11.75% due 8/01/2006 2,050,000 B- B3 3,375,000 Spanish Broadcasting System, 9.625% due 11/01/2009 3,467,813 Young Broadcasting Inc.: B- B3 2,000,000 9% due 1/15/2006 2,005,000 B- B3 1,000,000 8.75% due 6/15/2007 975,000 -------------- 18,099,093 Building CC C 3,150,000 Formica Corporation, 10.875% due 3/01/2009 567,000 Materials--0.8% Paint Sundry:+++++ NR* NR* 886,076 Term, due 8/11/2008 731,013 NR* NR* 523,975 Term B, due 8/11/2005 503,016 NR* NR* 436,198 Term C, due 8/11/2006 418,750 -------------- 2,219,779 Business BB Ba1 4,000,000 Xerox Corporation, 5.50% due 11/15/2003 3,560,000 Services--1.2%
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Cable Television CSC Holdings Inc.: Services--18.4% BB+ Ba2 $ 800,000 7.25% due 7/15/2008 $ 779,730 BB+ Ba2 1,000,000 7.625% due 7/15/2018 910,509 Century Cable LLC, Term:+++++ BB Ba2 5,000,000 due 6/30/2009 4,949,080 BB Ba2 3,000,000 due 12/31/2009 2,970,000 Charter Communications Holdings: BBB- Ba3 4,500,000 due 9/18/2008+++++ 4,367,813 B+ B2 5,000,000 10% due 4/01/2009 4,850,000 B+ B2 2,000,000 11.125% due 1/15/2011 2,015,000 B+ B2 2,500,000 ++0/9.92% due 4/01/2011 1,750,000 B+ B2 1,000,000 10% due 5/15/2011 (b) 957,500 Classic Cable Inc.:+++++ NR* NR* 66,667 Revolving Credit, due 11/19/2002 66,667 NR* NR* 2,596,849 Term C, due 1/31/2008 2,239,782 B B3 3,000,000 Coaxial Communications/Phoenix, 10% due 8/15/2006 3,000,000 CCC+ Caa1 1,672,000 ++Coaxial LLC/Coaxial Finance, 0/12.875% due 8/15/2008 1,262,360 Echostar DBS Corporation: B+ B1 700,000 9.25% due 2/01/2006 714,000 B+ B1 3,275,000 9.375% due 2/01/2009 3,365,062 BB+ Ba3 4,000,000 Insight Midwest, Term B, due 12/31/2009+++++ 4,016,072 NR* NR* 3,750,000 Mallard Cablevision LLC, Term B, due 9/30/2008+++++ 2,062,500 B+ B2 2,000,000 Mediacom LLC, 9.50% due 1/15/2013 2,090,000 CC Ca 750,000 Multicanal SA, 10.50% due 4/15/2018 157,500 BB Ba2 4,000,000 Olympus Cable Holdings LLC, Term B, due 9/30/2010+++++ 3,976,876 Pegasus Communications: CCC+ B3 350,000 9.75% due 12/01/2006 255,500 B+ B1 1,980,000 Term, due 4/30/2005+++++ 1,917,713 NR* NR* 1,575,000 Supercanal Holdings SA, 11.50% due 5/15/2005 (b)(e) 31,500 Telewest Communications PLC (e): B B2 5,000,000 9.625% due 10/01/2006 2,700,000 B B2 2,900,000 9.875% due 2/01/2010 1,566,000 United Pan-Europe Communications NV (e): D Ca 3,000,000 ++10.875% due 8/01/2009 390,000 D Ca 5,000,000 11.25% due 2/01/2010 650,000 -------------- 54,011,164 Chemicals--5.1% BB+ B1 2,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 1,828,840 Huntsman Corporation: (b)(e) D Ca 6,000,000 7.08% due 7/01/2007 (f) 1,440,000 D Ca 2,000,000 9.50% due 7/01/2007 540,000 B+ B2 1,350,000 ISP Holdings Inc., 10.625% due 12/15/2009 (b) 1,380,375 Lyondell Chemical Company: BB Ba3 2,500,000 9.50% due 12/15/2008 (b) 2,512,500 B+ B2 2,000,000 10.875% due 5/01/2009 1,900,000 B B3 2,750,000 Noveon Inc., 11% due 2/28/2011 2,904,688 NR* NR* 2,435,053 Pinnacle Polymers, Term B, due 12/31/2005+++++ 2,461,352 -------------- 14,967,755
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Computer-Related NR* NR* $ 2,335,377 Bridge Information, Term B, due 5/29/2005+++++ (e) $ 951,666 Products--0.3% Consumer B- B3 5,958,000 Albecca Inc., 10.75% due 8/15/2008 6,643,170 Products--5.6% BB+ Ba3 1,500,000 American Greetings, 11.75% due 7/15/2008 1,455,000 NR* Caa2 1,000,000 Evenflo Company Inc., 11.75% due 8/15/2006 (e) 155,000 B- Caa2 1,050,000 Home Products International Inc., 9.625% due 5/15/2008 892,500 BB- Ba3 575,000 Pennzoil-Quaker State, 10% due 11/01/2008 (b) 612,375 B B2 800,000 Playtex Products Inc., 9.375% due 6/01/2011 848,000 CCC+ B3 7,000,000 US Industries Inc., 7.125% due 10/15/2003 (e) 5,740,000 -------------- 16,346,045 Educational CCC- Caa3 1,050,000 La Petite Academy/LPA Holdings, 10% due 