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)

 

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:        [phone]       

 

Date of fiscal year end:      December 31            

 

Date of reporting period:      March 31, 2008     

 

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 March 31, 2008

			Ratings
Principal Amount ($)		Description	Moody’s			Standard & Poor’s			Value ($)
Senior Loans - 13.91% (a) (b)
		Aerospace and Defense - 0.66%
495,000		US Airways Group, Inc., Term Loan, 5.63%, 03/23/2014		B2			B+		359,261
		Broadcasting and Entertainment - 1.64%
1,000,000		Bresnan Communications, LLC, Additional Term Loan B First Lien, 5.93%, 06/30/2013		B2			BB-		897,500
		Buildings and Real Estate - 5.03%
1,980,229		Pacific Clarion, LLC, Term Loan, 15.00%, 01/23/2009 (c)		NR			NR		1,947,621
		Realogy Corp.
783,513		Initial Term B Loan, 7.51%, 10/10/2013		Ba3			BB-		631,566
211,477		Synthetic Letter of Credit, 2.99%, 10/10/2013		Ba3			BB-		169,825
									2,749,012
		Cargo Transport - 1.06%
		SIRVA Worldwide, Inc.
55,576		Revolver DIP, 9.62%, 03/31/2009 (d)		B2			NR		55,576
138,940		Term Loan DIP, 9.62%, 06/30/2008		B2			NR		65,997
986,290		Tranche B Term Loan, 8.18%, 12/01/2010		B2			NR		461,091
									582,664
		Diversified Media - 1.23%
992,500		Tribune Co., Initial Tranche B Advance, 5.54%, 06/04/2014		B2			B		671,178
		Electronics - 0.23%
149,244		Freescale Semiconductor, Inc., Term Loan, 7.33%, 11/29/2013		Ba1			BB		126,526
		Retail - 0.75%
493,530		Burlington Coat Factory Warehouse Corp., Term Loan, 7.32%, 05/28/2013		B2			B-		413,025
		Utilities - 3.31%
1,990,000		Texas Competitive Electric Holdings Co., LLC, Initial Tranche B-3 Term Loan, 8.40%, 10/10/2014		Ba3			B+		1,809,845
		Total Senior Loans (cost $8,979,713)							7,609,011
Corporate Notes & Bonds - 125.78% (a)
		Aerospace and Defense - 0.23%
3,000,000		Delta Air Lines, Inc., 8.30%, 12/15/2029 (e) (f)		NR			NR		97,500
1,000,000		Northwest Airlines, Inc., 8.88%, 12/30/2027 (e) (f)		NR			NR		26,250
									123,750
		Automobile - 4.94%
3,000,000		American Tire Distributors Holdings, Inc., 11.08%, 04/01/2012 (g)		Caa1			CCC+		2,700,000
		Broadcasting and Entertainment - 6.81%
2,000,000		Liberty Media Corp., 7.88%, 07/15/2009		Ba2			BB+		2,016,946
1,500,000		Time Warner Entertainment Co., LP, 10.15%, 05/01/2012		Baa1			BBB+		1,710,882
									3,727,828

1

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PROSPECT STREET INCOME SHARES INC.
Schedule of Investments (unaudited) (continued)
As of March 31, 2008

