psec_pos-8c.htm
As
filed with the Securities and Exchange Commission on January 29,
2009
Registration
No. 333-143819
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
N-2
x REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
o PRE-EFFECTIVE
AMENDMENT NO.
x POST-EFFECTIVE
AMENDMENT NO. 9
PROSPECT
CAPITAL CORPORATION
(Exact
Name of Registrant as Specified in Charter)
10
East 40th Street, 44th Floor
New
York, NY 10016
(Address
of Principal Executive Offices)
Registrant's
Telephone Number, including Area Code: (212) 448-0702
John
F. Barry III
Brian
H. Oswald
c/o
Prospect Capital Management LLC
10
East 40th Street, 44th Floor
New
York, NY 10016
(212)
448-0702
(Name and
Address of Agent for Service)
Copies
of information to:
Richard
T. Prins
Skadden
Arps Slate Meagher & Flom LLP
4
Times Square
New
York, NY 10036
(212)
735-3000
Approximate Date of Proposed Public
Offering: As soon as practicable after the effective date of
this Registration Statement.
If any
securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a distribution reinvestment plan,
check the following box. x
It
is proposed that this filing will become effective (check appropriate
box):
x when declared effective
pursuant to section 8(c).
If
appropriate, check the following box:
o
This post-effective amendment designates a new effective date for a previously
filed post-effective amendment registration statement.
o
This form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act and the Securities Act registration
statement number of the earlier effective registration statement for the same
offering
is .
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title
of Securities Being Registered
|
Amount
Being Registered
|
Proposed
Maximum Offering Price Per Unit
|
Proposed
Maximum Aggregate Offering Price(1)
|
Amount
of Registration Fee
|
Common
Stock, $.001 par value per share(2)
|
|
|
$
|
|
Preferred
Stock(2)
|
|
|
|
|
Debt
Securities(3)
|
|
|
|
|
Warrants(4)
|
|
|
|
|
Total
|
$500,000,000
|
|
$500,000,000(5)
|
$19,650
|
(1)
|
Estimated
solely for the purpose of calculating the registration fee. Pursuant to
Rule 457(o) of the rules and regulations under the Securities Act of 1933,
which permits the registration fee to be calculated on the basis of the
maximum offering price of all the securities listed, the table does not
specify by each class information as to the amount to be registered,
proposed maximum offering price per unit or proposed maximum aggregate
offering price.
|
(2)
|
Subject
to Note 5 below, there is being registered hereunder an indeterminate
principal amount of common stock or preferred stock as may be sold, from
time to time.
|
(3)
|
Subject
to Note 5 below, there is being registered hereunder an indeterminate
principal amount of debt securities as may be sold, from time to
time. If any debt securities are issued at an original issue
discount, then the offering price shall be in such greater principal
amount as shall result in an aggregate price to investors not to exceed
$500,000,000.
|
(4)
|
Subject
to Note 5 below, there is being registered hereunder an indeterminate
principal amount of warrants as may be sold, from time to time,
representing rights to purchase common stock, preferred stock or debt
securities.
|
(5)
|
In
no event will the aggregate offering price of all securities issued from
time to time pursuant to this registration statement exceed
$500,000,000.
|
Filed
Pursuant to Rule 497(e)
Registration
No. 333-143819
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in
any state where the offer and sale is not
permitted.
|
Subject
to Completion
Preliminary
Prospectus dated January 29, 2009
$500,000,000
(PROSPECT
LOGO)
PROSPECT
CAPITAL CORPORATION
Common
Stock
Preferred
Stock
Debt
Securities
Warrants
We may
offer, from time to time, in one or more offerings or series, together or
separately, up to $500,000,000 of our common stock, preferred stock, debt
securities or warrants representing rights to purchase shares of common stock,
preferred stock or debt securities, collectively, the Securities, to provide us
with funds to repay outstanding debt and to acquire investments that we
reasonably believe are in our acquisition pipeline. Securities may be
offered at prices and on terms to be disclosed in one or more supplements to
this prospectus, possibly at a discount to net asset value per share in certain
circumstances. You should read this prospectus and the applicable
prospectus supplement carefully before you invest in our
Securities.
Our
Securities may be offered directly to one or more purchasers, or through agents
designated from time to time by us, or to or through underwriters or
dealers. We may also offer common stock to our stockholders and
others through the issuance to stockholders of rights. The prospectus
supplement relating to the offering will identify any agents or underwriters
involved in the sale of our Securities, and will disclose any applicable
purchase price, fee, commission or discount arrangement between us and our
agents or underwriters or among our underwriters or the basis upon which such
amount may be calculated. See "Plan of Distribution." We
may not sell any of our Securities through agents, underwriters or dealers
without delivery of the prospectus and a prospectus supplement describing the
method and terms of the offering of such Securities. Our common stock
is traded on The NASDAQ Global Select Market under the symbol
"PSEC." As of January 28, 2009, the last reported sales price for our
common stock was $11.63.
Prospect
Capital Corporation, or the Company, is a company that lends to and invests in
middle market privately-held companies.
Prospect
Capital Corporation, a Maryland corporation, has been organized as a closed-end
investment company since April 13, 2004 and has filed an election to be treated
as a business development company under the Investment Company Act of 1940, as
amended, or the 1940 Act, and is a non-diversified investment company within the
meaning of the 1940 Act.
Prospect
Capital Management LLC, our investment adviser, manages our investments and
Prospect Administration LLC, our administrator, provides the administrative
services necessary for us to operate.
Investing
in our Securities involves a heightened risk of total loss of investment and is
subject to risks. Before buying any Securities, you should read the
discussion of the material risks of investing in our Securities in "Risk
Factors" beginning on page 9 of this prospectus.
This
prospectus contains important information about us that you should know before
investing in our Securities. Please read it before making an
investment decision and keep it for future reference. We file annual,
quarterly and current reports, proxy statements and other information about us
with the Securities and Exchange Commission, or the SEC. This
information will be available free of charge by writing to Prospect Capital
Corporation at 10 East 40th Street, 44th Floor, New York, NY 10016,
or by calling collect at 212-448-0702. Our Internet address is
http://www.prospectstreet.com. You may also obtain information about
us from the SEC's website (http://www.sec.gov).
Neither
the SEC nor any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
This
prospectus may not be used to consummate sales of securities unless accompanied
by a prospectus supplement.
The
date of this Prospectus is , 2009
Table
of Contents
Page
About
this Propectus
|
ii
|
Prospectus
Summary
|
1
|
Selected
Condensed Financial Data
|
7
|
Risk
Factors
|
9
|
Management's
Discussion and Analysis of Financial Conditions and Results of
Operations
|
24
|
Report
of Management on Internal Control Over Financial Reporting
|
41
|
Use
of Proceeds
|
42
|
Forward-Looking
Statements
|
43
|
Distributions
|
45
|
Price
Range of Common Stock
|
47
|
Business
|
48
|
Management
|
54
|
Certain
Relationships and Transactions
|
70
|
Control
Persons and Principal Stockholders
|
71
|
Portfolio
Companies
|
72
|
Determination
of Net Asset Value
|
75
|
Sales
of Common Stock Below Net Asset Value
|
76
|
Dividend
Reinvestment Plan
|
79
|
Material
U.S. Federal Income Tax Considerations
|
81
|
Descriptions
of Our Capital Stock
|
88
|
Description
of Our Preferred Stock
|
94
|
Description
of Our Debt Securities
|
95
|
Description
of Our Warrants
|
96
|
Regulation
|
98
|
Custodian,
Transfer and Dividend Paying Agent and Registrar
|
104
|
Brokerage
Allocation and Other Practices
|
105
|
Plan
of Distribution
|
106
|
Legal
Matters
|
108
|
Independent
Registered Public Accounting Firm
|
108
|
Available
Information
|
108
|
Index
to Financial Statements
|
F-1
|
Part
C – Other Information
|
C-1
|
ABOUT THIS PROSPECTUS
This
prospectus is part of a registration statement that we have filed with the SEC,
using the "shelf" registration process. Under the shelf registration
process, we may offer, from time to time on a delayed basis, up to $500,000,000
of our common stock, preferred stock, debt securities or warrants representing
rights to purchase shares of our common stock, preferred stock or debt
securities on the terms to be determined at the time of the
offering. The Securities may be offered at prices and on terms
described in one or more supplements to this prospectus. This
prospectus provides you with a general description of the Securities that we may
offer. Each time we use this prospectus to offer Securities, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add,
update or change information contained in this prospectus. Please
carefully read this prospectus and any prospectus supplement together with any
exhibits and the additional information described under the heading "Available
Information" and the section under the heading "Risk Factors" before you make an
investment decision.
PROSPECTUS SUMMARY
The
following summary contains basic information about this offering. It
does not contain all the information that may be important to an
investor. For a more complete understanding of this offering, we
encourage you to read this entire document and the documents to which we have
referred.
Information
contained or incorporated by reference in this prospectus may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which are statements about the future that may be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "plans," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable
terminology. These forward-looking statements do not meet the safe
harbor for forward-looking statements pursuant to Section 27A of the Securities
Act of 1933, as amended, or the Securities Act. The matters described
in "Risk Factors" and certain other factors noted throughout this prospectus and
in any exhibits to the registration statement of which this prospectus is a
part, constitute cautionary statements identifying important factors with
respect to any such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. The Company reminds all investors
that no forward-looking statement can be relied upon as an accurate or even
mostly accurate forecast because humans cannot forecast the future.
The
terms "we," "us," "our," and "Company" refer to Prospect Capital Corporation;
"Prospect Capital Management" or the "Investment Adviser" refers to
Prospect Capital Management LLC, our investment adviser; "Prospect
Administration" or the "Administrator" refers to Prospect Administration LLC,
our administrator; and "Prospect" refers to Prospect Capital Management LLC, its
affiliates and its predecessor companies.
The
Company
We are a
financial services company that lends to and invests in middle market
privately-held companies.
We were
originally organized under the name "Prospect Street Energy Corporation" and we
changed our name to "Prospect Energy Corporation" in June 2004. We
changed our name again to "Prospect Capital Corporation" in May 2007 and at the
same time terminated our policy of investing at least 80% of our net assets in
energy companies. While we expect to be less focused on the energy
industry in the future, we will continue to have significant holdings in the
energy and energy related industries. We have been organized as a
closed-end investment company since April 13, 2004 and have filed an election to
be treated as a business development company under the 1940 Act. We
are a non-diversified company within the meaning of the 1940 Act. Our
headquarters are located at 10 East 40th Street, 44th Floor, New York,
NY 10016, and our telephone number is (212) 448-0702.
The
Investment Adviser
Prospect
Capital Management, an affiliate of the Company, manages our investment
activities. Prospect Capital Management is an investment adviser that
has been registered under the Investment Advisers Act of 1940, or the Advisers
Act, since March 31, 2004. Under an investment advisory and
management agreement between us and Prospect Capital Management, or the
Investment Advisory Agreement, we have agreed to pay Prospect Capital Management
investment advisory fees, which will consist of an annual base management fee
based on our gross assets, which we define as total assets without deduction for
any liabilities, as well as a two-part incentive fee based on our
performance.
The
Offering
We may
offer, from time to time, in one or more offerings or series, together or
separately, up to $500,000,000 of our Securities to provide us with funds to
repay outstanding debt and to acquire investments that we reasonably believe are
in our acquisition pipeline.
Our
Securities may be offered directly to one or more purchasers, to new
stockholders, via an optional cash purchase, in which such purchaser can
purchase Securities directly from us for cash, or designated offeree program, in
which certain designated individuals who may or may not be new stockholders can
purchase Securities directly
from us
for cash, or through agents designated from time to time by us, or to or through
underwriters or dealers. The prospectus supplement relating to a
particular offering will disclose the terms of that offering, including the name
or names of any agents or underwriters involved in the sale of our Securities by
us, the purchase price, and any fee, commission or discount arrangement between
us and our agents or underwriters or among our underwriters, or the basis upon
which such amount may be calculated. See "Plan of
Distribution." We may not sell any of our Securities through agents,
underwriters or dealers without delivery of a prospectus supplement describing
the method and terms of the offering of our Securities. In certain
circumstances such sale may be at a discount to net asset value per share, which
may be dilutive to stockholders.
Set forth
below is additional information regarding the offering of our
Securities:
|
Use
of
proceeds
|
Unless
otherwise specified in a prospectus supplement, we intend to use the net
proceeds from selling Securities pursuant to this prospectus for new or
additional investments in portfolio companies in accordance with our
investment objective and strategies, repayment of then outstanding
indebtedness, acquisitions or general corporate purposes. See
"Use of Proceeds."
|
|
|
Distributions
|
We
have paid quarterly distributions to the holders of our common stock and
generally intend to continue to do so. The amount of the
quarterly distributions is determined by our Board of Directors and is
based on our estimate of our investment company taxable income and net
short-term capital gains. Certain amounts of the quarterly
distributions may from time to time be paid out of our capital rather than
from earnings for the quarter as a result of our deliberate planning or
accounting reclassifications. Distributions in excess of our
current or accumulated earnings or profits constitute a return of capital
and will reduce the stockholder's adjusted tax basis in such stockholder's
common stock. After the adjusted basis is reduced to zero,
these distributions will constitute capital gains to such
stockholders. Certain additional amounts may be deemed as
distributed to stockholders for income tax purposes. Other
types of Securities will likely pay distributions in accordance with their
terms. See "Price Range of Common Stock," "Distributions" and
"Material U.S. Federal Income Tax Considerations."
|
|
|
Taxation
|
We
have qualified and elected to be treated for U.S. Federal income tax
purposes as a regulated investment company, or a RIC, under Subchapter M
of the Internal Revenue Code of 1986, or the Code. As a RIC, we
generally do not have to pay corporate-level U.S. Federal income taxes on
any ordinary income or capital gains that we distribute to our
stockholders as dividends. To maintain our qualification as a
RIC and obtain RIC tax treatment, we must maintain specified
source-of-income and asset diversification requirements and distribute
annually at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if
any. See "Distributions" and "Material U.S. Federal Income Tax
Considerations."
|
|
|
Dividend
reinvestment plan
|
We
have a dividend reinvestment plan for our stockholders. This is
an "opt out" dividend reinvestment plan. As a result, when we
declare a dividend, the dividends are automatically reinvested in
additional shares of our common stock, unless a stockholder specifically
"opts out" of the dividend reinvestment plan so as to receive cash
dividends. Stockholders who receive distributions in the form
of stock are subject to the same U.S. Federal, state and local tax
consequences as stockholders who elect to receive their distributions in
cash. See "Dividend Reinvestment
Plan."
|
The
NASDAQ Global Select Market Symbol
|
PSEC
|
|
|
Anti-takeover
provisions
|
Our
charter and bylaws, as well as certain statutory and regulatory
requirements, contain provisions that may have the effect of discouraging
a third party from making an acquisition proposal for us. These
anti-takeover provisions may inhibit a change in control in circumstances
that could give the holders of our common stock the opportunity to realize
a premium over the market price of our common stock. See
"Description Of Our Capital Stock."
|
|
|
Management
arrangements
|
Prospect
Capital Management serves as our investment adviser. Prospect
Administration serves as our administrator and has engaged Vastardis Fund
Services, LLC, or Vastardis (formerly, EOS Fund Services LLC), as
sub-administrator. For a description of Prospect Capital
Management, Prospect Administration, Vastardis and our contractual
arrangements with these companies, see "Management ―
Management Services ― Investment Advisory Agreement," and "Management ―
Management Services— Administration Agreement."
|
|
|
Risk
factors
|
Investment
in our Securities involves certain risks relating to our structure and
investment objective that should be considered by prospective purchasers
of our Securities. In addition, investment in our Securities
involves certain risks relating to investing in the energy sector,
including but not limited to risks associated with commodity pricing,
regulation, production, demand, depletion and expiration, weather, and
valuation. We have a limited operating history upon which you
can evaluate our business. In addition, as a business
development company, our portfolio primarily includes securities issued by
privately-held companies. These investments generally involve a
high degree of business and financial risk, and are less liquid than
public securities. We are required to mark the carrying value
of our investments to fair value on a quarterly basis, and economic
events, market conditions and events affecting individual portfolio
companies can result in quarter-to-quarter mark-downs and mark-ups of the
value of individual investments that collectively can materially affect
our net asset value, or NAV. Also, our determinations of fair
value of privately-held securities may differ materially from the values
that would exist if there was a ready market for these
investments. A large number of entities compete for the same
kind of investment opportunities as we do. Moreover, our
business requires a substantial amount of capital to operate and to grow
and we seek additional capital from external sources. In
addition, the failure to qualify as a RIC eligible for pass-through tax
treatment under the Code on income distributed to stockholders could have
a materially adverse effect on the total return, if any, obtainable from
an investment in our Securities. See "Risk Factors" and the
other information included in this prospectus for a discussion of factors
you should carefully consider before deciding to invest in our
Securities.
|
|
|
Plan
of
distribution
|
We
may offer, from time to time, up to $500,000,000 of our common stock,
preferred stock, debt securities or warrants representing rights to
purchase shares of our common stock, preferred stock or debt securities on
the terms to be determined at the time of the offering. Such
terms may include an optional cash purchase in which a purchaser can
purchase Securities directly from us for cash or designated offeree
program in which certain designated individuals can purchase Securities
directly from us for cash. Securities may be offered at prices
and on terms described in one or more supplements to this prospectus
directly to one or more purchasers, or through agents
designated
|
|
from
time to time by us, or to or through underwriters or
dealers. The supplement to this prospectus relating to the
offering will identify any agents or underwriters involved in the sale of
our Securities, and will set forth any applicable purchase price, fee and
commission or discount arrangement or the basis upon which such amount may
be calculated. We may not sell Securities pursuant to this
prospectus without delivering a prospectus supplement describing the
method and terms of the offering of such Securities. For more
information, see "Plan of
Distribution."
|
Recent
Developments
On
November 14, 2008, we entered into a commitment letter with Rabobank to arrange
and structure a new dual rated credit facility. Under the terms of
the letter, we agreed to an increase in the current borrowing rate on the
facility to LIBOR + 2.50%.
Fees
and Expenses
The
following tables are intended to assist you in understanding the costs and
expenses that an investor in this offering will bear directly or
indirectly. We caution you that some of the percentages indicated in
the table below are estimates and may vary. In these tables, we
assume that we have borrowed $200 million under our credit facility, which is
the maximum amount available under the credit facility. Except where
the context suggests otherwise, whenever this prospectus contains a reference to
fees or expenses paid by "you" or "us" or that "we" will pay fees or expenses,
the Company will pay such fees and expenses out of our net assets and,
consequently, you will indirectly bear such fees or expenses as an investor in
the Company. However, you will not be required to deliver any money
or otherwise bear personal liability or responsibility for such fees or
expenses.
Stockholder transaction
expenses:
|
|
|
Sales
load (as a percentage of offering price)(1)
|
4.50%
|
|
Offering
expenses borne by us (as a percentage of offering price)(2)
|
0.20%
|
|
Dividend
reinvestment plan expenses(3)
|
None
|
|
Total
stockholder transaction expenses (as a percentage of offering price)(4)
|
4.70%
|
|
Annual expenses (as a
percentage of net assets attributable to common stock)*:
|
|
|
Combined
base management fee (3.04%)(5)
and incentive fees payable under Investment Advisory
|
|
|
Agreement
(20% of realized capital gains and 20% of pre-incentive fee net investment
income)
|
|
|
(5.44%)(6)
|
8.48%
|
|
Interest
payments on borrowed
funds
|
1.96%
|
(7)
|
Other
expenses
|
2.11%
|
(8)
|
Total
annual
expenses
|
12.55%
|
(6)(8)
|
Example
The
following table demonstrates the projected dollar amount of cumulative expenses
we would pay out of net assets and that you would indirectly bear over various
periods with respect to a hypothetical investment in our common
stock. In calculating the following expense amounts, we have assumed
we would have borrowed all $200 million available under our line of credit, that
our annual operating expenses would remain at the levels set forth in the table
above and that we would pay the stockholder costs shown in the table
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
You
would pay the following expenses on a $1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
investment,
assuming a 5% annual return
|
|
$ |
114.76 |
|
|
$ |
246.02 |
|
|
$ |
371.79 |
|
|
$ |
663.74 |
|
*
|
Net
assets attributable to our common stock equal net assets (i.e., total assets less
liabilities other than liabilities for money borrowed for investment
purposes) at September 30, 2008.
|
(1)
|
In
the event that the Securities to which this prospectus relates are sold to
or through underwriters, a corresponding prospectus supplement will
disclose the estimated applicable sales
load.
|
(2)
|
The
related prospectus supplement will disclose the estimated amount of
offering expenses, the offering price and the estimated offering expenses
borne by us as a percentage of the offering
price.
|
(3)
|
The
expenses of the dividend reinvestment plan are included in "other
expenses."
|
(4)
|
The
related prospectus supplement will disclose the offering price and the
total stockholder transaction expenses as a percentage of the offering
price.
|
(5)
|
Our
base management fee is 2% of our gross assets (which include any amount
borrowed, i.e.,
total assets without deduction for any liabilities). Although
no plans are in place to borrow the full amount under our line of credit,
assuming that we borrowed $200 million, the 2% management fee of gross
assets equals approximately 3.17% of net assets. See "Management ―
Management Services ― Investment Advisory Agreement" and footnote 6
below.
|
(6)
|
The
incentive fee payable to our Investment Adviser under the Investment
Advisory Agreement is based on our performance and will not be paid unless
we achieve certain goals. Under the assumption of a 5% return
required in the example, no incentive fee would be payable. The
incentive fee consists of two parts. The first part, the income
incentive fee, which is payable quarterly in arrears, will equal 20% of
the excess, if any, of our pre-incentive fee net investment income that
exceeds a 1.75% quarterly (7% annualized) hurdle rate, subject to a "catch
up" provision measured as of the end of each calendar
quarter. In the three months ended September 30, 2008, we paid
an incentive fee of $5.875 million (see calculation below). We
expect the incentive fees we pay to increase to the extent we earn greater
interest and dividend income through our investments in portfolio
companies and, to a lesser extent, realize capital gains upon the sale of
warrants or other equity investments in our portfolio companies and to
decrease if our interest and dividend income and capital gains
decrease. The "catch-up" provision requires us to pay 100% of
our pre-incentive fee net investment income with respect to that portion
of such income, if any, that exceeds the hurdle rate but is less than 125%
of the quarterly hurdle rate in any calendar quarter (8.75% annualized
assuming an annualized hurdle rate of 7%). The catch-up
provision is meant to provide Prospect Capital Management with 20% of our
pre-incentive fee net investment income as if a hurdle rate did not apply
when our pre-incentive fee net investment income exceeds 125% of the
quarterly hurdle rate in any calendar quarter (8.75% annualized assuming
an annualized hurdle rate of 7%). The income incentive fee will
be computed and paid on income that may include interest that is accrued
but not yet received in cash. If interest income is accrued but
never paid, the Board of Directors would decide to write off the accrual
in the quarter when the accrual is determined to be
uncollectible. The write off would cause a decrease in interest
income for the quarter equal to the amount of the prior
accrual. The Investment Adviser is not under any obligation to
reimburse us for any part of the incentive fee it received that was based
on accrued income that we never receive as a result of a default by an
entity on the obligation that resulted in the accrual of such
income. Our pre-incentive fee net investment income used to
calculate the income incentive fee is also included in the amount of our
gross assets used to calculate the 2% base management fee (see footnote 5
above). The second part of the incentive fee, the capital gains
incentive fee, will equal 20% of our realized capital gains, if any,
during a particular year computed net of all realized capital losses and
unrealized capital depreciation.
|
Examples
of how the incentive fee is calculated are as follows:
Assuming
pre-incentive fee net investment income of 0.55%, there would be no income
incentive fee because such income would not exceed the hurdle rate of
1.75%.
Assuming
pre-incentive fee net investment income of 2%, the income incentive fee would be
as follows:
= 100% ×
(2%-1.75%)
=
0.25%
Assuming
pre-incentive fee net investment income of 2.30%, the income incentive fee would
be as follows:
= (100% ×
("catch-up": 2.1875%-1.75%)) + (20% × (2.30%-2.1875%))
= (100% ×
0.4375%) + (20% × 0.1125%) = 0.4375% + 0.0225% = 0.46%
Assuming
net realized capital gains of 6% and realized capital losses and unrealized
capital depreciation of 1%, the capital gains incentive fee would be as
follows:
= 20% ×
(6%-1%)
= 20% ×
5% = 1%
The
following is a calculation of the most recently paid incentive fee paid in
September 2008 (for the quarter ended September 30, 2008) (in
thousands):
Prior
Quarter Net Asset
Value
|
|
$ |
429,623 |
|
Quarterly
Hurdle
Rate
|
|
|
1.75% |
|
Current
Quarter
Hurdle
|
|
$ |
7,518 |
|
125%
of the Quarterly Hurdle
Rate
|
|
|
2.1875% |
|
125%
of the Current Quarter
Hurdle
|
|
$ |
9,390 |
|
Current
Quarter Pre Incentive Fee Net Investment
Income
|
|
$ |
29,377 |
|
Incentive Fee ―
"Catch-Up"
|
|
$ |
1,878 |
|
Incentive
Fee ― 20% in excess of 125% of the Current Quarter Hurdle
|
|
$ |
3,997 |
|
Total
Current Quarter Incentive
Fee
|
|
$ |
5,875 |
|
For a
more detailed discussion of the calculation of the two-part incentive fee, see
"Management ―
Management Services ― Investment Advisory Agreement."
(7)
|
The
table above assumes that we have borrowed all $200 million available under
our line of credit, although no plans are in place to borrow the full
amount under our line of credit. The table below shows our
estimated annual expenses as a percentage of net assets attributable to
common stock, assuming that we did not incur any
indebtedness.
|
Base
management
fee
|
|
|
2.11 |
% |
Incentive
fees payable under Investment Advisory Agreement (20% of realized capital
gains and 20% of
|
|
|
|
|
pre-incentive
fee net investment income)
|
|
|
5.44 |
% |
Interest
payments on borrowed
funds
|
|
None
|
|
Other
expenses
|
|
|
2.80 |
% |
Total
annual expenses
(estimated)
|
|
|
10.36 |
% |
(8)
|
"Other
expenses" is based on our annualized expenses during our quarter ended
September 30, 2008 representing all of our estimated recurring operating
expenses (except fees and expenses reported in other items of this table)
that are deducted from our operating income and reflected as expenses in
our Statement of Operations. The estimate of our overhead
expenses, including payments under an administration agreement with
Prospect Administration, or the Administration Agreement, based on our
projected allocable portion of overhead and other expenses incurred by
Prospect Administration in performing its obligations under the
Administration Agreement. "Other expenses" does not include
non-recurring expenses. See "Management ―
Management Services ― Administration
Agreement."
|
|
While
the example assumes, as required by the SEC, a 5% annual return, our
performance will vary and may result in a return greater or less than
5%. The income incentive fee under our Investment Advisory
Agreement with Prospect Capital Management would be zero at the 5% annual
return assumption, as required by the SEC for this table, since no
incentive fee is paid until the annual return exceeds 7%; however, the
income incentive fee currently being earned is nevertheless used to
aggregate total expenses in the example as if the annual return were at
the level recently achieved, which is higher than 5%, in accordance with
SEC requirements. Accordingly, the resulting calculations
overstate expenses at the 5% annual return as these calculations do not
reflect the provisions of the Investment Advisory Agreement as it would
actually be applied in the case of a 5% annual return. This
illustration assumes that we will not realize any capital gains computed
net of all realized capital losses and unrealized capital depreciation in
any of the indicated time periods. If we achieve sufficient
returns on our investments, including through the realization of capital
gains, to trigger an incentive fee of a material amount, our expenses, and
returns to our investors after such expenses, would be
higher. In addition, while the example assumes reinvestment of
all dividends and distributions at NAV, participants in our dividend
reinvestment plan will receive a number of shares of our common stock,
determined by dividing the total dollar amount of the dividend payable to
a participant by the market price per share of our common stock at the
close of trading on the valuation date for the dividend. See
"Dividend Reinvestment Plan" for additional information regarding our
dividend reinvestment plan.
|
This
example and the expenses in the table above should not be considered a
representation of our future expenses. Actual expenses (including the
cost of debt, if any, and other expenses) may be greater or less than those
shown.
SELECTED CONDENSED FINANCIAL
DATA
You
should read the condensed financial information below with the Financial
Statements and Notes thereto included in this prospectus. Financial
information for the twelve months ended June 30, 2008, 2007, 2006 and 2005 and
for the period from April 13, 2004 (inception) through June 30, 2004 has been
derived from the audited financial statements for that
period. Quarterly financial information is derived from unaudited
financial data, but in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) that are necessary to present
fairly the results of such interim periods. Interim results for the
three months ended September 30, 2008 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30,
2009. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" starting on page 24 for more
information.
|
|
For the
Year/Period Ended June 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004 (1)
|
(in
thousands except data relating to shares, per share and number of
portfolio companies)
|
Performance Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
59,033
|
|
|
$
|
30,084
|
|
|
$
|
13,268
|
|
|
$
|
4,586
|
|
|
$
|
—
|
|
Dividend
income
|
|
|
12,033
|
|
|
|
6,153
|
|
|
|
3,601
|
|
|
|
3,435
|
|
|
|
—
|
|
Other
income
|
|
|
8,336
|
|
|
|
4,444
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
Total
investment income
|
|
|
79,402
|
|
|
|
40,681
|
|
|
|
16,869
|
|
|
|
8,093
|
|
|
|
—
|
|
Interest
and credit facility expenses
|
|
|
(6,318
|
)
|
|
|
(1,903
|
)
|
|
|
(642
|
)
|
|
|
—
|
|
|
|
—
|
|
Investment
advisory expense
|
|
|
(20,199
|
)
|
|
|
(11,226
|
)
|
|
|
(3,868
|
)
|
|
|
(1,808
|
)
|
|
|
—
|
|
Other
expenses
|
|
|
(7,772
|
)
|
|
|
(4,421
|
)
|
|
|
(3,801
|
)
|
|
|
(3,874
|
)
|
|
|
(100
|
)
|
Total
expenses
|
|
|
(34,289
|
)
|
|
|
(17,550
|
)
|
|
|
(8,311
|
)
|
|
|
(5,682
|
)
|
|
|
(100
|
)
|
Net
investment income
|
|
|
45,113
|
|
|
|
23,131
|
|
|
|
8,558
|
|
|
|
2,411
|
|
|
|
(100
|
)
|
Realized
and unrealized gains (losses)
|
|
|
(17,522
|
)
|
|
|
(6,403
|
)
|
|
|
4,338
|
|
|
|
6,340
|
|
|
|
—
|
|
Net
increase in net assets from operations
|
|
$
|
27,591
|
|
|
$
|
16,728
|
|
|
$
|
12,896
|
|
|
$
|
8,751
|
|
|
$
|
(100
|
)
|
Per Share Data (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets from operations
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
$
|
1.83
|
|
|
$
|
1.24
|
|
|
|
na
|
|
Distributions
declared per share
|
|
$
|
(1.59
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.38
|
)
|
|
|
na
|
|
Average
weighted shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
period
|
|
|
23,626,642
|
|
|
|
15,724,095
|
|
|
|
7,056,846
|
|
|
|
7,055,100
|
|
|
|
100
|
|
Assets and Liabilities
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
497,530
|
|
|
$
|
328,222
|
|
|
$
|
133,969
|
|
|
$
|
55,030
|
|
|
$
|
—
|
|
Other
assets
|
|
|
44,248
|
|
|
|
48,280
|
|
|
|
4,511
|
|
|
|
48,879
|
|
|
|
1
|
|
Total
assets
|
|
|
541,778
|
|
|
|
376,502
|
|
|
|
138,480
|
|
|
|
103,909
|
|
|
|
1
|
|
Amount
drawn on credit facility
|
|
|
91,167
|
|
|
|
—
|
|
|
|
28,500
|
|
|
|
—
|
|
|
|
—
|
|
Amount
owed to related parties
|
|
|
6,641
|
|
|
|
4,838
|
|
|
|
745
|
|
|
|
77
|
|
|
|
100
|
|
Other
liabilities
|
|
|
14,347
|
|
|
|
71,616
|
|
|
|
965
|
|
|
|
865
|
|
|
|
—
|
|
Total
liabilities
|
|
|
112,155
|
|
|
|
76,454
|
|
|
|
30,210
|
|
|
|
942
|
|
|
|
100
|
|
Net
assets
|
|
$
|
429,623
|
|
|
$
|
300,048
|
|
|
$
|
108,270
|
|
|
|
102,967
|
|
|
$
|
99
|
|
Investment Activity
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of portfolio companies at period end
|
|
|
29
|
(3)
|
|
|
24
|
(3)
|
|
|
15
|
|
|
|
6
|
|
|
|
—
|
|
Acquisitions
|
|
$
|
311,947
|
|
|
$
|
167,255
|
|
|
$
|
83,625
|
|
|
$
|
79,018
|
|
|
$
|
—
|
|
Sales,
repayments, and other disposals
|
|
$
|
127,212
|
|
|
$
|
38,407
|
|
|
$
|
9,954
|
|
|
$
|
32,083
|
|
|
$
|
—
|
|
Weighted-Average
Yield (4)
|
|
|
15.5
|
%
|
|
|
17.1
|
%
|
|
|
17.0
|
%
|
|
|
21.3
|
%
|
|
|
na
|
|
(1)
|
For
the period April 13, 2004 (inception) through June 30,
2004
|
(2)
|
Per
share data is based on average weighted shares for the
period
|
(3)
|
Includes
a net profits interest in Charlevoix Energy Trading LLC ("Charlevoix"),
remaining after loan was paid
|
(4)
|
Includes
dividends from certain equity
investments
|
|
|
For
the Three Months
ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
(in
thousands except data relating to shares, per share and number of
portfolio companies)
|
|
Performance Data:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
17,556
|
|
|
$
|
12,832
|
|
|
Dividend
income
|
|
|
4,723
|
|
|
|
1,618
|
|
|
Other
income
|
|
|
13,520
|
|
|
|
941
|
|
|
Total
investment income
|
|
|
35,799
|
|
|
|
15,391
|
|
|
Interest
and credit facility expenses
|
|
|
(1,518
|
)
|
|
|
(1,238)
|
|
|
Investment
advisory expense
|
|
|
(8,698
|
)
|
|
|
(3,832)
|
|
|
Other
expenses
|
|
|
(2,081
|
)
|
|
|
(2,456)
|
|
|
Total
expenses
|
|
|
(12,297
|
)
|
|
|
(7,526)
|
|
|
Net
investment income
|
|
|
23,502
|
|
|
|
7,865
|
|
|
Realized
and unrealized gains (losses)
|
|
|
(9,504
|
)
|
|
|
685
|
|
|
Net
increase in net assets from operations
|
|
$
|
13,998
|
|
|
$
|
8,550
|
|
|
Per Share Data (1):
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets from operations
|
|
$
|
0.47
|
|
|
$
|
0.43
|
|
|
Distributions
declared per share
|
|
$
|
(0.40
|
)
|
|
$
|
(0.39)
|
|
|
Average
weighted shares outstanding for
|
|
|
|
|
|
|
|
|
|
the
period
|
|
|
29,520,379
|
|
|
|
19,958,466
|
|
|
Assets and Liabilities
Data:
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
549,303
|
|
|
$
|
352,257
|
|
|
Other
assets
|
|
|
38,415
|
|
|
|
17,484
|
|
|
Total
assets
|
|
|
587,718
|
|
|
|
369,741
|
|
|
Amount
drawn on credit facility
|
|
|
131,667
|
|
|
|
59,962
|
|
|
Amount
owed to related parties
|
|
|
9,669
|
|
|
|
4,728
|
|
|
Other
liabilities
|
|
|
14,643
|
|
|
|
3,040
|
|
|
Total
liabilities
|
|
|
155,979
|
|
|
|
67,730
|
|
|
Net
assets
|
|
$
|
431,739
|
|
|
$
|
302,011
|
|
|
Investment Activity
Data:
|
|
|
|
|
|
|
|
|
|
No.
of portfolio companies at period end
|
|
|
31
|
(2)
|
|
|
26
|
(2)
|
|
Acquisitions
|
|
$
|
57,460
|
|
|
$
|
40,243
|
|
|
Sales,
repayments, and other disposals
|
|
$
|
10,949
|
|
|
$
|
17,949
|
|
|
Weighted-Average
Yield (3)
|
|
|
14.1
|
%
|
|
|
15.8
|
|
|
(1)
|
Per
share data is based on average weighted shares for the
period
|
(2)
|
Includes
a net profits interest in Charlevoix Energy Trading LLC ("Charlevoix"),
remaining after loan was paid
|
(3)
|
Includes
dividends from certain equity
investments
|
RISK
FACTORS
Investing
in our Securities involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this prospectus, before you decide whether to make an
investment in our Securities. The risks set forth below are not the
only risks we face. If any of the adverse events or conditions
described below occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, our
NAV, and the trading price of our common stock could decline, or the value of
our preferred stock, debt securities, warrants may decline, and you may lose all
or part of your investment.
Risks
Relating To Our Business
Our
financial condition and results of operations will depend on our ability to
manage our future growth effectively.
Prospect
Capital Management has been registered as an investment adviser since March 31,
2004, and we have been organized as a closed-end investment company since April
13, 2004. As such, each entity is subject to the business risks and
uncertainties associated with any young business enterprise, including the
limited experience in managing or operating a business development company under
the 1940 Act. Our ability to achieve our investment objective depends on our
ability to grow, which depends, in turn, on our Investment Adviser's ability to
continue to identify, analyze, invest in and monitor companies that meet our
investment criteria. Accomplishing this result on a cost-effective basis is
largely a function of our Investment Adviser's structuring of investments, its
ability to provide competent, attentive and efficient services to us and our
access to financing on acceptable terms. As we grow, Prospect Capital Management
will need to continue to hire, train, supervise and manage new employees.
Failure to manage our future growth effectively could have a materially adverse
effect on our business, financial condition and results of
operations.
We
are dependent upon Prospect Capital Management's key management personnel for
our future success.
We depend
on the diligence, skill and network of business contacts of the senior
management of our Investment Adviser. We also depend, to a significant extent,
on our Investment Adviser's access to the investment professionals and the
information and deal flow generated by these investment professionals in the
course of their investment and portfolio management activities. The senior
management team of the Investment Adviser evaluates, negotiates, structures,
closes, monitors and services our investments. Our success depends to a
significant extent on the continued service of the senior management team,
particularly John F. Barry III and M. Grier Eliasek. The departure of any of the
senior management team could have a materially adverse effect on our ability to
achieve our investment objective. In addition, we can offer no assurance that
Prospect Capital Management will remain our investment adviser or that we will
continue to have access to its investment professionals or its information and
deal flow.
We
are a relatively new company with limited operating history.
We were
incorporated in April 2004 and have conducted investment operations since July
2004. We are subject to all of the business risks and uncertainties
associated with any new business enterprise, including the risk that we may not
fully achieve our investment objective or be able to obtain sufficient debt
financing for our portfolio and that the value of your investment in us could
decline substantially or fall to zero. Dividends that we pay prior to
being fully invested may be substantially lower than the dividends that we
expect to pay when our portfolio is fully invested and levered. If we
do not realize yields in excess of our expenses, we may incur operating losses
and the market price of our shares may decline.
We
operate in a highly competitive market for investment
opportunities.
A large
number of entities compete with us to make the types of investments that we make
in target companies. We compete with other business development companies,
public and private funds, commercial and investment banks and commercial
financing companies. Additionally, because competition for investment
opportunities generally has increased among alternative investment vehicles,
such as hedge funds, those entities have begun to invest in areas they have not
traditionally invested in, including investments in middle-market
companies.
As a result of these new entrants, competition for investment opportunities at
middle-market companies has intensified, a trend we expect to
continue.
Many of
our existing and potential competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
or fuller relationships with borrowers and sponsors than us. Furthermore, many
of our competitors are not subject to the regulatory restrictions that the 1940
Act imposes on us as a business development company. We cannot assure you that
the competitive pressures we face will not have a materially adverse effect on
our business, financial condition and results of operations. Also, as a result
of existing and increasing competition and our competitors ability to provide a
total package solution, we may not be able to take advantage of attractive
investment opportunities from time to time, and we can offer no assurance that
we will be able to identify and make investments that are consistent with our
investment objective.
We do not
seek to compete primarily based on the interest rates that we offer, and we
believe that some of our competitors make loans with interest rates that are
comparable to or lower than the rates we offer. We may lose investment
opportunities if we do not match our competitors' pricing, terms and structure.
If we match our competitors' pricing, terms and structure, we may experience
decreased net interest income and increased risk of credit loss.
Most
of our portfolio investments are recorded at fair value as determined in good
faith by our Board of Directors and, as a result, there is uncertainty as to the
value of our portfolio investments.
A large
percentage of our portfolio investments consist of securities of privately held
companies. Hence, market quotations are generally not readily available for
determining the fair values of such investments. The determination of fair
value, and thus the amount of unrealized losses we may incur in any year, is to
a degree subjective, and the Investment Adviser has a conflict of interest in
making the determination. We value these securities quarterly at fair value as
determined in good faith by our Board of Directors based on input from our
Investment Adviser, a third party independent valuation firm and our audit
committee. Our Board of Directors utilizes the services of an independent
valuation firm to aid it in determining the fair value of any securities. The
types of factors that may be considered in determining the fair values of our
investments include the nature and realizable value of any collateral, the
portfolio company's ability to make payments and its earnings, the markets in
which the portfolio company does business, comparison to publicly traded
companies, discounted cash flow, current market interest rates and other
relevant factors. Because such valuations, and particularly valuations of
private securities and private companies, are inherently uncertain, the
valuations may fluctuate significantly over short periods of time due to changes
in current market conditions. The determinations of fair value by our Board of
Directors may differ materially from the values that would have been used if an
active market and market quotations existed for these investments. Our net asset
value could be adversely affected if the determinations regarding the fair value
of our investments were materially higher than the values that we ultimately
realize upon the disposal of such securities.
Senior
securities, including debt, expose us to additional risks, including
the typical risks associated with leverage.
We
currently use our revolving credit facility to leverage our portfolio and we
expect in the future to borrow from and issue senior debt securities to banks
and other lenders and may securitize certain of our portfolio
investments.
With
certain limited exceptions, as a BDC we are only allowed to borrow amounts such
that our asset coverage, as defined in the 1940 Act, is at least 200% after such
borrowing. The amount of leverage that we employ will depend on our Investment
Adviser's and our Board of Directors' assessment of market conditions and other
factors at the time of any proposed borrowing. There is no assurance that a
leveraging strategy will be successful. Leverage involves risks and special
considerations for stockholders, including:
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A
likelihood of greater volatility in the net asset value and market price
of our common stock;
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Diminished
operating flexibility as a result of asset coverage or investment
portfolio composition requirements that are more stringent than those
imposed by the 1940 Act;
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The
possibility that investments will have to be liquidated at less than full
value or at inopportune times to comply with debt covenants or to pay
interest or dividends on the
leverage;
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Increased
operating expenses due to the cost of leverage, including issuance and
servicing costs;
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Convertible
or exchangeable securities issued in the future may have rights,
preferences and privileges more favorable than those of our common stock;
and
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Subordination
to lenders' superior claims on our assets as a result of which lenders
will be able to receive proceeds available in the case of our liquidation
before any proceeds are distributed to our
stockholders.
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For
example, the amount we may borrow under our revolving credit facility is
determined, in part, by the fair value of our investments. If the fair value of
our investments declines, we may be forced to sell investments at a loss to
maintain compliance with our borrowing limits. Other debt facilities we may
enter into in the future may contain similar provisions. Any such forced sales
would reduce our net asset value and also make it difficult for the net asset
value to recover.
Our
Investment Adviser and our Board of Directors in their best judgment
nevertheless may determine to use leverage if they expect that the benefits to
our stockholders of maintaining the leveraged position will outweigh the
risks.
Changes
in interest rates may affect our cost of capital and net investment
income.
A
significant portion of the debt investments we make bears interest at fixed
rates and the value of these investments could be negatively affected by
increases in market interest rates. In addition, as the interest rate on our
revolving credit facility is at a variable rate based on an index, an increase
in interest rates would make it more expensive to use debt to finance our
investments. As a result, a significant increase in market interest rates could
both reduce the value of our portfolio investments and increase our cost of
capital, which would reduce our net investment income.
We
need to raise additional capital to grow because we must distribute most of our
income.
We need
additional capital to fund growth in our investments. A reduction in the
availability of new capital could limit our ability to grow. We must distribute
at least 90% of our ordinary income and realized net short-term capital gains in
excess of realized net long-term capital losses, if any, to our stockholders to
maintain our RIC status. As a result, such earnings are not available to fund
investment originations. We have sought additional capital by borrowing from
financial institutions and may issue debt securities or additional equity
securities. If we fail to obtain funds from such sources or from other sources
to fund our investments, we could be limited in our ability to grow, which may
have an adverse effect on the value of our common stock. In addition, as a
business development company, we are generally required to maintain a ratio of
at least 200% of total assets to total borrowings, which may restrict our
ability to borrow in certain circumstances.
The
lack of liquidity in our investments may adversely affect our
business.
We
generally make investments in private companies. Substantially all of these
securities are subject to legal and other restrictions on resale or are
otherwise less liquid than publicly traded securities. The illiquidity of our
investments may make it difficult for us to sell such investments if the need
arises. In addition, if we are required to liquidate all or a portion of our
portfolio quickly, we may realize significantly less than the value at which we
have previously recorded our investments. In addition, we may face other
restrictions on our ability to liquidate an investment in a portfolio company to
the extent that we or our Investment Adviser has material non-public information
regarding such portfolio company.
We
may experience fluctuations in our quarterly results.
We could
experience fluctuations in our quarterly operating results due to a number of
factors, including the interest or dividend rates payable on the debt or equity
securities we acquire, the default rate on debt securities, the level of our
expenses, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets, the seasonality of the energy industry, weather patterns, changes in
energy prices and general economic conditions. As a result of these factors,
results for any period should not be relied upon as being indicative of
performance in future periods.
Potential
conflicts of interest could impact our investment returns.
Our
executive officers and directors, and the executive officers of our Investment
Adviser, Prospect Capital Management, may serve as officers, directors or
principals of entities that operate in the same or related lines of business as
we do or of investment funds managed by our affiliates. Accordingly, they may
have obligations to investors in those entities, the fulfillment of which might
not be in our best interests or those of our stockholders. Nevertheless, it is
possible that new investment opportunities that meet our investment objective
may come to the attention of one of these entities in connection with another
investment advisory client or program, and, if so, such opportunity might not be
offered, or otherwise made available, to us. However, as an investment adviser,
Prospect Capital Management has a fiduciary obligation to act in the best
interests of its clients, including us. To that end, if Prospect Capital
Management or its affiliates manage any additional investment vehicles or client
accounts in the future, Prospect Capital Management will endeavor to allocate
investment opportunities in a fair and equitable manner over time so as not to
discriminate unfairly against any client. If Prospect Capital Management chooses
to establish another investment fund in the future, when the investment
professionals of Prospect Capital Management identify an investment, they will
have to choose which investment fund should make the investment.
In the
course of our investing activities, under the Investment Advisory Agreement we
pay base management and incentive fees to Prospect Capital Management, and
reimburse Prospect Capital Management for certain expenses it incurs. As a
result of the Investment Advisory Agreement, there may be times when the senior
management team of Prospect Capital Management has interests that differ from
those of our stockholders, giving rise to a conflict.
Prospect
Capital Management receives a quarterly income incentive fee based, in part, on
our pre-incentive fee net investment income, if any, for the immediately
preceding calendar quarter. This income incentive fee is subject to a fixed
quarterly hurdle rate before providing an income incentive fee return to the
Investment Adviser. This fixed hurdle rate was determined when then current
interest rates were relatively low on a historical basis. Thus, if interest
rates rise, it would become easier for our investment income to exceed the
hurdle rate and, as a result, more likely that our Investment Adviser will
receive an income incentive fee than if interest rates on our investments
remained constant or decreased. Subject to the receipt of any requisite
stockholder approval under the 1940 Act, our Board of Directors may readjust the
hurdle rate by amending the Investment Advisory Agreement.
