<PAGE>
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
SEMI-ANNUAL
REPORT
APRIL 30, 1998
[LOGO]
<PAGE>
June 22, 1999
LETTER TO SHAREHOLDERS
Dear Shareholders:
On April 30, 1999, the net asset value of the Fund was $8.39, as compared to
$7.97 on October 31, 1998. During the six month period ended April 30, 1999, the
Fund paid dividends to common stock shareholders in the amount of $0.63 per
share; the total dividends paid for the trailing twelve month period were $1.26
per share.
1999 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 12, 1999, the
stockholders re-elected the seven Directors of the Fund and ratified the
selection of Arthur Andersen LLP as independent public accountants for the
current fiscal year. Although a majority of the votes were cast in favor of a
proposal to increase the Manager's advisory fee, such proposal failed to win the
requisite Investment Company Act supermajority vote necessary for approval.
RIGHTS OFFERING:
The Fund completed a transferable rights offering to shareholders of record
on January 26, 1999. The Fund raised net proceeds of approximately $55 million.
The Fund issued 6,630,663 new common shares, increasing the total shares
outstanding to 26,468,651. The offering was accretive to shareholders as the
subscription price for new shares was $8.70 when the net asset value was
approximately $8.16. The net proceeds were invested during the month of April at
yields roughly equal to the Fund's current yield and permitted further portfolio
diversification and quality enhancement. Shareholders who received new shares
were eligible to receive the March 31, 1999 dividend.
THE HIGH YIELD MARKET:
The high yield market continues to exhibit a more volatile pattern as the
behavior of both the buy side and sell side market participants was modified and
adjusted in reaction to the market dislocation which occurred during the summer
of 1998. The high yield index as measured by the DLJ High Yield Index generated
a total return of 1.18% for the twelve month period ended April 30, 1999 and a
10.04% return for the six month period ending April 30, 1999. At April 30, 1999,
the spread between high yield securities and comparable U.S. Government
securities stood at 540 basis points down from 735 basis points at October 31,
1998. Total new issue volume year-to-date through April 30, 1999 approximated
$40.0 billion, approximately double the new issue volume in the fourth quarter
of 1998.
The flow of new funds into high yield mutual funds continued steady at
approximately $7.7 billion since September 1998.
THE FUND'S INVESTMENTS:
The total return on the Fund's net assets for the six months ended April 30,
1999, assuming reinvestment of dividends and adjusted for the rights offering
was approximately 13.2%. The total investment return on the Fund's per share
market price was (4.55%) for the six months ended April 30, 1999. The variation
from the total return on net assets is attributable to the decline in the per
share market value premium from 28.5% to 8.8% during the period.
As of April 30, 1999, the Fund held 162 issues representing 30 industry
groups. Cash and short-term investments represented approximately 1% of our
holdings. The average market price of the Fund's high yield securities was
$60.03 with an average coupon of 10.5%. At April 30, 1999, the Fund was
generating monthly net investment income of approximately $0.105 per common
share.
INVESTMENT OUTLOOK:
The capital markets continue to adjust following the financial turmoil of
1998. Some of the positive factors that could benefit the high yield market are:
1. The U.S. domestic economy continues to exhibit strength, which is a
positive for the high yield asset class.
2. Foreign economies that caused market turmoil in 1998 are improving and in
many cases performing better than observers expected.
3. The average leverage and coverage ratios of many new high yield issues
continues to be relatively conservative in comparison to the years
preceding the high default rates of 1990 and 1991.
4. The current yields available in the high yield market continue to offer
attractive returns.
Some of the factors that could negatively impact the high yield market are:
1. Since the summer 1998 credit crisis, capital committed to the high yield
market by the market makers appears to be more conditional, resulting in
continued market volatility and much wider valuations between sectors and
size of issues.
2. Deflationary forces continue strong in many sectors of the economy which
puts added pressure on highly leveraged companies.
3. The strong U.S. dollar, if it continues, could hurt sales of U.S.
companies, both domestically and internationally.
4. A Federal Reserve policy to raise interest rates during the remainder of
1999 could change investor psychology toward the high yield market as the
possibility of recession in 2000 would become more probable.
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 or
the Adviser 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, including a material
adverse impact. The Adviser cannot assure the Fund that certain of the companies
in which it has invested (or in which it may hereafter invest) may be adversely
affected, directly or indirectly, by Year 2000-related problems, which could
impact the value of such investments.
CONCLUSION:
The high yield market has grown substantially in the past five years and
offers investors attractive returns.
Management continues to evaluate the Fund's investments, seeking to maximize
the Fund's total return on net assets.
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, 1999
<TABLE>
<CAPTION>
FIXED INCOME -- 90.78%
Ratings
--------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
- ----- ----------- -------- ------- --------
<C> <S> <C> <C> <C>
AGRICULTURAL CHEMICALS/FARMING -- 1.39%
$ 5,000,000 LaRoche Industries Inc., 9 1/2%, sr. sub.
notes, series B, 09/15/07 .............. B- B3 $ 3,800,000
------------
AUTOMOBILE/AUTO PARTS/TRUCK
MANUFACTURING -- 2.43%
375,000 Aftermarket Technology Corp., 12%, sr.
sub. notes, series B, 08/01/04 ......... B B2 386,250
6,443,000 Iochpe-Maxion SA, 12 3/8%, notes, 11/08/02 NR NR 5,154,400
2,000,000 Localiza Rent a Car, 10 1/4%, sr. notes,
10/01/05 ............................... NR NR 1,100,000
------------
6,640,650
------------
BANKS/SAVINGS AND LOANS/FINANCE COMPANIES
CONSUMER CREDIT -- 3.26%
1,000,000 Bank Plus Corp.,12%, sr. notes, 07/18/07 . NR NR 850,000
2,533,000 Cityscape Financial Corp., 12 3/4%, sr.
notes, series A, 06/01/04 (b)* ......... D Ca 367,285
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 505,000
1,875,000 Mego Mortgage Corp., 12 1/2%, sr. sub.
notes, 12/01/01 ........................ B Ca 993,750
4,000,000 Nationwide Credit Inc., 10 1/4%, sr.
notes, 01/15/08 ........................ B- B3 1,920,000
1,000,000 Ocwen Federal Bank, 12%, sub. debs.,
06/15/05 ............................... BB- B1 960,000
3,300,000 Southern Pacific Funding Corp., 11 1/2%,
sr. notes, 11/01/04 (b)* ............... D Caa3 1,815,000
------------
8,911,035
------------
BROADCASTING -- TV/CABLE/RADIO/
PUBLISHING -- 12.52%
7,730,000 AMSC Acquisition Co., Inc., 12 1/4%, gtd.
