<PAGE>
June 20, 1996
LETTER TO SHAREHOLDERS
Dear Shareholders:
On April 30, 1996, the Net Asset Value of the Fund was $3.81, as compared to
$3.70 on October 31, 1995. During the six month period ended April 30, 1996, the
Fund paid dividends to Common Stock Shareholders in the amount of $0.21 per
share.
1996 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 1, 1996, the
stockholders elected seven directors of the Fund. Stockholders also ratified the
selection of Arthur Andersen LLP as independent public accountants for the
current fiscal year.
THE HIGH YIELD MARKET:
The High Yield market as measured by the CS First Boston Index generated an
annualized total return of 4.51% for the six months ended April 30, 1996. At
April 30, 1996, the spread between High Yield securities and comparable U.S.
Government securities stood at 402 basis points compared to 429 basis points at
October 31, 1995 and 414 basis points at April 28, 1995. Total new issue volume
through April 30, 1996 approximated $22.7 billion. The average price of a cash
paying high yield security was $98.99 with a yield of 10.18% at April 30, 1996.
This compared with an average price of $97.80 and a yield of 10.42% at October
31, 1995.
The flow of new funds into high yield mutual funds continues at a high level
averaging over $173 million per week since October 31, 1995. Total assets in
high yield mutual funds reached approximately $68 billion at April 30, 1996 as
compared to $60 billion at October 31, 1995, an increase of approximately 13%.
THE FUND'S INVESTMENTS:
The total return on the Fund's common stock for the six months ended April
30, 1996, assuming no dividend reinvestment, was approximately 23.8%. As of
April 30, 1996, the Fund held 180 issues representing 30 industry groups. Cash
and short-term investments represented 2.89% of our holdings. The average price
of the Fund's high yield securities was $95.87 with an average coupon of 11.5%.
At April 30, 1996, the Fund was generating monthly net investment income of
approximately $0.035 per common share.
INVESTMENT OUTLOOK:
The high yield market has performed well since October 1995. At April 30,
1996 the high yield market was approaching levels not experienced for several
years. Factors that would be expected to extend the positive trend for the High
Yield bond market are:
1. The cash flow into high yield funds remains strong and the cash
position of many high yield funds remains fairly high. The public
continues to invest large sums of money into mutual funds and has
seen their wealth increase approximately $2.0 trillion over the past
18 months as the stock market has advanced.
2. The Federal Reserve continues a steady course and appears reluctant
to raise interest rates at this time as it sees little indication of
inflation or signs that economic activity will accelerate from here.
3. The CRB Commodity Index, while moving to a high level in May, has
declined sharply in early June. Industrial raw materials have
experienced an even sharper decline.
4. Corporate buybacks and refinancings continue at a high level. In
addition, data shows that the public is holding in excess of $3
trillion in cash and cash equivalents. If interest rates were to
reverse their decline, a large amount of this cash could flow into
the capital markets in search of higher returns.
Some of the factors that could negatively impact the High Yield market are:
1. The next several months could see investors' expectations change,
which may be reflected in a market consolidation or decline.
2. High yield securities are trading at yields relative to U.S.
Treasuries that historically are at the low end of the range.
Expectations of a weaker economy could result in the spread
widening.
3. A significant decline in corporate profits and possible higher
short-term interest rates in 1997, as some are predicting, would
result in a surge in company failures and defaults on outstanding
corporate debt issues. In addition, many outstanding debt issues
could be downgraded.
4. The political environment still has the potential to create
uncertainty. A third party candidacy could still become a reality and
the two major political parties could encounter events and issues
that could significantly change voter behavior and election results.
RIGHTS OFFERING:
The Fund recently commenced a transferable rights offering to shareholders
of record on May 10, 1996. The offering is being made only pursuant to the
Prospectus which is part of a Registration Statement which has been filed with
the Securities and Exchange Commission. This report is not an offer to sell, nor
the solicitation of an offer to buy the Fund's securities.
CONCLUSION:
The six months ended April 30, 1996 have been favorable for the high yield
market as the economy has been stronger than expected and corporate activity has
been beneficial to high yield issuers in the form of mergers, acquisitions and
equity offerings. Interest rates increased from 6% to over 7% on long term
government securities, but the strength of the business cycle has overridden the
negative effects of higher rates. Money is expected to continue flowing into the
capital markets, in search of higher yields. However, there is the possibility
that in the next six months the opposite could occur -- falling interest rates
and a weakening economy.
Management continues to review the Fund's investments, eliminating issues
that appear fully-priced or vulnerable to disappointing financial results.
Respectfully submitted,
/s/ Richard E. Omohundro, Jr.
Richard E. Omohundro, Jr.
President
/s/ John A. Frabotta
John A. Frabotta
Vice President and
Chief Investment Officer
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 1996
<TABLE>
<CAPTION>
FIXED INCOME -- 88.88% (A)
Ratings
--------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
AEROSPACE AND DEFENSE -- 3.20%
<S> <C> <C> <C> <C>
