<PAGE>
December 20, 1995
LETTER TO SHAREHOLDERS
Dear Shareholders:
On October 31, 1995, the net asset value of the Fund was $3.70, as compared
to $3.66 on April 28, 1995 and $3.69 on October 31, 1994. During the fiscal year
ended October 31, 1995, the Fund paid dividends to shareholders on the common
stock in the amount of $0.42 per share. Total dividends paid for the calendar
year ending December 31, 1995 are $0.42.
THE HIGH YIELD MARKET:
The High Yield market, as measured by the CS First Boston Index, generated
an annualized total return of 14.61% for the ten month period ended October 31,
1995. The spread between high yield securities and comparable U.S. government
securities stood at 429 basis points at October 31, 1995 compared to 414 basis
points at April 28, 1995 and 354 basis points at October 31, 1994. Total new
issue volume through October 31, 1995 approximated $22.4 billion. The average
price of a cash-paying, high yield security was $97.80 with a yield of 10.42% at
October 31, 1995. This compares with an average price of $92.87 and a yield to
maturity of 11.59% as of October 31, 1994. The flow of new funds into high yield
mutual funds continues at a high level averaging over $203.6 million per week
since April, 1995. Total assets in high yield mutual funds reached approximately
$60 billion at October 31, 1995 as compared to $53 billion at April 28, 1995, an
increase of approximately 13%.
THE FUND'S INVESTMENTS:
The total return on the Fund's common stock for the twelve months ended
October 31, 1995 was 20%. As of October 31, 1995, the Fund held 178 issues
representing 31 industry groups. Cash and short-term investments represented
4.30% of total assets. At October 31, 1995, the Fund was generating monthly net
investment income of approximately $0.035 per common share.
INVESTMENT OUTLOOK:
The stock and bond markets have performed well since October 1994. At
October 31, 1995 the capital markets were nearly all at new highs. Factors that
would be expected to extend the positive outlook for the high yield bond market
are:
1. Cash flow into high yield funds remains strong and the cash positions
of many high yield funds is high.
2. The Federal Reserve appears to be pricing Fed Funds too high for the
current economic environment. The consummation of a budget accord
between the Administration and the Congress could be the event for
the Federal Reserve to sharply reduce the current Fed Funds rate
below 5.75%. Currently all US Treasury securities with maturities
under ten years are trading to yield less than 5.75%.
3. Raw material and industrial prices have continued to weaken and year
over year have fallen below their cost of funding. As inventory
levels are realigned many manufacturers will benefit.
4. Corporate buybacks and refinancings continue at a high level and net
issuance of debt and equity remain low, creating a declining supply
of securities. In the third quarter of 1995, net issuance was
estimated at a negative $85 billion as compared to a negative $75
billion in the second quarter.
Some of the factors that could negatively impact the high yield market are:
1. The financial markets have been very strong for all of 1995. A
correction or consolidation in the capital markets should not be
discounted.
2. Recent comments from the Federal Reserve that may imply that it may
not continue to maintain a more restrictive monetary policy. Both the
economy and the capital markets are assuming that Federal Reserve
easing will be necessary to prevent further weakness in 1996.
3. The earnings momentum of corporations has recently become much more
questionable. Without more friendly fiscal and monetary policies,
corporate earnings by mid-year could be slowing sharply with the
probability of a recession beginning in late 1996 and continuing into
1997. Weak business conditions or the expectation of weak business
conditions could be especially harsh to the high yield bond market.
4. The political environment could create uncertainty, particularly if a
third party Presidential candidate was to emerge. Also, an increase
in foreign military involvement could create unsettling conditions
with resulting problems for the capital markets.
CONCLUSION:
The fiscal year ended October 31, 1995 has been a period of strength in the
high yield market. Longer term interest rates are again at 6% and short term
interest rates could be set to decline sharply. With cash flows into high yield
funds remaining strong, the outlook for the high yield market appears favorable
for the next few months.
