<PAGE>
--------------------------------------------------------------------------------
PROSPECT STREET(R)
HIGH INCOME PORTFOLIO INC.
SEMI-ANNUAL
REPORT
APRIL 30, 2000
[Logo]
<PAGE>
June 19, 2000
LETTER TO STOCKHOLDERS
Dear Stockholders:
On April 28, 2000, the Fund's net asset value was $6.09, as compared to
$6.98 on October 29, 1999. During the six-month period ended April 30, 2000,
the Fund paid dividends to common stockholders in the amount of $0.58 per
share; the total dividends paid for the trailing twelve-month period were
$1.21 per share.
NEW ADVISER:
On January 21, 2000, Highland Capital Management, L.P. became the Fund's
investment adviser. This change was approved at the special stockholders'
meeting held on December 12, 1999.
At that meeting, stockholders elected six new board members and re-elected
four board members. Two of the re-elected Directors, John S. Albanese and
Christopher E. Roshier, served through June 9, 2000 at which time they agreed
to serve in a non-voting, advisory capacity until the 2000 annual
stockholders' meeting. On behalf of the remaining Directors and Highland
Capital Management, L.P., we would like to thank them for their years of
dedication and service to the Fund on behalf of its stockholders.
NEW OFFICERS:
At the regular meeting of the Board of Directors, held on February 4,
2000, the Board elected new officers of the Fund. James D. Dondero was elected
President, Mark K. Okada Executive Vice President and R. Joseph Dougherty
Senior Vice President.
DIVIDEND RATE:
On May 3, 2000, the Board of Directors voted to reduce the monthly
dividend from the then current rate of $0.095 per share to $0.075 per share.
As a result of the current market environment and portfolio repositioning, the
dividend was adjusted to be more reflective of the portfolio's current earning
rate.
On June 9, 2000, the Board of Directors adopted a new policy of declaring
dividends on a three-month forward basis. On that date, a dividend of $0.075
per share was declared for the months of June, July and August 2000.
THE HIGH YIELD MARKET:
The high yield market continued to exhibit strength until the fall of the
equity markets in March 2000. Since that time, reduced liquidity and limited
new issue volume have characterized the high yield market. High yield mutual
fund flows experienced a net outflow of $4.47 billion from October 28, 1999 to
April 26, 2000. The new issue market for the first quarter of 2000 was $16.8
billion, slightly over one-half of the new issue volume in the first quarter
of 1999, and less than one-fifth of the new issue volume for 1999.
The high yield market, as measured by the B, CCC and Distressed DLJ High
Yield Indices, generated total returns of 1.07%, (3.82%), and (7.14%),
respectively, for the six-month period ending April 28, 2000. At April 28,
2000, the spread between high yield securities and comparable U.S. Government
securities stood at 654 basis points up from 616 basis points at October 29,
1999 and 549 basis points at December 31, 1999. Widening credit spreads have
dramatically reduced primary bond issuance. Only recently have we seen
meaningful improvement in the primary and secondary markets. However, buyers
have been re-entering the market with considerable caution as a result of this
reduced liquidity, continued ratings downgrades and rising default rates.
THE FUND'S INVESTMENTS:
The Fund's total return based on net asset value per share for the six
months ended April 30, 2000, assuming reinvestment of dividends, was
approximately (4.87%). The Fund's total investment return based on market
price per share was (10.97%) for the same period. The variation from the total
return on net assets is attributable to the decline in the per share market
value premium from 15.04% to 8.65% during the period.
As of April 30, 2000, the Fund held 100 issues representing 31 industry
groups. Cash and short-term investments represented approximately 0.02% of the
Fund's holdings. The average market price of the Fund's high yield securities
was approximately $63.89 with an average coupon of 10.5%. At April 30, 2000,
the Fund was generating monthly net investment income of approximately $0.075
per common share.
INVESTMENT OUTLOOK:
While still showing signs of sluggishness, the high yield market appears
to be firming from its lows in March and April 2000. Some of the positive
factors which could extend this strengthening and benefit the high yield
market in particular are:
1. The U.S. domestic economy continuing to exhibit moderate strength,
which is a positive for the high yield asset class.
2. The moderation in the actual default rate versus industry projections
could increase bond prices from the currently depressed levels as a
result of increased confidence in the high yield sector.
3. The continued improvement in market liquidity could give way to a more
healthy new issue calendar.
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. A continuing Federal Reserve policy to raise interest rates that could
change investor psychology, as the possibility of a recession would
become more probable.
2. Continued high default rates.
3. Continued credit rating downgrades by the major rating agencies.
4. High levels of cash outflows from high yield mutual funds that could
result in further depressing bond prices as the funds are forced to
sell investments into a less liquid market.
LEVERAGE:
On January 21, 2000, the Fund repaid all borrowings under its $50 million
revolving credit facility with BankBoston, N.A., as lender and agent. The
funds required to repay the outstanding balance were borrowed by the Fund
under a new floating rate, $75 million revolving credit facility with Bank of
America, N.A., as lender and agent. At April 30, 2000, the Fund had an
outstanding borrowing of $75 million under this facility at an average
interest rate of 6.80%.