sr. notes, 04/01/98 .................... NR NR 5,720,200
17,107 Australis Media Ltd., 0%, gtd. sr. secd.
disc. notes, 05/15/03 (b)* ............. D NR 171
1,000,000 Australis Media Ltd., 0%, sr. secd. disc.
notes, 05/15/03 (b)* ................... D NR 10,000
8,404,000 DIVA Systems Corp., 0%, sr. disc. notes,
series B, 03/01/08 ..................... NR NR 2,941,400
500,000 Galaxy Telecom, L.P., 12 3/8%, sr. sub.
notes, 10/01/05 ........................ B- B3 556,875
3,000,000 Globalstar L.P., 11 1/2%, sr. notes,
06/01/05 ............................... NR Caa1 2,130,000
1,000,000 Goss Graphic Systems Inc., 12%, sr. sub.
notes, 10/15/06 ........................ CCC+ Caa3 350,000
3,500,000 Net Sat Services, 12 3/4%, sr. notes,
08/05/04 ............................... B Caa1 2,800,000
2,000,000 One Point Communications Co., 14 1/2%,
units, 06/01/08, 144A .................. NR NR 1,080,000
2,000,000 Optel Inc., 13%, sr. notes, series B,
02/15/05 ............................... B- B3 2,040,000
1,000,000 Park n View Inc., 13%, sr. notes,
series B, 05/15/08 ..................... NR NR 485,000
200,000 RBS Participaco, 14%, notes, 12/15/03 .... NR NR 195,000
4,000,000 Source Media Inc., 12%, sr. secd. notes,
11/01/04 ............................... B- B3 3,120,000
2,000,000 Spanish Broadcasting System Inc., 12 1/2%,
sr. notes, 06/15/02 .................... B B2 2,240,000
1,000,000 Star Choice Communications, 13%, sr. secd.
notes, 12/15/05 ........................ B B3 1,050,000
12,000,000 Supercanal Holdings S. A., 11 1/2%, sr.
notes, 05/15/05 ........................ C Caa3 5,880,000
4,500,000 Vialog Corporation, 12 3/4%, sr. notes,
series B, 11/15/01 ..................... B- Caa3 3,645,000
------------
34,243,646
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING --
4.25%
1,000,000 AXIA Inc., 10 3/4%, gtd. sr. sub. notes,
07/15/08 ............................... NR NR 1,015,000
500,000 Amtrol Acquisition Inc., 10 5/8%, sr. sub.
notes, 12/31/06 ........................ B- B3 502,500
2,000,000 Chatwins Group Inc., 13%, sr. exch. notes,
05/01/03 ............................... B- B2 2,000,000
1,000,000 Genmar Holdings Inc., 13 1/2%, sr. sub.
notes, series A, 07/15/01 .............. NR Caa2 1,022,520
2,000,000 Haynes International Inc., 11 5/8%, sr.
notes, 09/01/04 ........................ B- B3 1,780,000
1,000,000 Key Components LLC, 10 1/2%, gtd. sr.
notes, 06/01/08 ........................ NR NR 1,000,000
4,000,000 Pentacon Inc., 12 1/4%, sr. sub. notes,
04/01/09, 144A ......................... B- B3 3,920,000
500,000 Spinnaker Industries Inc., 10 3/4%, sr.
secd. notes, 10/15/06 .................. B B3 400,000
------------
11,640,020
------------
DIVERSIFIED/CONGLOMERATE SERVICES - 0.22%
550,000 Coinmach Corp., 11 3/4%, sr. notes, series
series D, 11/15/05 ..................... B+ B2 605,687
------------
ELECTRICAL EQUIPMENT/ELECTRONICS/COMPUTERS
-- 1.75%
500,000 Decision Holdings Corp., 0%, units,
08/01/08 (e)* .......................... CCC C 5,625
3,000,000 EV International Inc., 11%, sr. sub.
notes, series A, 03/15/07 .............. CCC+ B3 2,340,000
3,000,000 Phase Metrics Inc., 10 3/4%, sr. notes,
02/01/05 ............................... B- Caa3 1,800,000
1,300,000 Sharp Do Brasil, 9 5/8%, notes, 10/30/05 . NR NR 650,000
------------
4,795,625
------------
FINANCIAL SERVICES -- 4.03%
3,000,000 Advanta Corp., 7 3/8%, med. term notes,
10/16/00 ............................... BB- B2 2,730,000
1,000,000 Beal Financial Corp., 12 3/4%, sr. notes,
08/15/00 ............................... B- B2 1,020,000
425,000 First Federal Financial Corp., 11 3/4%,
notes, 10/01/04 ........................ B+ B2 434,562
500,000 Hawthorne Financial Corporation, 12 1/2%,
sr. notes, 12/31/04 .................... NR NR 484,375
500,000 Ocwen Financial Corp., 11 7/8%, notes,
10/01/03 ............................... BB- B1 450,000
2,000,000 Provident CBO I Inc., 10 7/8%, sr. secd.
notes, class C, 12/09/10, 144A ......... NR Ba3 2,000,000
3,500,000 Resource America Inc., 12%, sr. notes,
08/01/04 ............................... B- Caa1 3,185,000
8,500,000 United Companies Financial Corp., 8 3/8%,
sub. notes, 07/01/05 (b)* .............. D Ca 425,000
1,000,000 Wilshire Financial Services Group Inc.,
13%, notes, 01/01/04 (b)* .............. NR NR 290,000
------------
11,018,937
------------
FOOD/TOBACCO --3.18%
3,105,000 American Rice Inc., 13%, mtg. notes,
07/31/02 (b)* .......................... B- Ca 1,552,500
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 ..... CCC Caa1 430,000
1,000,000 North Atlantic Trading Inc., 11%, sr.
notes, 06/15/04 ........................ B B3 1,010,000
2,600,000 RAB Enterprises, 10 1/2%, sr. notes,
05/01/05 ............................... CCC+ Caa1 1,430,000
1,000,000 Sun World International Inc., 11 1/4%,
1st. mtg. notes, series B, 04/15/04 .... B B2 1,055,000
------------
8,705,942
------------
GENERAL & SPECIALTY RETAIL -- 1.86%
1,000,000 Big 5 Corp., 10 7/8%, sr. notes, series B,
11/15/07 ............................... B- B2 1,046,250
1,000,000 Mothers Work Inc., 12 5/8%, sr. notes,
08/01/05 ............................... B B3 1,089,400
1,000,000 SRI Receivable Pure Inc., 12 1/2%, tr.