5/15/2008 756,000 Services--0.3% Electronics/ CCC+ Caa3 3,232,000 Advanced Glassfiber Yarn, 9.875% due 1/15/2009 (e) 1,131,200 Electrical Amkor Technology Inc.: Components-- B+ B1 3,000,000 9.25% due 5/01/2006 2,827,500 2.5% B+ B1 3,300,000 9.25% due 2/15/2008 3,085,500 B Caa2 1,000,000 High Voltage Engineering, 10.75% due 8/15/2004 (e) 350,000 -------------- 7,394,200 Energy--7.0% BB- Ba3 2,000,000 BRL Universal Equipment, 8.875% due 2/15/2008 (b) 2,040,000 BB- Ba3 2,000,000 Belco Oil & Gas Corp., 8.875% due 9/15/2007 2,047,500 CCC+ Caa1 1,000,000 Continental Resources, 10.25% due 8/01/2008 870,000 BB- B3 1,492,500 Dresser Inc., Term B, due 4/10/2009+++++ 1,504,004 BB- B1 400,000 El Paso Energy Partners, 8.50% due 6/01/2011 408,000 CCC+ Caa1 1,500,000 Energy Corp. of America, 9.50% due 5/15/2007 1,021,875 CC Ca 2,000,000 Kelly Oil & Gas Corp., 10.375% due 10/15/2006 1,470,000 B B2 3,675,000 Lone Star Technologies, 9% due 6/01/2011 3,234,000 B- B3 2,500,000 Mission Resources Corporation, 10.875% due 4/01/2007 2,206,250 B+ B2 3,000,000 Nuevo Energy Company, 9.50% due 6/01/2008 2,850,000 WH Energy, Term B:+++++ NR* NR* 496,250 due 4/16/2007 495,009 NR* NR* 2,370,000 due 4/16/2007 2,364,075 -------------- 20,510,713 Environmental-- D NR* 3,200,000 IT Group Inc., 11.25% due 4/01/2009 (e) 32,000 0.0% Financial NR* Ba3 4,000,000 Highland Legacy Limited Co., 8.11% due 6/01/2011 (b)(f) 3,940,000 Services--2.6% NR* NR* 500,000 Investcorp SA, Term, due 10/21/2008+++++ 503,200 NR* Ba3 1,000,000 Pennant CBO Limited, 13.43% due 3/14/2011 (b) 985,000 SKM-Libertyview CBO Limited: (b) NR* Baa2 1,500,000 8.71% due 4/10/2011 1,442,685 NR* Ba3 1,000,000 11.91% due 4/10/2011 860,313 -------------- 7,731,198
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Food & Kindred BB Ba3 $ 500,000 Dimon Incorporated, 9.625% due 10/15/2011 $ 525,000 Products--2.0% BB+ Ba2 2,000,000 International Multi-Foods, Term B, due 2/28/2008+++++ 2,008,750 NR* Ba2 3,375,000 Dean Foods Company, Term B, due 7/15/2008+++++ 3,403,927 -------------- 5,937,677 Forest Ainsworth Lumber Company: Products--5.2% B- B3 6,180,000 12.50% due 7/15/2007 (c) 6,303,600 B- B3 2,000,000 13.875% due 7/15/2007 (b) 2,120,000 B+ B2 550,000 Millar Western Forest, 9.875% due 5/15/2008 532,125 BB+ Ba1 6,000,000 Tembec Finance Corporation, 9.875% due 9/30/2005 6,240,000 -------------- 15,195,725 Gaming--13.5% Ameristar Casinos Inc.:+++++ B+ Ba3 660,928 Term B, due 12/20/2006 666,918 B+ Ba3 566,510 Term C, due 12/20/2007 571,644 BB- Ba3 5,000,000 Boyd Gaming Corporation, 9.25% due 8/01/2009 5,250,000 Hollywood Park Inc. (e): CCC+ Caa1 5,275,000 9.25% due 2/15/2007 4,694,750 CCC+ Caa1 2,000,000 9.50% due 8/01/2007 1,795,000 Isle of Capri Casinos, Inc.:+++++ BB- Ba2 3,144,000 Term B, due 3/02/2006 3,167,580 BB- Ba2 2,751,000 Term C, due 3/02/2007 2,770,158 B B2 2,000,000 Jacobs Entertainment, 11.875% due 2/01/2009 (b) 1,942,500 B B2 5,000,000 Majestic Star LLC, 10.875% due 7/01/2006 5,050,000 BB+ Ba2 4,000,000 Park Place Entertainment, 8.125% due 5/15/2011 4,065,000 B B2 3,850,000 Peninsula Gaming LLC, 12.25% due 7/01/2006 (h) 3,859,625 B- B3 3,000,000 Penn National Gaming Inc., 11.125% due 3/01/2008 3,240,000 B+ B1 494,987 Scientific Games, Term B, due 9/30/2007+++++ 496,844 B+ B2 1,000,000 Sun International Hotels, 8.875% due 8/15/2011 997,500 CC Caa3 1,700,000 Trump Atlantic City Associates/Funding Inc., 11.25% due 5/01/2006 1,156,000 -------------- 39,723,519 Health Care B+ Ba2 2,500,000 Fresenius Medical Capital Trust IV, 7.875% due 6/15/2011 2,487,500 Providers--0.9% Health BB- Ba2 690,000 Davita Inc., Term B, due 3/31/2006+++++ 695,229 Services--4.9% B+ B1 4,716,438 Iasis Health, Term B, due 9/30/2006+++++ 4,642,743 NR* NR* 4,088,492 Mediq Inc., Term, due 6/13/2006+++++ 3,495,661 B+ B1 1,995,000 MedPointe Inc., Term B, due 9/30/2008+++++ 1,988,143 B- B3 3,350,000 Vanguard Health Systems, 9.75% due 8/01/2011 3,500,750 -------------- 14,322,526