$ 500,000 GPA Holland BV, 9 1/2%, medium term notes, 02/24/99 ................. NR NR $ 490,000
763,723 GPA Leasing USA Inc., 9 1/8%, equip. trust, series BN, 12/02/96 ..... BB- Ba3 748,448
1,715,000 K&F Industries Inc., 13 3/4%, sr. sub. deb., 08/01/01 ............... B- B2 1,783,600
500,000 Rohr Inc., 11 5/8%, sr. notes, 05/15/03 ............................. BB- Ba3 541,250
1,000,000 Sabreliner Corp., 12 1/2%, sr. notes, series B, 04/15/03 ............ B+ B2 920,000
------------
4,483,298
------------
AGRICULTURAL CHEMICALS/FARMING -- 1.69%
500,000 Calmar Spraying Systems Inc., 11 1/2%, sr. sub. notes, 08/15/05 ..... B- B3 501,250
500,000 Hines Horticultural Inc., 11 3/4%, sr. sub. notes, 144A, 10/15/05 ... NR B3 520,000
1,250,000 LaRoche Industries Inc., 13%, sr. sub. notes, 08/15/04 .............. B B3 1,353,125
------------
2,374,375
------------
AUTOMOBILE/AUTO PARTS/TRUCK MANUFACTURING -- 2.61%
1,000,000 AM General Corp., 12 7/8%, sr. notes, series B, 05/01/02 ............ B B3 1,020,000
250,000 Clark-Schwebel, 10 1/2%, sr. notes, 144A, 04/15/06 .................. B B2 255,625
500,000 Great Dane Holdings Inc., 12 3/4%, sr. sub. deb., 08/01/01 .......... CCC Caa 475,000
500,000 JPS Automotive Products Corp., 11 1/8%, sr. notes, 06/15/01 ......... B B2 512,500
500,000 Johnstown America Industries, Inc., 11 3/4%, sr. sub. notes, 08/15/05 B B3 465,000
500,000 Poindexter, J.B., Inc., 12 1/2%, sr. notes, 05/15/04 ................ B+ B2 412,500
500,000 Venture Holdings Trust, 9 3/4%, sr. sub. notes, 04/01/04 ............ B B3 520,000
------------
3,660,625
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES/
CONSUMER CREDIT -- 2.26%
1,000,000 Berkeley Federal Bank & Trust, 12%, sub. deb., 06/15/05 ............. B+ B1 1,030,000
1,000,000 Central Rents Inc., 12 7/8%, sr. notes, series B, 12/15/03 .......... NR B3 1,030,000
500,000 Imperial Credit Industry Inc., 9 3/4%, sr. notes, 01/15/04 .......... B B1 473,750
1,000,000 Lomas Mortgage USA Inc., 10 1/4%, sr. notes, 10/01/02 ............... D Ca 635,000
------------
3,168,750
------------
BROADCASTING - TV/CABLE/RADIO/PUBLISHING -- 7.82%
500,000 Adelphia Communication, 9 7/8%, sr. notes, 03/01/05 ................. B B3 472,500
1,000,000 Adelphia Communication, 12 1/2%, sr. notes, 05/15/02 ................ B B3 1,022,500
1,000,000 Allbritton, 11 1/2%, sr. sub. notes, 08/15/04 ....................... B- B3 1,040,000
1,000,000 American Media Operations, 11 5/8%, sr. sub. notes, 11/15/04 ........ B B1 1,005,000
500,000 Busse Broadcasting Corp., 11 5/8%, sr. secd. notes, 144A, 10/15/00 .. NR B3 479,800
500,000 Commodore Media Inc., 7 1/2%, sr. sub. notes, 05/01/03 .............. NR B3 490,000
750,000 Emerson Radio Corp., 8 1/2%, conv. sub. deb., 144A, 08/15/02 ........ NR NR 637,500
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub. notes, 10/01/05 ............. B- B3 523,750
500,000 Knoll Inc., 10 7/8%, sr. sub. notes, 144A, 03/15/06 ................. B- B3 500,000
500,000 Lamar Advertising, 11%, sr. secd. notes, 05/15/03 ................... B+ B1 521,250
750,000 Marcus Cable Co., L.P., 11 7/8%, sr. deb., 10/01/05 ................. B Caa 725,625
750,000 Paxson Communications Corp., 11 5/8%, sr. sub. notes, 10/01/02 ...... NR B3 778,125
250,000 Rifkin Acquisition Partners, 11 1/8%, sr. sub. notes, 144A, 01/15/06 B- B3 250,000
500,000 SFX Broadcasting Inc., 11 3/8%, sr. sub. notes, 10/01/00 ............ B B2 535,625
500,000 Sullivan Graphics Inc., 12 3/4%, sr. sub. notes, 08/01/05 ........... B- Caa 515,000
325,000 Winstar Communications Inc., 14%, sr. sub. disc. notes, 10/15/05 .... NR NR 195,000
650,000 Winstar Communications Inc., 14%, sr. disc. notes, 10/15/05 ......... NR NR 728,000
500,000 Wireless One Inc., 13%, sr. disc. notes, 10/15/03 ................... B- Caa 535,000
------------
10,954,675
------------
CHEMICALS/PLASTICS -- 3.40%
1,250,000 Arcadian Partners, L.P., 10 3/4%, sr. notes, series B, 05/01/05 ..... BB- B2 1,350,000
1,000,000 Key Plastics Inc., 14%, sr. notes, series B, 11/15/99 ............... B+ B2 1,005,000
500,000 Pioneer America Acquisition, 13 3/8%, sr. notes, 144A, 04/01/05 ..... B+ B2 510,000
1,000,000 Plastic Specialties & Technologies Inc., 11 1/4%, sr. notes, 12/01/03 B- B3 962,500
1,000,000 Trans Resources Inc., 11 7/8%, sr. sub. notes, 07/01/02 ............. B- B2 940,000
------------
4,767,500
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 2.15%
500,000 Aftermarket Technology Corp., 12%, sr. sub. notes, series B, 08/01/04 NR B3 535,000
500,000 IMO Industries Inc., 11 3/4%, sr. sub. notes, 144A, 05/01/06 ........ B- B3 492,820
500,000 Jordan Industries Inc., 10 3/8%, sr. notes, 08/01/03 ................ B+ B3 450,000
500,000 MVE Inc., 12 1/2%, sr. secd. notes, 02/15/02 ........................ B+ B3 525,000
500,000 Mail-Well Envelope Corp., 10 1/2%, sr. sub. notes, 02/15/04 ......... B B2 485,000
500,000 Selmer Inc., 11%, sr. sub. notes, 05/15/05 .......................... B- B3 525,000
------------
3,012,820
------------
DIVERSIFIED/CONGLOMERATE SERVICES -- 1.21%
250,000 Atlantis Group Inc., 11%, sr. notes, 02/15/03 ....................... B B2 232,500
550,000 Coinmach Corp., 11 3/4%, sr. notes, series B, 11/15/05 .............. B+ B2 550,000
500,000 Moseler Inc., 11%, sr. notes, series A, 04/15/03 .................... CCC- Caa 387,500
500,000 Primeco Inc., 12 3/4%, sr. sub. notes, 03/01/05 ..................... B B3 526,250
------------
1,696,250
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS -- 2.90%
500,000 Alpine Group Inc., 12 1/4%, sr. notes, 144A, 07/15/03 ............... B B3 491,250
1,000,000 Computervision Corp., 11 3/8%, sr. sub. notes, 08/15/99 ............. B- B3 1,045,000
500,000 Essex Group Inc., 10%, sr. notes, 05/01/03 .......................... B+ B1 505,000
500,000 Exide Electronics Group Inc., 11 1/2%, units, 03/15/06 .............. B B3 525,000
500,000 International Wire Group Inc., 11 3/4%, sr. sub. notes, 06/01/05 .... B+ B3 485,000