ctf. backed notes, series B, 12/15/00 .. NR NR 1,000,000
2,250,000 Wickes Inc, 11 5/8%, sr. sub. notes,
12/15/03 ............................... CCC+ Caa1 1,957,500
------------
5,093,150
------------
GROCERY/CONVENIENCE FOOD STORES -- 0.63%
2,000,000 Homeland Stores Inc., 10%, sr. notes,
08/01/03 ............................... NR NR 1,727,500
------------
HEALTHCARE/DRUGS/HOSPITAL SUPPLIES --
2.64%
3,715,000 Complete Management Inc., 8%, conv. sub.
debs., 08/15/03 (e)* ................... NR NR 167,175
5,006,000 Complete Management Inc., 8%, conv. sub.
debs., 12/15/03 (e)* ................... NR NR 225,270
3,000,000 Global Health Sciences Inc., 11%, sr.
notes, 05/01/08 ........................ NR NR 2,100,000
5,000,000 PHP Healthcare Corp., 6 1/2%, conv. sub.
debs., 12/15/02 (b)* ................... NR C 425,000
1,000,000 Sun Healthcare Group Inc., 6%, conv. sub.
notes, 03/01/04, 144A .................. NR C 125,000
3,500,000 Total Renal Care Holdings Inc., 7%, conv.
sub. notes, 05/15/09, 144A ............. B B1 2,835,000
2,695,000 Uromed Corp., 6%, conv. sub. notes,
10/15/03 ............................... NR NR 1,347,500
------------
7,224,945
------------
HOME FURNISHINGS/DURABLE CONSUMER PRODUCTS
-- 0.92%
1,010,000 Outboard Marine Corp., 10 3/4%, sr. notes,
06/01/08 ............................... B B3 828,200
500,000 Remington Products Co., LLC, 11%, sr. sub.
notes, series B, 05/15/06 .............. CCC+ B3 385,000
2,000,000 Syratech Corp., 11%, sr. notes, 04/15/07 . CCC+ Caa1 1,300,000
------------
2,513,200
------------
HOTEL/GAMING -- 0.67%
1,000,000 Bluegreen Corp., 10 1/2%, sr. secd. notes,
series B, 04/01/08 ..................... B B3 910,000
1,000,000 Epic Resorts LLC, 13%, gtd. sr. secd.
notes, series B, 06/15/05 .............. B- B3 920,000
------------
1,830,000
------------
INSURANCE COMPANIES -- 0.36%
1,000,000 Superior National Insurance Group Inc.,
10 3/4%, pfd. trust notes, 12/01/17 .... BB B1 980,000
------------
LEISURE/AMUSEMENT/MOTION PICTURES -- 3.01%
4,200,000 Booth Creek Ski Holdings Inc., 12 1/2%,
sr. notes, series B, 03/15/07 .......... B- Caa1 3,990,000
175,000 Discovery Zone Inc., 13 1/2%, gtd. sr.
secd. notes, 05/01/02 .................. NR NR 43,750
20,125,000 Marvel Holdings Inc., 0%, sr. secd. disc.
notes, series B, 04/15/98 (b)* ......... NR NR 1,006,250
2,000,000 Premier Cruise Ltd., 11%, sr. notes,
03/15/08, 144A (e)* .................... D Caa2 500,000
5,000,000 Silver Cinemas International Inc., 10 1/2%,
sr. sub. notes, 04/15/05 ............... CCC Ca 2,700,000
------------
8,240,000
------------
MACHINERY -- 0.24%
3,250,000 Willcox & Gibbs Inc., 12 1/4%, sr. notes,
series B, 12/15/03 (b)* ................ NR Caa3 650,000
------------
METALS/MINING -- 4.42%
7,000,000 Anker Coal Group Inc., 9 3/4%, sr. notes,
series B, 10/01/07 ..................... CC Ca 3,780,000
1,500,000 Continental Global Group Inc., 11%, sr.
notes, series B, 04/01/07 .............. B B2 1,380,000
1,000,000 Doe Run Corp., 11 1/4%, sr. notes, series
B, 03/15/05 ............................ NR NR 872,500
500,000 International Knife and Saw, 11 3/8%, sr.
sub. notes, 11/15/06 ................... B- B3 512,500
1,000,000 Kaiser Aluminum & Chemical Corp., 12 3/4%,
sr. sub. notes, 02/01/03 ............... CCC+ B3 1,005,000
2,000,000 NSM Steel Inc., 12%, sr. mtg. notes,
02/01/06, 144A .......................... CC Caa3 400,000
3,000,000 PT Alatief Freeport, 9 3/4%, gtd. sr.
notes, 04/15/01 ........................ CCC B3 2,700,000
1,000,000 Recycling Industries Inc., 13%, sub.
notes, 12/05/05, 144A (b)* ............. NR B3 250,000
1,500,000 TVX Gold Inc., 5%, conv. notes, 03/28/02 . NR NR 1,185,000
------------
12,085,000
------------
NON-AGRICULTURAL CHEMICALS/PLASTICS -- 3.72%
2,000,000 Borden Chemicals & Plastics, 9 1/2%,
notes, 05/01/05 ........................ B+ B1 1,980,000
1,000,000 RBX Corp., 12%, sr. secd. notes, series B,
01/15/03 ............................... NR NR 910,000
7,000,000 SF Holdings Group Inc., 0%, sr. secd.
disc. notes, 03/15/08 .................. B- Caa2 2,170,000
2,500,000 Sterling Chemicals Inc., 11 3/4%, sr. sub.
notes, 08/15/06 ........................ B+ B3 2,375,000
1,000,000 Sweetheart Cup Inc., 9 5/8%, sr. secd.
notes, 09/01/00 ........................ B+ B2 955,000
2,500,000 Sweetheart Cup Inc., 10 1/2%, sr. secd.
notes, 09/01/03 ........................ B- Caa1 1,775,000
------------
10,165,000
------------
OIL/NATURAL GAS/OIL SERVICES -- 8.59%
3,000,000 Abraxas Petroleum Corp., 12 7/8%, sr.
secd. notes, 03/15/03, 144A ............ NR B3 3,030,000
2,750,000 First Wave Marine Inc., 11%, sr. notes,
02/01/08 ............................... B- B3 2,588,437
7,500,000 Gothic Energy Corp., 0%, sr. secd. disc.
notes, 05/01/06 ........................ CCC- Caa3 2,625,000
1,000,000 Gothic Production Corp., 11 1/8%, sr.
secd. notes, 05/01/05 .................. NR NR 800,000
5,000,000 Hurricane Hydrocarbons Ltd., 11 3/4%, sr.
