<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
SEMI-ANNUAL
REPORT
APRIL 30, 1998
[LOGO]
<PAGE>
June 22, 1998
LETTER TO SHAREHOLDERS
Dear Shareholders:
On April 30, 1998, the net asset value of the Fund was $11.64, as compared
to $11.94 on October 31, 1997, after adjusting for the reverse stock split.
During the six month period ended April 30, 1998, also adjusted for the
reverse stock split, the Fund paid dividends to common stock shareholders in
the amount of $0.63; the total dividends paid on a post-split basis for the
trailing twelve month period was $1.26.
1998 STOCKHOLDERS' MEETING/CHANGES IN OPERATING POLICIES:
At the Annual Meeting of Stockholders held on March 10, 1998, 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.
A one-for-three reverse stock split was approved by the Fund's
stockholders at the annual meeting of stockholders held on March 11, 1998.
Accordingly, on April 1, 1998, the Fund effected a one-for-three reverse stock
split of its outstanding shares of Common Stock. As of the close of business
on April 1, 1998, and after giving effect to the reverse stock split, the
Company had 19,682,941 shares of Common Stock outstanding.
The stockholders also approved (i) an amendment to the Fund's Articles of
Amendment and Restatement authorizing the issuance of a new class of preferred
stock that would be issuable from time to time by the Board of Directors in
one or more series; (ii) an amendment of the Company's fundamental investment
restriction relating to borrowing and the issuance of senior securities,
pursuant to which the Fund is now permitted to borrow and to issue senior
securities, including senior indebtedness and preferred stock, to the full
extent permitted by the Investment Company Act of 1940; and (iii) a change of
the Fund's investment policy restricting the purchase of illiquid securities
(i.e., to 30% of total assets) from a fundamental restriction to a non-
fundamental restriction. This non-fundamental restriction precludes the Fund
from investing more than 30% of its total assets in securities that are not
readily marketable and may be changed by the Board of Directors (i.e. in
response to regulatory, market or other developments) without further approval
by stockholders.
THE HIGH YIELD MARKET:
The high yield market as measured by the CS First Boston Index generated
an annualized total return of 14.17% for the twelve month period ended April
30, 1998. At April 30, 1998, the spread between high yield securities and
comparable U.S. Government securities stood at 377 basis points compared to
352 basis points at April 30, 1997. Total new issue volume through April 30,
1998 approximated $55.0 billion, heavily weighted toward Rule 144A issues.
This four month new issue supply compares with a new issue supply of
approximately $122 billion for the 1997 calendar year. The average price for a
cash-paying high yield security was $100.71 with an average coupon of 10.18%.
The flow of new funds into high yield mutual funds continued at a high
level for the first four months of 1998, averaging approximately $400 million
per week. Total assets in high yield mutual funds exceeded $109 billion at
April 30, 1998 as compared to $96 billion at October 31, 1997.
RIGHTS OFFERING:
The Fund completed a transferable rights offering to shareholders of
record on December 24, 1997. The Fund raised net proceeds of approximately $53
million. The Fund issued 4,914,203 new common shares, post-split, increasing
the total shares outstanding to 19,711,875 at April 30, 1998. The net proceeds
were invested at yields in excess of the Fund's then current yield, permitted
further portfolio diversification and strengthened the equity portion of our
balance sheet.
REVERSE STOCK SPLIT:
At the March 11, 1998 Meeting of Shareholders, the shareholders voted to
approve a one-for-three reverse stock split, which became effective on April
1, 1998. The current dividend of $0.105 is equivalent to the $0.035 which was
paid on pre-split shares of common stock.
The rationales behind the reverse split were to: 1) increase the
marketability of the common stock, 2) reduce the brokerage commission rate
paid by shareholders when buying and selling the common stock, 3) increase the
visibility of common stock in order to further research coverage because
security firms rarely issue research reports on stock selling below $5.00 per
share, and 4) to give shareholders the ability to margin their stock, which
normally requires a price of at least $5.00.
LEVERAGE:
On May 15, 1998, the Fund redeemed all of its Taxable Auction Rate
Preferred Stock at an aggregate redemption price of $20 million, plus accrued
dividends. The funds required to redeem the preferred stock were borrowed by
the Fund under a new $30 million revolving credit facility with BankBoston,
N.A., as lender and agent.
YEAR 2000 PROBLEM:
Many computer systems were designed using only two digits to signify the
year (i.e. 98 for 1998). On January 1, 2000, if these systems are not
corrected, they may incorrectly interpret 00 as 1900 instead of 2000, leading
to computer shutdowns or errors. To the extent these systems conduct forward-
looking calculations, the computer problems may occur prior to January 1,
2000. Like other investment companies and financial and business
organizations, the Fund could be adversely affected in its ability to process
securities trades, price securities, provide shareholder account services and
otherwise conduct normal business operations if the computer systems used by
the Adviser or other Fund service providers do not adequately address this
problem in a timely manner. The Adviser does not anticipate that the
transition to the 21st century will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the Adviser has
sought assurances from the other Fund service providers that they are taking
the steps necessary to deal with the problem. The cost of any systems
remediation by persons other than the Fund will not be borne by the Fund.
However, no assurance can be given that the actions taken by the Adviser or
the Fund's other service providers will be sufficient to avoid any adverse
effect on the Fund.
THE FUND'S INVESTMENTS:
The total return on the Fund's net assets for the twelve months and the
six months ended April 30, 1998, assuming reinvestment of dividends and
adjusted for the rights offering, were 17.89% and 5.26%, respectively. As of
April 30, 1998, the Fund held 172 issues representing 29 industry groups. Cash
and short-term investments represented 5.38% of our holdings. The average
price of the Fund's high yield securities was $81.18 with an average coupon of
11%. At April 30, 1998, the Fund was generating monthly net investment income
of approximately $0.105 per common share.
INVESTMENT OUTLOOK:
The high yield market has performed well since October 1997. Factors that
would be expected to extend a favorable outlook for high yield securities are:
1. Money continues to flow into high yield mutual funds, seeking the high
interest rate yields that are offered in this sector of the corporate
bond market.
2. Below investment grade credits continue to have access to funds in both
the public and private markets. This access continues to contribute to
the low default rate experienced in the high yield market so far this
year.
3. A continuing decline in interest rates and redeployment of funds back
into US dollar denominated instruments is generating a demand for high
yield securities.
4. The turmoil in Asia and Japan makes it more likely that the Federal
Reserve will continue to move cautiously with monetary policies.
Some of the factors that could negatively impact the high yield market
are:
1. The Asian and Japanese turmoil continues to deteriorate and its impact
on the US capital markets as well as the economy continues to spread.