500,000 United Stationers Supply Co., 12 3/4%, sr. sub. notes, 05/01/05 ..... B- B3 535,000
500,000 VLSI Technology Inc., 8 1/4%, conv. sub. notes, 10/01/05 ............ B NR 475,625
------------
4,061,875
------------
FINANCIAL SERVICES-BROKERAGE/SYNDICATION/LEASING -- 1.00%
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes, 08/15/00 .................. B- B2 1,000,000
425,000 First Federal Financial Corp., 11 3/4%, notes, 10/01/04 ............. B+ B2 405,875
------------
1,405,875
------------
FOOD AND TOBACCO -- 4.95%
500,000 American Rice Inc., 13%, mtg. notes, 07/31/02 ....................... B- B3 457,500
1,000,000 BGLS, Inc., 15 3/4%, sr. secd. notes, series B, 01/31/01 ............ NR NR 865,000
1,250,000 Curtice Burns Foods Inc., 12 1/4%, sr. sub. notes, 02/01/05 ......... NR NR 1,231,250
250,000 Doane Products Co., 10 5/8%, sr. notes, 03/01/06 .................... B B3 255,000
750,000 Envirodyne Industries, Inc., 12%, sr. secd. notes, series A, 06/15/00 NR NR 750,000
1,000,000 Liggett Group Inc., 11 1/2%, gtd. sr. secd. notes, series B, 02/01/99 NR NR 850,000
250,000 Liggett Group Inc., 16 1/2%, notes, 02/01/99 ........................ NR NR 230,000
1,000,000 P&C Food Markets Inc., 11 1/2%, deb., 10/15/01 ...................... BB- NR 1,015,000
500,000 TLC Beatrice International Holdings Inc., 11 1/2%, sr. secd. notes,
10/01/05 .......................................................... BB- B1 508,750
750,000 Van de Kamps Inc., 12%, sr. sub. notes, 09/15/05 .................... B+ B3 780,000
------------
6,942,500
------------
GENERAL & SPECIALTY RETAIL -- 5.87%
1,000,000 Big 5 Holdings Inc., 13 5/8%, series B, 09/15/02 .................... B- B3 820,000
500,000 Cole National Group Inc., 11 1/4%, sr. notes, 10/01/01 .............. B+ B1 512,500
500,000 County Seat Stores Inc., 12%, sr. sub. notes, 10/01/02 .............. NR Caa 410,000
500,000 Dillon Read Structured Finance Corp., 8 3/8%, pass thru certs.,
class A, 08/15/15 ................................................. AAA NR 392,500
1,000,000 Finlay Fine Jewelry Corp., 10 5/8%, sr. notes, 05/01/03 ............. B B1 975,000
250,000 Hills Stores Co., 12 1/2%, sr. notes, 144a, 07/01/03 ................ NR Ba3 252,500
2,000,000 K Mart Corporation, 8.99%, mtg. pass thru, 07/05/10 ................. BB Ba2 1,727,500
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes, 08/01/05 ..................... B+ B3 1,050,000
750,000 Pamida Inc., 11 3/4%, sr. sub. notes, 03/15/03 ...................... B- Caa 637,500
1,500,000 Specialty Retailers Inc., 11%, sr. sub. notes, series B, 08/15/03 ... B- B3 1,447,500
------------
8,225,000
------------
GROCERY/CONVENIENCE -- 3.34%
1,000,000 Bruno's Inc., 10 1/2%, sr. notes, 08/01/05 .......................... B- B3 990,000
500,000 Jitney Jungle Stores, 12%, sr. notes, 03/01/06 ...................... B B2 513,750
500,000 Pantry Inc., 12%, sr. notes, series B, 11/15/00 ..................... B B2 470,000
1,000,000 Pathmark Stores Inc., 12 5/8%, sub. deb., 06/15/02 .................. B- B3 1,020,000
500,000 Ralph's Supermarkets Inc., 11%, sr. sub. notes, 06/15/05 ............ B- B3 469,375
750,000 Specialty Foods Corp., 11 1/8%, sr. notes, series B, 10/01/02 ....... B B3 716,250
500,000 Star Markets Company, Inc., 13%, sr. sub. notes, 11/01/04 ........... CCC+ B3 500,000
------------
4,679,375
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES -- 3.98%
528,267 Amerisource Distribution Corp., 11 1/4%, sr. deb., 07/15/05 (d) ..... B B3 586,376
1,000,000 Eye Care Centers of America Inc., 12%, sr. notes, 10/01/03 .......... B+ B3 980,000
500,000 Health O Meter Inc., 13%, sr. sub. notes, 08/15/02 .................. B- B3 465,000
500,000 IVAC Corp., 9 1/4%, sr. notes, 12/01/02 ............................. BB B3 505,000
1,000,000 Mediq/prn Life Support Services Inc., 11 1/8%, sr. secd. notes,
07/01/99 .......................................................... B B1 1,050,000
2,000,000 Unilab Corp., 11%, sr. notes, 04/01/06 .............................. B+ B1 1,985,000
------------
5,571,376
------------
HOME FURNISHINGS/DURABLE CONSUMER PRODUCTS -- 2.08%
2,000,000 CS Wireless Sytems Inc., 11 3/8%, units, 03/01/06 ................... CCC+ Caa 1,090,000
1,000,000 Lanesborough Corp., 10%, sr. notes, 04/15/00 ........................ NR NR 830,000
1,000,000 Simmons Co., 10 3/4%, sr. sub. notes, 144A, 04/15/06 ................ B B2 1,000,000
------------
2,920,000
------------
HOTEL/GAMING -- 1.49%
500,000 Courtyard by Marriott II, 10 3/4%, sr. secd. notes, 144A, 02/01/08 .. B- NR 510,000
1,000,000 Motels of America Inc., 12%, sr. sub. notes, series B, 04/15/04 ..... B B3 970,000
576,000 U.S. Trails Inc., 12%, secd. notes, 07/15/98 ........................ NR NR 414,720
278,000 U.S. Trails Inc., 12%, sr. notes, 07/15/98 .......................... NR Caa 200,160
------------
2,094,880
------------
LEISURE/AMUSEMENT/MOTION PICTURES -- 1.48%
1,250,000 Act III Theatres Inc., 11 7/8%, sr. sub. notes, 02/01/03 ............ B- B3 1,353,125
250,000 Live Entertainment Inc., 12%, sr. secd. sub. notes, 03/23/99 ........ NR NR 205,000
500,000 Premier Parks Inc., 12%, sr. notes, series A, 08/15/03 .............. B+ B2 520,000
------------
2,078,125
------------
MACHINERY -- 1.11%
500,000 Newflo Corp., 13 1/4%, sub. notes, 11/15/02 ......................... B- B3 527,500
500,000 Specialty Equipment Companies Inc., 11 3/8%, sr. sub. notes, 12/01/03 B- B3 507,500
500,000 Spreckels Industries Inc., 11 1/2%, gtd. sr. secd. notes, 09/01/00 .. B B2 515,000
------------
1,550,000
------------
METALS/MINING -- 6.86%
750,000 ACME Metals Inc., 12 1/2%, sr. secd. notes, 08/01/02 ................ B B1 765,000
1,000,000 Algoma Steel Inc., 12 3/8%, 1st mtg. notes, 07/15/05 ................ B B1 978,750
1,000,000 Bayou Steel Corporation, 10 1/4%, 1st mtg. notes, 03/01/01 .......... B B2 917,500