notes, 11/01/04 ........................ D C 1,000,000
4,350,000 ICO Inc., 10 3/8%, sr. notes, series B,
06/01/07 ............................... B+ B1 3,045,000
3,000,000 Kelley Oil & Gas Corp., 14%, sr. secd.
notes, 04/15/03, 144A (c) .............. B- B3 3,060,000
3,435,000 Northern Offshore, 10%, sr. notes,
05/15/05, 144A ......................... B- B3 1,545,750
5,930,000 Southwest Royalties Inc., 10 1/2%, sr.
notes, series B, 10/15/04 .............. CCC- Caa2 2,549,900
4,050,000 United Refining Co., 10 3/4%, sr. notes,
series B, 06/15/07 ..................... B- B3 3,240,000
------------
23,484,087
------------
PACKAGING/CONTAINERS -- 1.82%
3,250,000 Crown Packaging Ltd., 10 3/4%, sr. secd.
notes, series B, 11/01/00 .............. NR Caa2 2,275,000
500,000 Portola Packaging Inc., 10 3/4%, sr.
notes, 10/01/05 ........................ B B2 516,250
2,000,000 Tekni-Plex Inc., 11 1/4%, sr. sub. notes,
series B, 04/01/07 ..................... B- B3 2,190,000
------------
4,981,250
------------
PAPER/FOREST PRODUCTS/PRINTING -- 0.28%
800,000 Advanced Argo Publishing Co. Ltd., 13%,
gtd. sr. notes, 11/15/07 ............... CC Caa1 616,000
1,000,000 FSW International Finance Co., 12 1/2%,
gtd. sub. notes, 11/01/06 (e)* ......... D Ca 160,000
------------
776,000
------------
PERSONAL & MISCELLANEOUS SERVICES -0.36%
1,000,000 Styling Technology Corp., 10 7/8%, gtd.
sr. sub. notes, 07/01/08 ............... NR NR 1,000,000
------------
POLLUTION CONTROL/WASTE REMOVAL -- 0.16%
500,000 GNI Group Inc., 10 7/8%, gtd. sr. notes,
07/15/05 ............................... B+ B2 430,000
------------
PUBLIC UTILITY/ELECTRIC POWER/HYDRO
POWER -- 0.46%
7,465,000 Transamerican Energy Corp., 11 1/2%, sr.
secd. notes, series B, 06/15/02 D C 1,269,050
------------
REAL ESTATE DEVELOPMENT/REITS/BUILDING/
CONSTRUCTION -- 1.63%
1,000,000 American Architectural Products, 11 3/4%,
gtd. sr. notes, 12/01/07 ............... B Caa1 860,000
290,820 Bramalea Limited, 11 1/8%, 03/22/98 (b)* . NR NR 0
750,000 Peters, J.M., Inc., 12 3/4%, sr. notes,
05/01/02 ............................... B- B3 667,500
3,375,000 Presley Companies, 12 1/2%, sr. notes,
07/01/01 ............................... CCC Caa3 2,919,375
------------
4,446,875
------------
TELEPHONE/COMMUNICATIONS -- 19.99%
348,000 Alvey Systems, Inc., 11 3/8%, sr. sub.
notes, 01/31/03 ........................ B- B3 357,135
3,000,000 Arch Escrow Corp., 13 3/4%, sr. notes,
04/15/08, 144A .......................... B- B3 2,910,000
4,000,000 COVAD Communications Group, 12 1/2%, sr.
disc. notes, 02/15/09, 144A ............ NR B3 4,080,000
1,500,000 Consorcio Ecuatoriano de
Telecomunicationes SA, 14%, notes,
series B, 05/01/02 ..................... NR NR 750,000
1,400,000 Conecel Holdings Ltd., 14%, units,
10/01/00, 144A ......................... NR NR 490,000
500,000 Conecel Holdings Ltd., 14%, units,
10/01/00 ............................... NR NR 207,500
2,000,000 Convergent Communications, 13%, sr. notes,
04/01/08 ............................... NR NR 1,600,000
10,000,000 DTI Holdings Inc., 0%, sr. disc. notes,
03/01/08 ............................... NR NR 3,800,000
500,000 Econophone Inc., 13 1/2%, sr. notes
07/15/07 ............................... NR NR 545,000
4,000,000 First World Communications, 0%, sr. disc.
notes, 04/15/08 ........................ NR NR 2,120,000
2,000,000 Globix Corp., 13%, sr. notes, 05/01/05 ... NR NR 2,000,000
2,000,000 ICO Global Communications, 15%, units
08/01/05 ............................... CCC+ B3 1,280,000
2,000,000 In Flight Phone Corp., 14%, sr. disc.
notes, series B, 05/15/02 (b)* ......... NR C 180,000
2,000,000 Innova S De R.L., 12 7/8%, sr. exch.
notes, 04/01/07 ........................ B- B3 1,720,000
8,200,000 Innova S De R.L., 12 7/8%, reg. sr. notes,
04/01/07 ............................... B- B3 7,052,000
2,000,000 Ionica PLC, 0%, sr. disc. notes, 05/01/07
(d) .................................... NR Ca 60,000
1,000,000 Iridium Capital Corp., 14%, sr. notes,
series B, 07/15/05 ..................... CCC+ B3 390,000
1,000,000 Iridium Operations LLC, 11 1/4%, sr.
notes, 07/15/05 ........................ CCC+ B3 310,000
750,000 Iridium Operations LLC, 10 7/8%, gtd. sr.
notes, series D, 07/15/05 .............. CCC+ B3 255,000
1,000,000 Knology Holdings Inc., 0%, sr. disc.
notes, 10/15/07 ........................ NR NR 590,000
4,500,000 MGC Communications Inc., 13%, sr. secd.
notes, series B, 10/01/04 .............. NR Caa2 4,185,000
1,000,000 Occidente Y Caribe Cellular, 0%, sr. disc.
notes, series B, 03/15/04 .............. B B3 735,000
3,000,000 Orbital Imaging Corp., 11 5/8%, sr. notes,
03/01/05, 144A ......................... NR NR 2,865,000
5,000,000 Splitrock Services Inc., 11 3/4%, sr.
notes, series B, 07/15/08 .............. NR NR 5,000,000
1,500,000 Telehub Communications Corp., 0%, gtd. sr.
disc. notes, 07/31/05 .................. NR NR 990,000
3,750,000 Teletrac Inc., 14%, sr. notes, series B,
08/01/07 ............................... CCC NR 1,350,000
2,000,000 Total Access Communication Ltd., 7 5/8%,
bonds, 11/04/01, 144A .................. BB- B2 1,640,000
3,000,000 USA Mobile Communications Inc., 9 1/2%,
sr. notes, 02/01/04 .................... B- B3 2,712,500
10,000,000 USN Communications Inc., 0%, sr. disc.