INVESTMENT POLICIES:
The Board recently granted the Fund the ability to purchase equity
securities in connection with its holdings of debt securities to create
synthetic units, which are similar to units consisting of debt and warrants
that the Fund is permitted to purchase.
CONCLUSION:
While not fully recovered from its decline since the events in March 2000,
the high yield market has been exhibiting signs of a rebound and presents
investors with an attractive return opportunity.
Management continues to evaluate the Fund's investments, seeking to
maximize the Fund's total return on net assets.
Respectfully submitted,
/s/ James Dondero
James Dondero
President
/s/ Mark Okada
Mark Okada
Executive Vice President
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS
APRIL 30, 2000
FIXED INCOME -- 92.39%
<CAPTION>
Ratings
-------------------
Par Standard Value
Value Description & Poor's Moody's (Note 2)
----- ----------- -------- ------- --------
AEROSPACE AND DEFENSE -- 5.52%
<C> <S> <S> <S>
$ 7,000,000 Loral Space & Communication Ltd., 9 1/2%, sr. notes, 01/15/06 ............... B B1 $ 4,725,000
3,000,000 Orbital Imaging Corp., 11 5/8%, sr. notes, series D, 03/01/05 ............... CCC NR 1,500,000
6,900,000 Orbital Imaging Corp., 11 5/8%, sr. notes, series B, 03/01/05 ............... CCC NR 3,450,000
5,000,000 Orbital Sciences Corp., 5%, conv. sub. notes, 10/01/02 ...................... B- Caa1 3,556,250
------------
13,231,250
------------
AUTOMOBILE -- 1.44%
2,000,000 Collins & Aikman Products Co., 11 1/2%, gtd. sr. sub. notes, 04/15/06 ....... B B2 1,960,000
2,000,000 Venture Holdings Trust, 12%, sr. sub
notes, 06/01/09 ............................................................. B- B3 1,480,000
------------
3,440,000
------------
BANKING -- 0.39%
1,000,000 Ocwen Federal Bank FSB, 12%, sub. debs, 06/15/05 ............................ B+ B1 925,000
------------
BEVERAGE, FOOD AND TOBACCO -- 1.34%
1,000,000 North Atlantic Trading Company, Inc., 11%, sr. notes, 06/15/04 .............. B B3 930,000
1,000,000 SFC New Holdings, Inc., 12 1/8%, sr. notes, 10/01/02 ........................ CCC CCC2 971,250
2,000,000 Vlasic Foods International Inc., 10 1/4%, sr. sub. notes, series B, 07/01/09 B Caa1 1,300,000
------------
3,201,250
------------
BROADCASTING AND ENTERTAINMENT -- 18.17%
7,000,000 CD Radio Inc., 14 1/2%, sr. secd. notes, 05/15/09 ........................... CCC+ Caa1 6,527,500
13,500,000 ICO Global Communications, 15%, U.S. unit sr. notes wt., 08/01/05(b) ........ NR Ca 7,830,000
10,200,000 Innova S DE R.L., 12 7/8%, sr. exch. notes, 04/01/07 ........................ B- B3 9,200,000
7,740,000 Orion Network, 11 1/4%, sr. notes, 01/15/ 07 ................................ B+ B2 5,185,800
11,990,000 Satelites Mexicanos, 10 1/8%, sr. notes, 11/01/04 ........................... B- B3 8,992,500
5,000,000 Silver Cinemas International Inc., 10 1/ 2%, sr. sub. notes, 04/15/05(c) .... D Ca 1,200,000
1,000,000 Star Choice Communications, 13%, sr. secd. notes, 12/15/05 .................. B+ B3 1,015,000
4,000,000 XM Satellite Radio, Inc., 14%, sr. secd., 03/15/10 .......................... NR NR 3,600,000
------------
43,550,800
------------
BUILDINGS AND REAL ESTATE -- 2.43%
2,000,000 Fortress Group Inc., 13 3/4%, sr. notes, 05/15/03 ........................... NR B3 1,160,000
2,000,000 HMH Properties, 7 7/8%, sr. notes, series B, 08/01/08 ....................... BB Ba2 1,730,000
3,000,000 Penhall Acquisition Corporation, 12%, sr. notes, 08/01/06 ................... B- B3 2,940,000
------------
5,830,000
------------
CARGO TRANSPORT -- 0.79%
2,000,000 Global Health Sciences, 11%, sr. notes, 05/01/08 ............................ CCC+ Caa1 800,000
1,500,000 MTL Inc., 10%, sr. sub. notes, series B, 06/15/06 ........................... B- B3 1,095,000
------------
1,895,000
------------
CHEMICALS, PLASTICS AND RUBBER -- 0.10%
750,000 Moll Industries, 10%, sr. sub. notes, 07/01/08 .............................. B- B3 240,000
------------
CONTAINERS, PACKAGING AND GLASS -- 3.18%
500,000 Portola Packaging Inc., 10 3/4%, sr. notes, 10/01/05 ........................ B B3 435,000
2,000,000 Precise Technology Inc., 11 1/8%, sr. sub. notes, series B, 06/15/07 ........ B- B3 1,760,000
2,000,000 TEKNI-PLEX INC., 11 1/4%, sr. sub. notes, series B, 04/01/07 ................ B- B3 2,060,000
2,000,000 Sweetheart Cup Company Inc., 9 5/8%, sr. secd. notes, 09/01/00 .............. B+ B2 1,990,000
1,500,000 Sweetheart Cup Company Inc., 10 1/2%, sr. sub. notes, 09/01/03 .............. B- Caa1 1,380,000
------------
7,625,000
------------
DIVERSIFIED NATURAL RESOURCES AND PRECIOUS METALS -- 4.48%