750,000 GS Technologies Inc., 12%, gtd. sr. notes, 09/01/04 ................. B B2 774,375
1,000,000 ICF Kaiser International Inc., 12%, sr. sub. notes, 12/31/03 ........ B- B3 945,000
1,000,000 ICF Kaiser International Inc., 12%, units, 12/31/03 ................. B- B3 945,000
500,000 IVACO Inc., 11 1/2%, sr. notes, 09/15/05 ............................ B+ B1 528,750
1,000,000 Inland Steel Co., 12%, f.m. bonds, series T, 12/01/98 ............... BB- Ba3 1,090,000
1,000,000 Maxxam Group Inc., 11 1/4%, sr. secd. notes, 08/01/03 ............... B- B3 1,005,000
500,000 Pace Industries Inc., 10 5/8%, sr. notes, series B, 12/01/02 ........ B- B1 450,000
750,000 Sheffield Steel Corp., 12%, 1st mtg. notes, units, 11/01/01 ......... B- Caa 750,000
500,000 Sheffield Steel Corp., 12%, 1st mtg. notes, 11/01/01 ................ NR Caa 465,000
------------
9,614,375
------------
OIL/NATURAL GAS/OIL SERVICES -- 4.25%
500,000 ASTRA Compania Argentina Pet., 11 5/8%, sr. unsub., 144A, 12/02/99 .. BB- NR 490,000
1,000,000 Bridas Corp., 12 1/2%, sr. notes, 11/15/99 .......................... BB- B1 1,040,000
1,000,000 Gerrity Oil & Gas Corp., 11 3/4%, sr. sub. notes, 07/15/04 .......... B B3 1,000,000
500,000 Giant Industry Inc., 9 3/4%, gtd. sr. sub. notes, 11/15/03 .......... B+ B2 510,000
500,000 HarCor Energy Inc., 14 7/8%, sr. notes, 07/15/02 .................... B- B3 560,000
750,000 NS Group Inc., 13 1/2%, units, 07/15/03 ............................. B- B3 686,250
300,000 Presidio Oil Co., 11 1/2%, sr. gas indexed notes, series B, 09/15/00 NR Caa 312,000
375,000 TransAmerican Refining Corp., 16 1/2%, gtd. sr. notes, 02/15/02 ..... B- Caa 337,500
1,000,000 Tubos de Aceros de Mexico, 13 3/4%, notes, 12/08/99 ................. NR NR 1,013,750
------------
5,949,500
------------
PACKAGING/CONTAINERS -- 0.85%
500,000 Portola Packaging Inc., 10 3/4%, sr. notes, 10/01/05 ................ B B2 516,250
625,000 Sea Containers Ltd., 12 1/2%, sr. sub. deb., 12/01/04 ............... BB- B1 675,000
------------
1,191,250
------------
PAPER/FOREST PRODUCTS/PRINTING -- 2.46%
500,000 Day International Group, Inc., 11 1/8%, sr. sub. notes, series B,
06/01/05 .......................................................... B- B3 525,000
1,000,000 Repap Wisconsin Inc., 9 7/8%, sr. secd. notes, 05/01/06 ............. B+ B3 900,000
500,000 Trans Ocean Container Corp., 12 1/4%, sr. sub. notes, 07/01/04 ...... B- B3 520,000
1,370,000 Wickes Lumber Co., 11 5/8%, sr. sub. notes, 12/15/03 ................ CCC+ B3 945,300
500,000 Williamhouse-Regency of Delaware, Inc., 11 1/2%, sr. sub. deb.,
11/15/05 .......................................................... B- B3 550,000
------------
3,440,300
------------
PERSONAL & MISCELLANEOUS SERVICES -- 0.98%
750,000 ICON Health & Fitness, 13%, sr. sub. notes, 07/15/02 ................ B- B3 862,500
500,000 Outdoor Systems Inc., 10 3/4%, sr. notes, 08/15/03 .................. B B2 507,500
------------
1,370,000
------------
POLLUTION CONTROL/WASTE REMOVAL -- 0.96%
1,250,000 Allied Waste Industries Inc., 12%, sr. sub. notes, 02/01/04 ......... B B3 1,343,750
------------
PUBLIC UTILITY/ELECTRIC POWER/HYDRO POWER -- 2.28%
3,000,000 Consolidated Hydro Inc., 12%, sr. disc. notes, 07/15/03 ............. NR NR 750,000
1,000,000 Midland Funding Corp. II, 13 1/4%, secd. lease oblig., 07/23/06 ..... B- B2 1,110,000
500,000 Petroleum Heat & Power Inc., 10 1/8%, sub. notes, 04/01/03 .......... B+ B2 455,000
325,000 Petroleum Heat & Power Inc., 12 1/4%, sub. deb., 02/01/05 ........... B+ B2 341,250
500,000 Texas New Mexico Power Co., 12 1/2%, deb., 01/15/99 ................. B+ B1 535,000
------------
3,191,250
------------
RAIL/TRUCKING/OVERNIGHT DELIVERY -- 2.78%
1,000,000 Ameritruck, 12 1/4%, sr. sub. notes, series B, 11/15/05 ............. NR B3 985,000
1,500,000 Petro PSC Properties, 12 1/2%, sr. notes, 06/01/02 .................. B B3 1,417,500
500,000 TNT Transport (USA) Inc., 11 1/2%, sr. notes, 04/15/04 .............. B+ B1 525,000
1,000,000 Terex Corp., 13 3/4%, sr. secd. notes, 05/15/02 ..................... B- Caa 970,000
------------
3,897,500
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/CONSTRUCTION -- 5.32%
1,000,000 Associated Materials Inc., 11 1/2%, sr. sub. notes, 08/15/03 ........ B- B3 870,000
290,820 Bramalea Limited, 11 1/8%, deb., series 1, 03/22/98 (b) ............. NR NR 116,328
500,000 Georgia Marble Co., 16 5/8%, sr. sub. ext. reset notes, 01/01/49 (b) NR NR 500,000
500,000 Greystone Homes Inc., 10 3/4%, gtd. sr. notes, 03/01/04 ............. B B2 501,250
2,000,000 Hovnanian K Enterprises Inc., 11 1/4%, gtd. sub. notes, 04/15/02 .... B B2 1,827,500
1,000,000 MDC Holdings Inc., 11 1/8%, sr. notes, 12/15/03 ..................... B NR 975,000
500,000 Nortek Inc., 9 7/8%, sr. sub. notes, 03/01/04 ....................... CCC+ B3 471,250
500,000 Oriole Homes Corp., 12 1/2%, sr. notes, 01/15/03 .................... B B2 445,000
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes, 05/01/02 .................... NR B3 727,500
1,000,000 Saul, B.F. Real Estate Investments, 11 5/8%, sr. secd. notes,
series B, 04/01/02 ................................................ B- NR 1,015,000
------------
7,448,828
------------
TELEPHONE/COMMUNICATIONS -- 6.58%
500,000 Alvey Systems, Inc., 11 3/8%, sr. sub. notes, 144A, 01/31/03 ........ B- B3 515,000
800,000 American Communication Services, 12 3/4%, sr. disc. notes,
144A, 04/01/06 .................................................... NR NR 430,472
250,000 Centennial Cellular Corporation, 10 1/8%, sr. notes, 05/15/05 ....... B B2 253,750
750,000 Communications & Power Industries, Inc., 12%, sr. sub. notes,
08/01/05 .......................................................... B B3 750,000
500,000 Dictaphone Corp., 11 3/4%, sr. sub. notes, 08/01/05 ................. B- B3 496,250
1,000,000 Echostar Communications Company, 12 7/8%, sr. secd. disc.