notes, series B, 08/15/04 (b)* D Ca 1,100,000
2,000,000 Viatel Inc., 11 1/4%, sr. notes, 04/15/08 NR Caa1 2,090,000
2,000,000 Viatel Inc., 0%, sr. disc. notes, 04/15/08 NR Caa1 1,305,000
------------
54,669,135
------------
TEXTILES/OTHER MANUFACTURING/
APPAREL -- 1.56%
5,000,000 Converse Inc., 7%, conv. sub. notes,
06/01/04 ............................... NR NR 1,900,000
1,500,000 Derlan Manufacturing Inc., 10%, sr. notes,
01/15/07 ............................... B+ B3 1,366,875
150,000 GPO Synkro SA, 12%, bonds, 04/01/02 ...... NR NR 127,500
1,000,000 Glenoit Corp., 11%, sr. sub. notes,
04/15/07 ............................... B- B3 863,750
------------
4,258,125
------------
TRANSPORTATION/AIRLINES/BUS -- 4.43%
3,000,000 Alpha Shipping PLC, 9 1/2%, sr. notes,
series A, 02/15/08 (b)* ................ NR Ca 900,000
1,000,000 Cenargo International Ltd., 9 3/4%, 1st
mtg. notes, 06/15/08, 144A ............. NR NR 900,000
1,418,031 Mexico City Toluca Toll, 11%, notes,
05/19/02, 144A ......................... NR NR 1,162,785
3,000,000 Sabreliner Corp., 11%, sr. notes,
06/15/08, 144A ......................... B B3 2,670,000
500,000 TBS Shipping International Ltd., 10%, 1st
mtg. notes, 05/01/05 ................... NR NR 170,000
4,680,000 TRISM Inc., 10 3/4%, gtd. sr. sub. notes,
12/15/00 ............................... CCC Caa3 2,199,600
1,000,000 Trans World Airlines Inc., 11 3/8%, sr.
notes, 03/01/06 ........................ CC Caa1 530,000
2,000,000 Trans World Airlines Inc., 11 1/2%, sr.
secd. notes, 12/15/04 .................. CCC B2 1,720,000
2,000,000 Trans World Airlines Inc., 12%, sr. secd.
notes, 04/01/02 ........................ NR B2 1,860,000
------------
12,112,385
------------
TOTAL FIXED INCOME (cost $290,648,674)........................... $248,297,244
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 1999
COMMON STOCK, PREFERRED STOCK AND WARRANTS -- 4.94%
Value
Units Description (Note 2)
- ----- ----------- --------
10,000 American Capital Strategies ........................... $ 177,500
7,730 American Mobile Satellite, warrants, 144A* ............ 232,866
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
50,000 Annaly Mortgage Management Inc., 144A* ................ 481,250
10,000 Annaly Mortgage Management Inc. ....................... 103,750
50,000 Anthracite Capital Corp. .............................. 378,125
5,806 Apartment Investment & Management Co., class A* ....... 232,603
2,000 Bell Technology Group Ltd., warrants* ................. 0
12,888 Brooke Group Ltd. ..................................... 245,677
550 CS Wireless Systems Inc., 144A* ....................... 1
50,000 Capital Automotive, REIT .............................. 650,000
5,925 Capital Pac Holdings Inc., warrants, 144A* ............ 593
1,000 Central Rents Inc., 144A* ............................. 40,000
170,000 Chastain Capital Corp.* ............................... 940,313
4,392 Chattem Inc.* ......................................... 171,562
100,000 Commodore Separation Technology, warrants* ............ 18,750
100,000 Commodore Separation Technology, sr. conv. pfd. ....... 3,130
8,000 Convergent Communications, warrants, 144A* ............ 240,000
7,887 Cort Business Services Corp.* ......................... 181,966
6,000 DIVA Systems Corp., warrants, 144A* ................... 712,050
25,212 DIVA Systems Corp., warrants* ......................... 151,272
50,000 DTI Holdings Inc., warrants, 144A* .................... 6,750
750 Discovery Zone Inc., warrants, 144A* .................. 0
2,975 Discovery Zone Inc., warrants, class A* ............... 0
2,975 Discovery Zone Inc., warrants, class B* ............... 0
500 Econophone Inc., warrants, 144A* ...................... 4,000
1,000 Epic Resorts LLC, warrants, 144A* ..................... 10
8,862 Equus Gaming* ......................................... 10,062
20,000 Excel Legacy Corp.* ................................... 91,250
25,000 FBR Asset Investment Corp., 144A* ..................... 312,500
4,000 First World Communications, warrants, 144A* ........... 200,000
10,000 Giga Information Group Inc.* .......................... 36,250
17,251 GP Strategies Corp.* .................................. 265,234
2,000 Globalstar Telecommunications, warrants, 144A* ........ 270
28,000 Gothic Energy Corp., warrants* ........................ 32,200
9,533 Gothic Energy Corp., warrants, 144A* .................. 0
20,000 HRPT Properties Trust ................................. 292,500
11,000 HarCor Energy Inc., warrants* ......................... 6,864
1,500 Heartland Wireless Communications, warrants, 144A* .... 202
10,000 Hospitality Properties Trust .......................... 288,125
14,400 ICF Kaiser International Inc., warrants* .............. 1,944
750 IHF Capital Inc., warrants, 144A* ..................... 7,594
15,000 Imperial Credit Commercial Mortgage Investments Corp. . 147,187
750 Intermedia Communications of Florida Inc., warrants,
144A* ............................................... 87,937
1,000 Knology Holdings Inc., warrants, 144A* ................ 0
25,000 Local Financial Corp., 144A* .......................... 187,500
2,000 Loral Orion Network Systems Inc., warrants* ........... 24,250
3,000 MGC Communications Inc., warrants, 144A* .............. 456,000
51,960 Marvel Enterprises Inc., class A, warrants* ........... 77,940
33,314 Marvel Enterprises Inc., class B, warrants* ........... 33,314
87,999 Marvel Enterprises Inc., class C, warrants* ........... 35,200
625 Mego Mortgage Corp., pfd., series A* .................. 218,750
500 Motels of America Inc., 144A* ......................... 3,375
291 Mothers Work Inc.* .................................... 3,146
750 NS Group Inc., warrants* .............................. 90,000
20,000 National Propane Partners L.P. ........................ 237,500
24,000 New Plan Excel Realty Trust Inc. ...................... 445,500
4,000 Occidente Y Caribe Cellular, warrants, 144A* .......... 64,500
2,000 One Point Communications Co.* ......................... 0
3,500 Optel Inc.* ........................................... 52,500
1,000 Park n View Inc., warrants, 144A* ..................... 0
125,449 Prime Retail Inc. ..................................... 1,081,998
4,094 Prime Retail Inc., conv. pfd., series B .............. 67,295
33,333 Resource Asset Investment Trust * ..................... 383,329
17,700 SF Holdings Group Inc., 144A* ......................... 44,250
112 SF Holdings Group Inc., pfd., 144A* ................... 408,250
1,000 Sabreliner Corp., warrants* ........................... 1,000
3,750 Sheffield Steel Corp., warrants* ...................... 37
500 Signature Brands Inc., warrants* ...................... 0
20,000 Source Media Inc.* .................................... 437,500
500 Spanish Broadcasting Corp., warrants* ................. 102,500
5,000 Splitrock Services Inc., warrants, 144A* .............. 450,000
11,580 Star Choice Communications, warrants* ................. 15,884
1,500 Telehub Communications Corp., warrants, 144A* ......... 75,000