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Hotels & B B2 $ 6,000,000 Extended Stay America, 9.15% due 3/15/2008 $ 6,030,000 Motels--8.2% HMH Properties, Inc.: BB- Ba3 1,075,000 7.875% due 8/01/2008 1,042,750 BB- Ba3 1,600,000 8.45% due 12/01/2008 1,604,000 D NR* 4,520,000 Lodgian Financing Corp., 12.25% due 7/15/2009 (e) 2,130,050 BB Ba2 3,000,000 Prime Hospitality Corporation, 9.25% due 1/15/2006 3,090,000 Wyndham International, Inc. Term:+++++ NR* NR* 1,483,505 due 6/30/2004 1,341,336 NR* NR* 9,878,072 due 6/30/2006 8,916,636 -------------- 24,154,772 Industrial-- B- B2 1,000,000 Building One Services, 10.50% due 5/01/2009 (b) 450,000 Consumer B B3 2,000,000 Key3Media Group Inc., 11.25% due 6/15/2011 1,790,000 Services--4.3% Muzak Audio, Term B:+++++ B+ B1 2,407,861 due 12/31/2006 2,332,615 NR* NR* 8,372,727 due 12/31/2006 8,111,080 -------------- 12,683,695 Insurance--0.9% B+ Ba3 2,475,000 Willis Corroon Corporation, 9% due 2/01/2009 2,592,563 Leasing & Rental National Equipment Services: Services--1.1% B Caa1 1,000,000 10% due 11/30/2004 880,000 B Caa1 500,000 10% due 11/30/2004 440,000 CCC Ca 500,000 Neff Corp., 10.25% due 6/01/2008 (e) 300,000 B- B3 1,675,000 Williams Scotsman Inc., 9.875% due 6/01/2007 (b) 1,658,250 -------------- 3,278,250 Manufacturing-- B B3 1,021,449 Blount Inc., Term B, due 6/30/2006+++++ 1,009,957 1.9% CCC+ Caa2 1,932,000 Fairfield Manufacturing Company Inc., 9.625% due 10/15/2008 (e) 927,360 NR* NR* 171,008 Russell-Stanley Holdings, Inc., 4.50% due 11/30/2008 (b) 85,504 Terex Corp.: B B2 1,900,000 9.25% due 7/15/2011 1,957,000 BB- Ba3 1,549,146 Term B, due 3/06/2005+++++ 1,553,180 -------------- 5,533,001 Metals & B- B3 850,000 Bayou Steel Corp., 9.50% due 5/15/2008 (e) 425,000 Mining--2.0% Ispat International N.V.:+++++ (e) CCC+ Caa2 1,785,250 Term B, due 7/15/2005 1,056,274 CCC+ Caa2 1,785,250 Term C, due 7/15/2006 1,056,274 NR* B1 850,000 Oregon Steel Mills, 11% due 6/15/2003 850,000 D Ca 875,000 Pen Holdings Inc., 9.875% due 6/15/2008 (e) 393,750 B+ B1 2,000,000 Russel Metals Inc., 10% due 6/01/2009 2,062,500 NR* NR* 6,000,000 Wheeling-Pittsburg Steel Corp., Term, due 11/15/2006+++++ (e) 180,000 -------------- 6,023,798 Packaging--0.0% NR* Ca 4,000,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 (b)(e) 400
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Paper--3.9% B+ B2 $ 250,000 Graphic Packaging Corporation, 8.625% due 2/15/2012 (b) $ 258,750 Stone Container Corp.:+++++ B+ Ba3 4,499,963 Term F, due 12/31/2005 4,505,587 B+ Ba3 3,574,571 Term G, due 12/31/2006 3,574,199 B+ Ba3 3,055,259 Term H, due 12/31/2006 3,054,941 -------------- 11,393,477 Petroleum B+ B2 5,000,000 Giant Industries, Inc., 9% due 9/01/2007 (b) 4,800,000 Refineries--3.6% BB Ba3 3,444,790 Premcor Inc., Term, due 11/15/2004+++++ 2,824,728 Tesoro Petroleum Corp.: BB- B1 2,000,000 9% due 7/01/2008 1,920,000 BBB- Ba2 1,000,000 Term B, due 9/30/2009+++++ 1,003,021 -------------- 10,547,749 Printing & Can West Media Inc.: Publishing--1.7% B B2 400,000 10.625% due 5/15/2011 438,000 BB- Ba3 1,827,970 Term B, due 5/15/2008+++++ 1,845,923 BB- Ba3 1,142,030 Term C, due 5/15/2009+++++ 1,153,245 B- B3 1,500,000 T/SF Communications Corp., 10.375% due 11/01/2007 1,425,000 -------------- 4,862,168 Property CCC+ B3 600,000 Corrections Corporation of America, 12% due 6/01/2006 612,000 Management-- NR* Ba3 2,955,000 NRT Incorporated, Term, due 7/31/2004+++++ 2,915,601 1.2% -------------- 3,527,601 Restaurants-- B+ B2 2,000,000 AFC Enterprises, 10.25% due 5/15/2007 2,105,000 1.3% Domino's Pizza Inc.:+++++ B+ B1 836,509 Term