5,999,000 ANKER Coal Group Inc., 14 1/4%, sr. secd. notes series B, 09/01/07 .......... CCC Caa2 2,699,550
23,000,000 Uniforet Inc., 11 1/8%, sr. notes, 10/15/06 (c) ............................. D Ca 8,050,000
------------
10,749,550
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 2.10%
2,000,000 American Tissue Inc, 12 1/2%, sr. secd. notes, 07/15/06 ..................... B+ B3 2,050,000
1,000,000 AXIA Inc., 10 3/4%, sr. sub. notes, 07/15/08 ................................ B- B3 762,500
3,000,000 Clark Material Handling, 10 3/4%, sr. notes series D, 11/15/06(b) ........... NR Ca 225,000
4,000,000 Pentacon Inc., 12 1/4%, sr. sub. notes, 04/01/09 ............................ B- B3 2,000,000
------------
5,037,500
------------
DIVERSIFIED/CONGLOMERATE SERVICE -- 1.17%
4,000,000 Local Rent, 10 1/4%, sr. notes series B, 10/01/05 ........................... B+ B3 2,800,000
------------
ECOLOGICAL -- 0.08%
500,000 GNI Group Inc., 10 7/8%, sr. notes, 07/15/05 ................................ CCC B2 200,000
------------
ELECTRONICS -- 6.36%
1,700,000 Anacomp, Inc., 10 7/8%, sr. sub. notes series D, 04/01/04 ................... B- B3 1,564,000
1,000,000 COVAD Communications Group Inc., 12 1/2%, sr. disc. notes, 02/15/09 ......... B- B3 960,000
5,750,000 Orbcomm Global LP, 14%, sr. notes, 08/15/04 ................................. CCC Caa1 5,232,500
3,000,000 Rhythms Net Connections, 12 3/4%, notes, 04/15/09 ........................... CCC B3 2,535,000
2,000,000 Special Devices Inc., 11 3/8%, sr. sub. notes, 12/15/08 ..................... CCC+ Caa2 1,310,000
4,500,000 Vialog Corporation, 12 3/4%, sr. notes series B, 11/15/01 ................... B- Caa1 3,645,000
------------
15,246,500
------------
FINANCE -- 2.43%
1,115,625 Altiva Financial Corporation, 12%, conv. secd. sr. notes, 06/15/06, 144A .... NR NR 787,502
2,000,000 Bank Plus Corporation, 12%, sr. notes, 07/18/07 ............................. NR NR 1,480,000
500,000 Hawthorne Financial Corporation, 12 1/2%, sr. notes, 12/31/04 ............... NR NR 455,000
1,500,000 Life Financial, 0.99%, 03/15/04 ............................................. NR NR 1,440,000
2,000,000 Resource America Inc., 12%, sr. notes, 08/01/04 ............................. B- Caa1 1,660,000
------------
5,822,502
------------
GROCERY -- 0.25%
935,000 Homeland Stores Inc., 10%, sr. notes, 08/01/03 .............................. NR NR 607,750
------------
HEALTHCARE, EDUCATION AND CHILDCARE -- 1.51%
3,000,000 La Petite Academy, Incorporated, 10%, sr. notes, series B, 05/15/08 ......... B- B3 1,815,000
1,000,000 Omnicare Inc., 5%, conv. sub. debs., 12/01/07 ............................... BBB- Ba3 783,750
5,000,000 PHP Healthcare, 6 1/2%, conv. sub. debs., 12/15/02(b) ....................... NR NR 150,000
1,000,000 Schein Pharmaceutical, 9.04%, sr. notes, 12/15/04 ........................... CCC+ Caa1 881,250
------------
3,630,000
------------
HOME AND OFFICE FURNISHINGS, HOUSEWARES AND DURABLES -- 3.33%
2,000,000 Derby Cycle Corp., 10%, sr. notes, 05/15/08 ................................. CCC Caa1 1,250,000
5,000,000 O'Sullivan Industries, 13 3/8%, unit sr. sub. notes wt. exp., 10/15/09 ...... B- B3 4,850,000
5,205,000 U.S. Office Products Co., 9 3/4%, sr. sub. notes, 06/15/08 .................. CCC- Ca 1,873,800
------------
7,973,800
------------
HOTELS, MOTELS, INNS AND GAMING -- 1.45%
3,000,000 Epic Resorts LLC, 13%, sr. secd. notes series B, 06/15/05 ................... B- B3 1,890,000
2,550,000 La Quinta Inns, Inc., 7.27%, 02/26/07 ....................................... BB- Ba2 1,581,000
------------
3,471,000
------------
LEISURE, AMUSEMENT AND ENTERTAINMENT -- 2.24%
4,200,000 Booth Creek Ski Holdings, 12 1/2%, sr. notes series B, 03/15/07 ............. CCC Caa1 3,108,000
1,000,000 Marvel III Holdings Inc., 12%, sr. notes, 06/15/09 .......................... NR NR 730,000
20,125,000 Marvel III Holdings Inc., 0%, sr. secd. disc. notes, series B, 04/15/98(c) .. NR NR 0
2,000,000 Outboard Marine Corp., 10 3/4%, sr. notes, 06/01/08 ......................... B B3 1,480,000
2,000,000 Premier Cruises Ltd., 11%, sr. notes, 03/15/08, 144A(c) ..................... D NR 60,000
------------
5,378,000
------------
MACHINERY (NON AGRICULTURAL, NON CONSTRUCTION AND
NON ELECTRONIC) -- 0.12%
380,000 High Voltage Engineering, 10 1/2%, sr. notes, 08/15/04 ...................... B+ B3 290,700
------------
MINING, STEEL, IRON AND NON PRECIOUS METALS -- 3.81%
290,820 Bramalea, 11 1/8%, 03/22/98(c) .............................................. NR NR 0
1,500,000 Continental Global Group, 11%, sr. notes series B, 04/01/07 ................. B- B3 600,000
2,000,000 Haynes International Inc., 11 5/8%, sr. notes, 09/01/04 ..................... B- B3 1,100,000
