UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number
811-05557
Prospect Street
®
High Income Portfolio Inc.
(Exact name of registrant as specified in charter)
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of principal executive offices) (Zip code)
James D. Dondero
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Name and address of agent for service)
Registrant’s telephone number, including area code:
(877) 665-1287
Date of fiscal year end:
October 31
Date of reporting period:
April 30, 2008
Form N-CSR is to be used by management investment companies to file reports with the Commission not
later than 10 days after the transmission to stockholders of any report that is required to be
transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR
270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission
will make this information public. A registrant is not required to respond to the collection of
information contained in Form N-CSR unless the Form displays a currently valid Office of Management
and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the burden to Secretary,
Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed
this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
Prospect Street
®
High Income Portfolio Inc.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, TX 75240
Prospect
Street
®
High Income Portfolio Inc.
Semi-Annual
Report
April 30, 2008
Contents
This report has been prepared for the information of stockholders of Prospect Street
®
High Income Portfolio Inc.
Letter to Stockholders
Dear Stockholders:
We are pleased to provide you with our report for Prospect Street
®
High Income
Portfolio Inc. (the “Fund”) for the six months ended
April 30, 2008. On April 30, 2008, the net
asset value of the Fund was $2.90 per share, as compared to $3.41 on
October 31, 2007. On April 30,
2008, the closing market price of the Fund’s shares on the New
York Stock Exchange was $2.63 per
share, as compared to $3.01 on October 31, 2007. During the six months ended April 30, 2008, the
Fund distributed to common stockholders $0.1410 per share.
The Fund’s Investments:
The total return on the Fund’s per share market price, assuming reinvestment of distributions,
for the six months ended April 30, 2008, was (7.88)%. The total return on the Fund’s net assets,
assuming reinvestment of distributions, was (10.34)% for the six
months ended April 30, 2008. The
variation in total returns is attributable to the decrease in the market price of the Fund’s shares
of (12.62)% relative to a decrease in the net asset value of the
Fund’s shares of (14.96)% during
the period.
Distribution Declaration:
On May 1, 2008, the Fund’s Board of Directors declared a distribution of $0.0235 per share of
common stock, payable on May 30, 2008.
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Respectfully submitted,
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James Dondero
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President
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Mark Okada
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Executive Vice President
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1
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Portfolio Statistics
As of April 30, 2008 (unaudited)
Investment Type by Market Value
(As a percentage of total investments)
2
PROSPECT
STREET
®
HIGH INCOME PORTFOLIO INC.
Schedule of Investments (unaudited)
As of
April 30, 2008
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Ratings
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Principal
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Standard &
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Value
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Amount ($)
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Description
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Moody’s
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Poor’s
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($)
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Senior Loans - 16.83% (a) (b)
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Aerospace
and Defense - 0.42%
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495,000
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US Airways
Group, Inc., Term Loan, 5.18%, 03/23/2014
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B2
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B+
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371,562
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Broadcasting and Entertainment - 0.94%
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1,000,000
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Univision
Communications, Inc., Initial Term Loan, 5.47%,
09/29/2014
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Ba3
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B
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845,708
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Buildings
and Real Estate - 5.16%
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2,970,344
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Pacific
Clarion, LLC, Term Loan, 15.00%, 01/23/2009 (c) (d)
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NR
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NR
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2,918,363
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Realogy Corp.
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1,567,026
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Initial Term
B Loan, 5.72%, 10/10/2013
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Ba3
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BB-
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1,345,684
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421,892
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Synthetic
Letter of Credit, 7.51%, 10/10/2013
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Ba3
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BB-
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362,650
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4,626,697
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Chemicals, Plastics and Rubber - 2.08%
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2,000,000
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Solutia, Inc., Bridge Loan, 02/28/2015 (c) (e)
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B1
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B+
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1,860,000
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Electronics - 3.75%
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3,830,605
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Freescale
Semiconductor, Inc. Term Loan, 4.46%, 11/29/2013
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Ba1
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BB
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3,362,581
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Healthcare,
Education and Childcare - 1.91%
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1,937,560
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CCS Medical,
Inc., First Lien Term Loan, 8.10%, 09/30/2012
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B1
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B+
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1,714,740
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Housing - 2.10%
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2,000,000
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Weststate
Land Partners LLC, Second Lien Term Loan, 11.62%,
10/31/2008
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Caa1
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NR
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1,880,000
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Retail
Stores - 0.47%
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493,530
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Burlington
Coat Factory Warehouse Corp., Term Loan, 7.32%, 05/28/2013
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B2
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B-
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416,144
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Total Senior Loans (cost $16,165,833)
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15,077,432
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Corporate Notes & Bonds - 106.24% (a)
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Aerospace
and Defense - 1.89%
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4,000,000
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Delta Air
Lines, Inc., 8.30%, 12/15/2029 (f) (g)
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B2
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NR
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80,000
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Northwest
Airlines, Inc.
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1,655,068
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Series 2002
- 1, Class C2, 9.06%, 05/20/2012
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NR
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B+
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1,597,502
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1,500,000
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8.88%, 12/30/2027 (f) (g)
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NR
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NR
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18,750
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1,696,252
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Automobile - 3.72%
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3,500,000
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American
Tire Distributors Holdings, Inc., 8.95%, 04/01/2012 (h)
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Caa1
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CCC+
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3,185,000
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417,000
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Delphi
Corp., 6.50%, 05/01/2009 (g)
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NR
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NR
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146,993
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3,331,993
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Broadcasting
and Entertainment - 3.86%
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2,960,000
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Univision
Communications, Inc., PIK, 9.75%, 03/15/2015 (f) (i)
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B3
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CCC
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2,146,000
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2,000,000
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Young
Broadcasting, Inc., 10.00%, 03/01/2011
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Caa2
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CCC-
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1,310,000
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3,456,000
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See accompanying notes to the financial statements.
3
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Schedule of Investments (unaudited) (continued)
As of April 30, 2008
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Ratings
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Principal
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Standard &
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Value
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Amount ($)
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Description
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Moody’s
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Poor’s
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($)
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Corporate Notes & Bonds - (continued)
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Buildings
and Real Estate - 6.51%
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1,767,000
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Associated Materials, Inc., 03/01/2014 (f) (j)
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Caa2
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CCC
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1,272,240
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Realogy Corp.
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5,000,000
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10.50%, 04/15/2014 (f)
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Caa1
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CCC+
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3,700,000
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1,570,000
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12.38%, 04/15/2015 (f)
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Caa2
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CCC+
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863,500
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5,835,740
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Cable and
Other Pay Television Services - 4.25%
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4,861,000
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CCH I LLC, 11.00%, 10/01/2015 (f)
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Caa3
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CCC
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3,803,732
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Cable/Wireless
Video - 5.11%
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4,500,000
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Intelsat Bermuda, Ltd., 11.25%, 06/15/2016 (i)
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Caa2
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B-
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4,578,750
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Cargo
Transport - 0.31%
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1,000,000
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Motor Coach Industries International, Inc., 11.25%, 05/01/2009
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C
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CC
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275,000
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Chemicals,
Plastics and Rubber - 0.95%
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1,000,000
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Georgia Gulf Corp., 9.50%, 10/15/2014 (f)
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B2
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CCC+
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850,000
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Containers,
Packaging and Glass - 5.86%
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6,000,000
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Solo Cup Co., 8.50%, 02/15/2014 (f)
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Caa2
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CCC-
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5,250,000
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Electronics - 0.95%
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1,000,000
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WII Components, Inc., 10.00%, 02/15/2012 (f)
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B2
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B-
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855,000
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Food,
Beverage and Tobacco - 7.80%
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5,300,000
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Chiquita Brands International, Inc., 7.50%, 11/01/2014
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Caa2
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CCC
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4,809,750
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500,000
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Land O’ Lakes Capital Trust I, 7.45%, 03/15/2028 (i)
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B1
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B
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425,000
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2,000,000
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Pinnacle Foods Finance LLC, 10.63%, 04/01/2017 (f)
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Caa2
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CCC
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1,750,000
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6,984,750
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Forest
Products - Containers - 0.30%
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279,321
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NewPage Corp., PIK, 11.82%, 11/01/2013 (h)
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B2
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NR
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268,148
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Healthcare,
Education and Childcare - 16.56%
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3,305,339
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Argatroban Royalty Sub LLC, 18.50%, 09/30/2014
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NR
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NR
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3,321,866
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2,000,000
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Duloxetine Royalty Sub LLC, 13.00%, 10/15/2013
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NR
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NR
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2,070,000
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1,744,000
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Eszopiclone Royalty Sub LLC, 12.00%, 06/30/2014
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NR
|
|
NR
|
|
|
1,778,880
|
|
|
|
|
|
|
HCA, Inc.