Management continues to review the Fund's investments, eliminating issues
that appear fully-priced or vulnerable to either interest rate risk or
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
OCTOBER 31, 1995
FIXED INCOME -- 88.76%
<TABLE>
<CAPTION>
Ratings
------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
AEROSPACE AND DEFENSE -- 3.40%
<S> <C> <C> <C> <C>
$ 500,000 GPA Holland BV, 9.12%, medium-term notes, 02/24/99 ...................... NR NR $ 420,000
763,723 GPA Leasing USA Inc., 9 1/8%, equip. trust, series BN, 12/02/96 ......... B B3 683,250
2,000,000 K&F Industries Inc., 13 3/4%, sr. sub. deb., 08/01/01 ................... B- B2 2,080,000
500,000 Rohr Inc., 11 5/8%, sr. notes, 05/15/03 ................................. BB- Ba3 537,500
1,000,000 Sabreliner Corp., 12 1/2%, sr. notes, series B, 04/15/03 ................ B+ B2 920,000
------------
4,640,750
------------
AGRICULTURAL CHEMICALS/FARMING -- 1.71%
500,000 Calmar Spraying Systems Inc., 11 1/2%, sr. sub. notes, 144A, 08/15/05 ... B- B3 501,250
500,000 Hines Horticulture Inc., 11 3/4%, sr. sub. notes, 144A, 10/15/05 ........ NR NR 500,000
1,250,000 LaRoche Industries Inc., 13%, sr. sub. notes, 144A, 08/15/04 ............ B B3 1,337,500
------------
2,338,750
------------
AUTOMOBILE/AUTO PARTS/TRUCK MANUFACTURING -- 2.10%
1,000,000 AM General Corp., 12 7/8%, sr. notes, series B, 05/01/02 ............... B+ B3 982,500
500,000 JPS Automotive Products Corp., 11 1/8%, sr. notes, 06/15/01 ............. B B2 507,500
500,000 Johnstown America Industries, Inc., 11 3/4%, sr. sub. notes, 08/15/05 ... B B3 470,000
500,000 Poindexter, J.B., Inc., 12 1/2%, sr. notes, 05/15/04 .................... B+ B2 482,500
500,000 Venture Holdings Trust, 9 3/4%, sr. sub. notes, 04/01/04 ................ B B3 435,000
------------
2,877,500
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES/CONSUMER CREDIT -- 1.83%
1,000,000 Berkeley Federal Bank & Trust, 12%, sub. deb., 06/15/05 ................. B+ B1 1,025,000
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 455,000
------------
2,510,000
------------
BROADCASTING -- TV/CABLE/RADIO/PUBLISHING -- 8.59%
1,000,000 Allbritton, 11 1/2%, sr. sub. notes, 08/15/04 ........................... B- B3 1,066,250
2,000,000 American Telecasting Inc., 14 1/2%, sr. disc. notes, 08/15/05 ........... CCC+ Caa 1,100,000
500,000 Busse Broadcasting Corp., 11 5/8%, sr. secd. notes, 144A, 10/15/00 ...... NR B3 479,800
500,000 Chancellor Broadcasting Co., 12 1/2%, sr. sub. notes, 10/01/04 .......... B- B3 527,500
750,000 Emerson Radio Corp., 8 1/2%, conv. sub. deb., 144A, 08/15/02 ............ NR NR 750,000
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub. notes, 10/01/05 ................. B- B3 499,375
1,000,000 Heritage Media Services Inc., 11%, gtd. sr. secd. notes, 06/15/02 ....... BB- Ba3 1,080,000
1,000,000 Heritage Media Corp., 11%, sr. sub. notes, 10/01/02 ..................... B B2 1,065,000
500,000 Lamar Advertising, 11%, sr. secd. notes, 05/15/03 ....................... B+ B1 507,500
750,000 Marcus Cable Co., L.P., 11 7/8%, sr. deb., 10/01/05 ..................... B Caa 725,625
500,000 New City Communications Inc., 11 3/8%, sr. sub. notes, 11/01/03 ......... B- B3 467,500
750,000 Paxson Communications Corp., 11 5/8%, sr. deb., 10/01/05 ................ B- B3 741,225
500,000 SFX Broadcasting Inc., 11 3/8%, sr. sub. notes, 10/01/00 ................ B B3 522,500
750,000 Spanish Broadcasting Corp., 7 1/2%, sr. notes, 06/15/02 ................. B B3 699,375
500,000 Sullivan Graphics Inc., 12 3/4%, sr. sub. notes, 144A, 08/01/05 ......... B- Caa 500,000
325,000 Winstar Communications Inc., 14%, sr. sub. disc. notes, 10/15/05 ........ NR NR 496,933
500,000 Wireless One Inc., 13%, sr. disc. notes, 10/15/03 ....................... B- Caa 518,750
------------
11,747,333
------------
CHEMICALS/PLASTICS -- 4.01%
$ 750,000 Arcadian Partners, L.P., 10 3/4%, sr. notes, series B, 05/01/05 ......... BB- B2 $ 811,875
500,000 Harris Chemical North America, Inc., 10 3/4%, gtd. sr. sub. notes, 10/15/ B B3 407,500
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 910,000
1,000,000 Trans Resources Inc., 11 7/8%, sr. sub. notes, 07/01/02 ................. B- B2 940,000
980,000 Uniroyal Technology Corp., 11 3/4%, sr. secd. notes, 06/01/03 ........... B B2 906,500
------------
5,490,875
------------
CONSUMER DURABLE GOODS/HOME FURNISHINGS/CHILDCARE/TOYS -- 1.33%
1,200,000 Color Tile Inc., 10 3/4%, sr. notes, 12/15/01 (b) ....................... CCC+ Caa 492,000
1,000,000 Cort Furniture Rental Corp., 12%, sr. notes, 09/01/00 ................... B B2 1,055,000
250,000 Tarkett International, 9%, sr. sub. notes, 03/01/02 ..................... BBB- B1 266,875
------------
1,813,875
