Prospect Street Income Shares Inc - Quarterly Schedule of Portfolio Holdings of Registered Management Investment Company (N-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number    811-02365  

 

Prospect Street ® Income Shares Inc.

(Exact name of registrant as specified in charter)

Two Galleria Tower

13455 Noel Road, Suite 800

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

James D. Dondero

Highland Capital Management, L.P.

Two Galleria Tower

13455 Noel Road, Suite 800

Dallas, Texas 75240

(Name and address of agent for service)

 

Registrant's telephone number, including area code:    [phone]  

 

Date of fiscal year end: December 31       

 

Date of reporting period: September 30, 2007

 

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q 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 the 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.

 

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Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

 

PROSPECT STREET INCOME SHARES, INC.
Schedule of Investments (unaudited)
As of September 30, 2007

Ratings

Principal Amount ($)

Description

Moody’s

Standard & Poor’s

Value ($)

Senior Loans - 6.55% (a) (b)

Aerospace and Defense - 0.78%

500,000

US Airways Group, Inc., Term Loan, 7.86%, 03/23/2014

B2

B+

477,320

Cargo Transport - 1.09%

986,290

SIRVA Worldwide, Inc., Tranche B Term Loan, 12.60%, 12/01/2010

B2

NR

671,910

Diversified Media - 1.48%

1,000,000

Tribune Co., Initial Tranche B Advance, 8.36%, 05/19/2014

Ba2

BB

914,250

Information Technology - 0.23%

150,000

Freescale Semiconductor, Inc., Term Loan, 11/29/2013 (c)

Baa3

BB+

143,907

Retail - 0.78%

500,000

Burlington Coat Factory Warehouse Corp., Term Loan, 05/28/2013 (c)

B2

B-

480,875

Telecommunications - 2.19%

1,409,396

Univision Communications, Inc., Initial Term Loan, 7.61%, 09/29/2014

Ba3

B+

1,345,388

Total Senior Loans (cost $4,298,652)

4,033,650

Corporate Notes & Bonds - 133.02% (a)

Aerospace and Defense - 0.46%

3,000,000

Delta Air Lines, Inc., 8.30%, 12/15/2029 (d)

NR

NR

180,000

1,000,000

Northwest Airlines, Inc., 8.88%, 12/30/2027 (d)

NR

NR

102,500

282,500

Automobile - 4.86%

3,000,000

American Tire Distributors Holdings, Inc., 11.60%, 04/01/2012 (e)

Caa1

CCC+

2,992,500

Broadcasting and Entertainment - 6.24%

2,000,000

Liberty Media Corp., 7.88%, 07/15/2009

Ba2

BB+

2,068,370

1,500,000

Time Warner Entertainment Co., LP, 10.15%, 05/01/2012

Baa1

BBB+

1,774,656

3,843,026

Buildings and Real Estate - 6.95%

2,750,000

Black & Decker, 5.75%, 11/15/2016

Baa2

BBB

2,691,681

500,000

Realogy Corp., 10.50%, 04/15/2014 (f)

Caa1

B-

427,500

1,000,000

SUSA Partnership, LP, 7.45%, 07/01/2018

Aa1

AAA

1,159,347

4,278,528

Cable and Other Pay Television Services - 2.71%

500,000

CCH I LLC, 11.00%, 10/01/2015

Caa2

CCC

508,750

1,000,000

Comcast Cable Holdings, 9.80%, 02/01/2012

NR

BBB+

1,158,490

1,667,240

Cargo Transport - 0.30%

250,000

Motor Coach Industries International, Inc., 11.25%, 05/01/2009

Ca

CC

188,125

Chemicals, Plastics and Rubber - 10.55%

2,000,000

Albemarle Corp., 5.10%, 02/01/2015

Baa3

BBB

1,894,632

See accompanying notes.
1

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PROSPECT STREET INCOME SHARES, INC.
Schedule of Investments (unaudited) (continued)
As of September 30, 2007

Ratings

Principal Amount ($)

Description

Moody’s

Standard & Poor’s

Value ($)

Corporate Notes & Bonds (continued)

Chemicals, Plastics and Rubber (continued)

2,500,000

Clorox Co., 4.20%, 01/15/2010

A3

BBB+

2,452,810

2,000,000

Potash Corp. of Saskatchewan, Inc., 7.75%, 05/31/2011

Baa1

BBB+

2,153,102

6,500,544

Containers, Packaging and Glass - 7.99%

4,750,000

Solo Cup Co., 8.50%, 02/15/2014

Caa2

CCC-

4,227,500

1,000,000

Tekni-Plex, Inc., Series B, 12.75%, 06/15/2010

Caa3

C

695,000

4,922,500

Electronics - 6.88%

2,500,000

Charys Holding Co., Inc., 8.75%, 02/16/2012 (f)