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
7.69%, 06/15/2025
|
|
Caa1
|
|
B-
|
|
|
421,805
|
|
|
|
500,000
|
|
|
7.50%, 11/15/2095
|
|
Caa1
|
|
B-
|
|
|
389,862
|
|
|
|
2,000,000
|
|
|
Risperidone Royalty Sub LLC, 7.00%, 01/01/2012
|
|
NR
|
|
NR
|
|
|
1,830,000
|
|
|
|
5,000,000
|
|
|
TCD Pharma, 16.00%, 04/15/2024
|
|
NR
|
|
NR
|
|
|
5,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,837,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home and Office Furnishings, Housewares, and Durable Consumer - 1.89%
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
Spectrum Brands, Inc., PIK, 12.00%, 10/02/2013 (f) (h)
|
|
Caa3
|
|
CCC-
|
|
|
1,690,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
4
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Schedule of Investments (unaudited) (continued)
As of
April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratings
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Standard &
|
|
Value
|
|
|
Amount ($)
|
|
|
Description
|
|
Moody’s
|
|
Poor’s
|
|
($)
|
|
|
Corporate Notes & Bonds - (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information Technology - 8.59%
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
Charys Holding Co., Inc., 8.75%, 02/16/2012 (g) (i)
|
|
NR
|
|
NR
|
|
|
1,250,000
|
|
|
|
2,000,000
|
|
|
Freescale Semiconductor, Inc., 6.68%, 12/15/2014 (h)
|
|
B2
|
|
B
|
|
|
1,605,000
|
|
|
|
6,500,000
|
|
|
MagnaChip Semiconductor, 6.05%, 12/15/2011 (h)
|
|
B2
|
|
B
|
|
|
4,842,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,697,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance - 5.74%
|
|
|
|
|
|
|
|
|
|
|
7,000,000
|
|
|
HUB International Holdings, Inc., 10.25%, 06/15/2015 (i)
|
|
Caa1
|
|
CCC+
|
|
|
5,145,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leisure, Amusement, Motion Pictures, Entertainment - 13.59%
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
Ames True Temper, Inc., 6.71%, 01/15/2012 (h)
|
|
Caa3
|
|
CCC-
|
|
|
1,657,500
|
|
|
|
8,000,000
|
|
|
Blockbuster, Inc., 9.00%, 09/01/2012 (f)
|
|
Caa2
|
|
CCC
|
|
|
6,540,000
|
|
|
|
8,000,000
|
|
|
Tropicana Entertainment LLC, 9.63%, 12/15/2014 (f) (g)
|
|
Ca
|
|
CC
|
|
|
3,980,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,177,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas - 3.52%
|
|
|
|
|
|
|
|
|
|
|
2,225,000
|
|
|
Energy XXI Gulf Coast, Inc., 10.00%, 06/15/2013
|
|
Caa2
|
|
CCC
|
|
|
2,002,500
|
|
|
|
1,080,000
|
|
|
McMoran Exploration Co., 11.88%, 11/15/2014
|
|
Caa1
|
|
CCC+
|
|
|
1,150,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,152,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal, Food, and Miscellaneous Services - 0.00%
|
|
|
|
|
|
|
|
|
|
|
837,840
|
|
|
Outsourcing Services Group, Inc., PIK, 9.00%, 07/15/2009 (d)
|
|
NR
|
|
NR
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Stores - 5.80%
|
|
|
|
|
|
|
|
|
|
|
3,500,000
|
|
|
Claire’s Stores, Inc., 10.50%, 06/01/2017 (f)
|
|
Caa2
|
|
CCC+
|
|
|
1,942,500
|
|
|
|
3,250,000
|
|
|
Dollar General Corp., 10.63%, 07/15/2015 (f)
|
|
Caa1
|
|
CCC+
|
|
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,192,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications - 9.04%
|
|
|
|
|
|
|
|
|
|
|
6,538,000
|
|
|
Digicel Group, Ltd., PIK, 9.13%, 01/15/2015 (f) (i)
|
|
Caa2
|
|
NR
|
|
|
5,557,300
|
|
|
|
2,000,000
|
|
|
Grande Communications Holdings, Inc., 14.00%, 04/01/2011
|
|
Caa1
|
|
NR
|
|
|
2,030,000
|
|
|
|
500,000
|
|
|
Nordic Telephone Co. Holdings, 8.88%, 05/01/2016 (i)
|
|
B2
|
|
B
|
|
|
513,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,101,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities - 0.00%
|
|
|
|
|
|
|
|
|
|
|
56,303
|
|
|
USGen New England, Inc., 7.46%, 01/02/2015 (g) (i)
|
|
NR
|
|
NR
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate Notes & Bonds (cost $111,844,694)
|
|
|
|
|
|
|
95,179,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset - Backed Securities (a) (h) (i) - 4.21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
Goldman Sachs Asset Management CLO PLC, Series 2007 - 1A,
Class D, 5.99%, 08/01/2022
|
|
Baa2
|
|
BBB
|
|
|
1,265,400
|
|
|
|
1,000,000
|
|
|
GSC Partners CDO Fund, Ltd., Series 2007 - 8A, Class C, 4.19%,
04/17/2021
|
|
Baa2
|
|
BBB
|
|
|
557,800
|
|
|
|
1,000,000
|
|
|
Primus CLO, Ltd., Series 2007 - 2A, Class D, 5.11%, 07/15/2021
|
|
Baa2
|
|
BBB
|
|
|
664,400
|
|
|
|
1,000,000
|
|
|
Rampart CLO, Ltd., Series 2006 - 1A, Class C, 4.18%, 04/18/2021
|
|
Baa2
|
|
BBB
|
|
|
644,000
|
|
|
|
1,000,000
|
|
|
St. James River CLO, Ltd., Series 2007 - 1A, Class E, 7.24%,
06/11/2021
|
|
Ba2
|
|
BB
|
|
|
644,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset - Backed Securities (cost $4,086,347)
|
|
|
|
|
|
|
3,775,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
5
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Schedule of Investments (unaudited) (continued)
As of
April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratings
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Standard &
|
|
Value
|
|
|
Amount ($)
|
|
|
Description
|
|
Moody’s
|
|
Poor’s
|
|
($)
|
|
|
Claims - 0.08% (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace and Defense - 0.08%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest Airlines, Inc.
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
ALPA Trade Claim, 08/21/2013
|
|
NR
|
|
NR
|
|
|
14,550
|
|
|
|
1,065,300
|
|
|
Flight Attendant Claim, 08/21/2013
|
|
NR
|
|
NR
|
|
|
25,834
|
|
|
|
632,250
|
|
|
IAM Trade Claim, 08/21/2013
|
|
NR
|
|
NR
|
|
|
15,332
|
|
|
|
702,450
|
|
|
Retiree Claim, 08/21/2013
|
|
NR
|
|
NR
|
|
|
17,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Claims (cost $647,521)
|
|
|
|
|
|
|
72,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks - 5.07% (a) (k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,258
|
|
|
Altiva Financial Corp.
|
|
|
|
|
|
|
5,552
|
|
|
|
46,601
|
|
|
American Banknote Corp.
|
|
|
|
|
|
|
775,907
|
|
|
|
853,905
|
|
|
ICO Global Communications Holding, Ltd. (f)
|
|
|
|
|
|
|
3,185,066
|
|
|
|
232
|
|
|
Knology, Inc.
|
|
|
|
|
|
|
2,974
|
|
|
|
55,843
|
|
|
Northwest Airlines, Inc.
|
|
|
|
|
|
|
539,448
|
|
|
|
24,015
|
|
|
Outsourcing Services Group, Inc. (d)
|
|
|
|
|
|
|
0
|
|
|
|
1,189
|
|
|
Time Warner Cable, Inc., Class A
|
|
|
|
|
|
|
33,292
|
|
|
|
1
|
|
|
Viatel Holding Ltd.
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stocks (cost $12,424,388)
|
|
|
|
|
|
|
4,542,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants - 0.00% (a) (k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
XM Satellite Radio, Inc., 03/15/2010
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants (cost $870,339)
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments - 132.43% (cost $146,039,122) (l)
|
|
|
|
|
|
|
118,647,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets & Liabilities, Net - 12.22%
|
|
|
|
|
|
|
10,944,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares - (44.65)%
|
|
|
|
|
|
|
(40,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets Applicable to Common Stock - 100.00%
|
|
|
|
|
|
$
|
89,591,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
6
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Schedule of Investments (unaudited) (continued)
As of April 30, 2008
|
|
|
|
|
(a)
|
|
Percentages are based on net assets applicable to common stock.
|
|
|
|
(b)
|
|
Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the
Fund invests generally pay interest at rates which are periodically determined by reference to a
base lending rate plus a premium. (Unless otherwise identified by footnote (c), all senior loans
carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered
by one or more major United States banks, (ii) the lending rate offered by one or more European
banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at April 30, 2008. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933
Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured
floating rate loans often require prepayments from excess cash flow or permit the borrower to
repay at its election. The degree to which borrowers repay, whether as a contractual
requirement or at their election, cannot be predicted with accuracy. As a result, the actual
remaining maturity may be substantially less than the stated maturity shown.
|
|
|
|
(c)
|
|
Fixed rate senior loan.
|
|
|
|
(d)
|
|
Represents fair value as determined by the Fund’s investment adviser, in good faith, pursuant
to the policies and procedures approved by the Fund’s Board of Directors (the “Board”). Securities
with a total aggregate market value of $2,918,363, or 3.26% of net assets were fair valued as of
April 30, 2008.