2,850,000 Renco Steel Holding, 10 7/8%, sr. secd. notes series B, 02/01/05 ............ B- Caa2 2,565,000
3,180,000 Reunion Industries Inc., 13%, sr. notes purch. offer waiver, 05/01/03 ....... B- B2 3,014,800
2,000,000 WHX Corp., 10 1/2%, sr. notes, 04/15/05 ..................................... B- B3 1,855,000
------------
9,134,800
------------
OIL AND GAS -- 4.82%
3,125,000 Belden & Blake Corp., 9 7/8%, sr. sub. notes series B, 06/15/07 ............. CCC- Caa3 1,796,875
3,706,000 Contour Energy Co., 14%, 04/15/03 ........................................... B- B3 3,724,530
3,750,000 First Wave Marine Inc., 11%, sr. notes, 02/01/08 ............................ B- B3 2,250,000
2,000,000 Frontier Oil Corp., 11 3/4%, sr. notes, 11/15/09 ............................ B+ B2 1,925,000
2,000,000 Grey Wolf Inc., 8 7/8%, sr. notes, 07/01/07 ................................. B+ B1 1,845,000
------------
11,541,405
------------
PERSONAL AND NONDURABLE CONSUMER PRODUCTS -- 0.38%
$ 2,400,000 AAI Fostergrant Inc., 10 3/4%, sr. notes, 07/15/06 .......................... CCC Caa3 $ 600,000
1,000,000 Styling Technology Corp., 10 7/8%, sr. sub. notes, 07/01/08 ................. C Caa3 300,000
------------
900,000
------------
PERSONAL TRANSPORTATION -- 1.18%
2,000,000 Trans World Airlines, 11 1/2%, sr. secd. notes, 12/15/04 .................... CCC B2 1,270,000
2,000,000 Trans World Airlines, 12%, sr. secd. notes, 04/01/02 ........................ NR B2 1,565,000
------------
2,835,000
------------
PERSONAL, FOOD AND MISCELLANEOUS SERVICES -- 0.28%
1,000,000 Advantica Restaurant Group, 11 1/4%, sr. notes, 01/15/08 .................... B B3 660,000
------------
PRINTING AND PUBLISHING -- 2.25%
9,000,000 Repap Enterprises, 6%, conv. sub. debs., 06/30/05, 144A ..................... NR NR 5,400,000
------------
RETAIL STORES -- 1.88%
1,000,000 Mother's Work Inc., 12 5/8%, sr. notes, 08/01/05 ............................ B B3 940,000
2,000,000 Petro Stopping Center, 10 1/2%, sr. notes, 02/01/07 ......................... B B3 1,740,000
2,250,000 Wickes Lumber Co., 11 5/8%, sr. sub. notes, 12/15/03 ........................ CCC Caa1 1,822,500
------------
4,502,500
------------
STRUCTURED FINANCE OBLIGATIONS -- 1.49%
4,000,000 DLJ CBO LTD., 11.96%, Class C-2 notes, 04/15/11 ............................. NR NR 3,580,000
------------
TELECOMMUNICATIONS -- 15.77%
3,250,000 Arch Communications Inc., 13 3/4%, sr. notes, 04/15/08 ...................... B- B3 2,713,750
5,000,000 BTI Telecom Corporation, 10 1/2%, sr. notes, 09/15/07 ....................... B B3 4,012,500
500,000 Econophone (Destia Comm.) Inc., 13 1/2%, sr. notes, 07/15/07 ................ NR NR 520,625
8,500,000 Globalstar, L.P., 11 3/8%, sr. notes, 02/15/04 .............................. B- Caa1 3,060,000
7,000,000 GST Network Funding Inc., 0%, sr. secd. disc. notes, 05/01/08 ............... NR NR 2,730,000
15,480,000 Motient Corporation, 12 1/4%, 04/01/08 ...................................... NR NR 11,300,400
6,000,000 MPower, 13%, 10/01/04 ....................................................... NR NR 6,090,000
1,500,000 Telehub Communications Corporation, 0%, sr. disc. notes, 07/31/05(c) ........ NR NR 120,000
3,000,000 USA Mobile Communication, 9 1/2%, sr. notes, 02/01/04 ....................... B- B3 2,400,000
2,000,000 Viatel Inc., 11 1/4%, sr. notes, 04/15/08 ................................... B- B3 1,110,000
2,000,000 Viatel Inc., 0%, sr. disc. notes, 04/15/08 .................................. 1,820,000
2,000,000 Winstar Communications, Inc., 12 3/4%, sr. notes, 04/15/10, 144A ............ B- B3 1,910,000
------------
37,787,275
------------
TEXTILES AND LEATHER -- 1.65%
4,960,000 Converse Inc., 7%, sub. notes conv., 06/01/04 ............................... NR NR 520,800
1,000,000 Glenoit Corporation, 11%, sr. sub. notes, 04/15/07 .......................... D Ca 210,000
3,800,000 Norton McNaught, 12 1/2%, sr. notes, 06/01/05 ............................... B B2 3,230,000
------------
3,960,800
------------
Total Fixed Income (cost $262,032,747)....................................... $221,447,382
------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
APRIL 30, 2000
COMMON STOCK, PREFERRED STOCK AND WARRANTS -- 3.24%
<CAPTION>
Value
Units Description (Note 2)
----- ----------- --------
<S> <C> <C>
41,666 Altiva Financial Corp.* ............................................................................ $ 52,083
62,031 AMC Financial Inc.* ................................................................................ 0
2,000 American Telecasting Inc., warrants* ............................................................... 20