The
income incentive fee payable by us is computed and paid on income that may
include interest that has been accrued but not yet received in cash. If a
portfolio company defaults on a loan that has a deferred interest feature, it is
possible that interest accrued under such loan that has previously been included
in the calculation of the income incentive fee will become uncollectible. If
this happens, our Investment Adviser is not required to reimburse us for any
such income incentive fee payments. If we do not have sufficient liquid assets
to pay this incentive fee or distributions to stockholders on such accrued
income, we may be required to liquidate assets in order to do so. This fee
structure could give rise to a conflict of interest for our Investment Adviser
to the extent that it may encourage the Investment Adviser to favor debt
financings that provide for deferred interest, rather than current cash payments
of interest.
We have
entered into a royalty-free license agreement with Prospect Capital Management.
Under this agreement, Prospect Capital Management agrees to grant us a
non-exclusive license to use the name "Prospect Capital." Under the license
agreement, we have the right to use the "Prospect Capital" name for so long as
Prospect Capital Management or one of its affiliates remains our Investment
Adviser. In addition, we rent office space from Prospect Administration, an
affiliate of Prospect Capital Management, and pay Prospect Administration our
allocable portion of overhead and other expenses incurred by Prospect
Administration in performing its obligations as Administrator under the
Administration Agreement, including rent and our allocable portion of the costs
of our
chief
financial officer and chief compliance officer and their respective staffs. This
may create conflicts of interest that our Board of Directors
monitors.
Our
incentive fee could induce Prospect Capital Management to make speculative
investments.
The
incentive fee payable by us to Prospect Capital Management may create an
incentive for our Investment Adviser to make investments on our behalf that are
more speculative or involve more risk than would be the case in the absence of
such compensation arrangement. The way in which the incentive fee payable is
determined (calculated as a percentage of the return on invested capital) may
encourage the Investment Adviser to use leverage to increase the return on our
investments. Increased use of leverage and this increased risk of replacement of
that leverage at maturity, would increase the likelihood of default, which would
disfavor holders of our common stock. Similarly, because the Investment Adviser
will receive an incentive fee based, in part, upon net capital gains realized on
our investments, the Investment Adviser may invest more than would otherwise be
appropriate in companies whose securities are likely to yield capital gains, as
compared to income producing securities. Such a practice could result in our
investing in more speculative securities than would otherwise be the case, which
could result in higher investment losses, particularly during economic
downturns.
The
incentive fee payable by us to Prospect Capital Management could create an
incentive for our Investment Adviser to invest on our behalf in instruments,
such as zero coupon bonds, that have a deferred interest feature. Under these
investments, we would accrue interest income over the life of the investment but
would not receive payments in cash on the investment until the end of the term.
Our net investment income used to calculate the income incentive fee, however,
includes accrued interest. For example, accrued interest, if any, on our
investments in zero coupon bonds will be included in the calculation of our
incentive fee, even though we will not receive any cash interest payments in
respect of payment on the bond until its maturity date. Thus, a portion of this
incentive fee would be based on income that we may not have yet received in cash
and in the event of default may never receive.
Changes
in laws or regulations governing our operations may adversely affect our
business.
We and
our portfolio companies are subject to regulation by laws at the local, state
and U.S. Federal levels. These laws and regulations, as well as their
interpretation, may be changed from time to time. Accordingly, changes in these
laws or regulations could have a materially adverse effect on our business. For
additional information regarding the regulations we are subject to, see
"Regulation."
Risks
Relating To Our Operation As A Business Development Company
Our
Investment Adviser and its senior management team have limited experience
managing a business development company under the 1940 Act.
The 1940
Act imposes numerous constraints on the operations of business development
companies. For example, business development companies are, with narrow
exceptions, required to invest at least 70% of their total assets in securities
of certain privately held, thinly traded or distressed U.S. companies, cash,
cash equivalents, U.S. government securities and other high quality debt
investments that mature in one year or less. Our Investment Adviser's and its
senior management team's limited experience in managing a portfolio of assets
under such constraints may hinder their ability to take advantage of attractive
investment opportunities and, as a result, achieve our investment objective. In
addition, our investment strategies differ in some ways from those of other
investment funds that have been managed in the past by the investment
professionals.
A
failure on our part to maintain our status as a business development company
would significantly reduce our operating flexibility.
If we do
not continue to qualify as a business development company, we might be regulated
as a registered closed-end investment company under the 1940 Act; our failure to
qualify as a BDC would make us subject to additional regulatory requirements,
which may significantly decrease our operating flexibility by limiting our
ability to employ leverage.
If
we fail to qualify as a RIC, we will have to pay corporate-level taxes on our
income, and our income available for distribution would be reduced.
To
maintain our qualification for U.S. Federal income tax purposes as a RIC under
Subchapter M of the Code, and obtain RIC tax treatment, we must meet certain
source of income, asset diversification and annual distribution
requirements.
The
source of income requirement is satisfied if we derive at least 90% of our
annual gross income from interest, dividends, payments with respect to certain
securities loans, gains from the sale or other disposition of stock, securities
or options thereon or foreign currencies, or other income derived with respect
to our business of investing in such stock, securities or currencies, and net
income from interests in "qualified publicly traded partnerships," as defined in
the Code.
The
annual distribution requirement for a RIC is satisfied if we distribute at least
90% of our ordinary income and realized net short-term capital gains in excess
of realized net long-term capital losses, if any, to our stockholders on an
annual basis. Because we use debt financing, we are subject to certain asset
coverage ratio requirements under the 1940 Act and financial covenants that
could, under certain circumstances, restrict us from making distributions
necessary to qualify for RIC tax treatment. If we are unable to obtain cash from
other sources, we may fail to qualify for RIC tax treatment and, thus, may be
subject to corporate-level income tax.
To
maintain our qualification as a RIC, we must also meet certain asset
diversification requirements at the end of each calendar quarter. Failure to
meet these tests may result in our having to dispose of certain investments
quickly in order to prevent the loss of RIC status. Because most of our
investments are in private companies, any such dispositions could be made at
disadvantageous prices and may result in substantial losses.
If we
fail to qualify as a RIC for any reason or become subject to corporate income
tax, the resulting corporate taxes could substantially reduce our net assets,
the amount of income available for distribution, and the actual amount of our
distributions. Such a failure would have a materially adverse effect on us and
our stockholders. For additional information regarding asset coverage ratio and
RIC requirements, see "Regulation – Senior Securities" and "Material U.S.
Federal Income Tax Considerations".
Regulations
governing our operation as a business development company affect our ability to
raise, and the way in which we raise, additional capital.
We have
incurred indebtedness under our revolving credit facility and, in the future,
may issue preferred stock and/or borrow additional money from banks or other
financial institutions, which we refer to collectively as "senior securities,"
up to the maximum amount permitted by the 1940 Act. Under the provisions of the
1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior
securities only in amounts such that our asset coverage, as defined in the 1940
Act, equals at least 200% after each issuance of senior securities. If the value
of our assets declines, we may be unable to satisfy this test, which could
prohibit us from paying dividends and could prohibit us from qualifying as a
RIC. If we cannot satisfy this test, we may be required to sell a portion of our
investments or sell additional shares of common stock at a time when such sales
may be disadvantageous in order to repay a portion of our indebtedness. In
addition, issuance of additional common stock could dilute the percentage
ownership of our current stockholders in us.
As a BDC
regulated under provisions of the 1940 Act, we are not generally able to issue
and sell our common stock at a price below the current net asset value per
share. If our common stock trades at a discount to net asset value,
this restriction could adversely affect our ability to raise
capital. We may, however, sell our common stock, or warrants, options
or rights to acquire our common stock, at a price below the current net asset
value of our common stock in certain circumstances, including if (1) the holders
of a majority of our shares (or, if less, at least 67% of a quorum consisting of
a majority of our shares) and a similar majority of the holders of our shares
who are not affiliated persons of us approve the sale of our common stock at a
price that is less than the current net asset value, and (2) a majority of our
Directors who have no financial interest in the transaction and a majority of
our independent Directors (a) determine that such sale is in our and our
stockholders' best interests and (b) in consultation with any underwriter or
underwriters of the offering, make a good faith determination as of a time
either immediately prior to the first solicitation by us or on our behalf of
firm commitments to purchase such shares,
or
immediately prior to the issuance of such shares, that the price at which such
shares are to be sold is not less than a price which closely approximates the
market value of such shares, less any distributing commission or
discount.
To
generate cash for funding new investments, we pledged a substantial portion of
our portfolio investments under our revolving credit facility. These assets are
not available to secure other sources of funding or for securitization. Our
ability to obtain additional secured or unsecured financing on attractive terms
in the future is uncertain.
Alternatively,
we may securitize our future loans to generate cash for funding new investments.
To securitize loans, we may create a wholly owned subsidiary and contribute a
pool of loans to such subsidiary. This could include the sale of interests in
the loans by the subsidiary on a non-recourse basis to purchasers who we would
expect to be willing to accept a lower interest rate to invest in investment
grade loan pools. We would retain a portion of the equity in the securitized
pool of loans. An inability to successfully securitize our loan portfolio could
limit our ability to grow our business and fully execute our business strategy,
and could decrease our earnings, if any. Moreover, the successful securitization
of our loan portfolio exposes us to a risk of loss for the equity we retain in
the securitized pool of loans and might expose us to losses because the residual
loans in which we do not sell interests may tend to be those that are riskier
and more likely to generate losses. A successful securitization may also impose
financial and operating covenants that restrict our business activities and may
include limitations that could hinder our ability to finance additional loans
and investments or to make the distributions required to maintain our status as
a RIC under Subchapter M of the Code. The 1940 Act may also impose restrictions
on the structure of any securitizations.
Our
common stock may trade at a discount to our net asset value per
share.
Common
stock of BDCs, like that of closed-end investment companies, frequently trades
at a discount to current net asset value. Recently, our common stock has traded
at a discount to our net asset value, adversely affecting our ability to raise
capital. The risk that our common stock may continue to trade at a discount to
our net asset value is separate and distinct from the risk that our net asset
value per share may decline.
If
we sell common stock at a discount to our net asset value per share,
stockholders who do not participate in such sale will experience immediate
dilution in an amount that may be material.
We have
asked our stockholders for approval for us to be able to sell an unlimited
number of shares of our common stock at any level of discount from net asset
value per share in accordance with the exception described above in " –
Regulations governing our operation as a business development company affect our
ability to raise, and the way in which we raise, additional
capital." The issuance or sale by us of shares of our common stock at
a discount to net asset value poses a risk of dilution to our
stockholders. In particular, stockholders who do not purchase
additional shares at or below the discounted price in proportion to their
current ownership will experience an immediate decrease in net asset value per
share (as well as in the aggregate net asset value of their shares if they do
not participate at all). These stockholders will also experience a
disproportionately greater decrease in their participation in our earnings and
assets and their voting power than the increase we experience in our assets,
potential earning power and voting interests from such issuance or
sale. For additional information and hypothetical examples of these
risks, see "Sales of Common Stock Below Net Asset Value" and the prospectus
supplement pursuant to which such sale is made.
We
may have difficulty paying our required distributions if we recognize income
before or without receiving cash representing such income.
For U.S.
Federal income tax purposes, we include in income certain amounts that we have
not yet received in cash, such as original issue discount, which may arise if we
receive warrants in connection with the making of a loan or possibly in other
circumstances, or payment-in-kind interest, which represents contractual
interest added to the loan balance and due at the end of the loan term. Such
original issue discount, which could be significant relative to our overall
investment activities, or increases in loan balances as a result of
payment-in-kind arrangements, are included in our taxable income before we
receive any corresponding cash payments. We also may be required to include in
taxable income certain other amounts that we do not receive in cash. While we
focus primarily on investments that will generate a current cash return, our
investment portfolio currently includes, and we may continue to invest in,
securities that do not pay some or all of their return in periodic current cash
distributions.
The
income incentive fee payable by us is computed and paid on income that may
include interest that has been accrued but not yet received in cash. If a
portfolio company defaults on a loan that is structured to provide accrued
interest, it is possible that accrued interest previously used in the
calculation of the income incentive fee will become uncollectible.
Since in
some cases we may recognize taxable income before or without receiving cash
representing such income, we may have difficulty meeting the tax requirement to
distribute at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any, to
maintain RIC tax treatment. Accordingly, we may have to sell some of our
investments at times we would not consider advantageous, raise additional debt
or equity capital or reduce new investment originations to meet these
distribution requirements. If we are not able to obtain cash from other sources,
we may fail to qualify for RIC treatment and thus become subject to
corporate-level income tax. See "Regulation – Senior Securities" and "Material
U.S. Federal Income Tax Considerations".
Our
ability to enter into transactions with our affiliates is
restricted.
We are
prohibited under the 1940 Act from knowingly participating in certain
transactions with our affiliates without the prior approval of our independent
directors. Any person that owns, directly or indirectly, 5% or more of our
outstanding voting securities is our affiliate for purposes of the 1940 Act and
we are generally prohibited from buying or selling any security or other
property from or to such affiliate, absent the prior approval of our independent
directors. The 1940 Act also prohibits "joint" transactions with an affiliate,
which could include investments in the same portfolio company (whether at the
same or different times), without prior approval of our independent
directors. We are prohibited from buying or selling any security or
other property from or to our Investment Adviser and its affiliates and persons
with whom we are in a control relationship, or entering into joint transactions
with any such person, absent the prior approval of the SEC.
Risks
Relating To Our Investments
We
may not realize gains or income from our investments.
We seek
to generate both current income and capital appreciation. However, the
securities we invest in may not appreciate and, in fact, may decline in value,
and the issuers of debt securities we invest in may default on interest and/or
principal payments. Accordingly, we may not be able to realize gains from our
investments, and any gains that we do realize may not be sufficient to offset
any losses we experience. See "Business – Our Investment Objective and
Policies".
Our
portfolio is concentrated in a limited number of portfolio companies in the
energy industry, which subject us to a risk of significant loss if any of these
companies defaults on its obligations under any of the securities that we hold
or if the energy industry experiences a downturn.
As of
September 30, 2008, we had invested in a number of companies in the energy and
energy related industries. A consequence of this lack of diversification is that
the aggregate returns we realize may be significantly and adversely affected if
a small number of such investments perform poorly or if we need to write down
the value of any one investment. Beyond our income tax diversification
requirements, we do not have fixed guidelines for diversification, and our
investments are concentrated in relatively few portfolio companies. In addition,
to date we have concentrated on making investments in the energy industry. While
we expect to be less focused on the energy and energy related industries in the
future, we anticipate that we will continue to have significant holdings in the
energy and energy related industries. As a result, a downturn in the energy
industry could materially and adversely affect us.
The
energy industry is subject to many risks.
We have a
significant concentration in the energy industry. Our definition of energy, as
used in the context of the energy industry, is broad, and different sectors in
the energy industry may be subject to variable risks and economic pressures. As
a result, it is difficult to anticipate the impact of changing economic and
political conditions on our portfolio companies and, as a result, our financial
results. The revenues, income (or losses) and valuations of energy companies can
fluctuate suddenly and dramatically due to any one or more of the following
factors:
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Commodity Pricing Risk.
Energy companies in general are directly affected by energy commodity
prices, such as the market prices of crude oil, natural gas and wholesale
electricity, especially for those that own the underlying energy
commodity. In addition, the volatility of commodity prices can affect
other energy companies due to the impact of prices on the volume of
commodities transported, processed, stored or distributed and on the cost
of fuel for power generation companies. The volatility of commodity prices
can also affect energy companies' ability to access the capital markets in
light of market perception that their performance may be directly tied to
commodity prices. Historically, energy commodity prices have been cyclical
and exhibited significant volatility. Although we generally prefer risk
controls, including appropriate commodity and other hedges, by certain of
our portfolio companies, if available, some of our portfolio companies may
not engage in hedging transactions to minimize their exposure to commodity
price risk. For those companies that engage in such hedging transactions,
they remain subject to market risks, including market liquidity and
counterparty creditworthiness. In addition, such companies may also still
have exposure to market prices if such companies do not produce volumes or
other contractual obligations in accordance with such hedging
contracts.
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Regulatory Risk. The
profitability of energy companies could be adversely affected by changes
in the regulatory environment. The businesses of energy companies are
heavily regulated by U.S. Federal, state and local governments in diverse
ways, such as the way in which energy assets are constructed, maintained
and operated and the prices energy companies may charge for their products
and services. Such regulation can change over time in scope and intensity.
For example, a particular by-product of an energy process may be declared
hazardous by a regulatory agency, which can unexpectedly increase
production costs. Moreover, many state and U.S. Federal environmental laws
provide for civil penalties as well as regulatory remediation, thus adding
to the potential liability an energy company may face. In addition, the
deregulation of energy markets and the unresolved regulatory issues
related to some power markets such as California create uncertainty in the
regulatory environment as rules and regulations may be adopted on a
transitional basis. We cannot assure you that the deregulation of energy
markets will continue and if it continues, whether its impact on energy
companies' profitability will be positive.
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Production Risk. The
profitability of energy companies may be materially impacted by the volume
of crude oil, natural gas or other energy commodities available for
transporting, processing, storing, distributing or power generation. A
significant decrease in the production of natural gas, crude oil, coal or
other energy commodities, due to the decline of production from existing
facilities, import supply disruption, depressed commodity prices,
political events, Organization of Petroleum Exporting Countries actions or
otherwise, could reduce revenue and operating income or increase operating
costs of energy companies and, therefore, their ability to pay debt or
dividends.
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Demand Risk. A
sustained decline in demand for crude oil, natural gas, refined petroleum
products and electricity could materially affect revenues and cash flows
of energy companies. Factors that could lead to a decrease in market
demand include a recession or other adverse economic conditions, an
increase in the market price of the underlying commodity, higher taxes or
other regulatory actions that increase costs, or a shift in consumer
demand for such products.
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Depletion and Exploration
Risk. A portion of any one energy company's assets may be dedicated
to natural gas, crude oil and/or coal reserves and other commodities that
naturally deplete over time. Depletion could have a materially adverse
impact on such company's ability to maintain its revenue. Further,
estimates of energy reserves may not be accurate and, even if accurate,
reserves may not be fully utilized at reasonable costs. Exploration of
energy resources, especially of oil and gas, is inherently risky and
requires large amounts of capital.
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Weather Risk.
Unseasonable extreme weather patterns could result in significant
volatility in demand for energy and power. In addition, hurricanes,
storms, tornados, floods, rain, and other significant weather events could
disrupt supply and other operations at our portfolio companies as well as
customers or suppliers to such companies. This volatility may create
fluctuations in earnings of energy companies.
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Operational Risk.
Energy companies are subject to various operational risks, such as
failed drilling or well development, unscheduled outages, underestimated
cost projections, unanticipated operation
and
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maintenance
expenses, failure to obtain the necessary permits to operate and failure
of third-party contractors (for example, energy producers and shippers) to
perform their contractual obligations. In addition, energy companies
employ a variety of means of increasing cash flow, including increasing
utilization of existing facilities, expanding operations through new
construction, expanding operations through acquisitions, or securing
additional long-term contracts. Thus, some energy companies may be subject
to construction risk, acquisition risk or other risk factors arising from
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Competition Risk. The
progress in deregulating energy markets has created more competition in
the energy industry. This competition is reflected in risks associated
with marketing and selling energy in the evolving energy market and a
competitor's development of a lower-cost energy or power source, or of a
lower cost means of operations, and other risks arising from
competition.
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Valuation Risk. Since
mid-2001, excess power generation capacity in certain regions of the
United States has caused substantial decreases in the market
capitalization of many energy companies. While such prices have recovered
to some extent, we can offer no assurance that such decreases in market
capitalization will not recur, or that any future decreases in energy
company valuations will be insubstantial or temporary in
nature.
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Terrorism Risk. Since
the September 11th attacks, the U.S. government has issued public warnings
indicating that energy assets, specifically those related to pipeline
infrastructure, production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity. The continued
threat of terrorism and related military activity will likely increase
volatility for prices of natural gas and oil and could affect the market
for products and services of energy companies. In addition, any future
terrorist attack or armed conflict in the United States or elsewhere may
undermine economic conditions in the United States in
general.
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Financing Risk. Some of
our portfolio companies rely on the capital markets to raise money to pay
their existing obligations. Their ability to access the capital markets on
attractive terms or at all may be affected by any of the risks associated
with energy companies described above, by general economic and market
conditions or by other factors. This may in turn affect their ability to
satisfy their obligations with us.
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Our
investments in prospective portfolio companies may be risky and we could lose
all or part of our investment.
Some of
our portfolio companies have relatively short or no operating histories. These
companies are and will be subject to all of the business risk and uncertainties
associated with any new business enterprise, including the risk that these
companies may not reach their investment objective and the value of our
investment in them may decline substantially or fall to zero.
In
addition, investment in the middle market companies that we are targeting
involves a number of other significant risks, including:
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these
companies may have limited financial resources and may be unable to meet
their obligations under their securities that we hold, which may be
accompanied by a deterioration in the value of their securities or of any
collateral with respect to any securities and a reduction in the
likelihood of our realizing on any guarantees we may have obtained in
connection with our investment;
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they
may have shorter operating histories, narrower product lines and smaller
market shares than larger businesses, which tend to render them more
vulnerable to competitors' actions and market conditions, as well as
general economic downturns;
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because
many of these companies are privately held companies, public information
is generally not available about these companies. As a result, we will
depend on the ability of our Investment Adviser to obtain adequate
information to evaluate these companies in making investment decisions. If
our Investment Adviser is unable to uncover all material information about
these companies, it may not make a fully informed investment decision, and
we may lose money on our investments;
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they
are more likely to depend on the management talents and efforts of a small
group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a materially
adverse impact on our portfolio company and, in turn, on
us;
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they
may have less predictable operating results, may from time to time be
parties to litigation, may be engaged in changing businesses with products
subject to a risk of obsolescence and may require substantial additional
capital to support their operations, finance expansion or maintain their
competitive position; and
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they
may have difficulty accessing the capital markets to meet future capital
needs.
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In
addition, our executive officers, directors and our Investment Adviser could, in
the ordinary course of business, be named as defendants in litigation arising
from proposed investments or from our investments in the portfolio
companies.
Economic
recessions or downturns could impair our portfolio companies and harm our
operating results.
The U.S.
and most other economies have entered a recessionary period, which may be
prolonged and severe. Our portfolio companies will generally be
affected by the conditions and overall strength of the national, regional and
local economies, including interest rate fluctuations, changes in the capital
markets and changes in the prices of their primary commodities and products.
These factors also impact the amount of residential, industrial and commercial
growth in the energy industry. Additionally, these factors could adversely
impact the customer base and customer collections of our portfolio
companies.
As a
result, many of our portfolio companies may be susceptible to economic slowdowns
or recessions and may be unable to repay our loans or meet other obligations
during these periods. Therefore, our non-performing assets are likely to
increase, and the value of our portfolio is likely to decrease, during these
periods. Adverse economic conditions also may decrease the value of collateral
securing some of our loans and the value of our equity investments. Economic
slowdowns or recessions could lead to financial losses in our portfolio and a
decrease in revenues, net income and assets. Unfavorable economic conditions
also could increase our funding costs, limit our access to the capital markets
or result in a decision by lenders not to extend credit to us. These events
could prevent us from increasing investments and harm our operating
results.
A
portfolio company's failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, termination of
its loans and foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio company's
ability to meet its obligations under the debt or equity securities that we
hold. We may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms, which may include the waiver of certain
financial covenants, with a defaulting portfolio company. In addition, if one of
our portfolio companies were to go bankrupt, even though we may have structured
our interest as senior debt or preferred equity, depending on the facts and
circumstances, including the extent to which we actually provided managerial
assistance to that portfolio company, a bankruptcy court might re-characterize
our debt or equity holding and subordinate all or a portion of our claim to
those of other creditors.
The
lack of liquidity in our investments may adversely affect our
business.
We make
investments in private companies. A portion of these investments may be subject
to legal and other restrictions on resale, transfer, pledge or other disposition
or will otherwise be less liquid than publicly traded securities. The
illiquidity of our investments may make it difficult for us to sell such
investments if the need arises. In addition, if we are required to liquidate all
or a portion of our portfolio quickly, we may realize significantly less than
the value at which we have previously recorded our investments. In addition, we
face other restrictions on our ability to liquidate an investment in a business
entity to the extent that we or our investment adviser has or could be deemed to
have material non-public information regarding such business
entity.
We
may have limited access to information about privately held companies in which
we invest.
We invest
primarily in privately-held companies. Generally, little public information
exists about these companies, and we are required to rely on the ability of our
Investment Adviser's investment professionals to obtain
adequate
information to evaluate the potential returns from investing in these companies.
These companies and their financial information are not subject to the
Sarbanes-Oxley Act and other rules that govern public companies. If we are
unable to uncover all material information about these companies, we may not
make a fully informed investment decision, and we may lose money on our
investment.
We
may not be in a position to control a portfolio investment when we are a debt or
minority equity investor and its management may make decisions that could
decrease the value of our investment.
We make
both debt and minority equity investments in portfolio companies. As a result,
we are subject to the risk that a portfolio company may make business decisions
with which we disagree, and the management of such company, as representatives
of the holders of their common equity, may take risks or otherwise act in ways
that do not serve our interests. As a result, a portfolio company may make
decisions that could decrease the value of our portfolio holdings.
Our
portfolio companies may incur debt or issue equity securities that rank equally
with, or senior to, our investments in such companies.
We may
invest in mezzanine debt and dividend-paying equity securities issued by our
portfolio companies. Our portfolio companies usually have, or may be permitted
to incur, other debt, or issue other equity securities, that rank equally with,
or senior to, the securities in which we invest. By their terms, such
instruments may provide that the holders are entitled to receive payment of
dividends, interest or principal on or before the dates on which we are entitled
to receive payments in respect of the securities in which we invest. Also, in
the event of insolvency, liquidation, dissolution, reorganization or bankruptcy
of a portfolio company, holders of securities ranking senior to our investment
in that portfolio company would typically be entitled to receive payment in full
before we receive any distribution in respect of our investment. After repaying
the senior security holders, the portfolio company may not have any remaining
assets to use for repaying its obligation to us. In the case of securities
ranking equally with securities in which we invest, we would have to share on an
equal basis any distributions with other security holders in the event of an
insolvency, liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
We
may not be able to fully realize the value of the collateral securing our debt
investments.
Although
a substantial amount of our debt investments are protected by holding security
interests in the assets of the portfolio companies, we may not be able to fully
realize the value of the collateral securing our investments due to one or more
of the following factors:
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our
debt investments are primarily made in the form of mezzanine loans,
therefore our liens on the collateral, if any, are subordinated to those
of the senior secured debt of the portfolio companies, if any. As a
result, we may not be able to control remedies with respect to the
collateral;
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the
collateral may not be valuable enough to satisfy all of the obligations
under our secured loan, particularly after giving effect to the repayment
of secured debt of the portfolio company that ranks senior to our
loan;
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bankruptcy
laws may limit our ability to realize value from the collateral and may
delay the realization process;
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our
rights in the collateral may be adversely affected by the failure to
perfect security interests in the collateral;
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the
need to obtain regulatory and contractual consents could impair or impede
how effectively the collateral would be liquidated and could affect the
value received; and
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some
or all of the collateral may be illiquid and may have no readily
ascertainable market value. The liquidity and value of the collateral
could be impaired as a result of changing economic conditions,
competition, and other factors, including the availability of suitable
buyers.
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Our
investments in foreign securities may involve significant risks in addition to
the risks inherent in U.S. investments.
Our
investment strategy contemplates potential investments in securities of foreign
companies. Investing in foreign companies may expose us to additional risks not
typically associated with investing in U.S. companies. These risks include
changes in exchange control regulations, political and social instability,
expropriation, imposition of foreign taxes, less liquid markets and less
available information than is generally the case in the United States, higher
transaction costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards and greater price
volatility.
Although
currently most of our investments are, and we expect that most of our
investments will be, U.S. dollar-denominated, our investments that are
denominated in a foreign currency will be subject to the risk that the value of
a particular currency will change in relation to one or more other currencies.
Among the factors that may affect currency values are trade balances, the level
of short-term interest rates, differences in relative values of similar assets
in different currencies, long-term opportunities for investment and capital
appreciation, and political developments.
We
may expose ourselves to risks if we engage in hedging transactions.
We may
employ hedging techniques to minimize certain investment risks, such as
fluctuations in interest and currency exchange rates, but we can offer no
assurance that such strategies will be effective. If we engage in hedging
transactions, we may expose ourselves to risks associated with such
transactions. We may utilize instruments such as forward contracts, currency
options and interest rate swaps, caps, collars and floors to seek to hedge
against fluctuations in the relative values of our portfolio positions from
changes in currency exchange rates and market interest rates. Hedging against a
decline in the values of our portfolio positions does not eliminate the
possibility of fluctuations in the values of such positions or prevent losses if
the values of such positions decline. However, such hedging can establish other
positions designed to gain from those same developments, thereby offsetting the
decline in the value of such portfolio positions. Such hedging transactions may
also limit the opportunity for gain if the values of the portfolio positions
should increase. Moreover, it may not be possible to hedge against an exchange
rate or interest rate fluctuation that is so generally anticipated that we are
not able to enter into a hedging transaction at an acceptable
price.
The
success of our hedging transactions depends on our ability to correctly predict
movements, currencies and interest rates. Therefore, while we may enter into
such transactions to seek to reduce currency exchange rate and interest rate
risks, unanticipated changes in currency exchange rates or interest rates may
result in poorer overall investment performance than if we had not engaged in
any such hedging transactions. The degree of correlation between price movements
of the instruments used in a hedging strategy and price movements in the
portfolio positions being hedged may vary. Moreover, for a variety of reasons,
we may not seek to establish a perfect correlation between such hedging
instruments and the portfolio holdings being hedged. Any such imperfect
correlation may prevent us from achieving the intended hedge and expose us to
risk of loss. In addition, it may not be possible to hedge fully or perfectly
against currency fluctuations affecting the value of securities denominated in
non-U.S. currencies.
Our
Board of Directors may change our operating policies and strategies without
prior notice or stockholder approval, the effects of which may be adverse to us
and could impair the value of our stockholders' investment.
Our Board
of Directors has the authority to modify or waive our current operating policies
and our strategies without prior notice and without stockholder approval. We
cannot predict the effect any changes to our current operating policies and
strategies would have on our business, financial condition, and value of our
common stock. However, the effects might be adverse, which could negatively
impact our ability to pay dividends and cause stockholders to lose all or part
of their investment.
Risks
Relating To Our Securities
Investing
in our securities may involve a high degree of risk.
The
investments we make in accordance with our investment objective may result in a
higher amount of risk than alternative investment options and volatility or loss
of principal. Our investments in portfolio companies may be speculative and
aggressive, and therefore, an investment in our shares may not be suitable for
someone with low risk tolerance.
The
market price of our securities may fluctuate significantly.
The
market price and liquidity of the market for our securities may be significantly
affected by numerous factors, some of which are beyond our control and may not
be directly related to our operating performance. These factors
include:
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significant
volatility in the market price and trading volume of securities of
business development companies or other companies in the energy industry,
which are not necessarily related to the operating performance of these
companies;
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changes
in regulatory policies or tax guidelines, particularly with respect to
RICs or business development companies;
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loss
of RIC qualification;
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changes
in earnings or variations in operating results;
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changes
in the value of our portfolio of investments;
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any
shortfall in revenue or net income or any increase in losses from levels
expected by investors or securities analysts;
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departure
of one or more of Prospect Capital Management's key
personnel;
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operating
performance of companies comparable to us;
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changes
in prevailing interest rates;
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general
economic trends and other external factors; and
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loss
of a major funding source.
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Sales
of substantial amounts of our securities in the public market may have an
adverse effect on the market price of our securities.
As of
January 28, 2009, we have 29,786,128 shares of common stock outstanding. Sales
of substantial amounts of our securities or the availability of such securities
for sale could adversely affect the prevailing market price for our securities.
If this occurs and continues it could impair our ability to raise additional
capital through the sale of securities should we desire to do so.
There
is a risk that you may not receive dividends or that our dividends may not grow
over time.
We have
made and intend to continue to make distributions on a quarterly basis to our
stockholders out of assets legally available for distribution. We cannot assure
you that we will achieve investment results or maintain a tax status that will
allow or require any specified level of cash distributions or year-to-year
increases in cash distributions. In addition, due to the asset coverage test
applicable to us as a business development company, we may be limited in our
ability to make distributions.
Provisions
of the Maryland General Corporation Law and of our charter and bylaws could
deter takeover attempts and have an adverse impact on the price of our common
stock.
Our
charter and bylaws and the Maryland General Corporation Law contain provisions
that may have the effect of delaying, deferring or preventing a transaction or a
change in control that might involve a premium price for our stockholders or
otherwise be in their best interest. These provisions may prevent you
from being able to sell shares of our common stock at a premium over the current
of prevailing market prices.
Our
charter provides for the classification of our Board of Directors into three
classes of directors, serving staggered three-year terms, which may render a
change of control or removal of our incumbent management more difficult.
Furthermore, any and all vacancies on our Board of Directors will be filled
generally only by the affirmative vote of a majority of the remaining directors
in office, even if the remaining directors do not constitute a quorum, and any
director elected to fill a vacancy will serve for the remainder of the full term
until a successor is elected and qualifies.
Our Board
of Directors is authorized to create and issue new series of shares, to classify
or reclassify any unissued shares of stock into one or more classes or series,
including preferred stock and, without stockholder approval, to amend our
charter to increase or decrease the number of shares of common stock that we
have authority to issue, which could have the effect of diluting a stockholder's
ownership interest. Prior to the issuance of shares of common stock of each
class or series, including any reclassified series, our Board of Directors is
required by our governing documents to set the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
class or series of shares of stock.
Our
charter and bylaws also provide that our Board of Directors has the exclusive
power to adopt, alter or repeal any provision of our bylaws, and to make new
bylaws. The Maryland General Corporation Law also contains certain provisions
that may limit the ability of a third party to acquire control of us, such
as:
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The
Maryland Business Combination Act, which, subject to certain limitations,
prohibits certain business combinations between us and an "interested
stockholder" (defined generally as any person who beneficially owns
10% or more of the voting power of the common stock or an affiliate
thereof) for five years after the most recent date on which the
stockholder becomes an interested stockholder and, thereafter, imposes
special minimum price provisions and special stockholder voting
requirements on these combinations; and
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The
Maryland Control Share Acquisition Act, which provides that "control
shares" of a Maryland corporation (defined as shares of common stock
which, when aggregated with other shares of common stock controlled by the
stockholder, entitles the stockholder to exercise one of three increasing
ranges of voting power in electing directors) acquired in a "control share
acquisition" (defined as the direct or indirect acquisition of ownership
or control of "control shares") have no voting rights except to the extent
approved by stockholders by the affirmative vote of at least two-thirds of
all the votes entitled to be cast on the matter, excluding all interested
shares of common stock.
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The
provisions of the Maryland Business Combination Act will not apply, however, if
our Board of Directors adopts a resolution that any business combination between
us and any other person will be exempt from the provisions of the Maryland
Business Combination Act. Although our Board of Directors has adopted such a
resolution, there can be no assurance that this resolution will not be altered
or repealed in whole or in part at any time. If the resolution is altered or
repealed, the provisions of the Maryland Business Combination Act may discourage
others from trying to acquire control of us.
As
permitted by Maryland law, our bylaws contain a provision exempting from the
Maryland Control Share Acquisition Act any and all acquisitions by any person of
our common stock. Although our bylaws include such a provision, such a provision
may also be amended or eliminated by our Board of Directors at any time in the
future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION\
AND
RESULTS OF OPERATIONS
(All
figures in this item are in thousands except per share and other
data)
The
following discussion should be read in conjunction with our financial statements
and related notes and other financial information appearing elsewhere in this
prospectus. In addition to historical information, the following
discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information due
to the factors discussed under "Risk Factors" and "Forward-Looking Statements"
appearing elsewhere herein.
Overview
Introduction
We are a
financial services company that primarily lends and invests in middle market,
privately-held companies. We are a closed-end investment company that
has filed an election to be treated as a business development company under the
1940 Act. We invest primarily in senior and subordinated debt and
equity of companies in need of capital for acquisitions, divestitures, growth,
development, project financing and recapitalization. We work with the
management teams or financial sponsors to seek investments with historical cash
flows, asset collateral or contracted pro-forma cash flows.
We seek
to be a long-term investor with our portfolio companies. To date we
have invested primarily in industries related to the industrial/energy
economy. However, we continue to widen our strategy focus in other
sectors of the economy to diversify our portfolio holdings.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, or
GAAP. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Changes in the economic
environment, financial markets and any other parameters used in determining such
estimates could cause actual results to differ materially. In
addition to the discussion below, our critical accounting policies are further
described in the notes to the financial statements.
Basis
of Consolidation
Under the
1940 Act rules, the regulations pursuant to Article 6 of
Regulation S-X, and the American Institute of Certified Public Accountants'
Audit and Accounting Guide for Investment Companies, we are precluded from
consolidating any entity other than another registered investment company or an
operating company which provides substantially all of its services and benefits
to us. Our September 30, 2008, June 30, 2008, and
September 30, 2007 financial statements include our accounts and the
accounts of Prospect Capital Funding, LLC, our only wholly-owned,
closely-managed subsidiary that is also an investment company. All
intercompany balances and transactions have been eliminated in
consolidation.
Investment
Classification
We are a
non-diversified company within the meaning of the 1940 Act. We
classify our investments by level of control. As defined in the 1940
Act, control investments are those where there is the ability or power to
exercise a controlling influence over the management or policies of a
company. Control is generally presumed to exist when a company or
individual possesses beneficial ownership of 25% or more of the voting
securities of an investee company. Affiliated investments and
affiliated companies are defined by a lesser degree of influence and are deemed
to exist through possession beneficial ownership of 5% or more of the
outstanding voting securities of another person.
Investments
are recognized when we assume an obligation to acquire a financial instrument
and assume the risks for gains or losses related to that
instrument. Investments are derecognized when we assume an obligation
to sell a financial instrument and forego the risks for gains or losses related
to that instrument. Specifically, we record all security transactions
on a trade date basis. Investments in other, non-security financial
instruments are recorded on the basis of subscription date or redemption date,
as applicable. Amounts for investments recognized or derecognized but
not yet settled are reported as Receivables for investments sold and Payables
for investments purchased, respectively, in the Consolidated Statements of
Assets and Liabilities.
Investment
Valuation
Our Board
of Directors has established procedures for the valuation of our investment
portfolio. These procedures are detailed below.
Investments
for which market quotations are readily available are valued at such market
quotations.
Short-term
investments that mature in 60 days or less and are viewed as creditworthy,
such as U.S. Treasury Bills, are valued at amortized cost, which approximates
fair value. The amortized cost method involves recording a security
at its cost (i.e., principal amount plus any premium and less any discount) on
the date of purchase and thereafter amortizing/ accreting that difference
between the principal amount due at maturity and cost assuming a constant yield
to maturity as determined at the time of purchase. Short-term
securities that mature in more than 60 days are valued at current market
quotations by an independent pricing service or at the mean between the bid and
ask prices obtained from at least two brokers or dealers (if available, or
otherwise by a principal market maker or a primary market
dealer). Investments in money market mutual funds are valued at their
net asset value as of the close of business on the day of
valuation.
For most
of our investments, market quotations are not available. With respect
to investments for which market quotations are not readily available or when
such market quotations are deemed not to represent fair value, our Board of
Directors has approved a multi-step valuation process each quarter, as described
below:
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our
quarterly valuation process begins with each portfolio company or
investment being reviewed by our investment professionals with the
independent valuation firm;
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the
independent valuation firm engaged by our Board of Directors conducts
independent appraisals and makes their own independent
assessment;
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the
audit committee of our Board of Directors reviews and discusses the
preliminary valuation of our Investment Adviser and that of the
independent valuation firm; and
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the
Board of Directors discusses the valuations and determines the fair value
of each investment in our portfolio in good faith based on the input of
our Investment Adviser, the independent valuation firm and the audit
committee.
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Investments
are valued utilizing a market approach, an income approach, or both approaches,
as appropriate. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities (including a business). The income approach
uses valuation techniques to convert future amounts (for example, cash flows or
earnings) to a single present amount (discounted). The measurement is
based on the value indicated by current market expectations about those future
amounts. In following these approaches, the types of factors that we
may take into account in fair value pricing our investments include, as
relevant: available current market data, including relevant and applicable
market trading and transaction comparables, applicable market yields and
multiples, security covenants, call protection provisions, information rights,
the nature and realizable value of any collateral, the portfolio company's
ability to make payments, its earnings and discounted cash flows, the markets in
which the portfolio company does business, comparisons of financial ratios of
peer companies that are public, M&A comparables, the principal market and
enterprise values, among other factors.
In
September, 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements", or FAS 157. FAS 157 defines fair value,
establishes a
framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those years. We have adopted this statement on a
prospective basis beginning in the quarter ended September 30,
2008. Adoption of this statement did not have a material effect on
our financial statements for the quarter ended September 30,
2008.
FAS No. 157
classifies the inputs used to measure these fair values into the following
hierarchy:
Level 1: Quoted prices in
active markets for identical assets or liabilities, accessible by the Company at
the measurement date.
Level 2: Quoted prices for
similar assets or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active, or other
observable inputs other than quoted prices.
Level 3: Unobservable inputs
for the asset or liability.
In all
cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level
of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
each investment.
The
changes to generally accepted accounting principles from the application of
FAS 157 relate to the definition of fair value, framework for measuring
fair value, and the expanded disclosures about fair value
measurements. FAS 157 applies to fair value measurements already
required or permitted by other standards. In accordance with
FAS 157, the fair value of our investments is defined as the price that we
would receive upon selling an investment in an orderly transaction to an
independent buyer in the principal or most advantageous market in which that
investment is transacted.
Revenue
Recognition
Realized
gains or losses on the sale of investments are calculated using the specific
identification method.
Interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing and/or commitment
fees associated with investments in portfolio companies are accreted into
interest income over the respective terms of the applicable
loans. Upon the prepayment of a loan or debt security, any prepayment
penalties and unamortized loan origination, closing and commitment fees are
recorded as interest income.
Dividend
income is recorded on the ex-dividend date.
Structuring
fees and similar fees are recognized as income as earned, usually when
paid. Structuring fees, excess deal deposits, net profits interests
and overriding royalty interest are included in other income.
Loans are
placed on non-accrual status when principal or interest payments are past due
90 days or more or when there is reasonable doubt that principal or
interest will be collected. Accrued interest is generally reversed
when a loan is placed on non-accrual status. Interest payments
received on non-accrual loans may be recognized as income or applied to
principal depending upon management's judgment. Non-accrual loans are
restored to accrual status when past due principal and interest is paid and in
management's judgment, are likely to remain current. At
September 30, 2008 two loans extended to Integrated Contract Services,
Inc., or Integrated, and one loan extended to Worcester Energy Partners, Inc.,
or WEPI, were on non-accrual status. The loan principal of these
loans amounted to $54,420 at September 30, 2008.
Statement
of Assets and Liabilities Overview
During
the three months ended September 30, 2008, net assets have increased by
$2,116 from $429,623 to $431,739. This net increase in assets
resulted from a $13,998 increase from operations, offset by $11,882 in dividends
declared to our stockholders. We recognized net investment income of
$23,502 during the quarter and net
realized
gains on investments of $1,645 that was offset by a decrease in net assets due
to changes in unrealized appreciation/ depreciation of investments of
$11,149. The result was the $13,998 increase in net assets resulting
from operations.
The
aggregate value of our portfolio investments was $549,303 and $497,530 as of
September 30, 2008 and June 30, 2008, respectively. During
the three months ended September 30, 2008, our net cost of investments
increased by $62,922, or 12.7%, as we invested in 3 new investments and
follow-on investments while we sold one investment, received repayment on
another investment, and settled the net profit interests on a third
investment. This increased level of investment was financed by
increased borrowings on our credit facility and from funds generated from
operations. At September 30, 2008, we are invested in 31
long-term portfolio investments (including a net profits interest remaining in
Charlevoix Energy Trading LLC, or Charlevoix).
During
the fiscal year ended June 30, 2008, net assets increased by $129,575, from
$300,048 to $429,623. This increase resulted from the issuance of new
shares of our common stock (less offering costs) in the amount of $138,744,
dividend reinvestments of $2,753, and another $27,591 from
operations. These increases, in turn, were offset by $39,513 in
dividend distributions to our stockholders. The $27,591 increase in
net assets resulting from operations is net of the following: Net
investment income of $45,113, realized loss on investments of $16,222, and a net
decrease in net assets due to changes in unrealized appreciation/depreciation of
investments of $1,300. The realized losses were mainly due to the
sale of Central Illinois Energy, LLC, or CIE, and Advantage Oilfield Group Ltd.,
or AOG. The net unrealized depreciation was driven by significant
write-downs in our investments in, Integrated, WEPI, and our coal holdings
(Whymore, Genesis, North Fork Collieries LLC, or North Fork, and Unity Virginia
Holdings LLC, or Unity – now consolidated into Yatesville), which, in turn, were
almost offset by write-ups for our investments in GSHI, and by the disposition
of previously written-down investments in AOG and in ESA.
The
aggregate value of our portfolio investments was $497,530 and $328,222 as of
June 30, 2008 and June 30, 2007, respectively. During the
fiscal year ended June 30, 2008, our net cost of investments increased by
$170,608, or 51.6%, as we invested in 15 new and follow-on investments while we
sold three investments and we received repayment on five other
investments.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reported period. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
Investment
Activity
During
the three months ended September 30, 2008, we completed 3 new investments
and several follow-on investments in existing portfolio companies, totaling
approximately $70,036. The more significant of these investments are
described briefly in the following:
On
August 1, 2008, we provided $7,400 in debt financing to Castro Cheese
Company, Inc., or Castro, based in Houston, Texas. Castro is a
leading manufacturer, marketer, and distributor of Hispanic cheeses and
creams.
On
August 4, 2008, we provided $15,000 in debt financing to support the
take-private acquisition of the TriZetto Group, or TriZetto. TriZetto
is a leading healthcare information technology company.
On
August 21, 2008, we provided a $26,000 senior secured debt financing and
co-invested $2,300 in equity alongside Great Point Partners, LLC, or
Great Point, in its growth recapitalization of BNN Holdings
Corp. d/b/a Biotronic NeuroNetwork, or Biotronic, based in Ann Arbor,
Michigan. Biotronic is the largest independent national provider of
intra-operative neurophysiological monitoring services.
On
July 23, 2008 and September 8, 2008 we made follow-on secured debt
investments of $400 and $2,700, respectively in Iron Horse Coiled Tubing, Inc.,
or Iron Horse, in support of the build out of additional equipment.
During
the year ended June 30, 2008, we completed 15 new investments and several
follow-on investments in existing portfolio companies, totaling approximately
$311,947. The more significant of these investments are described
briefly in the following:
On
July 31, 2007, we provided $15,000 growth financing to Wind River, a
privately-held oil and gas production business based in Salt Lake City,
Utah. The investment was in the form of senior secured notes with a
net profits interest.
On
August 8, 2007, we provided $6,000 growth and recapitalization financing to
Deep Down, a deepwater drilling services and manufacturing provider based in
Houston, Texas. The investment was in the form of senior secured
notes and warrants.
On
August 28, 2007, we provided $9,200 growth and recapitalization financing
to Diamondback, an oil and gas production company based in Tulsa,
Oklahoma. The investment was in the form of senior secured notes with
a net profits interest.
On
October 9, 2007, we made a second lien debt investment of $9,750 in Resco
Products, Inc., a leading designer and manufacturer of refractory materials
based in Pittsburgh, Pennsylvania.
On
October 17, 2007, we made a $3,000 follow-on secured debt investment in
NRG, in support of NRG's acquisition of Dynafab Corporation, or
Dynafab. Dynafab is a manufacturer of a range of metal structures and
vessels for use in the oil and gas and transportation industries, including fuel
tanks for on-road and off-road vehicles as well as various drilling rig
components.
On
October 19, 2007, we made a second lien debt investment of approximately
$5,000 in a leading provider of outsourced technical services based in
Pennsylvania. The Company's investment is supporting the acquisition
of this service provider by HM Capital Partners, L.P., or HM, a
$1.6 billion private equity fund based in Dallas, Texas. HM's
investment professionals previously were principals with Hicks, Muse, Tate &
Furst, Inc.