3,750 Teletrac Holdings Inc., warrants, 144A* ............... 0
4,000 Terex Corp., rights* .................................. 58,500
5,133 Trans World Airlines Inc.* ............................ 27,911
2,000 Trans World Airlines Inc., warrants* .................. 300,000
25,000 Ugly Duckling Corp. * ................................. 165,625
1,000 Unifi Communications Inc., warrants, 144A* ............ 135
9,800 Uniroyal Technology Corp., warrants* .................. 58,800
4,500 Vialog Corporation, warrants* ......................... 225,000
1,041 Viatel Inc., pfd., series A* .......................... 250,100
1,500 WHX Corp., pfd.* ...................................... 54,000
20,000 Walden Residential Properties, conv. pfd., series B* .. 447,500
40,000 Wilshire Real Estate Investments* ..................... 160,000
1,500 Wireless One Inc., warrants* .......................... 19
------------
TOTAL COMMON STOCK, PREFERRED STOCKS AND WARRANTS
(cost $15,264,085) .................................. 13,496,415
------------
TOTAL INVESTMENTS IN SECURITIES (cost $305,912,759) $261,793,659
------------
SHORT-TERM INVESTMENTS -- 0.72%
Par Value
Value (Note 2)
- ----- --------
COMMERCIAL PAPER:
$1,974,000 Ciesco LP., 4.80%, 05/03/99, A1+/P1 ........... $ 1,973,474
------------
TOTAL SHORT-TERM INVESTMENTS (cost $1,973,474) 1,973,474
------------
TOTAL INVESTMENTS - 96.44% (COST $307,886,233) 263,767,133
------------
OTHER ASSETS - 3.56% .......................... 9,747,010
------------
TOTAL ASSETS - 100% ........................... $273,514,143
============
(a) Percentages indicated are based on total assets.
(b) Denotes company has filed for bankruptcy.
(c) When issued security.
(d) Denotes security currently in receivorship.
(e) Denotes security currently in default.
NR Denotes not rated.
* Non-income producing security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
April 30, 1999
ASSETS
Investments in securities at value
(identified cost $307,886,233; see Schedule
of Investments and Note 2) .............................. $263,767,133
Cash ....................................................... 456,432
Receivables:
Interest and dividends ................................... 9,145,263
Prepaid insurance .......................................... 128,066
Other assets ............................................... 17,249
------------
Total assets ....................................... $273,514,143
------------
LIABILITIES
Payables:
Investment securities purchased .......................... $ 185,629
Accrued expenses (Note 3) .................................. 587,234
Bank loan (Note 14) ........................................ 50,000,000
------------
Total liabilities .................................. $ 50,772,863
------------
Net Assets:
Common stock, $.03 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 26,544,666 shares ............ $ 796,340
Capital in excess of par value (Notes 2 and 5) ........... 303,504,559
Accumulated undistributed net investment income (Note 2) . 3,103,467
Accumulated net realized loss from security transactions . (40,543,986)
Net unrealized depreciation of investments ............... (44,119,100)
------------
Total net assets (equivalent to $8.39 per share,
based on 26,544,666 shares outstanding) ......... $222,741,280
=============
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, 1999
INVESTMENT INCOME (Note 2):
Interest income .............................................. $ 12,800,484
Dividend income .............................................. 376,618
Accretion of discount ........................................ 2,971,196
------------
Total investment income ................................ $ 16,148,298
------------
EXPENSES:
Interest expense ............................................. $ 1,439,674
Investment advisory fee (Note 3) ............................. 694,973
Custodian and transfer agent fees ............................ 84,301
Professional fees ............................................ 108,295
Amortization of prepaid surety bond premiums (Note 7) ........ 7,011
Directors' fees .............................................. 46,739
Insurance expense ............................................ 53,355
Excise tax expense ........................................... 236,205
Miscellaneous expenses ....................................... 140,729
------------
Total expenses ......................................... $ 2,811,282
------------
Net investment income .................................. $ 13,337,016
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments sold ........................ $(12,491,534)
Change in net unrealized depreciation of investments (Note 2) 21,890,328
------------
Net realized and unrealized gain on investments ........ $ 9,398,794
------------
Net increase in net assets resulting from operations ... $ 22,735,810
============
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, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ...................... $ 10,940,024
Operating expenses paid .............................. (2,734,500)
-------------
Net cash provided by operating activities ...... $ 8,205,524
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities .................... $(190,517,216)
Sales and maturities of portfolio securities ......... 129,963,378
-------------
Net cash used in investing activities .......... $ (60,553,838)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock rights offering
and sale of common stock ........................... $ 55,145,397
Proceeds from bank loan .............................. 10,000,000
Common stock dividends paid from operations .......... (12,940,381)
-------------
Net cash provided by financing activities ...... $ 52,205,016
-------------
NET DECREASE IN CASH ................................... $ (143,298)
CASH, BEGINNING OF PERIOD .............................. 599,730
-------------
CASH, END OF PERIOD .................................... $ 456,432
=============
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 ....................................... $ 22,735,810
Increase in interest and dividend receivables ...... (2,237,078)
Amortization of Fidelity Bond and other
deferred assets .................................. 5,745
Decrease in other assets ........................... 48,697
Increase in accrued expenses and other payables .... 22,340
Net realized loss on investments sold .............. 12,491,534
Change in net unrealized depreciation of
investments ...................................... (21,890,328)
Accretion of bond discount ......................... (2,971,196)
-------------
Net cash provided by operating activities ...... $ 8,205,524
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............. $ 1,830,870
Cash paid during the period for excise taxes ......... 123,991
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Fiscal Year Ended
April 30, October 31,
1999 1998
---------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................ $ 13,337,016 $ 24,548,657
Net realized loss on investments sold ................ (12,491,534) (5,007,628)
