<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
SEMI-ANNUAL
REPORT
APRIL 30, 1997
[Logo]
<PAGE>
June 20, 1997
LETTER TO SHAREHOLDERS
Dear Shareholders:
On April 30, 1997, the net asset value of the Fund was $3.76, as compared
to $3.90 on October 31, 1996. During the six month period ended April 30,
1997, the Fund paid dividends to common stock shareholders in the amount of
$0.21 per share. The total dividends paid for the trailing twelve month period
was $0.42.
1997 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 1, 1997 the stockholders
re-elected the 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 11.9% for the twelve month period ended April
30, 1997. At April 30, 1997, the spread between high yield securities and
comparable U.S. Government securities stood at 352 basis points compared to
404 basis points at October 31, 1996. Total new issue volume through April 30,
1997 approximated $42.7 billion, heavily weighted toward Rule 144A issues. The
average price for a cash paying high yield security was $101.625 with an
average coupon of 10.43%.
The flow of new funds into high yield mutual funds continued at a high
level for the first 4 months of 1997, averaging approximately $200 million per
week. Total assets in high yield mutual funds exceeded $82 billion at April
30, 1997 as compared to $75 billion at October 31, 1996. Corporate bond
obligations ("CBOs"), entities formed to invest exclusively in high yield
securities, have become major investors with approximately $8.0 billion raised
in 1997 and an estimated $12.0 billion more in registration. These two factors
have been major drivers in narrowing the spread between investment grade
securities and high yield securities.
RIGHTS OFFERING:
The Fund recently completed a non-transferable rights offering to
shareholders of record on February 25, 1997. The Fund raised net proceeds of
approximately $44 million. The Fund issued 12,918,092 new common shares,
increasing the total shares outstanding to 43,957,725. The net proceeds were
invested at yields in excess of the Fund's then current yield and permitted
further portfolio diversification. Shareholders who received new shares were
eligible to receive the April 30, 1997 dividend.
THE FUND'S INVESTMENTS:
The total return on the Fund's net assets for the six months ended April
30, 1997, assuming reinvestment of dividends and adjusted for the rights
offering was approximately 5.2%. As of April 30, 1997, the Fund held 200
issues representing 28 industry groups. Cash and short-term investments
represented .62% of our holdings. The average price of the Fund's high yield
securities was $91.46 with an average coupon of 10.8%. At April 30, 1997, 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 1996. Factors that
would be expected to extend a favorable outlook for the high yield securities
are:
1. The cash flow into high yield funds and newly forming CBOs remains
high.
2. The need for yield by investors remains strong, bringing more
investors into the high yield market.
3. The Federal Reserve has remained accommodative, holding interest
rates unchanged at its most recent open market meeting.
4. The Banking system remains highly liquid, enabling it to
accommodate high yield borrowers, thereby contributing to the very
low level of corporate defaults.
Some of the factors that could negatively impact the high yield market
are:
1. The market's sensitivity to any sharp or sustained sell-off in the
S&P 500 index.
2. Competitive pressures in many industries remain intense and highly
leveraged companies are more susceptible to the negative impact of
such competition and resulting pricing pressures.
3. A stronger dollar compared to many of our trading partners could
exacerbate the profit position of many U.S. companies, severely
impacting highly leveraged companies.
4. The capital market has been essentially accommodative to investors
providing a benign environment for the high yield investor. A less
accommodative capital market could result in investors becoming
more risk adverse, resulting in a flight from lower quality into
higher quality investments.
CONCLUSION:
The six months ended April 30, 1997 have been a period of strength in the
high yield market. There continues to be a strong demand for high yielding
investments and our expectation is that this demand will continue in the near
future.
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
APRIL 30, 1997
FIXED INCOME -- 91.32%
Ratings
----------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
AGRICULTURAL CHEMICALS/FARMING -- 1.14%
$ 500,000 Calmar Spraying Systems Inc.,
11 1/2%, sr. sub. notes,
series B, 08/15/05 ............. B- B3 $ 491,250
500,000 Hines Horticulture Inc., 11 3/4%,
sr. sub. notes, 10/15/05 ....... B- B3 528,750
1,250,000 Laroche Industries Inc., 13%, sr.
sub. notes, 08/15/04 ........... B B3 1,334,375
------------
2,354,375
------------
AUTOMOBILE/AUTO PARTS/TRUCK
MANUFACTURING -- 3.57%
1,000,000 AM General Corp., 12 7/8%, sr.
notes, series B, 05/01/02 ...... B- B3 915,000
1,000,000 Aetna Industries Inc., 11 7/8%,
sr. notes, 10/01/06 ............ B- B3 1,060,000
375,000 Aftermarket Technology Corp., 12%,
sr. sub. notes,
series B, 08/01/04 ............. NR B3 399,375
1,000,000 CSK Auto Inc. 11%, sr. sub. notes,
11/01/06 ....................... B- B3 1,000,000
1,000,000 Hayes Wheels International Inc.
11%, sr. sub. notes, 07/15/06 .. B B3 1,083,750
500,000 Iochpe-Maxion SA, 12 3/8%, notes,
11/08/02 ....................... NR NR 490,000
500,000 Motors & Gears Inc., 10 3/4%, sr.
notes, series A, 144A, 11/15/06 BB- B3 500,000
500,000 Poindexter, J.B., Inc., 12 1/2%,
sr. notes, 05/15/04 ............ B- B2 490,000
750,000 Simula Inc., 8%, conv. sr. sub.
notes, 05/01/04 ................ NR NR 750,000
781,000 Venture Holdings Trust, 9 3/4%,
sr. sub. notes, 04/01/04 ....... B- B3 726,330
------------
7,414,455
------------
BANKS/SAVINGS AND LOANS/FINANCE
COMPANIES/CONSUMER CREDIT -- 0.52%
1,000,000 Ocwen Federal Bank, 12%, sub.
debs., 06/15/05 ................ B+ B1 1,060,000
BROADCASTING -- TV/CABLE/RADIO/
PUBLISHING -- 14.46%
1,000,000 Adelphia Communication, 9 7/8%,
sr. notes, 03/01/07 ............ B B3 945,000
1,000,000 Albritton Communications Corp., 11
1/2%, sr. sub. debs., 08/15/04 . B- B3 1,040,000
1,000,000 Australis Media Ltd., 0%, sr.