The continued weakness in the Japanese yen could contribute to a
further deterioration in this part of the world.
2. Corporate profits for US companies can be expected to come under
ongoing pressure due to lower priced imports and rising domestic
inventory levels in the US economy.
3. The strong economy has been a major contributor to the improving credit
positions of many below investment grade issuers. The strong first
quarter was heavily influenced by the large inventory accumulation
which could contribute to a weaker economy in the next several
quarters.
CONCLUSION:
The six months ended April 30, 1998 have been a period of strength in the
high yield market due to the inflow of capital. The business cycle continues
to provide underlying support for below investment grade issuers and our
expectation is that this support will continue in the near future.
Management continues to review the Fund's investments, seeking to maximize
the Fund's income and capital preservation.
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, 1998
<TABLE>
FIXED INCOME -- 83.73%
<CAPTION>
Ratings
-------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
<S> <C> <C>
AGRICULTURAL CHEMICALS/FARMING -- 0.36%
$ 500,000 Calmar Spraying Systems Inc., 11 1/2%, sr.
sub. notes, series B, 08/15/05 ......... B- B3 $ 535,000
500,000 Hines Horticulture Inc., 11 3/4%, sr. sub.
notes, series B, 10/15/05 .............. CCC+ B3 545,000
------------
1,080,000
------------
AUTOMOBILE/AUTO PARTS/TRUCK MANUFACTURING -- 6.10%
1,000,000 Aetna Industries Inc., 11 1/2%, sr. notes,
10/01/06 ............................... B- B3 1,095,000
1,500,000 Chatwins Group Inc., 13%, sr. exch. notes,
05/01/03 ............................... B- B2 1,597,500
7,750,000 Highway Master Communication, 13 3/4%, sr.
notes, series B, 09/15/05 .............. B Caa 8,098,750
5,250,000 Iochpe-Maxion SA, 12 3/8%, notes, 11/08/02 NR NR 4,515,000
3,000,000 Localiza Rent a Car, 10 1/4%, sr.
notes,10/01/05 ......................... BB- B2 2,654,951
500,000 Motors & Gears Inc., 10 3/4%, sr. notes,
series D, 11/15/06 ..................... B B3 536,250
------------
18,497,451
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES/CONSUMER
CREDIT -- 4.12%
1,000,000 Bank Plus Corp.,12%, sr. notes, 07/18/07 . NR NR 1,140,000
2,500,000 Emergent Group Inc., 10 3/4%, sr. notes,
series B, 09/15/04 ..................... B- B3 2,418,750
750,000 FBR Information Investors, L.P., 12%,
units, 04/15/28** ...................... NR NR 150,000
4,500,000 Federal Home Loan Mortgage, 4.03%, sr.
notes, 12/15/22 ........................ NR AAA 337,505
1,500,000 Life Federal Savings Bank,13 1/2%, sub.
debs, 03/15/04 ......................... NR NR 1,500,000
500,000 Local Financial Corp., 11%, sr. notes,
09/05/04, 144A ......................... NR NR 541,250
2,500,000 Mego Mortgage, 12 1/2%, sr. sub. notes,
12/01/01 ............................... NR Caa 2,000,000
1,000,000 Ocwen Federal Bank, 12%, sub. debs.,
06/15/05 ............................... BB- B1 1,100,000
3,300,000 Southern Pacific Funding Corp., 11 1/2%,
sr. notes, 11/01/04 .................... B- B3 3,300,000
------------
12,487,505
------------
BROADCASTING -- TV/CABLE/RADIO/PUBLISHING - 8.84%
2,000,000 American Mobile Satellite, 12 1/4%, sr.
notes, 04/01/08, 144A .................. NR NR 2,030,000
17,107 Australis Media Ltd., 0%, gtd. sr. secd.
disc. notes, 05/15/03 .................. NR NR 1,711
1,000,000 Australis Media Ltd., 0%, sr. secd. disc.
notes, 05/15/03 ........................ D C 250,000
500,000 Busse Broadcasting Corp., 11 5/8%, sr.
secd. notes, 10/15/00 .................. B- B3 537,500
10,000,000 CAI Wireless System Inc., 12 1/4%, sr.
disc. notes, 09/15/02 .................. CCC+ Caa 2,000,000
9,000,000 CS Wireless Systems Inc., 0%, sr. disc.
notes, series B, 03/01/06 .............. CCC- Caa 1,800,000
2,404,000 DIVA Systems Corp., 0%, sub. disc. notes,
03/01/08, 144A ......................... NR NR 1,304,170
750,000 Emerson Radio Corp., 8 1/2%, conv. sr.
sub. deb, 08/15/02, 144A ............... NR NR 540,000
750,000 Emerson Radio Corp., 8 1/2%, conv. sr.
sub. deb, 08/15/02 ..................... NR NR 540,000
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub.
notes, 10/01/05 ........................ B- B3 557,500
3,500,000 Net Sat Services, 12 3/4%, sr. notes,
08/05/04 ............................... B B2 3,587,500
3,500,000 Optel Inc., 13%, sr. notes, series B,
02/15/05 ............................... B- B3 3,911,250
500,000 RBS Participaco, 14%, notes, 12/15/03 .... BB- NR 545,000
4,000,000 Source Media Inc., 12%, sr. secd. notes,
11/01/04, 144A ......................... B- B3 4,040,000
2,000,000 Spanish Broadcasting System Inc., 12 1/2%,
sr. notes, 06/15/02 .................... B B2 2,280,000
1,000,000 Star Choice Communications, 13%, sr. secd.
notes, 12/15/05, 144A .................. B B3 992,500
1,000,000 Vialog Corporation, 12 3/4%, sr. notes,
series B, 11/15/01 ..................... B- Caa 1,000,000
4,500,000 Wireless One Inc., 13%, sr. disc. notes,
10/15/03 ............................... CCC+ B3 900,000
------------
26,817,131
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 1.48%
500,000 Amtrol Acquisition Inc., 10 5/8%, sr. sub.
notes, 12/31/06 ........................ B- B3 $ 517,500
1,000,000 Genmar Holdings Inc., 13 1/2%, sr. sub.
notes, series A, 07/15/01 .............. NR Caa 1,022,500
1,000,000 Haynes International Inc., 11 5/8%, sr.
notes, 09/01/04 ........................ B- B3 1,120,000
500,000 MVE Inc., 12 1/2%, sr. secd. notes,
02/15/02 ............................... B B3 507,500
500,000 Selmer Inc., 11%, sr. sub. notes, 05/15/05 B B3 547,500
500,000 Spinnaker Industries Inc., 10 3/4%, sr.