			Ratings
Principal Amount ($)		Description	Moody’s			Standard & Poor’s			Value ($)
Corporate Notes & Bonds (continued)
		Buildings and Real Estate - 6.96%
2,750,000		Black & Decker, 5.75%, 11/15/2016		Baa2			BBB		2,649,499
1,000,000		SUSA Partnership, LP, 7.45%, 07/01/2018		Aa1			AAA		1,159,355
									3,808,854
		Cable and Other Pay Television Services - 2.73%
500,000		CCH I LLC, 11.00%, 10/01/2015		Caa2			CCC		350,000
1,000,000		Comcast Cable Holdings, 9.80%, 02/01/2012		NR			BBB+		1,141,506
									1,491,506
		Cargo Transport - 0.13%
250,000		Motor Coach Industries International, Inc., 11.25%, 05/01/2009		C			CC		68,750
		Chemicals, Plastics and Rubber - 13.70%
2,000,000		Albemarle Corp., 5.10%, 02/01/2015		Baa3			BBB		1,980,970
2,500,000		Clorox Co., 4.20%, 01/15/2010		A3			BBB+		2,509,775
1,000,000		Georgia Gulf Corp., 9.50%, 10/15/2014 (f)		B2			CCC+		777,500
2,000,000		Potash Corp. of Saskatchewan, Inc., 7.75%, 05/31/2011		Baa1			BBB+		2,225,760
									7,494,005
		Containers, Packaging and Glass - 7.38%
4,750,000		Solo Cup Co., 8.50%, 02/15/2014 (f)		Caa2			CCC-		4,037,500
		Environmental Services - 3.98%
2,000,000		Republic Services, Inc., 6.75%, 08/15/2011		Baa1			NR		2,176,848
		Finance - 20.11%
3,500,000		Allied Capital Corp., 6.00%, 04/01/2012		Baa2			BBB+		3,542,570
2,000,000		BankAmerica Institutional, Series A, 8.07%, 12/31/2026 (h)		Aa3			A-		2,066,556
1,500,000		Penhall International, Corp., 12.00%, 08/01/2014 (h)		B3			CCC+		1,275,000
3,750,000		Unilever Capital Corp., 7.13%, 11/01/2010		A1			A+		4,114,114
									10,998,240
		Food, Beverage and Tobacco - 8.17%
3,750,000		Kellogg Co., Series B, 6.60%, 04/01/2011		A3			BBB+		4,043,944
500,000		Land O’ Lakes Capital Trust I, 7.45%, 03/15/2028 (h)		B1			B		425,000
									4,468,944
		Healthcare, Education and Childcare - 7.14%
2,194,712		Argatroban Royalty Sub, LLC, 18.50%, 09/21/2014		NR			NR		2,205,686
1,417,000		Eszopiclone Royalty Sub LLC, 12.00%, 06/30/2014		NR			NR		1,445,340
250,000		Teva Pharmaceutical Finance LLC, 5.55%, 02/01/2016		Baa2			BBB		252,110
									3,903,136
		Home and Office Furnishings, Housewares, and Durable Consumer - 1.13%
250,000		Masonite Corp., 11.00%, 04/06/2015		NR			BB-		173,750
530,000		Spectrum Brands, Inc., PIK, 11.50%, 10/02/2013 (f) (g)		Caa3			CCC-		442,550
									616,300

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PROSPECT STREET INCOME SHARES INC.
Schedule of Investments (unaudited) (continued)
As of March 31, 2008