|
|
|
|
(e)
|
|
All or a portion of this position has not settled. Contract rates do not
take effect until settlement date.
|
|
|
|
(f)
|
|
Securities (or a portion of securities)
on loan as of April 30, 2008. See Note 8.
|
|
|
|
(g)
|
|
The issuer is in default of certain debt covenants. Income is
not being accrued.
|
|
|
|
(h)
|
|
Variable rate asset. The interest rate shown
reflects the rate in effect at April 30, 2008.
|
|
|
|
(i)
|
|
Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only
be resold, in transactions exempt from registration, to qualified institutional buyers. At April
30, 2008, these securities amounted to $23,391,411, or 26.11% of net assets.
|
|
|
|
(j)
|
|
Step Coupon. A bond that pays an initial coupon rate for the first period and then a higher
coupon rate for the following periods until maturity. The coupon rate will be 0.00% until the date
shown below and the subsequent rate below, thereafter.
|
|
|
|
|
|
|
|
Security
|
|
Date
|
|
Rate
|
|
Associated Materials, Inc.
|
|
03/01/09
|
|
11.25%
|
|
|
|
|
|
(k)
|
|
Non-income producing security.
|
|
|
|
(l)
|
|
Cost basis for U.S. federal income tax purposes is identical to book basis. Unrealized
appreciation and depreciation on investments are as follows:
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
915,566
|
|
|
Gross unrealized depreciation
|
|
|
(28,307,617
|
)
|
|
|
|
|
|
|
Net unrealized depreciation
|
|
$
|
(27,392,051
|
)
|
|
|
|
|
|
CDO
Collateralized Debt Obligation
CLO Collateralized Loan Obligation
NR Not Rated
PIK Payment-in-Kind
See accompanying notes to the financial statements.
7
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Statement of Assets and Liabilities (unaudited)
As of April 30, 2008
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investment in securities, at value (cost $146,039,122)
|
|
|
118,647,071
|
|
|
Foreign currency (cost $23,614)
|
|
|
28,024
|
|
|
Cash and cash equivalents
|
|
|
10,932,559
|
|
|
Cash held as collateral for securities loaned (Note 8)
|
|
|
38,940,447
|
|
|
Interest receivable
|
|
|
2,693,181
|
|
|
Receivable for investments sold
|
|
|
607,968
|
|
|
Prepaid assets
|
|
|
41,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
171,890,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Payable upon receipt of securities loaned (Note 8)
|
|
|
38,940,447
|
|
|
Payable for investments purchased
|
|
|
3,059,833
|
|
|
Investment advisory fee payable (Note 3)
|
|
|
68,030
|
|
|
Preferred shares distribution payable
|
|
|
27,680
|
|
|
Other accounts payable
|
|
|
203,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,299,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares:
|
|
|
|
|
|
Preferred shares, $0.01 par value ($25,000 liquidation preference)
|
|
|
|
|
|
Authorized - 1,000,000 shares
|
|
|
—
|
|
|
Issued and outstanding - 1,600 Series W shares (Note 7)
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total preferred shares
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets Applicable to Common Stock:
|
|
|
|
|
|
Common stock, $0.03 par value
|
|
|
|
|
|
Authorized - 100,000,000 shares
|
|
|
—
|
|
|
Issued and outstanding - 30,874,699 shares
|
|
|
926,241
|
|
|
Capital in excess of par value
|
|
|
250,189,763
|
|
|
Accumulated net realized gain/(loss) on investments and foreign currency transactions
|
|
|
(137,695,031
|
)
|
|
Undistributed net investment income
|
|
|
3,556,268
|
|
|
Net unrealized appreciation/(depreciation) on investments and translation of assets and liabilities
denominated in foreign currency
|
|
|
(27,386,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common stock
|
|
|
89,591,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share of common stock outstanding
|
|
|
2.90
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
8
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Statement of Operations
For the Six Months Ended April 30, 2008 (unaudited)
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
Interest Income
|
|
|
6,962,691
|
|
|
Accretion of bond discount (net)
|
|
|
436,104
|
|
|
Securities lending income
|
|
|
232,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,631,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment advisory fee (Note 3)
|
|
|
428,066
|
|
|
Administration fee
|
|
|
38,894
|
|
|
Transfer agency fees
|
|
|
22,740
|
|
|
Printing expense
|
|
|
24,635
|
|
|
Legal fees
|
|
|
22,897
|
|
|
Registration expenses
|
|
|
13,694
|
|
|
Rating agency fees
|
|
|
8,354
|
|
|
Audit fees
|
|
|
22,675
|
|
|
Insurance expenses
|
|
|
36,690
|
|
|
Custody fee
|
|
|
10,361
|
|
|
Preferred shares broker expense
|
|
|
50,474
|
|
|
Directors’ fees and expenses (Note 5)
|
|
|
18,113
|
|
|
Miscellaneous expense
|
|
|
24,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
722,532
|
|
|
Interest expense
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
728,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
6,903,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized Gain/(Loss) on Investments and Foreign Currency
|
|
|
|
|
|
Net realized gain/(loss) on investments
|
|
|
(4,159,588
|
)
|
|
Net change in unrealized appreciation/(depreciation) on investments
|
|
|
(13,278,792
|
)
|
|
Net change in unrealized appreciation/(depreciation) on unfunded transactions
|
|
|
(321
|
)
|
|
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in
foreign currency
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain/(loss) on investments and foreign currency
|
|
|
(17,436,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Preferred Shareholders
|
|
|
(933,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net assets from operations
|
|
|
(11,466,113
|
)
|
|
|
|
|
|
See accompanying notes to the financial statements.
9
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Statement of Cash Flows
For the Six Months Ended April 30, 2008 (unaudited)
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
|
|
|
|
Cash Flows provided by Operating Activities:
|
|
|
|
|
|
Interest received
|
|
|
7,492,164
|
|
|
Decrease in cash held as collateral for securities loaned
|
|
|
10,375,034
|
|
|
Operating expenses paid
|
|
|
(672,382
|
)
|
|
Preferred shares distributions
|
|
|
(944,336
|
)
|
|
Purchase of portfolio securities
|
|
|
(46,887,234
|
)
|
|
Decrease in payable upon receipt of securities loaned
|
|
|
(10,375,034
|
)
|
|
Sales and maturities of portfolio securities
|
|
|
48,502,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and foreign currency provided by operating activities
|
|
|
7,490,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows used by Financing Activities:
|
|
|
|
|
|
Common stock distributions paid from net investment income
|
|
|
(4,353,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(4,353,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Foreign Currency
|
|
|
3,137,608
|
|
|
Cash and Foreign Currency, Beginning of the Period
|
|
|
7,822,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Foreign Currency, End of the Period
|
|
|
10,960,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net Changes in Net Assets Resulting from Operations to Net Cash Provided by
Operating Activities:
|
|
|
|
|
|
Net change in net assets resulting from operations
|
|
|
(11,466,113
|
)
|
|
Change in interest and dividends receivable
|
|
|
296,558
|
|
|
Change in investments
|
|
|
1,615,495
|
|
|
Change in prepaids
|
|
|
23,961
|
|
|
Change in investment advisory fee payable
|
|
|
(12,388
|
)
|
|
Change in accrued expenses
|
|
|
33,377
|
|
|
Net realized gain/(loss) on investments and foreign currency transactions
|
|
|
4,159,588
|
|
|
Net change in unrealized appreciation/(depreciation) on investments and translation of assets and liabilities
denominated in foreign currency
|
|
|
13,276,567
|
|
|
Accretion of bond discount
|
|
|
(436,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and foreign currency provided by operating activities
|
|
|
7,490,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
Interest paid during the period
|
|
|
6,103
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
10
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
April 30, 2008
|
|
|
October 31, 2007
|
|
|
|
|
($)
|
|
|
($)
|
|
|
From Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
6,903,075
|
|
|
|
11,532,622
|
|
|
Net realized gain/(loss) on investments and foreign currency transactions
|
|
|
(4,159,588
|
)
|
|
|
5,084,562
|
|
|
Net change in unrealized appreciation/(depreciation) on investments and translation of
assets and liabilities denominated in foreign currency
|
|
|
(13,276,567
|
)
|
|
|
(4,987,805
|
)
|
|
Distributions to preferred shareholders
|
|
|
(933,033
|
)
|
|
|
(2,124,100
|
)
|
|
|
|
|
|
|
|
|
|
Net change in net assets from operations
|
|
|
(11,466,113
|
)
|
|
|
9,505,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Distributions to Common Stockholders:
|
|
|
|
|
|
|
|
|
|
Distributions to common stockholders from net investment income
|
|
|
(4,353,333
|
)
|
|
|
(8,629,480
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from distributions to common stockholders
|
|
|
(4,353,333
|
)
|
|
|
(8,629,480
|
)
|
|
|
|
|
|
|
|
|
|
Total change in net assets
|
|
|
(15,819,446
|
)
|
|
|
875,799
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets Applicable to Common Stock:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
105,410,609
|
|
|
|
104,534,810
|
|
|
|
|
|
|
|
|
|
|
End of period (including undistributed net investment income of $3,556,268 and $1,939,559,
respectively)
|
|
|
|
|
|
|
|
|
|
|
|
|
89,591,163
|
|
|
|
105,410,609
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
11
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
Financial Highlights
Selected per share data and ratios
For each share of common stock outstanding throughout the years presented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