secd. notes, 10/15/06 .................. B B3 513,750
250,000 Therma Wave Inc., 10 5/8%, sr. notes,
series B, 05/15/04 ..................... B B2 258,125
------------
4,486,875
------------
DIVERSIFIED/CONGLOMERATE SERVICES -- 0.20%
550,000 Coinmach Corp., 11 3/4%, sr. notes, series
D, 11/15/05 ............................ B+ B2 613,250
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS -- 1.46%
500,000 Decision Holdings Corp., 0%, sr. disc.
debs., 08/01/08 ........................ B- NR 292,500
500,000 International Wire Group Inc., 11 3/4%,
sr. sub. notes, 06/01/05 ............... B- B3 550,000
990,000 Real Time Data Inc., 0%, sub. disc. notes,
08/15/06, 144A ......................... NR NR 485,100
1,400,000 Sharp Do Brasil, 9 5/8%, notes, 10/30/05 . NR NR 1,397,200
1,750,000 Teletrac Inc., 14%, sr. notes, series B,
08/01/07 ............................... B- Caa 1,715,000
------------
4,439,800
------------
FINANCIAL SERVICES -- 1.57%
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes,
08/15/00 ............................... B- B2 1,070,000
425,000 First Federal Financial Corp., 11 3/4%,
notes, 10/01/04 ........................ B+ B2 456,875
500,000 Hawthorne Financial Corporation, 12 1/2%,
sr. notes, 12/31/04 .................... NR NR 500,000
500,000 Ocwen Financial Corp., 11 7/8%, notes,
10/01/03 ............................... B+ B1 570,000
2,000,000 Wilshire Financial Services Group Inc.,
13%, notes, 01/01/04 ................... NR NR 2,160,000
------------
4,756,875
------------
FOOD/TOBACCO -- 7.45%
2,000,000 Advantica Restaurant Group Inc., 11 1/4%,
sr. notes, 01/15/08 .................... B B2 2,097,500
3,105,000 American Rice Inc., 13%, mtg. notes,
07/31/02 ............................... D Caa 2,468,475
250,000 AmeriKing Inc., 10 3/4%, sr. notes,
12/01/06 ............................... B- B3 265,000
3,228,442 Cafeteria Operators L.P., 12%, sr. secd.
notes, 12/31/01 ........................ NR NR 3,228,442
1,000,000 Gorges Quik to Fix Foods Inc., 11 1/2%,
sr. sub. notes, series B, 12/01/06 ..... B- B3 1,047,500
4,050,000 Liggett Group Inc., 11 1/2%, gtd. sr.
secd. notes, series B, 02/01/99 ........ NR NR 3,118,500
450,000 Liggett Group Inc., 19 3/4%, gtd. sr.
secd. notes, series C, 02/01/99 ........ NR NR 371,000
1,000,000 North Atlantic Trading Inc., 11%, sr.
notes, 06/15/04 ........................ B B3 1,010,000
3,750,000 P&C Food Markets Inc., 11 1/2%, sr. notes,
10/15/01 ............................... BB- B3 3,337,500
1,000,000 Rallys Hamburger Inc., 9 7/8%, sr. notes,
06/15/00 ............................... B- Caa 977,500
3,000,000 Specialty Foods Corp., 11 1/4%, sr. sub.
notes, series B, 08/15/03 .............. CCC Caa 2,760,000
1,000,000 Sun World International Inc., 11 1/4%,
1st. mtg. notes, series B, 04/15/04 .... B B2 1,090,000
750,000 Van De Kamps Inc., 12%, sr. sub. notes,
09/15/05 ............................... B- B2 840,000
------------
22,611,417
------------
GENERAL & SPECIALTY RETAIL -- 2.38%
1,000,000 Big 5 Corp., 10 7/8%, sr. notes, series B,
11/15/07 ............................... B- B2 $ 995,490
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes,
08/01/05 ............................... B B3 1,080,000
1,000,000 SRI Receivable Pure Inc., 12 1/2%, tr.
ctf. backed notes, series B, 12/15/00 .. NR NR 1,030,000
2,000,000 Shop at Home Inc., 11%, sr. secd. notes,
04/01/05 ............................... B B1 2,045,000
2,000,000 Wilsons Leather Experts Inc., 11 1/4%, sr.
notes, series B, 08/15/04 .............. NR B3 2,070,000
------------
7,220,490
------------
GROCERY/CONVENIENCE FOOD STORES -- 0.73%
2,000,000 Homeland Stores Inc., 10%, sr. notes,
08/01/03 ............................... NR NR 1,830,000
351,000 Pantry Inc., 12%, sr. notes, series B,
11/15/00 ............................... B+ B2 372,060
------------
2,202,060
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES -- 3.23%
3,000,000 Global Health Sciences Inc., 11%, sr.
notes, 05/01/08, 144A .................. B+ Caa 2,940,000
2,000,000 Grupo Azucarero Mexico SA, 11 1/2%, sr.
notes, 01/15/05, 144A .................. B+ B3 1,620,000
3,000,000 Phar Mor Inc., 11.72%, notes, 09/11/02 ... B- B3 3,165,000
500,000 Signature Brands, Inc., 13%, sr. sub.
notes, 08/15/02 ........................ B- B3 545,000
100,000 Uromed Corp., 6%, conv. bonds, 10/15/03 .. NR NR 61,000
500,000 Uromed Corp., 6%, conv. sub. notes,
10/15/03, 144A ............................... NR NR 265,000
2,450,000 Uromed Corp., 6%, conv. sub. notes,
10/15/03 ............................... NR NR 1,197,437
------------
9,793,437
------------
HOME FURNISHINGS/DURABLE CONSUMER PRODUCTS -- 1.90%
5,000,000 Converse Inc., 7%, conv. sub. notes,
06/01/04 ............................... NR NR 3,231,250
1,000,000 Gothic Products Corp., 11 1/8%, sr. secd.
notes, 05/01/05, 144A .................. B- B3 1,008,750
1,000,000 Simmons Co., 10 3/4%, sr. sub. notes,
04/15/06 ............................... B B2 1,075,000
500,000 Syratech Corp., 11%, sr. notes, 04/15/07 . B- B3 445,000
------------
5,760,000
------------
HOTEL/GAMING -- 0.60%
1,000,000 Bluegreen Corp., 10 1/2%, sr. secd. notes,
04/01/08, 144A ......................... B B3 1,000,000
500,000 Courtyard By Mariott II Ltd., 10 3/4%, sr.