Change in net unrealized appreciation (depreciation)
of investments ..................................... 21,890,328 (69,126,156)
------------ ------------
Net increase (decrease) in net assets resulting
from operations .............................. $ 22,735,810 $(49,585,127)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (108,680 shares and 175,689 shares,
respectively) to common stockholders for
reinvestment of dividends .......................... $ 975,320 $ 1,995,745
Net proceeds from sale of common stock issued
(6,630,663 and 4,914,203 shares, respectively, after
deducting $2,541,371 and $2,599,872 of soliciting
fees and other expenses, respectively) ............. 55,145,397 53,422,039
Redemption of taxable auction rate preferred stock
(200 shares at $100,000 liquidation preference) ... -- (20,000,000)
------------ ------------
Increase in net assets resulting from fund share
transactions ................................. $ 56,120,717 $ 35,417,784
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Preferred dividends ($0 and $3,144 per share,
respectively) ...................................... $ 0 $ (628,030)
Common dividends ($.63 and $1.26 per share,
respectively) from operations ...................... (13,915,701) (23,313,075)
------------ ------------
Decrease in net assets resulting from
distributions to stockholders ................ (13,915,701) (23,941,105)
------------ ------------
Total net increase (decrease) in net assets .... $ 64,940,826 $(38,108,448)
NET ASSETS:
Beginning of period .................................. 157,800,454 195,908,902
------------ ------------
End of period (including $3,103,467 and $3,682,152 of
undistributed net investment income as of April 30,
1999 and October 31, 1998, respectively) ........... $222,741,280 $157,800,454
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
For the
Six Months
Ended For the Years Ended October 31,
April 30, --------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.97 $ 11.94 $ 11.70 $ 11.10 $ 11.07 $ 12.75
-------- -------- -------- -------- -------- --------
Net investment income ............. $ .58# $ 1.30# $ 1.38# $ 1.50# $ 1.35 $ 1.44#
Net realized and unrealized
gain (loss) on investments ...... .40# (3.76)# .72# .60# .09 (1.14)#
-------- -------- -------- -------- -------- --------
Total from investment
operations .............. $ .98 $ (2.46) $ 2.10 $ 2.10 $ 1.44 $ .30
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated
net investment income
To preferred stockholders ..... $ -- $ (.03) $ (.09) $ (.12) $ (.15) $ (.09)
To common stockholders ........ .63 (1.26) (1.26) (1.26) (1.26) (1.35)
-------- -------- -------- -------- -------- --------
Total distributions ....... $ .63 $ (1.29) $ (1.35) $ (1.38) $ (1.41) $ (1.44)
-------- -------- -------- -------- -------- --------
Effect of sale of common
stock and related
expenses from rights offering ... $ .07 $ (.22) $ (.51) $ (.12) $ -- $ (.54)
-------- -------- -------- -------- -------- --------
Net asset value, end of period .... $ 8.39 $ 7.97 $ 11.94 $ 11.70 $ 11.10 $ 11.07
======== ======== ======== ======== ======== ========
Per share market value, end of period $ 9.13 $ 10.25 $ 12.39 $ 12.00 $ 11.64 $ 10.50
======== ======== ======== ======== ======== ========
Total investment return ........... (4.55)%(d) (7.63)% 14.82% 15.29% 28.57% (7.78)%
======== ======== ======== ======== ======== ========
Net assets, end of period,
applicable to common stock (a) .. $222,741 $157,800 $175,909 $120,711 $ 93,309 $ 92,072
======== ======== ======== ======== ======== ========
Net assets, end of period,
applicable to preferred stock (a) $ -- $ -- $ 20,000 $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ======== ========
Net assets, end of period (a) ..... $222,741 $157,800 $195,909 $140,711 $113,309 $112,072
======== ======== ======== ======== ======== ========
Ratio of operating expenses
to average net assets,
applicable to common stock ...... 3.06%(c) 2.67% 2.30% 3.06% 3.27% 3.27%
Ratio of net investment
income to average net
assets, applicable to
common stock .................... 14.54%(c) 11.92% 11.94% 13.20% 13.47% 12.25%
Ratio of operating expenses
to average net assets** ......... 2.45%(c)+ 2.18%+ 1.81%+ 2.21%+ 2.28%+ 2.30%+
Ratio of net investment
income to average net
assets** ........................ 11.61%(c) 9.72% 9.42% 9.51% 9.39% 8.64%
Portfolio turnover rate ........... 61.67%(d) 156.48% 176.04% 108.33% 80.71% 72.00%
(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 reverse stock split in April of 1998. (Note 12).
(c) Annualized.
(d) Not annualized.
** Ratios calculated on the basis of expenses and net investment income relative to average net assets (total assets less
accrued liabilities (excluding bank loans and senior notes)).
+ Excluding interest expense, the ratio of operating expenses to average net assets (total assets less accrued liabilities
(excluding bank loans and senior notes)) is 1.19%(c), 1.20%, 1.13%, 1.30%, 1.29% and 1.32%, respectively.
# Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's
rights offerings.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
<TABLE>
<CAPTION>
INFORMATION REGARDING SENIOR SECURITIES
For the
Six Months
Ended As of October 31,
April 30, -----------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Indebtedness $50,000,000 $40,000,000 $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
Asset Coverage:
Per Indebtedness(a) 545% 495% 1,080% 804% 667% 660%
Per preferred stock share (b) N/A N/A 540% 402% 333% 330%
Involuntary Liquidation Preference:
Per preferred stock share (c) N/A N/A $ 100,000 $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note N/A N/A $ 1,003.80 $ 990.00 $ 987.50 $ 937.10
Per preferred stock share N/A N/A 100,000 100,000 100,000 100,000
(a) Calculated by subtracting the Fund's total liabilities (not including bank loans and 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 bank loans and senior securities) from the Fund's total
assets and dividing such amount by the principal amount of the debt outstanding and aggregate liquidation preference of the
outstanding shares of Taxable Auction Rate Preferred Stock.
(c) Plus accumulated and unpaid dividends.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
(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 exchange traded 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, which comprise the major portion of the Fund's portfolio
holdings, are primarily non- investment-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. These investments are stated at fair
value on the basis of subjective valuations furnished by an independent pricing
service or broker dealers, subject to review and 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.
Gains and losses on sales of investments are calculated on the identified cost
method for both financial reporting and federal income tax purposes. It is the
Fund's practice to first select for sale those securities that have the highest
cost and also qualify for long-term capital gain or loss treatment for tax
purposes.