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 1.81%
500,000 Aftermarket Technology Corp., 12%, sr. sub. notes,
series B, 08/01/04 .................................................... NR B3 531,250
500,000 Jordan Industries Inc., 10 3/8%, sr. notes, 08/01/03 .................... B+ B3 460,000
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 B3 485,000
500,000 Selmer Inc., 11%, sr. sub. notes, 05/15/05 .............................. B- B3 480,000
------------
2,481,250
------------
DIVERSIFIED/CONGLOMERATE SERVICES -- 0.92%
250,000 Atlantis Group Inc., 11%, sr. notes, 02/15/03 ........................... B B2 232,500
500,000 Primeco Inc., 12 3/4%, sr. sub. notes, 03/01/05 ......................... B B3 522,500
500,000 Solon Automated Services Inc., 12 3/4%, sr. notes, 07/15/01 ............. B+ B1 497,500
------------
1,252,500
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS -- 3.60%
500,000 Alpine Group Inc., 12 1/4%, sr. notes, 144A, 07/15/03 ................... B B3 458,685
500,000 CAI Wireless Systems, Inc., 12 1/4%, sr. disc. notes, 09/15/02 .......... BB- B3 534,375
1,000,000 Computervision Corp., 11 3/8%, sr. sub. notes, 08/15/99 ................. CCC+ B3 1,045,000
500,000 Essex Group Inc., 10%, sr. notes, 05/01/03 .............................. B+ B1 490,000
500,000 International Wire Group Inc., 11 3/4%, sr. sub. notes, 144A, 06/01/05 .. B- B3 500,000
1,000,000 Merisel Inc., 12 1/2%, sr. notes, 12/31/04 .............................. B B2 885,000
500,000 United Stationers Supply Co., 12 3/4%, sr. sub. notes, 05/01/05 ......... NR NR 535,000
500,000 VLSI Technology Inc., 8 1/4%, conv. sub. notes, 10/01/05 ................ B NR 475,000
------------
4,923,060
------------
FINANCIAL SERVICES-BROKERAGE/SYNDICATION/LEASING -- 0.73%
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes, 08/15/00 ...................... B- B2 995,000
------------
FOOD AND TOBACCO -- 2.95%
500,000 American Restaurant Group Inc., 12%, sr. secd. notes, 09/15/98 .......... B+ B2 375,000
500,000 American Rice Inc., 13%, mtg. notes, 07/31/02 ........................... B- B3 472,500
1,000,000 Eagle Foods Centers Inc., 8 5/8%, sr. notes, 04/15/00 ................... B+ B1 560,000
750,000 Envirodyne Industries, Inc., 12%, sr. secd. notes, series A, 06/15/00 ... NR NR 750,000
500,000 Liggett Group Inc., 11 1/2%, gtd. sr. secd. notes, series B, 02/01/99 ... NR NR 385,000
250,000 Liggett Group Inc., 16 1/2%, notes, 02/01/99 ............................ NR NR 230,000
500,000 TLC Beatrice International Holdings Inc., 11 1/2%,
sr. secd. notes, 10/01/05 ............................................. BB- B1 497,500
750,000 Van de Kamps Inc., 12%, sr. sub. notes, 144A, 09/15/05 .................. B- B3 772,500
------------
4,042,500
------------
GENERAL & SPECIALTY RETAIL -- 4.00%
500,000 Cole National Group Inc., 11 1/4%, sr. notes, 10/01/01 .................. B+ B1 497,500
500,000 County Seat Stores Inc., 12%, sr. sub. notes, 10/01/02 .................. NR NR 492,500
1,000,000 Finlay Fine Jewelry Corp., 10 5/8%, sr. notes, 05/01/03 ................. B B1 985,000
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes, 144A, 08/01/05 ................... B+ B3 980,000
1,250,000 Pamida Inc., 11 3/4%, sr. sub. notes, 03/15/03 .......................... B- B3 1,100,000
1,500,000 Specialty Retailers Inc., 11%, sr. sub. notes, series B, 08/15/03 ....... B- B3 1,417,500
------------
5,472,500
------------
GROCERY/CONVENIENCE -- 5.73%
1,000,000 Bruno's, Inc., 10 1/2%, sr. notes, 08/01/05 ............................. B- B3 985,000
1,000,000 Farm Fresh Inc., 12 1/4%, sr. notes, 10/01/00 ........................... B- B2 850,000
1,250,000 Pantry Inc., 12%, sr. notes, series B, 11/15/00 ......................... B+ B3 1,225,000
1,000,000 Pathmark Stores Inc., 12 5/8%, sub. deb., 06/15/02 ...................... B B3 1,020,000
1,000,000 Ralph's Supermarkets Inc., 11%, sr. sub. notes, 06/15/05 ................ B- B3 975,000
500,000 Smitty's Super Value Inc., 12 3/4%, sr. sub. notes, series B, 06/15/04 .. B- B2 485,000
750,000 Speciality Foods Corp., 11 1/8%, sr. notes, series A, 144A, 10/01/02 .... B B3 716,250
500,000 Star Markets Company, Inc., 13%, sr. sub. notes, 11/01/04 ............... CCC+ B3 485,000
1,000,000 Thrifty Payless, Inc., 12 1/4%, sr. sub. notes, 04/15/04 ................ B- B3 1,100,000
------------
7,841,250
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES -- 3.50%
528,267 Amerisource Distribution Corp., 11 1/4%, sr. deb., 07/15/05 (d) ......... B B3 586,376
750,000 Dade International Inc., 13%, sr. sub. notes, 02/01/05 .................. B+ B3 821,250
1,000,000 Eye Care Centers of America Inc., 12%, sr. notes, 10/01/03 .............. B+ B3 880,000
500,000 Health O Meter Inc., 13%, sr. sub. notes, 08/15/02 ...................... B- B3 465,000