secd. notes, series B, 02/01/08 ........ B- NR 551,250
313,593 U.S. Trails Inc., 12%, sr. sub. pik notes,
07/15/03 ............................... NR NR 282,234
------------
1,833,484
------------
INSURANCE COMPANIES -- 0.85%
1,500,000 Resource America Inc., 12%, sr. notes,
08/01/04 ............................... NR Caa 1,500,000
1,000,000 Superior National Insurance Group Inc.,
103/4%, pfd. Trust notes, 12/01/17 ..... BB B1 1,065,000
------------
2,565,000
------------
LEISURE/AMUSEMENT/MOTION PICTURES -- 4.02%
4,200,000 Booth Creek Ski Holdings Inc., 12 1/2%,
sr. notes, series B, 03/15/07 B- Caa 4,431,000
750,000 Discovery Zone Inc., 13 1/2%, sr. secd.
notes, 08/01/02 ........................ NR NR 742,500
20,125,000 Marvel Holdings Inc., 0%, sr. secd. disc.
notes, series B, 04/15/98(b) ........... NR NR 603,750
4,000,000 Planet Hollywood International Inc., 12%,
sr. sub. notes, 04/01/05, 144A ......... CCC+ B2 3,945,000
2,000,000 Premier Cruise Ltd., 11%, sr. notes,
03/15/08, 144A ......................... CCC+ B3 $ 1,990,000
500,000 SFX Entertainment Inc., 9 1/8%, sr. sub.
notes, 02/01/08, 144A .................. NR Caa 485,000
------------
12,197,250
------------
MACHINERY -- 1.40%
1,000,000 Central Tractor Farm Country, 10 5/8%, sr.
notes, 04/01/07 ........................ B+ B2 1,057,500
3,250,000 Willcox & Gibbs Inc., 12 1/4%, sr. notes,
series B, 12/15/03 ..................... B+ B3 3,185,000
------------
4,242,500
------------
METALS/MINING -- 4.88%
1,500,000 Continental Global Group Inc., 11%, sr.
notes, series B, 04/01/07 .............. B B2 1,597,500
1,000,000 Doe Run Corp., 11 1/4%, sr. notes,
03/15/05, 144A ......................... B+ B2 1,040,000
750,000 GS Technologies Inc., 12%, gtd. sr. notes,
09/01/04 ............................... B B2 821,250
2,000,000 IVACO Inc., 11 1/2%, sr. notes, 09/15/05 . B+ B1 2,195,000
500,000 International Knife and Saw, 11 3/8%, sr.
sub. notes, 11/15/06 ................... B- B3 545,000
4,500,000 NSM Steel Inc., 12%, sr. mtg. notes,
02/01/06, 144A ......................... B- B3 4,275,000
3,000,000 PT Alatief Freeport, 9 3/4%, gtd. sr.
notes, 04/15/01 ........................ B- NR 3,224,109
1,500,000 TVX Gold Inc., 5%, conv. notes, 03/28/02 . NR NR 1,117,500
------------
14,815,359
------------
NON-AGRICULTURAL CHEMICALS/PLASTICS -- 3.50%
5,000,000 Hurricane Hydrocarbons Ltd., 11 3/4%, sr.
notes, 11/01/04 ........................ B- B3 5,012,500
1,000,000 Kaiser Aluminun & Chemical Corp., 12 3/4%,
sr. sub. notes, 02/01/03 ............... CCC+ B2 1,065,000
1,000,000 RBX Corp., 12%, sr. secd. notes, 01/15/03,
144A ................................... B+ B2 1,010,000
3,500,000 Sterling Chemicals Inc., 11 3/4%, sr. sub.
notes, 08/15/06 ........................ B+ B3 3,517,500
------------
10,605,000
------------
OIL/NATURAL GAS/OIL SERVICES -- 1.67%
750,000 First Wave Marine Inc., 11%, sr. notes,
02/01/08 ............................... B- B3 787,500
275,000 National Energy Group Inc., 10 3/4%, sr.
notes, series D, 11/01/06 .............. B B1 257,125
1,000,000 Ultrapetrol Bahamas Ltd., 10 1/2%, 1st
mtg. notes, 04/01/08, 144A ............. BB- B1 1,000,000
3,000,000 United Refining Co., 10 3/4%, sr. notes,
series B, 06/15/07 ..................... B- B2 3,030,000
------------
5,074,625
------------
PACKAGING/CONTAINERS -- 1.86%
3,250,000 Crown Packaging Ltd., 10 3/4%, sr. secd.
notes, series B, 11/01/00 .............. NR Caa 2,892,500
500,000 Portola Packaging Inc., 10 3/4%, sr.
notes, 10/01/05 ........................ B B2 527,500
2,000,000 Tekni-Plex Inc., 11 1/4%, sr. sub. notes,
series B, 04/01/07 ..................... B- B3 2,225,000
------------
5,645,000
------------
PAPER/FOREST PRODUCTS/PRINTING -- 1.15%
800,000 Advanced Argo Publishing Co. Ltd., 13%,
notes, 11/15/07, 144A .................. CCC+ B2 848,000
325,000 American Pad & Paper Company, 13%, sr.
sub. notes, series B, 11/15/05 ......... B- B3 329,062
1,000,000 FSW International Finance Co., 12 1/2%,
gtd. sub. notes, 11/01/06 .............. D Caa 245,000
2,000,000 Plainwell Inc., 11%, sr. sub. notes,
03/01/08, 144A ......................... B- B3 2,060,000
------------
3,482,062
------------
PERSONAL & MISCELLANEOUS SERVICES -- 2.54%
500,000 Anchor Advanced Products Inc., 11 3/4%,
sr. notes, series B, 04/01/04 .......... B+ B3 $ 550,000
2,000,000 Carson Inc., 10 3/8%, sr. sub. notes,
series B, 11/01/07 ..................... B- NR 2,055,000
3,500,000 T/SF Communications Corp., 10 3/8%, sr.
sub. notes, 11/01/07 ................... B- B3 3,561,250
1,500,000 Young America Corp., 11 5/8%, sr. sub.
notes, 02/15/06, 144A .................. B- B3 1,530,000
------------
7,696,250
------------
PUBLIC UTILITY/ELECTRIC POWER/HYDRO POWER -- 0.77%
2,000,000 Panda Global Energy Co., 12 1/2%, sr.
secd. notes, 04/15/04 .................. B- B2 1,830,000
500,000 Texas New Mexico Power Co., 12 1/2%,
debs., 01/15/99 ........................ BBB Ba3 514,389
------------
2,344,389
------------
RAIL/TRUCKING/OVERNIGHT DELIVERY -- 1.53%
375,000 Aftermarket Technology Corp., 12%, sr.