185,900 Ames Department Stores Inc. ........................................................................ 0
131 ANKER Coal Group Inc., 144A ........................................................................ 0
13,531 Brooke Group Limited ............................................................................... 187,743
5,925 Capital PAC Holdings Inc., warrants, 144A* ......................................................... 0
100,000 Commodore Separation Technology .................................................................... 25,000
100,000 Commodore Separation Technology, warrants* ......................................................... 0
550 CS Wireless Systems Inc., 144A* .................................................................... 1
2,000 Epic Resorts LLC, warrants, 144A* .................................................................. 0
8,862 Equus Gaming Co. L.P. .............................................................................. 12,185
10,000 GIGA Information Group Inc.* ....................................................................... 80,000
28,000 Gothic Energy Corporation, warrants* ............................................................... 0
9,533 Gothic Energy Corporation, warrants, 144A* ......................................................... 0
17,251 GP Strategies Corp.* ............................................................................... 71,160
11,000 Harcor Energy Inc., warrants* ...................................................................... 0
1,500 Heartland Wireless, warrants, 144A* ................................................................ 0
1,000 Knology Holdings Inc., warrants, 144A* ............................................................. 0
2,000 Loral Orion Network Systems Inc., warrants* ........................................................ 23,750
500 Motels of America Inc., 144A* ...................................................................... 125
291 Mother's Work Inc.* ................................................................................ 3,492
475,000 Motient Corporation* ............................................................................... 5,937,500
13,480 Motient Corporation, warrants* ..................................................................... 1,012,685
300 MPower, warrants* .................................................................................. 14,700
8,774 NS Group Inc. ...................................................................................... 139,287
3,500 Optel Inc., warrants* .............................................................................. 0
6,900 Orbital Imaging Corp., warrants, 144A* ............................................................. 138,863
148,117 Premier Cruises Ltd. ............................................................................... 0
1,000 Sabreliner Corporation, warrants* .................................................................. 0
3,750 Sheffield Steel Corp., warrants* ................................................................... 0
500 Signature Brands, Inc., warrants* .................................................................. 0
1,500 Telehub Communications Corporation, 144A ........................................................... 1,500
2,000 Trans World Airlines ............................................................................... 10,000
1,000 Unifi Communications Inc., warrants, 144A* ......................................................... 135
9,800 Uniroyal Technology Corp., warrants* ............................................................... 0
4,500 Vialog Corporation, warrants* ...................................................................... 1,740
1,500 WHX Corp. .......................................................................................... 41,344
1,500 Wireless One Inc., warrants* ....................................................................... 15
------------
TOTAL COMMON STOCK, PREFERRED STOCK, AND WARRANTS (cost $11,901,284) ............................... 7,753,328
------------
TOTAL INVESTMENTS IN SECURITIES -- 95.63% (cost $273,934,031) ...................................... 229,200,710
------------
OTHER ASSETS -- 4.37% .............................................................................. 10,480,433
------------
TOTAL ASSETS -- 100.00% ............................................................................ $239,681,143
============
(a) Percentages indicated are based on total assets.
(b) Denotes company has filed for bankruptcy.
(c) Denotes security currently in default.
NR Denotes not rated.