B, due 12/21/2006 847,619 B+ B1 839,152 Term C, due 12/21/2007 850,296 -------------- 3,802,915 Retail B+ Ba3 1,000,000 Advanced Stores, Term B, due 11/30/2007+++++ 1,003,750 Specialty--1.3% Shoppers DrugMart:+++++ BB Ba3 1,454,934 Term C, due 2/04/2008 1,463,725 BB Ba3 1,454,934 Term E, due 2/04/2009 1,463,725 -------------- 3,931,200 Satellite NR* B1 2,425,000 Satelites Mexicanos SA, 6.35% due 6/30/2004 (b)(f) 2,176,438 Telecommunications Distribution Systems--0.7% Textile Mill D Ca 3,000,000 Galey & Lord, Inc., 9.125% due 3/01/2008 375,000 Products--0.1% NR* NR* 900,000 Globe Manufacturing Corp., 10% due 8/01/2008 (e) 90 -------------- 375,090
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Industries+++ Ratings Ratings Amount Corporate Debt Obligations Value Tower American Tower: Construction & B- Caa1 $ 4,000,000 9.375% due 2/01/2009 $ 2,640,000 Leasing--2.8% BB- B1 2,000,000 Term B, due 12/30/2007+++++ 1,762,812 Crown Castle International Corporation: B B3 500,000 9% due 5/15/2011 350,000 B B3 1,875,000 9.375% due 8/01/2011 1,378,125 B B3 3,000,000 9.50% due 8/01/2011 2,190,000 -------------- 8,320,937 Transportation D NR* 2,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (b)(e) 440,000 Services--0.8% B- B3 2,000,000 North American Van Lines, 13.375% due 12/01/2009 2,040,000 -------------- 2,480,000 Utilities--8.4% B+ Ba2 4,500,000 AES Corporation, 8.50% due 11/01/2007 1,890,000 NR* NR* 3,750,000 AES EDC Funding, Term, due 10/06/2003+++++ 2,915,625 NR* Ba3 1,500,000 AES New York Funding, Term, due 2/28/2005+++++ 1,323,750 BB+ Ba1 500,000 Calpine Canada Energy Finance, 8.50% due 5/01/2008 360,008 BB+ Ba1 1,300,000 Calpine Corporation, 8.50% due 2/15/2011 936,200 BB- Ba2 12,000,000 Mission Energy Holdings, 13.50% due 7/15/2008 12,120,000 Mission Energy Holding Co.:+++++ NR* NR* 1,298,701 Term A, due 7/02/2006 1,318,182 NR* NR* 3,701,299 Term B, due 7/02/2006 3,766,071 -------------- 24,629,836 Waste Allied Waste:+++++ Management-- BB Ba3 1,519,581 Term B, due 6/30/2006 1,510,844 2.2% BB Ba3 1,823,498 Term C, due 6/30/2007 1,813,013 B+ B2 3,000,000 Allied Waste North America, 10% due 8/01/2009 3,052,500 NR* NR* 1,350,000 Safety-Kleen Corporation, 9.25% due 5/15/2009 (e) 135 B B3 97,000 Stericycle Inc., 12.375% due 11/15/2009 114,460 -------------- 6,490,952 Wired NR* NR* 2,310,944 Pacific Crossing, Term B, due 7/28/2006+++++ 733,725 Telecommuni- NR* NR* 3,166,667 Teligent Inc., Term, due 7/01/2002+++++ (e) 98,958 cations--1.2% B- B3 2,500,000 Time Warner Telecom Inc., 10.125% due 2/01/2011 (e) 1,575,000 NR* NR* 3,500,000 WCI Capital, Term, due 12/31/2002+++++ 875,000 Williams Communications Group, Inc. (e): CC Ca 2,250,000 10.70% due 10/01/2007 292,500 CC Ca 500,000 10.875% due 10/01/2009 65,000 -------------- 3,640,183 Wireless B- Caa1 4,900,000 ++Microcell Telecommunications, 0/12% due 6/01/2009 (e) 1,543,500 Telecommuni- B B1 12,000,000 Nextel Communications, Inc., 9.50% due 2/01/2011 (e) 7,380,000 cations--3.8% B+ B2 1,000,000 ++PTC International Finance BV, 0/10.75% due 7/01/2007 975,000 B+ B2 750,000 PTC International Finance II SA, 11.25% due 12/01/2009 802,500 CCC+ Ca 740,000 TeleSystem International Wireless, 10.92% due 12/30/2003 (e) 586,450 -------------- 11,287,450 Total Investments in Corporate Debt Obligations (Cost--$488,311,209)--136.8% 402,292,870
Senior High Income Portfolio, Inc., February 28, 2002 SCHEDULE OF INVESTMENTS (concluded)