sub. notes, series B, 08/01/04 ......... B B2 414,375
2,250,000 Golden Ocean Group Ltd., 10%, sr. notes,
08/31/01, 144A ......................... CCC+ B3 1,923,750
750,000 Johnstown America Industries Inc., 11 3/
4%, sr. sub. notes, series C, 08/15/05 . B B3 832,500
1,000,000 MC Shipping Inc., 11 1/4%, sr. notes,
03/01/08, 144A ......................... B+ B1 1,002,500
500,000 TBS Shipping International Ltd., 10%, 1st
mtg. notes, 05/01/05, 144A ............. B+ B2 464,620
------------
4,637,745
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/
CONSTRUCTION -- 1.07%
1,000,000 American Architecture, 11 3/4%, sr. notes,
12/01/07, 144A ......................... B Caa 1,057,500
290,820 Bramalea Limited, 11 1/8%, 03/22/98(b) ... NR NR 72,705
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes,
05/01/02 ............................... B- B3 806,250
1,375,000 Presley Companies, 12 1/2%, sr. notes,
07/01/01 ............................... CCC Caa 1,306,250
------------
3,242,705
------------
TELEPHONE/COMMUNICATIONS -- 10.87%
500,000 Alvey Systems, Inc., 11 3/8%, sr. sub.
notes, 01/31/03 ........................ B- B3 528,750
2,000,000 Bell Technology Group Ltd., 13%, units,
05/01/05 ............................... NR NR 2,000,000
2,000,000 Cell Net Data System Inc., 0%, sr. disc.
notes, series B, 10/01/07 .............. NR NR 1,125,000
1,000,000 Consorcio de Telecom SA, 14%, notes,
Series B, 05/01/02 ..................... NR NR 1,050,000
1,000,000 Echostar DBS Corp., 12 1/2%, sr. secd.
notes, 07/01/02 ........................ B- Caa 1,120,000
500,000 Econophone Inc., 13 1/2%, sr. notes,
07/15/07 ............................... NR NR 567,500
4,500,000 First World Communications, 0%, units,
04/15/08, 144A ......................... NR NR 2,295,000
3,000,000 Hyperion Telecommunications Inc., 12 1/4%,
sr. secd. notes, series B, 09/01/04 .... B B3 3,337,500
2,000,000 In Flight Phone Corp., 14%, sr. disc.
notes, series B, 05/15/02 .............. NR C 210,000
3,500,000 Ionica PLC, 13 1/2%, sr. notes, 08/15/06 . NR Caa 3,080,000
2,000,000 Ionica PLC, 0%, sr. disc. notes, 05/01/07 NR Caa 910,000
1,000,000 Knology Holdings Inc., 0%, sr. disc.
notes, 10/15/07 ........................ NR NR 575,840
3,000,000 MGC Communications Inc., 13%, sr. secd.
notes, series B, 10/01/04 .............. NR Caa 3,150,000
1,000,000 Occidente Y Caribe Cellular, 0%, units,
03/15/04 ............................... B B3 794,500
1,500,000 Orbcomm Global L.P., 14%, sr. notes,
08/15/04 ............................... B- B3 1,747,500
2,750,000 Phonetel Technologies Inc., 12%, sr.
notes, 12/15/06 ........................ B- B2 2,433,750
3,000,000 Pratama Datakom Asia BV, 12 3/4%, gtd. sr.
notes, 07/15/05, 144A .................. NR NR $ 1,590,000
2,000,000 Total Access Communication Ltd., 7 5/8%,
bonds, 11/04/01, 144A .................. BB Ba2 1,655,000
2,000,000 USN Communications Inc., 0%, sr. disc.
notes, series B, 08/15/04 .............. B- Caa 1,630,000
500,000 Verio Inc., 10 3/4%, sr. notes, 04/01/05,
144A ................................... NR NR 517,500
2,000,000 Viatel Inc., 11 1/4%, units, 04/15/08 .... NR Caa 2,110,000
650,000 Winstar Communications Inc., 14%, sr.
disc. notes, 10/15/05 .................. CCC+ Caa 523,250
------------
32,951,090
------------
TEXTILES/OTHER MANUFACTURING/APPAREL -- 1.43%
1,000,000 Brazos Sportswear Inc., 10 1/2%, sr.
notes, 07/01/07 ........................ B+ B2 1,003,750
150,000 GPO Synkro SA, 12%, bonds, 04/01/02 ...... NR NR 135,000
1,000,000 Glenoit Corp., 11%, sr. sub. notes,
04/15/07 ............................... B- B2 995,601
2,000,000 Hosiery Corporation of America Inc.,
13 3/4%, sr. sub. notes, 08/01/02 ...... B- B3 2,205,000
543 JPS Cap Corp., 0%, contingent pay. notes,
09/10/98 ............................... NR NR 472
------------
4,339,823
------------
TRANSPORTATION/AIRLINES/BUS -- 5.77%
4,500,000 Air Trans Airlines, 10 1/2%, sr. secd.
notes, series B, 04/15/01 .............. B- B2 4,500,000
1,000,000 CHC Helicopter Corp., 11 1/2%, sr. sub.
notes, 07/15/02 ........................ B- B3 1,057,500
1,435,981 Mexico City Toluca Toll, 11%, notes,
05/19/02, 144A ......................... NR NR 1,378,542
1,000,000 Sabreliner Corp., 12 1/2%, sr. notes,
series B, 04/15/03 ..................... B Caa 1,050,000
2,000,000 Trans World Airlines Inc., 11 1/2%, sr.
secd. notes, 12/15/04 .................. CCC B2 2,000,000
1,000,000 Trans World Airlines Inc., 11 3/8%, sr.
notes, 03/01/06, 144A .................. CC Caa 992,500
2,000,000 Trans World Airlines Inc., 12%, sr. secd.