* Non-income producing security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
BALANCE SHEET
April 30, 2000
<S> <C>
ASSETS
Investments in securities (identified cost $273,934,031; see Schedule of Investments and Note 2) ................ $229,200,710
Cash ............................................................................................................ 34,824
Receivables:
Investment securities sold ...................................................................................... 2,010,208
Interest and dividends .......................................................................................... 8,306,092
Prepaid insurance ............................................................................................... 99,750
Other assets .................................................................................................... 29,559
------------
Total assets .................................................................................................... $239,681,143
------------
LIABILITIES
Payables:
Investment securities purchased ................................................................................. $ 1,014,800
Accrued expenses (Note 3) ....................................................................................... 642,576
Bank loan (Note 12) ............................................................................................. 75,000,000
------------
Total liabilities ............................................................................................... $ 76,657,376
------------
Net Assets:
Common stock, $.03 par value --
Authorized -- 100,000,000 shares
Issued and outstanding -- 26,774,364 shares ..................................................................... $ 803,231
Capital in excess of par value (Note 5) ......................................................................... 286,469,565
Distributions in excess of accumulated net investment income (Note 2) ........................................... (230,764)
Accumulated net realized loss from security transactions ........................................................ (79,284,944)
Net unrealized depreciation on investments ...................................................................... (44,733,321)
------------
Total net assets (equivalent to $6.09 per share, based on 26,774,364 shares outstanding) ........................ $163,023,767
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF OPERATIONS
For the six months ended April 30, 2000
<S> <C>
INVESTMENT INCOME (Note 2):
Interest income ............................................................................................... $ 15,954,147
Dividend income ............................................................................................... 345,148
Accretion of discount and other miscellaneous income .......................................................... 2,426,353
------------
Total investment income ....................................................................................... $ 18,725,648
------------
EXPENSES:
Interest expense .............................................................................................. $ 2,002,369
Investment advisory fees (Note 3) ............................................................................. 741,849
Custodian and transfer agent fees ............................................................................. 130,079
Insurance expense ............................................................................................. 193,829
Professional fees ............................................................................................. 151,157
Directors' fees ............................................................................................... 42,466
Miscellaneous expense ......................................................................................... 79,539
------------
Total expenses ................................................................................................ $ 3,341,288
------------
Net investment income ......................................................................................... $ 15,384,360
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments sold ......................................................................... $(31,141,129)
Net change in unrealized depreciation of investments (Note 2) ................................................. 7,455,860
------------
Net realized and unrealized loss on investments ............................................................... $(23,685,269)
------------
Net decrease in net assets resulting from operations .......................................................... $ (8,300,909)
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CASH FLOWS
For the six months ended April 30, 2000
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received ................................................................................. $ 15,239,327
Operating expenses paid ......................................................................................... (3,129,534)
-------------
Net cash provided by operating activities ....................................................................... $ 12,109,793
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of portfolio securities ................................................................................ $(202,655,762)
Sales and maturities of portfolio securities .................................................................... 180,396,931
-------------
Net cash used in investing activities ........................................................................... $ (22,258,831)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loan ......................................................................................... $ 25,000,000
Common stock dividends paid from operations ..................................................................... (14,842,134)
-------------
Net cash provided by financing activities ....................................................................... $ 10,157,866
-------------
NET INCREASE IN CASH ............................................................................................ $ 8,828
CASH, BEGINNING OF PERIOD ....................................................................................... 25,996
-------------
CASH, END OF PERIOD ............................................................................................. $ 34,824
=============
RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ............................................................ $ (8,300,909)
Increase in interest and dividend receivables ................................................................... (1,403,809)
Increase in prepaid insurance ................................................................................... (24,615)
Increase in other assets ........................................................................................ (25,713)
Increase in accrued expenses .................................................................................... 262,083
Net realized loss on investments ................................................................................ 31,141,129
Change in net unrealized loss on investments .................................................................... (7,455,860)
Accretion of bond discount ...................................................................................... (2,082,513)
-------------