On
November 1, 2007, we made a second lien secured debt investment, as well as
a small equity co-investment, aggregating approximately $13,750 in Maverick
Healthcare Group, L.L.C. (d/b/a Preferred Homecare) a leading comprehensive home
healthcare services provider based in Mesa, Arizona.
On
November 5, 2007, we invested approximately $18,000 in second lien secured
financing in Shearer's, a snack food manufacturer based in Brewster, Ohio, with
Winston Partners as the private equity financial sponsor.
On
November 9, 2007, we made a second lien debt investment of $12,000 in
Qualitest, and its affiliates, a leading manufacturer and distributor of generic
pharmaceuticals based in Huntsville, Alabama.
On
November 14, 2007, we entered into an agreement to invest in a second lien
secured debt from Deb Shops of $15,000. This transaction was
consummated on December 10, 2007. Deb Shops is a leading
specialty apparel retailer based in Philadelphia, Pennsylvania.
On
November 21, 2007, we provided combined debt financing of $25,386 to IEC
and ARS, two related oilfield service companies based in Houston,
Texas. This investment took the form of two separate senior secured
instruments with cross-collateralized guarantees and a NPI in each
company.
On
February 11, 2008, we made a $5,121 senior secured loan to North Fork, a
Kentucky-based mining and coal production company. We also have a
controlling equity interest in North Fork.
On
March 5, 2008, we made an additional secured Term C debt investment of
approximately $6,500 in Unitek Acquisition, Inc., or Unitek, a leading provider
of outsourced technical services based in Blue Bell, Pennsylvania. We
have now extended in the aggregate $11,500 of debt capital to
Unitek.
On
March 14, 2008, we provided debt financing of $14,500 to support the
acquisition of American Gilsonite Company, or AGC by a private equity firm based
in New York. AGC is a specialty mineral company with operations based
in Bonanza, Utah. Furthermore, we made an additional $1,000
investment in the equity of AGC.
On
April 3, 2008, we provided $39,800 of first and second lien debt and equity
for the recapitalization of Ajax, a custom forger of seamless rolled steel rings
located in York, South Carolina. Our debt is secured by a first lien
on inventory, machinery, and certain other assets of Ajax. The equity
interest purchased in Ajax is controlling in nature and was made alongside
equity co-investments by Ajax's senior managers.
On
April 30, 2008, we provided debt financing of $20,000 to support the
acquisition by Peerless, headquartered in Dallas, Texas, of
Nitram. Peerless is a leading designer, manufacturer, and marketer of
industrial environmental separation and filtration systems while Nitram focuses
on separation, heat transfer, pulsation dampening, and industrial silencing
products. Peerless and Nitram serve a diversified, global list of
customers in industries such as oil and gas production, gas pipelines, chemical
and petrochemical processing, and power generation.
During
the three months ended September 30, 2008, we closed-out 2 positions which
are briefly described below.
On
July 3, 2008, we exercised our warrant for 4,960,585 shares of common stock
in Deep Down, Inc., or Deep Down. As permitted by the terms of the
warrant, we elected to make this exercise on a cashless basis entitling us to
2,618,129 common shares. On August 1, 2008, we sold all the
shares acquired receiving $1,649 of net proceeds.
On
August 27, 2008, R-V Industries, Inc., or R-V repaid the $7,526 debt
outstanding to us.
On
September 30, 2008, we settled our net profits interests, or NPIs, in IEC
Systems LP, or IEC and Advanced Rig Services LLC, or ARS, with the companies for
a combined $12,576. IEC and ARS originally issued the NPIs to us when
we loaned a combined $25,600 to IEC and ARS on November 20,
2007. In conjunction with the NPI realization, we simultaneously
reinvested the $12,576 as incremental senior secured debt in IEC and
ARS. The incremental debt will amortize over the period ending
November 20, 2010.
For the
year ended June 30, 2008, we closed-out seven positions which are briefly
described below.
On
August 16, 2007, Arctic completely paid its loan with an additional
prepayment penalty of $461 for the loan. Including the prepayment
premium, we realized a 20% cash internal rate of return on this investment,
representing 1.25 times cash on cash (not including the equity investments that
the Company continues to hold). On April 30, 2008, we fully
exited out of our investment in Arctic through the sale of our equity interest
in Arctic for approximately $3,400.
On
December 5, 2007, we received $5,099 from the sale of our debt investment
in CIE, an ethanol project.
On
December 28, 2007 and December 31, 2007, we entered into two
agreements which monetized our investment in AOG. These transactions
generated aggregate proceeds of $3,939 for us.
On
February 20, 2008, Ken-Tex Energy Corp., or Ken-Tex, repaid the $10,800
debt that it owed us. As part of the transaction, we also sold back
our NPI and overriding royalty interest, ORRI, in Ken-Tex. In
addition to the debt repayment, this transaction generated $3,300 in the form of
a prepayment penalty and the sale of the NPI and ORRI.
On
March 5, 2008, we closed out our position of common shares of Evolution
Petroleum Corp. , or Evolution, at a gain of $486.
On
March 31, 2008, TLOGH, L.P. repaid the $15,500 debt that it owed to
us.
On
June 6, 2008, Deep Down repaid the $12,000 debt that it owed
us. We realized an approximately 29% cash-on-cash internal rate of
return, or IRR on the Deep Down investment, representing a 1.2 times
cash-on-cash multiple, from a prepayment premium of approximately $450, upfront
fees, and interest. At June 30, 2008, we own a warrant to
purchase approximately 5.0 million shares of Deep Down common stock at an
exercise price of $0.507 per share. On July 3, 2008, we
exercised our warrant on a cashless basis entitling us to 2,618,129 common
shares. On August 1, 2008, we sold all the shares acquired
receiving $1,649 of net proceeds.
The
following is a quarter-by-quarter summary of our investment
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
2008
|
|
$ |
70,456 |
|
|
$ |
10,949 |
|
June
30,
2008
|
|
|
118,913 |
|
|
|
61,148 |
|
March
31,
2008
|
|
|
31,794 |
|
|
|
28,891 |
|
December
31,
2007
|
|
|
120,846 |
|
|
|
19,223 |
|
September
30,
2007
|
|
|
40,394 |
|
|
|
17,949 |
|
June
30,
2007
|
|
|
130,345 |
|
|
|
9,857 |
|
March
31,
2007
|
|
|
19,701 |
|
|
|
7,731 |
|
December
31,
2006
|
|
|
62,679 |
|
|
|
17,796 |
|
September
30,
2006
|
|
|
24,677 |
|
|
|
2,781 |
|
June
30,
2006
|
|
|
42,783 |
|
|
|
5,752 |
|
March
31,
2006
|
|
|
15,732 |
|
|
|
901 |
|
December
31,
2005
|
|
|
— |
|
|
|
3,523 |
|
September
30,
2005
|
|
|
25,342 |
|
|
|
— |
|
June
30,
2005
|
|
|
17,544 |
|
|
|
— |
|
March
31,
2005
|
|
|
7,332 |
|
|
|
— |
|
December
31,
2004
|
|
|
23,771 |
|
|
|
32,083 |
|
September
30,
2004
|
|
|
30,371 |
|
|
|
— |
|
Since
inception
|
|
$ |
782,680 |
|
|
$ |
218,584 |
|
(1)
|
Includes
new deals, additional fundings, refinancings and PIK
interest.
|
(2)
|
Includes
scheduled principal payments, prepayments and
refinancings.
|
Investment
Holdings
As of
September 30, 2008, we continued to pursue our investment
strategy. Despite our name change to "Prospect Capital Corporation"
and the termination of our policy to invest at least 80% of our net assets in
energy companies, we currently have a concentration of investments in companies
in the energy and energy related industries. Some of the companies in
which we invest have relatively short or no operating
histories. These companies are and will be subject to all of the
business risk and uncertainties associated with any new business enterprise,
including the risk that these companies may not reach their investment objective
or the value of our investment in them may decline substantially or fall to
zero.
Our
portfolio had an annualized current yield of 15.5% and 15.5% across all our
long-term debt and certain equity investments as of September 30, 2008 and
September 30, 2007, respectively. This yield includes interest
from all of our long-term investments as well as dividends from Gas Solutions
Holdings, Inc., or GSHI, NRG Manufacturing, Inc., or NRG and Ajax Rolled Ring
& Machine, or Ajax. We expect the current yield to decline over
time as we increase the size of the portfolio. Monetization of other
equity positions that we hold is not included in this yield
calculation. In each of our portfolio companies, we hold equity
positions, ranging from minority interests to majority stakes, which we expect
over time to contribute to our investment returns. Some of these
equity positions include features such as contractual minimum internal rates of
returns, preferred distributions, flip structures and other features expected to
generate additional investment returns, as well as contractual protections and
preferences over junior equity, in addition to the yield and security offered by
our cash flow and collateral debt protections.
We
classify our investments by level of control. As defined in the 1940
Act, control investments are those where there is the ability or power to
exercise a controlling influence over the management or policies of a
company. Control is generally deemed to exist when a company or
individual possesses or has the right to acquire within 60 days or less, a
beneficial ownership of 25% or more of the voting securities of an investee
company. Affiliated investments and affiliated companies are defined
by a lesser degree of influence and are deemed to exist through the possession
outright or via the right to acquire within 60 days or less, beneficial
ownership of 5% or more of the outstanding voting securities of another
person.
As of
September 30, 2008, we own controlling interests in Ajax Rolled Ring &
Machine, or Ajax, C&J Cladding, LLC, or C&J, GSHI, Integrated, Iron
Horse, NRG, R-V, WEPI and Yatesville Coal Holdings, Inc., or
Yatesville. We also own affiliated interests in Appalachian Energy
Holdings, LLC, or AEH, and Biotronic.
The
following is a summary of our investment portfolio by level of control at
September 30, 2008 and 2007:
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
|
|
$ |
202,324 |
|
|
|
35.0 |
|
|
$ |
145,645 |
|
|
|
40.1 |
|
Affiliate
|
|
|
33,392 |
|
|
|
5.8 |
|
|
|
14,631 |
|
|
|
4.0 |
|
Non-Control/Non-Affiliate
|
|
|
313,587 |
|
|
|
54.2 |
|
|
|
191,981 |
|
|
|
52.8 |
|
Money
Market Funds
|
|
|
28,658 |
|
|
|
5.0 |
|
|
|
11,348 |
|
|
|
3.1 |
|
Total
Portfolio
|
|
$ |
577,961 |
|
|
|
100.0 |
|
|
$ |
363,605 |
|
|
|
100.0 |
|
As of
June 30, 2008, we own controlling interests in Ajax, C&J, GSHI,
Integrated, Iron Horse, NRG, R-V, WEPI, and Yatesville. We also own
an affiliated interest in AEH.
The
following is a summary of our investment portfolio by level of control at June
30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
|
|
$ |
205,827 |
|
|
|
38.8 |
% |
|
$ |
145,121 |
|
|
|
39.5 |
% |
Affiliate
|
|
|
6,043 |
|
|
|
1.2 |
% |
|
|
14,625 |
|
|
|
4.0 |
% |
Non-Control/Non-Affiliate
|
|
|
285,660 |
|
|
|
53.8 |
% |
|
|
168,476 |
|
|
|
45.2 |
% |
Money
Market
Funds
|
|
|
33,000 |
|
|
|
6.2 |
% |
|
|
41,760 |
|
|
|
11.3 |
% |
Total
Portfolio
|
|
$ |
530,530 |
|
|
|
100.0 |
% |
|
$ |
369,982 |
|
|
|
100.0 |
% |
The
following is our investment portfolio presented by type of investment at
September 30, 2008 and September 30, 2007, respectively:
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market Funds
|
|
$ |
28,658 |
|
|
|
5.0 |
|
|
$ |
11,348 |
|
|
|
3.1 |
|
Senior
Secured Debt
|
|
|
265,582 |
|
|
|
46.0 |
|
|
|
218,282 |
|
|
|
60.0 |
|
Subordinated
Secured Debt
|
|
|
201,769 |
|
|
|
34.9 |
|
|
|
79,001 |
|
|
|
21.7 |
|
Preferred
Stock
|
|
|
8,732 |
|
|
|
1.5 |
|
|
|
120 |
|
|
|
0.1 |
|
Common
Stock
|
|
|
62,136 |
|
|
|
10.7 |
|
|
|
51,301 |
|
|
|
14.1 |
|
Membership
Interests
|
|
|
3,447 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
0.0 |
|
Warrants
|
|
|
7,637 |
|
|
|
1.3 |
|
|
|
3,553 |
|
|
|
1.0 |
|
Total
Portfolio
|
|
$ |
577,961 |
|
|
|
100.0 |
|
|
$ |
363,605 |
|
|
|
100.0 |
|
The
following is our investment portfolio presented by type of investment at
June 30, 2008 and June 30, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market Funds
|
|
$ |
33,000 |
|
|
|
6.2 |
% |
|
$ |
41,760 |
|
|
|
11.3 |
% |
Senior
Secured Debt
|
|
|
203,985 |
|
|
|
38.5 |
% |
|
|
202,243 |
|
|
|
54.7 |
% |
Subordinated
Secured Debt
|
|
|
215,585 |
|
|
|
40.6 |
% |
|
|
78,905 |
|
|
|
21.3 |
% |
Preferred
Stock
|
|
|
6,455 |
|
|
|
1.2 |
% |
|
|
106 |
|
|
|
0.0 |
% |
Common
Stock
|
|
|
59,563 |
|
|
|
11.2 |
% |
|
|
43,517 |
|
|
|
11.8 |
% |
Membership
Interests
|
|
|
3,000 |
|
|
|
0.6 |
% |
|
|
— |
|
|
|
0.0 |
% |
Warrants
|
|
|
8,942 |
|
|
|
1.7 |
% |
|
|
3,451 |
|
|
|
0.9 |
% |
Total
Portfolio
|
|
$ |
530,530 |
|
|
|
100.0 |
% |
|
$ |
369,982 |
|
|
|
100.0 |
% |
The
following is our investment portfolio presented by geographic location of the
investment at September 30, 2008 and September 30, 2007,
respectively:
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$ |
12,800 |
|
|
|
2.2 |
|
|
$ |
19,847 |
|
|
|
5.5 |
|
Midwest
US
|
|
|
75,890 |
|
|
|
13.1 |
|
|
|
36,965 |
|
|
|
10.2 |
|
Northeast
US
|
|
|
57,522 |
|
|
|
10.0 |
|
|
|
43,940 |
|
|
|
12.1 |
|
Southeast
US
|
|
|
128,463 |
|
|
|
22.2 |
|
|
|
69,055 |
|
|
|
19.0 |
|
Southwest
US
|
|
|
229,575 |
|
|
|
39.7 |
|
|
|
167,450 |
|
|
|
46.0 |
|
Western
US
|
|
|
45,053 |
|
|
|
7.8 |
|
|
|
15,000 |
|
|
|
4.1 |
|
Money
Market Funds
|
|
|
28,658 |
|
|
|
5.0 |
|
|
|
11,348 |
|
|
|
3.1 |
|
Total
Portfolio
|
|
$ |
577,961 |
|
|
|
100.00 |
|
|
$ |
363,605 |
|
|
|
100.0 |
|
The
following is our investment portfolio presented by geographic location of the
investment at June 30, 2008 and June 30, 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western
US
|
|
$ |
30,322 |
|
|
|
5.7 |
% |
|
$ |
— |
|
|
|
0.0 |
% |
Southeast
US
|
|
|
128,512 |
|
|
|
24.2 |
% |
|
|
70,545 |
|
|
|
19.1 |
% |
Southwest
US
|
|
|
211,177 |
|
|
|
39.9 |
% |
|
|
157,097 |
|
|
|
42.5 |
% |
Midwest
US
|
|
|
47,869 |
|
|
|
9.0 |
% |
|
|
36,942 |
|
|
|
10.0 |
% |
Northeast
US
|
|
|
68,468 |
|
|
|
12.9 |
% |
|
|
44,558 |
|
|
|
12.0 |
% |
Canada
|
|
|
11,182 |
|
|
|
2.1 |
% |
|
|
19,080 |
|
|
|
5.1 |
% |
Money
Market Funds
|
|
|
33,000 |
|
|
|
6.2 |
% |
|
|
41,760 |
|
|
|
11.3 |
% |
Total
Portfolio
|
|
$ |
530,530 |
|
|
|
100.0 |
% |
|
$ |
369,982 |
|
|
|
100.0 |
% |
The
following is our investment portfolio presented by industry sector of the
investment at September 30, 2008 and September 30, 2007,
respectively:
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biofuels/Ethanol
|
|
$ |
— |
|
|
|
0.0 |
|
|
$ |
8,000 |
|
|
|
2.2 |
|
Biomass
Power
|
|
|
12,202 |
|
|
|
2.1 |
|
|
|
24,413 |
|
|
|
6.7 |
|
Construction
Services
|
|
|
5,189 |
|
|
|
0.9 |
|
|
|
16,000 |
|
|
|
4.4 |
|
Contracting
|
|
|
5,000 |
|
|
|
0.9 |
|
|
|
5,000 |
|
|
|
1.4 |
|
Financial
Services
|
|
|
22,987 |
|
|
|
4.0 |
|
|
|
25,000 |
|
|
|
6.9 |
|
Food
Products
|
|
|
27,281 |
|
|
|
4.7 |
|
|
|
— |
|
|
|
0.0 |
|
Gas
Gathering and Processing
|
|
|
63,454 |
|
|
|
11.0 |
|
|
|
45,000 |
|
|
|
12.4 |
|
Healthcare
|
|
|
56,717 |
|
|
|
9.8 |
|
|
|
— |
|
|
|
0.0 |
|
Manufacturing
|
|
|
102,735 |
|
|
|
17.8 |
|
|
|
48,664 |
|
|
|
13.4 |
|
Metal
Services
|
|
|
7,821 |
|
|
|
1.3 |
|
|
|
5,837 |
|
|
|
1.6 |
|
Mining
and Coal Production
|
|
|
27,891 |
|
|
|
4.8 |
|
|
|
16,970 |
|
|
|
4.6 |
|
Oilfield
Fabrication
|
|
|
37,109 |
|
|
|
6.4 |
|
|
|
— |
|
|
|
0.0 |
|
Oil
and Gas Production
|
|
|
110,449 |
|
|
|
19.1 |
|
|
|
134,494 |
|
|
|
37.0 |
|
Pharmaceuticals
|
|
|
11,332 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
0.0 |
|
Production
Services
|
|
|
12,800 |
|
|
|
2.2 |
|
|
|
16,253 |
|
|
|
4.5 |
|
Retail
|
|
|
12,407 |
|
|
|
2.1 |
|
|
|
— |
|
|
|
0.0 |
|
Shipping
Vessels
|
|
|
6,675 |
|
|
|
1.1 |
|
|
|
6,626 |
|
|
|
1.8 |
|
Specialty
Minerals
|
|
|
15,911 |
|
|
|
2.8 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
|
11,343 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
0.0 |
|
Money
Market Funds
|
|
|
28,658 |
|
|
|
5.0 |
|
|
|
11,348 |
|
|
|
3.1 |
|
Total
Portfolio
|
|
$ |
577,961 |
|
|
|
100.0 |
|
|
$ |
363,605 |
|
|
|
100.0 |
|
The
following is our investment portfolio presented by industry sector of the
investment at June 30, 2008 and June 30, 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biofuels/Ethanol
|
|
$ |
— |
|
|
|
0.0 |
% |
|
$ |
8,000 |
|
|
|
2.1 |
% |
Biomass
Power
|
|
|
15,580 |
|
|
|
2.9 |
% |
|
|
25,047 |
|
|
|
6.8 |
% |
Construction
Services
|
|
|
6,043 |
|
|
|
1.1 |
% |
|
|
15,305 |
|
|
|
4.1 |
% |
Contracting
|
|
|
5,000 |
|
|
|
0.9 |
% |
|
|
5,000 |
|
|
|
1.3 |
% |
Financial
Services
|
|
|
23,699 |
|
|
|
4.5 |
% |
|
|
25,000 |
|
|
|
6.8 |
% |
Food
Products
|
|
|
19,351 |
|
|
|
3.7 |
% |
|
|
— |
|
|
|
0.0 |
% |
Gas
Gathering and Processing
|
|
|
61,542 |
|
|
|
11.6 |
% |
|
|
44,500 |
|
|
|
12.0 |
% |
Healthcare
|
|
|
13,752 |
|
|
|
2.6 |
% |
|
|
— |
|
|
|
0.0 |
% |
Manufacturing
|
|
|
109,542 |
|
|
|
20.7 |
% |
|
|
41,376 |
|
|
|
11.2 |
% |
Metal
Services
|
|
|
6,829 |
|
|
|
1.3 |
% |
|
|
5,829 |
|
|
|
1.6 |
% |
Mining
and Coal Production
|
|
|
25,726 |
|
|
|
4.9 |
% |
|
|
18,499 |
|
|
|
5.0 |
% |
Oilfield
Fabrication
|
|
|
24,854 |
|
|
|
4.7 |
% |
|
|
— |
|
|
|
0.0 |
% |
Oil
and Gas Production
|
|
|
112,850 |
|
|
|
21.3 |
% |
|
|
110,243 |
|
|
|
29.8 |
% |
Pharmaceuticals
|
|
|
11,523 |
|
|
|
2.2 |
% |
|
|
— |
|
|
|
0.0 |
% |
Production
Services
|
|
|
14,038 |
|
|
|
2.6 |
% |
|
|
22,870 |
|
|
|
6.2 |
% |
Retail
|
|
|
13,428 |
|
|
|
2.5 |
% |
|
|
— |
|
|
|
0.0 |
% |
Shipping
Vessels
|
|
|
6,804 |
|
|
|
1.3 |
% |
|
|
6,553 |
|
|
|
1.8 |
% |
Specialty
Minerals
|
|
|
15,632 |
|
|
|
2.9 |
% |
|
|
— |
|
|
|
0.0 |
% |
Technical
Services
|
|
|
11,337 |
|
|
|
2.1 |
% |
|
|
— |
|
|
|
0.0 |
% |
Money
Market Funds
|
|
|
33,000 |
|
|
|
6.2 |
% |
|
|
41,760 |
|
|
|
11.3 |
% |
Total
Portfolio
|
|
$ |
530,530 |
|
|
|
100.0 |
% |
|
$ |
369,982 |
|
|
|
100.0 |
% |
Investment
Valuation
In
determining the fair value of our portfolio investments at September 30,
2008, the Audit Committee considered valuations from the independent valuation
firm and from management having an aggregate range of $519,641 to $570,010,
excluding money market investments. In determining the fair value of
our portfolio investments at June 30, 2008, the Audit Committee considered
valuations from the independent valuation firm and from management having an
aggregate range of $471,291 to $513,775.
Several
general economic factors have occurred during the past year which have affected
the valuation of our investment portfolio.
Generally,
interest rates offered on loans similar to those that we have originated have
changed since our investments were consummated. While we do not
believe that there has been any diminution of credit quality, general changes in
current interest rates would affect the price for which we could sell these
assets and we have adjusted our fair value of these assets to reflect such
changes. At September 30, 2008, we have adjusted the value of
thirteen debt investments based upon such general changes in market interest
rates including: AEH, Biotronic, C&J, Deb Shops, Inc., or Deb Shops,
Diamondback Operating, LP, or Diamondback, H&M Oil & Gas, LLC, Freedom
Marine Services LLC, Maverick Healthcare Group, L.L.C., Qualitest
Pharmaceuticals, Inc., or Qualitest, Regional Management Corp., or Regional,
Shearer's Foods, Inc., or Shearer's, Stryker Energy, LLC, or Stryker, and
TriZetto. At June 30, 2008, we have adjusted the value of nine debt
investments based upon such general changes in market interest rates
including: AEH, C&J, Deb Shops, Diamondback, Jettco Marine
Services LLC, Qualitest, Regional, Shearer's, and Stryker.
Three
debt investments were made to companies that are not performing in line with
budget expectations. These investments (Conquest Cherokee, LLC, or
Conquest, Iron Horse, and Wind River Resources Corp. and Wind River II
Corp., collectively Wind River) are adequately collateralized and we expect full
recovery. For these assets, we used higher market interest rates to
take into account the increased credit risk and general changes in current
interest rates for similar assets to determine their fair value.
Control
investments offer increased risk and reward over straight debt
investments. Operating results and changes in market multiples can
result in dramatic changes in values from quarter to
quarter. Significant downturns in operations can further result in
our looking to recoveries on sales of assets rather than the enterprise value of
the
investment. Several
control assets in our portfolio are under enhanced scrutiny by our senior
management and our Board of Directors and are discussed below.
Gas
Solutions Holdings, Inc.
GSHI is
an investment that we made in September 2004 and own 100% of the
equity. GSHI is a midstream gathering and processing business located
in East Texas. GSHI has improved its operations and experienced an
increase in revenue, gross margin, and EBITDA (the latter two metrics on both an
absolute and a percentage of revenues basis) over the past four
years.
In late
December 2007, we engaged RBC Capital Markets Corporation as a financial
advisor to explore strategic alternatives, including a potential
sale. We have been in discussions with multiple interested purchasers
for GSHI and have not yet entered into a binding
agreement. Significant negotiations continue. While we
wish to unlock the value we see in GSHI, we do not wish to enter into any
agreement at any time that does not recognize the long term value we see in
GSHI. As an almost fully hedged midstream asset generating
predictable and consistent cash flow to us, GSHI is an asset that we wish to
sell at a value-maximizing price, or not at all. We have a patient
approach toward the process. A sale of the assets, rather than the
stock of GSHI, might result in a significant tax liability at the GSHI level
which will need to be paid prior to any distribution to us.
In late
March 2008, Royal Bank of Canada provided a $38 million term loan to
Gas Solutions II Ltd., a wholly owned subsidiary of GSHI, the proceeds of which
were used to refinance all of the approximately $8 million of outstanding
senior secured debt held by Citibank N.A. (formerly known as Citibank Texas,
N.A. and First American Bank, SSB) as well as to make a $30 million cash
distribution to GSHI. We have non-recourse access to this cash at
GSHI.
In early
May 2008, Gas Solutions II Ltd. purchased a series of propane puts at $0.10
out of the money and at prices of $1.53 per gallon and $1.394 per gallon
covering the periods May 1, 2008, through April 30, 2009, and
May 1, 2009, through April 30, 2010, respectively. These
hedges have been executed at close to the highest market propane prices ever
achieved on an historical basis; such hedges preserve the upside of Gas
Solutions II Ltd. to benefit from potential future increases in commodity
prices. GSHI has generated approximately $19.5 million of
unadjusted plant operating income for the first eight months ending
August 31, 2008. Annualizing the current year results, this is
an increase of 126.7% from the 2007 results.
In
determining the value of GSHI, we have utilized three methods to derive the
enterprise value: the market approach, income approach, and the indicative value
from several letters of interest. These methods offer a wide range of
values and our Board of Directors has determined the value to be $63,454 (after
tax) and $61,542 (after tax) for our debt and equity positions at
September 30, 2008 and June 30, 2008, respectively. GSHI has
been valued at $38,212 above its amortized cost, compared to the $36,321
unrealized gain recorded at June 30, 2008 and compared to the $21,222
unrealized gain recorded at June 30, 2007.
Integrated
Contract Services, Inc.
Our
investment in Integrated is under enhanced review by our senior management team
due to existing or potential payment and/or covenant defaults under the
contracts governing these investments. Integrated owns the assets of
ESA Environmental Specialists, Inc., or ESA, and 100% of the stock of The
Healing Staff, or THS. ESA originally defaulted under our contract
governing our investment in ESA, prompting us to commence foreclosure actions
with respect to certain ESA assets in respect of which we have a priority
lien. In response to our actions, ESA filed voluntarily for
reorganization under the bankruptcy code on August 1, 2007. On
September 20, 2007 the U.S. Bankruptcy Court approved a Section 363 Asset
Sale from ESA to us. To complete this transaction, we contributed our
ESA debt to a newly-formed entity, Integrated, and provided funds for working
capital on October 9, 2007. In return for the ESA debt, we
received senior secured debt in Integrated of equal amount to our ESA debt,
preferred stock of Integrated, and 49% of the Integrated common
stock. Integrated subsequently ceased operations and assigned the
collateral back to us. Integrated is in default of both payment and
financial covenants. During September and October 2007, we
provided $1,170 to THS for working capital.
We have a
senior-secured, first-lien debt position with collateral in the form of
receivables, real estate, other assets, guaranties, and the stock of
THS. Based upon an analysis of the liquidation value of the ESA
assets
and the
enterprise value of THS, our Board of Directors reaffirmed the fair value of our
investment in Integrated at $5,000, a reduction of $11,567 from its amortized
cost, compared to the $11,464 unrealized loss recorded at June 30, 2008. At
June 30, 2007, an $8,766 unrealized loss was recorded on this
investment.
R-V
Industries, Inc.
R-V
demonstrated strong performance in operations throughout 2008 with trailing
twelve-month EBITDA increasing by over 50% since our closing in May
2007. R-V continues to pay down debt, repaying $7,000 of our debt
during the fiscal year ended June 30, 2008. Our Board of
Directors, upon recommendation from senior management, has set the value of the
R-V investment at $18,549 at June 30, 2008, $5,924 above its amortized
cost, compared to valuing the R-V investment at par at June 30,
2007. During the quarter ended September 30, 2008, R-V repaid the
remainder of its senior secured debt owed to us. Our Board of
Directors, upon recommendation from senior management, has set the value of the
R-V equity investment at $11,991 at September 30, 2008, $5,241 above its
amortized cost.
Worcester
Energy Partners, Inc.
WEPI is
under enhanced review by our senior management team due to poor operating
results since investment. We have installed a new manager at WEPI who
is instituting new controls to reduce costs and improve
efficiency. WEPI has negotiated an interim agreement with the buyer
of its energy production and is now earning revenues sufficient to cover its
debt service requirements. Our Board of Directors, upon
recommendation from senior management, has set the value of the WEPI investment
based upon an enterprise valuation at $12,202 at September 30, 2008, a
reduction of $28,116 from its amortized cost, compared to the $22,141 unrealized
loss recorded at June 30, 2008 and a $1,686 unrealized loss recorded at
June 30, 2007.
Yatesville
Coal Holdings, Inc.
All of
our coal holdings are now held in one consolidated entity,
Yatesville. The consolidated group has seen an improvement in
operating results primarily from increased prices in coal, improved production,
reductions in operating expenses from the consolidation of the management and
operations and the allocation of assets to their most efficient
use. Until a longer track record is established or a viable sales
process is in place, we will continue to value Yatesville on an asset
basis. Our Board of Directors, upon recommendation from senior
management, has set the value of the Yatesville investment at $27,891 at
September 30, 2008, a reduction of $13,611 from its amortized cost,
compared to the $14,694 unrealized loss recorded at June 30, 2008 and a
$10,969 unrealized loss recorded at June 30, 2007.
Capitalization
Our
investment activities are capital intensive and the availability and cost of
capital is a critical component of our business. We capitalize our
business with a combination of debt and equity. Our debt is currently
consists of a revolving credit facility availing us of the ability to borrow up
to $200 million of debt and our equity capital is currently comprised
entirely of common equity.
We had
$131,667 and $91,167 of borrowings at September 30, 2008 and June 30,
2008, respectively. These borrowings were made against a credit
facility in place at Rabobank Nederland. The maintenance of this
facility requires us to pay a fee for the amount not drawn
upon. Through November 30, 2007, this fee is assessed at the
rate of 37.5 basis points per annum of the amount of that unused portion; after
that date, this rate increased to 50.0 basis points per annum if that unused
portion was greater than 50% of the total amount of the facility. The
following table shows the facility amounts and outstanding borrowings at
September 30, 2008, June 30, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$ |
200,000 |
|
|
$ |
131,667 |
|
|
$ |
200,000 |
|
|
$ |
91,167 |
|
|
$ |
200,000 |
|
|
$ |
— |
|
The
following table shows the contractual maturity of our revolving credit facility
at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility Payable
|
|
$ |
131,667 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
During
the quarter ended September 30, 2008, we did not raise any additional
equity as the market was not conducive to a public offering. The
following table shows the calculation of net asset value per share as of
September 30, 2008 June 30, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$ |
431,739 |
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
Shares
of common stock outstanding
|
|
|
29,520,379 |
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
Net
asset value per share
|
|
$ |
14.63 |
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
At
September 30, 2008, we had 29,520,379 of our common stock issued and
outstanding.
Results
of Operations
Net
increase in net assets resulting from operations for the three months ended
September 30, 2008 and September 30, 2007 was $13,998 and $8,550,
respectively, representing $0.47 and $0.43 per share,
respectively. We experienced a net realized and unrealized loss of
$9,504 or approximately $0.32 per share in the three months ended
September 30, 2008. This compares with the net realized and
unrealized gain of $685 during the three months ended September 30, 2007 or
approximately $0.04 per share.
Net
increase in net assets resulting from operations for the years ended
June 30, 2008, 2007 and 2006 was $27,591, $16,728 and $12,896,
respectively, representing $1.17, $1.06 and $1.83 per share,
respectively. We experienced realized and unrealized gains of $4,338
or approximately $0.61 per share in the year ended June 30, 2006, primarily
from the unrealized gain recognized on our investment in GSHI. During
the year ended June 30, 2007, we experienced unrealized and realized losses
of $6,403 or approximately $0.41 per share primarily from the write-downs of our
investments in AOG. During the year ended June 30, 2008, we
experienced unrealized and realized losses of $17,522 or approximately $0.74 per
share primarily from the sales of our investments in AOG and CIE at a
loss.
While we
seek to maximize gains and minimize losses, our investments in portfolio
companies can expose our capital to risks greater than those we may anticipate
as these companies are typically not issuing securities rated investment grade,
have limited resources, have limited operating history, are generally private
companies with limited operating information available and are likely to depend
on a small core of management talents. Changes in any of these
factors can have a significant impact on the value of the portfolio
company.
Investment
Income
We
generate revenue in the form of interest income on the debt securities that we
own, dividend income on any common or preferred stock that we own, and amortized
loan origination fees on the structuring of new deals. Our
investments, if in the form of debt securities, will typically have a term of
one to ten years and bear interest at a fixed or floating rate. To
the extent achievable, we will seek to collateralize our investments by
obtaining security interests in our portfolio companies' assets. We
also may acquire minority or majority equity interests in our portfolio
companies, which may pay cash or in-kind dividends on a recurring or otherwise
negotiated basis. In addition, we may generate revenue in other forms
including prepayment penalties and possibly consulting fees. Any such
fees generated in connection with our investments are recognized as
earned.
Investment
income, which consists of interest income, including accretion of loan
origination fees and prepayment penalty fees, dividend income and other income,
including net profits interest, overriding royalties interest and structuring
fees, was $35,799 and $15,391 for the three months ended September 30, 2008
and
September 30,
2007, respectively. The following table describes the various
components of investment income and the related levels of debt
investments:
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
17,556 |
|
|
$ |
12,832 |
|
Dividend
income
|
|
|
4,723 |
|
|
|
1,618 |
|
Other
income
|
|
|
13,520 |
|
|
|
941 |
|
Total
investment
income
|
|
$ |
35,799 |
|
|
$ |
15,391 |
|
|
|
|
|
|
|
|
|
|
Average
debt principal of
investments
|
|
$ |
493,487 |
|
|
$ |
321,139 |
|
Weighted-average
interest rate
earned
|
|
|
14.11 |
% |
|
|
15.85 |
% |
Investment
income has been increasing as a larger investment portfolio has been generating
greater income from both interest and dividends. Average interest
income producing assets have increased from $321,139 for the three months ended
September 30, 2007 to $493,487 for the three months ended
September 30, 2008. While we have been able to increase the
gross amount of interest income, average yields on interest bearing assets have
decreased from 15.9% for the three months ended September 30, 2007 to 14.1%
for three months ended September 30, 2008. The decrease in yield
is the result of our increasing our asset mix in financings with private equity
sponsors. We believe that such financings offer less risk, and
consequently lower yields, due, in part, to lesser risk to our capital resulting
from larger equity at risk underneath our capital. Holding these
types of investments has allowed us to more effectively utilize our credit
facility to finance such assets at an average rate of 4.3% for the three months
ended September 30, 2008.
The
increase in investment income is also driven by increases in income from
dividends and other sources. Dividend income has grown significantly
from $1,618 for the three months ended September 30, 2007 to $4,723 for the
three months ended September 30, 2008. Much of the increase in
dividend income is attributable to dividends received as a result of our
investment in GSHI which paid $4,000 and $850 for the three months ended
September 30, 2008 and September 30, 2007,
respectively. Dividends were also received from our investments in
Ajax and NRG. The significant increase in other income reflects our
settlement of our net profit interests in IEC/ ARS for $12,576. In
addition to settlement of net profit interests, sources of other income include,
but are not limited to, income from structuring fees and overriding royalty
interests.
Investment
income was $79,402, $40,681, and $16,869 for the years ended June 30, 2008,
June 30, 2007 and June 30, 2006, respectively. Drivers of
these increases include increased assets generating increased interest income
along with increased income from royalty, net profits, and restructuring
fees. The following table describes the various components of
investment income and the related levels of debt investments:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
59,033 |
|
|
$ |
30,084 |
|
|
$ |
13,268 |
|
Dividend
income
|
|
|
12,033 |
|
|
|
6,153 |
|
|
|
3,601 |
|
Other
income
|
|
|
8,336 |
|
|
|
4,444 |
|
|
|
— |
|
Total
investment
income
|
|
$ |
79,402 |
|
|
$ |
40,681 |
|
|
$ |
16,869 |
|
Average
debt principal of
investments
|
|
$ |
397,913 |
|
|
$ |
172,605 |
|
|
$ |
70,727 |
|
Other
income – Restructuring fee
income
|
|
$ |
4,751 |
|
|
$ |
2,574 |
|
|
$ |
— |
|
Total
investment income has increased from $16,869 for the year ended June 30,
2006 to $40,681 for the year ended June 30, 2007 to $79,402 for the year
ended June 30, 2008. Investment income has been increasing as we
continue to deploy the additional capital, raised in both debt and equity
offerings, in revenue-producing assets.
Average
interest income producing assets have increased from $70,727 for the year ended
June 30, 2006 to $172,605 for the year ended June 30, 2007 to $397,913
for the year ended June 30, 2008. While we have been able to
increase the gross amount of interest income, average yields on interest bearing
assets have decreased from 18.8% for the year ended June 30, 2006 to 17.4%
for the year ended June 30, 2007 to 14.8% for the year ended June 30,
2008. These decreases are the result of our increasing our asset mix
in financings with private equity sponsors. We believe that such
financings offer less risk, and consequently lower yields, due, in part, to
lesser risk to our capital
resulting
from larger equity at risk underneath our capital. Holding these
types of investments has allowed us to more effectively utilize our credit
facility to finance such assets at an average rate of 5.67% for the year ended
June 30, 2008.
Investment
income is also generated from dividends and other income. Dividend
income has grown significantly from $3,601 for the year ended June 30, 2006
to $6,153 for the year ended June 30, 2007 to $12,033 for the year ended
June 30, 2008. We have received dividends from our investments
in GSHI, R-V, Ajax, C&J and NRG. Other income has come primarily
from structuring fees, overriding royalty interests, and prepayment penalties on
net profits interests.
Operating
Expenses
Our
primary operating expenses consist of investment advisory fees (base and
incentive fees), credit facility costs, legal and professional fees and other
operating and overhead-related expenses. These expenses include our
allocable portion of overhead under the Administration Agreement with Prospect
Administration under which Prospect Administration provides administrative
services and facilities for us. Our investment advisory fees
compensate our Investment Adviser for its work in identifying, evaluating,
negotiating, closing and monitoring our investments. We bear all
other costs and expenses of our operations and transactions in accordance with
our Administration Agreement with Prospect Administration. Operating
expenses were $12,297 and $7,526 for the three months ended September 30,
2008 and September 30, 2007, respectively. Operating expenses were $34,289,
$17,550, and $8,311 for the years ended June 30, 2008, June 30, 2007
and June 30, 2006, respectively.
The base
investment advisory expense was $2,823 and $1,866 for the three months ended
September 30, 2008 and September 30, 2007,
respectively. The increase in this expense is directly related to our
growth in total assets. For the three months ended September 30,
2008 and September 30, 2007, we incurred $5,875 and $1,966, respectively,
of income incentive fees. The increase in the income incentive fees
is driven by our stronger performance with respect to net investment income as
evidenced by net operating income ratios of 11.7% and 10.7% for the three months
ended September 30, 2008 and September 30, 2007,
respectively. No capital gains incentive fee has yet been incurred
pursuant to the Investment Advisory Agreement.
The base
investment advisory expenses were $8,921, $5,445, and $2,082 for the years ended
June 30, 2008, June 30, 2007 and June 30, 2006,
respectively. These increases are directly related to our growth in
total assets. $11,278, $5,781, and $1,786 income incentive fees were
earned for the years ended June 30, 2008, June 30, 2007 and
June 30, 2006, respectively. The increases in the income
incentive fees are driven by our stronger performance with respect to net
investment income as evidenced by net operating income ratios of 12.66%, 9.71%
and 7.90% for the years ended June 30, 2008, June 30, 2007 and
June 30, 2006, respectively. No capital gains incentive fee has
yet been incurred pursuant to the Investment Advisory Agreement.
During
the three months ended September 30, 2008 and September 30, 2007, we
incurred $1,518 and $1,238, respectively of expenses related to our credit
facilities. These expenses are related directly to the leveraging
capacity put into place for each of those periods and the levels of indebtedness
actually undertaken in those quarters. The table below describes the
various credit facility expenses and the related indicators of leveraging
capacity and indebtedness.
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
1,230 |
|
|
$ |
891 |
|
Amortization
of deferred financing
costs
|
|
|
180 |
|
|
|
186 |
|
Commitment
and other fees
|
|
|
108 |
|
|
|
161 |
|
Total
|
|
$ |
1,518 |
|
|
$ |
1,238 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
debt
outstanding
|
|
$ |
115,419 |
|
|
$ |
49,763 |
|
Weighted-average
interest rate
incurred
|
|
|
4.27 |
% |
|
|
7.18 |
% |
Facility
amount at beginning of
period
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
During
the years ended June 30, 2008, June 30, 2007 and June 30, 2006,
we incurred $6,318, $1,903, and $642, respectively of expenses related to our
credit facilities. The table below describes the various credit
facility expenses and the related indicators of leveraging capacity and
indebtedness.
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
5,104 |
|
|
$ |
357 |
|
|
$ |
422 |
|
Amortization
of deferred financing
costs
|
|
|
726 |
|
|
|
1,264 |
|
|
|
220 |
|
Commitment
and other
fees
|
|
|
488 |
|
|
|
282 |
|
|
|
— |
|
Total
|
|
$ |
6,318 |
|
|
$ |
1,903 |
|
|
$ |
642 |
|
Weighted-average
debt
outstanding
|
|
$ |
90,032 |
|
|
$ |
4,282 |
|
|
$ |
4,696 |
|
Weighted-average
interest
rate
|
|
|
5.67 |
% |
|
|
8.37 |
% |
|
|
9.01 |
% |
Facility
amount at beginning of
year
|
|
$ |
200,000 |
|
|
$ |
30,000 |
|
|
$ |
— |
|
As our
asset base has grown and we have added complexity to our capital raising
activities, due, in part, to our securitization credit facility initiated in
June 2007, we have commensurately increased the size of our administrative
and financial staff, accounting for a significant increase in the overhead
allocation from Prospect Administration. Over the last year, Prospect
Administration has added several additional staff members, including a senior
finance professional, a treasurer, a corporate counsel and other finance
professionals. As our portfolio continues to grow, we expect to
continue to increase the size of our administrative and financial staff on a
basis that provides increasing returns to scale. However, initial
investments in administrative and financial staff may not provide returns to
scale immediately, perhaps not until the portfolio increases to a greater
size. Other allocated expenses from Prospect Administration have, as
expected, increased alongside with the increase in staffing and asset
base.
Asset-based
fees from Vastardis, the sub-administrator to Prospect Administration, have also
grown as assets have grown. Legal costs decreased significantly from
$1,206 for the three months ended September 30, 2007 to $597 for the three
months ended September 30, 2008 as there were reduced costs for litigation
during the 2008 period. Legal costs for the year ended
June 30, 2008 increased significantly from the year ended June 30,
2007 as we continue to vigorously defend certain legal actions against us during
this period.
Net
Realized Gains (Loss)
Net
realized gains (losses) were $1,645 and $(11) for the three months ended
September 30, 2008 and September 30, 2007,
respectively. The net realized gain of $1,645 for the three months
ended September 30, 2008 was due primarily to the sale of the warrants
related to Deep Down while the $(11) realized loss registered for the three
months ended September 30, 2007 is attributable to the sale of U.S.
Treasury Bills.
Net
realized gains (losses) were ($16,222), $1,949, and $303 for the years ended
June 30, 2008, June 30, 2007 and June 30, 2006,
respectively. The net realized loss of ($16,222) sustained in FY2008
was due mainly to the sale of CIE and AOG while the $1,949 realized gain
registered for FY2007 is attributable to the sale of Evolution.
Increase
(Decrease) in Net Assets from Net Changes in Unrealized
Appreciation/Depreciation
Increase
(decrease) in net assets from changes in unrealized appreciation/depreciation
was $(11,149) and $696 for the three months ended September 30, 2008 and
September 30, 2007, respectively. For the three months ended
September 30, 2008, the $11,149 decrease in net assets from the net change
in unrealized appreciation/depreciation was driven by significant write-downs in
our investments in WEPI, Deb Shops, Iron Horse and by the disposition of Deep
Down which had been previously valued above cost. These instances of
unrealized depreciation were partially offset by unrealized appreciation in
C&J, GSHI, and Yatesville. For the three months ended
September 30, 2007, the $696 increase in net assets from such changes is
attributable to write-ups of our investment in NRG offset by write-downs for our
investments in ESA, Genesis Coal Corp., or Genesis, Whymore Coal Company, Inc.,
or Whymore, and WEPI.
Increase
(decrease) in net assets from changes in unrealized appreciation/depreciation
was ($1,300), ($8,352), and $4,035 for the years ended June 30, 2008,
June 30, 2007 and June 30, 2006, respectively. For FY2008,
the ($1,300) decrease in net assets from the net change in unrealized
appreciation/depreciation was driven by significant write-downs in our
investments in Integrated, Worcester Energy Co., Inc., or WECO, and Yatesville
partially offset by the write-up for our investment in GSHI and by the
disposition of previously written-down
investments
in AOG and ESA. FY2007's ($8,352) decrease in net assets from such
changes is attributable to significant write-downs of our investments in AOG,
ESA, Unity and Whymore which, in turn, were slightly offset by a significant
write-up in the value for GSHI. For FY2006, the $4,035 increase in
net assets due to changes in unrealized appreciation/depreciation was mainly
attributable to a write-up of the investment in GSHI.
Financial
Condition, Liquidity and Capital Resources
Our cash
flows used in operating activities totaled $27,785 and $52,578, for the three
months ended September 30, 2008 and September 30, 2007,
respectively. Financing activities provided cash flows of $28,499 and
$52,578 for the three months ended September 30, 2008 and
September 30, 2007, respectively. Dividends paid were $11,845
and $6,587, for the three months ended September 30, 2008 and
September 30, 2007, respectively.
Our cash
flows provided by (used in) operating activities totaled ($204,025), ($143,890),
($29,919), for the years ended June 30, 2008, June 30, 2007 and
June 30, 2006, respectively. Financing activities provided
(used) cash flows of $204,580, $143,890, and $20,332, for the years ended
June 30, 2008, June 30, 2007 and June 30, 2006,
respectively. Dividends paid and declared were $24,915, $21,634, and
$7,663, for the years ended June 30, 2008, June 30, 2007 and
June 30, 2006, respectively.
Our
primary uses of funds have been to add to our investments in our portfolio
companies, to add new companies to our investment portfolio, and to make cash
distributions to holders of our common stock. In the future, we may
also use some of our funds to buy back our common stock on the open
market.
We have
and may continue to fund a portion of our cash needs through borrowings from
banks, issuances of senior securities or secondary offerings. We may
also securitize a portion of our investments in mezzanine or senior secured
loans or other assets. Our objective is to put in place such
borrowings in order to enable us to expand our portfolio. At
September 30, 2008, we had a $200,000 revolving credit facility on which
$131,667 was outstanding. At June 30, 2008, we had a $200,000
revolving credit facility on which $91,167 was outstanding. This
facility matures on June 6, 2009, and we are currently negotiating for an
extension and expansion of the facility.