notes, 04/01/02 ........................ NR B2 3,400,000
1,940,818 Tribasa Toll Road Trust, 10 1/2%, notes,
12/01/11 ............................... NR NR 1,591,471
1,940,818 Tribasa Toll Road Trust, 10 1/2%, notes,
series A, 12/01/11, 144A ............... NR NR 1,533,248
------------
17,503,261
------------
Total Fixed Income (cost $254,875,867).............. $253,941,834
------------
COMMON STOCK AND WARRANTS -- 5.60%
<CAPTION>
Value
Units Description (Note 2)
- ----- ----------- --------
<S> <C> <C>
10,500 Ambassador Apartments Inc. ................................. $ 215,250
10,000 American Capital Strategies ................................ 226,250
2,000 American Telecasting Inc., warrants* ....................... 20
185,900 Ames Department Stores Inc., excess cash flow pmt.,
series A* ................................................ 0
594,876 Ames Department Stores Inc., lit. trust units* ............. 0
10,000 Annaly Mortgage Management Inc ............................. 108,750
50,000 Annaly Mortgage Management Inc. ............................ 537,500
50,000 Anthracite Capital Corp. ................................... 728,125
14,500 Auto Bond Acceptance, preferred, series A .................. 121,438
50,000 Capital Automotive, REIT ................................... 778,125
5,925 Capital Pac Holdings Inc., warrants, 144A* ................. 592
2,000 Cell Net Data System Inc., warrants* ....................... 40,000
1,000 Central Rents Inc., 144A* .................................. 60,500
170,000 Chastain Capital Corp. ..................................... 2,550,000
4,932 Chattem Inc.* .............................................. 136,863
100,000 Commodore Separation Technology, warrants* ................. 31,250
100,000 Commodore Separation Technology, sr. conv. preferred ....... 387,500
33,000 Cort Business Services Corp., warrants* .................... 66,000
500 County Seat Holdings Inc., warrants* ....................... 72
20,000 Criimi Mae Inc., conv. preferred, series B ................. 710,000
550 CS Wireless Systems Inc., 144A* ............................ 0
750 Discovery Zone Inc., warrants, 144A* ....................... 0
6,000 DIVA Systems Corp., warrants* .............................. 0
500 Econophone Inc., warrants, 144A* ........................... 4,000
20,000 Excel Legacy Corp.* ........................................ 105,000
20,000 Excel Realty Trust Inc. .................................... 535,000
25,000 FBR Asset Investment Corp., 144A ........................... 500,000
2,000 Globalstar Telecommunications, warrants, 144A* ............. 21,750
1,500 Golden Ocean Group Ltd.* ................................... 7,687
28,000 Gothic Energy Corp., warrants* ............................. 59,500
9,533 Gothic Energy Corp., warrants* ............................. 0
11,000 HarCor Energy Inc., warrants* .............................. 6,875
500 HDA Management Corp., warrants* ............................ 20,062
20,000 Health & Retirement Properties Trust ....................... 390,000
1,500 Heartland Wireless Communications, warrants, 144A* ......... 202
7,750 Highway Master Communication, warrants* .................... 78,469
10,000 Hospitality Properties Trust ............................... 321,250
14,400 ICF Kaiser International Inc., warrants* ................... 5,400
750 IHF Capital Inc., warrants, 144A* .......................... 7,594
15,000 Imperial Credit Commercial Mortgage Investments Corp. ...... 216,563
750 Intermedia Communications of Florida Inc., warrants,
144A* .................................................... 87,938
49,970 JPS Textile Group, Inc.* ................................... 587,418
1,000 Knology Holdings Inc., warrants, 144A* ..................... 0
25,000 Local Financial Corp., 144A* ............................... 250,000
1,851,500 Marvel Entertainment Group Inc.* ........................... 694,313
3,000 MGC Communications Inc., warrants, 144A* ................... 165,000
500 Motels of America Inc., 144A* .............................. 5,250
20,000 National Propane Partners L.P. ............................. 391,250
750 NS Group Inc., warrants* ................................... 90,000
3,500 Optel Inc.* ................................................ 35
2,000 Orion Network Systems Inc., warrants* ...................... 26,500
125,449 Prime Retail Inc. .......................................... 1,779,808
4,094 Prime Retail Inc. conv. pfd., series B ..................... 95,441
33,333 Resource Asset Investment Trust ............................ 620,827
1,000 Sabreliner Corp., warrants* ................................ 1,000
100 SF Holdings Group Inc., pfd., 144A* ........................ 900,000
3,750 Sheffield Steel Corp., warrants* ........................... 38
500 Spanish Broadcasting Corp., warrants* ...................... 245,500
11,580 Star Choice Communications, warrants* ...................... 0
15,000 Supermarkets General Holdings Corp., exchangeable
preferred* ............................................... 427,500
1,750 Teletrac Holdings Inc., warrants, 144A* .................... 52,500
4,000 Terex Corp., rights* ....................................... 40
5,133 Trans World Airlines Inc.* ................................. 49,726
2,000 Trans World Airlines Inc., warrants* ....................... 20
25,000 Ugly Duckling Corp.* ....................................... 278,125
1,000 Unifi Communications Inc., warrants, 144A* ................. 0
9,800 Uniroyal Technology Corp., warrants* ....................... 98
1,000 Vialog Corporation, warrants* .............................. 0
20,000 Walden Residential Properties, conv. preferred, series B ... 545,000
1,500 WHX Corp., preferred ....................................... 81,188
40,000 Wilshire Real Estate Investments ........................... 640,000
1,500 Wireless One Inc., warrants* ............................... 15
------------
TOTAL COMMON STOCK AND WARRANTS (cost $16,115,996) ......... 16,992,117
------------
TOTAL INVESTMENTS IN SECURITIES (cost $270,991,863) ........ 270,933,951
------------
OTHER ASSETS -- 10.67% ..................................... 32,338,004
------------
TOTAL ASSETS -- 100% ....................................... $303,271,955
============
* Non-income producing security.
** When-issued security.
(a) Percentages indicated are based on total assets.
(b) Denotes company has filed for bankruptcy.