				Ratings
Principal Amount ($)		Description		Moody’s		Standard & Poor’s		Value ($)
Corporate Notes & Bonds (continued)
		Information Technology - 4.27%
2,500,000		Charys Holding Co., Inc., 8.75%, 02/16/2012 (e) (h)		NR		NR		1,250,000
1,500,000		MagnaChip Semiconductor, 6.05%, 12/15/2011 (g)		B2		B		1,087,500
								2,337,500
		Leisure, Amusement, Motion Pictures, Entertainment - 8.06%
1,500,000		Blockbuster, Inc., 9.00%, 09/01/2012 (f)		Caa2		CCC		1,230,000
1,531,000		Six Flags, Inc.Convertible, 4.50%, 05/15/2015		Caa2		CCC-		822,912
4,500,000		Tropicana Entertainment LLC, 9.63%, 12/15/2014 (f)		Ca		CC		2,356,875
								4,409,787
		Oil and Gas - 5.61%
2,000,000		Dominion Resources, Inc., Series D, 5.00%, 03/15/2013		Baa2		BBB		2,044,508
1,225,000		Energy XXI Gulf Coast, Inc., 10.00%, 06/15/2013		Caa2		CCC		1,022,875
								3,067,383
		Telecommunications - 9.00%
1,750,000		Cricket Communications, Inc., 9.38%, 11/01/2014		Caa1		B-		1,666,875
500,000		Digicel Group, Ltd., PIK, 9.13%, 01/15/2015 (h)		Caa2		NR		413,750
1,000,000		Grande Communications Holdings, Inc., 14.00%, 04/01/2011		Caa1		B-		1,010,000
2,085,000		ICO North America, 8.50%, 08/15/2009		NR		NR		1,834,800
								4,925,425
		Utilities - 15.43%
4,000,000		Consolidated Edison Co. of New York, 4.70%, 06/15/2009		A1		A-		4,060,404
2,000,000		Kiowa Power Partners LLC, 5.74%, 03/30/2021 (h)		Baa3		BBB-		1,976,504
500,000		Southern Power Co., Series D, 4.88%, 07/15/2015		Baa1		BBB+		480,397
1,829,260		Tenaska Virginia Partners LP, 6.12%, 03/30/2024 (h)		NR		NR		1,921,775
								8,439,080
		Total Corporate Notes & Bonds (cost $73,993,869)						68,794,836
Asset-Backed Securities - 11.07% (a) (g) (h)
4,000,000		ACA CLO, Ltd., Series 2006-2A, Class B, 4.61%, 01/20/2021		A2		A		2,734,375
1,000,000		Goldman Sachs Asset Management CLO, PLC, Series 2007-1A, Class D, 5.99%, 08/01/2022		Baa2		BBB		746,000
1,000,000		GSC Partners CDO Fund, Ltd., Series 2007-8A, Class C, 5.47%, 04/17/2021		Baa2		BBB		560,500
1,000,000		Primus CLO, Ltd., Series 2007-2A, Class D, 6.66%, 07/15/2021		Baa2		BBB		695,700
1,000,000		Rampart CLO, Ltd., Series 2006-1A, Class C, 5.40%, 04/18/2021		Baa2		BBB		647,900
1,000,000		St. James River CLO, Ltd., Series 2007-1A, Class E, 7.24%, 06/11/2021		Ba2		BB		671,400
		Total Asset-Backed Securities (cost $6,939,060)						6,055,875

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PROSPECT STREET INCOME SHARES INC.
Schedule of Investments (unaudited) (continued)
As of March 31, 2008

			Ratings
Principal Amount ($)		Description	Moody’s		Standard & Poor’s		Value ($)
Claims - 0.12% (a)
		Aerospace and Defense - 0.12%
		Northwest Airlines, Inc.
400,000		ALPA Trade Claim, 08/21/2013	NR		NR			13,248
421,500		IAM Trade Claim, 08/21/2013	NR		NR			13,960
468,300		Retiree Claim, 08/21/2013	NR		NR			15,510
710,200		Flight Attendant Claim, 08/21/2013	NR		NR			23,522
		Total Claims (cost $431,682)						66,240
Shares
Common Stock - 0.51% (a) (i)
31,012		Northwest Airlines, Inc.						278,798
		Total Common Stocks (cost $476,079)						278,798
Preferred Stocks - 0.00% (a) (i)
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
1,000		XM Satellite Radio, Inc., 03/15/2010						0
		Total Warrants (cost $140,010)						10
		Total Investments - 151.39% (cost $91,895,413) (j)						82,804,770
		Other Assets & Liabilities, Net - 3.46%						1,890,986
		Preferred Stock - (54.85)%						(30,000,000	)
		Net Assets Applicable to Common Stock - 100.00%					$	54,695,756

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PROSPECT STREET INCOME SHARES INC.

Schedule of Investments (unaudited) (continued)

As of March 31, 2008

(a)	Percentages are based on net assets applicable to common stock.
(b)	Senior loans in which Prospect Street Income Shares Inc. (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 (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 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 March 31, 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)	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 $1,947,621 or 3.56% of net assets, were valued under fair value as of March 31, 2008.
(d)	Senior loan asset has an additional unfunded loan commitment. As of March 31, 2008, the Fund had an unfunded loan commitment, SIRVA Worldwide, Inc., of $126,115, which could be extended at the option of the Borrower, pursuant to the loan agreement.
(e)	The issuer is in default of certain debt covenants. Income is not being accrued.
(f)	Securities (or a portion of securites) on loan. As of March 31, 2008, the market value of securities loaned was $8,968,175. The loaned securities were secured with cash collateral of $9,922,300.
(g)	Variable rate asset. The interest rate shown reflects the rate in effect at March 31, 2008.
(h)	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 March 31, 2008, these securities amounted $15,384,460 or 28.13% of net assets.
(i)	Non-income producing security.
(j)	Cost basis for U.S. federal income tax purposes is identical to book basis. Unrealized appreciation and depreciation on investments are as folllows:

	Gross unrealized appreciation		$	1,645,761
	Gross unrealized depreciation			(10,736,404	)
	Net unrealized depreciation		$	(9,090,643	)

CDO	Collateralized Debt Obligation
CLO	Collateralized Loan Obligation
DIP	Debtor-in-Possession
NR	Not Rated
PIK	Payment-in-Kind

Security Valuation:

Investments for which listed market quotations are readily available are stated at market value, which is determined by using the last reported sale price or, if no sales are reported, as in the case of some securities traded over-the-counter, the last reported bid price. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value.

Other investments, which comprise the major portion of the Fund’s portfolio holdings, are primarily non-investment grade corporate debt securities, for which market quotations are not readily available due to a thinly traded market with a limited number of market makers. These investments are stated at fair value on the basis of subjective valuations furnished by an independent pricing service or broker dealers, subject to review and adjustment by Highland Capital Management, L.P. (the “Investment Adviser”) based upon quotations obtained from market makers. The independent pricing service determines value based primarily on quotations from dealers and brokers, market transactions, accessing data from quotation services, offering sheets obtained from dealers and various relationships between securities. The independent pricing service utilizes the last sales price based on odd-lot trades, if available. If such price is not available, the price furnished is based on round-lot or institutional size trades. For securities in which there is no independent price from a pricing service or from round-lot or institutional size trades, they are fair value priced in good faith by the Investment Adviser.

For more information with regart to significant accounting policies, see the most recent annual report filed with the Securities and Exchange Commission.

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PROSPECT STREET INCOME SHARES INC.

Schedule of Investments (unaudited) (continued)

As of March 31, 2008

Adoption of Statement of Financial Accounting Standards No. 157 “Fair Value Measurement” (“FAS 157”):

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurement,” which is effective for financial statements issued for fiscal years beginning after November 15, 2007. FAS 157 defines how fair value should be determined for financial reporting purposes, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about the use of fair value measurements, but is not expected to result in any changes to the fair value measurements of the investments. FAS 157 requires companies to provide expanded information about the assets and liabilities measured at fair value and the potential effect of these fair valuations on net assets for the reportable periods as contained in the Fund’s periodic filings.

The Fund has adopted FAS 157 as of January 1, 2008. The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of FAS 157 did not have any material effect on the Fund’s net asset value. However, the adoption of FAS 157 does require the Fund to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements The three levels of the fair value hierarchy established under FAS 157 are described below:

          • Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;

          • Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

           • Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets as of March 31, 2008 as follows:

Investments in Securities (Market Value)		Total			Level 1			Level 2			Level 3
Portfolio Investments		$	82,804,770		$	278,798		$	76,918,241		$	5,607,731
Total		$	82,804,770		$	278,798		$	76,918,241		$	5,607,731

The Fund did not have any liabilities that were measured at fair value on a recurring basis at March 31, 2008.

The following table presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2007 and at March 31, 2008.

Assets at Fair Value using unobservable inputs (Level 3)		Portfolio Investments
Balance as of December 31, 2007		$	1,032,510
Transfers in/(out) of Level 3			—
Net amortization/(accretion) of premium/(discount)			11,892
Net realized gains/(losses)			—
Net unrealized gains/(losses)			(34,392	)
Net purchases and sales			4,597,721
Balance as of March 31, 2008		$	5,607,731

The $34,392 of net unrealized losses presented in the table above relate to investments that are still held at March 31, 2008.

6

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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, President
	(principal executive officer)

 

Date	May 23, 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.

 

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

 

Date	May 23, 2008

 

 

By (Signature and Title)*	/s/ M. Jason Blackburn
	M. Jason Blackburn, Secretary and Treasurer
	(principal financial officer)

 

Date	May 23, 2008

 

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

 

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