On
September 6, 2007, our Registration Statement on Form N-2 was declared
effective by the SEC. At September 30, 2008, under the
Registration Statement, we had remaining availability to issue up to
approximately $354,000 of our equity securities over the next three
years.
Off-Balance
Sheet Arrangements
At
September 30, 2008, we did not have any off-balance sheet liabilities or
other contractual obligations that are reasonably likely to have a current or
future material effect on our financial condition, other than those which
originate from 1) the Investment Advisory Agreement and the Administration
Agreement and 2) the portfolio companies.
Developments
Since September 30, 2008
On
October 9, 2008, our Board of Directors approved a share repurchase plan
under which we may repurchase up to $20,000 of our common stock at prices below
our net asset value as reported in our financial statements published for the
year ended June 30, 2008.
On
October 16, 2008, we issued 117,549 shares of our common stock in
connection with the Dividend Reinvestment Plan. See "Dividend
Reinvestment Plan."
REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, and for performing an assessment of the effectiveness of
internal control over financial reporting as of June 30, 2008. Internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that (i) pertain to assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the financial
statements.
Management
performed an assessment of the effectiveness of the Company's internal control
over financial reporting as of June 30, 2008 based upon criteria in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO"). Based on our assessment, management
determined that the Company's internal control over financial reporting was
effective as of June 30, 2008 based on the criteria on Internal Control —
Integrated Framework issued by COSO.
Our
management's assessment of the effectiveness of our internal control over
financial reporting as of June 30, 2008 has been audited by BDO Seidman LLP, an
independent registered public accounting firm, as stated in their report which
appears in the 10-K.
USE OF PROCEEDS
Unless
otherwise specified in a prospectus supplement, we intend to use the net
proceeds from selling Securities pursuant to this prospectus for investment in
portfolio companies in accordance with our investment objective and strategies,
repayment of then outstanding indebtedness, acquisitions or general corporate
purposes. A supplement to this prospectus relating to each offering
will more fully identify the use of the proceeds from such offering including
any intention to utilize proceeds to pay expenses in order to avoid sales of
long-term assets.
We
anticipate that substantially all of the net proceeds of an offering of
Securities pursuant to this prospectus will be used for the above purposes
within six months, depending on the availability of appropriate investment
opportunities consistent with our investment objective and market
conditions. In addition, we expect that there will be several
offerings pursuant to this prospectus; we expect that substantially all of the
proceeds from all offerings will be used within three years. Pending
our new investments, we plan to invest a portion of net proceeds in cash
equivalents, U.S. government securities and other high-quality debt investments
that mature in one year or less from the date of investment and other general
corporate purposes. The management fee payable by us will not be
reduced while our assets are invested in such securities. See "Regulation ― Temporary
Investments" for additional information about temporary investments we
may make while waiting to make longer-term investments in pursuit of our
investment objective.
FORWARD-LOOKING STATEMENTS
Our
annual report on Form l0-K for the year ended June 30, 2008, any of our
quarterly reports on Form 10-Q or current reports on Form 8-K, or any other oral
or written statements made in press releases or otherwise by or on behalf of
Prospect Capital Corporation including this prospectus may contain forward
looking statements within the meaning of the Section 21E of the Securities
Exchange Act of 1934, as amended, which involve substantial risks and
uncertainties. Forward looking statements predict or describe our future
operations, business plans, business and investment strategies and portfolio
management and the performance of our investments and our investment management
business. These forward-looking statements are not historical facts,
but rather are based on current expectations, estimates and projections about
our industry, our beliefs, and our assumptions. Words such as
"intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projected," "projections," "plans," "seeks,"
"anticipates," "anticipated," "should," "could," "may," "will," "designed to,"
"foreseeable future," "believe," "believes" and "scheduled" and variations of
these words and similar expressions are intended to identify forward-looking
statements. Our actual results or outcomes may differ materially from
those anticipated. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date the statement was
made. We undertake no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise. These forward-looking statements do not meet the safe
harbor for forward-looking statements pursuant to Section 27A of the Securities
Act. These statements are not guarantees of future performance and
are subject to risks, uncertainties, and other factors, some of which are beyond
our control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements,
including without limitation:
|
·
|
our
future operating results,
|
|
|
|
|
·
|
our
business prospects and the prospects of our portfolio
companies,
|
|
|
|
|
·
|
the
impact of investments that we expect to make,
|
|
|
|
|
·
|
the
dependence of our future success on the general economy and its impact on
the industries in which we invest,
|
|
|
|
|
·
|
the
ability of our portfolio companies to achieve their
objectives,
|
|
|
|
|
·
|
difficulty
in obtaining financing or raising capital, especially in the current
credit and equity environment,
|
|
|
|
|
·
|
the
level and volatility of prevailing interest rates and credit spreads,
magnified by the current turmoil in the credit
markets,
|
|
|
|
|
·
|
adverse
developments in the availability of desirable loan and investment
opportunities whether they are due to competition, regulation or
otherwise,
|
|
|
|
|
·
|
a
compression of the yield on our investments and the cost of our
liabilities, as well as the level of leverage available to
us,
|
|
|
|
|
·
|
our
regulatory structure and tax treatment, including our ability to operate
as a business development company and a regulated investment
company;
|
|
|
|
|
·
|
the
adequacy of our cash resources and working capital;
|
|
|
|
|
·
|
the
timing of cash flows, if any, from the operations of our portfolio
companies;
|
|
|
|
|
·
|
the
ability of our investment adviser to locate suitable investments for us
and to monitor and administer our investments,
|
|
|
|
|
·
|
authoritative
generally accepted accounting principles or policy changes from such
standard-setting bodies as the Financial Accounting Standards Board, the
Securities and Exchange Commission, Internal Revenue
|
|
|
|
|
|
Service,
the New York Stock Exchange, and other authorities that we are subject to,
as well as their counterparts in any foreign jurisdictions where we might
do business; and |
|
|
|
|
·
|
the
risks, uncertainties and other factors we identify in "Risk Factors" and
elsewhere in this prospectus and in our filings with the
SEC.
|
Although
we believe that the assumptions on which these forward-looking statements are
based are reasonable, any of those assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also
could be inaccurate. Important assumptions include our ability to
originate new loans and investments, certain margins and levels of profitability
and the availability of additional capital. In light of these and
other uncertainties, the inclusion of a projection or forward-looking statement
in this prospectus should not be regarded as a representation by us that our
plans and objectives will be achieved. These risks and uncertainties
include those described or identified in "Risk Factors" and elsewhere in this
prospectus. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this
prospectus.
DISTRIBUTIONS
We have
paid and intend to continue to distribute quarterly distributions to our
stockholders out of assets legally available for distribution. Our
distributions, if any, will be determined by our Board of
Directors. Certain amounts of the quarterly distributions may from
time to time be paid out of our capital rather than from earnings for the
quarter as a result of our deliberate planning or by accounting
reclassifications.
In order
to maintain RIC tax treatment, we must distribute at least 90% of our ordinary
income and realized net short-term capital gains in excess of realized net
long-term capital losses, if any, out of the assets legally available for
distribution. In order to avoid certain excise taxes imposed on RICs,
we are required to distribute with respect to each calendar year by January 31
of the following year an amount at least equal to the sum of
|
·
|
98%
of our ordinary income for the calendar year,
|
|
|
|
|
·
|
98%
of our capital gains in excess of capital losses for the one-year period
ending on October 31 of the calendar year, and
|
|
|
|
|
·
|
any
ordinary income and net capital gains for preceding years that were not
distributed during such years.
|
In
December 2008, our Board of Directors elected to retain excess profits generated
in the quarter ended September 30, 2008 and pay a 4% excise tax on such retained
earnings. We anticipate that the tax to be paid in the quarter ending
March 31, 2009 will be approximately $532,000.
In
addition, although we currently intend to distribute realized net capital gains
(which we define as net long-term capital gains in excess of short-term capital
losses), if any, at least annually, out of the assets legally available for such
distributions, we may decide in the future to retain such capital gains for
investment. In such event, the consequences of our retention of net
capital gains are as described under "Material U.S. Federal Income Tax
Considerations." We can offer no assurance that we will achieve
results that will permit the payment of any cash distributions and, if we issue
senior securities, we may be prohibited from making distributions if doing so
causes us to fail to maintain the asset coverage ratios stipulated by the 1940
Act or if distributions are limited by the terms of any of our
borrowings.
We
maintain an "opt out" dividend reinvestment plan for our common
stockholders. As a result, if we declare a dividend, then
stockholders' cash dividends will be automatically reinvested in additional
shares of our common stock, unless they specifically "opt out" of the dividend
reinvestment plan so as to receive cash dividends. See "Dividend
Reinvestment Plan." To the extent prudent and practicable, we intend
to declare and pay dividends on a quarterly basis.
With
respect to the dividends paid to stockholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies were treated as taxable income and
accordingly, distributed to stockholders. From our initial public
offering through September 30, 2008, we have distributed over 100% of our
taxable income to our stockholders. For the fiscal year ended June
30, 2008, we declared total dividends of approximately $39.5
million.
Tax
characteristics of all distributions will be reported to stockholders, as
appropriate, on Form 1099-DIV after the end of the year. Our ability
to pay distributions could be affected by future business performance,
liquidity, capital needs, alternative investment opportunities and loan
covenants.
The
following table lists the quarterly distributions per share since shares of our
common stock began being regularly quoted on The NASDAQ Global Select
Market:
|
|
|
|
|
|
|
|
|
|
|
11/11/2004
|
|
12/10/2004
|
|
12/30/2004
|
|
$ |
0.100 |
|
|
$ |
705,510 |
|
2/9/2005
|
|
3/11/2005
|
|
3/30/2005
|
|
$ |
0.125 |
|
|
$ |
881,888 |
|
4/21/2005
|
|
6/10/2005
|
|
6/30/2005
|
|
$ |
0.150 |
|
|
$ |
1,058,265 |
|
9/15/2005
|
|
9/22/2005
|
|
9/29/2005
|
|
$ |
0.200 |
|
|
$ |
1,411,020 |
|
12/12/2005
|
|
12/22/2005
|
|
12/29/2005
|
|
$ |
0.280 |
|
|
$ |
1,975,428 |
|
3/15/2006
|
|
3/23/2006
|
|
3/30/2006
|
|
$ |
0.300 |
|
|
$ |
2,116,530 |
|
6/14/2006
|
|
6/23/2006
|
|
6/30/2006
|
|
$ |
0.340 |
|
|
$ |
2,401,060 |
|
7/31/2006
|
|
9/22/2006
|
|
9/29/2006
|
|
$ |
0.380 |
|
|
$ |
4,858,879 |
|
12/15/2006
|
|
12/29/2006
|
|
1/5/2007
|
|
$ |
0.385 |
|
|
$ |
7,263,926 |
|
3/14/2007
|
|
3/23/2007
|
|
3/30/2007
|
|
$ |
0.3875 |
|
|
$ |
7,666,837 |
|
6/14/2007
|
|
6/22/2007
|
|
6/29/2007
|
|
$ |
0.390 |
|
|
$ |
7,752,900 |
|
9/6/2007
|
|
9/19/2007
|
|
9/28/2007
|
|
$ |
0.3925 |
|
|
$ |
7,830,008 |
|
12/18/2007
|
|
12/28/2007
|
|
1/7/2008
|
|
$ |
0.395 |
|
|
$ |
9,369,850 |
|
3/6/2008
|
|
3/31/2008
|
|
4/16/2008
|
|
$ |
0.400 |
|
|
$ |
10,468,455 |
|
6/19/2008
|
|
6/30/2008
|
|
7/16/2008
|
|
$ |
0.40125 |
|
|
$ |
11,845,052 |
|
9/16/2008
|
|
9/30/2008
|
|
10/16/2008
|
|
$ |
0.4025 |
|
|
$ |
11,881,953 |
|
12/19/2008
|
|
12/31/2008
|
|
1/20/2009
|
|
$ |
0.40375 |
|
|
$ |
11,958,904 |
|
Total
Declared
|
|
|
|
|
|
|
|
|
|
$ |
101,446,465 |
|
PRICE RANGE OF COMMON
STOCK
Our
common stock is quoted on The NASDAQ Global Select Market under the symbol
"PSEC." The following table sets forth, for the periods indicated,
our net asset value per share of common stock and the high and low sales prices
per share of our common stock as reported on The NASDAQ Global Select
Market. Our common stock historically trades at prices both above and
below its NAV. There can be no assurance, however, that such premium
or discount, as applicable, to NAV will be maintained.
|
|
|
|
|
Premium
(Discount)
of
High to
|
|
|
Premium
(Discount)
of
Low to
|
|
|
Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
Months Ending June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
13.67 |
|
|
$ |
15.45 |
|
|
$ |
14.42 |
|
|
|
13.0 |
% |
|
|
5.5 |
% |
|
|
— |
|
Second
quarter
|
|
|
13.74 |
|
|
|
15.15 |
|
|
|
11.63 |
|
|
|
10.3 |
% |
|
|
(15.4 |
)% |
|
$ |
0.100 |
|
Third
quarter
|
|
|
13.74 |
|
|
|
13.72 |
|
|
|
10.61 |
|
|
|
(0.1 |
)% |
|
|
(22.8 |
)% |
|
|
0.125 |
|
Fourth
quarter
|
|
|
14.59 |
|
|
|
13.47 |
|
|
|
12.27 |
|
|
|
(7.7 |
)% |
|
|
(15.9 |
)% |
|
|
0.150 |
|
Twelve
Months Ending June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
14.60 |
|
|
$ |
13.60 |
|
|
$ |
11.06 |
|
|
|
(6.8 |
)% |
|
|
(24.2 |
)% |
|
$ |
0.200 |
|
Second
quarter
|
|
|
14.69 |
|
|
|
15.46 |
|
|
|
13.02 |
|
|
|
5.2 |
% |
|
|
(12.6 |
)% |
|
|
0.280 |
|
Third
quarter
|
|
|
14.81 |
|
|
|
16.64 |
|
|
|
15.00 |
|
|
|
12.4 |
% |
|
|
1.3 |
% |
|
|
0.300 |
|
Fourth
quarter
|
|
|
15.31 |
|
|
|
17.05 |
|
|
|
15.83 |
|
|
|
11.5 |
% |
|
|
3.4 |
% |
|
|
0.340 |
|
Twelve
Months Ending June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
14.86 |
|
|
$ |
16.77 |
|
|
$ |
15.30 |
|
|
|
12.9 |
% |
|
|
2.3 |
% |
|
$ |
0.380 |
|
Second
quarter
|
|
|
15.24 |
|
|
|
18.79 |
|
|
|
15.60 |
|
|
|
24.5 |
% |
|
|
(0.9 |
)% |
|
|
0.385 |
|
Third
quarter
|
|
|
15.18 |
|
|
|
17.68 |
|
|
|
16.40 |
|
|
|
16.5 |
% |
|
|
8.0 |
% |
|
|
0.3875 |
|
Fourth
quarter
|
|
|
15.04 |
|
|
|
18.68 |
|
|
|
16.91 |
|
|
|
24.2 |
% |
|
|
12.4 |
% |
|
|
0.390 |
|
Twelve
Months Ending June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
15.08 |
|
|
$ |
18.68 |
|
|
$ |
14.15 |
|
|
|
24.7 |
% |
|
|
(16.1 |
)% |
|
$ |
0.3925 |
|
Second
quarter
|
|
|
14.58 |
|
|
|
17.17 |
|
|
|
11.22 |
|
|
|
18.3 |
% |
|
|
(23.3 |
)% |
|
|
0.395 |
|
Third
quarter
|
|
|
14.15 |
|
|
|
16.00 |
|
|
|
13.55 |
|
|
|
13.1 |
% |
|
|
(4.2 |
)% |
|
|
0.400 |
|
Fourth
quarter
|
|
$ |
14.55 |
|
|
$ |
16.12 |
|
|
$ |
13.18 |
|
|
|
10.8 |
% |
|
|
(9.4 |
)% |
|
|
0.40125 |
|
Twelve
Months Ending June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
14.63 |
|
|
$ |
14.24 |
|
|
$ |
11.12 |
|
|
|
(.27 |
)% |
|
|
(24.0 |
)% |
|
$ |
0.4025 |
|
Second
quarter
|
|
|
—(3) |
|
|
$ |
13.08 |
|
|
$ |
6.29 |
|
|
|
—(3) |
|
|
|
—(3) |
|
|
|
0.40375 |
|
Third
quarter (to
1/28/09)
|
|
|
—(3) |
|
|
$ |
12.89 |
|
|
$ |
10.74 |
|
|
|
—(3) |
|
|
|
—(3) |
|
|
|
— |
|
(1)
|
Net
asset value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the
date of the high or low sales price. The net asset values shown
are based on outstanding shares at the end of each
period.
|
(2)
|
The
High/Low Stock Price is calculated as of the closing price on a given day
in the applicable quarter.
|
(3)
|
NAV
has not yet been finally determined for any day after September 30,
2008.
|
On
January 28, 2009, the last reported sales price of our common stock was $11.63
per share. As of December 31, 2008, we had approximately 47
stockholders of record.
BUSINESS
General
We are a
financial services company that primarily lends and invests in middle market
privately-held companies. We are a closed-end investment company that
has filed an election to be treated as a business development company under the
Investment Company Act of 1940 as amended, or the 1940 Act. We are a
Maryland corporation that was organized on April 13, 2004 under the name
"Prospect Street Energy Corporation". We changed our name to
"Prospect Energy Corporation" on June 23, 2004. We changed our
name again to "Prospect Capital Corporation" in May 2007 and at the same time
terminated our policy of investing at least 80% of our net assets in energy
companies. While we expect to be less focused on the energy industry
in the future, we will continue to have significant holdings in the energy and
energy related industries.
Our
headquarters are located at 10 East 40th Street,
44th
Floor, New York, NY 10016, and our telephone number is (212)
448-0702. Our investment adviser is Prospect Capital Management
LLC.
Our
Investment Objective and Policies
Our
investment objective is to generate both current income and long-term capital
appreciation through debt and equity investments. We focus on making
investments in private companies, and many of our investments are in energy
companies. We are a non-diversified company within the meaning of the
1940 Act.
We
concentrate on making investments in companies having annual revenues of less
than $500 million and in transaction sizes of less than $250 million,
which we refer to as "target" or "middle market" companies. In most
cases, these middle market companies are privately-held companies at the time we
invest in them.
We seek
to maximize returns and protect risk for our investors by applying rigorous
analysis to make and monitor our investments. While the structure of
our investments varies, we can invest in senior secured debt, senior unsecured
debt, subordinated secured debt, subordinated unsecured debt, mezzanine debt,
convertible debt, convertible preferred equity, preferred equity, common equity,
warrants and other instruments, many of which generate current
yield. Our investments primarily range between approximately
$5 million and $50 million each, although this investment size may
vary as the size of our capital base changes.
While our
primary focus is on seeking current income through investment in the debt and/or
dividend-paying equity securities of eligible privately-held, thinly-traded or
distressed companies and long-term capital appreciation by acquiring
accompanying warrants, options or other equity securities of such companies, we
may invest up to 30% of the portfolio in opportunistic investments in order to
seek enhanced returns for stockholders. Such investments may include
investments in the debt and equity instruments of broadly-traded public
companies. We expect that these public companies generally will have
debt securities that are non-investment grade. Within this 30%
basket, we may also invest in debt and equity securities of companies located
outside of the United States.
Our
investments may include other equity investments, such as warrants, options to
buy a minority interest in a portfolio company, or contractual payment rights or
rights to receive a proportional interest in the operating cash flow or net
income of such company. When determined by our Investment Adviser to
be in our best interest, we may acquire a controlling interest in a portfolio
company. Any warrants we receive with our debt securities may require
only a nominal cost to exercise, and thus, as a portfolio company appreciates in
value, we may achieve additional investment return from this equity
interest. We have structured, and will continue to structure, some
warrants to include provisions protecting our rights as a minority-interest or,
if applicable, controlling-interest holder, as well as puts, or rights to sell
such securities back to the company, upon the occurrence of specified
events. In many cases, we obtain registration rights in connection
with these equity interests, which may include demand and "piggyback"
registration rights.
We plan
to hold many of our investments to maturity or repayment, but will sell our
investments earlier if a liquidity event takes place, such as the sale or
recapitalization of a portfolio company, or if we determine a sale of one or
more of our investments to be in our best interest.
We have
qualified and elected to be treated for U.S. Federal income tax purposes as a
RIC under Subchapter M of the Code. As a RIC, we generally do not
have to pay corporate-level U.S. Federal income taxes on any ordinary income or
capital gains that we distribute to our stockholders as dividends. To
continue to qualify as a RIC, we must, among other things, meet certain
source-of-income and asset diversification requirements (as described
below). In addition, to qualify for RIC tax treatment we must
distribute to our stockholders, for each taxable year, at least 90% of our
"investment company taxable income," which is generally our ordinary income plus
the excess of our realized net short-term capital gains over our realized net
long-term capital losses.
For a
discussion of the risks inherent in our portfolio investments, see "Risk Factors ― Risks
Related to our Investments."
Industry
Sectors
We have
invested significantly in industrial and energy related
companies. However, we continue to widen our strategy focus in other
sectors of the economy to diversify our portfolio holdings. The
energy industry consists of companies in the direct energy value chain as well
as companies that sell products and services to, or acquire products and
services from, the direct energy value chain. In this prospectus, we
refer to all of these companies as "energy companies" and assets in these
companies as "energy assets." The categories of energy companies in
this chain are described below. The direct energy value chain broadly
includes upstream businesses, midstream businesses and downstream
businesses:
|
·
|
Upstream
businesses find, develop and extract energy resources, including natural
gas, crude oil and coal, which are typically from geological reservoirs
found underground or offshore, and agricultural
products.
|
|
|
|
|
·
|
Midstream
businesses gather, process, refine, store and transmit energy resources
and their byproducts in a form that is usable by wholesale power
generation, utility, petrochemical, industrial and gasoline
customers.
|
|
|
|
|
·
|
Downstream
businesses include the power and electricity segment as well as businesses
that process, refine, market or distribute hydrocarbons or other energy
resources, such as customer-ready natural gas, propane and gasoline, to
end-user customers.
|
Ongoing
Relationships with Portfolio Companies
Monitoring
Prospect
Capital Management monitors our portfolio companies on an ongoing basis.
Prospect Capital Management will continue to monitor the financial trends of
each portfolio company to determine if it is meeting its business plan and to
assess the appropriate course of action for each company.
Prospect
Capital Management employs several methods of evaluating and monitoring the
performance and value of our investments, which may include, but are not limited
to, the following:
|
·
|
Assessment
of success in adhering to the portfolio company's business plan and
compliance with covenants;
|
|
|
|
|
·
|
Regular
contact with portfolio company management and, if appropriate, another
financial or strategic sponsor, to discuss financial position,
requirements and accomplishments;
|
|
|
|
|
·
|
Attendance
at and participation in board meetings of the portfolio company;
and
|
|
|
|
|
·
|
Review
of monthly and quarterly financial statements and financial projections
for portfolio companies.
|
Valuation
Process
Our Board
of Directors has established procedures for the valuation of our investment
portfolio. These procedures are detailed below.
Investments
for which market quotations are readily available are valued at such market
quotations.
Short-term
investments that mature in 60 days or less and are viewed as creditworthy, such
as United States Treasury Bills, are valued at amortized cost, which
approximates fair value. The amortized cost method involves recording a security
at its cost (i.e., principal amount plus any premium and less any discount) on
the date of purchase and thereafter amortizing/ accreting that difference
between the principal amount due at maturity and cost assuming a constant yield
to maturity as determined at the time of purchase. Short-term securities that
mature in more than 60 days are valued at current market quotations by an
independent pricing service or at the mean between the bid and ask prices
obtained from at least two brokers or dealers (if available, or otherwise by a
principal market maker or a primary market dealer). Investments in money market
mutual funds are valued at their net asset value as of the close of business on
the day of valuation.
For most
of our investments, market quotations are not available. With respect to
investments for which market quotations are not readily available or when such
market quotations are deemed not to represent fair value, our Board of Directors
has approved a multi-step valuation process each quarter, as described
below:
|
·
|
our
quarterly valuation process begins with each portfolio company or
investment being reviewed by our investment professionals with the
independent valuation firm;
|
|
|
|
|
·
|
the
independent valuation firm engaged by our Board of Directors conducts
independent appraisals and makes their own independent
assessment;
|
|
|
|
|
·
|
the
audit committee of our Board of Directors reviews and discusses the
preliminary valuation of our Investment Adviser and that of the
independent valuation firms; and
|
|
|
|
|
·
|
the
Board of Directors discusses valuations and determines the fair value of
each investment in our portfolio in good faith based on the input of our
investment adviser, the respective independent valuation firm and the
audit committee.
|
Investments
are valued utilizing a market approach, an income approach, or both approaches,
as appropriate. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses valuation
techniques to convert future amounts (for example, cash flows or earnings) to a
single present amount (discounted). The measurement is based on the value
indicated by current market expectations about those future amounts. In
following these approaches, the types of factors that we may take into account
in fair value pricing our investments include, as relevant: available current
market data, including relevant and applicable market trading and transaction
comparables, applicable market yields and multiples, security covenants, call
protection provisions, information rights, the nature and realizable value of
any collateral, the portfolio company's ability to make payments, its earnings
and discounted cash flows, the markets in which the portfolio company does
business, comparisons of financial ratios of peer companies that are public,
M&A comparables, the principal market and enterprise values, among other
factors.
In
September, 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements", or FAS 157.
FAS 157 defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years. We have adopted this
statement on a prospective basis beginning in the quarter ended September 30,
2008. Adoption of this statement did not have a material effect on our financial
statements for the quarter ended September 30, 2008.
FAS No.
157 classifies the inputs used to measure these fair values into the following
hierarchy:
Level 1: Quoted prices in
active markets for identical assets or liabilities, accessible by the Company at
the measurement date.
Level 2: Quoted prices for
similar assets or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active, or other
observable inputs other than quoted prices.
Level 3: Unobservable inputs
for the asset or liability.
In all
cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level
of input that is significant to the fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to each investment.
The changes to generally accepted accounting principles from the application of
FAS 157 relate to the definition of fair value, framework for measuring fair
value, and the expanded disclosures about fair value measurements. FAS 157
applies to fair value measurements already required or permitted by other
standards. In accordance with FAS 157, the fair value of our investments is
defined as the price that we would receive upon selling an investment in an
orderly transaction to an independent buyer in the principal or most
advantageous market in which that investment is transacted.
For a
discussion of the risks inherent in determining the value of securities for
which readily available market values do not exist, see "Risk Factors—Risks
relating to our business—Most of our portfolio investments are recorded at fair
value as determined in good faith by our Board of Directors and, as a result,
there is uncertainty as to the value of our portfolio investments."
Valuation
of Other Financial Assets and Financial Liabilities
In
February 2007, FASB issued SFAS 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - including an amendment of FASB Statement No. 115".
SFAS 159 permits an entity to elect fair value as the initial and subsequent
measurement attribute for many of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities measured using
another measurement attribute. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those years. We have adopted this statement on July 1,
2008 and have elected not to value some assets and liabilities at fair value as
would be permitted by SFAS 159.
The
Investment Adviser
Prospect
Capital Management manages our investments as our investment
adviser. Prospect Capital Management is a Delaware limited liability
corporation that has been registered as an investment adviser under the Advisers
Act since March 31, 2004. Prospect Capital Management is led by
John F. Barry III and M. Grier Eliasek, two senior executives with significant
investment advisory and business experience. Both Messrs. Barry and
Eliasek spend a significant amount of their time in their roles at Prospect
Capital Management working on the Company's behalf. The principal
executive offices of Prospect Capital Management are 10 East 40th Street,
44th
Floor, New York, NY 10016. We depend on the diligence, skill and
network of business contacts of the senior management of our Investment
Adviser. We also depend, to a significant extent, on our Investment
Adviser's investment professionals and the information and deal flow generated
by those investment professionals in the course of their investment and
portfolio management activities. The Investment Adviser's senior
management team evaluates, negotiates, structures, closes, monitors and services
our investments. Our future success depends to a
significant
extent on the continued service of the senior management team, particularly John
F. Barry III and M. Grier Eliasek. The departure of any of the senior
managers of our Investment Adviser could have a materially adverse effect on our
ability to achieve our investment objective. In addition, we can
offer no assurance that Prospect Capital Management will remain our Investment
Adviser or that we will continue to have access to its investment professionals
or its information and deal flow. Under our Investment Advisory
Agreement, we pay Prospect Capital Management investment advisory fees, which
consist of an annual base management fee based on our gross assets as well as a
two-part incentive fee based on our performance. Mr. Barry currently
controls Prospect Capital Management. See "Management ― Management
Services ― Board of Directors approval of the Investment Advisory
Agreement."
As a
business development company, we offer, and must provide upon request,
managerial assistance to certain of our portfolio companies. This
assistance could involve, among other things, monitoring the operations of our
portfolio companies, participating in board and management meetings, consulting
with and advising officers of portfolio companies and providing other
organizational and financial guidance. We may receive fees for these
services. Such fees would not qualify as "good income" for purposes
of the 90% income test that we must meet each year to qualify as a
RIC. Prospect Administration provides such managerial assistance on
our behalf to portfolio companies when we are required to provide this
assistance.
Staffing
Mr. John
F. Barry III, our chairman and chief executive officer, Mr. Grier Eliasek, our
chief operating officer and president, and Mr. Brian H. Oswald, our chief
financial officer, chief compliance officer, treasurer and secretary comprise
our senior management. Over time, we expect to add additional
officers and employees. Messrs. Barry and Eliasek each also serves as
an officer of Prospect Administration and performs his respective functions
under the terms of the Administration Agreement. Our day-to-day
investment operations are managed by Prospect Capital Management. In
addition, we reimburse Prospect Administration for our allocable portion of
expenses incurred by it in performing its obligations under the Administration
Agreement, including rent and our allocable portion of the costs of our Chief
Executive Officer, President, Chief Financial Officer, Chief Operating Officer,
Chief Compliance Officer, Treasurer and Secretary and their respective
staffs. See "Management ― Management
Services ― Administration Agreement."
Properties
We do not
own any real estate or other physical properties materially important to our
operation. Our corporate headquarters are located at 10 East 40th Street,
44th
Floor, New York, NY 10016, where we occupy an office space pursuant
to the Administration Agreement.
Legal
Proceedings
On
December 6, 2004, Dallas Gas Partners, L.P., or DGP, served the Company with a
complaint filed November 30, 2004 in the U.S. District for the Southern District
of Texas, Galveston Division. DGP alleges that DGP was defrauded and
that the Company breached its fiduciary duty to DGP and tortiously interfered
with DGP's contract to purchase Gas Solutions, Ltd. (a subsidiary of our
portfolio company, GSHI) in connection with the Company's alleged agreement in
September 2004 to loan DGP funds with which DGP intended to buy Gas Solutions,
Ltd. for approximately $26 million. The complaint seeks relief not
limited to $100 million. The Company believes that the DGP complaint
is frivolous and without merit, and intend to defend the matter
vigorously. On November 30, 2005, U.S. Magistrate Judge John R.
Froeschner of the U.S. District Court for the Southern District of Texas,
Galveston Division, issued a recommendation that the court grant the Company's
Motion for Summary Judgment dismissing all claims by DGP. On February
21, 2006, U.S. District Judge Samuel Kent of the U.S. District Court for the
Southern District of Texas, Galveston Division issued an order granting the
Company's Motion for Summary Judgment dismissing all claims by DGP, against the
Company. On May 16, 2007, the Court also granted us summary judgment
on DGP's liability to the Company on our counterclaim for DGP's breach of a
release and covenant not to sue. On January 4, 2008, the Court, Judge
Melinda Harmon presiding, granted the Company's motion to dismiss all DGP's
claims asserted against certain officers and affiliates of the
Company. The Company's damage claims against DGP remain
pending.
In May
2006, based in part on unfavorable due diligence and the absence of investment
committee approval, the Company declined to extend a loan for $10 million to a
potential borrower, or plaintiff. Plaintiff was subsequently sued by
its own attorney in a local Texas court for plaintiff's failure to pay fees owed
to its attorney. In December 2006, plaintiff filed a cross-action
against the Company and certain affiliates, or collectively the defendants, in
the same local Texas court, alleging, among other things, tortious interference
with contract and fraud. The Company petitioned the U.S. District
Court for the Southern District of New York, or the District Court to compel
arbitration and to enjoin the Texas action. In February 2007, the
Company's motions were granted. Plaintiff appealed that
decision. The arbitration commenced in July 2007 and concluded in
late November 2007. Post-hearing briefings were completed in February
2008. On April 14, 2008, the arbitrator rendered an award in favor of
the Company, rejecting all of plaintiff's claims. On April 18, 2008,
the Company filed a petition before the District Court to confirm the award,
which is now pending.
We are
involved in various investigations, claims and legal proceedings that arise in
the ordinary course of our business. These matters may relate to
intellectual property, employment, tax, regulation, contract or other
matters. The resolution of such matters that may arise out of these
investigations, claims and proceedings will be subject to various uncertainties
and, even if such matters are without merit, could result in the expenditure of
significant financial and managerial resources.
We are
not aware of any other material pending legal proceeding, and no such material
proceedings are contemplated to which we are a party or of which any of our
property is subject.
MANAGEMENT
Our
business and affairs are managed under the direction of our Board of
Directors. Our Board of Directors currently consists of five
directors, three of whom are not "interested persons" of the Company as defined
in Section 2(a)(19) of the 1940 Act. We refer to these individuals as
our independent directors. Our Board of Directors elects our officers
to serve for a one-year term and until their successors are duly elected and
qualify, or until their earlier removal or resignation.
Board
Of Directors And Executive Officers
Under our
charter, our directors are divided into three classes. Directors are
elected for a staggered term of three years each, with a term of office of one
of the three classes of directors expiring each year. At each annual
meeting of our stockholders, the successors to the class of directors whose
terms expire at such meeting are elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election. Each director holds office for the term to which he
or she is elected and until his or her successor is duly elected and
qualifies.
Directors
and Executive Officers
Our
directors and executive officers and their positions are set forth
below. The address for each director and executive officer is c/o
Prospect Capital Corporation, 10 East 40th Street,
44th
Floor, New York, NY 10016.
Independent
Directors
|
|
Position(s)
Held
with
the
Company
|
|
Term of
Office(1) and
Length of
Time
Served
|
|
Principal
Occupation(s) During
Past
5 Years
|
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director
|
|
Other
Directorships
Held by
Director(2)
|
Graham
D.S. Anderson, 43
|
|
Director
|
|
Class
I Director since September 2008; Term expires 2011
|
|
General
Partner of Euclid SR Partners from 2000 to present. From 1996 to 2000, Mr.
Anderson was a General Partner of Euclid Partners, the predecessor to
Euclid SR Partners.
|
|
One
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Eugene
S. Stark, 50
|
|
Director
|
|
Class
III Director since September 2008; Term expires 2010
|
|
Principal
Financial Officer, Chief Compliance Officer and Vice President –
Administration of General American Investors Company, Inc. from May 2005
to present. Prior to his role with General American Investors Company,
Inc., Mr. Stark served as the Chief Financial Officer of Prospect Capital
Corporation from January 2005 to April 2005. From May 1987 to December
2004 Mr. Stark served as Senior Vice President and Vice President with
Prudential Financial, Inc.
|
|
One
|
|
None
|
|
|
Position(s)
Held
with
the
Company
|
|
Term of
Office(1) and
Length of
Time
Served
|
|
Principal
Occupation(s) During
Past
5 Years
|
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director
|
|
Other
Directorships
Held by
Director(2)
|
F.
Lee Liebolt, 67
|
|
Director
|
|
Class
I Director since June 2006; Term expires at the 2008 Annual Meeting of
Stockholders or when his successor is elected
|
|
Mr.
Liebolt is a lawyer in private practice. From September 2005 to
August 2006, he was senior counsel at Harkins Cinningham
LLP. Prior thereto, Mr. Liebolt practiced at Sidley Austin
Brown & Wood LLP and certain predecessor firms as a partner (1976 to
2002) and as senior counsel (January 2003 to August 2005)
|
|
One
|
|
None
|
(1)
|
Our
Board of Directors is divided into three classes of directors serving
staggered three-year terms. Mr. Anderson is a Class I director
with a term that will expire in 2011, Mr. Eliasek is
a Class II director with a term that will expire in 2009 and
Mr. Barry and Mr. Stark are Class III directors with a term that will
expire in 2010.
|
(2)
|
No
director otherwise serves as a director of an investment company subject
to the 1940 Act.
|
Interested
Directors
|
|
Position(s)
Held
with
the
Company
|
|
Term of
Office(1) and
Length of
Time
Served
|
|
Principal
Occupation(s) During
Past
5 Years
|
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director
|
|
Other
Directorships
Held by
Director(2)
|
John
F. Barry III(3)
56
|
|
Director,
Chairman
of the
Board
of Directors, and
Chief
Executive
Officer
|
|
Class
III Director since June 2004; Term expires 2010
|
|
Chairman
and Chief Executive Officer of the Company; Managing Director and Chairman
of the Investment Committee of Prospect Capital Management and Prospect
Administration since June 2004; Managing Director of Prospect Capital
Management.
|
|
One
|
|
None
|
M.
Grier Eliasek(3)
35
|
|
Director,
President and Chief Operating Officer
|
|
Class
II Director since June 2004; Term expires 2009
|
|
President
and Chief Operating Officer of the Company, Managing Director of Prospect
Capital Management and Prospect Administration
|
|
One
|
|
None
|
(1)
|
Our
Board of Directors is divided into three classes of directors serving
staggered three-year terms. Mr. Anderson is a Class I director
with a term that will expire in 2011, Mr. Eliasek is a Class II
director with a term that will expire in 2009 and Mr. Barry and Mr.
Stark are Class III directors with terms that will expire in
2010.
|
(2)
|
No
director otherwise serves as a director of an investment company subject
to the 1940 Act.
|
(3)
|
Messrs.
Barry and Eliasek are each considered an "interested person" under the
1940 Act by virtue of serving as one of our officers and having a
relationship with Prospect Capital
Management.
|
Information
about Executive Officers who are not Directors
|
|
Position(s)
Held with
the
Company
|
|
Term
of Office and
Length
of Time Served
|
|
Principal
Occupation(s)
During
Past Five Years
|
Brian
H. Oswald, 48
|
|
Chief
Financial Officer, Chief Compliance Officer, Treasurer and Secretary(1)
|
|
November
2008 to present as Chief Financial Officer and October 2008 to present as
Chief Compliance Officer
|
|
Joined
Prospect Administration as Managing Director in June
2008. Previously Managing Director in Structured Finance Group
at GSC Group (2006 to 2008) and Chief Financial Officer at Capital Trust,
Inc. (2003 to 2005)
|
(1)
|
Mr.
William E. Vastardis was the Chief Compliance Officer until September 30,
2008. On October 1, 2008, Brian H. Oswald assumed this role and effective
November 11, 2008, Mr. Oswald also assumed the roles of Chief Financial
Officer and Treasurer, replacing Mr.
Vastardis.
|
Independent
Directors
Graham D.S.
Anderson. Mr. Anderson has served as General Partner of Euclid
SR Partners from 1996 to present. Mr. Anderson currently serves as a
member of the Board of Directors of Acurian, Inc. (a clinical trial recruitment
company), FatWire Software Corp. (a web content management company), iJet Risk
Management (an operational risk management information company), Plateau Systems
Limited (a human capital management software company) and SkinMedica Inc. (a
dermatology and cosmeceuticals company).
F. Lee Liebolt,
Jr. Mr. Liebolt is a lawyer in private
practice. From September 2005 to August 2006, he was senior counsel
at Harkins Cunningham LLP. Prior thereto, Mr. Liebolt practiced at
Sidley Austin Brown & Wood LLP and certain predecessor firms as a partner
(1976 to 2002) and as senior counsel (January 2003 to August
2005). Mr. Liebolt received his law degree from the University of
North Carolina at Chapel Hill and his Bachelor of Arts degree from the
University of Pennsylvania.
Eugene S.
Stark. Mr. Stark has served as Principal Financial Officer,
Chief Compliance Officer and Vice President - Administration of General American
Investors Company, Inc. from May 2005 to present. Prior to his role with General
American Investors Company, Inc., Mr. Stark served as the Chief Financial
Officer of Prospect Capital Corporation from January 2005 to April 2005. From
May 1987 to December 2004 Mr. Stark served as Senior Vice President (division
level) and Vice President (corporate level) with Prudential Financial, Inc. in
various financial management positions. Mr. Stark serves as a member of the
Board of Directors of Prospect Capital Funding LLC, a wholly-owned subsidiary of
the Company, and sits on the Board of Trustees and is a Member of the Finance
Committee of Mount Saint Mary Academy.
Interested
Directors
John F. Barry
III. Mr. Barry is chairman and chief executive officer of the
Company and is a control person of Prospect Capital Management and a managing
director of Prospect Administration. Mr. Barry is chairman of
Prospect's investment committee and has been an officer of Prospect since
1990. In addition to overseeing Prospect, Mr. Barry has served on the
boards of directors of twelve private and public Prospect portfolio
companies. Mr. Barry has served on the board of advisors of USEC
Inc., a publicly-traded energy company. Mr. Barry has served as
chairman and chief executive officer of Bondnet Trading Systems. From
1988 to 1989, Mr. Barry managed the investment bank of
L.F. Rothschild & Company, focusing on private equity and debt
financings for energy and other companies. From 1983 to 1988, Mr.
Barry was a senior investment and merchant banker at Merrill Lynch & Co.,
where he was a founding member of the project finance group, executing more than
$4 billion in energy and other financings. From 1979 to 1983, Mr.
Barry was a corporate securities attorney at Davis Polk & Wardwell, where he
advised energy companies and their commercial and investment
bankers. From 1978 to 1979, Mr. Barry served as law clerk to Circuit
Judge, formerly Chief Judge, J. Edward Lumbard of the U.S. Court of Appeals for
the Second Circuit in New York City. Mr. Barry is chairman of the
board of directors of the Mathematics Foundation of America, a non-profit
foundation which enhances opportunities in mathematics education for students
from diverse backgrounds. Mr. Barry received his JD cum laude from
Harvard Law School,
where he
was an editor of the Harvard Law Review, and his Bachelor of Arts magna cum
laude from Princeton University, where he was a University Scholar.
M. Grier
Eliasek. Mr. Eliasek is president and chief operating officer
of the Company and a managing director of Prospect Capital Management and
Prospect Administration. At the Company, Mr. Eliasek is responsible
for various administrative and investment management functions and leads and
supervises other Prospect professionals in origination and assessment of
investments. Mr. Eliasek has served as a senior investment
professional at Prospect since 1999. Prior to joining Prospect, Mr.
Eliasek assisted the chief financial officer of Amazon.com in 1999 in corporate
strategy, customer acquisition, and new product launches. From 1995
to 1998, Mr. Eliasek served as a consultant with Bain & Company, a global
strategy consulting firm, where he managed engagements for companies in several
different industries. At Bain, Mr. Eliasek analyzed new lines of
businesses, developed market strategies, revamped sales organizations and
improved operational performance. Mr. Eliasek received his MBA from
Harvard Business School. Mr. Eliasek received his Bachelor of Science
in Chemical Engineering with Highest Distinction from the University of
Virginia, where he was a Jefferson Scholar and a Rodman Scholar.
Executive
Officer
Brian H.
Oswald. Mr. Oswald is chief financial officer, chief
compliance officer, secretary and treasurer of the Company. He began
his career at KPMG Peat Marwick, where he held various positions over his
ten-year tenure, finishing as a Senior Manager in the financial institutions
group. During his time at KPMG, he served as the reviewing senior manager for
several initial public offerings of financial institutions. After
KPMG, Mr. Oswald served as the Executive Vice President and President of
Gloversville Federal Savings and Loan Association, served as the Director of
Financial Reporting and Subsidiary Accounting for River Bank America and served
as the Corporate Controller for Magic Solutions, Inc. In each of these
positions, Mr. Oswald instituted significant operational changes and was
instrumental in raising additional equity for River Bank America. From 2003 to
2005, Mr. Oswald led Capital Trust, Inc., a self-managed finance and investment
management REIT which specializes in credit-sensitive structured financial
products, as Chief Financial Officer. From 1997 to 2003, he served as Chief
Accounting Officer for Capital Trust. Prior to joining the Company, Mr. Oswald
spent two years with the Structured Finance Division of GSC Group, serving as
Managing Director of Finance for this asset management company. At GSC, Mr.
Oswald managed the finances for a REIT, two hedge funds and thirteen
CDOs. Mr. Oswald joined the Administrator on June 16,
2008. Mr. Oswald holds a B.A. degree in Accounting from Moravian
College. He is a licensed Certified Public Accountant in the States of New York
and Pennsylvania, and is a Certified Management Accountant. Mr. Oswald also
serves as a board member of RMJ Laboratories, Inc.
For
information on the investment professionals of Prospect Capital Management, see
"Business ― The
Investment Adviser ― Staffing."
Committees
of the Board of Directors
Our Board
of Directors has established an Audit Committee and a Nominating and Corporate
Governance Committee. For the fiscal year ended June 30, 2008, our Board of
Directors held twenty-three Board of Director meetings, sixteen Audit Committee
meetings, and one Nominating and Corporate Governance Committee meeting. All
directors attended at least 75% of the aggregate number of meetings of the Board
of Directors and of the respective committees on which they served. We require
each director to make a diligent effort to attend all board and committee
meetings, as well as each annual meeting of stockholders.
The Audit Committee. The
Audit Committee operates pursuant to a charter approved by the Board of
Directors. The charter sets forth the responsibilities of the Audit Committee,
which include selecting or retaining each year an independent registered public
accounting firm, or the independent accountants, to audit the accounts and
records of the Company; reviewing and discussing with management and the
independent accountants the annual audited financial statements of the Company,
including disclosures made in management's discussion and analysis, and
recommending to the Board of Directors whether the audited financial statements
should be included in the Company's annual report on Form 10-K; reviewing and
discussing with management and the independent accountants the Company's
quarterly financial statements prior to the filings of its quarterly reports on
Form 10-Q; pre-approving the independent accountants' engagement to render audit
and/or permissible non-audit services; and evaluating the qualifications,
performance and independence of the independent accountants. The Audit
Committee
is
presently composed of three persons: Messrs. Anderson, Liebolt and Stark, each
of whom is not an "interested person" as defined in the 1940 Act and is
considered independent under the Marketplace Rules of the NASDAQ Stock Market
LLC. The Company's Board of Directors has determined that Mr. Stark is an "audit
committee financial expert" as that term is defined under Item 407 of Regulation
S-K and Mr. Stark serves as the Chairman of the Audit Committee. The Audit
Committee may delegate its pre-approval responsibilities to one or more of its
members. The member(s) to whom such responsibility is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting. Messrs. Anderson and Stark were added to the
Audit Committee concurrent with their election to the Board of Directors on
September 15, 2008 and September 4, 2008, respectively.
The
function of the Audit Committee is oversight. Our management is primarily
responsible for maintaining appropriate systems for accounting and financial
reporting principles and policies and internal controls and procedures that
provide for compliance with accounting standards and applicable laws and
regulations. The independent accountants are primarily responsible for planning
and carrying out a proper audit of our annual financial statements in accordance
with generally accepted accounting standards. The independent accountants are
accountable to the Board of Directors and the Audit Committee, as
representatives of our stockholders. The Board of Directors and the Audit
Committee have the ultimate authority and responsibility to select, evaluate
and, where appropriate, replace our independent accountants (subject, if
applicable, to stockholder ratification).
In
fulfilling their responsibilities, it is recognized that members of the Audit
Committee are not our full-time employees or management and are not, and do not
represent themselves to be, accountants or auditors by profession. As such, it
is not the duty or the responsibility of the Audit Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures, to determine that the financial statements are complete and accurate
and are in accordance with generally accepted accounting principles, or to set
auditor independence standards. Each member of the Audit Committee is entitled
to rely on (a) the integrity of those persons within and outside us and
management from which it receives information; (b) the accuracy of the financial
and other information provided to the Audit Committee absent actual knowledge to
the contrary (which is required to be promptly reported to the Board of
Directors); and (c) statements made by our officers and employees, our
Investment Adviser or other third parties as to any information technology,
internal audit and other non-audit services provided by the independent
accountants to us.
The Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance Committee,
or the Nominating and Governance Committee, is responsible for selecting
qualified nominees to be elected to the Board of Directors by stockholders;
selecting qualified nominees to fill any vacancies on the Board of Directors or
a committee thereof; developing and recommending to the Board of Directors a set
of corporate governance principles applicable to the Company; overseeing the
evaluation of the Board of Directors and management; and undertaking such other
duties and responsibilities as may from time to time be delegated by the Board
of Directors to the Nominating and Governance Committee. The Nominating and
Governance Committee is presently composed of two persons: Messrs. Anderson, and
Stark, each of whom is not an "interested person" as defined in Section 2(a)(19)
of the 1940 Act and Mr. Anderson serves as the Chairman of the Nominating and
Governance Committee. Messrs. Stark and Anderson were added to the Nominating
and Governance Committee concurrent with their election to the Board of
Directors on September 4, 2008 and September 15, 2008,
respectively.
The
Nominating and Governance Committee will consider stockholder recommendations
for possible nominees for election as directors when such recommendations are
submitted in accordance with the Company's bylaws and any applicable law, rule
or regulation regarding director nominations. Nominations should be sent to the
Corporate Secretary, c/o Prospect Capital Corporation, 10 East 40th Street, 44th
Floor, New York, New York 10016. When submitting a nomination to the Company for
consideration, a stockholder must provide all information that would be required
under applicable SEC rules to be disclosed in connection with election of a
director, including the following minimum information for each director nominee:
full name, age and address; principal occupation during the past five years;
current directorships on publicly held companies and investment companies;
number of shares of our common stock owned, if any; and, a written consent of
the individual to stand for election if nominated by the Board of Directors and
to serve if elected by the stockholders. Criteria considered by the Nominating
and Governance Committee in evaluating the qualifications of individuals for
election as members of the Board of Directors include compliance with the
independence and other applicable requirements of the Marketplace Rules of
NASDAQ and the 1940 Act and all other applicable laws, rules, regulations and
listing standards, the criteria,
policies
and principles set forth in the Nominating and Corporate Governance Committee
Charter, and the ability to contribute to the effective management of the
Company, taking into account our needs and such factors as the individual's
experience, perspective, skills, expertise and knowledge of the industries in
which the Company operates, personal and professional integrity, character,
business judgment, time availability in light of other commitments, dedication
and conflicts of interest. The Nominating and Governance Committee also may
consider such other factors as it may deem to be in our best interests and those
of our stockholders. The Board of Directors also believes it is appropriate for
certain key members of our management to participate as members of the Board of
Directors.
Corporate
Governance
Corporate Governance
Guidelines. Upon the recommendation of the Nominating and
Governance Committee, the Board of Directors has adopted Corporate Governance
Guidelines on behalf of the Company. These Corporate Governance Guidelines
address, among other things, the following key corporate governance topics:
director responsibilities; the size, composition, and membership criteria of the
Board of Directors; composition and responsibilities of directors serving on
committees of the Board of Directors; director access to officers, employees,
and independent advisors; director orientation and continuing education;
director compensation; and an annual performance evaluation of the Board of
Directors.
Code of Conduct. We have
adopted a code of conduct which applies to, among others, our senior officers,
including our Chief Executive Officer and Chief Financial Officer, as well as
all of our employees. Our code of conduct is an exhibit to our Annual Report on
Form 10-K filed with the SEC, and can be accessed via the Internet site of the
SEC at http://www.sec.gov. We intend
to disclose amendments to or waivers from a required provision of the code of
conduct on Form 8-K.
Code of
Ethics. We, Prospect Capital Management and Prospect
Administration have each adopted a code of ethics pursuant to Rule 17j-1 under
the 1940 Act that establishes procedures for personal investments and restricts
certain personal securities transactions. Personnel subject to each code may
invest in securities for their personal investment accounts, including
securities that may be purchased or held by us, so long as such investments are
made in accordance with the code's requirements.
Internal Reporting and Whistle
Blower Protection Policy. The Company's Audit Committee
has established guidelines and procedures regarding the receipt, retention and
treatment of complaints regarding accounting, internal accounting controls or
auditing matters, collectively, Accounting Matters, and the confidential,
anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters. Persons with complaints or concerns regarding
Accounting Matters may submit their complaints to our Chief Compliance Officer,
or CCO. Persons who are uncomfortable submitting complaints to the CCO,
including complaints involving the CCO, may submit complaints directly to our
Audit Committee Chairman. Complaints may be submitted on an anonymous
basis.
The CCO
may be contacted at: Prospect Capital Corporation, Chief Compliance
Officer, 10 East 40th Street, 44th Floor, New York, New York 10016.
The Audit
Committee Chairman may be contacted at: Prospect Capital Corporation,
Audit Committee Chairman, 10 East 40th Street, 44th Floor, New York, New York
10016.
Independent
Directors
The Board
of Directors, in connection with the 1940 Act and Marketplace Rules 4200(a)(15)
and 4350(c) of NASDAQ, has considered the independence of members of the Board
of Directors who are not employed by Prospect Capital Management and has
concluded that Messrs. Anderson, Liebolt and Stark are not "interested
persons" as defined by the 1940 Act and therefore qualify as independent
directors under the standards promulgated by the Marketplace Rules of NASDAQ. In
reaching this conclusion, the Board of Directors concluded that Messrs.
Anderson, Liebolt and Stark had no relationships with Prospect Capital
Management or any of its affiliates, other than their positions as directors of
the Company and, if applicable, investments in us that are on the same terms as
those of other stockholders.
Proxy
Voting Policies And Procedures
We have
delegated our proxy voting responsibility to Prospect Capital
Management. The guidelines are reviewed periodically by Prospect
Capital Management and our non-interested directors, and, accordingly, are
subject to change. See "Regulation ― Proxy Voting
Policies and Procedures."
Compensation
of Directors and Officers
The
following table sets forth information regarding the compensation received by
the directors and executive officers from the Company for the fiscal year ended
June 30, 2008. No compensation is paid to the interested directors by
the Company.
|
|
Aggregate
Compensation
from
the
Company
|
|
Pension
or
Retirement
Benefits
Accrued
as
Part of the
Company's
Expenses(1)
|
|
Total
Compensation
Paid
to
Director/Officer
|
Interested
Directors
|
|
|
|
|
|
|
John
F. Barry(2)
|
|
None
|
|
None
|
|
None
|
M.
Grier Eliasek(2)
|
|
None
|
|
None
|
|
None
|
Independent
Directors
|
|
|
|
|
|
|
Graham
D.S. Anderson(5)
|
|
None
|
|
None
|
|
None
|
William
J. Gremp
|
|
$86,250
|
|
None
|
|
$86,250
|
F.
Lee Liebolt, Jr.(3)
|
|
$80,000
|
|
None
|
|
$80,000
|
Walter
V.E. Parker(3)
|
|
$86,250
|
|
None
|
|
$86,250
|
Eugene
S. Stark(4)
|
|
None
|
|
None
|
|
None
|
Executive
Officers
|
|
|
|
|
|
|
William
E. Vastardis(6,7)
|
|
—
|
|
None
|
|
—
|
Brian
H. Oswald(2)
|
|
None
|
|
None
|
|
None
|
(1)
|
We
do not have a bonus, profit sharing or retirement plan, and directors do
not receive any pension or retirement
benefits.
|
(2)
|
We
have not paid, and we do not intend to pay, any annual cash compensation
to our executive officers for their services as executive
officers. Messrs. Barry and Eliasek are compensated by Prospect
Capital Management from the income Prospect Capital Management receives
under the management agreement between Prospect Capital Management and
us. Mr. Oswald is compensated by Prospect Administration from
the income Prospect Administration receives under the Administration
Agreement.
|
(3)
|
Messrs.
Liebolt and Parker ceased being members of the Board of Directors
concurrent with the election of directors at the Company's most recent
annual meeting.
|
(4)
|
Mr.
Stark joined our Board of Directors on September 4,
2008.
|
(5)
|
Mr.
Anderson joined our Board of Directors on September 15,
2008.
|
(6)
|
Mr.
Vastardis served as Chief Compliance Officer from January 4, 2005
through September 30, 2008, and served as Chief Financial Officer and
Treasurer from April 30, 2005 through November 11, 2008. Mr.
Vastardis served as Secretary from April 30, 2005 through June 6,
2008.
|
(7)
|
The
compensation of William E. Vastardis for his service as Chief Financial
Officer and Treasurer of the Company was paid by Vastardis Fund Services
LLC, our sub-administrator. Vastardis Fund Services was in turn
paid by the Company at a monthly minimum rate of $33,333.33 or annual fees
on gross assets of 0.20% on the first $250 million, 0.15% on the next $250
million, 0.10% on the next $250 million, 0.075% on the next $250 million
and 0.05% over one billion. The compensation of William E.
Vastardis for his service as Chief Compliance Officer of the Company was
paid by Vastardis Compliance Services LLC. Vastardis Compliance
Services LLC is in turn paid by the Company at a monthly rate of
$6,250. In addition, the Company pays Vastardis Compliance
Services LLC for certain other services at the rate of $270 per
hour. Both Vastardis Fund Services LLC and Vastardis Compliance
Services LLC determine the compensation to be paid to Mr. Vastardis with
respect to the Company based on a case-by-case evaluation of the time and
resources that is required to fulfill his duties to the
Company. For the fiscal year ending June 30, 2008, the Company
paid Vastardis Compliance Services LLC $75,000 for services rendered by
Mr. Vastardis as Chief Compliance Officer. For the fiscal year
ending June 30, 2008, the Company paid Vastardis Fund Services LLC
approximately $783,520 for services required to be provided by Prospect
Administration, including, but not limited to, (a) clerical, bookkeeping
and record keeping services, (b) conducting relations with custodians,
depositories, transfer agents and other third-party service providers and
(c) furnishing reports to Prospect Administration and the Board of
Directors of the Company of its performance of obligations. In addition,
the fees paid to Vastardis Fund Service LLC cover the services rendered by
Mr. Vastardis as our Chief Financial Officer and
Treasurer.
|
For the
first nine months of the fiscal year ended June 30, 2008, the independent
directors received an annual fee of $70,000, paid monthly in advance, plus
reimbursement of any reasonable out-of-pocket expenses incurred. The
chairman of each committee also received an additional annual fee of
$5,000. For the last three months of the fiscal year ended June 30,
2008, the independent directors received an annual fee of $75,000, paid monthly
in advance, plus $1,250 in connection with each board or committee meeting
attended, and the chairman of each committee also received an additional annual
fee of $5,000. The independent directors were also
reimbursed
for any
reasonable out-of-pocket expenses incurred. No compensation was paid
to directors who are interested persons of the Company as defined in 1940
Act. In addition, the Company purchases directors' and officers'
liability insurance on behalf of the directors and officers.
Effective
July 1, 2008, the independent directors received an annual fee of $90,000 plus
reimbursement of any reasonable out-of-pocket expenses incurred. The
chairman of the Audit Committee received an additional annual cash retainer of
$7,500 and the chairman of the Nominating and Corporate Governance Committee
received an additional annual cash retainer of $5,000. Effective September 15,
2008, board member s who do not serve on any committees of the board receive an
annual fee of 11,250.
Effective
October 1, 2008, the independent directors who serves on a committee of the
Board receive an annual fee of $85,000 plus reimbursement of any reasonable
out-of-pocket expenses incurred and committee chairmen no longer receive any
additional compensation.
Management
Services
Investment
Advisory Agreement
We have
entered into the Investment Advisory Agreement with Prospect Capital Management
under which the Investment Adviser, subject to the overall supervision of our
Board of Directors, manages the day-to-day operations of, and provides
investment advisory services to, us. Under the terms of the
Investment Advisory Agreement, our Investment Adviser: (i) determines
the composition of our portfolio, the nature and timing of the changes to our
portfolio and the manner of implementing such changes, (ii) identifies,
evaluates and negotiates the structure of the investments we make (including
performing due diligence on our prospective portfolio companies); and (iii)
closes and monitors investments we make.
Prospect
Capital Management's services under the Investment Advisory Agreement are not
exclusive, and it is free to furnish similar services to other entities so long
as its services to us are not impaired. For providing these services
the Investment Adviser receives a fee from us, consisting of two
components: a base management fee and an incentive
fee. The base management fee is calculated at an annual rate of 2% on
our gross assets (including amounts borrowed). For services rendered
under the Investment Advisory Agreement, the base management fee is payable
quarterly in arrears. The base management fee is calculated based on
the average value of our gross assets at the end of the two most recently
completed calendar quarters and appropriately adjusted for any share issuances
or repurchases during the current calendar quarter. Base management
fees for any partial month or quarter are appropriately prorated.
The
incentive fee has two parts. The first part, the income incentive
fee, is calculated and payable quarterly in arrears based on our pre-incentive
fee net investment income for the immediately preceding calendar
quarter. For this purpose, pre-incentive fee net investment income
means interest income, dividend income and any other income (including any other
fees (other than fees for providing managerial assistance), such as commitment,
origination, structuring, diligence and consulting fees and other fees that we
receive from portfolio companies) accrued during the calendar quarter, minus our
operating expenses for the quarter (including the base management fee, expenses
payable under the Administration Agreement described below, and any interest
expense and dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income
includes, in the case of investments with a deferred interest feature (such as
original issue discount, debt instruments with payment in kind interest and zero
coupon securities), accrued income that we have not yet received in
cash. Pre-incentive fee net investment income does not include any
realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation. Pre-incentive fee net investment
income, expressed as a rate of return on the value of our net assets at the end
of the immediately preceding calendar quarter, is compared to a "hurdle rate" of
1.75% per quarter (7% annualized).
The net
investment income used to calculate this part of the incentive fee is also
included in the amount of the gross assets used to calculate the 2% base
management fee. We pay the Investment Adviser an income incentive fee
with respect to our pre-incentive fee net investment income in each calendar
quarter as follows:
|
·
|
no
incentive fee in any calendar quarter in which our pre-incentive fee net
investment income does not exceed the hurdle
rate;
|
|
·
|
100%
of our pre-incentive fee net investment income with respect to that
portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle rate but is less than 125% of the quarterly hurdle rate
in any calendar quarter (8.75% annualized with a 7% annualized hurdle
rate); and
|
|
|
|
|
·
|
20%
of the amount of our pre-incentive fee net investment income, if any, that
exceeds 125% of the quarterly hurdle rate in any calendar quarter (8.75%
annualized with a 7% annualized hurdle
rate).
|
These
calculations are appropriately prorated for any period of less than three months
and adjusted for any share issuances or repurchases during the current
quarter.
The
second part of the incentive fee, the capital gains incentive fee, is determined
and payable in arrears as of the end of each calendar year (or upon termination
of the Investment Advisory Agreement, as of the termination date), and equals
20% of our realized capital gains for the calendar year, if any, computed net of
all realized capital losses and unrealized capital depreciation at the end of
such year. In determining the capital gains incentive fee payable to
the Investment Adviser, we calculate the aggregate realized capital gains,
aggregate realized capital losses and aggregate unrealized capital depreciation,
as applicable, with respect to each investment that has been in our
portfolio. For the purpose of this calculation, an "investment" is
defined as the total of all rights and claims which may be asserted against a
portfolio company arising out of our participation in the debt, equity, and
other financial instruments issued by that company. Aggregate
realized capital gains, if any, equals the sum of the differences between the
aggregate net sales price of each investment and the aggregate cost basis of
such investment when sold or otherwise disposed. Aggregate realized
capital losses equal the sum of the amounts by which the aggregate net sales
price of each investment is less than the aggregate cost basis of such
investment when sold or otherwise disposed. Aggregate unrealized
capital depreciation equals the sum of the differences, if negative, between the
aggregate valuation of each investment and the aggregate cost basis of such
investment as of the applicable calendar year-end. At the end of the
applicable calendar year, the amount of capital gains that serves as the basis
for our calculation of the capital gains incentive fee involves netting
aggregate realized capital gains against aggregate realized capital losses on a
since-inception basis and then reducing this amount by the aggregate unrealized
capital depreciation. If this number is positive, then the capital
gains incentive fee payable is equal to 20% of such amount, less the aggregate
amount of any capital gains incentive fees paid since inception.
The total
base management fees earned by and paid to Prospect Capital Management during
the three months ended September 30, 2008 and September 30, 2007 were
$2.8 million and $1.9 million respectively, and $8.9 million, $5.4 million
and $2.1 million for the twelve months ended June 30, 2008, June 30, 2007 and
June 30, 2006, respectively.
The
income incentive fees were $5.9 million and $1.9 million, for the three months
ended September 30, 2008 and September 30, 2007 respectively, and $11.3 million,
$5.8 million and $1.8 million for the twelve months ended June 30, 2008, June
30, 2007 and June 30, 2006, respectively. No capital gains incentive
fees were earned for the three months ended September 30, 2008 and September 30,
2007.
The total
investment advisory fees were $8.7 million, and $3.8 million for the three
months ended September 30, 2008 and September 30, 2007 respectively, and $20.2
million, $11.2 million and $3.9 million for the twelve months ended June 30,
2008, June 30, 2007 and June 30, 2006, respectively.
Because
of the structure of the incentive fee, it is possible that we may have to pay an
incentive fee in a quarter where we incur a loss. For example, if we
receive pre-incentive fee net investment income in excess of the hurdle rate for
a quarter, we will pay the applicable income incentive fee even if we have
incurred negative total return in that quarter due to realized or unrealized
losses on our investments.
Examples
of Quarterly Incentive Fee Calculation
Example
1: Income Incentive Fee(*):
Alternative
1
Assumptions
Investment
income (including interest, dividends, fees, etc.) = 1.25%
Hurdle
rate(1) =
1.75%
Base
management fee(2) =
0.50%
Other
expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.20%
Pre-incentive
fee net investment income (investment income – (base management fee + other
expenses)) = 0.55%
Pre-incentive
net investment income does not exceed hurdle rate, therefore there is no income
incentive fee.
Alternative
2
Assumptions
Investment
income (including interest, dividends, fees, etc.) = 2.70%
Hurdle
rate(1) =
1.75%
Base
management fee(2) =
0.50%
Other
expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.20%
Pre-incentive
fee net investment income (investment income – (base management fee + other
expenses)) = 2%
Pre-incentive
net investment income exceeds hurdle rate, therefore there is an income
incentive fee payable by us to our Investment Adviser.
Income
incentive Fee
|
=
100% × "Catch Up" + the greater of 0% AND (20% × (pre-incentive fee net
investment income – 2.1875%)
|
|
|
|
=
(100% × (2% – 1.75%)) + 0%
|
|
|
|
=
100% × 0.25% + 0%
|
|
|
|
=
0.25%
|
Alternative
3
Assumptions
Investment
income (including interest, dividends, fees, etc.) = 3%
Hurdle
rate(1) =
1.75%
Base
management fee(2) =
0.50%
Other
expenses (legal, accounting, custodian, transfer agent, etc.)(3) =
0.20%
Pre-incentive
fee net investment income (investment income – (base management fee + other
expenses)) = 2.30%
Pre-incentive
net investment income exceeds hurdle rate, therefore there is an income
incentive fee payable by us to our Investment Adviser.
Income
incentive Fee
|
=
100% × "Catch Up" + the greater of 0% AND (20% × (pre-incentive fee net
investment income – 2.1875%)
|
|
|
|
=
(100% × (2.1875% – 1.75%)) + the greater of 0% AND (20% × (2.30% –
2.1875%))
|
|
|
|
=
(100% × 0.4375%) + (20% × 0.1125%)
|
|
|
|
=
0.4375% + 0.0225%
|
|
|
|
=
0.46%
|
(*)
|
The
hypothetical amount of pre-incentive fee net investment income shown is
based on a percentage of total net
assets.
|
(1)
|
Represents
7% annualized hurdle rate.
|
(2)
|
Represents
2% annualized base management fee.
|
(3)
|
Excludes
organizational and offering
expenses.
|
Example
2: Capital Gains Incentive Fee:
Alternative
1
Assumptions
·
|
Year
1:
|
$20 million
investment made
|
|
|
|
·
|
Year
2:
|
Fair
market value, or FMV of investment determined to be
$22 million
|
|
|
|
·
|
Year
3:
|
FMV
of investment determined to be $17 million
|
|
|
|
·
|
Year
4:
|
Investment
sold for
$21 million
|
The
impact, if any, on the capital gains portion of the incentive fee would
be:
·
|
Year
1:
|
No
impact
|
|
|
|
·
|
Year
2:
|
No
impact
|
|
|
|
·
|
Year
3:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation)
|
|
|
|
·
|
Year
4:
|
Increase
base amount on which the second part of the incentive fee is calculated by
$4 million ($1 million of realized capital gain and
$3 million reversal in
unrealized capital
depreciation)
|
Alternative
2
Assumptions
·
|
Year
1:
|
$20 million
investment made
|
|
|
|
·
|
Year
2:
|
FMV
of investment determined to be $17 million
|
|
|
|
·
|
Year
3:
|
FMV
of investment determined to be $17 million
|
|
|
|
·
|
Year
4:
|
FMV
of investment determined to be $21 million
|
|
|
|
·
|
Year
5:
|
FMV
of investment determined to be $18 million
|
|
|
|
·
|
Year
6:
|
Investment
sold for
$15 million
|
The
impact, if any, on the capital gains portion of the incentive fee would
be:
·
|
Year
1:
|
No
impact
|
|
|
|
·
|
Year
2:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation)
|
|
|
|
·
|
Year
3:
|
No
impact
|
|
|
|
·
|
Year
4:
|
Increase
base amount on which the second part of the incentive fee is calculated by
$3 million (reversal in
unrealized capital depreciation)
|
|
|
|
·
|
Year
5:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$2 million (unrealized capital depreciation)
|
|
|
|
·
|
Year
6:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$3 million ($5 million of realized capital loss offset by a
$2 million reversal in
unrealized capital
depreciation)
|
Alternative
3
Assumptions
·
|
Year
1:
|
$20 million
investment made in company A, or Investment A, and $20 million
investment made in company B, or Investment B
|
|
|
|
·
|
Year
2:
|
FMV
of Investment A is determined to be $21 million, and Investment B is
sold for $18 million
|
|
|
|
·
|
Year
3:
|
Investment
A is sold for
$23 million
|
The
impact, if any, on the capital gains portion of the incentive fee would
be:
·
|
Year
1:
|
No
impact
|
|
|
|
·
|
Year
2:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$2 million (realized capital loss on Investment B)
|
|
|
|
·
|
Year
3:
|
Increase
base amount on which the second part of the incentive fee is calculated by
$3 million (realized capital gain on Investment
A)
|
Alternative
4
Assumptions
·
|
Year
1:
|
$20 million
investment made in company A, or Investment A, and $20 million
investment made in company B, or Investment
B
|
|
|
|
·
|
Year
2:
|
FMV
of Investment A is determined to be $21 million, and FMV of
Investment B is determined to be $17 million
|
|
|
|
·
|
Year
3:
|
FMV
of Investment A is determined to be $18 million, and FMV of
Investment B is determined to be $18 million
|
|
|
|
·
|
Year
4:
|
FMV
of Investment A is determined to be $19 million, and FMV of
Investment B is determined to be $21 million
|
|
|
|
·
|
Year
5:
|
Investment
A is sold for $17 million, and Investment B is sold for
$23 million
|
The
impact, if any, on the capital gains portion of the incentive fee would
be:
·
|
Year
1:
|
No
impact
|
|
|
|
·
|
Year
2:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation on Investment
B)
|
|
|
|
·
|
Year
3:
|
Decrease
base amount on which the second part of the incentive fee is calculated by
$1 million ($2 million in unrealized capital depreciation on
Investment A and $1 million recovery in unrealized capital
depreciation on Investment B)
|
|
|
|
·
|
Year
4:
|
Increase
base amount on which the second part of the incentive fee is calculated by
$3 million ($1 million recovery in unrealized capital
depreciation on Investment A and $2 million recovery in unrealized
capital depreciation on Investment B)
|
|
|
|
·
|
Year
5:
|
Increase
base amount on which the second part of the incentive fee is calculated by
$1 million ($3 million realized capital gain on Investment B
offset by $3 million realized capital loss on Investment A plus a
$1 million reversal in
unrealized capital depreciation on Investment A from Year
4)
|
Payment
of our expenses
All
investment professionals of the Investment Adviser and its staff, when and to
the extent engaged in providing investment advisory and management services, and
the compensation and routine overhead expenses of such personnel allocable to
such services, will be provided and paid for by the Investment
Adviser. We bear all other costs and expenses of our operations and
transactions, including those relating to: organization and offering;
calculation of our net asset value (including the cost and expenses of any
independent valuation firm); expenses incurred by Prospect Capital Management
payable to third parties, including agents, consultants or other advisers (such
as independent valuation firms, accountants and legal counsel), in monitoring
our financial and legal affairs and in monitoring our investments and performing
due diligence on our prospective portfolio companies; interest payable on debt,
if any, and dividends payable on preferred stock, if any, incurred to finance
our investments; offerings of our debt, our preferred shares, our common stock
and other securities; investment advisory fees; fees payable to third parties,
including agents, consultants or other advisors, relating to, or associated
with, evaluating and making investments; transfer agent and custodial fees;
registration fees; listing fees; taxes; independent directors' fees and
expenses; costs of preparing and filing reports or other documents with the SEC;
the costs of any reports, proxy statements or other notices to stockholders,
including printing costs; our allocable portion of the fidelity bond, directors
and officers/errors and omissions liability insurance, and any other insurance
premiums; direct costs and expenses of administration, including auditor and
legal costs; and all other expenses incurred by us, by our Investment Adviser or
by Prospect Administration in connection with administering our business, such
as our allocable portion of overhead under the Administration Agreement,
including rent and our allocable portion of the costs of our chief compliance
officer and chief financial officer and their respective staffs under the
sub-administration agreement, as further described below.
Duration
and termination
The
Investment Advisory Agreement was originally approved by our Board of Directors
on June 23, 2004 and was re-approved by the Board of Directors on
June 6, 2008 for an additional one-year term expiring June 22,
2009. Unless terminated earlier as described below, it will remain in
effect from year to year thereafter if approved annually by our Board of
Directors or by the affirmative vote of the holders of a majority of our
outstanding voting securities, including, in either case, approval by a majority
of our directors who are not interested persons. The Investment
Advisory Agreement will automatically terminate in the event of its
assignment. The Investment Advisory Agreement may be terminated by
either party without penalty upon not more than 60 days' written notice to
the other. See "Risk factors—Risks Relating to Our Business—We are
dependent upon Prospect Capital Management's key management personnel for our
future success."
Administration
Agreement
We have
also entered into an Administration Agreement with Prospect Administration under
which Prospect Administration, among other things, provides (or arranges for the
provision of) administrative services and
facilities
for us. For providing these services, we reimburse Prospect
Administration for our allocable portion of overhead incurred by Prospect
Administration in performing its obligations under the Administration Agreement,
including rent and our allocable portion of the costs of our chief compliance
officer and chief financial officer and their respective
staffs. Under this agreement, Prospect Administration furnishes us
with office facilities, equipment and clerical, bookkeeping and record keeping
services at such facilities. Prospect Administration also performs,
or oversees the performance of, our required administrative services, which
include, among other things, being responsible for the financial records that we
are required to maintain and preparing reports to our stockholders and reports
filed with the SEC. In addition, Prospect Administration assists us
in determining and publishing our net asset value, overseeing the preparation
and filing of our tax returns and the printing and dissemination of reports to
our stockholders, and generally oversees the payment of our expenses and the
performance of administrative and professional services rendered to us by
others. Under the Administration Agreement, Prospect Administration
also provides on our behalf managerial assistance to those portfolio companies
to which we are required to provide such assistance. The
Administration Agreement may be terminated by either party without penalty upon
60 days' written notice to the other party. Prospect
Administration is a wholly owned subsidiary of our Investment
Adviser.
Prospect
Administration, pursuant to the approval of our Board of Directors, has engaged
Vastardis to serve as our sub-administrator to perform certain services required
of Prospect Administration. Under the sub-administration agreement,
Vastardis provides us with office facilities, equipment, clerical, bookkeeping
and record keeping services at such facilities. Vastardis also
conducts relations with custodians, depositories, transfer agents, dividend
disbursing agents, other stockholder servicing agents, accountants, corporate
fiduciaries, and such other persons in any such other capacity deemed to be
necessary or desirable. Vastardis provides reports to the
Administrator and the Board of Directors of its performance of obligations and
furnishes advice and recommendations with respect to such other aspects of our
business and affairs as it shall determine to be desirable. In May
2006, the engagement was revised and renewed as an asset-based fee on a sliding
scale starting at 0.20% on the first $250 million in gross assets and
ending at 0.05% on gross assets over $1 billion with a $400,000 annual
minimum, payable monthly. Vastardis does not provide any advice or
recommendation relating to the securities and other assets that we should
purchase, retain or sell or any other investment advisory services to
us. Vastardis is responsible for the financial and other records that
either we (or the Administrator on our behalf) are required to maintain and
prepares reports to stockholders, and reports and other materials filed with the
SEC. In addition, Vastardis assists us in determining and publishing
our net asset value, overseeing the preparation and filing of our tax returns,
and the printing and dissemination of reports to our stockholders, and generally
overseeing the payment of our expenses and the performance of administrative and
professional services rendered to us by others.
We
reimbursed Prospect Administration $0.589 million and $0.259 million, for the
three months ended September 30, 2008 and September 30, 2007 respectively, and
$2.139 million, $0.785 million and $0.310 million for the twelve months ended
June 30, 2008, June 30, 2007 and June 30, 2006, respectively, for services it
provided to the Company at cost.
Indemnification
The
Investment Advisory Agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
reckless disregard of its duties and obligations, Prospect Capital Management
and its officers, managers, agents, employees, controlling persons, members and
any other person or entity affiliated with it are entitled to indemnification
from us for any damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) arising from the
rendering of Prospect Capital Management's services under the Investment
Advisory Agreement or otherwise as our Investment Adviser.
The
Administration Agreement provides that, absent willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration and its
officers, managers, partners, agents, employees, controlling persons, members
and any other person or entity affiliated with it are entitled to
indemnification from us for any damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts reasonably paid in settlement)
arising from the rendering of Prospect Administration's services under the
Administration Agreement or otherwise as our administrator.
Under the
sub-administration agreement, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis, are not liable to the Administrator or
to
us for
any action taken or omitted to be taken by Vastardis in connection with the
performance of any of its duties or obligations or otherwise as
sub-administrator for the Administrator on our behalf. The agreement
also provides that, absent willful misfeasance, bad faith or negligence in the
performance of Vastardis' duties or by reason of the reckless disregard of
Vastardis' duties and obligations, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis are entitled to indemnification from the Administrator
and us. All damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement) incurred
in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Administrator or us or our security holders) arising out of or
otherwise based upon the performance of any of Vastardis' duties or obligations
under the agreement or otherwise as sub-administrator for the Administrator on
our behalf.
Board
of Directors approval of the Investment Advisory Agreement
On June
6, 2008, our Board of Directors voted unanimously to renew the Investment
Advisory Agreement for the 12-month period ending June 22, 2009. In
its consideration of the Investment Advisory Agreement, the Board of Directors
focused on information it had received relating to, among other
things: (a) the nature, quality and extent of the advisory and other
services to be provided to us by Prospect Capital Management; (b) comparative
data with respect to advisory fees or expense ratios paid by other business
development companies with similar investment objectives; (c) our projected
operating expenses; (d) the projected profitability of Prospect Capital
Management and any existing and potential sources of indirect income to Prospect
Capital Management or Prospect Administration from their relationships with us
and the profitability of those relationships; (e) information about the services
to be performed and the personnel performing such services under the Investment
Advisory Agreement; (f) the organizational capability and financial
condition of Prospect Capital Management and its affiliates and (g) the
possibility of obtaining similar services from other third party service
providers or through an internally managed structure. In approving
the renewal of the Investment Advisory Agreement, the Board of Directors,
including all of the directors who are not "interested persons," considered the
following:
|
·
|
Nature, Quality and Extent of
Services. The Board of Directors considered the nature,
extent and quality of the investment selection process employed by
Prospect Capital Management. The Board of Directors also
considered Prospect Capital Management's personnel and their prior
experience in connection with the types of investments made by
us. The Board of Directors concluded that the services to be
provided under the Investment Advisory Agreement are generally the same as
those of comparable business development companies described in the
available market data.
|
|
|
|
|
·
|
Investment
Performance. The Board of Directors reviewed our
investment performance as well as comparative data with respect to the
investment performance of other externally managed business development
companies. The Board of Directors concluded that Prospect
Capital Management was delivering results consistent with our investment
objective and that our investment performance was satisfactory when
compared to comparable business development companies.
|
|
|
|
|
·
|
The reasonableness of the fees
paid to Prospect Capital Management. The Board of
Directors considered comparative data based on publicly available
information on other business development companies with respect to
services rendered and the advisory fees (including the management fees and
incentive fees) of other business development companies as well as our
projected operating expenses and expense ratio compared to other business
development companies. The Board of Directors, on behalf of the
Company, also considered the profitability of Prospect Capital
Management. Based upon its review, the Board of Directors
concluded that the fees to be paid under the Investment Advisory Agreement
are reasonable compared to other business development
companies.
|
|
|
|
|
·
|
Economies of
Scale. The Board of Directors considered information
about the potential of Prospect Capital Management to realize economies of
scale in managing our assets, and determined that at this time there were
not economies of scale to be realized by Prospect Capital
Management.
|
Based on
the information reviewed and the discussions detailed above, the Board of
Directors (including all of the directors who are not "interested persons")
concluded that the investment advisory fee rates and terms are fair and
reasonable in relation to the services provided and approved the renewal of the
Investment Advisory Agreement with Prospect Capital Management as being in the
best interests of the Company and its stockholders.
Portfolio
Managers
The
following individuals function as portfolio managers primarily responsible for
the day-to-day management of our portfolio. Our portfolio managers
are not responsible for day-to-day management of any other
accounts. For a description of their principal occupations for the
past five years, see above.
|
|
|
|
Length
of Service with
Company(Years)
|
John
F. Barry
|
|
Chairman
and Chief Executive Officer
|
|
4
|
M.
Grier Eliasek
|
|
President
and Chief Operating Officer
|
|
4
|
Mr.
Eliasek receive compensation from the Company. Mr. Eliasek receives a
salary and bonus from Prospect Capital Management that takes into account his
role as a senior officer of the Company and of Prospect Capital Management, his
performance and the performance of each of Prospect Capital Management and the
Company. Mr. Barry receives no compensation from the
Company. Mr. Barry, as the sole member of Prospect Capital
Management, receives a salary and/or bonus from Prospect Capital Management and
is entitled to equity distributions after all other obligations of Prospect
Capital Management are met.
The
following table sets forth the dollar range of our common stock beneficially
owned by each of the portfolio managers described above as of January 29,
2009.
|
|
Aggregate
Dollar Range of Common
Stock
Beneficially Owned by
Prospect
Capital Management
|
John
F. Barry
|
|
Over
$ 100,000
|
M.
Grier Eliasek
|
|
Over
$ 100,000
|
Managerial
Assistance
As a
business development company, we offer, and must provide upon request,
managerial assistance to certain of our portfolio companies. This
assistance could involve, among other things, monitoring the operations of our
portfolio companies, participating in board and management meetings, consulting
with and advising officers of portfolio companies and providing other
organizational and financial guidance. We may receive fees for these
services. Such fees, if received by us, and not other entities, may
not always qualify as "good income" for purposes of the 90% income test that we
must meet each year to qualify as a RIC. Prospect Administration
provides such managerial assistance on our behalf to portfolio companies and is
compensated therefore when we are required to provide this
assistance. We received $0.2 million and $0.2 million in managerial
assistance for the three months ended September 30, 2008 and September 30, 2007
respectively, and $0.7 million, $0.5 million and $0.2 million in managerial
assistance for the twelve months ended June 30, 2008, June 30, 2007 and June 30,
2006, respectively. These fees are paid to the
Administrator.
License
Agreement
We
entered into a license agreement with Prospect Capital Management, pursuant to
which Prospect Capital Management agreed to grant us a nonexclusive, royalty
free license to use the name "Prospect Capital." Under this
agreement, we have a right to use the Prospect Capital name, for so long as
Prospect Capital Management or one of its affiliates remains our investment
adviser. Other than with respect to this limited license, we have no
legal right to the Prospect Capital name. This license agreement will
remain in effect for so long as the Investment Advisory Agreement with our
Investment Adviser is in effect.
CERTAIN RELATIONSHIPS AND
TRANSACTIONS
We have
entered into the Investment Advisory Agreement with Prospect Capital Management.
Our Chairman of the Board of Directors is the sole member of and controls
Prospect Capital Management. Our senior management may in the future also serve
as principals of other investment managers affiliated with Prospect Capital
Management that may in the future manage investment funds with investment
objectives similar to ours. In addition, our executive officers and directors
and the principals of Prospect Capital Management may serve as officers,
directors or principals of entities that operate in the same or related lines of
business as we do or of investment funds managed by affiliates. Accordingly, we
may not be given the opportunity to participate in certain investments made by
investment funds managed by advisers affiliated with Prospect Capital
Management. However, our Investment Adviser and other members of the affiliated
present and predecessor companies of Prospect Capital Management intend to
allocate investment opportunities in a fair and equitable manner consistent with
our investment objectives and strategies so that we are not disadvantaged in
relation to any other client. See "Risk Factors ― Risks
Relating To Our Business ― Potential conflicts of interest could impact
our investment returns."
In
addition, pursuant to the terms of the Administration Agreement, Prospect
Administration provides, or arranges to provide, the Company with the office
facilities and administrative services necessary to conduct our day-to-day
operations. Prospect Capital Management is the sole member of and controls
Prospect Administration. Prospect Administration, pursuant to the approval of
our Board of Directors, has engaged Vastardis to serve as the sub-administrator
of the Company.
We have
no intention of investing in any portfolio company in which Prospect Capital
Management or any affiliate currently has an investment.
CONTROL PERSONS AND PRINCIPAL
STOCKHOLDERS
As of
November 30, 2008, there were no persons that owned 25% or more of our
outstanding voting securities, and we believe no person should be deemed to
control us, as such term is defined in the 1940 Act.
The
following table sets forth, as of January 16, 2009, certain ownership
information with respect to our common stock for those persons who directly or
indirectly own, control or hold with the power to vote, 5% or more of our
outstanding common stock and all officers and directors, as a
group. Unless otherwise indicated, we believe that the beneficial
owners set forth in the tables below have sole voting and investment
power.
|
|
|
|
|
|
Percentage
of
Common
Stock
Outstanding(1)
|
Prospect
Capital Management LLC(2)
|
|
Record
and beneficial
|
|
757,287
|
|
2.56%
|
All
officers and directors as a group (7 persons)(3)
|
|
Record
and beneficial
|
|
1,247,740
|
|
4.21%
|
(1)
|
Does
not reflect shares of common stock reserved for issuance upon any exercise
of any underwriters' overallotment
option.
|
(2)
|
John
F. Barry is a control person of Prospect Capital
Management.
|
(3)
|
Represents
shares of common stock held by Prospect Capital
Management. Because John F. Barry controls Prospect Capital
Management, he may be deemed to be the beneficial owner of shares of our
common stock held by Prospect Capital Management. The address
for all officers and directors is c/o Prospect Capital Corporation, 10
East 40th Street, 44th Floor, New York, NY
10016.
|
The
following table sets forth the dollar range of our equity securities
beneficially owned by each of our directors and officers as of January 16,
2009. We are not part of a "family of investment companies" as that
term is defined in the 1940 Act.
Name
of Director or Officer
|
|
Dollar
Range of
Equity
Securities in
the
Company(1)
|
Independent
Directors
|
|
|
Graham
D.S.
Anderson.
|
|
$10,001-$50,000
|
F.
Lee
Liebolt
|
|
$1-$10,000
|
Eugene
S.
Stark
|
|
$10,001-$50,000
|
Interested
Directors
|
|
|
John
F. Barry III(2)
|
|
Over
$100,000
|
M.
Grier
Eliasek
|
|
Over
$100,000
|
Officer
|
|
|
Brian
H. Oswald(3)
|
|
$50,001-$100,000
|
(1)
|
Dollar
ranges are as follows: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000 or over $100,000.
|
(2)
|
Represents
an indirect beneficial ownership in shares of our common stock, that are
beneficially owned directly by Prospect Capital Management, by reason of
Mr. Barry's position as a control person of Prospect Capital
Management.
|
(3)
|
Mr.
William E. Vastardis was also the Chief Compliance Officer until September
30, 2008. On October 1, 2008, Brian H. Oswald assumed this role and
effective November 11, 2008, Mr. Oswald also assumed the roles of Chief
Financial Officer and Treasurer, replacing Mr. Vastardis. Mr. Oswald is
also the Secretary of the Company.
|
PORTFOLIO
COMPANIES
The
following is a listing of our portfolio companies at September 30,
2008. Values are as of September 30, 2008.
The
portfolio companies are presented in three categories: “companies
more than 25% owned” are portfolio companies in which we directly or indirectly
own more than 25% of the outstanding voting securities of such portfolio company
and, therefore, are presumed to be controlled by us under the 1940 Act;
“companies owned 5% to 25%” are portfolio companies where we directly or
indirectly own 5% to 25% of the outstanding voting securities of such portfolio
company and/or hold one or more seats on the portfolio company’s Board of
Directors and, therefore, are deemed to be an affiliated person under the 1940
Act; “companies less than 5% owned” are portfolio companies where we directly or
indirectly own less than 5% of the outstanding voting securities of such
portfolio company and where we have no other affiliations with such portfolio
company. As of September 30, 2008, we owned 100% of the fully diluted
common equity of GSHI, 51% of the common equity of WEPI, 49% of the fully
diluted common equity of Integrated, 79.83% of the fully diluted common equity
of Iron Horse, 80% of the fully diluted common equity of NRG, 74.51% of the
fully diluted equity of R-V, 76.55% of the fully diluted common equity of Ajax
and 100% of the fully diluted common equity of Yatesville. We make
available significant managerial assistance to our portfolio
companies. We generally request and may receive rights to observe the
meetings of our portfolio companies’ Boards of Directors.
Name
of Portfolio
Company
|
|
Nature
of its
Principal
Business
(Location)
|
|
Title
and Class of
Securities
Held
|
|
|
|
|
|
Equity
Securities
Held,
at
Fair
Value
(In
millions)
|
|
Loans,
at
Fair
Value
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies
more
than 25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax
Rolled Ring and
Machine
|
|
Manufacturing
(South Carolina)
|
|
Senior
secured debt, subordinated secured debt, preferred stock and common
equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Preferred shares; Senior secured note Tranche A, 10.50% due
4/01/2013; Subordinated secured note Tranche B, 11.50% plus 6.00% PIK due
4/01/2013
|
|
6.1
|
|
33.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J
Cladding LLC
|
|
Metal
services (Texas)
|
|
Senior
secured debt and warrants
|
|
First
priority lien on substantially all assets
|
|
Warrants,
common shares, expiring 3/30/2014; Senior secured note, 14.00% due
3/30/2012
|
|
3.7
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Solutions
Holdings, Inc.
|
|
Gas
gathering and processing (Texas)
|
|
Subordinated
secured debt and common equity
|
|
Second
priority lien on substantially all assets, subject to first priority lien
of senior lender, Royal Bank of Canada
|
|
Common
shares; Subordinated secured note, 18.00% due 12/22/2009
|
|
43.5
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Contract
Services, Inc.
|
|
Contracting
(North Carolina)
|
|
Senior
and junior secured debt, preferred stock and common equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Preferred shares; Senior and junior secured notes, 7.00% plus
7.00% PIK due 9/30/2010; Senior demand note, 15.00% due
6/30/2009
|
|
0.0
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron
Horse Coiled
Tubing, Inc.
|
|
Production
services (Alberta, Canada)
|
|
Senior
secured debt, bridge loan and common equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Senior secured note, 15.00% due 4/19/2009; Bridge loan, 15.00%
plus 3.00% PIK due 12/11/2008
|
|
0.0
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG
Manufacturing,
Inc.
|
|
Manufacturing
(Texas)
|
|
Senior
secured debt and common equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Senior secured note, 16.50% due 8/31/2011
|
|
8.7
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V
Industries, Inc.
|
|
Manufacturing
(Pennsylvania)
|
|
Warrants
and common equity
|
|
N/A
– loan repaid.
|
|
Common
shares; Warrants, common shares, expiring 6/30/2017
|
|
12.0
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester
Energy
Partners, Inc.
|
|
Biomass
power (Maine)
|
|
Senior
secured debt, convertible preferred stock and common
equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Convertible Preferred shares; Senior secured note,
12.50% due 12/31/2012
|
|
0.0
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Portfolio
Company
|
|
Nature
of its
Principal
Business
(Location)
|
|
Title
and Class of
Securities
Held
|
|
|
|
|
|
Equity
Securities
Held,
at
Fair
Value
(In
millions)
|
|
Loans,
at
Fair
Value
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yatesville
Coal
Holdings, Inc.
|
|
Mining
and coal production (Kentucky)
|
|
Senior
and junior secured debt and common equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Senior secured note, 15.68% due 12/31/2010; Junior secured note,
15.68% due 12/31/2010
|
|
0.0
|
|
27.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies
5% to
25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian
Energy
Holdings LLC
|
|
Construction
services (West Virginia)
|
|
Senior
secured debt, warrants and preferred units
|
|
First
priority lien on substantially all assets
|
|
Preferred
units; Warrants, common shares, expiring 2/13/2016 and 6/17/2018; Senior
secured note Tranche A, 14.00% plus 3.00% PIK due 1/31/2011; Senior
secured note Tranche B, 14.00% plus 3.00% PIK due
5/01/2009
|
|
0.9
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotronic
NeuroNetwork
|
|
Healthcare
(Michigan)
|
|
Senior
secured debt and preferred stock
|
|
First
priority lien on substantially all assets
|
|
Preferred
shares; Senior secured note, 11.50%, 1.00% PIK due
2/21/2013
|
|
2.3
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies
less
than 5% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Gilsonite
Company
|
|
Specialty
minerals (Utah)
|
|
Subordinated
secured debt and membership interests
|
|
Second
priority lien on substantially all assets
|
|
Membership
interests; Subordinated secured note, 12.00% plus 3.00% PIK due
3/14/2013
|
|
1.2
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castro
Cheese
Company,
Inc.
|
|
Food
products (Texas)
|
|
Junior
secured debt
|
|
Second
priority lien on substantially all assets
|
|
Junior
secured note, 11.00% plus 2.00% PIK due 2/28/2013
|
|
0.0
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest
Cherokee
LLC
|
|
Oil
and gas production (Tennessee)
|
|
Senior
secured debt and overriding royalty interest
|
|
First
priority lien on substantially all assets
|
|
Overriding
royalty interest, 5.00%; Senior secured note, 13.00% due
5/05/2009
|
|
0.0
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb
Shops, Inc. |
|
Retail
(Pennsylvania)
|
|
Senior
secured debt
|
|
Second
priority lien on substantially all assets
|
|
Senior secured note,
10.81% due 10/23/2014;
|
|
0.0
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback
Operating LP
|
|
Oil
and gas production (Oklahoma)
|
|
Senior
secured debt and net profit interest
|
|
First
priority lien on substantially all assets
|
|
Net
profit interest, 15.00%; Senior secured note, 12.00% plus 2.00% PIK due
8/27/2011
|
|
0.0
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom
Marine
Services LLC
|
|
Shipping
vessels (Louisiana)
|
|
Subordinated
secured debt and net profit interest
|
|
Second
priority lien on substantially all assets
|
|
Net
profit interest, 22.50%; Subordinated secured note, 12.00% plus 4.00% PIK
due 12/31/2011
|
|
0.0
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M
Oil & Gas LLC |
|
Oil
and gas production (Texas)
|
|
Senior
secured debt and net profit interest
|
|
First
priority lien on substantially all assets
|
|
Net
profit interest, 8.00%; Senior secured note, 13.00% due
6/30/2010
|
|
0.0
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
Systems LP/
Advanced Rig
Services LLC (“ARS”)
|
|
Oilfield
fabrication (Texas)
|
|
Senior
secured debt
|
|
First
priority lien on substantially all assets
|
|
Senior
secured notes 12.00% plus 3.00% PIK due 11/20/2012
|
|
0.0
|
|
37.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick
Healthcare LLC
|
|
Healthcare
(Arizona)
|
|
Second
lien debt, preferred units and common units
|
|
Second
priority lien on substantially all assets
|
|
Common
units; Preferred units; Second lien debt, 12.00% plus 1.50% PIK due
4/30/2014
|
|
1.3
|
|
12.4
|
Name
of Portfolio
Company
|
|
Nature
of its
Principal
Business
(Location)
|
|
Title
and Class of
Securities
Held
|
|
|
|
|
|
Equity
Securities
Held,
at
Fair
Value
(In
millions)
|
|
Loans,
at
Fair
Value
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller
Petroleum, Inc.
|
|
Oil
and gas production (Tennessee)
|
|
Warrants
|
|
N/A
— loan repaid
|
|
Warrants,
expiring 5/04/2010 through 9/30/2013
|
|
0.1
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless
Manufacturing Co.
|
|
Manufacturing
(Texas)
|
|
Subordinated
secured debt
|
|
Second
priority lien on substantially all assets
|
|
Subordinated
secured debt, 11.50% plus 3.50% PIK due 4/29/2013
|
|
0.0
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest
Pharmaceuticals,
Inc.
|
|
Pharmaceuticals
(Alabama)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien debt, 11.26% due 4/30/2015
|
|
0.0
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Management
Corp.
|
|
Financial
services (South Carolina)
|
|
Subordinated
secured debt
|
|
Second
priority lien on substantially all assets
|
|
Subordinated
secured note, 12.00% plus 2.00% PIK due 6/29/2012
|
|
0.0
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco
Products, Inc.
|
|
Manufacturing
(Pennsylvania)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien debt, 10.81% due 6/22/2014
|
|
0.0
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shearer’s
Foods, Inc.
|
|
Food
products (Ohio)
|
|
Second
lien debt and membership interests
|
|
Common
equity; Second priority lien on substantially all assets
|
|
Membership
interests; Second lien debt, 14.00% due 10/31/2013
|
|
2.3
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker
Energy LLC
|
|
Oil
and gas production (Ohio)
|
|
Subordinated
secured revolving credit facility and overriding royalty
interest
|
|
Second
priority lien on substantially all assets
|
|
Overriding
royalty interest, 3.50%; Subordinated secured revolving credit facility,
12.00% due 12/01/2011
|
|
0.0
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TriZetto
Group
|
|
Healthcare
(California)
|
|
Subordinated
unsecured debt
|
|
Unsecured
|
|
Subordinated
unsecured note, 12.00% plus 1.50% PIK due 10/01/2016
|
|
0.0
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek
|
|
Technical
services (Pennsylvania)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien debt, 12.75% due 12/31/2013
|
|
0.0
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind
River Resources
Corp. and Wind
River II Corp.
|
|
Oil
and gas production (Utah)
|
|
Senior
secured debt
|
|
First
priority lien on substantially all assets
|
|
Senior
secured note, 13.00% due 7/31/2010
|
|
0.0
|
|
14.3
|
DETERMINATION
OF NET ASSET VALUE
The net
asset value per share of our outstanding shares of common stock will be
determined quarterly by dividing the value of total assets minus liabilities by
the total number of shares outstanding.