1,000,000 Mediq/prn Life Support Services Inc., 11 1/8% sr. secd. notes, 07/01/99 . B B1 950,000
1,000,000 Tenet Healthcare Corp., 10 1/8%, sr. sub. notes, 03/01/05 ............... B+ Ba3 1,082,500
------------
4,785,126
------------
HOTEL/GAMING -- 1.51%
500,000 El Comandante Capital Corp., 11 3/4%, 1st mtg. notes, 12/15/03 .......... B+ B2 475,000
1,000,000 Motels of America Inc., 12%, sr. sub. notes, series B, 04/15/04 ......... B B3 1,015,000
576,000 U.S. Trails Inc., 12%, secd. notes, 07/15/98 ............................ NR NR 391,680
278,000 U.S. Trails Inc., 12%, sr. notes, 07/15/98 .............................. NR Caa 189,040
------------
2,070,720
------------
INSURANCE COMPANIES -- 0.19%
250,000 American Annuity Group Inc., 11 1/8%, sr. sub. notes, 02/01/03 .......... B+ Ba3 263,750
------------
LEISURE/AMUSEMENT/MOTION PICTURES -- 2.38%
$1,250,000 Act III Theatres Inc., 11 7/8%, sr. sub. notes, 02/01/03 ................ B- B3 $ 1,334,375
750,000 Genmar Holdings, Inc., 13 1/2%, sr. sub. notes, series A, 07/15/01 ...... B- B3 750,000
250,000 Live Entertainment Inc., 12%, sr. secd. sub. notes, 03/23/99 ............ NR NR 205,000
500,000 Marvel III Holdings Inc., 9 1/8%, sr. secd. notes, series B, 02/15/98 ... B- Caa 472,500
500,000 Premier Parks Inc., 12%, sr. notes, 144A, 08/15/03 ...................... B+ B2 500,000
------------
3,261,875
------------
MACHINERY -- 1.09%
500,000 Newflo Corp., 13 1/4%, sub. notes, 11/15/02 ............................. B- B3 511,250
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 478,750
------------
1,497,500
------------
METALS/MINING -- 6.64%
750,000 ACME Metals Inc., 12 1/2%, sr. secd. notes, 08/01/02 .................... B B1 739,688
1,000,000 Algoma Steel Inc., 12 3/8%, 1st mtg. notes, 07/15/05 .................... B B1 915,000
1,000,000 Bayou Steel Corporation, 10 1/4%, 1st mtg. notes, 03/01/01 .............. B B2 905,000
750,000 GS Technologies Inc., 12%, gtd. sr. notes, 09/01/04 ..................... B B2 751,875
500,000 Horsehead Industries Inc., 14%, sub. notes, 06/01/99 .................... CCC- B2 500,000
1,000,000 ICF Kaiser International Inc., 12%, sr. sub. notes, 12/31/03 ............ B- B3 900,000
500,000 IVACO Inc., 11 1/2%, sr. notes, 09/15/05 ................................ B+ B1 498,125
1,000,000 Inland Steel Co., 12%, f.m. bonds, series T, 12/01/98 ................... BB- Ba3 1,090,000
1,120,000 Maxxam Group Inc., 11 1/4%, sr. secd. notes, 08/01/03 ................... B- B3 1,120,000
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, 11/01/01 .................... B- B3 750,000
500,000 Sheffield Steel Corp., 12%, 1st mtg. notes, 11/01/01 .................... NR NR 465,000
------------
9,084,688
------------
OIL/NATURAL GAS/OIL SERVICES -- 5.02%
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 960,000
600,000 Dual Drilling Co., 9 7/8%, sr. sub. notes, 01/15/04 ..................... B- B3 558,000
1,000,000 Flores & Rucks Inc., 13 1/2%, sr. notes, 12/01/04 ....................... B B3 1,120,000
1,000,000 Gerrity Oil & Gas Corp., 11 3/4%, sr. sub. notes, 07/15/04 .............. B B3 880,000
500,000 Giant Industry Inc., 9 3/4%, gtd. sr. sub. notes, 11/15/03 .............. B+ B2 485,000
500,000 HarCor Energy Inc., 14 7/8%, sr. notes, 144A, 07/15/02 .................. B- B3 497,289
750,000 NS Group Inc., 13 1/2%, units, 07/15/03 ................................. B- B3 630,000
500,000 Nuevo Energy Co., 12 1/2%, sr. sub. notes, 06/15/02 ..................... B- B3 542,500
300,000 Presidio Oil Co., 11 1/2%, sr. gas indexed notes, series B, 09/15/00 .... D Caa 292,500
375,000 TransAmerican Refining Corp., 16 1/2%, gtd. sr. notes, 02/15/02 ......... B- Caa 416,250
------------
6,871,539
PACKAGING/CONTAINERS -- 0.87% ------------
500,000 Portola Packaging Inc., 10 3/4%, sr. notes, 10/01/05 .................... B B2 513,750
625,000 Sea Containers Ltd., 12 1/2%, sr. sub. deb., 12/01/04 ................... BB- B1 681,250
------------
1,195,000
------------
PAPER/FOREST PRODUCTS/PRINTING -- 3.09%
$ 500,000 APP International Finance Company B.V., 11 3/4%,
gtd. secd. notes, 10/01/05 ............................................ BB Ba3 $ 512,500
500,000 Day International Group, Inc., 11 1/8%, sr. sub. notes, 144A, 06/01/05 .. B- B3 500,000
750,000 Indah Kiat Int'l. Finance Co., 11 7/8%, gtd. secd. notes, 06/15/02 ..... BB Ba2 780,000
800,000 The Pacific Lumber Company, 10 1/2%, sr. notes, 03/01/03 ................ B+ B3 764,000
500,000 Trans Ocean Container Corp., 12 1/4%, sr. sub. notes, 07/01/04 .......... B- B3 512,500
870,000 Wickes Lumber Co., 11 5/8%, sr. sub. notes, 12/15/03 .................... B- B3 652,500
500,000 Williamhouse-Regency of Delaware, Inc., 11 1/2%, sr. sub. deb., 06/15/05. B- B2 502,500