Shares Industries+++ Held Equity Investments Value Advertising--0.0% 13,020 Petry Media Corporation (Warrants)(a) $ 0 Cable Television 2,500 Adelphia Communications (Preferred) 265,000 Services--0.1% 615,733 Supercanal Holdings SA (Warrants)(a) 6 -------------- 265,006 Energy--0.0% 2,432 Forest Oil Corporation (e) 62,478 Financial Services--0.0% 1,500 Olympic Financial Limited (Warrants)(a) 15 Gaming--0.0% 27,112 Peninsula Gaming LLC (Warrants)(a) 162,670 Manufacturing--0.1% 4,130,972 Cambridge Liquidating Trust (e) 247,858 25,000 Russell-Stanley Holdings, Inc. (e) 0 -------------- 247,858 Medical Equipment--0.0% 10,284 Mediq Inc. (Preferred) 0 Metals & Mining--0.0% 18,279 Geneva Steel Holdings Corp. (e) 1,462 5,732 Geneva Steel Holdings Corp. (Rights)(g) 0 -------------- 1,462 Printing & Publishing--1.0% 150,000 NewsCorp Overseas Ltd. (Preferred) 2,872,500 Transportation Services--0.0% 35,255 Trism, Inc. (e) 740 Wired 6,858 AT&T Canada Inc. (e) 168,295 Telecommunications--0.1% Wireless 3,000 McCaw International Ltd. (Warrants)(a)(b) 54,000 Telecommunications--0.0% Total Equity Investments (Cost--$4,509,158)--1.3% 3,835,024 Face Amount Short-Term Investments Commercial Paper**--2.5% $ 7,226,000 General Motors Acceptance Corp., 1.98% due 3/01/2002 7,226,000 Total Short-Term Investments (Cost--$7,226,000)--2.5% 7,226,000 Total Investments (Cost--$500,046,367)--140.6% 413,353,894 Liabilities in Excess of Other Assets--(40.6%) (119,366,301) -------------- Net Assets--100.0% $ 293,987,593 ============== *Not Rated. **Commercial Paper is traded on a discount basis; the interest rate shown reflects the discount rate paid at the time of purchase by the Portfolio. ++Represents a zero coupon or step bond; a step bond will commence its accrual at a fixed rate of interest on a predetermined date until maturity. +++Breakdown is as a percent of net assets. +++++Floating or Variable Rate Corporate Debt--The interest rates on floating or variable rate corporate debt are subject to change periodically, based on the change in the prime rate of a US Bank, LIBOR (London Interbank Offered Rate) or, in some cases, another base lending rate. Corporate loans represent 48.3% of the Portfolio's net assets. (a)Warrants entitle the Portfolio 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)Represents a pay-in-kind security which may pay interest/dividends in additional face/shares. (d)Pass-through security is subject to principal paydowns. (e)Non-income producing security. (f)Floating rate note. (g)Each Equity Right entitles the Portfolio to purchase one share of New Preferred Stock at a price of $10.80 per Equity Right. (h)Each $1,000 face amount contains 7.042 convertible preferred membership interests of Peninsula Gaming LLC. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
Senior High Income Portfolio, Inc., February 28, 2002 FINANCIAL INFORMATION Statement of Assets, Liabilities and Capital as of February 28, 2002 Assets: Investments, at value (identified cost--$500,046,367) $ 413,353,894 Cash 501,967 Interest receivable 7,961,658 Deferred facility fees 2,621 Prepaid expenses and other assets 55,471 --------------- Total assets 421,875,611 --------------- Liabilities: Loans 127,600,000 Payables: Investment adviser $ 144,496 Interest on loans 29,140 Commitment fees 14,355 187,991 --------------- Deferred income 21,273 Accrued expenses and other liabilities 78,754 --------------- Total liabilities 127,888,018 --------------- Net Assets: Net assets $ 293,987,593 =============== Capital: Common Stock, par value $.10 per share; 200,000,000 shares authorized (54,396,613 shares issued and outstanding) $ 5,439,661 Paid-in capital in excess of par 504,543,693 Undistributed investment income--net $ 2,807,352 Accumulated realized capital losses on investments--net (132,107,284) Unrealized depreciation on investments--net (86,695,829) --------------- Total accumulated losses--net (215,995,761) --------------- Total capital--Equivalent to $5.40 net asset value per share of Common Stock (market price--$5.89) $ 293,987,593 =============== See Notes to Financial Statements.