In
calculating the value of our total assets, we will value investments for which
market quotations are readily available at such market
quotations. Short-term investments which mature in 60 days or
less, such as U.S. Treasury bills, are valued at amortized cost, which
approximates market value. The amortized cost method involves
recording a security at its cost (which we define as principal amount plus any
premium and less any discount) on the date of purchase and thereafter
amortizing/accreting that difference between the principal amount due at
maturity and cost assuming a constant yield to maturity as determined at the
time of purchase. Short-term securities which mature in more than
60 days are valued at current market quotations by an independent pricing
service or at the mean between the bid and ask prices obtained from at least two
brokers or dealers (if available, or otherwise by a principal market maker or a
primary market dealer). Investments in money market mutual funds are
valued at their net asset value as of the close of business on the day of
valuation.
Most of
the investments in our portfolio do not have market quotations which are readily
available, meaning the investments do not have actively traded
markets. Debt and equity securities for which market quotations are
not readily available are valued with the assistance of an independent valuation
service using a documented valuation policy and a valuation process that is
consistently applied under the direction of our Board of
Directors. For a discussion of the risks inherent in determining the
value of securities for which readily available market values do not exist, see
"Risk Factors—Risks Relating to Our Business—Most of our portfolio investments
are recorded at fair value as determined in good faith by our Board of Directors
and, as a result, there is uncertainty as to the value of our portfolio
investments."
The
factors that may be taken into account in valuing such investments include, as
relevant, the portfolio company's ability to make payments, its estimated
earnings and projected discounted cash flows, the nature and realizable value of
any collateral, the financial environment in which the portfolio company
operates, comparisons to securities of similar publicly-traded companies,
changes in interest rates for similar debt instruments and other relevant
factors. Due to the inherent uncertainty of determining the fair
value of investments that do not have readily available market quotations, the
fair value of these investments may differ significantly from the values that
would have been used had such market quotations existed for such investments,
and any such differences could be material.
As part
of the fair valuation process, the independent valuation firm engaged by the
Board of Directors performs a review of each debt and equity investment with
management and provides a range of values for each investment, which, along with
management's valuation recommendations, is reviewed by management and the Audit
Committee. The independent valuation firm may adjust their
preliminary evaluations to reflect comments provided by management and the Audit
Committee. The Audit Committee reviews the final valuation report and
management's valuation recommendations and makes a recommendation to the Board
of Directors based on its analysis of the methodologies employed and the various
weights that should be accorded to each portion of the valuation as well as
factors that the independent valuation firm and management may not have included
in their evaluation processes. The Board of Directors then evaluates
the Audit Committee recommendations and undertakes a similar analysis to
determine the fair value of each investment in the portfolio in good
faith.
Determination
of fair values involves subjective judgments and estimates not susceptible to
substantiation by auditing procedures. Accordingly, under current
accounting standards, the notes to our financial statements will refer to the
uncertainty with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
SALES OF COMMON STOCK BELOW NET ASSET
VALUE
We have
asked our stockholders to approve our ability to sell an unlimited number of
shares of our common stock at any level of discount from net asset value (NAV)
per share during the twelve-month period following such approval. If
we obtain this authorization, in order to sell shares pursuant to this
authorization a majority of our directors who have no financial interest in the
sale and a majority of our independent directors must (a) find that the sale is
in our best interests and in the best interests of our stockholders, and (b) in
consultation with any underwriter or underwriters of the offering, make a good
faith determination as of a time either immediately prior to the first
solicitation by us or on our behalf of firm commitments to purchase such shares,
or immediately prior to the issuance of such shares, that the price at which
such shares are to be sold is not less than a price which closely approximates
the market value of such shares, less any distributing commission or
discount. We could also sell shares of common stock below NAV per
share in certain other circumstances, including rights offerings.
In making
a determination that an offering below NAV per share is in our and our
stockholders' best interests, our Board of Directors would consider a variety of
factors including:
|
·
|
The
effect that an offering below NAV per share would have on our
stockholders, including the potential dilution they would experience as a
result of the offering;
|
|
|
|
|
·
|
Whether
the estimated offering price would closely approximate the market value of
our shares;
|
|
|
|
|
·
|
The
anticipated rate of return on and availability of investments;
and
|
|
|
|
|
·
|
The
leverage available to us.
|
Sales by
us of our common stock at a discount from NAV pose potential risks for our
existing stockholders whether or not they participate in the offering, as well
as for new investors who participate in the offering.
Impact On Existing Stockholders Who
Do Not Participate
Our
existing stockholders who do not participate in an offering below NAV per share
or who do not buy additional shares in the secondary market at the same or lower
price we obtain in
the offering (after expenses and commissions) face the greatest potential
risks. These stockholders will experience an immediate decrease
(often called dilution) in the NAV of the shares they hold and their NAV per
share. These stockholders will also experience a disproportionately
greater decrease in their participation in our earnings and assets and their
voting power than the increase we will experience in our assets, potential
earning power and voting interests due to the offering.
The
following chart illustrates the level of dilution that would be experienced by a
nonparticipating stockholder in three different hypothetical offerings of
different sizes and levels of discount from NAV per share.
The
examples assume that the issuer has 30,000,000 common shares outstanding,
$600,000,000 in total assets and $150,000,000 in total
liabilities. The current NAV and NAV per share are thus $450,000,000
and $15.00. The chart illustrates the dilutive effect on Stockholder
A of (1) an offering of 1,500,000 shares (5% of the outstanding shares) at
$14.25 per share after offering expenses and commission (a 5% discount from
NAV), (2) an offering of 3,000,000 shares (10% of the outstanding shares) at
$13.50 per share after offering expenses and commissions (a 10% discount from
NAV) and (3) an offering of 6,000,000 shares (20% of the outstanding shares) at
$12.00 per share after offering expenses and commissions (a 20% discount from
NAV). The prospectus supplement pursuant to which any discounted
offering is made will include a chart based on the actual number of shares in
such offering and the actual discount to the most recently determined
NAV.
|
|
|
|
Example
1
5%
Offering
at
5% Discount
|
|
Example
2
10%
Offering
at
10% Discount
|
|
Example
3
20%
Offering
at
20% Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares Outstanding
|
|
30,000,000
|
|
31,500,000
|
|
5.00%
|
|
33,000,000
|
|
10.00%
|
|
36,000,000
|
|
20.00%
|
NAV
per Share
|
|
$15.00
|
|
$14.96
|
|
(0.24)%
|
|
$14.86
|
|
(0.91)%
|
|
$14.50
|
|
(3.33)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution
to Nonparticipating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Stockholder A
|
|
30,000
|
|
30,000
|
|
0%
|
|
30,000
|
|
0%
|
|
30,000
|
|
0%
|
Percentage
Held by Stockholder A
|
|
.10%
|
|
0.095%
|
|
(4.76)%
|
|
0.090%
|
|
(9.09)%
|
|
0.08%
|
|
(16.67)%
|
Total
NAV Held by Stockholder A
|
|
$450,000
|
|
$448,929
|
|
(0.24)%
|
|
$445,909
|
|
(0.91)%
|
|
$435,000
|
|
(3.33)%
|
Investment
per Share Held by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
A
|
|
$15.00
|
|
$15.00
|
|
0%
|
|
$15.00
|
|
0%
|
|
$15.00
|
|
0%
|
Dilution
per Share Held by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
A (NAV per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
Investment per Share)
|
|
|
|
$(.04)
|
|
(.24)%
|
|
$(.14)
|
|
(.91)%
|
|
$(.50)
|
|
(3.33)%
|
Impact
On Existing Stockholders Who Do Participate
Our
existing stockholders who participate in an offering below NAV per share or
who buy additional shares in the secondary market at the same or lower price as
we obtain in the
offering (after expenses and commissions) will experience the same types of
dilution as the nonparticipating stockholders, albeit at a lower level, to the
extent they purchase less than the same percentage of the discounted offering as
their interest in our shares immediately prior to the offering. The
level of dilution will decrease as the number of shares such stockholders
purchase increases. Existing stockholders who buy more than such
percentage will, in contrast, experience an increase (often called accretion) in
NAV that exceeds the amount of dilution to their holdings prior to the offering
and a disproportionately greater increase in their participation in our earnings
and assets and their voting power than our increase in assets, potential earning
power and voting interests due to the offering. The level of
accretion will increase as the excess number of shares such stockholder
purchases increases. Even a stockholder who overparticipates will,
however, be subject to the risk that we may make additional discounted offerings
in which such stockholder does not participate, in which case such a stockholder
will experience dilution as described above in such subsequent
offerings.
The
following chart illustrates the level of dilution and accretion in the
hypothetical 10% discount offering from the prior chart (Example 2) for a
stockholder that acquires shares equal to (1) 50% of its proportionate share of
the offering (i.e., 1,500 shares, which is 0.05% of an offering of 3,000,000
shares) rather than its 0.10% proportionate share and (2) 150% of such
percentage (i.e. 4,500 shares, which is 0.15% of an offering of 3,000,000 shares
rather than its 0.10% proportionate share). The prospectus supplement
pursuant to which any discounted offering is made will include a chart for these
examples based on the actual number of shares in such offering and the
actual discount from the most recently determined NAV per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares Outstanding
|
|
30,000,000
|
|
33,000,000
|
|
10%
|
|
33,000,000
|
|
10%
|
|
|
|
|
NAV
per Share
|
|
$15.00
|
|
$14.86
|
|
(0.91)%
|
|
$14.86
|
|
(.91)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion
to Participating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Stockholder A
|
|
30,000
|
|
31,500
|
|
5%
|
|
34,500
|
|
15%
|
|
|
|
|
Percentage
Held by Stockholder A
|
|
.10%
|
|
0.097%
|
|
(4.55)%
|
|
0.102%
|
|
4.55%
|
|
|
|
|
Total
NAV Held by Stockholder A
|
|
$450,000
|
|
$468,090
|
|
4.055%
|
|
$512,670
|
|
14%
|
|
|
|
|
Investment
per Share Held by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder
A (assumed to Be $15.00 on Shares Held Prior to Sale)
|
|
$15.00
|
|
$14.93
|
|
(0.48)%
|
|
$14.80
|
|
(1.30)%
|
|
|
|
|
Dilution/Accretion
per Share Held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by
Stockholder A (NAV per Share Less Investment per Share)
|
|
|
|
$(0.07)
|
|
(0.47)%
|
|
$0.06
|
|
0.40%
|
|
|
|
|
Impact On New
Investors
Investors
who are not currently stockholders and who participate in an offering below NAV
per share will experience an immediate increase in the NAV of their shares and
their NAV per share compared to the price they pay for their
shares. These investors will experience a disproportionately greater
participation in our earnings and assets and their voting power than our
increase in assets, potential earning power and voting
interests. These investors will, however, be subject to the risk that
we may make additional discounted offerings in which such new stockholder does
not participate, in which case such new stockholder will experience dilution as
described above in such subsequent offerings.
The
following chart illustrates the level of accretion for new investors that would
be experienced by a new investor in the same hypothetical 5%, 10% and 20%
discounted offerings as described in the first chart above. The
illustration is for a new investor who purchases the same percentage (0.10%) of
the shares in the offering as Stockholder A in the prior examples held
immediately prior to the offering. The prospectus supplement pursuant
to which any discounted offering is made will include a chart for these examples
based on the actual number of shares in such offering and the actual discount
from the most recently determined NAV per share.
|
|
|
|
Example
1
|
|
Example
2
|
|
Example
3
|
|
|
|
|
5%
Offering
at
5% Discount
|
|
10%
Offering
at
10% Discount
|
|
20%
Offering
at
20% Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
30,000,000
|
|
31,500,000
|
|
5%
|
|
33,000,000
|
|
10%
|
|
36,000,000
|
|
20%
|
Total
Shares Outstanding
|
|
$15.00
|
|
$14.96
|
|
(0.24)%
|
|
$14.86
|
|
(0.91)%
|
|
$14.50
|
|
(3.33)%
|
NAV
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
to New Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Investor A
|
|
0
|
|
1,500
|
|
|
|
3,000
|
|
|
|
6,000
|
|
|
Percentage
Held by Investor A
|
|
0%
|
|
.10
|
% |
|
|
.01
|
% |
|
|
.01
|
% |
|
Total
NAV Held by Investor A
|
|
$0
|
|
$22,446
|
|
|
|
$44,580
|
|
|
|
$87,000
|
|
|
Investment
per Share Held by Investor A
|
|
$0
|
|
$14.25
|
|
|
|
$13.50
|
|
|
|
$12.00
|
|
|
Accretion
per Share Held by Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NAV
per Share Less Investment per Share)
|
|
|
|
$0.71
|
|
5.01%
|
|
$1.36
|
|
10.10%
|
|
$2.50
|
|
20.83%
|
DIVIDEND REINVESTMENT PLAN
We have
adopted a dividend reinvestment plan that provides for reinvestment of our
distributions on behalf of our stockholders, unless a stockholder elects to
receive cash as provided below. As a result, when our Board of
Directors authorizes, and we declare, a cash dividend, then our stockholders who
have not "opted out" of our dividend reinvestment plan will have their cash
dividends automatically reinvested in additional shares of our common stock,
rather than receiving the cash dividends.
No action
is required on the part of a registered stockholder to have their cash dividend
reinvested in shares of our common stock. A registered stockholder
may elect to receive an entire dividend in cash by notifying the plan
administrator and our transfer agent and registrar, in writing so that such
notice is received by the plan administrator no later than the record date for
dividends to stockholders. The plan administrator sets up an account
for shares acquired through the plan for each stockholder who has not elected to
receive dividends in cash and hold such shares in non-certificated
form. Upon request by a stockholder participating in the plan, the
plan administrator will, instead of crediting shares to the participant's
account, issue a certificate registered in the participant's name for the number
of whole shares of our common stock and a check for any fractional
share. Such request by a stockholder must be received three days
prior to the dividend payable date in order for that dividend to be paid in
cash. If such request is received less than three days prior to the
dividend payable date, then the dividends are reinvested and shares are
repurchased for the stockholder's account; however, future dividends are paid
out in cash on all balances. Those stockholders whose shares are held
by a broker or other financial intermediary may receive dividends in cash by
notifying their broker or other financial intermediary of their
election.
We
primarily use newly issued shares to implement the plan, whether our shares are
trading at a premium or at a discount to net asset value. However, we
reserve the right to purchase shares in the open market in connection with our
implementation of the plan. The number of shares to be issued to a
stockholder is determined by dividing the total dollar amount of the dividend
payable to such stockholder by the market price per share of our common stock at
the close of regular trading on The NASDAQ Global Select Market on the valuation
date for such dividend. If we use newly-issued shares to implement
the plan, the valuation date will not be earlier than the last day that
stockholders have the right to elect to receive cash in lieu of
shares. Market price per share on that date will be the closing price
for such shares on The NASDAQ Global Select Market or, if no sale is reported
for such day, at the average of their reported bid and asked
prices. The number of shares of our common stock to be outstanding
after giving effect to payment of the dividend cannot be established until the
value per share at which additional shares will be issued has been determined
and elections of our stockholders have been tabulated. Stockholders
who do not elect to receive dividends in shares of common stock may experience
accretion to the net asset value of their shares if our shares are trading at a
premium at the time we issue new shares under the plan and dilution if our
shares are trading at a discount. The level of accretion or discount
would depend on various factors, including the proportion of our stockholders
who participate in the plan, the level of premium or discount at which our
shares are trading and the amount of the dividend payable to a
stockholder.
There are
no brokerage charges or other charges to stockholders who participate in the
plan. The plan administrator's fees under the plan are paid by
us. If a participant elects by written notice to the plan
administrator to have the plan administrator sell part or all of the shares held
by the plan administrator in the participant's account and remit the proceeds to
the participant, the plan administrator is authorized to deduct a $15
transaction fee plus a $0.10 per share brokerage commissions from the
proceeds.
Stockholders
who receive dividends in the form of stock are subject to the same U.S. Federal,
state and local tax consequences as are stockholders who elect to receive their
dividends in cash. A stockholder's basis for determining gain or loss
upon the sale of stock received in a dividend from us will be equal to the total
dollar amount of the dividend payable to the stockholder. Any stock
received in a dividend will have a new holding period for tax purposes
commencing on the day following the day on which the shares are credited to the
U.S. stockholder's account.
Participants
may terminate their accounts under the plan by notifying the plan administrator
via its website at www.amstock.com or by filling out the transaction request
form located at the bottom of their statement and sending it to the plan
administrator at American Stock Transfer & Trust Company, P.O. Box 922, Wall
Street Station, New York, NY 10269-0560 or by calling the plan administrator's
Interactive Voice Response System at (888) 888-0313.
The plan
may be terminated by us upon notice in writing mailed to each participant at
least 30 days prior to any payable date for the payment of any dividend by
us. All correspondence concerning the plan should be directed to the
plan administrator by mail at American Stock Transfer & Trust Company, 59
Maiden Lane, New York, NY 10007 or by telephone at (718) 921-8200.
Stockholders
who purchased their shares through or hold their shares in the name of a broker
or financial institution should consult with a representative of their broker or
financial institution with respect to their participation in our dividend
reinvestment plan. Such holders of our stock may not be identified as
our registered stockholders with the plan administrator and may not
automatically have their cash dividend reinvested in shares of our common stock
by the administrator.
MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The
following discussion is a general summary of the material U.S. Federal income
tax considerations applicable to us and to an investment in our
shares. This summary does not purport to be a complete description of
the income tax considerations applicable to us or our investors on such an
investment. For example, we have not described tax consequences that
we assume to be generally known by investors or certain considerations that may
be relevant to certain types of holders subject to special treatment under U.S.
Federal income tax laws, including stockholders subject to the alternative
minimum tax, tax-exempt organizations, insurance companies, dealers in
securities, pension plans and trusts, financial institutions, U.S. stockholders
(as defined below) whose functional currency is not the U.S. dollar, persons who
mark-to-market our shares and persons who hold our shares as part of a
"straddle," "hedge" or "conversion" transaction. This summary assumes
that investors hold our common stock as capital assets (within the meaning of
the Code). The discussion is based upon the Code, Treasury
regulations, and administrative and judicial interpretations, each as of the
date of this prospectus and all of which are subject to change, possibly
retroactively, which could affect the continuing validity of this
discussion. We have not sought and will not seek any ruling from the
Internal Revenue Service, or the IRS, regarding this offering. This
summary does not discuss any aspects of U.S. estate or gift tax or foreign,
state or local tax. It does not discuss the special treatment under
U.S. Federal income tax laws that could result if we invested in tax-exempt
securities or certain other investment assets.
A "U.S.
stockholder" is a beneficial owner of shares of our common stock that is for
U.S. Federal income tax purposes:
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·
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a
citizen or individual resident of the United States;
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|
|
|
|
·
|
a
corporation, or other entity treated as a corporation for U.S. Federal
income tax purposes, created or organized in or under the laws of the
United States or any state thereof or the District of
Columbia;
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|
|
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·
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an
estate, the income of which is subject to U.S. Federal income taxation
regardless of its source; or
|
|
|
|
|
·
|
a
trust if (1) a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (2) it has
a valid election in place to be treated as a U.S.
person.
|
A
"Non-U.S. stockholder" is a beneficial owner of shares of our common stock that
is not a partnership and is not a U.S. stockholder.
If a
partnership (including an entity treated as a partnership for U.S. Federal
income tax purposes) holds shares of our common stock, the tax treatment of a
partner in the partnership will generally depend upon the status of the partner
and the activities of the partnership. A prospective stockholder that
is a partner of a partnership holding shares of our common stock should consult
its tax advisors with respect to the purchase, ownership and disposition of
shares of our common stock.
Tax
matters are very complicated and the tax consequences to an investor of an
investment in our shares will depend on the facts of his, her or its particular
situation. We encourage investors to consult their own tax advisors
regarding the specific consequences of such an investment, including tax
reporting requirements, the applicability of U.S. Federal, state, local and
foreign tax laws, eligibility for the benefits of any applicable tax treaty and
the effect of any possible changes in the tax laws.
Election
To Be Taxed As A RIC
As a
business development company, we have qualified and elected to be treated as a
RIC under Subchapter M of the Code. As a RIC, we generally are not
subject to corporate-level U.S. Federal income taxes on any ordinary income or
capital gains that we distribute to our stockholders as dividends. To
qualify as a RIC, we must, among other things, meet certain source-of-income and
asset diversification requirements (as described below). In addition,
to obtain RIC tax treatment, we must distribute to our stockholders, for each
taxable year, at least 90% of our "investment company taxable income," which is
generally our ordinary income plus the excess of realized net short-term capital
gains over realized net long-term capital losses, or the Annual Distribution
Requirement.
Taxation
As A RIC
Provided that we qualify as a
RIC and satisfy the Annual Distribution Requirement, we will not be subject to
U.S. Federal income tax on the portion of our investment company taxable income
and net capital gain (which we define as net long-term capital gains in excess
of net short-term capital losses) we timely distribute to
stockholders. We will be subject to U.S. Federal income tax at the
regular corporate rates on any income or capital gain not distributed (or deemed
distributed) to our stockholders.
We will
be subject to a 4% non-deductible U.S. Federal excise tax on certain
undistributed income of RICs unless we distribute in a timely manner an amount
at least equal to the sum of (1) 98% of our ordinary income for each calendar
year, (2) 98% of our capital gain net income for the one-year period ending
October 31 in that calendar year and (3) any income realized, but not
distributed, in preceding years.
In
December 2008, our Board of Directors elected to retain excess profits generated
in the quarter ended September 30, 2008 and pay a 4% excise tax on such retained
earnings. We anticipate that the tax at December 31, 2008 to be paid
in the quarter ending March 31, 2009 will be approximately
$532,000.
In order
to qualify as a RIC for U.S. Federal income tax purposes, we must, among other
things:
|
·
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qualify
to be treated as a business development company or be registered as a
management investment company under the 1940 Act at all times during each
taxable year;
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|
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|
|
·
|
derive
in each taxable year at least 90% of our gross income from dividends,
interest, payments with respect to certain securities loans, gains from
the sale or other disposition of stock or other securities or currencies
or other income derived with respect to our business of investing in such
stock, securities or currencies and net income derived from an interest in
a "qualified publicly traded partnership" (as defined in the Code) or the
90% Income Test; and
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|
|
·
|
diversify
our holdings so that at the end of each quarter of the taxable
year:
|
|
|
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|
·
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at
least 50% of the value of our assets consists of cash, cash equivalents,
U.S. Government securities, securities of other RICs, and other
securities if such other securities of any one issuer do not represent
more than 5% of the value of our assets or more than 10% of the
outstanding voting securities of the issuer (which for these purposes
includes the equity securities of a "qualified publicly traded
partnership"); and
|
|
·
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no
more than 25% of the value of our assets is invested in the securities,
other than U.S. Government securities or securities of other RICs,
(i) of one issuer (ii) of two or more issuers that are controlled, as
determined under applicable tax rules, by us and that are engaged in the
same or similar or related trades or businesses or (iii) of one or more
"qualified publicly traded partnerships," or the Diversification
Tests.
|
To the
extent that we invest in entities treated as partnerships for U.S. Federal
income tax purposes (other than a "qualified publicly traded partnership"), we
generally must include the items of gross income derived by the partnerships for
purposes of the 90% Income Test, and the income that is derived from a
partnership (other than a "qualified publicly traded partnership") will be
treated as qualifying income for purposes of the 90% Income Test only to the
extent that such income is attributable to items of income of the partnership
which would be qualifying income if realized by us directly. In
addition, we generally must take into account our proportionate share of the
assets held by partnerships (other than a "qualified publicly traded
partnership") in which we are a partner for purposes of the Diversification
Tests.
In order
to meet the 90% Income Test, we may establish one or more special purpose
corporations to hold assets from which we do not anticipate earning dividend,
interest or other qualifying income under the 90% Income Test. Any
such special purpose corporation would generally be subject to U.S. Federal
income tax, and could result in a reduced after-tax yield on the portion of our
assets held there.
We may be
required to recognize taxable income in circumstances in which we do not receive
cash. For example, if we hold debt obligations that are treated under
applicable tax rules as having original issue discount
(such as
debt instruments with payment-in-kind interest or, in certain cases, increasing
interest rates or issued with warrants), we must include in income each year a
portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by
us in the same taxable year. Because any original issue discount
accrued will be included in our investment company taxable income for the year
of accrual, we may be required to make a distribution to our stockholders in
order to satisfy the Annual Distribution Requirement, even though we will not
have received any corresponding cash amount.
Gain or
loss realized by us from warrants acquired by us as well as any loss
attributable to the lapse of such warrants generally will be treated as capital
gain or loss. Such gain or loss generally will be long-term or
short-term, depending on how long we held a particular warrant.
Although
we do not presently expect to do so, we are authorized to borrow funds and to
sell assets in order to satisfy distribution requirements. However,
under the 1940 Act, we are not permitted to make distributions to our
stockholders while our debt obligations and other senior securities are
outstanding unless certain "asset coverage" tests are met. See "Regulation ― Senior
Securities." Moreover, our ability to dispose of assets to
meet our distribution requirements may be limited by (1) the illiquid nature of
our portfolio and/or (2) other requirements relating to our status as a RIC,
including the Diversification Tests. If we dispose of assets in order
to meet the Annual Distribution Requirement or to avoid the excise tax, we may
make such dispositions at times that, from an investment standpoint, are not
advantageous.
If we
fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify
as a RIC in any taxable year, we will be subject to tax in that year on all of
our taxable income, regardless of whether we make any distributions to our
stockholders. In that case, all of such income will be subject to
corporate-level U.S. Federal income tax, reducing the amount available to be
distributed to our stockholders. See "Failure To Obtain RIC Tax
Treatment."
Certain
of our investment practices may be subject to special and complex U.S. Federal
income tax provisions that may, among other things, (i) disallow, suspend or
otherwise limit the allowance of certain losses or deductions, (ii) convert
lower taxed long-term capital gain and qualified dividend income into higher
taxed short-term capital gain or ordinary income, (iii) convert an ordinary
loss or a deduction into a capital loss (the deductibility of which is more
limited), (iv) cause us to recognize income or gain without a corresponding
receipt of cash, (v) adversely affect the time as to when a purchase or sale of
stock or securities is deemed to occur, (vi) adversely alter the
characterization of certain complex financial transactions, and (vii) produce
income that will not be qualifying income for purposes of the 90% Income
Test. We will monitor our transactions and may make certain tax
elections in order to mitigate the effect of these provisions.
As
described above, to the extent that we invest in equity securities of entities
that are treated as partnerships for U.S. Federal income tax purposes, the
effect of such investments for purposes of the 90% Income Test and the
Diversification Tests will depend on whether or not the partnership is a
"qualified publicly traded partnership" (as defined in the Code). If
the partnership is a "qualified publicly traded partnership," the net income
derived from such investments will be qualifying income for purposes of the 90%
Income Test and will be "securities" for purposes of the Diversification
Tests. If the partnership, however, is not treated as a "qualified
publicly traded partnership," then the consequences of an investment in the
partnership will depend upon the amount and type of income and assets of the
partnership allocable to us. The income derived from such investments
may not be qualifying income for purposes of the 90% Income Test and, therefore,
could adversely affect our qualification as a RIC. We intend to
monitor our investments in equity securities of entities that are treated as
partnerships for U.S. Federal income tax purposes to prevent our
disqualification as a RIC.
We may
invest in preferred securities or other securities the U.S. Federal income tax
treatment of which may not be clear or may be subject to recharacterization by
the IRS. To the extent the tax treatment of such securities or the
income from such securities differs from the expected tax treatment, it could
affect the timing or character of income recognized, requiring us to purchase or
sell securities, or otherwise change our portfolio, in order to comply with the
tax rules applicable to RICs under the Code.
Taxation
Of U.S. Stockholders
Distributions
by us generally are taxable to U.S. stockholders as ordinary income or capital
gains. Distributions of our "investment company taxable income"
(which is, generally, our ordinary income plus realized net short-term capital
gains in excess of realized net long-term capital losses) will be taxable as
ordinary income to U.S. stockholders to the extent of our current or accumulated
earnings and profits, whether paid in cash or reinvested in additional common
stock. For taxable years beginning on or before December 31, 2010, to
the extent such distributions paid by us to noncorporate stockholders (including
individuals) are attributable to dividends from U.S. corporations and
certain qualified foreign corporations, such distributions generally will be
eligible for taxation at rates applicable to long term capital gains (currently
a maximum tax rate of 15%) provided that we properly
designate such distribution as derived from "qualified dividend income" and
certain holding period and other requirements are satisfied. In this
regard, it is not anticipated that a significant portion of distributions paid
by us will be attributable to qualified dividends and, therefore, generally will
not qualify for the long term capital gains. Distributions of our net
capital gains (which is generally our realized net long-term capital gains in
excess of realized net short-term capital losses) properly designated by us as
"capital gain dividends" will be taxable to a U.S. stockholder as long-term
capital gains (currently at a maximum rate of 15% in the case of individuals,
trusts or estates), regardless of the U.S. stockholder's holding period for his,
her or its common stock and regardless of whether paid in cash or reinvested in
additional common stock. Distributions in excess of our current and
accumulated earnings and profits first will reduce a U.S. stockholder's adjusted
tax basis in such stockholder's common stock and, after the adjusted basis is
reduced to zero, will constitute capital gains to such U.S.
stockholder.
Although
we currently intend to distribute any long-term capital gains at least annually,
we may in the future decide to retain some or all of our long-term capital
gains, but designate the retained amount as a "deemed
distribution." In that case, among other consequences, we will pay
tax on the retained amount, each U.S. stockholder will be required to
include his, her or its proportionate share of the deemed distribution in income
as if it had been actually distributed to the U.S. stockholder, and the U.S.
stockholder will be entitled to claim a credit equal to his, her or its
allocable share of the tax paid thereon by us. The amount of the
deemed distribution net of such tax will be added to the U.S. stockholder's tax
basis for his, her or its common stock. Since we expect to pay tax on
any retained capital gains at our regular corporate tax rate, and since that
rate is in excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual stockholders will be
treated as having paid and for which they will receive a credit will exceed the
tax they owe on the retained net capital gain. Such excess generally
may be claimed as a credit against the U.S. stockholder's other U.S. Federal
income tax obligations or may be refunded to the extent it exceeds a
stockholder's liability for U.S. Federal income tax. A stockholder
that is not subject to U.S. Federal income tax or otherwise required to file a
U.S. Federal income tax return would be required to file a U.S. Federal income
tax return on the appropriate form in order to claim a refund for the taxes we
paid. In order to utilize the deemed distribution approach, we must
provide written notice to our stockholders prior to the expiration of
60 days after the close of the relevant taxable year. We cannot
treat any of our investment company taxable income as a "deemed
distribution."
For
purposes of determining (1) whether the Annual Distribution Requirement is
satisfied for any year and (2) the amount of capital gain dividends paid for
that year, we may, under certain circumstances, elect to treat a dividend that
is paid during the following taxable year as if it had been paid during the
taxable year in question. If we make such an election, the U.S.
stockholder will still be treated as receiving the dividend in the taxable year
in which the distribution is made. However, any dividend declared by
us in October, November or December of any calendar year, payable to
stockholders of record on a specified date in any such month and actually paid
during January of the following year, will be treated as if it had been received
by our U.S. stockholders on December 31 of the year in which the dividend was
declared.
If an
investor purchases shares of our common stock shortly before the record date of
a distribution, the price of the shares will include the value of the
distribution and the investor will be subject to tax on the distribution even
though it represents a return of his, her or its investment.
A U.S.
stockholder generally will recognize taxable gain or loss if the stockholder
sells or otherwise disposes of his, her or its shares of our common
stock. Any gain arising from such sale or disposition generally will
be treated as long-term capital gain or loss if the stockholder has held his,
her or its shares for more than one year. Otherwise, it would be
classified as short-term capital gain or loss. However, any capital
loss arising from the sale or disposition of shares of our common stock held for
six months or less will be treated as long-term capital loss to
the
extent of the amount of capital gain dividends received, or undistributed
capital gain deemed received, with respect to such shares. In
addition, all or a portion of any loss recognized upon a disposition of shares
of our common stock may be disallowed if other substantially identical shares
are purchased (whether through reinvestment of distributions or otherwise)
within 30 days before or after the disposition. The ability to
otherwise deduct capital losses may be subject to other limitations under the
code.
In
general, individual U.S. stockholders currently are subject to a maximum U.S.
Federal income tax rate of 15% on their net capital gain, or the excess of
realized net long-term capital gain over realized net short-term capital loss
for a taxable year, including a long-term capital gain derived from an
investment in our shares. Such rate is lower than the maximum rate on
ordinary income currently payable by individuals. Corporate U.S.
stockholders currently are subject to U.S. Federal income tax on net capital
gain at the maximum 35% rate also applied to ordinary
income. Noncorporate stockholders with net capital losses for a year
(which we define as capital losses in excess of capital gains) generally may
deduct up to $3,000 of such losses against their ordinary income each year; any
net capital losses of a noncorporate stockholder in excess of $3,000 generally
may be carried forward and used in subsequent years as provided in the
Code. Corporate stockholders generally may not deduct any net capital
losses for a year, but may carry back such losses for three years or carry
forward such losses for five years.
We will
send to each of our U.S. stockholders, as promptly as possible after the end of
each calendar year, a notice detailing, on a per share and per distribution
basis, the amounts includible in such U.S. stockholder's taxable income for such
year as ordinary income and as long-term capital gain. In addition,
the U.S. Federal tax status of each year's distributions generally will be
reported to the IRS (including the amount of dividends, if any, eligible for the
15% maximum rate). Distributions may also be subject to additional
state, local and foreign taxes depending on a U.S. stockholder's particular
situation. Dividends distributed by us generally will not be eligible
for the dividends-received deduction or the preferential rate applicable to
qualifying dividends.
We may be
required to withhold U.S. Federal income tax, or backup withholding, currently
at a rate of 28% from all taxable distributions to any noncorporate U.S.
stockholder (1) who fails to furnish us with a correct taxpayer identification
number or a certificate that such stockholder is exempt from backup withholding,
or (2) with respect to whom the IRS notifies us that such stockholder has failed
to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect. An individual's taxpayer
identification number is his or her social security number. Backup
withholding is not an additional tax, and any amount withheld may be refunded or
credited against the U.S. stockholder's U.S. Federal income tax liability,
provided that proper
information is timely provided to the IRS.
Taxation
Of Non-U.S. Stockholders
Whether
an investment in the shares is appropriate for a Non-U.S. stockholder will
depend upon that person's particular circumstances. An investment in
the shares by a Non-U.S. stockholder may have adverse tax
consequences. Non-U.S. stockholders should consult their tax advisers
before investing in our common stock.
Distributions
of our "investment company taxable income" to Non-U.S. stockholders that are not
"effectively connected" with a U.S. trade or business carried on by the Non-U.S.
stockholder, will generally be subject to withholding of U.S. Federal income tax
at a rate of 30% (or lower rate provided by an applicable treaty) to the extent
of our current and accumulated earnings and profits. However,
effective for taxable years beginning before January 1, 2010, we generally will
not be required to withhold any amounts with respect to distributions of
(i) U.S.-source interest income that would not have been subject to
withholding of U.S. Federal income tax if they had been earned directly by a
Non-U.S. stockholder, and (ii) net short-term capital gains in excess of net
long-term capital losses that would not have been subject to withholding of U.S.
Federal income tax if they had been earned directly by a Non-U.S. stockholder,
in each case only to the extent that such distributions are properly designated
by us as "interest-related dividends" or "short-term capital gain dividends," as
the case may be, and certain other requirements are met.
Actual or
deemed distributions of our net capital gains to a Non-U.S. stockholder, and
gains realized by a Non-U.S. stockholder upon the sale of our common stock, that
are not effectively connected with a U.S. trade or business carried on by the
Non-U.S. stockholder, will generally not be subject to U.S. Federal withholding
tax and generally will not be subject to U.S. Federal income tax unless the
Non-U.S. stockholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and
meets
certain
other requirements. However, withholding of U.S. Federal income tax
at a rate of 30% on capital gains of nonresident alien individuals who are
physically present in the United States for more than the 182 day period only
applies in exceptional cases because any individual present in the United States
for more than 182 days during the taxable year is generally treated as a
resident for U.S. income tax purposes; in that case, he or she would be subject
to U.S. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. Federal withholding
tax. In addition, dividends paid or deemed paid to Non-U.S.
stockholders that are attributable to gain from "U.S. real property interests,"
or USRPIs, which the Code defines to include direct holdings of U.S. real
property and interests (other than solely as a creditor) in "U.S. real property
holding corporations" such as "real estate investment trusts," or REITs, and
also may include certain REIT capital gain dividends, will generally be subject
to U.S. Federal income tax and may give rise to an obligation for those Non-U.S.
stockholders to file a U.S. Federal income tax return, and will generally be
subject to withholding tax.
If we
distribute our net capital gains in the form of deemed rather than actual
distributions (which we may do in the future), a Non-U.S. stockholder will be
entitled to a U.S. Federal income tax credit or tax refund equal to the
stockholder's allocable share of the tax we pay on the capital gains deemed to
have been distributed. In order to obtain the refund, the Non-U.S.
stockholder must obtain a U.S. taxpayer identification number and file a U.S.
Federal income tax return even if the Non-U.S. stockholder would not otherwise
be required to obtain a U.S. taxpayer identification number or file a U.S.
Federal income tax return. Accordingly, investment in the shares may
not be appropriate for a Non-U.S. stockholder.
Distributions
of our "investment company taxable income" and net capital gains (including
deemed distributions) to Non-U.S. stockholders, and gains realized by Non-U.S.
stockholders upon the sale of our common stock that is "effectively connected"
with a U.S. trade or business carried on by the Non-U.S. stockholder (or if an
income tax treaty applies, attributable to a "permanent establishment" in the
United States), will be subject to U.S. Federal income tax at the graduated
rates applicable to U.S. citizens, residents and domestic
corporations. Corporate Non-U.S. stockholders may also be subject to
an additional branch profits tax at a rate of 30% imposed by the Code (or lower
rate provided by an applicable treaty). In the case of a
non-corporate Non-U.S. stockholder, we may be required to withhold U.S. Federal
income tax from distributions that are otherwise exempt from withholding tax (or
taxable at a reduced rate) unless the Non-U.S. stockholder certifies his or her
foreign status under penalties of perjury or otherwise establishes an
exemption.
The tax
consequences to a Non-U.S. stockholder entitled to claim the benefits of an
applicable tax treaty may differ from those described
herein. Non-U.S. stockholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in our shares.
A
Non-U.S. stockholder who is a nonresident alien individual may be subject to
information reporting and backup withholding of U.S. Federal income tax on
dividends unless the Non-U.S. stockholder provides us or the dividend paying
agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise
meets documentary evidence requirements for establishing that it is a Non-U.S.
stockholder or otherwise establishes an exemption from backup
withholding.
Non-U.S.
persons should consult their own tax advisors with respect to the U.S. Federal
income tax and withholding tax, and state, local and foreign tax consequences of
an investment in the shares.
Failure
To Obtain RIC Tax Treatment
If we
were unable to obtain tax treatment as a RIC, we would be subject to tax on all
of our taxable income at regular corporate rates. We would not be
able to deduct distributions to stockholders, nor would they be required to be
made. Distributions would generally be taxable to our stockholders as
ordinary dividend income (currently eligible for the 15% maximum rate) to the
extent of our current and accumulated earnings and profits. Subject
to certain limitations under the Code, corporate distributees would be eligible
for the dividends-received deduction.
Distributions
in excess of our current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the stockholder's tax basis, and
any remaining distributions would be treated as a capital gain.
The
discussion set forth herein does not constitute tax advice, and potential
investors should consult their own tax advisors concerning the tax
considerations relevant to their particular situation.
DESCRIPTION OF OUR CAPITAL
STOCK
The
following description is based on relevant portions of the Maryland General
Corporation Law and on our charter and bylaws. This summary is not
necessarily complete, and we refer you to the Maryland General Corporation Law
and our charter and bylaws for a more detailed description of the provisions
summarized below.
Capital
Stock
Our
authorized capital stock consists of 100,000,000 shares of stock, par value
$.001 per share, all of which is initially classified as common
stock. Our common stock is traded on The NASDAQ Global Select Market
under the symbol "PSEC." There are no outstanding options or warrants
to purchase our stock. No stock has been authorized for issuance
under any equity compensation plans. Under Maryland law, our
stockholders generally are not personally liable for our debts or
obligations.
Under our
charter, our Board of Directors is authorized to classify and reclassify any
unissued shares of stock into other classes or series of stock, and to authorize
the issuance of such shares, without obtaining stockholder
approval. As permitted by the Maryland General Corporation Law, our
charter provides that the Board of Directors, without any action by our
stockholders, may amend the charter from time to time to increase or decrease
the aggregate number of shares of stock or the number of shares of stock of any
class or series that we have authority to issue.
The below
table sets forth each class of our outstanding securities as of January 29,
2009:
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|
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(3)
Amount
Held
by
the Company
or
for its Account
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(4)
Amount
Outstanding
Exclusive
of Amount
Shown
Under (3)
|
Common
Stock
|
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100,000,000
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0
|
|
29,786,128
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Common
stock
All
shares of our common stock have equal rights as to earnings, assets, dividends
and voting and, when they are issued, will be duly authorized, validly issued,
fully paid and nonassessable. Distributions may be paid to the
holders of our common stock if, as and when authorized by our Board of Directors
and declared by us out of funds legally available therefor. Shares of
our common stock have no preemptive, conversion or redemption rights and are
freely transferable, except where their transfer is restricted by U.S. Federal
and state securities laws or by contract. In the event of a
liquidation, dissolution or winding up of us, each share of our common stock
would be entitled to share ratably in all of our assets that are legally
available for distribution after we pay all debts and other liabilities and
subject to any preferential rights of holders of our preferred stock, if any
preferred stock is outstanding at such time. Each share of our common
stock is entitled to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Except as provided
with respect to any other class or series of stock, the holders of our common
stock will possess exclusive voting power. There is no cumulative
voting in the election of directors, which means that prior to the issuance of
preferred stock holders of a majority of the outstanding shares of common stock
will elect all of our directors, and holders of less than a majority of such
shares will be unable to elect any director.
Preferred
stock
Our
charter authorizes our Board of Directors to classify and reclassify any
unissued shares of stock into other classes or series of stock, including
preferred stock. Prior to issuance of shares of each class or series,
the Board of Directors is required by Maryland law and by our charter to set the
terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for each class or series. Thus, the Board of
Directors could authorize the issuance of shares of preferred stock with terms
and conditions which could have the effect of delaying, deferring or preventing
a transaction or a change in control that might involve a premium price for
holders of our common stock or otherwise be in their best
interest. You should note, however, that any issuance of preferred
stock must comply with
the
requirements of the 1940 Act. The 1940 Act requires, among other
things, that (1) immediately after issuance and before any dividend or other
distribution (other than in shares of stock) is made with respect to our common
stock and before any purchase of common stock is made, such preferred stock
together with all other senior securities must not exceed an amount equal to 50%
of our total assets after deducting the amount of such dividend, distribution or
purchase price, as the case may be, and (2) the holders of shares of preferred
stock, if any are issued, must be entitled as a class to elect two directors at
all times and to elect a majority of the directors if dividends on such
preferred stock become in arrears by two years or more until all arrears are
cured. Certain matters under the 1940 Act require the separate vote
of the holders of any issued and outstanding preferred stock. For
example, holders of preferred stock would vote separately from the holders of
common stock on a proposal to operate other than as an investment
company. We believe that the availability for issuance of preferred
stock will provide us with increased flexibility in structuring future
financings and acquisitions.
Limitation
On Liability Of Directors And Officers; Indemnification And Advance Of
Expenses
Maryland
law permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter contains such a
provision which eliminates directors' and officers' liability to the maximum
extent permitted by Maryland law, subject to the requirements of the 1940
Act.
Our
charter authorizes us, to the maximum extent permitted by Maryland law and
subject to the requirements of the 1940 Act, to obligate ourselves to indemnify
any present or former director or officer or any individual who, while serving
as a director or officer and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her service in any
such capacity and to pay or reimburse their reasonable expenses in advance of
final disposition of a proceeding. Our bylaws obligate us, to the
maximum extent permitted by Maryland law and subject to the requirements of the
1940 Act, to indemnify any present or former director or officer or any
individual who, while serving as a director or officer and at our request,
serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as
a director, officer, partner or trustee and who is made, or threatened to be
made, a party to the proceeding by reason of his or her service in any such
capacity from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her service in any
such capacity and to pay or reimburse their reasonable expenses in advance of
final disposition of a proceeding. The charter and bylaws also permit
us to indemnify and advance expenses to any person who served a predecessor of
us in any of the capacities described above and any of our employees or agents
or any employees or agents of our predecessor. In accordance with the
1940 Act, we will not indemnify any person for any liability to which such
person would be subject by reason of such person's willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Maryland
law requires a corporation (unless its charter provides otherwise, which our
charter does not) to indemnify a director or officer who has been successful, on
the merits or otherwise, in the defense of any proceeding to which he or she is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made, or threatened to be
made, a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (1) was committed in
bad faith or (2) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that a personal benefit
was improperly received, unless in either case a court orders indemnification,
and then only for expenses. In addition, Maryland law permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his or her good faith belief that he or she
has met
the standard of conduct necessary for indemnification by the corporation and (b)
a written undertaking by him or her or on his or her behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
Our
insurance policy does not currently provide coverage for claims, liabilities and
expenses that may arise out of activities that a present or former director or
officer of us has performed for another entity at our request. There
is no assurance that such entities will in fact carry such
insurance. However, we note that we do not expect to request our
present or former directors or officers to serve another entity as a director,
officer, partner or trustee unless we can obtain insurance providing coverage
for such persons for any claims, liabilities or expenses that may arise out of
their activities while serving in such capacities.