------------
4,224,000
------------
PERSONAL & MISCELLANEOUS SERVICES -- 0.95%
750,000 ICON Health & Fitness, 13%, sr. sub. notes, 07/15/02 .................... B- B3 813,750
500,000 Outdoor Systems Inc., 10 3/4%, sr. notes, 08/15/03 ...................... B B2 482,500
------------
1,296,250
------------
POLLUTION CONTROL/WASTE REMOVAL -- 0.98%
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 -- 3.22%
477,000 Beaver Valley II Funding Corp., 8 5/8%, s.f. deb., 06/01/07 ............. B+ B1 438,840
500,000 Kenetech Corp., 12 3/4%, sr. secd. notes, 12/15/02 ...................... B- B2 425,000
1,000,000 Midland Funding Corp. II, 13 1/4%, secd. lease oblig., 07/23/06 ......... B- B2 1,050,000
500,000 Petroleum Heat & Power Inc., 10 1/8%, sub. notes, 04/01/03 .............. B+ B2 455,000
500,000 Petroleum Heat & Power Inc., 12 1/4%, sub. deb., 02/01/05 ............... B+ B2 525,000
500,000 Texas New Mexico Power Co., 12 1/2%, deb., 01/15/99 ..................... B B1 535,000
1,500,000 WRT Energy Corp., 13 7/8%, sr. notes, 03/01/02 (b) ...................... B- Caa 975,000
------------
4,403,840
------------
RAIL/TRUCKING/OVERNIGHT DELIVERY -- 2.64%
1,500,000 Petro PSC Properties, 12 1/2%, sr. notes, 06/01/02 ...................... B B3 1,477,500
1,000,000 Roadmaster Industries Inc., 11 3/4%, sr. sub. notes, 07/15/02 ........... B- B3 800,000
500,000 TNT Transport (USA) Inc., 11 1/2%, sr. notes, 04/15/04 .................. B+ B1 508,125
1,000,000 Terex Corp., 13 3/4%, sr. secd. notes, 05/15/02 ......................... B Caa 820,000
------------
3,605,625
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/CONSTRUCTION -- 4.85%
1,000,000 Associated Materials Inc., 11 1/2%, sr. sub. notes, 08/15/03 ............ B- B3 870,000
1,500,000 Baldwin Company, 10 3/8%, sr. notes, 08/01/03 ........................... D Ca 690,000
290,820 Bramalea Limited, 11 1/8%, deb., series 1, 03/22/98 (b) ................. NR NR 174,492
500,000 Continental Homes Hldg. Corp., 12%, sr. notes, 08/01/99 ................. B B1 532,500
500,000 Georgia Marble Co., 16 5/8%, sr. sub. ext. reset notes, 01/01/49 (b) .... NR NR 480,000
500,000 Greystone Homes Inc., 10 3/4%, gtd. sr. notes, 03/01/04 ................. B B2 441,250
1,000,000 MDC Holdings Inc., 11 1/8%, sr. notes, 12/15/03 ......................... B NR 945,000
500,000 Nortek Inc., 9 7/8%, sr. sub. notes, 03/01/04 ........................... CCC+ B3 467,500
500,000 Oriole Homes Corp., 12 1/2%, sr. notes, 01/15/03 ........................ B B2 475,000
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes, 05/01/02 ........................ NR B3 727,500
1,000,000 Presley Companies, 12 1/2%, sr. notes, 07/01/01 ......................... B- B3 837,500
------------
6,640,742
------------
TELEPHONE/COMMUNICATIONS -- 5.83%
$ 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, 144A, 08/01/05 ........................................ NR B3 750,000
500,000 Dictaphone Corp., 11 3/4%, sr. sub. notes, 08/01/05 ..................... B- B3 500,000
2,000,000 IXC Communications Inc., 12 1/2%, sr. disc. notes,
series A, 144A, 10/01/05 .............................................. NR B3 2,005,000
750,000 Intermedia Communications of Florida, Inc., 13 1/2%, sr. notes, 06/01/05. B- B3 787,500
500,000 Metrocall, Inc., 10 3/8%, sr. sub. notes, 10/01/07 ...................... B- B2 515,000
500,000 Mobile Telecommications 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, 144A, 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 1,057,500
500,000 Telefonica de Argentina, 11 7/8%, notes, 11/01/04 ....................... BB- B1 488,750
500,000 USA Mobile Communications, 14%, sr. notes, 11/01/04 ..................... CCC+ B3 577,500
------------
7,983,915
------------
TEXTILES/APPAREL -- 1.13%
1,000,000 Linter Textile Corp. Ltd., 13 3/4%, sr. sub. deb., 10/01/00 (b) ......... D Ca 12,500
500,000 Polysindo Eka Perkasa, 13%, sr. notes, 06/15/01 ......................... BB- B1 525,000
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 523,500
------------
1,546,000
------------
TRANSPORTATION/AIRLINES/BUS -- 2.16%
1,000,000 CHC Helicopter Corp., 11 1/2%, sr. sub. notes, 07/15/02 ................. B- B3 880,000
1,000,348 Continental Airlines Inc., 6%, conv. secd. deb., 02/01/02 (b) ........... NR NR 975,339
1,000,000 Continental Airlines, Inc., 12 1/8%, secd. equip. certs., 04/15/96 (b) .. NR NR 130,000
1,000,000 U.S. Air, 9.82%, equip. trust certs., 01/01/13 .......................... B+ B1 963,411
------------
2,948,750
------------
Total Fixed Income (cost $123,653,636) .................................. $121,450,213
------------
COMMON STOCK AND WARRANTS -- 2.89%
Value
Units Description (Note 2)
----- ----------- --------