secd. disc. notes, 05/15/03 .... NR Caa 600,000
500,000 Busse Broadcasting Corp., 11 5/8%,
sr. secd. notes, 10/15/00 ...... NR B3 495,000
10,000,000 CAI Wireless System Inc., 12 1/4%,
sr. disc. notes, 09/15/02 ...... CCC+ Caa 4,050,000
2,000,000 CS Wireless Systems Inc., 0%, sr.
disc. notes, 03/01/06 .......... CCC+ Caa 640,000
2,000,000 Diamond Cable Communication, 0%,
sr. disc. notes, 12/15/05 ...... B- B3 1,390,000
6,000,000 DIVA Systems Corp., 0%, sub. disc.
notes, 05/15/06 ................ NR NR 3,360,000
500,000 Galaxy Telecom, L.P., 12 3/8%, sr.
sub. notes, 10/01/05 ........... B- B3 513,750
500,000 Global Star L.P., 11 3/8%, sr.
notes, 02/15/04 ................ B B3 490,000
250,000 Gray Communications Systems Inc.,
10 5/8%, sr. sub.
notes, 10/01/06 ................ B- B3 261,562
1,250,000 Heartland Wireless, 14%, sr.
notes, 10/15/04 ................ B B3 662,500
1,000,000 Intermedia Capital Partners IV, 11
1/4%, sr. notes, 08/01/06 ...... B B2 1,020,000
750,000 Marcus Cable Co., L.P., 11 7/8%,
sr. debs., 10/01/05 ............ B Caa 785,625
2,500,000 Optel Inc., 13%, sr. notes, 144A,
02/15/05 ....................... B- B3 2,450,000
1,750,000 Paxson Communications Corp.,
11 5/8%, sr. sub. notes,
10/01/02 ....................... NR B3 1,837,500
1,000,000 Peterson Publishing Co. LLC,
11 1/8%, sr. sub. notes,
11/15/06 ....................... B- B3 1,040,000
500,000 RBS Participaco, 14%, notes,
12/15/03 ......................... BB- NR 560,000
1,000,000 Sinclair Broadcast Group Inc.,
10%, sr. sub. notes, 09/30/05 .. B B2 990,000
2,000,000 Spanish Broadcasting System Inc.,
7 1/2%, sr. notes, 06/15/02 .... B B3 2,155,000
500,000 Stuart Entertainment Inc.,
12 1/2%, sr. sub. notes,
11/15/04 ....................... B- B3 422,500
1,500,000 TCI Satellite Entertainment Inc.,
10 7/8%, sr. sub. notes,
144A, 02/15/07 ................. NR B3 1,500,000
1,000,000 Telewest Communication PLC, 0%,
sr. disc. debs., 10/01/07 ...... B+ B1 681,250
500,000 TV Azteca, 10 1/2%, gtd. sr.
notes, 144A, 02/15/07 .......... B Ba3 504,375
1,000,000 UIH Australia Pac Inc., 14%, sr.
disc. notes, series B, 05/15/06 B- B2 580,000
1,000,000 United International Holdings, 0%,
sr. secd. disc. notes, 11/15/99 B- B3 732,500
500,000 Wireless One Inc., 13%, sr. disc.
notes, 10/15/03 ................ B- B3 400,000
------------
30,106,562
------------
DIVERSIFIED/CONGLOMERATE
MANUFACTURING -- 2.82%
500,000 Amtrol Acquisition Inc., 10 5/8%,
sr. sub. notes, 12/31/06 ....... B- B3 500,000
250,000 Clark Material Handling Corp.,
10 3/4%, sr. notes, 11/15/06 ... B+ B1 255,000
1,000,000 Genmar Holdings Inc., 13 1/2%, sr.
sub. notes, series A, 07/15/01 . CCC- Caa 970,000
1,000,000 Haynes International Inc.,
11 5/8%, sr. notes, 09/01/04 ... B- B3 1,070,000
500,000 IMO Industries Inc., 11 3/4%, sr.
sub. notes, 05/01/06 ........... B- Caa 503,750
500,000 Knoll Inc., 10 7/8%, sr. sub.
notes, 03/15/06 ................ B+ B3 525,000
500,000 Mail-Well Envelope Corp., 10 1/2%,
sr. sub. notes, 02/15/04 ....... B B2 505,000
500,000 MVE Inc., 12 1/2%, sr. secd.
notes, 02/15/02 ................ B+ B3 530,000
500,000 Selmer Inc., 11%, sr. sub. notes,
05/15/05 ....................... B B3 520,000
500,000 Spinnaker Industries Inc.,
10 3/4%, sr. secd. notes,
10/15/06 ....................... B B3 500,000
------------
5,878,750
------------
DIVERSIFIED/CONGLOMERATE
SERVICES -- 0.47%
550,000 Coinmach Corp., 11 3/4%, sr.
notes, series B, 11/15/05 ...... B+ B2 577,500
333,000 Primeco Inc., 12 3/4%, sr. sub.
notes, 03/01/05 ................ B+ B3 377,955
-----------
955,455
-----------
ELECTRICAL EQUIPMENT/ELECTRONICS/
COMPUTERS -- 3.86%
1,000,000 Computervision Corp., 11 3/8%, sr.
sub. notes, 08/15/99 ........... B- B3 975,000
1,000,000 Dictaphone Corp., 11 3/4%, sr.
sub. notes, 08/01/05 ........... B- B3 920,000
750,000 Electronic Retailing Systems Inc.,
13 1/4%, sr. disc. notes,
144A, 02/01/04 ................. NR NR 509,122
750,000 Emerson Radio Corp., 8 1/2%, conv.
sub. debs., 144A, 08/15/02 ..... NR NR 412,500
500,000 International Wire Group Inc.,
11 3/4%, sr. sub. notes,
06/01/05 ....................... B- B3 491,250
990,000 Real Time Data Inc., 0%, sub.