Provisions
Of The Maryland General Corporation Law And Our Charter And Bylaws
Anti-takeover
Effect
The
Maryland General Corporation Law and our charter and bylaws contain provisions
that could make it more difficult for a potential acquiror to acquire us by
means of a tender offer, proxy contest or otherwise. These provisions
are expected to discourage certain coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire control of us to
negotiate first with our Board of Directors. These provisions could
have the effect of depriving stockholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of us. We believe that the benefits of
these provisions outweigh the potential disadvantages of discouraging any such
acquisition proposals because, among other things, the negotiation of such
proposals may improve their terms.
Control
share acquisitions
The
Maryland General Corporation Law under the Control Share Act provides that
control shares of a Maryland corporation acquired in a control share acquisition
have no voting rights except to the extent approved by a vote of two-thirds of
the votes entitled to be cast on the matter. Shares owned by the
acquiror, by officers or by directors who are employees of the corporation are
excluded from shares entitled to vote on the matter. Control shares
are voting shares of stock which, if aggregated with all other shares of stock
owned by the acquiror or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by virtue of a revocable
proxy), would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power:
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one-tenth
or more but less than one-third,
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·
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one-third
or more but less than a majority, or
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·
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a
majority or more of all voting
power.
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The
requisite stockholder approval must be obtained each time an acquiror crosses
one of the thresholds of voting power set forth above. Control shares
do not include shares the acquiring person is then entitled to vote as a result
of having previously obtained stockholder approval. A control share
acquisition means the acquisition of control shares, subject to certain
exceptions.
A person
who has made or proposes to make a control share acquisition may compel the
Board of Directors of the corporation to call a special meeting of stockholders
to be held within 50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an undertaking to
pay the expenses of the meeting. If no request for a meeting is made,
the corporation may itself present the question at any stockholders
meeting.
If voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then the
corporation may repurchase for fair value any or all of the control shares,
except those for which voting rights have previously been
approved. The right of the corporation to repurchase control shares
is subject to certain conditions and limitations, including, as provided in our
bylaws, compliance with the 1940 Act. Fair value is determined,
without regard to the absence of voting rights for the
control
shares, as of the date of the last control share acquisition by the acquiror or
of any meeting of stockholders at which the voting rights of the shares are
considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for
purposes of appraisal rights may not be less than the highest price per share
paid by the acquiror in the control share acquisition.
The
Control Share Act does not apply (a) to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the transaction
or (b) to acquisitions approved or exempted by the charter or bylaws of the
corporation.
Our
bylaws contain a provision exempting from the Control Share Act any and all
acquisitions by any person of our shares of stock. There can be no
assurance that such provision will not be amended or eliminated at any time in
the future. However, we will amend our bylaws to be subject to the
Control Share Act only if the Board of Directors determines that it would be in
our best interests and if the SEC does not object to our determination that our
being subject to the Control Share Act does not conflict with the 1940
Act.
Business
combinations
Under
Maryland law, "business combinations" between a Maryland corporation and an
interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested stockholder is
defined as:
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·
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any
person who beneficially owns 10% or more of the voting power of the
corporation's shares; or
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·
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an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting stock of
the corporation.
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A person
is not an interested stockholder under this statute if the Board of Directors
approved in advance the transaction by which he otherwise would have become an
interested stockholder. However, in approving a transaction, the
Board of Directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
Board of Directors.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the Board of
Directors of the corporation and approved by the affirmative vote of at
least:
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·
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80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation; and
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·
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two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
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These
super-majority vote requirements do not apply if the corporation's common
stockholders receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously
paid by the interested stockholder for its shares.
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the Board of Directors before the time that
the interested stockholder becomes an interested stockholder. Our
Board of Directors has adopted a resolution that any business combination
between us and any other person is exempted from the provisions of the Business
Combination Act, provided that the business
combination is first approved by the Board of Directors, including a majority of
the directors who are not interested persons as defined in the 1940
Act. This resolution, however, may be altered or repealed in whole or
in part at any time. If this resolution is repealed, or the Board of
Directors does not otherwise approve a business combination, the
statute
may discourage others from trying to acquire control of us and increase the
difficulty of consummating any offer.
Conflict
with 1940 Act
Our
bylaws provide that, if and to the extent that any provision of the Maryland
General Corporation Law, including the Control Share Act (if we amend our bylaws
to be subject to such Act) and the Business Combination Act, or any provision of
our charter or bylaws conflicts with any provision of the 1940 Act, the
applicable provision of the 1940 Act will control.
Classified
Board of Directors
Our Board
of Directors is divided into three classes of directors serving staggered
three-year terms. The current terms of the first, second and third
classes will expire in 2009, 2010 and 2011 respectively, and in each case, until
their successors are duly elected and qualify. Each year one class of
directors will be elected to the Board of Directors by the
stockholders. A classified board may render a change in control of us
or removal of our incumbent management more difficult. We believe,
however, that the longer time required to elect a majority of a classified Board
of Directors will help to ensure the continuity and stability of our management
and policies.
Election
of directors
Our
charter and bylaws provide that the affirmative vote of the holders of a
majority of the outstanding shares of stock entitled to vote in the election of
directors will be required to elect a director. Under the charter,
our Board of Directors may amend the bylaws to alter the vote required to elect
directors.
Number
of directors; vacancies; removal
Our
charter provides that the number of directors will be set only by the Board of
Directors in accordance with our bylaws. Our bylaws provide that a
majority of our entire Board of Directors may at any time increase or decrease
the number of directors. However, unless our bylaws are amended, the
number of directors may never be less than three nor more than
eight. Our charter provides that, at such time as we have three
independent directors and our common stock is registered under the Exchange Act
of 1934, as amended, or the Exchange Act, we elect to be subject to the
provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law
regarding the filling of vacancies on the Board of
Directors. Accordingly, at such time, except as may be provided by
the Board of Directors in setting the terms of any class or series of preferred
stock, any and all vacancies on the Board of Directors may be filled only by the
affirmative vote of a majority of the remaining directors in office, even if the
remaining directors do not constitute a quorum, and any director elected to fill
a vacancy will serve for the remainder of the full term of the directorship in
which the vacancy occurred and until a successor is elected and qualifies,
subject to any applicable requirements of the 1940 Act.
Our
charter provides that a director may be removed only for cause, as defined in
our charter, and then only by the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of directors.
Action
by stockholders
The
Maryland General Corporation Law provides that stockholder action can be taken
only at an annual or special meeting of stockholders or (unless the charter
provides for stockholder action by less than unanimous written consent, which
our charter does not) by unanimous written consent in lieu of a
meeting. These provisions, combined with the requirements of our
bylaws regarding the calling of a stockholder-requested special meeting of
stockholders discussed below, may have the effect of delaying consideration of a
stockholder proposal until the next annual meeting.
Advance
notice provisions for stockholder nominations and stockholder
proposals
Our
bylaws provide that with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by stockholders may be made only (1) pursuant to
our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder
who is entitled to vote at the meeting and who has complied with the advance
notice procedures of the bylaws. With respect to special
meetings
of stockholders, only the business specified in our notice of the meeting may be
brought before the meeting. Nominations of persons for election to
the Board of Directors at a special meeting may be made only (1) pursuant
to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of
Directors has determined that directors will be elected at the meeting, by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice provisions of the bylaws.
The
purpose of requiring stockholders to give us advance notice of nominations and
other business is to afford our Board of Directors a meaningful opportunity to
consider the qualifications of the proposed nominees and the advisability of any
other proposed business and, to the extent deemed necessary or desirable by our
Board of Directors, to inform stockholders and make recommendations about such
qualifications or business, as well as to provide a more orderly procedure for
conducting meetings of stockholders. Although our bylaws do not give
our Board of Directors any power to disapprove stockholder nominations for the
election of directors or proposals recommending certain action, they may have
the effect of precluding a contest for the election of directors or the
consideration of stockholder proposals if proper procedures are not followed and
of discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to us and our stockholders.
Calling
of special meetings of stockholders
Our
bylaws provide that special meetings of stockholders may be called by our Board
of Directors and certain of our officers. Additionally, our bylaws
provide that, subject to the satisfaction of certain procedural and
informational requirements by the stockholders requesting the meeting, a special
meeting of stockholders will be called by the secretary of the corporation upon
the written request of stockholders entitled to cast not less than a majority of
all the votes entitled to be cast at such meeting.
Approval
of extraordinary corporate action; amendment of charter and bylaws
Under
Maryland law, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of stockholders entitled to
cast at least two-thirds of the votes entitled to be cast on the
matter. However, a Maryland corporation may provide in its charter
for approval of these matters by a lesser percentage, but not less than a
majority of all of the votes entitled to be cast on the matter. Our
charter generally provides for approval of charter amendments and extraordinary
transactions by the stockholders entitled to cast at least a majority of the
votes entitled to be cast on the matter.
Our
charter also provides that certain charter amendments and any proposal for our
conversion, whether by merger or otherwise, from a closed-end company to an
open-end company or any proposal for our liquidation or dissolution requires the
approval of the stockholders entitled to cast at least 80 percent of the votes
entitled to be cast on such matter. However, if such amendment or
proposal is approved by at least two-thirds of our continuing directors (in
addition to approval by our Board of Directors), such amendment or proposal may
be approved by a majority of the votes entitled to be cast on such a
matter. The "continuing directors" are defined in our charter as our
current directors as well as those directors whose nomination for election by
the stockholders or whose election by the directors to fill vacancies is
approved by a majority of the continuing directors then on the Board of
Directors.
Our
charter and bylaws provide that the Board of Directors will have the exclusive
power to make, alter, amend or repeal any provision of our bylaws.
No
appraisal rights
Except
with respect to appraisal rights arising in connection with the Control Share
Act discussed above, as permitted by the Maryland General Corporation Law, our
charter provides that stockholders will not be entitled to exercise appraisal
rights.
DESCRIPTION OF OUR PREFERRED
STOCK
In
addition to shares of common stock, our charter authorizes the issuance of
preferred stock. If we offer preferred stock under this prospectus,
we will issue an appropriate prospectus supplement. We may issue
preferred stock from time to time in one or more series, without stockholder
approval. Our Board of Directors is authorized to fix for any series
of preferred stock the number of shares of such series and the designation,
relative powers, preferences and rights, and the qualifications, limitations or
restrictions of such series; except that, such an issuance must adhere to the
requirements of the 1940 Act, Maryland law and any other limitations imposed by
law.
The 1940
Act requires, among other things, that (1) immediately after issuance and before
any distribution is made with respect to common stock, the liquidation
preference of the preferred stock, together with all other senior securities,
must not exceed an amount equal to 50% of our total assets (taking into account
such distribution) and (2) the holders of shares of preferred stock, if any are
issued, must be entitled as a class to elect two directors at all times and to
elect a majority of the directors if dividends on the preferred stock are in
arrears by two years or more.
For any
series of preferred stock that we may issue, our Board of Directors will
determine and the prospectus supplement relating to such series will
describe:
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the
designation and number of shares of such series;
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the
rate and time at which, and the preferences and conditions under which,
any dividends will be paid on shares of such series, the cumulative nature
of such dividends and whether such dividends have any participating
feature;
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any
provisions relating to convertibility or exchangeability of the shares of
such series;
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the
rights and preferences, if any, of holders of shares of such series upon
our liquidation, dissolution or winding up of our
affairs;
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the
voting powers of the holders of shares of such
series;
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any
provisions relating to the redemption of the shares of such
series;
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any
limitations on our ability to pay dividends or make distributions on, or
acquire or redeem, other securities while shares of such series are
outstanding;
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any
conditions or restrictions on our ability to issue additional shares of
such series or other securities;
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if
applicable, a discussion of certain U.S. Federal income tax
considerations; and
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any
other relative power, preferences and participating, optional or special
rights of shares of such series, and the qualifications, limitations or
restrictions thereof.
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All
shares of preferred stock that we may issue will be identical and of equal rank
except as to the particular terms thereof that may be fixed by our Board of
Directors, and all shares of each series of preferred stock will be identical
and of equal rank except as to the dates from which cumulative dividends thereon
will be cumulative.
DESCRIPTION OF OUR DEBT
SECURITIES
We may
issue debt securities in one or more series which, if publicly offered, will be
under an indenture to be entered into between us and a trustee. The
specific terms of each series of debt securities we publicly offer will be
described in the particular prospectus supplement relating to that
series. For a complete description of the terms of a particular
series of debt securities, you should read both this prospectus and the
prospectus supplement relating to that particular series.
The
prospectus supplement, which will accompany this prospectus, will describe the
particular series of debt securities being offered by including:
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the
designation or title of the series of debt securities;
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the
total principal amount of the series of debt
securities;
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the
percentage of the principal amount at which the series of debt securities
will be offered;
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the
date or dates on which principal will be payable;
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the
rate or rates (which may be either fixed or variable) and/or the method of
determining such rate or rates of interest, if any;
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the
date or dates from which any interest will accrue, or the method of
determining such date or dates, and the date or dates on which any
interest will be payable;
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the
terms for redemption, extension or early repayment, if
any;
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the
currencies in which the series of debt securities are issued and
payable;
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the
provision for any sinking fund;
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any
restrictive covenants;
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whether
the series of debt securities are issuable in certificated
form;
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any
provisions for defeasance or covenant defeasance;
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any
special U.S. Federal income tax implications, including, if applicable,
U.S. Federal income tax considerations relating to original issue
discount;
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any
provisions for convertibility or exchangeability of the debt securities
into or for any other securities;
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whether
the debt securities are subject to subordination and the terms of such
subordination;
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the
listing, if any, on a securities exchange;
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the
name and address of the trustee; and
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The debt
securities may be secured or unsecured obligations. Under the
provisions of the 1940 Act, we are permitted, as a business development company,
to issue debt only in amounts such that our asset coverage, as defined in the
1940 Act, equals at least 200% after each issuance of debt. Unless
the prospectus supplement states otherwise, principal (and premium, if any) and
interest, if any, will be paid by us in immediately available
funds.
DESCRIPTION OF OUR
WARRANTS
We may
issue warrants to purchase shares of our common stock, preferred stock or debt
securities from time to time. Such warrants may be issued
independently or together with one of our Securities and may be attached or
separate from such securities. We will issue each series of warrants
under a separate warrant agreement to be entered into between us and a warrant
agent. The warrant agent will act solely as our agent and will not
assume any obligation or relationship of agency for or with holders or
beneficial owners of warrants.
A
prospectus supplement will describe the particular terms of any series of
warrants we may issue, including the following:
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the
title of such warrants;
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the
aggregate number of such warrants;
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the
price or prices at which such warrants will be issued;
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the
currency or currencies, including composite currencies, in which the price
of such warrants may be payable;
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the
number of shares of common stock, preferred stock or debt securities
issuable upon exercise of such warrants;
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the
price at which and the currency or currencies, including composite
currencies, in which the shares of common stock, preferred stock or debt
securities purchasable upon exercise of such warrants may be
purchased;
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the
date on which the right to exercise such warrants will commence and the
date on which such right will expire; |
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whether
such warrants will be issued in registered form or bearer
form;
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if
applicable, the minimum or maximum amount of such warrants which may be
exercised at any one time;
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if
applicable, the number of such warrants issued with each share of common
stock, preferred stock or debt securities;
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if
applicable, the date on and after which such warrants and the related
shares of common stock, preferred stock or debt securities will be
separately transferable;
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information
with respect to book-entry procedures, if any;
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if
applicable, a discussion of certain U.S. Federal income tax
considerations; and
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any
other terms of such warrants, including terms, procedures and limitations
relating to the exchange and exercise of such
warrants.
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We and
the warrant agent may amend or supplement the warrant agreement for a series of
warrants without the consent of the holders of the warrants issued thereunder to
effect changes that are not inconsistent with the provisions of the warrants and
that do not materially and adversely affect the interests of the holders of the
warrants.
Under the
1940 Act, we may generally only offer warrants provided that (1) the
warrants expire by their terms within ten years; (2) the exercise or conversion
price is not less than the current market value at the date of issuance; (3) our
stockholders authorize the proposal to issue such warrants, and our Board of
Directors approves such issuance on the basis that the issuance is in our best
interests and the best interest of our stockholders; and (4) if the warrants are
accompanied by other securities, the warrants are not separately transferable
unless no class of such warrants and the securities accompanying them has been
publicly distributed. The 1940 Act also provides that
the
amount of
our voting securities that would result from the exercise of all outstanding
warrants at the time of issuance may not exceed 25% of our outstanding voting
securities.
REGULATION
We are a
closed-end, non-diversified investment company that has filed an election to be
treated as a business development company under the 1940 Act and has elected to
be treated as a RIC under Subchapter M of the Code. The 1940 Act
contains prohibitions and restrictions relating to transactions between business
development companies and their affiliates (including any investment advisers or
sub-advisers), principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the directors be persons other than
"interested persons," as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that we may not change the nature of our
business so as to cease to be, or to withdraw our election as, a business
development company unless approved by a majority of our outstanding voting
securities.
We may
invest up to 100% of our assets in securities acquired directly from issuers in
privately negotiated transactions. With respect to such securities,
we may, for the purpose of public resale, be deemed an "underwriter" as that
term is defined in the Securities Act. Our intention is to not write
(sell) or buy put or call options to manage risks associated with the
publicly-traded securities of our portfolio companies, except that we may enter
into hedging transactions to manage the risks associated with interest rate and
other market fluctuations. However, in connection with an investment
or acquisition financing of a portfolio company, we may purchase or otherwise
receive warrants to purchase the common stock of the portfolio
company. Similarly, in connection with an acquisition, we may acquire
rights to require the issuers of acquired securities or their affiliates to
repurchase them under certain circumstances. We also do not intend to
acquire securities issued by any investment company that exceed the limits
imposed by the 1940 Act. Under these limits, except with respect to
money market funds we generally cannot acquire more than 3% of the voting stock
of any registered investment company, invest more than 5% of the value of our
total assets in the securities of one investment company or invest more than 10%
of the value of our total assets in the securities of more than one investment
company. With regard to that portion of our portfolio invested in
securities issued by investment companies, it should be noted that such
investments subject our stockholders indirectly to additional
expenses. None of these policies are fundamental and may be changed
without stockholder approval.
Qualifying
Assets
Under the
1940 Act, a business development company may not acquire any asset other than
assets of the type listed in Section 55(a) of the 1940 Act, which are
referred to as qualifying assets, unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the company's total
assets. The principal categories of qualifying assets relevant to our
business are the following:
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(1)
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Securities
purchased in transactions not involving any public offering from the
issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is,
or has been during the preceding 13 months, an affiliated person of
an eligible portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An "eligible portfolio
company" is defined in the 1940 Act and rules adopted pursuant thereto as
any issuer which:
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(a)
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is
organized under the laws of, and has its principal place of business in,
the United States;
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(b)
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is
not an investment company (other than a small business investment company
wholly owned by the business development company) or a company that would
be an investment company but for exclusions under the 1940 Act for certain
financial companies such as banks, brokers, commercial finance companies,
mortgage companies and insurance companies; and
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(c)
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satisfies
any of the following:
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1.
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does
not have any class of securities with respect to which a broker or dealer
may extend margin credit;
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is
controlled by a business development company or a group of companies
including a business development company and the business
development
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company
has an affiliated person who is a director of the eligible portfolio
company;
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is
a small and solvent company having total assets of not more than
$4 million and capital and surplus of not less than
$2 million;
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does
not have any class of securities listed on a national securities exchange;
or
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has
a class of securities listed on a national securities exchange, but has an
aggregate market value of outstanding voting and non-voting common equity
of less than $ 250 million.
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(2)
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Securities
in companies that were eligible portfolio companies when we made our
initial investment if certain other requirements are
satisfied.
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(3)
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Securities
of any eligible portfolio company which we control.
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(4)
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Securities
purchased in a private transaction from a U.S. issuer that is not an
investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject
to reorganization or if the issuer, immediately prior to the purchase of
its securities was unable to meet its obligations as they came due without
material assistance other than conventional lending or financing
agreements.
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(5)
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Securities
of an eligible portfolio company purchased from any person in a private
transaction if there is no ready market for such securities and we already
own 60% of the outstanding equity of the eligible portfolio
company.
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(6)
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Securities
received in exchange for or distributed on or with respect to securities
described in (1) through (4) above, or pursuant to the exercise of
warrants or rights relating to such securities.
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(7)
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Cash,
cash equivalents, U.S. government securities or high-quality debt
securities maturing in one year or less from the time of
investment.
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In
addition, a business development company must have been organized and have its
principal place of business in the United States and must be operated for the
purpose of making investments in the types of securities described in (1), (2),
(3) or (4) above.
Managerial
Assistance to Portfolio Companies
In order
to count portfolio securities as qualifying assets for the purpose of the 70%
test, the business development company must either control the issuer of the
securities or must offer to make available to the issuer of the securities
(other than small and solvent companies described above) significant managerial
assistance; except that, where the business development company purchases such
securities in conjunction with one or more other persons acting together, one of
the other persons in the group may make available such managerial
assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby the business development company,
through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company.
Temporary
Investments
Pending
investment in other types of "qualifying assets," as described above, our
investments may consist of cash, cash equivalents, including money market funds,
U.S. government securities or high quality debt securities maturing in one year
or less from the time of investment, which we refer to, collectively, as
temporary investments, so that 70% of our assets are qualifying
assets. Typically, we will invest in money market funds, U.S.
treasury bills or in repurchase agreements that are fully collateralized by cash
or securities issued by the U.S. government or its agencies. A
repurchase agreement involves the purchase by an investor, such as us, of a
specified security and the simultaneous agreement by the seller to repurchase it
at an agreed upon future date and at a price which is greater
than the
purchase price by an amount that reflects an agreed-upon interest
rate. There is no percentage restriction on the proportion of our
assets that may be invested in such repurchase agreements. However,
if more than 25% of our total assets constitute repurchase agreements from a
single counterparty, we would not meet the Diversification Tests in order to
qualify as a RIC for U.S. Federal income tax purposes. Thus, we do
not intend to enter into repurchase agreements with a single counterparty in
excess of this limit. Our Investment Adviser will monitor the
creditworthiness of the counterparties with which we enter into repurchase
agreement transactions.
Senior
Securities
We are
permitted, under specified conditions, to issue multiple classes of indebtedness
and one class of stock senior to our common stock if our asset coverage, as
defined in the 1940 Act, is at least equal to 200% immediately after each such
issuance. In addition, while any preferred stock or public debt
securities remain outstanding, we must make provisions to prohibit any
distribution to our stockholders or the repurchase of such securities or shares
unless we meet the applicable asset coverage ratios after giving effect to such
distribution or repurchase. We may also borrow amounts up to 5% of
the value of our total assets for temporary or emergency purposes without regard
to asset coverage. For a discussion of the risks associated with
leverage, see "Risk Factors."
Code
of Ethics
We and
Prospect Capital Management have each adopted a code of ethics pursuant to Rule
17j-1 under the 1940 Act that establishes procedures for personal investments
and restricts certain personal securities transactions. Personnel
subject to each code may invest in securities for their personal investment
accounts, including securities that may be purchased or held by us, so long as
such investments are made in accordance with the code's
requirements. For information on how to obtain a copy of each code of
ethics, see "Available Information."
Investment
Concentration
Our
investment objective is to generate both current income and long-term capital
appreciation through debt and equity investments. While we are
diversifying the portfolio, many of our existing investments are in the energy
and energy related industries.
Compliance
Policies and Procedures
We and
our Investment Adviser have adopted and implemented written policies and
procedures reasonably designed to prevent violation of the U.S. Federal
securities laws, and are required to review these compliance policies and
procedures annually for their adequacy and the effectiveness of their
implementation, and to designate a Chief Compliance Officer to be responsible
for administering the policies and procedures. Brian H. Oswald serves
as our Chief Compliance Officer.
Proxy
Voting Policies and Procedures
We have
delegated our proxy voting responsibility to Prospect Capital
Management. The Proxy Voting Policies and Procedures of Prospect
Capital Management are set forth below. The guidelines are reviewed
periodically by Prospect Capital Management and our independent directors, and,
accordingly, are subject to change.
Introduction. As
an investment adviser registered under the Advisers Act, Prospect Capital
Management has a fiduciary duty to act solely in the best interests of its
clients. As part of this duty, Prospect Capital Management recognizes
that it must vote client securities in a timely manner free of conflicts of
interest and in the best interests of its clients.
These
policies and procedures for voting proxies for Prospect Capital Management's
Investment Advisory clients are intended to comply with Section 206 of, and Rule
206(4)-6 under, the Advisers Act.
Proxy
policies. These policies are designed to be responsive to the
wide range of subjects that may be the subject of a proxy vote. These
policies are not exhaustive due to the variety of proxy voting issues that
Prospect Capital Management may be required to consider. In general,
Prospect Capital Management will vote proxies in accordance with these
guidelines unless: (1) Prospect Capital Management has determined to
consider the matter on
a
case-by-case basis (as is stated in these guidelines), (2) the subject matter of
the vote is not covered by these guidelines, (3) a material conflict of interest
is present, or (4) Prospect Capital Management might find it necessary to vote
contrary to its general guidelines to maximize stockholder value and vote in its
clients' best interests. In such cases, a decision on how to vote
will be made by the Proxy Voting Committee (as described below). In
reviewing proxy issues, Prospect Capital Management will apply the following
general policies:
Elections of
directors. In general, Prospect Capital Management will vote
in favor of the management-proposed slate of directors. If there is a
proxy fight for seats on the Board of Directors or Prospect Capital Management
determines that there are other compelling reasons for withholding votes for
directors, the Proxy Voting Committee will determine the appropriate vote on the
matter. Prospect Capital Management believes that directors have a
duty to respond to stockholder actions that have received significant
stockholder support. Prospect Capital Management may withhold votes
for directors that fail to act on key issues such as failure to implement
proposals to declassify boards, failure to implement a majority vote
requirement, failure to submit a rights plan to a stockholder vote and failure
to act on tender offers where a majority of stockholders have tendered their
shares. Finally, Prospect Capital Management may withhold votes for
directors of non-U.S. issuers where there is insufficient information about the
nominees disclosed in the proxy statement.
Appointment of
auditors. Prospect Capital Management believes that the
Company remains in the best position to choose the auditors and will generally
support management's recommendation.
Changes in capital
structure. Changes in a company's charter, articles of
incorporation or by-laws may be required by state or U.S. Federal
regulation. In general, Prospect Capital Management will cast its
votes in accordance with the Company's management on such
proposal. However, the Proxy Voting Committee will review and analyze
on a case-by-case basis any proposals regarding changes in corporate structure
that are not required by state or U.S. Federal regulation.
Corporate restructurings, mergers
and acquisitions. Prospect Capital Management believes proxy
votes dealing with corporate reorganizations are an extension of the investment
decision. Accordingly, the Proxy Voting Committee will analyze such
proposals on a case-by-case basis.
Proposals affecting the rights of
stockholders. Prospect Capital Management will generally vote
in favor of proposals that give stockholders a greater voice in the affairs of
the Company and oppose any measure that seeks to limit those
rights. However, when analyzing such proposals, Prospect Capital
Management will weigh the financial impact of the proposal against the
impairment of the rights of stockholders.
Corporate
governance. Prospect Capital Management recognizes the
importance of good corporate governance in ensuring that management and the
Board of Directors fulfill their obligations to the
stockholders. Prospect Capital Management favors proposals promoting
transparency and accountability within a company.
Anti-takeover
measures. The Proxy Voting Committee will evaluate, on a
case-by-case basis, proposals regarding anti-takeover measures to determine the
measure's likely effect on stockholder value dilution.
Stock
splits. Prospect Capital Management will generally vote with
the management of the Company on stock split matters.
Limited liability of
directors. Prospect Capital Management will generally vote
with management on matters that would affect the limited liability of
directors.
Social and corporate
responsibility. The Proxy Voting Committee may review and
analyze on a case-by-case basis proposals relating to social, political and
environmental issues to determine whether they will have a financial impact on
stockholder value. Prospect Capital Management may abstain from
voting on social proposals that do not have a readily determinable financial
impact on stockholder value.
Proxy voting
procedures. Prospect Capital Management will generally vote
proxies in accordance with these guidelines. In circumstances in
which (1) Prospect Capital Management has determined to consider the matter on a
case-by-case basis (as is stated in these guidelines), (2) the subject matter of
the vote is not covered by these guidelines, (3) a material conflict of interest
is present, or (4) Prospect Capital Management might find it necessary to vote
contrary to its general guidelines to maximize stockholder value and vote in its
clients' best interests, the Proxy Voting Committee will vote the
proxy.
Proxy voting
committee. Prospect Capital Management has formed a proxy
voting committee to establish general proxy policies and consider specific proxy
voting matters as necessary. In addition, members of the committee
may contact the management of the Company and interested stockholder groups as
necessary to discuss proxy issues. Members of the committee will
include relevant senior personnel. The committee may also evaluate
proxies where we face a potential conflict of interest (as discussed
below). Finally, the committee monitors adherence to guidelines, and
reviews the policies contained in this statement from time to time.
Conflicts of
interest. Prospect Capital Management recognizes that there
may be a potential conflict of interest when it votes a proxy solicited by an
issuer that is its advisory client or a client or customer of one of our
affiliates or with whom it has another business or personal relationship that
may affect how it votes on the issuer's proxy. Prospect Capital
Management believes that adherence to these policies and procedures ensures that
proxies are voted with only its clients' best interests in mind. To
ensure that its votes are not the product of a conflict of interests, Prospect
Capital Management requires that: (i) anyone involved in the decision
making process (including members of the Proxy Voting Committee) disclose to the
chairman of the Proxy Voting Committee any potential conflict that he or she is
aware of and any contact that he or she has had with any interested party
regarding a proxy vote; and (ii) employees involved in the decision making
process or vote administration are prohibited from revealing how Prospect
Capital Management intends to vote on a proposal in order to reduce any
attempted influence from interested parties.
Proxy voting. Each
account's custodian will forward all relevant proxy materials to Prospect
Capital Management, either electronically or in physical form to the address of
record that Prospect Capital Management has provided to the
custodian.
Proxy
recordkeeping. Prospect Capital Management must retain the
following documents pertaining to proxy voting:
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copies
of its proxy voting polices and procedures;
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copies
of all proxy statements;
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records
of all votes cast by Prospect Capital Management;
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copies
of all documents created by Prospect Capital Management that were material
to making a decision how to vote proxies or that memorializes the basis
for that decision; and
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copies
of all written client requests for information with regard to how Prospect
Capital Management voted proxies on behalf of the client as well as any
written responses provided.
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All of
the above-referenced records will be maintained and preserved for a period of
not less than five years from the end of the fiscal year during which the last
entry was made. The first two years of records must be maintained at
our office.
Proxy voting
records. Clients may obtain information about how Prospect
Capital Management voted proxies on their behalf by making a written request for
proxy voting information to: Compliance Officer, Prospect Capital
Management LLC, 10 East 40th Street,
44th
Floor, New York, NY 10016.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 imposes a variety of regulatory requirements on
publicly-held companies. In addition to our Chief Executive and Chief Financial
Officers' required certifications as to the accuracy of our
financial
reporting, we are also required to disclose the effectiveness of our disclosure
controls and procedures as well as report on our assessment of our internal
controls over financial reporting, the latter of which must be audited by our
independent registered public accounting firm.
The
Sarbanes-Oxley Act also requires us to continually review our policies and
procedures to ensure that we remain in compliance with all rules promulgated
under the Act.
CUSTODIAN, TRANSFER AND DIVIDEND PAYING
AGENT AND REGISTRAR
Our
Securities are held under a custody agreement by U.S. Bank National
Association. The address of the custodian is: 1555 North
Rivercenter Drive, MK-WI-5302, Milwaukee, WI 53212, Attention: Mutual
Fund Custody Account Administrator, facsimile: (866)
350-1430. American Stock Transfer & Trust Company acts as our
transfer agent, dividend paying agent and registrar. The principal
business address of American Stock Transfer & Trust Company is 59 Maiden
Lane, New York, NY 10007, telephone number: (718)
921-8200.
BROKERAGE ALLOCATION AND OTHER
PRACTICES
Since we
generally acquire and dispose of our investments in privately negotiated
transactions, we infrequently use brokers in the normal course of our
business. The aggregate amount of brokerage commissions paid by us
during the three most recent fiscal years is $105,613. Subject to
policies established by our Board of Directors, Prospect Capital Management is
primarily responsible for the execution of the publicly-traded securities
portion of our portfolio transactions and the allocation of brokerage
commissions.
Prospect
Capital Management does not expect to execute transactions through any
particular broker or dealer, but seeks to obtain the best net results for the
Company, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
and operational facilities of the firm and the firm's risk and skill in
positioning blocks of securities. While Prospect Capital Management
generally seeks reasonably competitive trade execution costs, the Company will
not necessarily pay the lowest spread or commission
available. Subject to applicable legal requirements, Prospect Capital
Management may select a broker based partly upon brokerage or research services
provided to it and the Company and any other clients. In return for
such services, we may pay a higher commission than other brokers would charge if
Prospect Capital Management determines in good faith that such commission is
reasonable in relation to the services provided.
PLAN OF DISTRIBUTION
We may
sell the Securities in any of four ways (or in any combination): (a) through
underwriters or dealers; (b) directly to a limited number of purchasers or to a
single purchaser, including existing stockholders in a rights offering; (c)
through agents; or (d) directly to our stockholders and others through the
issuance of transferable or non-transferable rights to our stockholders. In the
case of a rights offering, the applicable prospectus supplement will set forth
the number of shares of our common stock issuable upon the exercise of each
right and the other terms of such rights offering. Any underwriter or agent
involved in the offer and sale of the Securities will also be named in the
applicable prospectus supplement. The Securities may be sold "at-the-market" to
or through a market maker or into an existing trading market for the securities,
on an exchange or otherwise. The prospectus supplement will set forth the terms
of the offering of such securities, including:
|
·
|
the
name or names of any underwriters or agents and the amounts of Securities
underwritten or placed by each of them;
|
|
|
|
|
·
|
the
offering price of the Securities and the proceeds to us and any discounts,
commissions or concessions allowed or reallowed or paid to underwriters or
agents; and
|
|
|
|
|
·
|
any
securities exchanges on which the Securities may be
listed.
|
If so
indicated in the applicable prospectus supplement, we will authorize
underwriters or other persons acting as our agents to solicit offers by certain
institutions to purchase the Securities from us pursuant to contracts providing
for payment and delivery on a future date. Institutions with which such
contracts may be made include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable institutions and
others, but in all cases such institutions must be approved by us. The
obligations of any purchaser under any such contract will be subject to the
condition that the purchase of the securities not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject. The underwriters and such other agents will not have any responsibility
in respect of the validity or performance of such contracts. Such contracts will
be subject only to those conditions set forth in the prospectus supplement, and
the prospectus supplement will set forth the commission payable for solicitation
of such contracts.
We may
use Stock to acquire investments in companies, the terms of which will be
further disclosed in a prospectus supplement if such stock is issued in an
offering hereunder.
Any
offering price and any discounts or concessions allowed or reallowed or paid to
underwriters or agents may be changed from time to time.
We may
sell shares of our common stock at a price below net asset value per share if a
majority of the number of beneficial holders of our stock have approved such a
sale or if the following conditions are met: (1) holders of a majority of our
stock and a majority of our stock not held by affiliated persons have approved
issuance at less than net asset value per share during the one-year period prior
to such sale; (2) a majority of our directors who have no financial interest in
the sale and a majority of such directors who are not interested persons of us
have determined that any such sale would be in our best interests and in the
best interests of our stockholders; and (3) a majority of our directors who have
no financial interest in the sale and a majority of such directors who are not
interested persons of us, in consultation with the underwriter or underwriters
of the offering if it is to be underwritten, have determined in good faith, and
as of a time immediately prior to the first solicitation by or on behalf of us
of firm commitments to purchase such securities or immediately prior to the
issuance of such securities, that the price at which such securities are to be
sold is not less than a price which closely approximates the market value of
those securities, less any distributing commission or discount.
If
underwriters are used in the sale of any Securities, the Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Securities may be either offered to the public through underwriting
syndicates represented by managing underwriters, or directly by underwriters.
Generally, the underwriters' obligations to purchase the Securities will be
subject to certain conditions precedent.
The
maximum commission or discount to be received by any FINRA member or independent
broker-dealer will not exceed 5%. In connection with any rights offering to our
stockholders, we may also enter into a standby underwriting arrangement with one
or more underwriters pursuant to which the underwriter(s) will purchase our
common stock remaining unsubscribed for after the rights offering.
We may
sell the Securities through agents from time to time. The prospectus supplement
will name any agent involved in the offer or sale of the Securities and any
commissions we pay to them. Generally, any agent will be acting on a best
efforts basis for the period of its appointment.
We may
authorize underwriters, dealers or agents to solicit offers by certain
purchasers to purchase the Securities from us at the public offering price set
forth in the prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. The
contracts will be subject only to those conditions set forth in the prospectus
supplement, and the prospectus supplement will set forth any commissions we pay
for soliciting these contracts.
Agents,
dealers and underwriters may be entitled to indemnification by us against
certain civil liabilities, including liabilities under the Securities Act or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents, dealers and underwriters may be
customers of, engage in transactions with, or perform services for us in the
ordinary course of business.
We may
enter into derivative transactions with third parties, or sell securities not
covered by this prospectus to third parties in privately negotiated
transactions. If the applicable prospectus supplement indicates, in connection
with those derivatives, the third parties may sell securities covered by this
prospectus and the applicable prospectus supplement, including in short sale
transactions. If so, the third party may use securities pledged by us or
borrowed from us or others to settle those sales or to close out any related
open borrowings of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of stock. The
third party in such sale transactions will be an underwriter and, if not
identified in this prospectus, will be identified in the applicable prospectus
supplement (or a post-effective amendment). We or one of our affiliates may loan
or pledge securities to a financial institution or other third party that in
turn may sell the securities using this prospectus. Such financial institution
or third party may transfer its short position to investors in our Securities or
in connection with a simultaneous offering of other securities offered by this
prospectus or otherwise.
Any of
our common stock sold pursuant to a prospectus supplement will be listed on The
NASDAQ Global Select Market, or another exchange on which our common stock is
traded.
In order
to comply with the securities laws of certain states, if applicable, the
Securities offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states, the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirements is available and is complied with.
LEGAL MATTERS
Certain
legal matters regarding the securities offered by this prospectus will be passed
upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
NY, and Venable LLP as special Maryland counsel.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BDO
Seidman, LLP is the independent registered public accounting firm of the
Company.
We have
filed with the SEC a registration statement on Form N-2, together with all
amendments and related exhibits, under the Securities Act, with respect to our
Securities offered by this prospectus. The registration statement
contains additional information about us and the Securities being registered by
this prospectus. We file with or submit to the SEC annual, quarterly
and current periodic reports, proxy statements and other information meeting the
informational requirements of the Exchange Act. This information and
the information specifically regarding how we voted proxies relating to
portfolio securities for the period ended June 30, 2008, are available free of
charge by contacting us at 10 East 40th Street,
44th
floor, New York, NY 10016 or by telephone at toll-free
(888) 748-0702. You may inspect and copy these reports, proxy
statements and other information, as well as the registration statement and
related exhibits and schedules, at the Public Reference Room of the SEC at 100 F
Street NE, Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at (202)
551-8090. The SEC maintains an Internet site that contains reports,
proxy and information statements and other information filed electronically by
us with the SEC which are available on the SEC's Internet site at
http://www.sec.gov. Copies of these reports, proxy and information
statements and other information may be obtained, after paying a duplicating
fee, by electronic request at the following E-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20549-0102.
INDEX TO FINANCIAL
STATEMENTS
|
|
Consolidated
Statements of Assets and Liabilities September 30, 2008 and June 30,
2008
|
F-2
|
Consolidated
Statements of Operations September 30, 2008 and September 30,
2007
|
F-3
|
Consolidated
Statements of Changes In Net Assets September 30, 2008 and September 30,
2007
|
F-4
|
Consolidated
Statements of Changes In Net Assets September 30, 2008 and September 30,
2007
|
F-5
|
Consolidated
Statements of Changes In Net Assets September 30, 2008 and June 30,
2008
|
F-6
|
Notes
to Consolidated Financial Statements September 30, 2008
|
F-21
|
|
|
AUDITED
FINANCIAL STATEMENTS
|
|
Consolidated
Statements of Assets and Liabilities
|
F-34
|
Consolidated
Statements of Operations
|
F-35
|
Consolidated
Statements of Changes in Net Assets
|
F-36
|
Consolidated
Statements of Cash Flows
|
F-37
|
Consolidated
Schedule of Investments June 30, 2008
|
F-38
|
Consolidated
Schedule of Investments June 30, 2007
|
F-46
|
Notes
to Consolidated Financial Statements
|
F-51
|
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
September
30, 2008 and June 30, 2008
(in
thousands, except share and per share data)
|
|
September
30, 2008
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments
at fair value (cost of $559,727 and $496,805, respectively, Note
3)
|
|
|
|
|
|
|
Control
investments (cost of $204,064 and $203,661, respectively)
|
|
$ |
202,324 |
|
|
$ |
205,827 |
|
Affiliate
investments (cost of $33,354 and $5,609, respectively)
|
|
|
33,392 |
|
|
|
6,043 |
|
Non-control/Non-affiliate
investments (cost of $322,309 and $287,535, respectively)
|
|
|
313,587 |
|
|
|
285,660 |
|
Total
investments at fair value
|
|
|
549,303 |
|
|
|
497,530 |
|
Investments
in money market
funds
|
|
|
28,658 |
|
|
|
33,000 |
|
Cash
|
|
|
1,269 |
|
|
|
555 |
|
Receivables
for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
5,516 |
|
|
|
4,094 |
|
Dividends
|
|
|
230 |
|
|
|
4,248 |
|
Loan
principal
|
|
|
63 |
|
|
|
71 |
|
Managerial
assistance
|
|
|
382 |
|
|
|
380 |
|
Potential
deal expenses
|
|
|
303 |
|
|
|
— |
|
Other
|
|
|
232 |
|
|
|
187 |
|
Prepaid
expenses
|
|
|
346 |
|
|
|
273 |
|
Deferred
financing
costs
|
|
|
1,416 |
|
|
|
1,440 |
|
Total
Assets
|
|
|
587,718 |
|
|
|
541,778 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Credit
facility
payable
|
|
|
131,667 |
|
|
|
91,167 |
|
Dividends
payable
|
|
|
11,882 |
|
|
|
11,845 |
|
Due
to Prospect Administration (Note
7)
|
|
|
1,038 |
|
|
|
695 |
|
Due
to Prospect Capital Management (Note
7)
|
|
|
8,631 |
|
|
|
5,946 |
|
Accrued
expenses
|
|
|
994 |
|
|
|
1,104 |
|
Other
liabilities
|
|
|
1,767 |
|
|
|
1,398 |
|
Total
Liabilities
|
|
|
155,979 |
|
|
|
112,155 |
|
Net
Assets
|
|
$ |
431,739 |
|
|
$ |
429,623 |
|
|
|
|
|
|
|
|
|
|
Components
of Net Assets
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share (100,000,000 and 100,000,000 common
shares
|
|
|
|
|
|
|
|
|
authorized,
respectively; 29,520,379 and 29,520,379 issued and outstanding,
respectively)
|
|
$ |
30 |
|
|
$ |
30 |
|
Paid-in
capital in excess of
par
|
|
|
441,332 |
|
|
|
441,332 |
|
Undistributed
net investment
income
|
|
|
13,128 |
|
|
|
1,508 |
|
Accumulated
realized losses on
investments
|
|
|
(12,327 |
) |
|
|
(13,972 |
) |
Unrealized
(depreciation) appreciation on
investments
|
|
|
(10,424 |
) |
|
|
725 |
|
Net
Assets
|
|
$ |
431,739 |
|
|
$ |
429,623 |
|
Net
Asset Value Per
Share
|
|
$ |
14.63 |
|
|
$ |
14.55 |
|
See
notes to consolidated financial statements
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
September
30, 2008 and September 30, 2007
(in
thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Investment
Income
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
Control
investments (Net of foreign withholding tax of $47 and $89,
respectively)
|
|
$ |
6,722 |
|
|
$ |
5,063 |
|
Affiliate
investments (Net of foreign withholding tax of $0 and $35,
respectively)
|
|
|
560 |
|
|
|
667 |
|
Non-control/non-affiliate
investments
|
|
|
10,274 |
|
|
|
7,102 |
|
Total
interest income
|
|
|
17,556 |
|
|
|
12,832 |
|
Dividend
income:
|
|
|
|
|
|
|
|
|
Control
investments
|
|
|
4,584 |
|
|
|
1,450 |
|
Money
market funds
|
|
|
139 |
|
|
|
168 |
|
Total
dividend income
|
|
|
4,723 |
|
|
|
1,618 |
|
Other
income: (See Note 4)
|
|
|
|
|
|
|
|
|
Control/affiliate
investments
|
|
|
744 |
|
|
|
10 |
|
Non-control/non-affiliate
investments
|
|
|
12,776 |
|
|
|
931 |
|
Total
other income
|
|
|
13,520 |
|
|
|
941 |
|
Total
Investment Income
|
|
|
35,799 |
|
|
|
15,391 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Investment
advisory fees:
|
|
|
|
|
|
|
|
|
Base
management fee (Note 7)
|
|
|
2,823 |
|
|
|
1,866 |
|
Income
incentive fee (Note 7)
|
|
|
5,875 |
|
|
|
1,966 |
|
Total
investment advisory fees
|
|
|
8,698 |
|
|
|
3,832 |
|
Interest
and credit facility
expenses
|
|
|
1,518 |
|
|
|
1,238 |
|
Chief
Financial, Chief Compliance Officer and Sub-administration
fees
|
|
|
250 |
|
|
|
186 |
|
Legal
fees
|
|
|
597 |
|
|
|
1,206 |
|
Valuation
services
|
|
|
160 |
|
|
|
113 |
|
Sarbanes-Oxley
compliance
expenses
|
|
|
2 |
|
|
|
10 |
|
Audit
and tax related
fees
|
|
|
175 |
|
|
|
250 |
|
Allocation
of overhead from Prospect Administration (Note
7)
|
|
|
588 |
|
|
|
260 |
|
Insurance
expense
|
|
|
61 |
|
|
|
64 |
|
Directors'
fees
|
|
|
81 |
|
|
|
55 |
|
Other
general and administrative
expenses
|
|
|
167 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
12,297 |
|
|
|
7,526 |
|
|
|
|
|
|
|
|
|
|
Net
Investment Income
|
|
|
23,502 |
|
|
|
7,865 |
|
|
|
|
|
|
|
|
|
|
Net
realized gain (loss) on
investments
|
|
|
1,645 |
|
|
|
(11 |
) |
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
(11,149 |
) |
|
|
696 |
|
Net
Increase in Net Assets Resulting from Operations
|
|
$ |
13,998 |
|
|
$ |
8,550 |
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from operations per
share:
|
|
$ |
0.47 |
|
|
$ |
0.43 |
|
Dividends
declared per
share:
|
|
$ |
0.40 |
|
|
$ |
0.39 |
|
See
notes to consolidated financial statements
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
September
30, 2008 and September 30, 2007
(in
thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Increase
in Net Assets from Operations:
|
|
|
|
|
|
|
Net
investment
income
|
|
$ |
23,502 |
|
|
$ |
7,865 |
|
Net
realized gain (loss) on
investments
|
|
|
1,645 |
|
|
|
(11 |
) |
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
(11,149 |
) |
|
|
696 |
|
Net
Increase in Net Assets Resulting from Operations
|
|
|
13,998 |
|
|
|
8,550 |
|
|
|
|
|
|
|
|
|
|
Dividends
to
Stockholders:
|
|
|
(11,882 |
) |
|
|
(7,830 |
) |
Capital
Share Transactions:
|
|
|
|
|
|
|
|
|
Reinvestment
of
dividends
|
|
|
— |
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
Net
Increase in Net Assets Resulting from Capital Share
Transactions
|
|
|
— |
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
Total Increase in Net
Assets:
|
|
|
2,116 |
|
|
|
1,963 |
|
Net
assets at beginning of
period
|
|
|
429,623 |
|
|
|
300,048 |
|
Net
Assets at End of Period
|
|
$ |
431,739 |
|
|
$ |
302,011 |
|
Capital
Share Activity:
|
|
|
|
|
|
|
|
|
Shares
issued through reinvestment of
dividends
|
|
|
— |
|
|
|
72,073 |
|
Net
increase in capital share
activity
|
|
|
— |
|
|
|
72,073 |
|
Shares
outstanding at beginning of period
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding at End of
Period
|
|
|
29,520,379 |
|
|
|
20,021,138 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
September
30, 2008 and September 30, 2007
(in
thousands, except share data)
(Unaudited)
|
|
For
The Three Months Ended
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
increase in net assets resulting from
operations
|
|
$ |
13,998 |
|
|
$ |
8,550 |
|
Net
realized (gain) loss on
investments
|
|
|
(1,645 |
) |
|
|
11 |
|
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
11,149 |
|
|
|
(696 |
) |
Accretion
of original issue discount on
investments
|
|
|
(1,770 |
) |
|
|
(894 |
) |
Amortization
of deferred financing
costs
|
|
|
180 |
|
|
|
186 |
|
Gain
on settlement of net profits
interest
|
|
|
(12,576 |
) |
|
|
— |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Payments
for purchases of
investments
|
|
|
(57,460 |
) |
|
|
(40,243 |
) |
Payment-In-Kind
interest
|
|
|
(420 |
) |
|
|
(151 |
) |
Proceeds
from sale of investments and collection of investment
principal
|
|
|
10,949 |
|
|
|
17,949 |
|
Purchases
of cash
equivalents
|
|
|
(9,999 |
) |
|
|
(129,975 |
) |
Sales
of cash
equivalents
|
|
|
9,999 |
|
|
|
129,964 |
|
Net
investments in money market
funds
|
|
|
4,342 |
|
|
|
30,412 |
|
Increase
in interest
receivable
|
|
|
(1,422 |
) |
|
|
(934 |
) |
Decrease
in dividends
receivable
|
|
|
4,018 |
|
|
|
199 |
|
Decrease
(increase) in loan principal
receivable
|
|
|
8 |
|
|
|
(125 |
) |
Increase
in receivable for managerial
assistance
|
|
|
(2 |
) |
|
|
— |
|
(Increase)
decrease in receivable for potential deal
expenses
|
|
|
(303 |
) |
|
|
1,625 |
|
(Increase)
decrease in other
receivables
|
|
|
(45 |
) |
|
|
13 |
|
(Increase)
decrease in due from prepaid
expenses
|
|
|
(73 |
) |
|
|
217 |
|
Decrease
in payables for securities
purchased
|
|
|
— |
|
|
|
(70,000 |
) |
Increase
in due to Prospect
Administration
|
|
|
343 |
|
|
|
88 |
|
Increase
(decrease) in due to Prospect Capital
Management
|
|
|
2,685 |
|
|
|
(198 |
) |
(Decrease)
increase in accrued
expenses
|
|
|
(110 |
) |
|
|
921 |
|
Increase
in other
liabilities
|
|
|
369 |
|
|
|
503 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Operating Activities:
|
|
|
(27,785 |
) |
|
|
(52,578 |
) |
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit
facility
|
|
|
47,500 |
|
|
|
59,962 |
|
Payments
under credit
facility
|
|
|
(7,000 |
) |
|
|
— |
|
Financing
costs paid and
deferred
|
|
|
(156 |
) |
|
|
(400 |
) |
Decrease
in deferred offering
costs
|
|
|
— |
|
|
|
(397 |
) |
Dividends
paid
|
|
|
(11,845 |
) |
|
|
(6,587 |
) |
Net
Cash Provided By Financing Activities:
|
|
|
28,499 |
|
|
|
52,578 |
|
|
|
|
|
|
|
|
|
|
Total
Increase in
Cash
|
|
|
714 |
|
|
|
— |
|
Cash
balance at beginning of
period
|
|
|
555 |
|
|
|
— |
|
Cash
Balance at End of Period
|
|
$ |
1,269 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Cash
Paid For
Interest
|
|
$ |
1,250 |
|
|
$ |
734 |
|
Non-Cash
Financing Activity:
|
|
|
|
|
|
|
|
|
Amount
of shares issued in connection with dividend reinvestment
plan
|
|
$ |
— |
|
|
$ |
1,243 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax
Rolled Ring & Machine
|
|
South
Carolina/ Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares (7 total unrestricted common shares outstanding and 803.18
restricted common shares outstanding)
|
|
|
|
|
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
0.0% |
|
Preferred
shares (7,222.6 total preferred shares outstanding)
|
|
|
|
|
6,142.6 |
|
|
|
6,112 |
|
|
|
6,112 |
|
|
|
1.4% |
|
Senior
secured note, 10.50%, 4/01/2013 (4),
(28)
|
|
|
|
$ |
21,817 |
|
|
|
21,817 |
|
|
|
21,817 |
|
|
|
5.1% |
|
Subordinated
secured note, 11.50%plus 6.00% PIK, 4/01/2013 (4),
(29)
|
|
|
|
$ |
11,500 |
|
|
|
11,500 |
|
|
|
11,500 |
|
|
|
2.7% |
|
Total
|
|
|
|
|
|
|
|
|
39,429 |
|
|
|
39,429 |
|
|
|
9.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J
Cladding LLC (4)
|
|
Texas/Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common shares, expiring 3/30/2014 (1,000 total company units
outstanding)
|
|
|
|
|
400 |
|
|
|
580 |
|
|
|
3,699 |
|
|
|
0.9% |
|
Senior
secured note, 14.00%,3/30/2012 (12)
|
|
|
|
$ |
4,350 |
|
|
|
3,644 |
|
|
|
4,122 |
|
|
|
1.0% |
|
Total
|
|
|
|
|
|
|
|
|
4,224 |
|
|
|
7,821 |
|
|
|
1.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Solutions Holdings, Inc. (3)
|
|
Texas/Gas
Gathering and Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (100 total common shares outstanding)
|
|
|
|
|
100 |
|
|
|
5,242 |
|
|
|
43,454 |
|
|
|
10.1% |
|
Subordinated
secured note, 18.00%,12/22/2009 (4)
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.6% |
|
Total
|
|
|
|
|
|
|
|
|
25,242 |
|
|
|
63,454 |
|
|
|
14.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Contract Services, Inc. (5)
|
|
North
Carolina/ Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (100 total common shares outstanding)
|
|
|
|
|
49 |
|
|
|
594 |
|
|
|
— |
|
|
|
0.0% |
|
Series
A preferred shares (10 total Series A preferred shares
outstanding)
|
|
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Junior
secured note, 7.00% plus 7.00% PIK, 9/30/2010
|
|
|
|
$ |
14,003 |
|
|
|
14,003 |
|
|
|
3,030 |
|
|
|
0.7% |
|
Senior
secured note, 7.00% plus 7.00% PIK, 9/30/2010
|
|
|
|
$ |
800 |
|
|
|
800 |
|
|
|
800 |
|
|
|
0.2% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
demand note, 15.00%, 6/30/2009 (6)
|
|
|
|
$ |
1,170 |
|
|
|
1,170 |
|
|
|
1,170 |
|
|
|
0.3% |
|
Total
|
|
|
|
|
|
|
|
|
16,567 |
|
|
|
5,000 |
|
|
|
1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron
Horse Coiled Tubing, Inc.