|
|
|
|
2008
|
|
|
Years Ended October 31,
|
|
|
|
|
(unaudited)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net asset value, beginning of period
|
|
$
|
3.41
|
|
|
$
|
3.39
|
|
|
$
|
3.25
|
|
|
$
|
3.08
|
|
|
$
|
2.61
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (a)
|
|
$
|
0.22
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
0.35
|
|
|
$
|
0.37
|
|
|
Net realized and unrealized gain/(loss) on
investments (a)
|
|
$
|
(0.56
|
)
|
|
$
|
—
|
(b)
|
|
$
|
0.11
|
|
|
$
|
0.14
|
|
|
$
|
0.47
|
|
|
$
|
0.81
|
|
|
Distributions to preferred shareholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
$
|
(0.37
|
)
|
|
$
|
0.30
|
|
|
$
|
0.40
|
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from accumulated net investment
income to common stockholders
|
|
$
|
(0.14
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
$
|
(0.14
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
2.90
|
|
|
$
|
3.41
|
|
|
$
|
3.39
|
|
|
$
|
3.25
|
|
|
$
|
3.08
|
|
|
$
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price per share, end of period
|
|
$
|
2.63
|
|
|
$
|
3.01
|
|
|
$
|
3.23
|
(c)
|
|
$
|
2.77
|
|
|
$
|
3.24
|
|
|
$
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return based on market value (d)
|
|
|
(7.88
|
%)(e)
|
|
|
1.63
|
%
|
|
|
26.86
|
%(c)
|
|
|
(6.90
|
%)
|
|
|
21.61
|
%
|
|
|
66.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (f)
|
|
$
|
89,591
|
|
|
$
|
105,411
|
|
|
$
|
104,535
|
|
|
$
|
100,443
|
|
|
$
|
93,894
|
|
|
$
|
74,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares outstanding, end of period (f)
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per preferred share (g)
|
|
|
324
|
%
|
|
|
382
|
%
|
|
|
372
|
%
|
|
|
351
|
%
|
|
|
334
|
%
|
|
|
285
|
%
|
|
Ratio of total expenses to average net
assets, applicable to common stock (i)
|
|
|
1.57
|
%(h)
|
|
|
1.35
|
%(h)
|
|
|
1.67
|
%
|
|
|
1.85
|
%
|
|
|
2.18
|
%
|
|
|
4.07
|
%
|
|
Ratio of net investment income to average net
assets, applicable to common stock (i)
|
|
|
15.02
|
%
|
|
|
10.80
|
%
|
|
|
10.15
|
%
|
|
|
10.08
|
%
|
|
|
11.88
|
%
|
|
|
16.60
|
%
|
|
Portfolio turnover rate
|
|
|
30.41
|
%(e)
|
|
|
216.17
|
%
|
|
|
150.28
|
%
|
|
|
72.84
|
%
|
|
|
81.25
|
%
|
|
|
111.35
|
%
|
|
|
|
|
|
(a)
|
|
Calculation is based on average shares outstanding during the indicated period due to the per
share effect of the Fund’s rights offerings.
|
|
|
|
(b)
|
|
Represents less than $0.005 per share.
|
|
|
|
(c)
|
|
A closing market price of $3.24, rather than $3.23, was disclosed in the Fund’s October 31,
2006 annual report as its New York Stock Exchange (“NYSE”) market price at October 31, 2006. This
occurred because the composite index price was inadvertently used instead of the NYSE price.
Accordingly, the one-year return for the fiscal year ended October 31, 2006 was 26.86%, rather than
27.23% previously reported.
|
|
|
|
(d)
|
|
Total investment return based on market value may result in substantially different returns
than investment return based on net asset value, as market value can be significantly greater or
less than the net asset value. Total investment return calculation assumes reinvestment of
distributions.
|
|
|
|
(e)
|
|
Not annualized.
|
|
|
|
(f)
|
|
Dollars in
thousands.
|
|
|
|
(g)
|
|
Calculated by subtracting the Fund’s total liabilities (not including senior securities) from
the Fund’s total assets and dividing such amount by the principal amount of the debt outstanding
and aggregate liquidation preference of the outstanding shares of Series W Auction Rate
Cumulative Preferred Shares.
|
|
|
|
(h)
|
|
Ratio of total expenses to average net asset includes interest expense of 0.01% for the six
months ended April 30, 2008 and the year ended October 31, 2007.
|
|
|
|
(i)
|
|
Ratios do not reflect the effect of dividend payments to preferred shareholders.
|
See accompanying notes to the financial statements.
12
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS
April 30, 2008 (unaudited)
(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
(“SEC”) as a diversified, closed-end investment management company under the Investment Company Act
of 1940, as amended (the “1940 Act”). The Fund commenced operations on December 5, 1988.
Investment Objective:
The Fund’s investment objective is to provide high current income, while seeking to preserve
stockholders’ capital, through investment in a professionally managed, diversified portfolio of
high yield, high risk securities (commonly referred to as “junk” bonds or securities).
(2) Significant Accounting Policies:
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.
(a) Use of Estimates
The Fund’s financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”), which require 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.
(b) Valuation of Investments
In computing the Fund’s net assets attributable to common stock, securities with readily
available market quotations use those quotations for valuation. When portfolio securities are
traded on the relevant day of valuation, the valuation will be the last reported sale price on that
day. If there are no such sales on that day, the security will be valued at the mean between the
most recently quoted bid and asked prices provided by the principal market makers. If there is more
than one such principal market maker, the value shall be the average of such means. Securities
without a sale price or quotations from principal market makers on the valuation day will be valued
by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on
exchanges and consequently are valued based on a mean of the bid and ask price from the third-party
pricing services or broker-dealer sources.
If securities do not have readily available market quotations or pricing service prices,
including circumstances under which such are determined not to be accurate or current (including
when events materially affect the value of securities occurring between the time when market price
is determined and calculation of the Fund’s net asset value), such securities are valued at their
fair value, as determined by Highland Capital Management, L.P. (the “Investment Adviser”) in good
faith in accordance with procedures approved by the Fund’s Board of Directors. In these cases, the
Fund’s net asset value will reflect the affected portfolio securities’ value as determined in the
judgment of the Investment Adviser instead of being determined by the market. Using a fair value
pricing methodology to value securities may result in a value that is different from a security’s
most recent sale price and from the prices used by other investment companies to calculate their
net asset values.
There can be no assurance that the Fund’s valuation of a security will not differ from the
amount that it realizes upon the sale of such security. Short-term investments, that is, those with
a remaining maturity of 60 days or less, are valued at amortized cost. Repurchase agreements are
valued at cost plus accrued interest. Foreign price quotations are converted to U.S. dollar
equivalents using the 4:00 PM London Time Spot Rate.
13
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(c) Security Transactions and Related Investment Income
Security transactions are accounted for on the trade date. 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. Dividend income is recorded on ex-dividend date. It is
the Fund’s policy to place securities on non-accrual status when collection of interest is
doubtful.
(d) Foreign Currency
Foreign currencies, investments and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the exchange rates using the current 4:00 PM London
Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and
liabilities resulting from changes in exchange rates, between trade and settlement dates on
securities transactions and between the accrual and payment dates on dividends, interest income and
foreign withholding taxes are recorded as unrealized foreign currency gains/(losses). Realized
gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and
expenses are translated on the respective dates of such transactions. The effect of changes in
foreign currency exchange rates on investments in securities are not segregated in the statement of
operations from the effects of changes in market prices of those securities, but are included with
the net realized and unrealized gain or loss on investment securities.
(e) Federal Income Taxes
It is the Fund’s policy to comply with the requirements of Subchapter M 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 and gains, if any, to its stockholders
each year; as such, the Fund will not be subject to federal income taxes. Gains and losses on sales
of investments are calculated on the identified cost method for both financial reporting and
federal income tax purposes.
The accumulated capital losses available to offset future capital gains, if any, expire in the
amounts indicated below on the following dates:
|
|
|
|
|
|
|
Carryover Available
|
|
|
Expiration Date
|
|
$
|
35,790,515
|
|
|
October 31, 2008
|
|
|
36,946,575
|
|
|
October 31, 2009
|
|
|
15,212,478
|
|
|
October 31, 2010
|
|
|
21,799,603
|
|
|
October 31, 2011
|
|
|
21,289,289
|
|
|
October 31, 2012
|
|
|
2,406,796
|
|
|
October 31, 2013
|
|
|
|
|
|
|
$
|
133,445,256
|
|
|
|
|
|
|
|
|
In July 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the
course of preparing the Fund’s tax returns to determine whether the tax positions are
“more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not
deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or
expense in the current year. FASB required adoption of FIN 48 for fiscal years beginning after
December 15, 2006, and FIN 48 is to be applied to all open tax years as of the effective date.