disc. notes, 08/15/06 .......... NR NR 517,790
1,000,000 Unifi Communications Inc., 14%,
sr. notes, 03/01/04 ............ NR NR 1,000,000
2,000,000 Unisys Corp., 12%, sr. notes,
series B, 04/15/03 ............. B+ B1 2,140,000
500,000 Unisys Corp., 11 3/4%, sr. notes,
10/15/04 ....................... B+ B1 528,750
500,000 United Stationers Supply Co.,
12 3/4%, sr. sub. notes,
05/01/05 ....................... B- B3 547,500
------------
8,041,912
------------
FINANCIAL SERVICES -- BROKERAGE/
SYNDICATION/LEASING -- 1.44%
1,000,000 Beal Financial Corp., 12 3/4%, sr.
notes, 08/15/00 ................ B- B2 1,060,000
425,000 First Federal Financial Corp.,
11 3/4%, notes, 10/01/04 ....... B+ B2 420,750
500,000 Ocwen Financial Corp., 11 7/8%,
notes, 10/01/03 ................ B+ B1 525,000
1,000,000 Wilshire Financial Services Group,
13%, notes, 01/01/04 ........... NR NR 1,000,000
------------
3,005,750
------------
FOOD AND TOBACCO -- 7.25%
349,983 American Restaurant Group Inc.,
13%, sr. secd. notes, 09/15/98 . B- Caa 325,485
1,000,000 American Rice Inc., 13%, mtg.
notes, 07/31/02 ................ B- Caa 1,030,000
250,000 AmeriKing Inc., 10 3/4%, sr.
notes, 12/01/06 ................ B- B3 258,750
1,000,000 BGLS, Inc., 15 3/4%, sr. secd.
notes, series B, 01/31/01 ...... NR NR 750,000
1,228,442 Cafeteria Operators L.P., 12%, sr.
secd. notes, 12/31/01 .......... NR NR 1,228,442
1,000,000 Doane Products Co., 10 5/8%, sr.
notes, 03/01/06 ................ B+ B3 1,020,000
1,000,000 Fleming Companies Inc., 10 5/8%,
sr. notes, 12/15/01 ............ B+ Ba3 1,020,000
1,000,000 Gorges Quik to Fix Foods Inc.,
11 1/2%, sr. sub. notes, 144A,
12/01/06 ....................... B- B3 1,040,000
500,000 International Home Foods Inc.,
10 3/8%, sr. sub. notes,
11/01/06 ....................... B- B2 511,250
500,000 Liggett Group Inc., 11 1/2%, gtd.
sr. secd. notes, series B,
02/01/99 ....................... NR NR 325,000
250,000 Liggett Group Inc., 16 1/2%,
notes, 02/01/99 ................ NR NR 200,000
3,000,000 Specialty Foods Corp., 11 1/8%,
sr. notes, series B, 10/01/02 .. B B3 3,000,000
2,000,000 Specialty Foods Corp., 11 1/4%,
sr. sub. notes, series B,
08/15/03 ....................... B- Caa 1,790,000
300,000 Standard Communications Corp.,
7 1/4%, conv. sub. debs.,
03/31/07 ....................... B B3 272,250
1,000,000 Sun World International Inc.,
11 1/4%, 1st. mtg. notes, 144A,
04/15/04 ....................... B B2 1,000,000
500,000 TLC Beatrice International
Holdings Inc., 11 1/2%, sr.
secd. notes, 10/01/05 .......... BB- B1 505,000
750,000 Van De Kamps Inc., 12%, sr. sub.
notes, 09/15/05 ................ B- B2 817,500
------------
15,093,677
------------
GENERAL & SPECIALTY RETAIL -- 2.12%
333,000 Guitar Centers Management Co.
Inc., 11%, sr. notes, 07/01/06 . B+ B1 340,492
750,000 Hills Stores Co., 12 1/2%, sr.
notes, series B, 07/01/03 ...... NR B2 682,500
500,000 Loehmanns Inc., 11 7/8%, sr.
notes, 05/15/03 ................ B B2 516,250
1,000,000 Mothers Work Inc., 12 5/8%, sr.
notes, 08/01/05 ................ B B3 1,010,000
1,000,000 SRI Receivable Pure Inc., 12 1/2%,
tr. ctf. backed notes,
series B, 12/15/00 ............. NR NR 1,000,000
500,000 Service Merchandise, 9%, sr. sub.
debs., 12/15/04 ................ B+ B2 362,500
500,000 Specialty Retailers Inc., 11%, sr.
sub. notes, series B, 08/15/03 . B B3 510,000
------------
4,421,742
------------
GROCERY/CONVENIENCE -- 4.35%
1,866,000 Cumberland Farms Inc., 10 1/2%,
gtd. secd. notes, 10/01/13 ..... NR NR 1,833,345
2,500,000 Grand Union Co., 12%, sr. notes,
09/01/04 ....................... B- B3 2,381,250
2,000,000 Jitney-Jungle Stores Inc., 12%,
sr. notes, 03/01/06 ............ B B2 2,120,000
500,000 Pantry Inc., 12%, sr. notes,
series B, 11/15/00 ............. B B2 510,000
1,000,000 Pathmark Stores Inc., 12 5/8%,
sub. debs., 06/15/02 ........... B- Caa 1,020,000
1,000,000 Payless Cashways Inc., 9 1/8%, sr.
sub. notes, 04/15/03 ........... B- B3 525,000
750,000 Pueblo Xtra International Inc.,
9 1/2%, sr. notes, series B,
144A, 08/01/03 ................. B- B2 676,875
------------
9,066,470
------------
HEALTHCARE/DRUGS/HOSPITAL
SUPPLIES -- 2.44%
750,000 Complete Management Inc., 8%,
conv. sub. debs., 08/15/03 ..... NR NR 780,000
500,000 Complete Management Inc., 8%,
conv. sub. debs., 12/15/03 ..... NR NR 497,500
500,000 Health O Meter Inc., 13%, sr. sub.
notes., 08/15/02 ............... B- B3 550,000
250,000 Maxxim Medical Inc., 10 1/2%, sr.