Senior High Income Portfolio, Inc., February 28, 2002 FINANCIAL INFORMATION (continued) Statement of Operations
For the Year Ended February 28, 2002 Investment Interest $ 45,367,842 Income: Dividends 244,306 Facility and other fees 448,119 --------------- Total income 46,060,267 --------------- Expenses: Loan interest expense $ 4,874,929 Investment advisory fees 2,246,328 Borrowing costs 223,150 Accounting services 122,288 Professional fees 117,944 Transfer agent fees 104,139 Printing and shareholder reports 47,334 Custodian fees 47,118 Listing fees 43,569 Directors' fees and expenses 43,493 Pricing services 15,551 Other 44,732 --------------- Total expenses 7,930,575 --------------- Investment income--net 38,129,692 --------------- Realized & Realized loss on investments--net (62,079,579) Unrealized Change in unrealized depreciation on investments--net (3,634,077) Loss on --------------- Investments-- Net Decrease in Net Assets Resulting from Operations $ (27,583,964) Net: =============== See Notes to Financial Statements.
Senior High Income Portfolio, Inc., February 28, 2002 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended February 28, Increase (Decrease) in Net Assets: 2002 2001 Operations: Investment income--net $ 38,129,692 $ 44,375,475 Realized loss on investments--net (62,079,579) (19,006,056) Change in unrealized depreciation on investments--net (3,634,077) (29,213,747) --------------- --------------- Net decrease in net assets resulting from operations (27,583,964) (3,844,328) --------------- --------------- Dividends to Dividends to shareholders from investment income--net (38,498,128) (45,300,420) Shareholders: --------------- --------------- Capital Share Value of shares issued to Common Stock shareholders in Transactions: reinvestment of dividends 2,724,880 445,039 --------------- --------------- Net increase in net assets resulting from capital share transactions 2,724,880 445,039 --------------- --------------- Net Assets: Total decreasein net assets (63,357,212) (48,699,709) Beginning of year 357,344,805 406,044,514 --------------- --------------- End of year* $ 293,987,593 $ 357,344,805 =============== =============== *Undistributed investment income--net $ 2,807,352 $ 3,009,392 =============== =============== See Notes to Financial Statements.
Senior High Income Portfolio, Inc., February 28, 2002 FINANCIAL INFORMATION (continued) Statement of Cash Flows
For the Year Ended February 28, 2002 Cash Provided Net decrease in net assets resulting from operations $ (27,583,964) by Operating Adjustments to reconcile net decrease in net assets resulting from operations to Activities: net cash provided by operating activities: Decrease in receivables 1,509,273 Decrease in other assets 208,682 Decrease in other liabilities (976,120) Realized and unrealized loss on investments--net 65,713,656 Amortization of premium and discount--net (3,953,907) --------------- Net cash provided by operating activities 34,917,620 --------------- Cash Provided Proceeds from sales and paydowns of long-term investments 235,968,988 by Investing Purchases of long-term investments (215,558,517) Activities: Purchases of short-term investments--net (5,452,876) --------------- Net cash provided by investing activities 14,957,595 --------------- Cash Used for Cash receipts of borrowings 102,900,000 Financing Cash payments on borrowings (116,500,000) Activities: Dividends paid to shareholders (35,773,248) --------------- Net cash used for financing activities (49,373,248) --------------- Cash: Net increase in cash 501,967 Cash at beginning of year -- --------------- Cash at end of year $ 501,967 =============== Cash Flow Cash paid for interest $ 5,445,384 Information: =============== Non-Cash Capital shares issued on reinvestment of dividends paid to shareholders $ 2,724,880 Financing =============== Activities: See Notes to Financial Statements.
Senior High Income Portfolio, Inc., February 28, 2002 FINANCIAL INFORMATION (concluded) Financial Highlights
The following per share data and ratios For the have been derived from information Year provided in the financial statements. For the Year Ended Ended For the Year Ended February 28, Feb. 29, February 28, Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 Per Share Net asset value, beginning of year $ 6.63 $ 7.54 $ 8.40 $ 9.37 $ 9.22 Operating --------- --------- --------- --------- --------- Performance: Investment income--net++ .70 .82 .88 .87 .92 Realized and unrealized gain (loss) on investments--net (1.22) (.89) (.86) (.95) .14 --------- --------- --------- --------- --------- Total from investment operations (.52) (.07) .02 (.08) 1.06 --------- --------- --------- --------- --------- Less dividends from investment income--net (.71) (.84) (.88) (.89) (.91) --------- --------- --------- --------- --------- Net asset value, end of year $ 5.40 $ 6.63 $ 7.54 $ 8.40 $ 9.37 ========= ========= ========= ========= ========= Market price per share, end of year $ 5.89 $ 6.64 $ 6.5625 $ 8.125 $ 10.125 ========= ========= ========= ========= ========= Total Based on net asset value per share (8.03%) .28% 1.11% (.87%) 11.95% Investment ========= ========= ========= ========= ========= Return:* Based on market price per share .16% 15.39% (9.02%) (11.26%) 17.41% ========= ========= ========= ========= ========= Ratios to Expenses, excluding interest expense .95% .90% .98% .90% .83% Average ========= ========= ========= ========= ========= Net Assets: Expenses 2.46% 3.59% 3.45% 2.99% 2.66% ========= ========= ========= ========= ========= Investment income--net 11.83% 11.92% 11.73% 9.87% 9.98% ========= ========= ========= ========= ========= Leverage: Amount of borrowings (in thousands) $ 127,600 $ 141,200 $ 127,000 $ 199,000 $ 181,200 ========= ========= ========= ========= ========= Average amount of borrowings outstanding during the year (in thousands) $ 128,203 $ 146,163 $ 175,899 $ 174,240 $ 149,166 ========= ========= ========= ========= ========= Average amount of borrowings outstanding per share during the year $ 2.37 $ 2.71 $ 3.26 $ 3.26 $ 2.85 ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $ 293,988 $ 357,345 $ 406,045 $ 452,559 $ 496,477 Data: ========= ========= ========= ========= ========= Portfolio turnover 47.93% 30.15% 46.11% 68.52% 58.60% ========= ========= ========= ========= ========= *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, 2002 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Senior High Income Portfolio, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol ARK. (a) Corporate debt obligations--The Fund invests principally in senior debt obligations ("Senior Debt") of companies, including Corporate Loans made by banks and other financial institutions and both privately and publicly offered corporate bonds and notes. Because agents and intermediaries are primarily commercial banks, the Fund's investment in Corporate Loans could be considered concentrated in financial institutions. (b) Valuation of investments--Corporate Loans 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. For Corporate Loans for which an active secondary market does not exist to a reliable degree in the opinion of the Investment Adviser, such Corporate Loans will be valued by the Investment Adviser at fair value, which is intended to approximate market value. Other portfolio securities may be valued on the basis of prices furnished by one or more pricing services which determine prices for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. In certain circumstances, portfolio securities are valued at the last sale price on the exchange that is the primary market for such securities, or the last quoted bid price for those securities for which the over-the-counter market is the primary market or for listed securities in which there were no sales during the day. The value of interest rate swaps, caps and floors is determined in accordance with a formula and then confirmed periodically by obtaining a bank quotation. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Positions in options are valued at the sale price on the market where any such option is principally traded. Short-term securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Senior High Income Portfolio, Inc., February 28, 2002 * Options--The Fund is authorized to write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction is less than or exceeds the premiums paid or received). Written and purchased options are non-income producing investments. * Interest rate transactions--The Fund is authorized to enter into interest rate swaps and purchase or sell interest rate caps and floors. In an interest rate swap, the Fund exchanges with another party their respective commitments to pay or receive interest on a specified notional principal amount. The purchase of an interest rate cap (or floor) entitles the purchaser, to the extent that a specified index exceeds (or falls below) a predetermined interest rate, to receive payments of interest equal to the difference between the index and the predetermined rate on a notional principal amount from the party selling such interest rate cap (or floor). (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Interest income is recognized on the accrual basis. (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) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax differences of $166,396 have been reclassified between accumulated net realized capital losses and undistributed net investment income. These reclassifications have 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 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. For the year ended February 28, 2002, the Fund reimbursed FAM $12,529 for certain accounting services. During the year ended February 28, 2002, the Fund paid Merrill Lynch Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, $1,661 for security price quotations to compute the net asset value of the Fund. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, and/or ML & Co. Senior High Income Portfolio, Inc., February 28, 2002 NOTES TO FINANCIAL STATEMENTS (concluded) 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended February 28, 2002 were $210,422,082 and $234,756,070, respectively. Net realized losses for the year ended February 28, 2002 and net unrealized losses as of February 28, 2002 were as follows: Realized Unrealized Losses Losses Long-term investments $ (62,079,579) $ (86,692,473) Unfunded corporate loans -- (3,356) -------------- -------------- Total $ (62,079,579) $ (86,695,829) ============== ============== As of February 28, 2002, net unrealized depreciation for Federal income tax purposes aggregated $86,714,509, of which $6,971,474 related to appreciated securities and $93,685,983 related to depreciated securities. The aggregate cost of investments at February 28, 2002 for Federal income tax purposes was $500,068,403. 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, 2002 and February 28, 2001 increased by 459,354 and 67,125, respectively, as a result of dividend reinvestment. 5. Unfunded Corporate Loans: As of February 28, 2002, the Fund had unfunded loan commitments of $1,230,000, which would be extended at the option of the borrower, pursuant to the following loan agreements: Unfunded Commitment Borrower (in thousands) Arena Brands, Inc. $297 Classic Cable Inc. 933 6. Short-Term Borrowings: On June 1, 2001, the Fund renewed its $190,000,000 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 United States for three-month certificates of deposit of major US money market banks plus .50%, or (ii) through 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. For the year ended February 28, 2002 the average amount borrowed was approximately $128,203,000 and the daily weighted average interest rate was 3.80%. 