1,000 American Financial Corp. .................................................................. $ 25,125
12,644 Amerisource Distribution Corp., class C (c) ............................................... 278,168
185,900 Ames Department Stores Inc., excess cash flow pmt., series A .............................. 0
594,876 Ames Department Stores Inc., lit. trust units ............................................. 0
8,000 CHC Helicopter, warrants .................................................................. 0
1,000 Central Rents, warrants ................................................................... 0
750 Chattem Inc., warrants .................................................................... 3,000
500 County Seat Holdings Inc., warrants ....................................................... 0
1,000 Eye Care Centers of America Inc., warrants ................................................ 0
20,000 Ford Motor Company ........................................................................ 575,000
30,000 Forest Oil Corp., warrants ................................................................ 23,438
500 HDA Management Corp., warrants ............................................................ 0
11,000 HarCor Energy Inc., warrants .............................................................. 0
20,000 Health & Retirement Properties Trust ...................................................... 325,000
1,500 Heartland Wireless Communications, warrants ............................................... 22,500
10,000 Hospitality Properties Trust .............................................................. 262,500
4,800 ICF Kaiser International Inc., warrants ................................................... 0
750 IHF Capital Inc., warrants ................................................................ 0
553 Insilco Corp., class B .................................................................... 18,456
76,248 Intelogic Trace Inc. (b) .................................................................. 0
12,392 Intelogic Trace Inc., preferred (b) ....................................................... 0
750 Intermedia Communications of Florida, Inc. ................................................ 8,437
50,908 Live Entertainment Inc., conv. preferred, series B ........................................ 343,629
20,000 MDC Holdings Inc. ......................................................................... 140,000
500 Motels of America, 144A ................................................................... 37,500
33,000 New Cort Holdings Corp., warrants ......................................................... 33,000
5,925 Peters, J.M. Inc., warrants ............................................................... 22
1,000 Petro PSC Properties L.P., warrants ....................................................... 33,000
59,577 Pioneer Financial Services Inc., preferred ................................................ 834,078
10,500 Prime Residential ......................................................................... 183,750
1,000 Sabreliner Corp., warrants ................................................................ 0
500 Smitty's Supermarkets Inc., class B ....................................................... 5,000
500 Spanish Broadcasting Corp., warrants ...................................................... 80,000
34,722 Summitt Care Corp ......................................................................... 720,482
148,562 United Gas Holding Corp. (c) .............................................................. 0
------------
Total Common Stock and Warrants (cost $8,205,456) ......................................... 3,952,085
------------
Total Investments in Securities (cost $131,859,092) ....................................... $125,402,298
============
SHORT-TERM INVESTMENTS -- 4.30%
Par
Value
-----
COMMERCIAL PAPER:
$5,883,000 CXC Incorporated, 5.85%, 11/01/95, A-1/P-1 ................................................ $ 5,883,000
------------
TOTAL SHORT-TERM INVESTMENT (cost $5,883,000) ............................................. 5,883,000
------------
TOTAL INVESTMENTS -- 95.98% (cost $137,742,092) ........................................... 131,285,298
------------
OTHER ASSETS -- 4.02% ..................................................................... 5,493,095
------------
TOTAL ASSETS -- 100% ...................................................................... $136,778,393
============
(a) Percentages indicated are based on total assets.
(b) Non income-producing security, currently in receivership. At October 31,
1995 these securities amounted to $3,239,331 or 2.4% of total net assets.
(c) Security valued in good faith following procedures approved by the Board of
Directors.
(d) Pay in kind.