sub. notes, 144A, 08/01/06 ..... B B3 250,000
3,000,000 Urohealth System Inc., 12 1/4%,
sr. sub. notes, 144A, 04/01/04 . B- B3 3,000,000
------------
5,077,500
------------
HOME FURNISHINGS/DURABLE CONSUMER
PRODUCTS -- 1.23%
500,000 MDC Communications Corp., 10 1/2%,
sr. sub. notes, 12/01/06 ....... B B3 522,500
1,000,000 Simmons Co., 10 3/4%, sr. sub.
notes, 04/15/06 ................ B B2 1,020,000
500,000 Speedy Muffler King Inc., 10 7/8%,
sr. notes, 10/01/06 ............ B+ B1 520,000
500,000 Syratech Corp., 11%, sr. notes,
04/15/07 ....................... B B1 500,000
------------
2,562,500
------------
HOTEL/GAMING -- 0.82%
500,000 Courtyard By Mariott II Ltd., 10
3/4%, sr. secd. notes, 02/01/08 B- NR 500,000
1,000,000 Motels of America Inc., 12%, sr.
sub. notes, series B, 04/15/04 . CCC+ B3 865,000
419,000 U.S. Trails Inc., 12%, sr. sub.
pik notes, 07/15/03 ............ NR NR 343,580
------------
1,708,580
------------
LEISURE/AMUSEMENT/MOTION
PICTURES -- 1.02%
1,250,000 Act III Theatres Inc., 11 7/8%,
sr. sub. notes, 02/01/03 ....... NR B3 1,359,375
250,000 Live Entertainment Inc., 12%, sr.
secd. sub. notes, 03/23/99 ..... NR NR 240,000
500,000 Premier Parks Inc., 12%, sr.
notes, series A, 08/15/03 ...... B+ B2 532,500
------------
2,131,875
------------
MACHINERY -- 2.34%
1,000,000 Central Tractor Farm Country,
10 5/8%, sr. notes, 04/01/07 ... B+ B1 1,000,000
500,000 Specialty Equipment Companies
Inc., 11 3/8%, sr. sub.
notes, 12/01/03 ................ B B3 520,000
3,250,000 Willcox & Gibbs Inc., 12 1/4%, sr.
notes, series A, 144A, 12/15/03 B+ B2 3,347,500
------------
4,867,500
------------
METALS/MINING -- 6.40%
1,500,000 Algoma Steel Inc., 12 3/8%, 1st.
mtg. notes, 07/15/05 ........... B B1 1,650,000
1,500,000 Continental Global Group Inc.,
11%, sr. notes, series A,
144A, 04/01/07 ................. B B2 1,500,000
750,000 GS Technologies Inc., 12%, gtd.
sr. notes, 09/01/04 ............ B B2 765,000
500,000 International Knife and Saw,
11 3/8%, sr. sub. notes,
11/15/06 ....................... B- B3 500,000
3,000,000 IVACO Inc., 11 1/2%, sr. notes,
09/15/05 ....................... B+ B1 3,030,000
1,000,000 Maxxam Group Inc., 11 1/4%, sr.
secd. notes, 08/01/03 .......... CCC+ B3 995,000
750,000 NS Group Inc., 13 1/2%, sr. secd.
notes, 07/15/03 ................ B- B3 750,937
1,000,000 Renco Metals Inc., 11 1/2%, sr.
notes, 07/01/03 ................ B B2 1,040,000
500,000 Sheffield Steel Corp., 12%, 1st.
mtg. notes, 11/01/01 ........... B- Caa 455,000
750,000 Sheffield Steel Corp., 12%, 1st.
mtg. notes, 11/01/01 ........... B- Caa 682,500
2,000,000 Weirton Steel Corp., 11 3/8%, sr.
notes, 07/01/04 ................ B B2 1,961,760
------------
13,330,197
------------
NON-AGRICULTURAL CHEMICALS/PLASTIC -- 2.13%
1,200,000 Anchor Glass Container Corp., 10
1/4%, sr. notes, 06/30/02 ...... D Ca 942,000
1,000,000 Astor Corp., 10 1/2%, sr. sub.
notes, series B, 10/15/06 ...... B- B3 995,000
1,000,000 Plastic Specialties &
Technologies, 11 1/4%, bonds,
12/01/03 ....................... NR B3 1,030,000
1,500,000 Sterling Chemicals Inc., 11 1/4%,
sr. sub. notes, 144A, 04/01/07 . B+ B3 1,477,995
------------
4,444,995
------------
OIL/NATURAL GAS/OIL SERVICES -- 2.64%
436,000 HarCor Energy Inc., 14 7/8%, sr.
notes, 07/15/02 ................ B- B3 488,320
1,000,000 Maxus Energy Corp., 11 1/2%, sr.
notes, 11/15/15 ................ BB- B1 1,051,250
3,000,000 Statia Terminals International.,
11 3/4%, mtg. notes,
series B, 11/15/03 ............. B B1 3,135,000
750,000 Trans Texas Gas Corp., 11 1/2%,
sr. secd. notes, 06/15/02 ...... BB- B2 832,500
------------
5,507,070
------------
PACKAGING/CONTAINERS -- 3.27%
2,500,000 Crown Packaging Ltd., 10 3/4%, sr.
secd. notes, series B, 11/01/00 NR Caa 2,275,000
500,000 Portola Packaging Inc., 10 3/4%,
sr. notes, 10/01/05 ............ B B2 508,750
500,000 Printpack Inc., 10 5/8%, sr. sub.
notes, series B, 08/15/06 ...... NR NR 517,500
1,375,000 Sea Containers Ltd., 12 1/2%, sr.
sub. debs., 12/01/04 ........... BB- B1 1,512,500
2,000,000 Tekni-Plex Inc., 11 1/4%, sr. sub.
notes, 144A, 04/01/07 .......... B- B3 2,000,000
------------
6,813,750
------------
PAPER/FOREST PRODUCTS/PRINTING -- 1.74%
325,000 American Pad & Paper Company, 13%,
sr. sub. notes, series B,
11/15/05 ....................... B- B3 366,437
500,000 Day International Group, Inc.,
11 1/8%, sr. sub. notes,
series B, 06/01/05 ............. B- B3 515,000
1,000,000 FSW International Finance Co.,
12 1/2%, gtd. sub. notes,
11/01/06 ....................... NR B1 1,000,000
1,000,000 Repap New Brunswick Inc., 10 5/8%,
sr. secd. notes, 04/15/05 ...... CC Caa 955,000
300,000 Repap Wisconsin Inc., 9 1/4%, sr.