NR denotes not rated.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
April 30, 1998
ASSETS
Investments in securities at value (identified cost
$270,991,863; see Schedule of Investments and Note 2) ........ $270,933,951
Cash ........................................................... 14,578,275
Receivables:
Investment securities sold ................................... 10,359,329
Interest and dividends ....................................... 7,012,827
Deferred debt issuance costs (Note 2) .......................... 2,517
Deferred auction agent fees (Note 6) ........................... 13,615
Prepaid surety bond premiums (Note 7) .......................... 47,340
Prepaid insurance .............................................. 230,083
Other assets ................................................... 94,018
------------
Total assets ........................................... $303,271,955
------------
LIABILITIES
Payables:
Investment securities purchased .............................. $ 2,895,402
Accrued expenses (Note 3) ...................................... 1,001,777
Senior notes (Note 4) .......................................... 20,000,000
Bank loan (Note 14) ............................................ 30,000,000
------------
Total liabilities ...................................... $ 53,897,179
------------
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, $.03 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 19,711,875 shares ................ $ 591,356
Capital in excess of par value (Notes 2 and 5) ............... 284,384,226
Accumulated undistributed net investment income (Note 2) ..... 3,251,576
Accumulated net realized loss from security transactions ..... (58,794,470)
Net unrealized depreciation of investments ................... (57,912)
------------
Net assets applicable to common stock (equivalent
to $11.64 per share, based on 19,711,875 shares
outstanding) ......................................... $229,374,776
------------
Total net assets ................................... $249,374,776
============
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF OPERATIONS
For the six months ended April 30, 1998
INVESTMENT INCOME (Note 2):
Interest income .............................................. $12,908,411
Dividend income .............................................. 441,481
Accretion of discount ........................................ 843,303
-----------
Total investment income ................................ $14,193,195
-----------
EXPENSES:
Interest expense ............................................. $ 807,669
Investment advisory fee (Note 3) ............................. 783,439
Custodian and transfer agent fees ............................ 84,301
Preferred dividend auction costs ............................. 52,069
Professional fees ............................................ 168,490
Amortization of prepaid surety bond premiums (Note 7) ........ 39,672
Directors' fees .............................................. 42,232
Insurance expense ............................................ 20,355
Amortization of deferred auction agent fees (Note 6) ......... 13,388
Excise tax expense ........................................... 114,557
Miscellaneous expenses ....................................... 220,150
-----------
Total expenses ......................................... $ 2,346,322
-----------
Net investment income .................................. $11,846,873
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on investments sold ........................ $ 1,820,900
Change in net unrealized appreciation of investments (Note 2) (3,174,640)
-----------
Net realized and unrealized loss on investments ........ $(1,353,740)
-----------
Net increase in net assets resulting from operations ... 10,493,133
DISTRIBUTIONS TO PREFERRED STOCKHOLDERS ($2,839 per share) ..... (567,787)
-----------
Net increase in net assets applicable to common
stockholders ......................................... $ 9,925,346
===========
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the six months ended April 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received .......................... $ 11,504,535
Operating expenses paid .................................. (4,082,827)
-------------
Net cash provided by operating activities .......... $ 7,421,708
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities ........................ $(295,638,721)
Sales and maturities of portfolio securities ............. 229,873,779
-------------
Net cash used in investing activities .............. $ (65,764,942)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock rights offering and sale
of common stock ........................................ $ 53,431,432
Proceeds from bank loan .................................. 30,000,000
Preferred stock dividends paid ........................... (567,187)
Common stock dividends paid from operations .............. (9,942,736)
-------------
Net cash provided by financing activities .......... $ 72,921,509
-------------
NET INCREASE IN CASH ....................................... $ 14,578,275
CASH, BEGINNING OF PERIOD .................................. -0-
-------------
CASH, END OF PERIOD ........................................ $ 14,578,275
=============
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 ... $ 10,493,133
Increase in interest and dividend receivables .......... (1,947,987)
Amortization of Fidelity Bond and other deferred assets 15,868
Increase in other assets ............................... (204,128)
Decrease in accrued expenses and other payables ........ (1,548,245)
Net realized gain on investments sold .................. (1,820,900)
Change in net unrealized appreciation of investments ... 3,174,640
Accretion of bond discount ............................. (740,673)
-------------
Net cash provided by operating activities .......... $ 7,421,708
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................. $ 807,670
Cash paid during the period for excise taxes ............. 114,557
=============
<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,
1998 1997
-------- --------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................ $ 11,846,873 $ 17,862,020
Net realized gain on investments sold ................ 1,820,900 4,773,501
Change in net unrealized appreciation/depreciation of
investments ........................................ (3,174,640) 4,499,052
------------ ------------
Net increase in net assets resulting from
operations ................................... $ 10,493,133 $ 27,134,573
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (82,241 shares and 96,957 shares,
respectively) to common stockholders for
reinvestment of dividends .......................... $ 981,853 $ 1,146,681
Net proceeds from sale of common stock issued
(4,914,203 and 4,306,031 shares, respectively, after
deducting $2,590,479 and $2,167,500 of soliciting
fees and other expenses, respectively) ............. 53,431,432 44,208,450
------------ ------------
Increase in net assets resulting from fund share
transactions ................................. $ 54,413,285 $ 45,355,131
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($2,839 and $5,456 per share,
respectively) ...................................... $ (567,787) $ (1,091,099)
Common dividends ($.63 and $1.26 per share,
respectively) from operations ...................... (10,872,757) (16,200,344)
------------ ------------
Decrease in net assets resulting from
distributions to stockholders ................ (11,440,544) (17,291,443)
------------ ------------
Total net increase in net assets ............... $ 53,465,874 $ 55,198,261
NET ASSETS:
Beginning of period .................................. 195,908,902 140,710,641
------------ ------------
End of period (including $3,251,576 and $2,845,247 of
undistributed net investment income as of April 30,
1998 and October 31, 1997, respectively) ........... $249,374,776 $195,908,902
============ ============
</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, ----------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ..................... $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75 $ 12.09
-------- -------- -------- -------- -------- --------
Net investment income ........ .66# 1.38# 1.50# 1.35 1.44# 1.89#
Net realized and unrealized
gain (loss) on investments.. (.08)# .72# .60# .09 (1.14)# 1.17#
-------- -------- -------- -------- -------- --------
Total from investment
operations ......... $ .58 $ 2.10 $ 2.10 $ 1.44 $ .30 $ 3.06
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated net
investment income
To preferred stockholders (.03) (.09) (.12) (.15) (.09) (.18)
To common stockholders ... (.63) (1.26) (1.26) (1.26) (1.35) (1.86)
-------- -------- -------- -------- -------- --------
Total distributions .. $ (.66) $ (1.35) $ (1.38) $ (1.41) $ (1.44) $ (2.04)
-------- -------- -------- -------- -------- --------
Effect of sale of common stock
and related expenses from
rights offering ............ $ (.22) $ (.51) $ (.12) $ -- $ (.54) $ (.36)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 11.64 $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75
======== ======== ======== ======== ======== =========
Per share market value, end of
period ..................... $ 12.38 $ 12.39 $ 12.00 $ 11.64 $ 10.50 $ 12.75
======== ======== ======== ======== ======== =========
Total investment return ...... 5.26% 14.82% 15.29% 28.57% (7.78)% 23.25%
======== ======== ======== ======== ======== =========
Net assets, end of period,
applicable to common
stock (a) .................. $229,375 $175,909 $120,711 $ 93,309 $ 92,072 $ 79,438
======== ======== ======== ======== ======== =========
Net assets, end of period,
applicable to preferred
stock (a) .................. $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ======== =========
Net assets, end of period (a) $249,375 $195,909 $140,711 $113,309 $112,072 $ 99,438
======== ======== ======== ======== ======== =========
Ratio of operating expenses to
average net assets,
applicable to common stock . 2.30%* 2.30% 3.06% 3.27% 3.27% 3.10%
Ratio of net investment income
to average net assets,
applicable to common stock . 11.63%* 11.94% 13.20% 13.47% 12.25% 13.49%
Ratio of operating expenses to
average net assets** ....... 1.89%*+ 1.81%+ 2.21%+ 2.28%+ 2.30%+ 2.13%+
Ratio of net investment income
to average net assets** 9.55%* 9.42% 9.51% 9.39% 8.64% 9.26%
Portfolio turnover rate ...... 197.16%* 176.04% 108.33% 80.71% 72.00% 117.20%
(a) Dollars in thousands.