NR denotes not rated
144A security is exempt from registration under Rule 144A of the Securities Act
of 1933. Such securities may be resold normally to qualified institutional
buyers in a transaction exempt from registration. At October 31, 1995 these
securities amounted to $14,023,414 or 10.3% of total net assets.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
October 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities at value (identified cost $131,859,092; see Schedule of Investments and $125,402,298
Short-term investments, at cost which approximates value (see Schedule of Investments and Note 2) . 5,883,000
Cash .............................................................................................. 48
Receivables:
Investment securities sold ...................................................................... 1,310,068
Interest ........................................................................................ 4,018,360
Deferred debt issuance and organizational costs (Note 2) .......................................... 14,998
Deferred auction agent fees (Note 6) .............................................................. 81,001
Prepaid surety bond premiums (Note 7) ............................................................. 7,013
Prepaid insurance ................................................................................. 29,923
Other assets ...................................................................................... 31,684
------------
Total assets .............................................................................. $136,778,393
------------
LIABILITIES
Payables:
Investment securities purchased ................................................................. $ 2,685,082
Accrued expenses (Note 3) ......................................................................... 784,335
Senior notes (Note 4) ............................................................................. 20,000,000
------------
Total liabilities ......................................................................... $ 23,469,417
------------
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 -- 25,189,990 shares ................................................... $ 251,900
Capital in excess of par value (Notes 2 and 5) .................................................. 164,331,238
Accumulated undistributed net investment income (Note 2) ........................................ 929,835
Accumulated net realized loss from security transactions ........................................ (65,747,203)
Net unrealized depreciation of investments ...................................................... (6,456,794)
------------
Net assets applicable to common stock (equivalent to $3.70 per share, based on 25,189,990
shares outstanding) ..................................................................... $ 93,308,976
------------
Total net assets ...................................................................... $113,308,976
============
</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 year ended October 31, 1995
INVESTMENT INCOME (Note 2):
<S> <C>
Interest income ........................................................................ $14,201,790
Dividend income ........................................................................ 113,280
Accretion of discount .................................................................. 1,066,765
----------
Total investment income .......................................................... $15,381,835
-----------
EXPENSES:
Interest expense ....................................................................... $ 1,305,999
Investment advisory fee (Note 3) ....................................................... 874,812
Custodian and transfer agent fees ...................................................... 175,049
Preferred dividend auction costs ....................................................... 153,282
Professional fees ...................................................................... 128,108
Miscellaneous expenses ................................................................. 111,055
Amortization of prepaid surety bond premiums (Note 7) .................................. 80,220
Directors' fees ........................................................................ 76,500
Insurance expense ...................................................................... 75,664
Amortization of deferred auction agent fees (Note 6) ................................... 26,999
-----------
Total expenses ................................................................... $ 3,007,688
-----------
Net investment income ............................................................ $12,374,147
-----------
REALIZED LOSS AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss on investments sold .................................................. $(3,741,007)
Change in net unrealized depreciation of investments (Note 2) .......................... 3,492,305
-----------
Net realized loss and unrealized gain on investments ............................. $ (248,702)
-----------
Net increase in net assets resulting from operations ............................. $12,125,445
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($5,996 per share) ............................... (1,199,291)
-----------
Net increase in net assets applicable to common stockholders ..................... $10,926,154
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the year ended October 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ............................ $ 14,784,492
Operating expenses paid .................................... (2,959,289)
-------------
Net cash provided by operating activities ............ $ 11,825,203
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities .......................... $(101,617,295)
Sales and maturities of portfolio securities ............... 100,807,621
-------------
Net cash used in investing activities ................ $ (809,674)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid ............................. (1,207,043)
Common stock dividends paid from operations ................ (9,808,528)
-------------
Net cash used in financing activities ................ $ (11,015,571)
-------------
NET DECREASE IN CASH ......................................... $ (42)
CASH, BEGINNING OF PERIOD .................................... 90
-------------
CASH, END OF PERIOD .......................................... $ 48
=============
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 ..... $ 12,125,445
Increase in interest and other receivables ............... (51,533)
Amortization of Fidelity Bond and other deferred assets .. 115,415
Decrease in other assets ................................. 11,359
Increase in accrued expenses ............................. 19,074
Net realized loss on investments sold .................... 3,741,007
Change in net unrealized depreciation of investments ..... (3,492,305)
Accretion of bond discount ............................... (540,490)
Increase in prepaid assets ............................... (102,769)
-------------
Net cash provided by operating activities ............ $ 11,825,203
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................... $ 653,829
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CHANGES IN NET ASSETS
Fiscal Year Ended Fiscal Year Ended
October 31, October 31,
1995 1994
----------------- -----------------
FROM OPERATIONS:
Net investment income ............. $ 12,374,147 $ 11,724,744
Net realized loss on investments
sold ............................. (3,741,007) (808,396)
Change in net unrealized
appreciation (depreciation) of
investments ...................... 3,492,305 (8,320,521)