secd. notes, 02/01/02 .......... CCC B2 298,500
500,000 Sullivan Graphics Inc., 12 3/4%,
sr. sub. notes, 08/01/05 ....... NR Caa 480,000
------------
3,614,937
------------
PERSONAL & MISCELLANEOUS SERVICES -- 1.82%
500,000 Anchor Advanced Products Inc.,
11 3/4%, sr. notes, 04/01/04 ... B+ B3 500,000
750,000 ICON Health & Fitness Inc., 13%,
sr. sub. notes, 07/15/02 ....... CCC+ B3 847,500
500,000 Iron Mountain Inc., 10 1/8%, sr.
sub. notes, 10/01/06 ........... B- B3 515,000
500,000 Pierce Leahy Corp., 11 1/8%, sr.
sub. notes, 07/15/06 ........... B- B3 508,750
500,000 Remington Products Co., 11%, sr.
sub. notes, series B, 05/15/06 . CCC+ B3 423,750
1,000,000 Renaissance Cosmetics, Inc.,
11 3/4%, sr. notes, 144A,
02/15/04 ....................... B- B3 1,000,000
------------
3,795,000
------------
PUBLIC UTILITY/ELECTRIC POWER/
HYDRO PLANT -- 1.97%
1,000,000 Midland Funding Corp. II, 13 1/4%,
secd. lease oblig., 07/23/06 ... B B2 1,095,000
2,100,000 Panda Global Energy Co., 12 1/2%,
sr. secd. notes, 144A, 04/15/04 B- NR 1,962,324
500,000 Petroleum Heat & Power Inc.,
12 1/4%, sub. debs., 02/01/05 .. B+ B2 507,500
500,000 Texas New Mexico Power Co.,
12 1/2%, debs., 01/15/99 ....... B+ Ba3 542,500
------------
4,107,324
------------
RAIL/TRUCKING/OVERNIGHT
DELIVERY -- 1.47%
2,000,000 Ameritruck Distribution Corp.,
12 1/4%, sr. sub. notes,
series B, 11/15/05 ............. B- B3 1,970,000
1,000,000 Terex Corp., 13 1/4%, sr. secd.
notes, 05/15/02 ................ B- Caa 1,100,000
------------
3,070,000
------------
REAL ESTATE DEVELOPMENT/REITS/
BUILDING/CONSTRUCTION -- 4.03%
290,820 Bramalea Limited, 11 1/4%, debs.,
series 1, 03/22/98 ............. NR NR 72,705
1,000,000 Hechinger Co., 6.95%, sr. notes,
10/15/03 ....................... B+ B2 630,000
1,000,000 ICF Kaiser International Inc.,
12%, sr. sub. notes, 12/31/03 .. B- B3 960,000
1,000,000 ICF Kaiser International Inc.,
13%, sr. sub. notes, 12/31/03 .. B- B3 960,000
1,000,000 MDC Holdings Inc., 11 1/8%, sr.
notes, 12/15/03 ................ B+ NR 1,035,000
1,500,000 Mechala Group Jamaica Ltd.,
12 3/4%, sr. notes, 144A,
12/30/99 ....................... NR NR 1,515,000
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 ................ B- B3 705,000
2,000,000 Ryland Group Inc., 10 1/2%, sr.
notes, 07/01/06 ................ BB Ba2 2,040,000
------------
8,392,705
------------
TELEPHONE/COMMUNICATIONS -- 10.79%
500,000 Alvey Systems, Inc., 11 3/8%, sr.
sub. notes, 01/31/03 ........... B- B3 515,000
800,000 American Communication Services,
12 3/4%, sr. disc.
notes, 04/01/06 ................ NR NR 420,000
750,000 Communications & Power Industries,
Inc., 12%, sr. sub. notes,
08/01/05 ....................... NR B3 783,750
500,000 Consorcio Ecuatoriano, 14%, sr.
notes, 144A, 05/01/02 .......... NR NR 500,000
1,000,000 Echostar Communications Company,
0%, sr. secd. disc. notes,
06/01/04 ....................... B B2 780,000
500,000 Echostar Satellite Broadcasting,
0%, sr. secd. disc. notes,
03/15/04 ....................... B- Caa 371,250
500,000 Fonorola Inc., 12 1/2%, sr. secd.
notes, 08/15/02 ................ B+ B2 542,500
2,500,000 Hyperion Telecommunications Inc.,
13%, sr. disc. notes,
series B, 144A, 04/15/03 ...... NR NR 1,475,000
750,000 Intermedia Communications of
Florida, Inc., 13 1/2%, sr.
notes, series B, 06/01/05 ...... B- B3 847,500
3,000,000 Intermedia Communications of
Florida, Inc., 0%, sr. disc.
notes, 05/15/06 ................ B- B3 1,965,000
2,000,000 IXC Communications Inc., 12 1/2%,
sr. notes, series B, 10/01/05 .. B B3 2,200,000
500,000 Omnipoint Corp., 11 5/8%, sr.
notes, 08/15/06 ................ CCC+ B3 520,000
1,500,000 Omnipoint Corp., 11 5/8%, sr.
notes, series A, 08/15/06 ...... CCC+ B3 1,567,102
2,500,000 Orbcomm Global L.P., 14%, sr.
notes, 08/15/04 ................ B- B3 2,543,750
750,000 Paging Network Inc., 10 1/8%, sr.
notes, 08/01/07 ................ B B2 678,750
250,000 Phonetel Technologies Inc., 12%,
sr. notes, 12/15/06 ............ B- B2 256,875
1,000,000 Rogers Cantel Mobile Inc.,
11 1/8%, gtd. sr. secd. notes,
07/15/02 ....................... BB- B2 1,057,500
350,000 Shared Technologies Fairchild, 0%,
sr. sub. disc. notes, 03/01/06 . B- Caa 273,000
500,000 Sprint Spectrum L.P., 11%, sr.