Settlements from litigation and class action suits are recognized when the
Fund acquires an enforceable right to such awards. Included in net realized loss
from investments is $0 and $3,273,015 attributable to class action settlements
received by the Fund during the six-month period ended April 30, 1999 and the
year ended October 31, 1998, respectively.
(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. It is the Fund's policy to place securities on non-accrual
status when collection of interest is doubtful.
(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, 1999, the cost of investments in securities for federal income
tax purposes was $308,455,189. Aggregate gross unrealized gains on securities in
which there was an excess of market value over tax cost was $12,776,213.
Aggregate gross unrealized losses on securities in which there was an excess of
tax cost over market value was $57,464,269. The net unrealized loss on
securities held by the Fund was $44,688,056 for federal income tax purposes.
At October 31, 1998, 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
$(18,529,051) October 31, 1999
(808,396) October 31, 2002
(3,703,531) October 31, 2003
(4,698,150) October 31, 2006
------------
$(27,739,128)
============
(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 had been deferred
and amortized on a straight-line basis over a period of five years. The senior
notes were redeemed (see Note 4) and the remaining deferred balance was
written-off during the year ended October 31, 1998.
(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 $694,973 in management fees for the six-month period ended April
30, 1999. 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 bank loan) 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, 1999, the fee payable to the Investment Adviser was
$202,685, 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 would mature, if not
previously redeemed, on December 1, 1998. The Fund was required to maintain
certain asset coverages with respect to the Senior Notes, as defined in the Note
Purchase Agreement, and the Senior Notes were subject to mandatory redemption if
the Fund fails to maintain these asset coverages. Interest on the Senior Notes
was at the rate of 6.53% per annum through November 30, 1998 and was due every
June 1 and December 1, commencing December 1, 1993.
The Senior Notes were redeemable, in whole or in part, by the Fund at certain
times and under certain circumstances, as defined in the Note Purchase
Agreement.
On July 24, 1998, the Fund redeemed all of its Senior Notes at an aggregate
redemption price of $20 million, plus accrued interest. The funds required to
redeem the Senior Notes were borrowed under a new $50 million credit facility
discussed in Note 14.
(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 were cumulative at a rate that was established at the offering of the
preferred stock and which was reset every 30 days thereafter by an auction.
Dividend rates ranged from 5.52% to 5.89% of the liquidation preference during
the year ended October 31, 1998. The remaining 200 shares of preferred stock
were 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 was also subject to mandatory redemption at a
redemption price equal to $100,250 per share, plus accumulated and unpaid
dividends, if the Fund was 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 voted together as a single class, except
that the holders of the preferred stock, as a separate class, voted to elect two
members of the Board of Directors, and separate class votes were required on
certain matters that affected the respective interests of the preferred stock
and common stock. The preferred stock had a liquidation preference of $100,000
per share, plus accumulated and unpaid dividends. The Fund was 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 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 have been amortized on
a straight-line basis over the life of the extended agreement. Amortization
expense for the six-month period ended April 30, 1999 was $0, as amounts were
fully amortized at October 31, 1998.
(7) SURETY BOND
The Fund had entered into an insurance agreement, dated as of December 1,
1988, with Financial Security Assurance, Inc. (FSA), pursuant to which FSA had
issued a surety bond. Under the terms of the surety bond, FSA unconditionally
and irrevocably guaranteed dividend, redemption and liquidation payments to
preferred shareholders upon failure of the Fund to do so, and the Fund would
then have been 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 paid an annual
premium of 0.40% on the maximum aggregate liquidation preference of the
preferred stock. In connection with the redemption of the preferred stock the
surety bond expired on May 15, 1998.
The Fund executed an amendment to the insurance agreement on April 11, 1990,
which provided 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 month period ended April 30, 1999, the aggregate cost of purchases
and proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $187,008,308 and $120,277,870,
respectively. There were no purchases or sales of U.S. Government obligations
during the six-month period ended April 30, 1999.
(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 payable on November 30 and December 31, 1998, and
January 29, February 26, March 31 and April 30, 1999.
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, 1999, the fair value of
the bank term loan was $50,000,000.
(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 January 26, 1999, the Fund commenced a rights offering whereby the Fund
issued to its shareholders of record, as of that date, nontransferable rights
entitling the holders thereof to subscribe for an aggregate of 6,630,663 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 rate of one
share of common stock for every three rights held. The subscription period for
the rights offering expired on February 19, 1999 and the Fund issued, on a
post-split basis, 6,630,663 shares of common stock at $8.70 per share. Proceeds
to the Fund amounted to $55,145,397, net of soliciting fees and offering
expenses of $2,541,371.
(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%. On July 24, 1998,
the Fund entered into an amended agreement to increase the available line of
credit to $50 million. Under the terms of the loan agreement the Fund is
required to maintain certain debt covenants, which include that the Fund's total
liabilities plus, without duplication, the aggregate amount of its debt, may not
exceed 25% of its total assets. The weighted average loan balance and interest
rate for the six months ended April 30, 1999 was approximately $46,685,000 and
5.73%, respectively. The outstanding loan balance at April 30, 1999 was $50
million, with an average interest rate on the outstanding loans of 5.59%. 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 $50
million exceeds the aggregate outstanding principal of the bank 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,
1999, the related statements of operations and cash flows for the six month
period then ended, the statements of changes in net assets for the year ended
October 31, 1998 and the six month period ended April 30, 1999 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, 1999 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, 1999, 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 7, 1999
<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 &
Wolosky LLP
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. Our website is prospectstreet.net.
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.
1999 STOCKHOLDERS' MEETING:
At the Annual Meeting of Stockholders held on March 12, 1999, the stockholders
elected seven directors of the Fund, as follows:
COMMON STOCK NOMINEES FOR WITHHELD
John S. Albanese ........................ 16,971,285 945,397
C. William Carey ........................ 16,966,691 949,991
Joseph G. Cote .......................... 16,963,138 953,544
John A. Frabotta ........................ 16,970,516 946,156
Richard E. Omohundro, Jr. ............... 16,966,843 949,839
Harlan D. Platt ......................... 16,959,140 957,542
Christopher E. Roshier .................. 16,958,794 957,888
Since an Investment Company Act supermajority was not obtained, the stockholders
did not approve a new Advisory Agreement which would have increased the annual
advisory fee to 0.70% of the Fund's average annual net assets up to and
including $200,000,000 and 0.65% of the excess of such managed assets over
$200,000,000. The numbers were as follows:
FOR AGAINST ABSTAIN
8,522,493 3,721,551 788,882
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
17,279,455 339,730 344,045
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
60 State Street, Suite 3750
Boston, MA 02109