However, on December 22, 2006, the SEC delayed the required implementation date of FIN 48 for
management investment companies until June 29, 2007. As of June 29, 2007, the Fund adopted FIN 48
for all subsequent reporting periods and management has determined that there is no material impact
on the financial statements.
14
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(f) Cash Flow Information
The Fund invests primarily in corporate debt securities and makes distributions 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.
(g) Cash and Cash Equivalents
The Fund considers all demand deposits and highly liquid investments purchased with original
maturities equal to or less than three months when purchased to be cash equivalents.
(h) Additional Accounting Standards
In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (“FAS 157”) was issued and is effective for fiscal years beginning after November 15,
2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. At this time, management is evaluating the implications
of FAS 157. Its impact on the financial statements has not yet been determined.
(3) Investment Advisory Agreement:
The Investment Adviser earned $428,066 in investment advisory fees for the six months ended
April 30, 2008. Investment advisory fees paid by the Fund to the Investment Adviser were calculated
at 0.65% (on an annual basis) of the average weekly net asset value (“NAV”), defined as total
assets of the Fund less accrued liabilities (excluding the principal amount of any bank loans,
notes and the liquidation preference of any preferred shares, including accrued and unpaid
dividends on any preferred shares), up to and including $175,000,000 of net assets, 0.55% on the
next $50,000,000 of net assets and 0.50% of the excess of net assets over $225,000,000.
(4) Purchases and Sales of Securities:
For the six months ended April 30, 2008, the aggregate cost of purchases and proceeds from
sales of investment securities, other than U.S. Government obligations and short-term investments,
was approximately $38,449,357 and $43,366,353, respectively. There were no purchases or sales of
U.S. Government obligations for the six months ended April 30, 2008.
(5) Certain Transactions:
An officer of the Investment Adviser serves on the Board of the Fund. He receives no compensation
in this capacity.
Effective January 1, 2008, each Director who is not an “interested person” (as defined in the
1940 Act) (“Independent Director”), receives an annual retainer of $150,000 payable in quarterly
installments and allocated among each portfolio in the Highland Fund Complex based on relative net
assets. The Highland Fund Complex consists of all of the registered investment companies and a
business development company advised by the Investment Adviser as of the date of this report. For
the six months ended April 30, 2008, the Fund incurred Board of Directors’ fees and expenses of
$18,113.
Prior to January 1, 2008, directors who are not officers or employees of the Investment
Adviser received fees of $15,000 per year, together with the reimbursement of actual out-of-pocket
expenses incurred relating to board meeting attendance.
15
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
(6) Distributions:
Distributions on the Fund’s common stock (“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). The Fund plans to pay monthly distributions to holders of Common Stock (“Common
Stockholders”). 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 Stockholders will not
exceed net investment income (as defined above) allocated to Common Stockholders for income tax
purposes.
For the year ended October 31, 2007, the tax character of distributions paid by the Fund to
Common Stockholders was as follows:
|
|
|
|
|
|
|
Distributions from net investment income
|
|
$
|
8,629,480
|
|
|
Distributions from paid in capital
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,629,480
|
|
|
|
|
|
|
For the year ended October 31, 2006, the tax character of distributions paid by the Fund to
Common Stockholders was as follows:
|
|
|
|
|
|
|
Distributions from net investment income
|
|
$
|
8,166,360
|
|
|
Distributions from paid in capital
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,166,360
|
|
|
|
|
|
|
The following is the history of the Fund’s calendar year distributions to Common Stockholders
and their composition in calendar years 2003 through 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Distributions to Common Stockholders
|
|
$
|
0.28
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
Composition of Distributions*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Income
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Return of Capital
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Capital Gains
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Income
|
|
$
|
0.28
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
Return of Capital
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Capital Gains
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.28
|
|
|
$
|
0.27
|
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Distributions and their composition may differ for Common Stockholders who bought or sold shares
during the year.
|
(7) Preferred Shares:
On March 16, 2001, the Fund issued 3,000 shares of Series W Auction Rate Cumulative Preferred
Shares (“Preferred Shares”) with $0.01 par value, $25,000 liquidation preference, for a total
issuance of $75,000,000. As of April 30, 2008, 1,600 Preferred Shares were outstanding. The Fund
may borrow amounts in the future to increase its use of leverage within the limitations imposed by
the 1940 Act. Significant provisions regarding the Preferred Shares are described below.
Redemption
The Preferred Shares are not subject to any sinking fund but are subject to mandatory
redemption under certain circumstances. If the Fund does not timely cure the failure to meet
certain asset coverage, portfolio valuation or timely filing
16
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
requirements, the Preferred Shares are subject to mandatory redemption out of funds legally
available in accordance with the Fund’s charter and applicable law, at a redemption price of
$25,000 per Preferred Share plus an amount equal to accumulated but unpaid dividends thereon,
whether or not earned or declared to the date fixed for redemption. In addition, the Fund at its
option may redeem Preferred Shares having a dividend period of one year or less at this same
redemption price to the extent permitted under the 1940 Act and Maryland law. Any Preferred Shares
repurchased or redeemed by the Fund will be classified as authorized but unissued Preferred Shares.
The Preferred Shares have no preemptive, exchange or conversion rights. The Fund will not issue any
class of stock senior to or on parity with the Preferred Shares.
Dividends
The Preferred Shares pay dividends based on a rate set at auctions, normally held every seven
days. In most instances, dividends are payable every seven days, on the first business day
following the end of the dividend period. The dividend payment date for special dividend periods of
more than seven days is set forth in the notice designating a special dividend period. At April 30,
2008, the rate on the Preferred Shares was 3.21%. In general, when the Fund has any Preferred
Shares outstanding, the Fund may not pay any dividend or distribution in respect of Common Stock
unless the Fund has paid all cumulative dividends on Preferred Shares.
Voting Rights
The Fund’s Preferred Shares and Common Stock have equal voting rights of one vote per share
and vote together as a single class. The Preferred Shares and Common Stock vote as separate classes
on certain matters as required under the Fund’s charter, the 1940 Act and Maryland law.
Liquidation
In the event of a liquidation of the Fund, whether voluntary or involuntary, the holders of
the Preferred Shares (“Preferred Shareholders”) are entitled to receive, prior to and in preference
to any distribution of any of the assets of the Fund available for distribution to the Common
Stockholders, a liquidation preference in the amount of $25,000 for each share outstanding plus an
amount equal to all dividends thereon, whether or not earned or declared, accumulated but unpaid to
and including the date of final distribution. After the payment to the Preferred Shareholders of
the full preferential amounts, the Preferred Shareholders will have no right or claim to any of the
remaining assets of the Fund.
(8) Securities Loans:
The Fund may make secured loans of its portfolio securities amounting to not more than
one-third of the value of its total assets, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of possible delays in
recovery of the securities or possible loss of rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans are made to unaffiliated broker-dealers
pursuant to agreements requiring that loans be continuously secured by collateral in cash or
short-term debt obligations at least equal at all times to the value of the securities subject to
the loan. The borrower pays to the Fund an amount equal to any interest or dividends received on
securities subject to the loan. The Fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the borrower. As of April 30, 2008, the
market value of securities loaned by the Fund was $36,861,054. The loans were secured with cash
collateral of $38,940,447.
(9) Disclosure of Significant Risks:
Credit Risk
Credit risk is the risk that the issuer of a security owned by the Fund will be unable to pay
the interest or principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.
17
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Interest Rate Risk
Interest rate risk is the risk that prices of securities owned by the Fund generally increase
when interest rates decline and decrease when interest rates increase.
Foreign Currency Risk
Securities quoted or denominated in non-U.S. currencies may be adversely affected by
fluctuations in relative currency exchange rates and by exchange control regulations. The Fund’s
investment performance may be negatively affected by a devaluation of a currency in which the
Fund’s investments are quoted or denominated.
(10) Stockholder Voting Results
On June 6, 2008 the Board of Directors approved the full redemption of the $40 million of
preferred shares outstanding.
At an Annual Meeting of the stockholders originally scheduled for June 6, 2008 and adjourned
until June 10, 2008 (the “Meeting”), the Common and Auction Rate Cumulative Preferred stockholders
of record of the Fund as of April 14, 2008 (“Record Date”) were asked to approve an Agreement and
Plan of Reorganization between the Fund and Highland Credit Strategies Fund (the “Acquiring Fund”)
pursuant to which the Fund will transfer its assets to the Acquiring Fund in exchange for Acquiring
Fund shares (and cash in lieu of certain fractional shares) and the Acquiring Fund’s assumption of
the Fund’s liabilities at which time the Fund will dissolve under applicable state law (“Proposal
1” or the “Reorganization”). In addition, the Common and Auction Rate Cumulative Preferred
stockholders of record of the Fund as of the Record Date were asked to approve the election of
Timothy K. Hui and Scott F. Kavanaugh as Class II Directors of the Fund (“Proposal 2”). As of the
Record Date, the Fund had the following common stock and preferred shares outstanding:
|
|
|
|
|
|
|
Common Stock
|
|
|
30,874,699
|
|
|
|
|
|
|
|
|
Auction Rate Cumulative Preferred Shares
|
|
|
1,600
|
|
On June 6, 2008, the date of the Meeting, although the Fund’s quorum requirement for holding
the meeting was met, there was not present in person or by proxy a sufficient number of shares to
approve Proposal 1. Therefore, the Meeting was adjourned until June 10, 2008.