notes, 08/15/06 ................ B+ B2 547,500
1,500,000 Teleport Communications Group, 0%,
sr. disc. notes, 07/01/07 ...... B B1 1,038,750
1,000,000 Tevecap SA, 12 5/8%, sr. notes,
144A, 11/26/04 ................. B B2 1,000,000
200,000 TV Filme, Inc., 12 7/8%, sr.
notes, 144A, 12/15/04 .......... B B2 200,000
800,000 TV Filme, Inc., 12 7/8%, sr.
notes, 12/15/04 ................ B B2 806,000
650,000 Winstar Communications Inc., 14%,
sr. disc. notes, 10/15/05 ...... NR NR 364,000
325,000 Winstar Communications Inc., 0%,
conv. sr. disc.
notes, 10/15/05 ................ NR NR 221,000
1,000,000 Winstar Equipment Corp., 12 1/2%,
gtd. sr. secd. disc.
notes, 144A, 03/15/04 .......... CCC+ NR 1,000,000
------------
22,474,227
------------
TEXTILES/APPAREL -- 0.48%
1,000,000 Glenoit Corp., 11%, sr. sub.
notes, 144A, 04/15/07 .......... B- B3 998,090
TRANSPORTATION/AIRLINES/BUS -- 4.73%
1,000,000 CHC Helicopter Corp., 11 1/2%, sr.
sub. notes, 07/15/02 ........... B- B3 1,030,000
3,000,000 Greyhound Lines, Inc., 11 1/2%,
sr. notes, 144A, 04/15/07 ...... B- B3 3,000,000
1,055,091 Mexico City Toluca Toll, 11%,
notes, 144A, 05/19/02 .......... NR NR 949,582
1,000,000 Sabreliner Corp., 12 1/2%, sr.
notes, series B, 04/15/03 ...... B B2 900,000
3,000,000 Trans World Airlines Inc., 12%,
sr. secd. notes, 144A, 04/01/02 NR NR 3,000,000
1,000,000 Trans World Airlines Inc., 12%,
sr. secd. reset notes, 11/03/98 NR NR 970,000
------------
9,849,582
------------
Total Fixed Income (cost
$188,978,369) .................. $190,144,980
------------
COMMON STOCK AND WARRANTS -- 5.06%
Value
Units Description (Note 2)
----- ----------- --------
10,500 Ambassador Apartments Inc. ...................... $ 255,940
2,000 American Telecasting Inc., warrants* ............ 5,000
185,900 Ames Department Stores Inc., excess cash flow pmt.,
series A ...................................... 0
594,876 Ames Department Stores Inc., lit. trust units ... 0
50,000 Annaly Mortgage Management Inc.* ................ 500,000
230,000 Audio Vox Corp.* ................................ 1,250,625
8,000 CHC Helicopter Corp., warrants* ................. 0
550 CS Wireless Systems Inc., 144A* ................. 0
5,925 Capital Pac Holdings Inc., warrants, 144A* ...... 22
1,000 Central Rents Inc., 144A ........................ 10
750 Chattem Inc., warrants* ......................... 3,000
100,000 Commodore Separation Technology, sr. conv.
preferred ..................................... 937,500
100,000 Commodore Separation Technology, warrants* ...... 137,500
33,000 Cort Business Services Corp., warrants* ......... 99,000
500 County Seat Holdings Inc., warrants* ............ 0
20,000 Criimi Mae Inc., conv. preferred, series B ...... 707,500
20,000 Excel Realty Trust Inc. ......................... 485,000
40,000 Fidelity Federal Bank, exchangeable preferred ... 1,130,000
500 HDA Management Corp., warrants* ................. 0
11,000 HarCor Energy Inc., warrants* ................... 0
20,000 Health & Retirement Properties Trust ............ 377,500
1,500 Heartland Wireless Communications, warrants* .... 1,500
10,000 Hospitality Properties Trust .................... 308,750
2,500 Hyperion Telecommunications, warrants, 144A* .... 0
4,800 ICF Kaiser International Inc., warrants* ........ 0
750 IHF Capital Inc., warrants* ..................... 0
553 Insilco Corp., class B* ......................... 20,599
750 Intermedia Communications of Florida Inc.,
warrants, 144A* ............................... 15,000
4,000 Jitney Jungle Stores., sr. exchangeable preferred,
series A ...................................... 520,240
500 Motels of America Inc., 144A* ................... 500
20,000 National Propane Partners ....................... 410,000
125,449 Prime Retail Inc. ............................... 1,521,069
1,000 Sabreliner Corp., warrants* ..................... 0
500 Spanish Broadcasting Corp., warrants* ........... 65,000
15,000 Supermarkets General Holdings Corp., exchangeable
preferred ..................................... 405,000
4,000 Terex Corp., rights* ............................ 7,000
38,430 Thousand Trails Inc.* ........................... 78,061
5,133 Trans World Airlines Inc.* ...................... 37,214
25,000 Ugly Duckling Corp.* ............................ 353,125
9,800 Uniroyal Technology Corp., warrants* ............ 9,800
148,562 United Gas Holding Corp. (b) (c) ................ 0
12,000 WHX Corp., preferred ............................ 391,500
20,000 Walden Residential Properties, conv. preferred,
series B ...................................... 505,000
1,500 Wireless One Inc., warrants ..................... 0
------------
TOTAL COMMON STOCK AND WARRANTS
(cost $14,296,936) ............................ 10,537,955
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $203,275,304) ........................... 200,682,935
------------
OTHER ASSETS -- 3.62% ........................... 7,543,157
------------
TOTAL ASSETS -- 100% ............................ $208,226,092
------------
*Non-income producing security.
(a) Percentages indicated are based on total assets.
(b) Non-income producing security, currently in receivorship.
(c) Security valued in good faith following procedures approved by the
Board of Directors.
(d) Pay in kind.
NR denotes not rated.