(b) The selected per share data and ratios have been restated, where applicable, for all periods to give effect for the
one-for-three stock split in April of 1998. (Note 10).
** 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, applicable to common stock and
preferred stock, is 1.24%, 1.13%, 1.30%, 1.29%, 1.32% and 1.50%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
* Annualized.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
INFORMATION REGARDING SENIOR SECURITIES
<CAPTION>
As of As of October 31,
April 30, -------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount
Outstanding:
Notes & Loans $50,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000
Preferred stock 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
Asset Coverage:
Per note (a) 599% 1,080% 804% 667% 660% 597%
Per preferred stock
share (b) 428% 540% 402% 333% 330% 299%
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 $ 1,005.00 $ 1,003.80 $ 990.00 $ 987.50 $ 937.10 $ 997.50
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.
</TABLE>
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
(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 based upon quotations obtained from
market makers. 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, 1998, the cost of investments in securities for federal income
tax purposes was $271,157,417. Aggregate gross unrealized gains on securities
in which there was an excess of market value over tax cost was $12,571,188.
Aggregate gross unrealized losses on securities in which there was an excess
of tax cost over market value was $12,463,546. The net unrealized gain on
securities held by the Fund was $107,642 for federal income tax purposes.
At October 31, 1997, 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
$(37,564,886) October 31, 1998
(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,703,531) October 31, 2003
------------
$(60,605,864)
============
(D) COMMON STOCK AND TAXABLE AUCTION RATE PREFERRED STOCK (PREFERRED STOCK),
OFFERING AND DEFERRED DEBT ISSUANCE 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 $783,439 in management fees for the six months ended April 30,
1998. 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, 1998, the fee
payable to the Investment Adviser was $215,463, 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) 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 5.52% to 5.89% of
the liquidation preference during the six months ended April 30, 1998. 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.
On May 15, 1998 the Fund redeemed all of its Taxable Auction Rate Preferred
Stock at an aggregate redemption price of $20 million. The funds required to
redeem the preferred stock were borrowed under a new $30 million credit
facility discussed in Note 14.
(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, 1998 was
$13,388.
(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, 1998, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $296,094,740 and
$236,694,231, respectively. There were no purchases or sales of U.S.
Government obligations during the six months ended April 30, 1998.
(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 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, 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 $.105 per share,
giving effect to the April 1998 1:3 reverse stock split, payable on November
28 and December 31, 1997, and January 30, February 27, March 31 and April 30,
1998.
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, 1998, the fair value
of the Senior Notes was $20,100,000 and that of the bank term loan was
$30,000,000.
(12) REVERSE STOCK SPLIT
In March of 1998, the shareholders of the Fund approved a one-for-three
reverse stock split which became effective on April 1, 1998. Certain per share
amounts included in the accompanying financial statements have been restated
to give effect for this reverse stock split.
(13) RIGHTS OFFERING
On December 24, 1997 the Fund commenced a rights offering whereby the Fund
issued to its shareholders of record, as of that date, non-transferable rights
entitling the holders thereof to subscribe for an aggregate of 4,914,203
shares of the Fund's common stock. Each record date shareholder had the
ability to receive one right for each whole share of common stock held. The
rights allowed the rights holder to subscribe for shares of common stock at
the right of one share of common stock for every three rights held. The
subscription period for the rights offering expired on January 23, 1998 and
the Fund issued, on a post-split basis, 4,914,203 shares of common stock at
$11.40 per share. Proceeds to the Fund amounted to $53,431,432, net of
soliciting fees and offering expenses of $2,590,479.
(14) BANK LOAN
On April 30, 1998 the Fund entered into a credit agreement ("the Agreement")
with a lending institution and borrowed the maximum amount of $30 million
under a revolving credit facility. The Fund's ability to utilize this facility
extends until April 30, 2001, though there are provisions in the Agreement
which allow for its modification prior to April 30, 2001, including extension,
termination and reduction of the facility amount. The Fund has the option to
choose the applicable interest rate on its borrowing with such rates being
based upon either the higher of the lending institution's base lending rate or
one half percent above the Federal funds rate, or, LIBOR plus 0.55%. The
interest rate on outstanding loans at April 30, 1998 was 8.50%. The Agreement
also provides for commitment fees at a rate of 0.09% per year on the daily
amount by which the aggregate amount of the commitment amount of $30 million
exceeds the aggregate outstanding principal of loans.
<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,
1998, 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, 1998 and the year ended October 31, 1997 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, 1998 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, 1998, 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
June 5, 1998
<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 and 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.
1998 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 11, 1998, the stockholders
elected seven directors of the Fund. The numbers were as follows:
PREFERRED STOCK NOMINEES FOR WITHHELD
John S. Albanese ................................ 167 10
John A. Frabotta ................................ 167 10
COMMON STOCK AND PREFERRED STOCK NOMINEES FOR WITHHELD
Richard E. Omohundro, Jr. ....................... 39,209,815 1,002,636
Joseph G. Cote .................................. 39,069,007 1,143,444
C. William Carey ................................ 39,285,175 1,200,592
Harlan D. Platt ................................. 39,060,597 1,151,855
Christopher E. Roshier .......................... 39,011,860 1,200,592
The stockholders also voted to amend the Fund's Articles of Amendment and
Restatement, as amended authorizing the issuance of a new class of preferred
stock that would be issuable from time to time by the Board of Directors in
one or more series. The numbers were as follows:
FOR AGAINST ABSTAIN
24,246,088 2,814,638 1,351,735
The stockholders also voted to amend the Fund's fundamental investment
restriction relating to borrowing and the issuance of senior securities. The
numbers were as follows:
FOR AGAINST ABSTAIN
23,942,965 2,980,157 1,489,341
The stockholders also voted to change the Fund's investment policy restricting
the purchase of illiquid securities from a fundamental restriction to a non-
fundamental restriction. The numbers were as follows:
FOR AGAINST ABSTAIN
23,399,194 3,505,481 1,507,788
The stockholders also approved a reverse split of the Fund's common stock. The
numbers were as follows:
FOR AGAINST ABSTAIN
34,956,827 3,829,092 1,426,366
The stockholders also ratified the selection of Arthur Andersen LLP as
independent public accountants for the current year. The numbers were as
follows:
FOR AGAINST ABSTAIN
38,789,403 482,214 940,667
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street, Suite 3750
Boston, MA 02109