NR

NR

2,525,000

2,000,000

MagnaChip Semiconductor, 8.94%, 12/15/2011 (e)

B2

B

1,710,000

4,235,000

Environmental Services - 3.40%

2,000,000

Republic Services, Inc., 6.75%, 08/15/2011

Baa2

NR

2,093,882

Finance - 17.98%

3,500,000

Allied Capital Corp., 6.00%, 04/01/2012

Baa2

BBB+

3,486,217

2,000,000

BankAmerica Institutional, Series A, 8.07%, 12/31/2026 (f)

Aa3

A-

2,080,700

1,500,000

Penhall International, Corp., 12.00%, 08/01/2014 (f)

B3

CCC+

1,522,500

3,750,000

Unilever Capital Corp., 7.13%, 11/01/2010

A1

A+

3,986,269

11,075,686

Food, Beverage and Tobacco - 9.40%

3,750,000

Kellogg Co., Series B, 6.60%, 04/01/2011

A3

BBB+

3,917,325

500,000

Land O’ Lakes Capital Trust I, 7.45%, 03/15/2028 (f)

B1

B-

452,500

Pinnacle Foods Finance LLC

500,000

9.25%, 04/01/2015 (f)

Caa2

CCC

478,750

1,000,000

10.63%, 04/01/2017 (f)

Caa2

CCC

942,500

5,791,075

Healthcare, Education and Childcare - 7.71%

2,500,000

Argatroban Royalty Sub LLC, 18.50%, 09/21/2014 (g)

NR

NR

2,500,000

1,495,000

Eszopiclone Royalty Sub LLC, 12.00%, 06/30/2014 (g)

NR

NR

1,554,800

500,000

Select Medical Corp., 7.63%, 02/01/2015

B3

CCC+

450,000

250,000

Teva Pharmaceutical Finance LLC, 5.55%, 02/01/2016

Baa2

BBB

243,261

4,748,061

Home and Office Furnishings, Housewares, and Durable Consumer - 2.06%

250,000

Masonite Corp., 11.00%, 04/06/2015

NR

NR

212,500

Spectrum Brands, Inc.

530,000

11.25%, 10/02/2013 PIK (e)

Caa3

CCC-

474,350

750,000

7.38%, 02/01/2015

Caa3

CCC-

581,250

1,268,100

Hotels, Motels, Inns and Gaming - 3.95%

3,000,000

Harrahs Operating Co., Inc., 5.38%, 12/15/2013

Baa3

BB

2,433,045

See accompanying notes.
2

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PROSPECT STREET INCOME SHARES, INC.
Schedule of Investments (unaudited) (continued)
As of September 30, 2007

Ratings

Principal Amount ($)

Description

Moody’s

Standard & Poor’s

Value ($)

Corporate Notes & Bonds (continued)

Leisure, Amusement, Motion Pictures, Entertainment - 11.74%

2,000,000

Blockbuster, Inc., 9.00%, 09/01/2012

Caa2

CCC

1,810,000

2,250,000

Six Flags, Inc., 4.50%, 05/15/2015

NR

CCC

1,912,500

4,500,000

Tropicana Entertainment LLC Finance Corp., 9.63%, 12/15/2014 (f)

Caa1

CCC+

3,510,000

7,232,500

Oil and Gas - 4.30%

2,000,000

Dominion Resources, Inc., 5.00%, 03/15/2013

Baa2

BBB

1,934,772

750,000

Energy XXI Gulf Coast, Inc., 10.00%, 06/15/2013 (f)

Caa2

CCC

712,500

2,647,272

Printing and Publishing - 3.28%

2,000,000

Network Communications, Inc., 10.75%, 12/01/2013

B2

B-

2,017,500

Retail Stores - 3.11%

2,000,000

Macy’s Retail Holdings, Inc., 5.90%, 12/01/2016

Baa2

BBB

1,917,260

Telecommunications - 5.64%

500,000

Digicel Group, Ltd., 8.88%, 01/15/2015 (f)

Caa2

NR

471,250

1,000,000

Grande Communications Holdings, Inc., 14.00%, 04/01/2011

Caa1

B-

1,050,000

2,000,000

ICO North America, 7.50%, 08/15/2009 (g)

NR

NR

1,950,000

3,471,250

Utilities - 13.51%

4,000,000

Consolidated Edison Co. of New York, 4.70%, 06/15/2009

A1

A

3,984,576

2,000,000

Kiowa Power Partners LLC, 5.74%, 03/30/2021 (f)

Baa3

BBB-

1,989,776

500,000

Southern Power Co., Series D, 4.88%, 07/15/2015

Baa1

BBB+

468,218

1,867,657

Tenaska Virginia Partners LP, 6.12%, 03/30/2024 (f)

NR

NR

1,876,633

8,319,203

Total Corporate Notes & Bonds (cost $84,263,598)

81,924,797

Asset-Backed Security - 5.72%

4,000,000

ACA CLO, Ltd., Series 2006-2A, Class B, 6.08%, 01/20/2021 (e) (g)

A2

A

3,526,252

Total Asset-Backed Security (cost $3,595,991)

3,526,252

Claims - 0.28%

Aerospace and Defense - 0.28%

Northwest Airlines, Inc.