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
April 30, 1997
ASSETS
Investments in securities at value (identified cost $203,275,304;
see Schedule of Investments and Note 2) $200,682,935
Cash ........................................................... 1,288,076
Receivables:
Investment securities sold ................................... 978,083
Interest and dividends ....................................... 5,000,705
Deferred debt issuance and organizational costs (Note 2) ....... 7,518
Deferred auction agent fees (Note 6) ........................... 40,614
Prepaid surety bond premiums (Note 7) .......................... 47,341
Prepaid insurance .............................................. 136,106
Other assets ................................................... 44,714
------------
Total assets ........................................... $208,226,092
------------
LIABILITIES
Payables:
Investment securities purchased .............................. $ 1,810,312
Accrued expenses (Note 3) ...................................... 1,205,559
Senior notes (Note 4) .......................................... 20,000,000
------------
Total liabilities ...................................... $ 23,015,871
------------
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 -- 43,957,725 shares ................ $ 439,577
Capital in excess of par value (Notes 2 and 5) ............... 229,652,255
Accumulated undistributed net investment income (Note 2) ..... 2,245,483
Accumulated net realized loss from security transactions ..... (64,534,725)
Net unrealized depreciation of investments ................... (2,592,369)
------------
Net assets applicable to common stock (equivalent
to $3.76 per share, based on 43,957,725 shares
outstanding) ......................................... $165,210,221
------------
Total net assets ................................... $185,210,221
============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF OPERATIONS
For the six months ended April 30, 1997
INVESTMENT INCOME (Note 2):
Interest income ............................................... $ 8,144,300
Dividend income ............................................... 279,636
Accretion of discount ......................................... 937,680
-----------
Total investment income ................................. $ 9,361,616
-----------
EXPENSES:
Interest expense .............................................. $ 647,632
Investment advisory fee (Note 3) .............................. 453,494
Custodian and transfer agent fees ............................. 84,301
Preferred dividend auction costs .............................. 72,359
Professional fees ............................................. 75,823
Miscellaneous expenses ........................................ 73,954
Amortization of prepaid surety bond premiums (Note 7) ......... 39,672
Directors' fees ............................................... 48,233
Insurance expense ............................................. 53,355
Amortization of deferred auction agent fees (Note 6) .......... 13,389
Excise tax expense ............................................ 72,000
-----------
Total expenses .......................................... $ 1,634,212
-----------
Net investment income ................................... $ 7,727,404
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments sold ......................... $ 861,073
Change in net unrealized depreciation of investments (Note 2) . (1,210,045)
-----------
Net realized and unrealized loss on investments ......... (348,972)
-----------
Net increase in net assets resulting from operations .... $ 7,378,432
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($2,716 per share) ...... (543,235)
-----------
Net increase in net assets applicable to common
stockholders .......................................... $ 6,835,197
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the six-months ended April 30, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ........................... $ 8,150,687
Operating expenses paid ................................... (1,458,937)
-------------
Net cash provided by operating activities ........... $ 6,691,750
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities ......................... $(127,929,919)
Sales and maturities of portfolio securities .............. 83,612,797
-------------
Net cash used in investing activities ............... $ (44,317,122)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock rights offering and sale
of common stock ......................................... 44,510,388
Preferred stock dividends paid ............................ (543,235)
Common stock dividends paid from operations ............... (6,555,399)
-------------
Net cash provided by financial activities ........... $ 37,411,754
-------------
NET DECREASE IN CASH ........................................ $ (213,618)
CASH, BEGINNING OF PERIOD ................................... 1,501,694
-------------
CASH, END OF PERIOD ......................................... $ 1,288,076
=============
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 .... $ 7,378,432
Increase in interest and other receivables .............. (345,445)
Amortization of Fidelity Bond and other deferred assets . 15,869
Increase in other assets ................................ (174,997)
Increase in accrued expenses ............................ 334,403
Net realized gain on investments sold ................... (861,073)
Change in net unrealized depreciation of investments .... 1,210,045
Accretion of bond discount .............................. (865,484)
-------------
Net cash provided by operating activities ........... $ 6,691,750
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest .................. $ 653,000
Cash paid during the year for excise taxes ................ 72,000
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Six Months
Ended Fiscal Year Ended
April 30, October 31,
1997 1996
------------ -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................ $ 7,727,404 $ 13,628,745
Net realized gain on investments sold ................ 861,073 351,405
Change in net unrealized appreciation (depreciation)
of investments ..................................... (1,210,045) 5,074,470
------------ ------------
Net increase in net assets resulting from
operations ................................... $ 7,378,432 $ 19,054,620
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (102,299 shares and 353,455 shares,
respectively) to common stockholders for
reinvestment of dividends .......................... $ 401,992 $ 1,333,077
Net proceeds from sale of common stock issued in
rights offerings (12,918,092 and 5,393,885 shares,
after deducting $2,156,165 and $996,862 of
soliciting fees and other expenses), respectively .. 44,219,785 19,553,840
------------ ------------
Increase in net assets resulting from fund share
transactions ................................. $ 44,621,777 $ 20,886,917
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($2,716 and $5,679 per share,
respectively) ...................................... $ (543,235) $ (1,135,736)
Common dividends ($.21 and $.42 per share,
respectively) from operations ...................... (6,957,394) (11,404,136)
------------ ------------
Decrease in net assets resulting from
distributions to stockholders ................ (7,500,629) (12,539,872)
------------ ------------
Total net increase in net assets ............... $ 44,499,580 $ 27,401,665
NET ASSETS:
Beginning of period .................................. 140,710,641 113,308,976
------------ ------------
End of period (including $2,245,483 and $2,018,708 of
undistributed net investment income as of April 30,
1997 and October 31, 1996, respectively) ........... $185,210,221 $140,710,641
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
<CAPTION>
For the
Six
Months
Ended For the Years Ended October 31,
April 30, ------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03 $ 3.89
-------- -------- -------- -------- -------- --------
Net investment income ............. .23# .50# .45 .48# .63# .62
Net realized and unrealized
gain (loss) on investments ...... (.01)# .20# .03 (.38)# .39# .07
-------- -------- -------- -------- -------- --------
Total from investment
operations ............... $ .22 $ .70 $ .48 $ .10 $ 1.02 $ .69
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated
net investment income
To preferred stockholders...... (.02) (.04) (.05) (.03) (.06) (.10)
To common stockholders ........ (.21) (.42) (.42) (.45) (.62) (.45)
-------- -------- -------- -------- -------- --------
Total distributions ....... $ (.23) $ (.46) $ (.47) $ (.48) $ (.68) $ (.55)
-------- -------- -------- -------- -------- --------
Effect of sale of common stock
and related expenses from
rights offering ................ $ (.13) $ (.04) $ -- $ (.18) $ (.12) $ --
-------- -------- -------- -------- -------- --------
Net asset value, end of period .... $ 3.76 $ 3.90 $ 3.70 $ 3.69 $ 4.25 $ 4.03
======== ======== ======== ======== ======== ========
Per share market value, end of
period .......................... $ 3.88 $ 4.00 $ 3.88 $ 3.50 $ 4.25 $ 4.00
======== ======== ======== ======== ======== ========
Total investment return ........... 2.17% 15.29% 28.57% (7.78)% 23.25% 27.99%
======== ======== ======== ======== ======== ========
Net assets, end of period,
applicable to
common stock (a) ................ $165,210 $120,711 $ 93,309 $ 92,072 $ 79,438 $ 55,178
======== ======== ======== ======== ======== ========
Net assets, end of period,
applicable to
preferred stock (a) ............. $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 30,000
======== ======== ======== ======== ======== ========
Net assets, end of period (a) ..... $185,210 $140,711 $113,309 $112,072 $ 99,438 $ 85,178
======== ======== ======== ======== ======== ========
Ratio of operating expenses to
average net assets** ............ 1.94%*+ 2.21%+ 2.28%+ 2.30%+ 2.13%+ 2.28%+
Ratio of net investment income
to average net
assets** ........................ 9.16%* 9.51% 9.39% 8.64% 9.26% 9.33%
Portfolio turnover rate ........... 49.32% 108.33% 80.71% 72.00% 117.20% 97.86%
(a) Dollars in thousands.