Net cash provided by operating activities ....................................................................... $ 12,109,793
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ........................................................................ $ 1,743,163
Cash paid during the period for excise taxes .................................................................... $ --
=============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
SIX MONTHS FISCAL YEAR
ENDED ENDED
APRIL 30, OCTOBER 31,
2000 1999
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ...................................................................... $ 15,384,360 $ 26,901,413
Net realized loss on investments sold ...................................................... (31,141,129) (38,743,202)
Change in net unrealized depreciation of investments ....................................... 7,455,860 13,820,247
------------ ------------
Net (decrease) increase in net assets resulting from operations ............................ $ (8,300,909) $ 1,978,458
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Shares issued (100,461 and 237,917 shares, respectively) to common stockholders for
reinvestment of dividends .................................................................. $ 653,340 $ 2,063,366
Net proceeds from sale of common stock issued (6,630,663 shares after deducting $2,691,261
of soliciting fees and other expenses) ..................................................... -- 54,995,507
------------ ------------
Net increase in net assets resulting from fund share transactions .......................... $ 653,340 $ 57,058,873
------------ ------------
DISTRIBUTIONS TO STOCKHOLDERS:
Common dividends ($0.58 and $1.26 per share, respectively) from operations ................. $(15,384,360) $(30,583,565)
Common dividends ($0.00 and $0.00 per share, respectively) in excess of net investment income (111,114) (87,410)
------------ ------------
Net decrease in net assets resulting from distributions .................................... $(15,495,474) $(30,670,975)
------------ ------------
Total (decrease) increase in net assets .................................................... $(23,143,043) $ 28,366,356
NET ASSETS:
Beginning of period ........................................................................ 186,166,810 157,800,454
------------ ------------
End of period (including $230,764 and $119,650 of distributions in excess of accumulated
net investment income as of April 30, 2000 and October 31, 1999, respectively) ........... $163,023,767 $186,166,810
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIODS PRESENTED
<CAPTION>
For the Years Ended October 31, (b)
--------------------------------------------------------------------------------
For the
Six Months
Ended
April 30,
2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........ $ 6.98 $ 7.97 $ 11.94 $ 11.70 $ 11.10 $ 11.07
-------- -------- -------- -------- -------- --------
Net investment income ....................... $ 0.58 $ 1.08# $ 1.30# $ 1.38# $ 1.50# $ 1.35
Net realized and unrealized gain (loss) on
investments................................ (0.89) (1.00)# (3.76)# .72# .60# .09
-------- -------- -------- -------- -------- --------
Total from investment operations .... $ 6.67 $ .08 $ (2.46) $ 2.10 $ 2.10 $ 1.44
-------- -------- -------- -------- -------- --------
Distributions:
Dividends from accumulated net
investment income
To preferred stockholders ............... $ -- $ -- $ (.03) $ (.09) $ (.12) $ (.15)
To common stockholders .................. (0.58) (1.26) (1.26) (1.26) (1.26) (1.26)
-------- -------- -------- -------- -------- --------
Total distributions ................. $ (0.58) $ (1.26) $ (1.29) $ (1.35) $ (1.38) $ (1.41)
-------- -------- -------- -------- -------- --------
Effect of sale of common stock and related
expenses from rights offerings ............ $ -- $ .19 $ (.22) $ (.51) $ (.12) $ --
-------- -------- -------- -------- -------- --------
Net asset value, end of period .............. $ 6.09 $ 6.98 $ 7.97 $ 11.94 $ 11.70 $ 11.10
======== ======== ======== ======== ======== ========
Per share market value, end of period ...... $ 6.56 $ 7.94 $ 10.25 $ 12.39 $ 12.00 $ 11.64
======== ======== ======== ======== ======== ========
Total investment return ..................... (10.97)%(d) (11.78)% (7.63)% 14.82% 15.29% 28.57%
======== ======== ======== ======== ======== ========
Net assets, end of period, applicable to
common stock (a) .......................... $163,024 $186,167 $157,800 $175,909 $120,711 $ 93,309
======== ======== ======== ======== ======== ========
Net assets, end of period, applicable to
preferred stock (a) ....................... $ -- $ -- $ -- $ 20,000 $ 20,000 $ 20,000
======== ======== ======== ======== ======== ========
Net assets, end of period (a) ............... $163,024 $186,167 $157,800 $195,909 $140,711 $113,309
======== ======== ======== ======== ======== ========
Ratio of operating expenses to average net
assets, applicable to common stock ........ 3.68%(c) 2.67% 2.67% 2.30% 3.06% 3.27%
Ratio of net investment income to average net
assets, applicable to common stock ........ 16.95%(c) 13.72% 11.92% 11.94% 13.20% 13.47%
Ratio of operating expenses to average
net assets** .............................. 2.75%(c)+ 2.14%+ 2.18%+ 1.81%+ 2.21%+ 2.28%+
Ratio of net investment income to average
net assets** .............................. 12.64%(c) 11.01% 9.72% 9.42% 9.51% 9.39%
Portfolio turnover rate ..................... 79.88%(d) 126.45% 156.48% 176.04% 108.33% 80.71%
(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 10).
(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 1.10%, 0.95%, 1.20%, 1.13%, 1.30% and 1.29%, 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 accomapnying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
INFORMATION REGARDING SENIOR SECURITIES
<TABLE>
<CAPTION>
For the
Six Months
Ended As of October 31,
April 30, --------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Amount Outstanding:
Indebtedness ...................... $75,000,000 $50,000,000 $40,000,000 $20,000,000 $20,000,000 $20,000,000
Preferred stock ................... -- -- -- 20,000,000 20,000,000 20,000,000
Asset Coverage:
Per Indebtedness(a) ............... 317% 472% 495% 1,080% 804% 667%
Per preferred stock share (b) ..... N/A N/A N/A 540% 402% 333%
Involuntary Liquidation Preference:
Per preferred stock share (c) ..... N/A N/A N/A $ 100,000 $ 100,000 $ 100,000
Approximate Market Value:
Per note .......................... N/A N/A N/A $ 1,003.80 $ 990.00 $ 987.50
Per preferred stock share ......... N/A N/A N/A 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 accomapnying notes are an integral part of these financial statements.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
(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 accounting principles generally accepted
in the United States, 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, 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 pursuant to 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.
(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, 2000, the cost of investments in securities for federal income
tax purposes was $273,966,890. Aggregate gross unrealized gains on securities
in which there was an excess of market value over tax cost was $5,532,400.
Aggregate gross unrealized losses on securities in which there was an excess
of tax cost over market value was $50,298,580. The net unrealized loss on
securities held by the Fund was $44,766,180 for federal income tax purposes.