notes, 06/01/04 ................................................... B- B2 745,000
500,000 Fonorola Inc., 12 1/2%, sr. secd. notes, 08/15/02 ................... B+ B2 540,000
500,000 Hyperion Telcommunications Inc., 13%, units, 04/15/03 ............... NR NR 266,360
750,000 Intermedia Communications of Florida, Inc., 13 1/2%, sr. notes,
06/01/05 .......................................................... B- B3 847,500
500,000 Metrocall, Inc., 10 3/8%, sr. sub. notes, 10/01/07 .................. B- B2 491,250
500,000 Mobile Telecommunications Inc., 13 1/2%, sr. sub. disc. notes,
12/15/02 .......................................................... BB- B2 552,500
500,000 ProNet Inc., 11 7/8%, sr. sub. notes, 06/15/05 ...................... B- B3 496,415
1,000,000 Rogers Cantel Mobile Inc., 11 1/8%, gtd. sr. secd. notes, 07/15/02 .. BB- B2 1,068,750
350,000 Shared Technologies, 12 1/4%, sr. sub. disc. notes, 144A, 03/01/06 .. B- Caa 245,970
500,000 Telefonica de Argentina, 11 7/8%, notes, 11/01/04 ................... BB- B1 533,750
1,000,000 Unisys Corp., 12%, sr. notes, 144A, 04/15/03 ........................ B+ B1 988,270
------------
9,221,237
------------
TEXTILES/APPAREL -- 1.03%
500,000 Avondale Materials, 10 1/4%, gtd. sr. sub. notes, 144A, 05/01/06 .... B+ B2 492,350
1,000,000 Linter Textile Corp. Ltd., 13 3/4%, sr. sub. deb., 10/01/00 (b) ..... D Ca 12,500
500,000 Synthetic Industries Inc., 12 3/4%, sr. sub. deb., 12/01/02 ......... B- B3 485,000
600,000 United States Leather, Inc., 10 1/4%, sr. notes, 07/31/03 ........... B- B2 450,000
------------
1,439,850
------------
TRANSPORTATION/AIRLINES/BUS -- 1.99%
1,000,000 CHC Helicopter Corp., 11 1/2%, sr. sub. notes, 07/15/02 ............. B- B3 880,000
1,000,000 Trans World Airlines Inc., 12%, sr. secd. reset notes, 11/03/98 ..... NR NR 1,010,000
1,000,000 U.S. Air, 9.82%, equip. trust certs., 01/01/13 ...................... B+ B1 900,000
------------
2,790,000
------------
Total Fixed Income (cost $123,828,233) ................................................... $124,545,139
------------
<CAPTION>
COMMON STOCK AND WARRANTS -- 3.60%
Units
-----
<S> <C> <C>
1,000 Allamerica Financial Corp. ............................................................... $ 26,000
2,000 American Telecasting Inc., warrants ...................................................... 64,000
12,644 Amerisource Distribution Corp., class C (b) (c) .......................................... 429,896
185,900 Ames Department Stores Inc., excess cash flow pmt., series A (b) (c) ..................... 0
594,876 Ames Department Stores Inc., lit. trust units (c) ........................................ 0
8,000 CHC Helicopter, warrants (c) ............................................................. 0
5,925 Capital Pac Holdings Inc., warrants ...................................................... 22
1,000 Central Rents, warrants (c) .............................................................. 0
750 Chattem Inc., warrants ................................................................... 3,000
1,000 Commodore Media Inc., warrants ........................................................... 113,000
7,000 Continental Airlines 8 1/2%, conv. preferred (b) ......................................... 490,875
33,000 Cort Business Services Corp., warrants ................................................... 99,000
500 County Seat Holdings Inc., warrants (c) .................................................. 0
1,000 Eye Care Centers of America Inc., warrants ............................................... 10,000
12,500 Fidelity Federal Bank, class A ........................................................... 114,063
40,000 Fidelity Federal Bank, exchangeable preferred ............................................ 1,085,000
30,000 Forest Oil Corp., warrants ............................................................... 11,719
500 HDA Management Corp., warrants (c) ....................................................... 0
11,000 HarCor Energy Inc., warrants (c) ......................................................... 0
20,000 Health & Retirement Properties Trust ..................................................... 337,500
1,500 Heartland Wireless Communications, warrants .............................................. 22,500
10,000 Hospitality Properties Trust ............................................................. 255,000
4,800 ICF Kaiser International Inc., warrants (c) .............................................. 0
750 IHF Capital Inc., warrants (c) ........................................................... 0
553 Insilco Corp., class B (b) ............................................................... 19,217
76,248 Intelogic Trace Inc. (b) (c) ............................................................. 0
12,392 Intelogic Trace Inc., preferred (b) ...................................................... 0
750 Intermedia Communications of Florida, Inc. (b) ........................................... 15,000
50,908 Live Entertainment Inc., conv. preferred, series B ....................................... 419,990
20,000 MDC Holdings Inc. ........................................................................ 140,000
500 Motels of America, 144A (b) .............................................................. 37,500
1,000 Petro PSC Properties LP, warrants ........................................................ 33,000
10,500 Prime Residential ........................................................................ 190,313
15,000 Prime Retail Inc., conv. preferred, series B ............................................. 266,250
1,000 Sabreliner Corp., warrants (c) ........................................................... 0
500 Spanish Broadcasting Corp., warrants ..................................................... 65,000
15,000 Supermarkets General Holdings, preferred ................................................. 361,875
9,800 Uniroyal Technology Corp., warrants ...................................................... 9,800
148,562 United Gas Holding Corp. (b) (c) ......................................................... 0
20,000 Walden Residential Properties, series A .................................................. 422,500
1,500 Wireless One Inc., warrants (c) .......................................................... 0
------------
Total Common Stock and Warrants (cost $9,086,376) ........................................ 5,042,020
------------
Total Investments in Securities (cost $132,914,609) ...................................... $129,587,159
============
SHORT-TERM INVESTMENTS -- 2.89%
Par
Value
-----
COMMERCIAL PAPER:
$4,052,000 IES Diversified Inc., 5.52%, 05/01/96, A-2/P-2 ........................................... $ 4,052,000
------------
TOTAL SHORT-TERM INVESTMENT (cost $4,052,000) ............................................ 4,052,000
------------
TOTAL INVESTMENTS -- 95.37% (cost $136,966,609) .......................................... 133,639,159
------------
OTHER ASSETS -- 4.63% .................................................................... 6,487,946
------------
TOTAL ASSETS -- 100% ..................................................................... $140,127,105
============
<FN>
(a) Percentages indicated are based on total assets.
(b) Non-income-producing security.
(c) Security valued in good faith following procedures approved by the Board of Directors.
(d) Pay in kind.
NR denotes not rated.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
BALANCE SHEET
April 30, 1996
<S> <C>
ASSETS
Investments in securities at value (identified cost $132,914,609; see Schedule of Investments and
Note 2) $129,587,159
Short-term investments, at cost, which approximates value (see Schedule of Investments and Note 2) 4,052,000
Cash .............................................................................................. 197
Receivables:
Investment securities sold ...................................................................... 2,296,502
Interest ........................................................................................ 3,932,892
Deferred debt issuance and organizational costs (Note 2) .......................................... 12,518
Deferred auction agent fees (Note 6) .............................................................. 67,613
Prepaid surety bond premiums (Note 7) ............................................................. 47,341
Prepaid insurance ................................................................................. 76,105
Other assets ...................................................................................... 54,778
------------
Total assets .............................................................................. $140,127,105
------------
LIABILITIES
Payables:
Investment securities purchased ................................................................. $ 2,687,585
Accrued expenses (Note 3) ......................................................................... 718,642
Senior notes (Note 4) ............................................................................. 20,000,000
------------
Total liabilities ......................................................................... $ 23,406,227
------------
Net Assets:
Taxable auction rate preferred stock, no par value --
Authorized -- 1,000 shares
Issued -- 200 shares, liquidation preference of $100,000 per share (Notes 5 and 7) ............ $ 20,000,000
------------
Common stock, $.01 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 25,380,510 shares ................................................... $ 253,805
Capital in excess of par value (Notes 2 and 5) .................................................. 165,037,803
Accumulated undistributed net investment income (Note 2) ........................................ 1,160,277
Accumulated net realized loss from security transactions ........................................ (66,403,558)
Net unrealized depreciation of investments ...................................................... (3,327,450)
------------
Net assets applicable to common stock (equivalent to $3.81 per share, based on 25,380,510
shares outstanding) ..................................................................... $ 96,720,877
------------
Total net assets ...................................................................... $116,720,877
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the six months ended April 30, 1996
<S> <C>
INVESTMENT INCOME (Note 2):
Interest income ........................................................................ $ 7,067,843
Dividend income ........................................................................ 93,892
Accretion of discount .................................................................. 545,795
-----------
Total investment income .......................................................... $ 7,707,530
-----------
EXPENSES:
Interest expense ....................................................................... $ 647,632
Investment advisory fee (Note 3) ....................................................... 432,025