400,000

ALPA Trade Claim, 08/21/2013

NR

NR

34,000

421,500

IAM Trade Claim, 08/21/2013

NR

NR

35,828

468,300

Retiree Claim, 08/21/2013

NR

NR

39,805

710,200

Flight Attendant Claim, 08/21/2013

NR

NR

60,367

Total Claims (cost $431,681)

170,000

See accompanying notes.
3

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PROSPECT STREET INCOME SHARES, INC.
Schedule of Investments (unaudited) (continued)
As of September 30, 2007

Shares			Description		Value ($)
Common Stocks - 4.01% (a) (h)
	68,864		Delta Air Lines, Inc.			1,236,111
	69,253		Northwest Airlines Corp.			1,232,704
			Total Common Stocks (cost $3,374,743)			2,468,815
Preferred Stocks - 0.00% (a) (h)
	10,000		Adelphia Communications Corp., Series B			0
	1,000,000		Adelphia Recovery Trust			0
			Total Preferred Stocks (cost $935,000)			0
Units
Warrants - 0.00% (a) (i)
	1,000		Grande Communications 04/01/2011			10
	17,481		Pathmark Stores, Inc. 09/19/2010			612
	1,000		XM Satellite Radio, Inc., 03/15/2010			0
			Total Warrants (cost $140,010)			622
			Total Investments - 149.58% (cost $97,039,674) (i)			92,124,136
			Other Assets & Liabilities, Net - (0.87)%			(537,183	)
			Preferred Stock - (48.71)%			(30,000,000	)
			Net Assets Applicable to Common Stock - 100.00%		$	61,586,953

(a)	Percentages are based on net assets applicable to common stock.
(b)	Senior loans in which the Fund invests generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. (Unless otherwise identified by (g), all senior loans carry a variable rate interest). These base lending rates are generally (i) the prime rate offered by one or more major U.S. banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (“LIBOR”) or (iii) the certificate of deposit rate. Rate shown represents the weighted average rate at September 30, 2007. Senior loans, while exempt from registration under the Security Act of 1933, as amended (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 maturities shown.
(c)	All or a portion of this position has not settled. Contract rates do not take effect until settlement date.
(d)	The issuer is in default of certain debt covenants. Income is not being accrued.
(e)	Variable rate security. The interest rate shown reflects the rate in effect at September 30, 2007.
(f)	Rule 144A securities - Private placement securities issued under Rule 144A are exempt from the registration requirement of the Securities Act of 1933, as amended. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2007, the market value of these securities aggregated $17,721,456 or 28.77% of net assets applicable to common stock.
(g)	Represents fair value as determined in good faith under the direction of the Board of Directors.
(h)	Non-income producing security.
(i)	The cost of a tax basis is identical to book. Unrealized appreciation and depreciation on investments are as follows:

Gross unrealized appreciation		$	1,307,868
Gross unrealized depreciation			(6,223,406	)
Net unrealized appreciation		$	(4,915,538	)

PIK	Payment in Kind
“NR”	Not Rated

See accompanying notes.
4

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PROSPECT STREET INCOME SHARES, INC.
Schedule of Investments (unaudited) (continued)
As of September 30, 2007

	Securities Valuation: Investments in debt securities are valued at the mean of the bid and ask prices on the last business day of the accounting period. Equity securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the accounting period; equity securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the closing bid price on that date. Warrants are valued at the last reported sales price on the last business day of the accounting period. Obligations with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available (which includes all restricted securities) are valued at fair value as determined by, or under the direction of, the Fund’s Board of Directors; such values require the use of estimates.
	For more information with regard to significant accounting policies, see the most recent semi-annual report filed with the Securities and Exchange Commission.

See accompanying notes.
5

 

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Item 2. Controls and Procedures.

 

(a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 3. Exhibits.

 

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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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.

 

(Registrant)

Prospect Street ® Income Shares Inc.

 

By (Signature and Title)*		/s/ James D. Dondero
		James D. Dondero, Chief Executive Officer
		(principal executive officer)

 

Date

November 26, 2007

 

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.

 

By (Signature and Title)*		/s/ James D. Dondero
		James D. Dondero, Chief Executive Officer
		(principal executive officer)

 

Date

November 26, 2007

 

By (Signature and Title)*		/s/ M. Jason Blackburn
		M. Jason Blackburn, Chief Financial Officer
		(principal financial officer)

 

 

Date

November 26, 2007

 

^* Print the name and title of each signing officer under his or her signature.

 

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