At October 31, 1999, 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
$ (808,396) October 31, 2002
(3,703,531) October 31, 2003
(4,688,248) October 31, 2006
(37,346,116) October 31, 2007
-----------
$(46,546,291)
============
(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. (PSIM) entered into an
agreement to sell certain of its assets and goodwill relating to the
management of the Fund to Highland Capital Management, L.P. (Highland, or
Investment Adviser) effective January 21, 2000. During the period between
November 1, 1999 and January 21, 2000, PSIM earned $338,412 in management
fees.
As of January 21, 2000, the Fund entered into a new advisory agreement with
Highland. Highland earned $403,437 in management fees for the period from
January 21, 2000 to April 30, 2000. Management fees paid by the Fund to both
PSIM and Highland were calculated at .65% (on an annual basis) of the average
weekly net asset value defined as, total assets of the Fund less accrued
liabilities (excluding the principal amount of the bank loan, 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, 2000, the fee payable to the
Investment Adviser was $101,747, which was included in accrued expenses in the
accompanying balance sheet.
(4) PURCHASES AND SALES OF SECURITIES
For the period ended April 30, 2000, the aggregate cost of purchases and
proceeds from sales of investment securities other than U.S. Government
obligations and short-term investments aggregated $203,812,172 and
$180,705,160, respectively. There were no purchases or sales of U.S.
Government obligations during the period ended April 30, 2000.
(5) 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 the reimbursement of actual out-of-pocket expenses
incurred 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 the reimbursement of actual out-of-
pocket expenses incurred relating to attendance at such meeting.
(6) 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, 1999, $.095 per share payable
on December 31, 1999 and January 31, February 29, March 31 and April 30, 2000.
Distributions on common stock are declared based on annual projections of
the Fund's net investment income (defined as dividends and interest income,
net of Fund expenses, less distributions on the preferred stock). The Fund
plans to pay monthly distributions to common shareholders. Meanwhile, as a
result of market conditions or investment decisions, the amount of
distributions may exceed net investment income earned at certain times
throughout the period. It is anticipated that, on an annual basis, the amount
of distributions to common shareholders will not exceed net investment income
(as defined) applicable to common shareholders on a tax basis. All
shareholders of the Fund are automatically considered participants in the
Dividend Reinvestment Plan (the "Plan") unless they elect otherwise. Under the
Plan, when the market price of common stock is equal to or exceeds the net
asset value on the record date for a 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 the 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.
(7) 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, 2000, the fair value
of the bank term loan was $75,000,000.
(8) 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 to this reverse stock split.
(9) 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 received 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 $54,995,507, net of soliciting fees and offering expenses
of $2,691,261.
(10) BANK LOAN
Effective January 21, 2000, the Fund has entered into a $75 million credit
agreement ("the Agreement") with a lending institution. The Fund's ability to
utilize this facility extends until January 19, 2001, though there are
provisions in the Agreement which allow for its modification, including
extension, termination and reduction of the facility amount. The applicable
interest rate is LIBOR plus 0.55%. Under the terms of the loan agreement the
Fund is required to maintain certain debt covenants. The Agreement also
provides for commitment fees at a rate of 0.10% per year on the daily amount
by which the aggregate amount of the commitment amount of $75 million exceeds
the aggregate outstanding principal of the bank loans. At April 30, 2000, the
outstanding loan balance was $75 million.
Prior to January 21, 2000, the Fund had a $50 million credit agreement with
another lending institution. This loan was repaid with funds drawn from the
$75 million agreement.
The weighted average balance and interest rate on these agreements were
$61,429,000 and 6.37%, respectively, for the six month period ending April 30,
2000. The average interest rate on the outstanding balance at April 30, 2000
was 6.80%.
<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,
2000, the related statements of operations and cash flows for the six month
period then ended, the statements of changes in net assets for the six month
period ended April 30, 2000 and the year ended October 31, 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 auditing standards generally
accepted in the United States. 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, 2000 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, 2000, 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
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 2, 2000
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
INVESTMENT ADVISER AUDITORS
Highland Capital Management, L.P. Arthur Andersen LLP
13455 Noel Road LB#45 Boston, MA
Dallas, TX 75240
TRANSFER AND SHAREHOLDERS' SERVICING
OFFICERS AGENT
James Dondero -- President State Street Bank and Trust Company
Mark Okada -- Executive Vice- P.O. Box 8200
President, Boston, MA 02266
R. Joseph Dougherty -- Senior Vice- (800) 426-5523
President and
Secretary CUSTODIAN
State Street Bank and Trust Company
DIRECTORS Boston, MA
John S. Albanese
C. William Carey Listed: NYSE
James Dondero Symbol: PHY
John Honis
Timothy Hui
Scott Kavanaugh
James Leary
Mark Okada
Harlan D. Platt
Christopher E. Roshier
LEGAL ADVISER
Strock & Strock & Lavan LLP
180 Maiden Lane
New York, NY 10038-4982
<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 and Wall Street
Journal Online publish Friday's closing net asset value of the Fund every
Monday and lists the market price of the Fund daily. They are also published
in Barron's Market Week every Saturday. 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.
<PAGE>
PROSPECT STREET HIGH INCOME PORTFOLIO INC.
13455 Noel Road LB#45
Dallas, TX 75240