Custodian and transfer agent fees ...................................................... 84,301
Preferred dividend auction costs ....................................................... 74,879
Professional fees ...................................................................... 81,823
Miscellaneous expenses ................................................................. 129,185
Amortization of prepaid surety bond premiums (Note 7) .................................. 39,672
Directors' fees ........................................................................ 37,936
Insurance expense ...................................................................... 53,534
Amortization of deferred auction agent fees (Note 6) ................................... 13,389
-----------
Total expenses ................................................................... $ 1,594,376
-----------
Net investment income ............................................................ $ 6,113,154
-----------
REALIZED LOSS AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss on investments sold .................................................. $ (656,355)
Change in net unrealized depreciation of investments (Note 2) .......................... 3,129,344
-----------
Net gain on investments .......................................................... $ 2,472,989
-----------
Net increase in net assets resulting from operations ............................. $ 8,586,143
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($2,879 per share) ............................... (575,785)
-----------
Net increase in net assets applicable to common stockholders ..................... $ 8,010,358
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
For the six months ended April 30, 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ................................................................. $ 7,381,131
Operating expenses paid ......................................................................... (1,754,806)
------------
Net cash provided by operating activities ................................................. $ 5,626,325
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities ............................................................... $(68,074,049)
Sales and maturities of portfolio securities .................................................... 67,622,115
------------
Net cash used in investing activities ..................................................... $ (451,934)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid .................................................................. (575,785)
Common stock dividends paid from operations ..................................................... (4,598,457)
------------
Net cash used in financing activities ..................................................... $ (5,174,242)
------------
NET INCREASE IN CASH .............................................................................. $ 149
CASH, BEGINNING OF PERIOD ......................................................................... 48
------------
CASH, END OF PERIOD ............................................................................... $ 197
============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations .......................................... $ 8,586,143
Decrease in interest and other receivables .................................................... 85,249
Amortization of Fidelity Bond and other deferred assets ....................................... 57,005
Decrease in accrued expenses .................................................................. (63,190)
Net realized loss on investments sold ......................................................... 656,355
Change in net unrealized depreciation of investments .......................................... (3,129,344)
Accretion of bond discount .................................................................... (415,371)
Increase in prepaid assets .................................................................... (150,522)
------------
Net cash provided by operating activities ................................................. $ 5,626,325
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........................................................ $ 653,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Six Months Fiscal Year
Ended Ended
April 30, October 31,
1996 1995
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ....................................................................... $ 6,113,154 $ 12,374,147
Net realized loss on investments sold ....................................................... (656,355) (3,741,007)
Change in net unrealized appreciation of investments ........................................ 3,129,344 3,492,305
------------ ------------
Net increase in net assets resulting from operations .................................. $ 8,586,143 $ 12,125,445
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (190,520 shares and 225,487 shares, respectively) to common stockholders for
reinvestment of dividends ................................................................. $ 708,470 $ 827,802
Net proceeds from sale of common stock issued ............................................... -- --
------------ ------------
Increase in net assets resulting from fund share transactions ......................... $ 708,470 $ 827,802
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($2,879 and $5,996 per share, respectively) ............................. $ (575,785) $ (1,199,291)
Common dividends ($.21 and $.42 per share, respectively) from operations .................... (5,306,927) (10,516,741)
------------ ------------
Decrease in net assets resulting from distributions to stockholders ................... (5,882,712) (11,716,032)
------------ ------------
Total net increase in net assets ...................................................... $ 3,411,901 $ 1,237,215
NET ASSETS:
Beginning of period ......................................................................... 113,308,976 112,071,761
------------ ------------
End of period (including $1,160,277 and $929,835 of undistributed net investment income as of
April 30, 1996 and October 31, 1995, respectively) ........................................ $116,720,877 $113,308,976
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
Six Months
Ended For the Years Ended October 31,
April 30, ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30
-------- -------- -------- -------- -------- --------
Net investment income ............... .22 .45 .48# .63# .62 .55
Net realized and unrealized gain
(loss) on investments ............. .12 .03 (.38)# .39# .07 .56
-------- -------- -------- -------- -------- --------
Total from investment
operations $ .34 $ .48 $ .10 $ 1.02 $ .69 $ 1.11
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated net investment income
To preferred stockholders ....... (.02) (.05) (.03) (.06) (.10) (.16)
To common stockholders .......... (.21) (.42) (.45) (.62) (.45) (.36)
Dividends to common stockholders
from paid-in-capital -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions ......... $ (.23) $ (.47) $ (.48) $ (.68) $ (.55) $ (.52)
-------- -------- -------- -------- -------- --------
Effect of sale of common stock and
related expenses from rights
offering .......................... $ -- $ -- $ (.18) $ (.12) $ -- $ --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ...... $ 3.81 $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89
======== ======== ======== ======== ======== ========
Per share market value, end of period $ 4.12 $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50
======== ======== ======== ======== ======== ========
Total investment return ............. 25.28%* 28.57% (7.78%) 23.25% 27.99% 57.36%
======== ======== ======== ======== ======== ========
Net assets, end of period, applicable
to common stock (a) $ 96,721 $ 93,309 $ 92,072 $ 79,438 $ 55,178 $ 53,040
======== ======== ======== ======== ======== ========
Net assets, end of period, applicable
to preferred stock (a) $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 30,000 $ 30,000
======== ======== ======== ======== ======== ========
Net assets, end of period (a) ....... $116,721 $113,309 $112,072 $ 99,498 $ 85,178 $ 83,040
======== ======== ======== ======== ======== ========
Ratio of operating expenses to
average net assets** .............. 2.37%*+ 2.28%+ 2.30%+ 2.13%+ 2.28%+ 2.93%+
Ratio of net investment income to
average net assets** .............. 9.10%* 9.39% 8.64% 9.26% 9.33% 9.24%
Portfolio turnover rate ............. 106.67%* 80.71% 72.00% 117.20% 97.86% 114.00%
<FN>
(a)Dollars in thousands.
*Annualized.
**Ratios calculated on the basis of expenses and net investment income relative to the net assets of both the common and
preferred shares plus the principal amount of the senior notes.
+Excluding interest expense, the ratio of operating expenses to average net assets (as defined) is 1.41%*, 1.29%, 1.32%, 1.50%,
1.72%, and 2.23%, respectively.
#Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
INFORMATION REGARDING SENIOR SECURITIES
For the Six As of October 31,
Months Ended ---------------------------------------------------------------------------------
April 30, 1996 1995 1994 1993 1992 1991
--------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Notes $20,000,000 $20,000,000 $20,000,000 $20,000,000 $ 5,000,000 $ 5,000,000
Preferred stock 20,000,000 20,000,000 20,000,000 20,000,000 30,000,000 30,000,000
Asset Coverage:
Per note (a) 684% 667% 660% 597% 1,804% 1,761%
Per preferred stock share (b) 342% 333% 330% 299% 258% 252%
Involuntary Liquidation Preference:
Per preferred stock share (c) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note $ 980.30 $ 987.50 $ 937.10 $ 997.50 $ 1,087.50 $ 1,000.00
Per preferred stock share 100,000 100,000 100,000 100,000 100,000 100,000
<FN>
(a) Calculated by subtracting the Fund's total liabilities (not including senior securities) from the Fund's total assets and
dividing such amount by the principal amount of the debt outstanding.
(b) Calculated by subtracting the Fund's total liabilities (not including senior securities) from the Fund's total assets and
dividing such amount by the principal amount of the debt outstanding and aggregate liquidation preference of the
outstanding shares of Taxable Auction Rate Preferred Stock.
(c) Plus accumulated and unpaid dividends.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996
(1) ORGANIZATION AND OPERATIONS
Prospect Street High Income Portfolio Inc. (the "Fund") was organized as a
corporation in the state of Maryland on May 13, 1988 and is registered with the
Securities and Exchange Commission as a diversified, closed-end, management
investment company under the Investment Company Act of 1940. The Fund commenced
operations on December 5, 1988. The Fund's financial statements have been
prepared in conformity with generally accepted accounting principles, which
requires the management of the Fund to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund, which are in
conformity with those generally accepted in the investment company industry.