------------ ------------
Net increase in net assets
resulting from operations .. $ 12,125,445 $ 2,595,827
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (225,487 shares
and 90,892 shares,
respectively) to common
stockholders for reinvestment
of dividends .................... $ 827,802 $ 376,001
Net proceeds from sale of common
stock issued (6,210,000
shares, after deducting
$1,010,212 of soliciting fees
and other expenses) ............. -- 21,345,788
------------ ------------
Increase in net assets
resulting from fund share
transactions .............. $ 827,802 $ 21,721,789
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($5,996 and
$4,185 per share, respectively) . $ (1,199,291) $ (837,080)
Common dividends ($.42 and $.45
per share, respectively) from
operations ....................... (10,516,741) (10,846,301)
------------ ------------
Decrease in net assets
resulting from distributions
to stockholders ............ (11,716,032) (11,683,381)
------------ ------------
Total net increase in net
assets ..................... $ 1,237,215 $ 12,634,235
NET ASSETS:
Beginning of period ............ 112,071,761 99,437,526
------------ ------------
End of period (including
$929,835 and $202,888 of
undistributed net investment
income as of October 31, 1995
and 1994, respectively) ...... $113,308,976 $112,071,761
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
<TABLE>
<CAPTION>
For the Years Ended October 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........................ $ 3.69 $ 4.25 $ 4.03 $ 3.89 $ 3.30
-------- -------- ------- ------- -------
Net investment income ....................................... .45 .48# .63# .62 .55
Net realized and unrealized gain (loss) on investments ...... .03 (.38)# .39# .07 .56
-------- -------- ------- ------- -------
Total from investment operations $ .48 $ .10 $ 1.02 $ .69 $ 1.11
-------- -------- ------- ------- -------
Distributions:
Dividends from accumulated net investment income
To preferred stockholders ............................... (.05) (.03) (.06) (.10) (.16)
To common stockholders .................................. (.42) (.45) (.62) (.45) (.36)
Dividends to common stockholders from paid-in capital ..... -- -- -- -- --
-------- -------- ------- ------- -------
Total distributions ................................. $ (.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 .............................. $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89
======== ======== ======= ======= =======
Per share market value, end of period ....................... $ 3.88 $ 3.50 $ 4.25 $ 4.00 $ 3.50
======== ======== ======= ======= =======
Total investment return ..................................... 28.57% (7.78)% 23.25% 27.99% 57.36%
======== ======== ======= ======= =======
Net assets, end of period, applicable to
common stock (a) .......................................... $ 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 $30,000 $30,000
Net assets, end of period (a) ................................ $113,309 $112,072 $99,498 $85,178 $83,040
Ratio of operating expenses to average net assets** .......... 2.28%+ 2.30%+ 2.13%+ 2.28%+ 2.93%+
Ratio of net investment income to average net assets** ....... 9.39% 8.64% 9.26% 9.33% 9.24%
Portfolio turnover rate ...................................... 80.71% 72.00% 117.20% 97.86% 114.00%
(a)Dollars in thousands.
**Ratios calculated on the basis of expenses and net investment income applicable to both the common and preferred
shares relative to the average net assets of both the common and preferred shareholders.
+Excluding interest expense, the ratio of operating expenses to average net assets is 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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
INFORMATION REGARDING SENIOR SECURITIES
<TABLE>
<CAPTION>
As of October 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------
Total Amount Outstanding:
<S> <C> <C> <C> <C> <C>
Notes $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 30,000,000 30,000,000
Asset Coverage:
Per note (a) 667% 660% 597% 1,804% 1,761%
Per preferred stock share (b) 333% 330% 299% 258% 252%
Involuntary Liquidation Preference:
Per preferred stock share (c) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note $ 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
(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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
(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 Funds 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. The Fund has reclassified $68,832 from capital in excess of par to
accumulated undistributed net investment income. This reclassification has no
impact on the net asset value of the Fund and is designed to present the Fund's
capital accounts on a tax basis.
At October 31, 1995, the cost of investments in securities for federal income
tax purposes was $131,859,092. Aggregate gross unrealized gains on securities in
which there was an excess of market value over tax cost was $3,971,122.
Aggregate gross unrealized losses on securities in which there was an excess of
tax cost over market value was $10,427,916. The net unrealized loss on
securities held by the Fund was $6,456,794 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 $874,812 in management fees for the year ended
October 31, 1995. 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 October 31, 1995, the
fee payable to the Investment Adviser was $74,149, 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 5.035% to 6.60% of the
liquidation preference during the year ended October 31, 1995. 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 year ended October 31, 1995 was $26,999.
(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 year ended October 31, 1995, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $101,073,307 and $97,942,113,
respectively. There were no purchases or sales of U.S. Government obligations
during the year ended October 31, 1995.
(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 30, 1994, and
January 31, February 28, March 31, April 28, May 31, June 30, July 31, August
31, September 29 and October 31, 1995.
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 a participant 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 October 31, 1995, the fair value
of the Senior Notes was $19,750,000.
<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 October 31,
1995, the related statements of operations and cash flows for the year then
ended, the statements of changes in net assets for the year ended October 31,
1995 and the year ended October 31, 1994 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
October 31, 1995 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 October 31, 1995, 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
December 1, 1995
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
INVESTMENT ADVISER AUDITORS
Prospect Street Investment Management Arthur Andersen LLP
Co., Inc. Boston, MA
Exchange Place, 37th Floor
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 and Trust Company
DIRECTORS Boston, MA
John S. Albanese
John F. Barry PAYING AGENT (PREFERRED)
C. William Carey Bankers Trust Company
John A. Frabotta New York, NY
Richard E. Omohundro, Jr.
Harlan D. Platt Listed: NYSE
Christopher E. Roshier Symbol: PHY
LEGAL ADVISER
Olshan Grundman Frome & Rosenzweig
New York, NY
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 -- President's Place, North
Quincy, MA 02171.
<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
ANNUAL
REPORT
OCTOBER 31, 1995
WALL
PROSPECT STREET
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
Exchange Place, 37th Floor
Boston, MA 02109