18
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
NOTES TO FINANCIAL STATEMENTS (continued)
At the resumption of the meeting on June 10, 2008, the Fund’s quorum requirement for holding
the meeting continued to be met and Proposals 1 and 2 were approved by the Common stockholders and
Auction Rate Cumulative Preferred shareholders of the Fund. The shares represented at the Meeting
on June 10, 2008 voted the Proposals as follows:
With respect to Proposal #1, the approval of an Agreement and Plan of Reorganization for the
Common Stock:
|
|
|
|
|
|
|
For:
|
|
|
16,688,813
|
|
|
|
|
|
|
|
|
Against:
|
|
|
1,278,113
|
|
|
|
|
|
|
|
|
Abstain:
|
|
|
684,194
|
|
|
|
|
|
|
|
|
Non Vote:
|
|
|
8,555,000
|
|
With respect to Proposal #1, the approval of an Agreement and Plan of Reorganization for the
Auction Rate Cumulative Preferred Shares:
|
|
|
|
|
|
|
For:
|
|
|
1,167
|
|
|
|
|
|
|
|
|
Against:
|
|
|
21
|
|
|
|
|
|
|
|
|
Abstain:
|
|
|
2
|
|
|
|
|
|
|
|
|
Non Vote:
|
|
|
377
|
|
With respect to Proposal #2, the election of Scott F. Kavanaugh as a Class II Director of the Fund
for the Common Stock:
|
|
|
|
|
|
|
For:
|
|
|
24,566,080
|
|
|
|
|
|
|
|
|
Withheld:
|
|
|
2,640,040
|
|
With respect to Proposal #2, the election of Timothy K. Hui as a Class II Director of the Fund
for the Auction Rate Cumulative Preferred Shares:
The Reorganization is subject to certain closing conditions and is currently expected to close in
July 2008.
19
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
ADDITIONAL INFORMATION (unaudited)
Additional Portfolio Information
The Investment Adviser and its affiliates manage other accounts, including registered and
private funds and individual accounts. Although investment decisions for the Fund are made
independently from those of such other accounts, the Investment Adviser may, consistent with
applicable law, make investment recommendations to other clients or accounts that may be the same
or different from those made to the Fund, including investments in different levels of the capital
structure of a company, such as equity versus senior loans, or that take contrary provisions in
multiple levels of the capital structure. The Investment Adviser has adopted policies and
procedures that address the allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential conflicts of interest that are
designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may
create situations where a client could be disadvantaged because of the investment activities
conducted by the Investment Adviser for other client accounts. When the Fund and one or more of
such other accounts is prepared to invest in, or desires to dispose of, the same security,
available investments or opportunities for each will be allocated in a manner believed by the
Investment Adviser to be equitable to the Fund and such other accounts. The Investment Adviser also
may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although
the Investment Adviser believes that, over time, the potential benefits of participating in volume
transactions and negotiating lower transaction costs should benefit all accounts including the
Fund, in some cases these activities may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
Approval of Investment Advisory Agreement
The Fund has retained the Investment Adviser to manage its assets pursuant to an advisory
agreement with the Investment Adviser (the “Advisory Agreement”). The Advisory Agreement has been
approved by the Fund’s Board, including a majority of the Independent Directors at a meeting held
on December 14, 2007. Following an initial term of two years, the Advisory Agreement continues in
effect from year-to-year provided such continuance is specifically approved at least annually by
the vote of the holders of at least a majority of the outstanding shares of the Fund, or by the
Board, and, in either event, by a majority of the Independent Directors of the Fund casting votes
in person at a meeting called for such purpose.
At the meeting held on December 14, 2007, the Independent Directors, assisted by their
independent legal counsel, met in executive session to discuss the continuation of the Advisory
Agreement. Prior to the meeting, the Independent Directors had requested detailed information from
the Investment Adviser which included: (1) information confirming the financial soundness of the
Investment Adviser; (2) information on the advisory and compliance personnel of the Investment
Adviser, including compensation arrangements; (3) information on the internal compliance procedures
of the Investment Adviser; (4) comparative information showing how the Fund’s fees and operating
expenses compare to (i) other registered investment companies and private funds that follow
investment strategies similar to those of the Fund and (ii) other private and registered pooled
investment vehicles or accounts managed by the Investment Adviser, as well as the performance of
such vehicles and accounts; (5) information regarding brokerage and portfolio transactions and (6)
information on any legal proceedings or regulatory audits or investigations affecting the
Investment Adviser. In connection with its deliberations at this meeting, the Board consulted with
independent counsel and counsel to the Fund and considered information and factors that it believed
were relevant to the interests of the Fund’s shareholders, including the following:
The nature, extent, and quality of the services provided by the Investment Adviser
The Board considered the portfolio management services provided by the Investment Adviser and
the activities related to portfolio management, including use of technology, research capabilities
and investment management staff. They discussed the experience and qualifications of the personnel
providing advisory services, including the background and experience of the members of the
portfolio management team. The Board reviewed the management structure, assets under man-
20
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
ADDITIONAL INFORMATION (unaudited) (continued)
agement and investment philosophies and processes of the Investment Adviser. They also reviewed and
discussed the Investment Adviser’s compliance policies and procedures. The Board concluded that the
Investment Adviser has the quality and depth of personnel and investment methods essential to
performing its duties under the Advisory Agreement and that the nature and quality of such advisory
services are satisfactory.
The Investment Adviser’s historical performance in managing the Fund
The Board reviewed the Investment Adviser’s historical performance in managing the Fund over
various time periods ended October 31, 2007. They contrasted this performance versus the Fund’s
peers as well as the Fund’s benchmark. They also noted that they had been given information
regarding the performance of Prospect Street
®
Income Shares Inc. (“CNN”) and Highland
Credit Strategies Fund (“HCF”) as part of their quarterly review and contrasted the Fund’s
performance versus that of CNN and HCF. The Board was satisfied with the Investment Adviser’s
historical performance in managing the Fund.
The costs of the services to be provided by the Investment Adviser and the profits realized by the
Investment Adviser and its affiliates from the relationship with the Fund
The Board also gave substantial consideration to the fees payable under the Advisory
Agreement, including: (1) the annual fee as a portion of the Fund’s managed assets paid to the
Investment Adviser under the Advisory Agreement; (2) the expenses the Investment Adviser incurs in
providing advisory services and (3) a comparison of the fees payable to the Investment Adviser
under the Advisory Agreement to fees payable either to the Investment Adviser by other funds or to
other investment advisers serving other closed-end companies with similar investment programs to
that of the Fund. After such review, the Board determined that the costs of the services to the
Fund and the profitability rate to the Investment Adviser with respect to the Advisory Agreement
were fair and reasonable.
The extent to which economies of scale would be realized as the Fund grows and whether fee levels
reflect these economies of scale for the benefit of shareholders
The Board considered the asset level of the Fund, the information provided by the Investment
Adviser relating to its costs, and information comparing the fee rate charged by the Investment
Adviser with fee rates charged by other unaffiliated investment managers to their clients and that
due to its nature as a closed-end fund, the Fund’s asset level is not expected to increase
significantly as a result of new capital contributions. The Board concluded that the fee structure
is reasonable and appropriate and, in view of the Fund’s structure, the sharing of economies of
scale is not particularly relevant.
Following a further discussion of the factors above and the merits of the Advisory Agreement
and its various provisions, it was noted that in considering the Advisory Agreement, no single
factor was determinative of the decision of the Board. Rather, after weighing all of the factors
and reasons discussed above, the Board determined that the Advisory Agreement, including the
advisory fees paid to the Investment Adviser under the Advisory Agreement, are fair and reasonable
to the Fund in light of the services that the Investment Adviser provides, its costs and the Fund’s
asset level and concluded that the Advisory Agreement should be continued for another year.
21
PROSPECT STREET
®
HIGH INCOME PORTFOLIO INC.
|
|
|
|
|
Investment Adviser
|
|
Fund Counsel
|
|
Highland Capital Management, L.P.
|
|
Ropes & Gray LLP
|
|
NexBank Tower
|
|
One International Place
|
|
13455 Noel Road
|
|
Boston, MA 02110
|
|
Suite 800
|
|
|
|
Dallas, TX 75240
|
|
|
|
|
|
|
|
Independent Registered Public Accounting Firm
|
|
Transfer and Stockholders’ Servicing Agent
|
|
Deloitte & Touche LLP
|
|
PFPC Inc.
|
|
JPMorgan Chase Tower
|
|
P.O. Box 43027
|
|
2200 Ross Avenue
|
|
Providence, RI 02940-3027
|
|
Suite 1600
|
|
|
|
Dallas, TX 75201-6778
|
|
Custodian
|
|
|
|
PFPC Trust Company
|
|
|
|
8800 Tinicum Boulevard
|
|
|
|
Philadelphia, PA 19153
|
Facts for Stockholders:
Prospect Street
®
High Income Portfolio Inc. (the “Fund”) is listed on the NYSE
under the symbol “PHY.” The Wall Street Journal and Wall Street Journal Online publish Friday’s
closing NAV of the Fund every Monday and list the market price of the Fund daily. The NAV and
market price of the Fund are also published in Barron’s Market Week every Saturday. Our website is
www.prospectstreet.net. A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities and the Fund’s proxy voting record
for the most recent 12-month period ended June 30th, are available (1) without charge, by calling
(877) 665-1287 and (2) on the SEC’s website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the first and
third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s
website at www.sec.gov and also may be reviewed and copied at the SEC’s Public Reference Room in
Washington, D.C. Information on the Public Reference Room may be obtained by calling
1-800-SEC-0330.