The Fund invests primarily in securities of fixed maturity, corporate debt
securities and in redeemable preferred stocks that are rated less than
investment grade. Risk of loss upon default by the issuer is significantly
greater with respect to such securities compared to investment-grade securities
because these securities are generally unsecured and are often subordinated to
other creditors of the issuer, and because these issuers usually have high
levels of indebtedness and are more sensitive to adverse economic conditions,
such as a recession, than are investment-grade issuers. In some cases, the
collection of principal and timely receipt of interest is dependent upon the
issuer attaining improved operating results, selling assets or obtaining
additional financing.
See the schedule of investments for information on individual securities, as
well as industry diversification and credit quality ratings.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) VALUATION OF INVESTMENTS
Investments for which listed market quotations are readily available are
stated at market value, which is determined using the last reported sale price
or, if no sales are reported, as in the case of some securities traded
over-the-counter, the last reported bid price. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost, which
approximates market.
Other investments, primarily noninvestment-grade corporate debt securities for
which market quotations are not readily available due to a thinly traded market
with a limited number of market makers, are stated at fair value on the basis of
valuations furnished by an independent pricing service, subject to adjustment by
the investment adviser in certain circumstances. The independent pricing service
determines value based primarily on quotations from dealers and brokers, market
transactions, accessing data from quotation services, offering sheets obtained
from dealers and various relationships between securities. The independent
pricing service utilizes the last sales price based on odd-lot trades, if
available. If such price is not available, the price furnished is based on
round-lot or institutional size trades. These procedures have been approved by
the Board of Directors.
The fair value of restricted securities is determined by the investment
adviser following procedures approved by the Board of Directors.
(B) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Realized gains and losses on investments sold are recorded on the
identified-cost basis. Interest income is recorded on the accrual basis.
(C) FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code of 1986, as amended, applicable to regulated investment companies,
and to distribute substantially all of its investment company taxable income to
its stockholders each year. Accordingly, no federal income tax provision is
required.
At April 30, 1996, the cost of investments in securities for federal income
tax purposes was $132,947,644. Aggregate gross unrealized gains on securities in
which there was an excess of market value over tax cost was $5,129,050.
Aggregate gross unrealized losses on securities in which there was an excess of
tax cost over market value was $8,489,535. The net unrealized loss on securities
held by the Fund was $3,360,485 for federal income tax purposes.
At October 31, 1995, the Fund had the following capital loss carryovers
available to offset future capital gains, if any, to the extent provided by
regulations:
CARRYOVER
AVAILABLE EXPIRATION DATE
$ (322,943) October 31, 1997
(42,345,806) October 31, 1998
(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,741,007) October 31, 2003
------------
$(65,747,203)
============
(D) COMMON STOCK AND TAXABLE AUCTION RATE PREFERRED STOCK (PREFERRED STOCK),
OFFERING AND DEFERRED DEBT ISSUANCE AND ORGANIZATIONAL COSTS
The costs incurred by the Fund in connection with the initial sale of the
common and preferred stock, as well as the common stock rights offerings, have
been recorded as a reduction of the common stock proceeds. The costs incurred by
the Fund in connection with its organization have been deferred and are being
amortized over a period of five years from the date on which the Fund commenced
operations. The costs incurred by the Fund in connection with the issuance of
the senior notes have been deferred and are being amortized on a straight-line
basis over a period of five years.
(E) CASH FLOW INFORMATION
The Fund invests primarily in corporate debt securities and distributes
dividends from net investment income, which are paid in cash or shares of common
stock of the Fund. These activities are reported in the accompanying statement
of changes in net assets, and additional information on cash receipts and cash
payments is presented in the accompanying statement of cash flows.
(3) INVESTMENT ADVISORY AGREEMENT
Prospect Street Investment Management Co., Inc., the Fund's Investment
Adviser, earned approximately $432,025 in management fees for the six months
ended April 30, 1996. Management fees paid by the Fund to the Investment Adviser
were calculated at .65% (on an annual basis) of the average weekly value of
total assets of the Fund less accrued liabilities (excluding the principal
amount of the notes and the liquidation preference of the preferred stock and
including accrued and unpaid dividends on the preferred stock) up to and
including $175,000,000 of net assets, .55% on the next $50,000,000 of net assets
and .50% of the excess of net assets over $225,000,000. At April 30, 1996, the
fee payable to the Investment Adviser was $63,174, which was included in accrued
expenses in the accompanying balance sheet.
(4) DEBT
In July 1993, the Fund repurchased the remaining $5,000,000 (principal amount)
of its senior extendible notes (the Notes), which carried an annual interest
rate through November 30, 1993 of 10.28%. The Fund simultaneously issued
$20,000,000 of new Senior Notes (the Senior Notes) which will mature, if not
previously redeemed, on December 1, 1998. The Fund is required to maintain
certain asset coverages with respect to the Senior Notes, as defined in the Note
Purchase Agreement, and the Senior Notes are subject to mandatory redemption if
the Fund fails to maintain these asset coverages. The Senior Notes bear interest
at the rate of 6.53% per annum through November 30, 1998. Interest on the Senior
Notes is due every June 1 and December 1, commencing December 1, 1993.
The Senior Notes are redeemable, in whole or in part, by the Fund at certain
times and under certain circumstances, as defined in the Note Purchase
Agreement.
(5) REDEEMABLE PREFERRED STOCK
In July 1993, the Fund redeemed 100 of the 300 shares of preferred stock that
were issued concurrently with the issuance of the Senior Extendible Notes.
Dividends are cumulative at a rate that was established at the offering of the
preferred stock and which has and will continue to be reset every 30 days
thereafter by an auction. Dividend rates ranged from 5.28% to 6.00% of the
liquidation preference during the six months ended April 30, 1996. The remaining
200 shares of preferred stock are redeemable, at the option of the Fund, at a
redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends, on any dividend payment date. The preferred stock is also subject to
mandatory redemption at a redemption price equal to $100,250 per share, plus
accumulated and unpaid dividends, if the Fund is in default of its surety asset
coverage requirements with respect to the preferred stock (see Note 7). In
general, the holders of the preferred stock and the common stock vote together
as a single class, except that the holders of the preferred stock, as a separate
class, vote to elect two members of the Board of Directors, and separate class
votes are required on certain matters that affect the respective interests of
the preferred stock and common stock. The preferred stock has a liquidation
preference of $100,000 per share, plus accumulated and unpaid dividends. The
Fund is required to maintain certain asset coverages with respect to the
preferred stock, as defined in the Fund's Note Purchase Agreement and Surety
Bond Agreement.
(6) AUCTION AGENT
The Fund amended and extended the auction agent agreement with Bear Stearns &
Co. Inc., on October 26, 1993 (which was originally dated May 7, 1990) to
provide for an extension to December 4, 1998. The Fund incurred additional costs
of $135,000 related to extending this agreement. These costs are being amortized
on a straight-line basis over the remaining life of the extended agreement.
Amortization expense for the six months ended April 30, 1996 was $13,389.