7. Distributions to Shareholders: On March 7, 2002, an ordinary income dividend of $.053765 was declared. The dividend was paid on March 29, 2002, to shareholders of record on March 18, 2002. The tax character of distributions paid during the fiscal years ended February 28, 2002 and February 28, 2001 was as follows: 2/28/2002 2/28/2001 Distributions paid from: Ordinary income $ 38,498,128 $ 45,300,420 -------------- -------------- Total taxable distributions $ 38,498,128 $ 45,300,420 ============== ============== As of February 28, 2002, the components of accumulated losses on a tax basis were as follows: Undistributed ordinary income--net $ 3,774,225 Undistributed long-term capital gains--net -- ---------------- Total undistributed earnings--net 3,774,225 Capital loss carryforward (117,544,395)* Unrealized losses--net (102,225,591)** ---------------- Total accumulated losses--net $ (215,995,761) ================ *On February 28, 2002, the Fund had a net capital loss carryforward of approximately $117,544,395, of which $7,097,962 expires in 2003; $12,057,150 expires in 2004; $733,844 expires in 2005; $4,282,847 expires in 2007; $12,755,214 expires in 2008; $25,658,795 expires in 2009 and $54,958,583 expires in 2010. 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 distributions applicable to 2002 for tax purposes, the tax deferral of losses on wash sales and the deferral of post-October capital losses for tax purposes. Senior High Income Portfolio, Inc., February 28, 2002 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, 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, 2002, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two- year period then ended, and the financial highlights for each of the years presented. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at February 28, 2002 by correspondence with the custodian and financial intermediaries; where replies were not received from financial intermediaries, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Senior High Income Portfolio, Inc. as of February 28, 2002, the results of its operations, its cash flows, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP New York, New York April 16, 2002 Senior High Income Portfolio, Inc., February 28, 2002 OFFICERS AND DIRECTORS
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director Interested Director Terry K. Glenn* President 1999 to Chairman Americas Region since 2001, and 196 None 800 Scudders Mill Road and present Executive Vice President since 1983 of Fund Plainsboro, NJ 08536 Director Asset Management, L.P. ("FAM") and Merrill Age: 61 Lynch Investment Managers, L.P. ("MLIM"); President of Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc., since 1985. *Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. The Director's term is unlimited. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors. Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director Independent Directors Ronald W. Forbes Director 1977 to Professor Emeritus of Finance, School of 57 None 1400 Washington Ave. present Business, State University of New York at Albany, NY 12222 Albany since 2000; and Professor thereof Age: 61 from 1989 to 2000. Cynthia A. Montgomery Director 1995 to Professor, Harvard Business School since 1989. 57 Unum- Harvard Business School present Provident Soldiers Field Road Corporation; Boston, MA 02163 Newell Age: 49 Rubbermaid Inc. Charles C. Reilly Director 1990 to Self-employed financial consultant since 1990. 57 None 9 Hampton Harbor Road present Hampton Bays, NY 11946 Age: 70 Kevin A. Ryan Director 1992 to Founder and currently Director Emeritus of 57 Charter 127 Commonwealth Ave. present the Boston University Center for the Education Chestnut Hill, MA 02467 Advancement of Ethics and Character and Partnership; Age: 69 Director thereof from 1989 to 1999; Council for Professor from 1982 to 1999 at Boston Ethical and University. Spiritual Education Roscoe S. Suddarth Director 2000 to Former President, Middle East Institute from 57 None 7403 MacKenzie Court present 1995 to 2001. Bethesda, MD 20817 Age: 66
Senior High Income Portfolio, Inc., February 28, 2002 OFFICERS AND DIRECTORS (concluded)
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director Independent Directors (concluded) Richard R. West Director 1978 to Professor of Finance since 1984, and 70 Bowne & Box 604 present currently Dean Emeritus of New York Co., Inc.; Genoa, NV 89411 University Leonard N.Stern School of Vornado Age: 64 Business Administration. Realty Trust; Alexander's Inc. Edward D. Zinbarg Director 1994 to Self-employed financial consultant since 1994. 57 None 5 Hardwell Road present Short Hills, NJ 07078-2117 Age: 67 *The Director's term is unlimited. Position(s) Length Held of Time Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Fund Officers Donald C. Burke Vice Vice First Vice President of FAM and MLIM since 1997 and the Treasurer P.O. Box 9011 President President thereof since 1999; Senior Vice President and Treasurer of Princeton Princeton, and since Services since 1999; Vice President of FAMD since 1999; Vice President NJ 08543-9011 Treasurer 1993 and of FAM and MLIM from 1990 to 1997; Director of Taxation of MLIM since Age: 41 Treasurer 1990. since 1999 Kevin Booth Vice 2001 to Director of MLIM since 1998; Vice President of MLIM since 1991. P.O. Box 9011 President present Princeton, and NJ 08543-9011 Portfolio Age: 46 Manager Joseph P. Matteo Vice 2001 to Director of MLIM since 2001; Vice President of MLIM since 1997; P.O. Box 9011 President present Vice President at The Bank of New York from 1994 to 1997. Princeton, and NJ 08543-9011 Portfolio Age: 37 Manager Bradley J. Lucido Secretary 1999 to Director of MLIM since 2002; Vice President of MLIM since 1999; P.O. Box 9011 present Attorney associated with MLIM since 1995; Attorney in private Princeton, NJ 08543-9011 practice from 1991 to 1995. Age: 36 *Officers of the Fund serve at the pleasure of the Board of Directors.
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