The Fund mails one stockholder report to each stockholder address. If you would like more than
one report, please call stockholder services at 1-877-665-1287 and additional reports will be sent
to you.
Questions Regarding Your Account:
Please telephone PFPC Inc. at their toll free number,
1-800-331-1710, Monday through Friday from 9:00 a.m. to 5:00 p.m. EST.
Written Correspondence Regarding Your Account:
Please address all general stockholder
inquiries to PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027.
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed registrants.
Not applicable.
Item 6. Investments.
|
(a)
|
|
Schedule of Investments in securities of unaffiliated issuers as of the close of the
reporting period is included as part of the report to shareholders filed under Item 1 of this
form.
|
|
|
|
(b)
|
|
Not applicable.
|
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment
Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Effective April 1, 2008, Brad Borud and R. Joseph Dougherty were appointed portfolio managers of
Prospect Street
®
High Income Portfolio Inc.
Brad Borud
. Mr. Borud is a Partner, Senior Trader and Chief Investment Officer — Retail Products at
Highland. Prior to his current duties, Mr. Borud served as a Senior Trader and Co-Director of
Portfolio Management for Highland from 2003 to 2008, as a Portfolio Manager and Team Leader from
2001 to 2003, as a Portfolio Manager from 1998 to 2001, and as a Portfolio Analyst from 1996 to
1998. As a Portfolio Manager, Mr. Borud covered a wide range of industries, including wireline
telecommunications, wireless telecommunications, telecommunication equipment manufacturers,
multichannel video and media. Prior to joining Highland in November 1996, Mr. Borud worked as a
Global Finance Analyst in the Corporate Finance Group at NationsBank from 1995 to 1996 where he was
involved in the originating, structuring, modeling and credit analysis of leveraged transactions
for large corporate accounts in the Southwest region of the United States. In 1994, Mr. Borud
served at Conseco Capital Management as an Analyst Intern in the Fixed Income Research Department,
following the transportation and energy sectors. Mr. Borud has a BS in Business Finance from
Indiana University.
R. Joseph Dougherty
. Mr. Dougherty is a Partner and Senior Portfolio Manager at Highland and heads
its Retail Products business unit. He serves as Portfolio Manager, Senior Vice President, Trustee
and/or Director of Highland’s NYSE-listed funds and 1940 Act registered funds. He also serves as
Portfolio Manager for Highland’s sub-advised closed-end funds. In this capacity, Mr. Dougherty
oversees investment decisions for the retail funds, alongside several other Portfolio Managers, and
manages the team dedicated to the day-to-day operations of the retail funds. Prior to his current
duties, Mr. Dougherty served as Portfolio Analyst for Highland from 1998 to 1999. As a Portfolio
Analyst, Mr. Dougherty followed companies within the chemical, retail, supermarket, wireless and
restaurant sectors. Prior to joining Highland in March 1998, Mr. Dougherty served as an Investment
Analyst with Sandera Capital Management from 1997 to 1998. Formerly, he was a Business Development
Manager at Akzo Nobel from 1994 to 1996 and a Senior Accountant at Deloitte & Touche, LLP from 1992
to 1994. He received an MBA from Southern Methodist University, and a BS in Accounting from
Villanova University. Mr. Dougherty is a Certified Public Accountant, and has earned the right to
use the Chartered Financial Analyst designation.
The following tables provide information about the funds and accounts, other than the Fund, for
which the Fund’s portfolio managers are primarily responsible for the day-today portfolio
management as of April 30, 2008.
Brad Borud
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
Total Assets
|
|
Total Number of Accounts
|
|
Total Assets Managed with
|
|
|
|
of Accounts
|
|
Managed
|
|
Managed with Performance-
|
|
Performance-Based
|
|
Type of Accounts
|
|
Managed
|
|
(millions)
|
|
Based Advisory Fee
|
|
Advisory Fee (millions)
|
|
Registered Investment
Companies:
|
|
|
15
|
|
|
$
|
6,939
|
|
|
|
2
|
|
|
$
|
294
|
|
|
Other Pooled Investment
Vehicles:
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Other Accounts:
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
R. Joseph Dougherty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
Total Assets
|
|
Total Number of Accounts
|
|
Total Assets Managed with
|
|
|
|
of Accounts
|
|
Managed
|
|
Managed with Performance-
|
|
Performance-Based
|
|
Type of Accounts
|
|
Managed
|
|
(millions)
|
|
Based Advisory Fee
|
|
Advisory Fee (millions)
|
|
Registered Investment
Companies:
|
|
|
10
|
|
|
$
|
5,677
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Other Pooled Investment
Vehicles:
|
|
|
1
|
|
|
$
|
334
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Other Accounts:
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Conflicts of Interests
The Adviser has built a professional working environment, a firm-wide compliance culture and
compliance procedures and systems designed to protect against potential incentives that may favor
one account over another. The Adviser has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio transactions, personal trading by
employees and other potential conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, the Adviser furnishes advisory services to
numerous clients in addition to the Fund, and the Adviser may, consistent with applicable law, make
investment recommendations to other clients or accounts (including accounts that are hedge funds or
have performance or higher fees paid to the Adviser or in which portfolio managers have a personal
interest in the receipt of such fees) that may be the same as or different from those made to the
Fund. In addition, the Adviser, its affiliates and any of their partners, directors, officers,
stockholders or employees may or may not have an interest in the securities whose purchase and sale
the Adviser recommends to the Fund. Actions with respect to securities of the same kind may be the
same as or different from the action that the Adviser, or any of its affiliates, or any of their
partners, directors, officers, stockholders or employees or any member of their families may take
with respect to the same securities. Moreover, the Adviser may refrain from rendering any advice
or services concerning securities of companies of which any of the Adviser’s (or its affiliates’)
partners, directors, officers or employees are directors or officers, or companies as to which the
Adviser or any of its affiliates or partners, directors, officers and employees of any of them has
any substantial economic interest or possesses material non-public information. In addition to its
various policies and procedures designed to address these issues, the Adviser includes disclosure
regarding these matters to its clients in both its Form ADV and investment advisory agreements.
The Adviser, its affiliates or their partners, directors, officers and employees similarly serve or
may serve other entities that operate in the same or related lines of business. Accordingly, these
individuals may have obligations to investors in those entities or funds or to other clients, the
fulfillment of which might not be in the best interests of the Fund. As a result, the Adviser will
face conflicts in the allocation of investment opportunities to the Fund and other funds and
clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the
clients for which they have responsibility, the Adviser will endeavor to allocate investment
opportunities in a fair and equitable manner which may, subject to applicable regulatory
constraints, involve pro rata co-investment by the Fund and such other clients or may involve a
rotation of opportunities among the Fund and such other clients.
While the Adviser does not believe there will be frequent conflicts of interest, if any, the
Adviser and its affiliates have both subjective and objective procedures and policies in place
designed to manage the potential conflicts of interest between the Adviser’s fiduciary obligations
to the Fund and their similar fiduciary obligations to other clients so that, for example,
investment opportunities are allocated in a fair and equitable manner among the Fund and such other
clients. An investment opportunity that is suitable for multiple clients of the Adviser and its
affiliates may not be capable of being shared among some or all of such clients due to the limited
scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940
Act. There can be no assurance that the Adviser’s or its affiliates’ efforts to allocate any
particular investment opportunity fairly among all clients for whom such opportunity is appropriate
will result in an allocation of all or part of such opportunity to the Fund. Not all conflicts of
interest can be expected to be resolved in favor of the Fund.
Compensation
Highland’s financial arrangements with its portfolio managers, its competitive compensation and its
career path emphasis at all levels reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year to year based on a number
of factors including the relative performance of a portfolio manager’s underlying account, the
combined performance of the portfolio managers’ underlying accounts, and the relative performance
of the portfolio managers’ underlying accounts measured against other employees. The principal
components of compensation include a base salary, a discretionary bonus, various retirement
benefits and one or more of the incentive compensation programs established by Highland, such as
its “Option It Plan” and its “Long-Term Incentive Plan,” described below.
Base compensation.
Generally, portfolio managers receive base compensation based on their seniority
and/or their position with Highland, which may include the amount of assets supervised and other
management roles within Highland.
Discretionary compensation.