(7) SURETY BOND
The Fund has entered into an insurance agreement, dated as of December 1,
1988, with Financial Security Assurance, Inc. (FSA), pursuant to which FSA has
issued a surety bond. Under the terms of the surety bond, FSA has
unconditionally and irrevocably guaranteed dividend, redemption and liquidation
payments to preferred shareholders upon failure of the Fund to do so, and the
Fund is then obligated to reimburse FSA for any amounts paid under the surety
bond. The surety bond had an initial term of five years and was scheduled to
expire on December 5, 1993. On July 15, 1993, the Fund extended the terms of the
surety bond from December 5, 1993 to December 5, 1998. The Fund will pay an
annual premium of 0.40% on the maximum aggregate liquidation preference of the
preferred stock.
The Fund executed an amendment to the insurance agreement on April 11, 1990,
which provides that the Fund must redeem or repurchase all of the then
outstanding shares of preferred stock in the event that the dividend rate on the
preferred stock for the period next succeeding the auction in September 1998 is
the maximum applicable rate (as defined) payable on the Fund's preferred stock.
(8) PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 1996, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $68,074,049 and $67,622,115,
respectively. There were no purchases or sales of U.S. Government obligations
during the six months ended April 30, 1996.
(9) CERTAIN TRANSACTIONS
Certain officers of the Investment Adviser serve on the Board of Directors of
the Fund. They receive no compensation in this capacity.
Directors who are not officers or employees of the Investment Adviser receive
a fee of $10,000 per year plus $2,000 per Directors' meetings attended, together
with actual out-of-pocket expenses relating to attendance at such meetings. In
addition, members of the Fund's audit committee, which consists of certain of
the Fund's noninterested Directors, receive $500 per audit committee meeting
attended, if held on a day other than a Directors' meeting, together with actual
out-of-pocket expenses relating to attendance at such meeting.
(10) DIVIDENDS AND DISTRIBUTIONS
The Board of Directors of the Fund declared regular dividends on the common
stock of $.035 per share payable on November 30 and December 29, 1995, and
January 31, February 29, March 29 and April 30, 1996.
Distributions on common stock are declared based on annual projections of the
Fund's net investment income (defined as dividends and interest income, net of
Fund expenses, less distributions on the preferred stock). The Fund plans to pay
monthly distributions to common shareholders. Meanwhile, as a result of market
conditions or investment decisions, the amount of distributions may exceed net
investment income earned at certain times throughout the period. It is
anticipated that, on an annual basis, the amount of distributions to common
shareholders will not exceed net investment income (as defined) applicable to
common shareholders on a tax basis. All shareholders of the Fund are
automatically considered participants in the Dividend Reinvestment Plan (the
"Plan") unless otherwise elected. Under the Plan, when the market price of
common stock shares is equal to or exceeds the net asset value on record date
for distribution, participants will receive all dividends and distributions in
full and fractional shares of the Fund at the most recently determined net asset
value but in no event less than 95% of market price. If on record date for
distributions the net asset value of the common stock exceeds its market price,
or if the Fund shall declare a dividend or capital gains distribution payable
only in cash, the dividend-paying agent will buy common stock in the open market
for the participants' accounts. Participants are not charged a service fee for
the Plan but are subject to a pro rata share of brokerage fees incurred with
respect to open market purchases of common stock.
(11) FAIR VALUE OF LONG-TERM DEBT
The fair value of the Fund's long-term debt is estimated based on the quoted
market prices for the same issues or on the current rates offered to the Fund
for debt of the same remaining securities. At April 30, 1996, the fair value of
the Senior Notes was $19,606,000.
(12) SUBSEQUENT EVENT
On May 10, 1996 the Fund commenced a rights offering whereby the Fund issued
to its shareholders of record, as of that date, transferable rights entitling
the holders thereof to subscribe for an aggregate of 8,840,000 shares of the
Fund's common stock. Each record date shareholder has the ability to receive one
right for each three shares of common stock held. Each right allows the rights
holder to subscribe for one share of common stock. The subscription period for
the rights offering expires on June 21, 1996, unless extended, after which time
the number of shares allotted to each subscriber will be determined.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Prospect Street High Income Portfolio Inc.:
We have audited the accompanying balance sheet of PROSPECT STREET HIGH
INCOME PORTFOLIO INC., including the schedule of investments, as of April 30,
1996, the related statements of operations and cash flows for the six months
then ended, the statements of changes in net assets for the six months ended
April 30, 1996 and the year ended October 31, 1995 and the financial highlights
for the periods presented. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
April 30, 1996 by correspondence with the custodian. 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, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Prospect Street High Income Portfolio Inc. as of April 30, 1996, and the results
of its operations, the changes in its net assets, its cash flows and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 31, 1996
<PAGE>
<TABLE>
<CAPTION>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<C> <C>
INVESTMENT ADVISER AUDITORS
Prospect Street Investment Management Co., Inc. Arthur Andersen LLP
60 State Street, Suite 3750 Boston, MA
Boston, MA 02109
TRANSFER AND SHAREHOLDERS' SERVICING AGENT
OFFICERS State Street Bank and Trust Company
Richard E. Omohundro, Jr. -- President P.O. Box 8200
John A. Frabotta -- Vice President, Boston, MA 02266
Treasurer and (800) 426-5523
Chief Investment
Officer CUSTODIAN
Karen J. Thelen -- Secretary State Street Bank & Trust Company
Boston, MA
DIRECTORS
John S. Albanese PAYING AGENT (PREFERRED)
C. William Carey Bankers Trust Company
Joseph G. Cote New York, NY
John A. Frabotta
Richard E. Omohundro, Jr. Listed: NYSE
Harlan D. Platt Symbol: PHY
Christopher E. Roshier
LEGAL ADVISER
Olshan Grundman Frome & Rosenzweig
New York, NY
</TABLE>
<PAGE>
FACTS FOR SHAREHOLDERS:
Prospect Street High Income Portfolio Inc. is listed on the New York Stock
Exchange under the symbol "PHY". The Wall Street Journal publishes Friday's
closing net asset value of the Fund every Monday and lists the market price of
the Fund daily.
QUESTIONS REGARDING YOUR ACCOUNT: Please telephone State Street Bank & Trust
Company at their toll free number 1-800-426-5523 Monday through Friday from
9:00 a.m. to 5:00 p.m.
WRITTEN CORRESPONDENCE REGARDING YOUR ACCOUNT: Please mail all correspondence
directly to Prospect Street High Income Portfolio Inc., c/o State Street Bank &
Trust Company, P.O. Box 8200, Boston, MA 02266. For express mail the address is
Prospect Street High Income Portfolio Inc., c/o State Street Bank & Trust
Company, 2 Heritage Drive, Corporate Stock Transfer -- 4th Floor, North Quincy,
MA 02171.
1996 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 1, 1996, the stockholders
elected seven directors of the Fund. The numbers were as follows:
PREFERRED STOCK NOMINEES FOR WITHHELD
John S. Albanese ................................ 150 0
John A. Frabotta ................................ 150 0
COMMON STOCK AND PREFERRED STOCK NOMINEES FOR WITHHELD
Richard E. Omohundro, Jr. ....................... 21,368,595 358,488
Joseph G. Cote .................................. 21,326,919 400,164
C. William Carey ................................ 21,378,924 348,159
Harlan D. Platt ................................. 21,324,413 402,669
Christopher E. Roshier .......................... 21,313,836 413,247
Stockholders also ratified the selection of Arthur Andersen LLP as independent
public accountants for the current fiscal year. The numbers were as follows:
FOR AGAINST ABSTAIN
21,374,288 132,857 209,207
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street, Suite 3750
Boston, MA 02109
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
SEMI-ANNUAL
REPORT
APRIL 30, 1996
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