*Annualized.
**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 (total assets less accrued liabilities (excluding senior
notes) of both the common and preferred shareholders.
+Excluding interest expense, the ratio of operating expenses to average net assets is 1.17%, 1.30%, 1.29%,
1.32%, 1.50%, and 1.72%, 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.
<TABLE>
INFORMATION REGARDING SENIOR SECURITIES
<CAPTION>
As of October 31,
As of ---------------------------------------------------------------------------
April 30, 1997 1996 1995 1994 1993 1992
--------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Notes $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000 $ 5,000,000
Preferred stock 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 30,000,000
Asset Coverage:
Per note (a) 1,026% 804% 667% 660% 597% 1,804%
Per preferred stock share (b) 513% 402% 333% 330% 299% 258%
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 $ 1,000.00 $ 990.00 $ 987.50 $ 937.10 $ 997.50 $ 1,087.50
Per preferred stock share 100,000 100,000 100,000 100,000 100,000 100,000
(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
APRIL 30, 1997
(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 and accretion of discounts are 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, 1997, the cost of investments in securities for federal income
tax purposes was $203,275,304. Aggregate gross unrealized gains on securities
in which there was an excess of market value over tax cost was $6,019,287.
Aggregate gross unrealized losses on securities in which there was an excess
of tax cost over market value was $8,611,656. The net unrealized loss on
securities held by the Fund was $2,592,369 for federal income tax purposes.
At October 31, 1996, 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
$(42,317,344) October 31, 1998
(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,703,531) October 31, 2003
------------
$(65,358,322)
============
(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 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 $453,494 in management fees for the six-months
ended April 30, 1997. 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,
1997, the fee payable to the Investment Adviser was $111,475, which was
included in accrued expenses in the accompanying balance sheet. However, for a
period of one year commencing on the expiration date of the May 1966 rights
offering, the Adviser will waive its advisory fee with respect to any increase
in the Fund's net assets resulting from the exercise of any rights pursuant to
the Offer.
(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) that 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 5.30% to 5.65% of
the liquidation preference during the six-months ended April 30, 1997. 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, 1997 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, 1997, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $127,944,609 and
$82,345,748, respectively. There were no purchases or sales of U.S. Government
obligations during the six months ended April 30, 1997.
(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' meeting attended,
together with actual out-of-pocket expenses relating to attendance at such
meetings and $1,000 per telephone meeting. In addition, members of the Fund's
audit committee, which consists of certain of the Fund's noninterested
Directors, receive $1,000 per audit committee meeting attended, if held on a
day other than the day of 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 29 and December 30, 1996, and
January 31, February 28, March 31 and April 30, 1997.
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 April 30, 1997, the fair value
of the Senior Notes was $20,000,000.
(12) RIGHTS OFFERING
On February 28, 1997 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 12,918,092
shares of the Fund's common stock. Each record date shareholder had the
ability to receive one right for each three shares of common stock held. Each
right allowed the rights holder to subscribe for one share of common stock.
The subscription period for the rights offering expired on March 25, 1997 and
the Fund issued 12,918,092 shares of common stock at $3.59 per share.
Proceeds to the Fund amounted to $44,219,785, net of soliciting fees and
offering expenses of $2,156,165.
<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,
1997, 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, 1997 and the year ended October 31, 1996 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, 1997 by correspondence with the custodian and brokers.
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, 1997, 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 30, 1997
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
INVESTMENT ADVISER AUDITORS
Prospect Street Investment Management Arthur Andersen LLP
Co., Inc. Boston, MA
60 State Street, Suite 3750
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
<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.
1997 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 7, 1997, the stockholders
elected seven directors of the Fund. The numbers were as follows:
<TABLE>
PREFERRED STOCK NOMINEES FOR WITHHELD
<S> <C> <C>
John S. Albanese ............................................... 150 10
John A. Frabotta ............................................... 150 10
COMMON STOCK AND PREFERRED STOCK NOMINEES FOR WITHHELD
Richard E. Omohundro, Jr. ...................................... 23,544,679 374,169
Joseph G. Cote ................................................. 23,468,954 449,893
C. William Carey ............................................... 23,569,144 349,673
Harlan D. Platt ................................................ 23,469,768 449,080
Christopher E. Roshier ......................................... 23,381,200 537,647
</TABLE>
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
23,494,777 205,989 218,042
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street, Suite 3750
Boston, MA 02109