In addition to base compensation, portfolio managers may receive
discretionary compensation, which can be a substantial portion of total compensation. Discretionary
compensation can include a discretionary cash bonus as well as one or more of the following:
Option It Plan
. The purpose of this plan is to attract and retain the highest
quality employees for positions of substantial responsibility, and to provide additional
incentives to a select group of management or highly-compensated employees of Highland in
order to promote the success of Highland.
Long Term Incentive Plan
. The purpose of this plan is to create positive morale
and teamwork, to attract and retain key talent and to encourage the achievement of common
goals. This plan seeks to reward participating employees based on the increased value of
Highland.
Senior portfolio managers who perform additional management functions may receive additional
compensation in these other capacities. Compensation is structured such that key professionals
benefit from remaining with Highland.
Ownership of Securities
The following table sets forth the dollar range of equity securities of the Fund beneficially owned
by each portfolio manager as of April 30, 2008.
|
|
|
|
|
|
|
|
|
Dollar Range of Equity Securities
|
|
Name of Portfolio Manager
|
|
Beneficially Owned by Portfolio Manager
|
|
Brad Borud
|
|
$
|
100,001 - $500,000
|
|
|
R. Joseph Dougherty
|
|
$
|
100,001 - $500,000
|
|
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Total
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
(c) Total Number of Shares
|
|
(d) Maximum Number (or Approximate
|
|
|
|
Shares (or
|
|
(b) Average
|
|
(or Units) Purchased as Part
|
|
Dollar Value) of Shares (or Units) that
|
|
|
|
Units)
|
|
Price Paid per
|
|
of Publicly Announced Plans
|
|
May Yet Be Purchased Under the Plans
|
|
Period
|
|
Purchased
|
|
Share (or Unit)
|
|
or Programs
|
|
or Programs
|
|
November 1, 2007 to
|
|
|
18,571
|
|
|
$
|
2.8646
|
|
|
|
18,571
|
|
|
|
30,874,699
|
|
|
November 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2007 to
|
|
|
19,590
|
|
|
$
|
2.7689
|
|
|
|
19,590
|
|
|
|
30,874,699
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 to
|
|
|
19,036
|
|
|
$
|
2.6923
|
|
|
|
19,036
|
|
|
|
30,874,699
|
|
|
January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2008 to
|
|
|
19,444
|
|
|
$
|
2.5680
|
|
|
|
19,444
|
|
|
|
30,874,699
|
|
|
February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1, 2008 to
|
|
|
25,421
|
|
|
$
|
2.4448
|
|
|
|
25,421
|
|
|
|
30,874,699
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2008 to
|
|
|
18,703
|
|
|
$
|
2.65
|
|
|
|
18,703
|
|
|
|
30,874,699
|
|
|
April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
120,765
|
|
|
|
|
|
|
|
120,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
|
The date each plan or program was announced: January 21, 2000
|
|
|
|
b.
|
|
The dollar amount (or share or unit amount) approved: NONE
|
|
|
|
c.
|
|
The expiration date (if any) of each plan or program: NONE
|
|
|
|
d.
|
|
Each plan or program that has expired during the period covered by the table: NONE
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e.
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Each plan or program the registrant has determined to terminate prior to expiration, or
under which the registrant does not intend to make further purchases.: NONE
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Item 10. Submission of Matters to a Vote of Security Holders.
On April 16, 2007 the Board of Trustees of the Fund approved changes to the Nominating Committee
Charter, including the addition of Annex A which provides procedures for shareholders to propose
nominations for Trustee candidates.
ANNEX A
NOMINATING COMMITTEE POLICY REGARDING
SELECTION / RECOMMENDATION OF TRUSTEE NOMINEES
A candidate for nomination as Trustee submitted by a shareholder will not be deemed to be properly
submitted to the Committee for the Committee’s consideration unless the following qualifications
have been met and procedures followed:
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1.
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A shareholder or group of shareholders (referred to in either case as a
“Nominating Shareholder”) that beneficially owned, in the aggregate, more than 5% of
the Fund’s voting common shares, with each of the shares used to calculate that
ownership held for at least one year as of the date the recommendation was made, may
submit one candidate to the Committee for consideration at an annual meeting of
shareholders.
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2.
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The Nominating Shareholder must submit any such recommendation (a “Shareholder
Recommendation”) in writing to the Fund, to the attention of the Secretary, at the
address of the principal executive offices of the Fund.
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3.
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The Shareholder Recommendation must be delivered to or mailed and received at
the principal executive offices of the Fund not less than 120 calendar days before the
date of the Fund’s proxy statement released to shareholders in connection with the
previous year’s annual meeting. If, however, the Fund did not hold an annual meeting in
the previous year, or if the date of this year’s annual meeting has been changed by
more than 30 days from the date of the previous year’s annual meeting, then the
deadline is a reasonable time before the Fund begins to print and mail its proxy
materials.
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4.
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The Shareholder Recommendation must include: (i) a statement in writing setting
forth (A) the name, date of birth, business address and residence address of the person
recommended by the Nominating Shareholder (the “candidate”); (B) any position or
business relationship of the candidate, currently or within the preceding five years,
with the Nominating Shareholder or an Associated Person of the Nominating Shareholder
(as defined below); (C) the class or series and number of all shares of the Fund owned
of record or beneficially by the candidate, as reported to such Nominating Shareholder
by the candidate; (D) any other information regarding the candidate that is required to
be disclosed about a nominee in a proxy statement or other filing required to be made
in connection with the solicitation of proxies for election of Trustees of the Fund;
(E) whether the Nominating Shareholder believes that the candidate is or will be an
“interested person” of the Fund (as defined in the 1940 Act) and, if believed not to be
an “interested person,” information regarding the candidate that will be sufficient for
the Fund to make such determination; and (F) information as to the candidate’s
knowledge of the investment company industry, experience as a Trustee or senior officer
of public companies, Trusteeships/trusteeships on the boards of other registered
investment companies and educational background; (ii) the written and signed consent of
the candidate to be named as a nominee and to serve as a Trustee if elected; (iii) the
written and signed agreement of the candidate to complete a Trustees’ questionnaire if
elected; (iv) the Nominating Shareholder’s consent to be named as such by the Fund; (v)
the class or series and number of all shares of the Fund owned beneficially and of
record by the Nominating Shareholder and any Associated Person of the Nominating
Shareholder and
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the dates on which such shares were acquired, specifying the number of
shares owned beneficially but not of record by each, and stating the names of each as
they appear on the Fund’s record books and the names of any nominee holders for each; and (vi) a
description of all arrangements or understandings between the Nominating Shareholder,
the candidate and/or any other person or persons (including their names) pursuant to
which the recommendation is being made by the Nominating Shareholder. “Associated
Person of the Nominating Shareholder” as used in this paragraph 4 means any person
required to be identified pursuant to clause (v) and any other person controlling,
controlled by or under common control with, directly or indirectly, (a) the
Nominating Shareholder or (b) any person required to be identified pursuant to clause
(v).
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5.
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The Committee may require the Nominating Shareholder to furnish such other
information as it may reasonably require or deem necessary to verify any information
furnished pursuant to paragraph 4 above or to determine the qualifications and
eligibility of the candidate proposed by the Nominating Shareholder to serve on the
Board. If the Nominating Shareholder fails to provide such other information in writing
within seven days of receipt of a written request from the Committee, the
recommendation of such candidate as a nominee will be deemed not properly submitted for
consideration, and will not be considered, by the Committee.
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Item 11. Controls and Procedures.
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(a)
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The registrant’s principal executive and principal financial officers have concluded,
based on their evaluation of the registrant’s disclosure controls and procedures as of a
date within 90 days of the filing date of this report, that the Registrant’s disclosure
controls and procedures are reasonably designed to ensure that information required to be
disclosed by the registrant on Form N-CSR is recorded, processed, summarized and reported
within the required time periods and that information required to be disclosed by the
registrant in the reports that it files or submits on Form N-CSR is accumulated and
communicated to the registrant’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
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(b)
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There were no changes in the registrant’s internal control over financial reporting
that occurred during the registrant’s second fiscal quarter of the period covered by this
report that have materially affected, or are reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
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Item 12. Exhibits.
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(a)
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(1)
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Not applicable.
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(a)
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(2)
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Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the
Sarbanes-Oxley Act of 2002 are attached hereto.
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(a)
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(3)
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Not applicable.
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(b)
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Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the
Sarbanes-Oxley Act of 2002 are attached hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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(registrant)
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Prospect Street
®
High Income Portfolio Inc.
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By (Signature and Title)*
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/s/ James D. Dondero
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James D. Dondero, Chief Executive Officer and President
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(principal executive officer)
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Date June 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
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By (Signature and Title)*
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/s/ James D. Dondero
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James D. Dondero, Chief Executive Officer and President
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(principal executive officer)
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Date June 26, 2008
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By (Signature and Title)*
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/s/ M. Jason Blackburn
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M. Jason Blackburn, Chief Financial Officer,
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Treasurer and Secretary
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(principal financial officer)
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Date June 26, 2008
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*
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Print the name and title of each signing officer under his or her signature.
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Grafico Azioni Prospect ST HI New (NYSE:PHY)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Prospect ST HI New (NYSE:PHY)
Storico
Da Giu 2023 a Giu 2024