|
|
Alberta,
Canada/ Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (2,231 total common shares outstanding)
|
|
|
|
|
1,781 |
|
|
$ |
268 |
|
|
$ |
1 |
|
|
|
0.0% |
|
Senior
secured note, 15.00%, 4/19/2009
|
|
|
|
$ |
9,250 |
|
|
|
9,139 |
|
|
|
8,180 |
|
|
|
1.9% |
|
Bridge
Loan, 15.00% plus 3.00% PIK, 12/11/2008
|
|
|
|
$ |
5,228 |
|
|
|
5,228 |
|
|
|
4,619 |
|
|
|
1.1% |
|
Total
|
|
|
|
|
|
|
|
|
14,635 |
|
|
|
12,800 |
|
|
|
3.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG
Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,000 total common shares outstanding)
|
|
|
|
|
800 |
|
|
|
2,317 |
|
|
|
8,656 |
|
|
|
2.0% |
|
Senior
secured note, 16.50%, 8/31/2011 (4),
(8)
|
|
|
|
$ |
13,080 |
|
|
|
13,080 |
|
|
|
13,080 |
|
|
|
3.0% |
|
Total
|
|
|
|
|
|
|
|
|
15,397 |
|
|
|
21,736 |
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V
Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (800,000 total common shares outstanding)
|
|
|
|
|
545,107 |
|
|
|
5,068 |
|
|
|
8,772 |
|
|
|
2.0% |
|
Warrants,
common shares, expiring 6/30/2017
|
|
|
|
|
200,000 |
|
|
|
1,682 |
|
|
|
3,219 |
|
|
|
0.7% |
|
Total
|
|
|
|
|
|
|
|
|
6,750 |
|
|
|
11,991 |
|
|
|
2.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester
Energy Partners, Inc. (9)
|
|
Maine/Biomass
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
|
— |
|
|
|
813 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 12.50%, 12/31/2012
|
|
|
|
$ |
39,617 |
|
|
|
39,505 |
|
|
|
12,201 |
|
|
|
2.8% |
|
Total
|
|
|
|
|
|
|
|
|
40,318 |
|
|
|
12,202 |
|
|
|
2.8% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
Portfolio Investments
(1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yatesville
Coal Holdings, Inc. (23)
|
|
Kentucky/Mining
and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (1,000 total common shares outstanding)
|
|
|
|
|
1,000 |
|
|
$ |
359 |
|
|
$ |
— |
|
|
|
0.0% |
|
Junior
secured note, 15.68%, 12/31/2010
|
|
|
|
$ |
31,143 |
|
|
|
31,143 |
|
|
|
17,891 |
|
|
|
4.1% |
|
Senior
secured note, 15.68%, 12/31/2010
|
|
|
|
$ |
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
2.3% |
|
Total
|
|
|
|
|
|
|
|
|
41,502 |
|
|
|
27,891 |
|
|
|
6.4% |
|
Total
Control Investments
|
|
|
|
|
|
|
|
|
204,064 |
|
|
|
202,324 |
|
|
|
46.9% |
|
Affiliate
Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian
Energy Holdings LLC (10),
(4)
|
|
West
Virginia/Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
- Class A common units, expiring 2/13/2016 (49,753 total class A common
units outstanding)
|
|
|
|
|
12,090 |
|
|
|
348 |
|
|
|
611 |
|
|
|
0.1% |
|
Series
A preferred equity (16,125 total series A preferred equity units
outstanding)
|
|
|
|
|
3,000 |
|
|
|
79 |
|
|
|
320 |
|
|
|
0.1% |
|
Series
B preferred equity (794 total series B preferred equity units
outstanding)
|
|
|
|
|
241 |
|
|
|
241 |
|
|
|
— |
|
|
|
0.0% |
|
Senior
Secured Debt Tranche A, 14.00% plus 3.00% PIK, 1/31/2011
|
|
|
|
$ |
2,397 |
|
|
|
2,397 |
|
|
|
2,397 |
|
|
|
0.6% |
|
Senior
Secured Debt Tranche B, 14.00% plus 3.00% PIK, 5/01/2009
|
|
|
|
$ |
1,960 |
|
|
|
1,960 |
|
|
|
1,861 |
|
|
|
0.4% |
|
Total
|
|
|
|
|
|
|
|
|
5,025 |
|
|
|
5,189 |
|
|
|
1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotronic
NeuroNetwork
|
|
Michigan/Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
shares (85,000 total preferred shares outstanding) (26)
|
|
|
|
|
9,925.455 |
|
|
|
2,300 |
|
|
|
2,300 |
|
|
|
0.5% |
|
Senior
secured note, 11.50% plus 1.00% PIK, 2/21/2013 (4),
(27)
|
|
|
|
$ |
26,030 |
|
|
|
26,029 |
|
|
|
25,903 |
|
|
|
6.0% |
|
Total
|
|
|
|
|
|
|
|
|
28,329 |
|
|
|
28,203 |
|
|
|
6.5% |
|
Total
Affiliate Investments
|
|
|
|
|
|
|
|
|
33,354 |
|
|
|
33,392 |
|
|
|
7.7% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
Portfolio Investments
(1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Gilsonite Company
|
|
Utah/Specialty
Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
Interest in AGC\PEP, LLC (11)
|
|
|
|
|
99.9999 |
% |
|
|
1,000 |
|
|
|
1,166 |
|
|
|
0.3% |
|
Subordinated
secured note, 12.00% plus 3.00%, 3/14/2013 (4)
|
|
|
|
$ |
14,745 |
|
|
|
14,745 |
|
|
|
14,745 |
|
|
|
3.4% |
|
Total
|
|
|
|
|
|
|
|
|
15,745 |
|
|
|
15,911 |
|
|
|
3.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castro
Cheese Company, Inc.(4)
|
|
Texas/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
secured note, 11.00% plus 2.00% PIK, 2/28/2013
|
|
|
|
$ |
7,424 |
|
|
|
7,281 |
|
|
|
7,281 |
|
|
|
1.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest
Cherokee, LLC (13),
(4)
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 5/05/2009 (14)
|
|
|
|
$ |
10,200 |
|
|
|
10,146 |
|
|
|
9,852 |
|
|
|
2.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb
Shops, Inc. (4)
|
|
Pennsylvania/Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 10.69%, 10/23/2014 (25)
|
|
|
|
$ |
15,000 |
|
|
|
14,588 |
|
|
|
12,407 |
|
|
|
2.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback
Operating, LP (15),
(4)
|
|
Oklahoma/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 12.00% plus 2.00% PIK,8/28/2011
|
|
|
|
$ |
9,200 |
|
|
|
9,200 |
|
|
|
8,873 |
|
|
|
2.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom
Marine Services LLC (15),
(4)
|
|
Louisiana/Shipping
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 4.00% PIK, 12/31/2011 (17)
|
|
|
|
$ |
7,019 |
|
|
|
6,926 |
|
|
|
6,675 |
|
|
|
1.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M
Oil & Gas, LLC (15), (4)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 6/30/2010 (16)
|
|
|
|
$ |
50,500 |
|
|
|
50,500 |
|
|
|
49,624 |
|
|
|
11.5% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
Systems LP ("IEC")/ Advance Rig Services LLC ("ARS") (4)
|
|
Texas/Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012 (30)
|
|
|
|
$ |
23,213 |
|
|
$ |
23,213 |
|
|
$ |
23,213 |
|
|
|
5.4% |
|
ARS
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012 (30)
|
|
|
|
$ |
13,897 |
|
|
|
13,896 |
|
|
|
13,896 |
|
|
|
3.2% |
|
Total
|
|
|
|
|
|
|
|
|
37,109 |
|
|
|
37,109 |
|
|
|
8.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick
Healthcare Group, L.L.C.
(4)
|
|
Arizona/Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
units (78,100,000 total common units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
1,252 |
|
|
|
1,252 |
|
|
|
0.3% |
|
Preferred
units (78,100,000 total preferred units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 12.00% plus 1.50% PIK, 10/31/2014
|
|
|
|
$ |
12,500 |
|
|
|
12,548 |
|
|
|
12,425 |
|
|
|
2.9% |
|
Total
|
|
|
|
|
|
|
|
|
13,800 |
|
|
|
13,677 |
|
|
|
3.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller
Petroleum, Inc.
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common shares, expiring 5/4/2010 to 3/31/2013 (14,566,856 total common
shares outstanding)
|
|
|
|
|
1,662,274 |
|
|
|
150 |
|
|
|
108 |
|
|
|
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless
Manufacturing Co. (4)
|
|
Texas/Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 11.50% plus 3.50% PIK, 4/30/2013
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest
Pharmaceuticals, Inc. (4)
|
|
Alabama/Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 11.26%, 4/30/2015 (18)
|
|
|
|
$ |
12,000 |
|
|
|
11,945 |
|
|
|
11,332 |
|
|
|
2.6% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Management Corp.(4)
|
|
South
Carolina/ Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$ |
25,042 |
|
|
|
25,042 |
|
|
|
22,987 |
|
|
|
5.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco
Products, Inc.(4)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 10.81%, 6/24/2014(19)
|
|
|
|
$ |
9,750 |
|
|
$ |
9,579 |
|
|
$ |
9,579 |
|
|
|
2.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shearer's
Foods, Inc.
|
|
Ohio/
Food Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mistral
Chip Holdings, LLC membership units (45,300 total membership
units outstanding)(24)
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,281 |
|
|
|
0.5% |
|
Second
lien debt, 14.00%, 10/31/2013(4)
|
|
|
|
$ |
18,000 |
|
|
|
18,000 |
|
|
|
17,719 |
|
|
|
4.1% |
|
Total
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker
Energy, LLC (20),(4)
|
|
Ohio/
Oil and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
revolving credit facility, 12.00%, 11/30/2011 (21)
|
|
|
|
$ |
29,500 |
|
|
|
29,068 |
|
|
|
27,687 |
|
|
|
6.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TriZetto
Group
|
|
California/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 12.00% plus 1.50% PIK, 10/01/2016
|
|
|
|
$ |
15,036 |
|
|
|
14,887 |
|
|
|
14,837 |
|
|
|
3.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek(4)
|
|
Pennsylvania/
Technical Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 12.75%, 12/27/2012(22)
|
|
|
|
$ |
11,500 |
|
|
|
11,343 |
|
|
|
11,343 |
|
|
|
2.6% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
September
30, 2008
(unaudited)
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind
River Resources Corp. and Wind River II Corp.(4)
|
|
Utah/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 7/31/2009(31)
|
|
|
|
$ |
15,000 |
|
|
|
15,000 |
|
|
|
14,305 |
|
|
|
3.3% |
|
Total
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
322,309 |
|
|
|
313,587 |
|
|
|
72.5% |
|
Total
Portfolio Investments
|
|
|
|
|
|
|
|
|
559,727 |
|
|
|
549,303 |
|
|
|
127.1% |
|
Money
Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity
Institutional Money Market Funds -Government Portfolio (Class
I)
|
|
|
|
|
22,178,957 |
|
|
|
22,179 |
|
|
|
22,179 |
|
|
|
5.1% |
|
Fidelity
Institutional Money Market Funds - Government Portfolio (Class I)(4)
|
|
|
|
|
6,478,714 |
|
|
|
6,479 |
|
|
|
6,479 |
|
|
|
1.5% |
|
Total
Money Market Funds
|
|
|
|
|
|
|
|
|
28,658 |
|
|
|
28,658 |
|
|
|
6.6% |
|
Total
Investments
|
|
|
|
|
|
|
|
$ |
588,385 |
|
|
$ |
577,961 |
|
|
|
133.7% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax
Rolled Ring & Machine
|
|
South
Carolina/ Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares (7 total unrestricted common shares outstanding and 803.18
restricted common shares outstanding)
|
|
|
|
|
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
0.0% |
|
Preferred
shares (7,222.6 total preferred shares
outstanding)
|
|
|
|
|
6,142.6 |
|
|
|
6,293 |
|
|
|
6,293 |
|
|
|
1.5% |
|
Senior
secured note, 10.50%, 4/01/2013 (4)
|
|
|
|
$ |
21,890 |
|
|
|
21,890 |
|
|
|
21,890 |
|
|
|
5.1% |
|
Subordinated
secured note, 11.50% plus 6.00% PIK, 4/01/2013(4)
|
|
|
|
$ |
11,500 |
|
|
|
11,500 |
|
|
|
11,500 |
|
|
|
2.6% |
|
Total
|
|
|
|
|
|
|
|
|
39,683 |
|
|
|
39,683 |
|
|
|
9.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J
Cladding LLC(4)
|
|
Texas/
Metal Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
company units, expiring 3/30/2014 (1,000 total company units
outstanding)
|
|
|
|
|
400 |
|
|
|
580 |
|
|
|
2,222 |
|
|
|
0.5% |
|
Senior
secured note, 14.00%, 3/30/2012 (12)
|
|
|
|
$ |
4,800 |
|
|
|
4,085 |
|
|
|
4,607 |
|
|
|
1.1% |
|
Total
|
|
|
|
|
|
|
|
|
4,665 |
|
|
|
6,829 |
|
|
|
1.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Solutions Holdings, Inc. (3)
Common shares (100 total common
shares outstanding)
|
|
Texas/
Gas Gathering and Processing
|
|
|
100 |
|
|
|
5,221 |
|
|
|
41,542 |
|
|
|
9.7% |
|
Subordinated
secured note, 18.00%, 12/22/2009 (4)
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.7% |
|
Total
|
|
|
|
|
|
|
|
|
25,221 |
|
|
|
61,542 |
|
|
|
14.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated
Contract Services, Inc. (5)
|
|
North
Carolina/ Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (100 total common shares outstanding)
|
|
|
|
|
49 |
|
|
|
491 |
|
|
|
— |
|
|
|
0.0% |
|
Series
A preferred shares (10 total Series A preferred shares
outstanding)
|
|
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
secured note, 14.00%, 9/30/2010
|
|
|
|
$ |
14,003 |
|
|
|
14,003 |
|
|
|
3,030 |
|
|
|
0.7% |
|
Senior
secured note, 14.00%, 9/30/2010
|
|
|
|
$ |
800 |
|
|
|
800 |
|
|
|
800 |
|
|
|
0.2% |
|
Senior
demand note, 15.00%, 6/30/2009(6)
|
|
|
|
$ |
1,170 |
|
|
|
1,170 |
|
|
|
1,170 |
|
|
|
0.3% |
|
Total
|
|
|
|
|
|
|
|
|
16,464 |
|
|
|
5,000 |
|
|
|
1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron
Horse Coiled Tubing, Inc.
|
|
Alberta,
Canada/ Production Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,093 total common shares outstanding)
|
|
|
|
|
643 |
|
|
$ |
268 |
|
|
$ |
49 |
|
|
|
0.0% |
|
Warrants
for common shares(7)
|
|
|
|
|
1,138 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 15.00%, 4/19/2009
|
|
|
|
$ |
9,250 |
|
|
|
9,094 |
|
|
|
9,073 |
|
|
|
2.1% |
|
Bridge
Loan, 15.00% plus 3.00% PIK, 12/11/2008
|
|
|
|
|
|
|
|
|
2,103 |
|
|
|
2,060 |
|
|
|
0.5% |
|
Total
|
|
|
|
|
|
|
|
|
11,465 |
|
|
|
11,182 |
|
|
|
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG
Manufacturing, Inc.
|
|
Texas/Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,000 total common shares outstanding)
|
|
|
|
|
800 |
|
|
|
2,317 |
|
|
|
8,656 |
|
|
|
2.0% |
|
Senior
secured note, 16.50%, 8/31/2011(4),
(8)
|
|
|
|
$ |
13,080 |
|
|
|
13,080 |
|
|
|
13,080 |
|
|
|
3.0% |
|
Total
|
|
|
|
|
|
|
|
|
15,397 |
|
|
|
21,736 |
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V
Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (800,000 total common shares
outstanding)
|
|
|
|
|
545,107 |
|
|
|
5,031 |
|
|
|
8,064 |
|
|
|
1.9% |
|
Warrants,
common shares, expiring 6/30/2017
|
|
|
|
|
200,000 |
|
|
|
1,682 |
|
|
|
2,959 |
|
|
|
0.7% |
|
Senior
secured note, 15.00%, 6/30/2017(4)
|
|
|
|
$ |
7,526 |
|
|
|
5,912 |
|
|
|
7,526 |
|
|
|
1.8% |
|
Total
|
|
|
|
|
|
|
|
|
12,625 |
|
|
|
18,549 |
|
|
|
4.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester
Energy Partners, Inc.(9)
|
|
Maine/
Biomass Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
|
— |
|
|
|
457 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 12.50%, 12/31/2012
|
|
|
|
$ |
37,388 |
|
|
|
37,264 |
|
|
|
15,579 |
|
|
|
3.6% |
|
Total
|
|
|
|
|
|
|
|
|
37,721 |
|
|
|
15,580 |
|
|
|
3.6% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Yatesville
Coal Holdings, Inc.(23)
|
|
Kentucky/Mining
and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (1,000 total common shares outstanding)
|
|
|
|
|
1,000 |
|
|
$ |
284 |
|
|
$ |
— |
|
|
|
0.0% |
|
Junior
secured note, 12.50%, 12/31/2012
|
|
|
|
$ |
30,136 |
|
|
|
30,136 |
|
|
|
15,726 |
|
|
|
3.7% |
|
Senior
secured note, 12.50%, 12/31/2012
|
|
|
|
$ |
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
2.3% |
|
Total
|
|
|
|
|
|
|
|
|
40,420 |
|
|
|
25,726 |
|
|
|
6.0% |
|
Total
Control Investments
|
|
|
|
|
|
|
|
|
203,661 |
|
|
|
205,827 |
|
|
|
48.0% |
|
Affiliate
Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian
Energy Holdings LLC(10),
(4)
|
|
West
Virginia/ Construction Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
- Class A common units, expiring 2/13/2016 (49,753 total class A common
units outstanding)
|
|
|
|
|
12,090 |
|
|
|
348 |
|
|
|
794 |
|
|
|
0.2% |
|
Series
A preferred equity (16,125 total series A preferred equity units
outstanding)
|
|
|
|
|
3,000 |
|
|
|
72 |
|
|
|
162 |
|
|
|
0.0% |
|
Series
B preferred equity (794 total series B preferred equity units
outstanding)
|
|
|
|
|
241 |
|
|
|
241 |
|
|
|
— |
|
|
|
0.0% |
|
Senior
Secured Debt Tranche A, 14.00% plus 3.00% PIK, 1/31/2011
|
|
|
|
$ |
3,003 |
|
|
|
3,003 |
|
|
|
3,003 |
|
|
|
0.7% |
|
Senior
Secured Debt Tranche B, 14.00% plus 3.00% PIK, 5/01/2009
|
|
|
|
$ |
1,945 |
|
|
|
1,945 |
|
|
|
2,084 |
|
|
|
0.5% |
|
Total
|
|
|
|
|
|
|
|
|
5,609 |
|
|
|
6,043 |
|
|
|
1.4% |
|
Total
Affiliate Investments
|
|
|
|
|
|
|
|
|
5,609 |
|
|
|
6,043 |
|
|
|
1.4% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Gilsonite Company
|
|
Utah/Specialty
Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
Interest in AGC\PEP, LLC(11)
|
|
|
|
|
99.9999 |
% |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
0.2% |
|
Subordinated
secured note, 12.00% plus 3.00%, 3/14/2013(4)
|
|
|
|
$ |
14,632 |
|
|
|
14,632 |
|
|
|
14,632 |
|
|
|
3.4% |
|
Total
|
|
|
|
|
|
|
|
|
15,632 |
|
|
|
15,632 |
|
|
|
3.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest
Cherokee, LLC(13),
(4)
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 5/05/2009(14)
|
|
|
|
$ |
10,200 |
|
|
$ |
10,125 |
|
|
$ |
9,923 |
|
|
|
2.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb
Shops, Inc.(4)
|
|
Pennsylvania/Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 10.69%,10/23/2014(25)
|
|
|
|
$ |
15,000 |
|
|
|
14,577 |
|
|
|
13,428 |
|
|
|
3.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deep
Down, Inc.(4)
|
|
Texas/Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common shares, expiring 8/6/2012 (174,732,501 total common shares
outstanding)
|
|
|
|
|
4,960,585 |
|
|
|
— |
|
|
|
2,856 |
|
|
|
0.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback
Operating, LP(15),
(4)
|
|
Oklahoma/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 12.00% plus 2.00% PIK, 8/28/2011
|
|
|
|
$ |
9,200 |
|
|
|
9,200 |
|
|
|
9,108 |
|
|
|
2.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom
Marine Services LLC(15),
(4)
|
|
Louisiana/Shipping
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 4.00% PIK, 12/31/2011(17)
|
|
|
|
$ |
6,948 |
|
|
$ |
6,850 |
|
|
$ |
6,805 |
|
|
|
1.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M
Oil & Gas, LLC(15),
(4)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 6/30/2010(16)
|
|
|
|
$ |
50,500 |
|
|
|
50,500 |
|
|
|
50,500 |
|
|
|
11.8% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
Systems LP ("IEC")/
|
|
Texas/Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Rig Services LLC ("ARS")(4)
|
|
|
|
$ |
19,028 |
|
|
|
19,028 |
|
|
|
19,028 |
|
|
|
4.4% |
|
IEC senior secured note, 12.00% plus 3.00% PIK, 11/20/2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$ |
5,825 |
|
|
|
5,825 |
|
|
|
5,825 |
|
|
|
1.4% |
|
Total
|
|
|
|
|
|
|
|
|
24,853 |
|
|
|
24,853 |
|
|
|
5.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick
Healthcare Group,
L.L.C. (4)
|
|
Arizona/Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
units (78,100,000 total common units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
1,252 |
|
|
|
1,252 |
|
|
|
0.3% |
|
Preferred
units (78,100,000 total preferred units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 12.00% plus 1.50% PIK, 10/31/2014
|
|
|
|
$ |
12,500 |
|
|
|
12,500 |
|
|
|
12,500 |
|
|
|
2.9% |
|
Total
|
|
|
|
|
|
|
|
|
13,752 |
|
|
|
13,752 |
|
|
|
3.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller
Petroleum, Inc.
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 5/4/2010 to 3/31/2013 (14,566,856 total common
shares outstanding)
|
|
|
|
|
1,571,191 |
|
|
|
150 |
|
|
|
111 |
|
|
|
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless
Manufacturing Co.(4)
|
|
Texas/Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 11.50% plus 3.50% PIK, 4/30/2013
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest
Pharmaceuticals, Inc.(4)
|
|
Alabama/Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 12.45%(18),
4/30/2015
|
|
|
|
$ |
12,000 |
|
|
|
11,944 |
|
|
|
11,523 |
|
|
|
2.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Management Corp.(4)
|
|
South
Carolina/Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$ |
25,000 |
|
|
|
25,000 |
|
|
|
23,699 |
|
|
|
5.5% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value/Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco
Products, Inc.(4)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 11.06%(19),
6/24/2014
|
|
|
|
$ |
9,750 |
|
|
|
9,574 |
|
|
|
9,574 |
|
|
|
2.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shearer's
Foods, Inc.
|
|
Ohio/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mistral
Chip Holdings, LLC membership units (45,300 total membership units
outstanding)(24)
|
|
|
|
|
2,000 |
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
|
|
0.5% |
|
Second
lien debt, 14.00%, 10/31/2013(4)
|
|
|
|
$ |
18,000 |
|
|
|
18,000 |
|
|
|
17,351 |
|
|
|
4.0% |
|
Total
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
19,351 |
|
|
|
4.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker
Energy, LLC(20),
(4)
|
|
Ohio/Oil
and GasProduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
revolving credit facility, 12.00%, 11/30/2011(21)
|
|
|
|
$ |
29,500 |
|
|
|
29,041 |
|
|
|
28,518 |
|
|
|
6.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek(4)
|
|
Pennsylvania/
Technical
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 12.75%(22),
12/27/2012
|
|
|
|
$ |
11,500 |
|
|
|
11,337 |
|
|
|
11,337 |
|
|
|
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind
River Resources Corp. and Wind River II Corp.(4)
|
|
Utah/Oil
and GasProduction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 7/31/2009
|
|
|
|
$ |
15,000 |
|
|
|
15,000 |
|
|
|
14,690 |
|
|
|
3.4% |
|
Total
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
287,535 |
|
|
|
285,660 |
|
|
|
66.4% |
|
Total
Portfolio Investments
|
|
|
|
|
|
|
|
|
496,805 |
|
|
|
497,530 |
|
|
|
115.8% |
|
Money
Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity
Institutional Money Market Funds - Government Portfolio (Class
I)
|
|
|
|
|
25,954,531 |
|
|
|
25,954 |
|
|
|
25,954 |
|
|
|
6.0% |
|
First
American Funds, Inc.- Prime Obligations Fund (Class A)(4)
|
|
|
|
|
7,045,610 |
|
|
|
7,046 |
|
|
|
7,046 |
|
|
|
1.6% |
|
Total
Money Market Funds
|
|
|
|
|
|
|
|
|
33,000 |
|
|
|
33,000 |
|
|
|
7.6% |
|
Total
Investments
|
|
|
|
|
|
|
|
$ |
529,805 |
|
|
$ |
530,530 |
|
|
|
123.4% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
September
30, 2008 and June 30, 2008
(in
thousands, except share data)
Endnote
Explanations for the Consolidated Schedule of Investments as of September 30,
2008 and June 30, 2008
(1)
|
The
securities in which we have invested were acquired in transactions that
were exempt from registration under the Securities Act of 1933, as
amended, or the "Securities Act." These securities may be
resold only in transactions that are exempt from registration under the
Securities Act.
|
|
|
(2)
|
Fair
value is determined by or under the direction of our Board of Directors
(Note 2).
|
|
|
(3)
|
Gas
Solutions Holdings, Inc. is a wholly-owned investment of
us.
|
|
|
(4)
|
Security,
or portion thereof, is held as collateral for the credit facility with
Rabobank Nederland (See Note 11). The values of these
investments at September 30, 2008 and June 30, 2008 were $406,984 and
$369,418, respectively; they represent 94.3% and 86.0% of net assets,
respectively.
|
|
|
(5)
|
Entity
was formed as a result of the debt restructuring of ESA Environmental
Specialist, Inc. The two loans maturing on 9/30/2010 have been
placed on a non-accrual status.
|
|
|
(6)
|
Loan
is with The Healing Staff (f/k/a Lisamarie Fallon, Inc) and affiliate of
Integrated Contract Services, Inc.
|
|
|
(7)
|
The
number of these warrants which are exercisable is contingent upon the
length of time that passes before the bridge loan is repaid, 224 shares on
August 11, 2008, 340 additional shares on October 11, 2008 and 574
additional shares on December 11, 2008.
|
|
|
(8)
|
Interest
rate is the greater of 16.5% or 12-Month LIBOR plus 11.0%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(9)
|
There
are several entities involved in the Worcester Energy Partners, Inc.
investment. We own 100 shares of common stock in Worcester
Energy Holdings, Inc., or WEHI, representing 100%. WEHI, in
turn, owns 51 membership certificates in Biochips LLC, which represents
51% ownership. We own 282 shares of common stock in Worcester
Energy Co., Inc., or WECO, which represents 51% ownership. We
own 1,665 shares of common stock in Worcester Energy Partners, Inc., or
WEPI, which represents 51% ownership. We also own 1,000 of
series A convertible preferred shares in WEPI. WECO, WEPI and
Biochips LLC are joint borrowers on the term note issued to Prospect
Capital. WEPI owns the equipment and operates the biomass
generation facility. Biochips LLC currently has no material
operations. WEPI owns 100 shares of common stock in Precision
Logging and Landclearing, Inc., or Precision, which represents 100%
ownership. Precision conducts all logging, processing and
delivery operations to supply fuel to the biomass generation
facility. As of September 30, 2008, our Board of Directors
assessed a fair value of $1 for all of these equity
positions. Effective July 1, 2008, this loan has been placed on
non-accrual status.
|
|
|
(10)
|
There
are several entities involved in the Appalachian Energy
investment. We own warrants the exercise of which will permit
us to purchase 12,090 units of Class A common units of Appalachian Energy
Holdings LLC, or AEH at a nominal cost and in near-immediate
fashion. We own 3,000 units of Series A preferred equity and
241 units of Series B preferred equity of AEH. The senior
secured notes are with C & S Operating LLC and East Cumberland L.L.C.,
both operating companies owned by Appalachian Energy Holdings
LLC.
|
|
|
(11)
|
We
own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,000 out of a
total of 64,027.25 shares of American Gilsonite Holding Company which owns
100% of American Gilsonite Company.
|
|
|
(12)
|
Interest
rate is the greater of 14.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(13)
|
We
have an overriding royalty interest and net profits interest in the
Portfolio Investment.
|
|
|
(14)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5% not to exceed
14.50%; rate reflected is as of the reporting date - September 30, 2008 or
June 30, 2008, as applicable.
|
|
|
(15)
|
We
have a net profits interest in the Portfolio
Investment.
|
|
|
(16)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(17)
|
Interest
rate is the greater of 12.0% or 3-Month LIBOR plus 6.11%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(18)
|
Interest
rate is 3-Month LIBOR plus 7.5%; rate reflected is as of the reporting
date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(19)
|
Interest
rate is 3-Month LIBOR plus 8.0%; rate reflected is as of the reporting
date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(20)
|
We
have an overriding royalty interest in the Portfolio
Investment.
|
|
|
(21)
|
Interest
rate is the greater of 12.0% or 12-Month LIBOR plus 7.0%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(22)
|
Interest
rate is the greater of 12.75% or 3-Month LIBOR plus 7.25%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(23)
|
On
June 30, 2008, we consolidated our holdings in four coal companies into
Yatesville Coal Holdings, Inc., or Yatesville, and consolidated the
operations under one management team. In the transaction, the
debt that we held of C&A Construction, Inc. (which is part of the
Whymore Coal Entities described below), Genesis Coal Corp., North Fork
Collieries LLC and Unity Virginia Holdings LLC were exchanged for newly
issued debt from Yatesville, and our ownership interests in C&A
Construction Inc., E&L Construction, Inc., Whymore Coal Company Inc.,
Genesis Coal Corp. and North Fork Collieries LLC were exchanged for 100%
of the equity of Yatesville. This reorganization allows for a
better utilization of the assets in the consolidated
group.
|
|
|
|
At
September 30, 2008 and at June 30, 2008, Yatesville owned 100% of the
membership interest of North Fork Collieries LLC. In addition,
Yatesville held a $5,721 note receivable from North Fork Collieries LLC as
of those two respective dates. |
|
|
|
At
September 30, 2008 and at June 30, 2008, Yatesville owned 75% of the
common stock of Genesis Coal Corp. and held a note receivable of $17,692
as of those two respective dates.
|
|
|
|
Yatesville
held a note receivable of $3,902 from Unity Virginia Holdings LLC at
September 30, 2008 and at June 30,
2008.
|
|
There
are several entities involved in Yatesville's investment in the Whymore
Coal Entities at September 30, 2008 and at June 30, 2008. As of
those two respective dates, Yatesville owned 10,000 shares of common stock
or 100% of the equity and held a $12,822 senior secured debt receivable
from C&A Construction, Inc., or C&A, which owns the
equipment. Yatesville owned 10,000 shares of common stock or
100% of the equity of E&L Construction, Inc., or E&L, which leases
the equipment from C&A, employs the workers, is listed as the operator
with the Commonwealth of Kentucky, mines the coal, receives revenues and
pays all operating expenses. Yatesville owns 4,900 shares of
common stock or 49% of the equity of Whymore Coal Company, Inc., or
Whymore, which applies for and holds permits on behalf of
E&L. Yatesville also owned 4,285 Series A convertible
preferred shares in each of C&A, E&L and
Whymore. Additionally, Yatesville retains an option to purchase
the remaining 51% of Whymore. Whymore and E&L are
guarantors under the C&A credit agreement with
Yatesville. |
|
|
(24)
|
Mistral
Chip Holdings, LLC owns 45,300 shares out of 50,500 total shares
outstanding of Chip Holdings, Inc., the parent company of Shearer's Foods,
Inc.
|
|
|
(25)
|
Interest
rate is 3-Month LIBOR plus 8.0%; rate reflected is as of the reporting
date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(26)
|
On
a fully diluted basis represents, 9.925% of voting common
shares.
|
|
|
(27)
|
Interest
rate is the greater of 11.5% or 6-month LIBOR plus 7.0%; rate reflected is
as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(28)
|
Interest
rate is the greater of 10.5% or 3-month LIBOR plus 7.5%; rate reflected is
as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(29)
|
Interest
rate is the greater of 11.5% or 3-month LIBOR plus 8.5%; rate reflected is
as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(30)
|
Interest
rate is the greater of 12.0% or 12-month LIBOR plus 6.0%; rate reflected
is as of the reporting date - September 30, 2008 or June 30, 2008, as
applicable.
|
|
|
(31)
|
Interest
rate is the greater of 13.0% or 12-month LIBOR plus 7.5% not to exceed
14.0%; rate reflected is as of the reporting date - September 30, 2008 or
June 30, 2008, as
applicable.
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
(in
thousands, except share and per share data)
Note
1. Organization
References
herein to "we", "us" or "our" refer to Prospect Capital Corporation and its
subsidiary unless the context specifically requires otherwise.
We
were formerly known as Prospect Energy Corporation, a Maryland
corporation. We were organized on April 13, 2004 and were funded in
an initial public offering, or IPO, completed on July 27, 2004. We
are a closed-end investment company that has filed an election to be treated as
a Business Development Company, or BDC, under the Investment Company Act of 1940
(the "1940 Act"). As a BDC, we have qualified and have elected to be
treated as a regulated investment company, or RIC, under Subchapter M of the
Internal Revenue Code. We invest primarily in senior and subordinated
debt and equity of companies in need of capital for acquisitions, divestitures,
growth, development, project financings, recapitalizations, and other
purposes.
On
May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital Funding,
LLC, a Delaware limited liability company, for the purpose of holding certain of
our loan investments in the portfolio which are used as collateral for our
credit facility.
Note 2. Significant
Accounting Policies
The
following are significant accounting policies consistently applied by
us:
Basis of
Presentation
These
interim financial statements, which are not audited, have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("US GAAP") for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X,
as appropriate.
Use of Estimates
The
preparation of US GAAP financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reported period. Changes in the economic environment,
financial markets, creditworthiness of our portfolio companies and any other
parameters used in determining these estimates could cause actual results to
differ, and these differences could be material.
Basis of
Consolidation
Under
the 1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X, and
the American Institute of Certified Public Accountants' Audit and Accounting
Guide for Investment Companies, we are precluded from consolidating any entity
other than another investment company or an operating company which provides
substantially all of its services and benefits to us. Our financial
statements include our accounts and the accounts of Prospect Capital Funding,
LLC, our only wholly-owned, closely- managed subsidiary that is also an
investment company. All intercompany balances and transactions have
been eliminated in consolidation.
Investment
Classification
We
are a non-diversified company within the meaning of the 1940 Act. We
classify our investments by level of control. As defined in the 1940
Act, control investments are those where there is the ability or power to
exercise a controlling influence over the management or policies of a
company. Control is generally deemed to exist when a company or
individual possesses or has the right to acquire within 60 days or less, a
beneficial ownership of 25% or more of the voting securities of an investee
company. Affiliated investments and affiliated companies are defined
by
a lesser degree of influence and are deemed to exist through the possession
outright or via the right to acquire within 60 days or less, beneficial
ownership of 5% or more of the outstanding voting securities of another
person.
Investments
are recognized when we assume an obligation to acquire a financial instrument
and assume the risks for gains or losses related to that
instrument. Investments are derecognized when we assume an obligation
to sell a financial instrument and forego the risks for gains or losses related
to that instrument. Specifically, we record all security transactions
on a trade date basis. Investments in other, non-security financial
instruments are recorded on the basis of subscription date or redemption date,
as applicable. Amounts for investments recognized or derecognized but
not yet settled are reported as receivables for investments sold and payables
for investments purchased, respectively, in the Consolidated Statements of
Assets and Liabilities.
Investment Valuation
Our
Board of Directors has established procedures for the valuation of our
investment portfolio. These procedures are detailed
below.
Investments
for which market quotations are readily available are valued at such market
quotations.
Short-term
investments that mature in 60 days or less, such as United States Treasury
Bills, are valued at amortized cost, which approximates fair
value. The amortized cost method involves recording a security at its
cost (i.e., principal amount plus any premium and less any discount) on the date
of purchase and thereafter amortizing/accreting that difference between the
principal amount due at maturity and cost assuming a constant yield to maturity
as determined at the time of purchase. Short-term securities that
mature in more than 60 days are valued at current market quotations by an
independent pricing service or at the mean between the bid and ask prices
obtained from at least two brokers or dealers (if available, or otherwise by a
principal market maker or a primary market dealer). Investments in
money market mutual funds are valued at their net asset value as of the close of
business on the day of valuation.
For
most of our investments, market quotations are not available. With
respect to investments for which market quotations are not readily available or
when such market quotations are deemed not to represent fair value, our Board of
Directors has approved a multi-step valuation process each quarter, as described
below:
1)
|
our
quarterly valuation process begins with each portfolio company or
investment being reviewed by our investment professionals with the
independent valuation firm;
|
2)
|
the
independent valuation firm engaged by our Board of Directors conducts
independent appraisals and makes their own independent
assessment;
|
3)
|
the
audit committee of our Board of Directors reviews and discusses the
preliminary valuation of our Investment Adviser and that of the
independent valuation firms; and
|
4)
|
the
Board of Directors discusses valuations and determines the fair value of
each investment in our portfolio in good faith based on the input of our
investment adviser, the respective independent valuation firm and the
audit committee.
|
Investments
are valued utilizing a market approach, an income approach, or both approaches,
as appropriate. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities (including a business). The income approach
uses valuation techniques to convert future amounts (for example, cash flows or
earnings) to a single present amount (discounted). The measurement is
based on the value indicated by current market expectations about those future
amounts. In following these approaches, the types of factors that we
may take into account in fair value pricing our investments include, as
relevant: available current market data, including relevant and
applicable market trading and transaction comparables, applicable market yields
and multiples, security covenants, call protection provisions, information
rights, the nature and realizable value of any collateral, the portfolio
company's ability to make payments, its earnings and discounted cash flows, the
markets in which the portfolio company does business, comparisons of financial
ratios of peer companies that are public, M&A comparables, the principal
market and enterprise values, among other factors.
In
September, 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements", or FAS 157.
FAS 157 defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those
years. We have adopted this statement on a prospective basis
beginning in the quarter ended September 30, 2008. Adoption of this
statement did not have a material effect on our financial statements for the
quarter ended September 30, 2008.
FAS
No. 157 classifies the inputs used to measure these fair values into the
following hierarchy:
Level 1: Quoted
prices in active markets for identical assets or liabilities, accessible by the
Company at the measurement date.
Level 2: Quoted
prices for similar assets or liabilities in active markets, or quoted prices for
identical or similar assets or liabilities in markets that are not active, or
other observable inputs other than quoted prices.
Level
3: Unobservable inputs for the asset or
liability.
In
all cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level
of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
each investment. The changes to generally accepted accounting
principles from the application of FAS 157 relate to the definition of fair
value, framework for measuring fair value, and the expanded disclosures about
fair value measurements. FAS 157 applies to fair value measurements
already required or permitted by other standards. In accordance with
FAS 157, the fair value of our investments is defined as the price that we would
receive upon selling an investment in an orderly transaction to an independent
buyer in the principal or most advantageous market in which that investment is
transacted.
Valuation of Other Financial Assets and
Financial Liabilities
In
February 2007, FASB issued SFAS 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - including an amendment of FASB Statement No.
115". SFAS 159 permits an entity to elect fair value as the initial
and subsequent measurement attribute for many of assets and liabilities for
which the fair value option has been elected and similar assets and liabilities
measured using another measurement attribute. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years. We have
adopted this statement on July 1, 2008 and have elected not to value some assets
and liabilities at fair value as would be permitted by SFAS 159.
Revenue Recognition
Realized
gains or losses on the sale of investments are calculated using the specific
identification method.
Interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing and/or commitment
fees associated with investments in portfolio companies are accreted into
interest income over the respective terms of the applicable
loans. Upon the prepayment of a loan or debt security, any prepayment
penalties and unamortized loan origination, closing and commitment fees are
recorded as interest income.
Dividend
income is recorded on the ex-dividend date.
Structuring
fees and similar fees are recognized as income as earned, usually when
paid. Structuring fees, excess deal deposits, net profits interests
and overriding royalty interest are included in other income.
Loans
are placed on non-accrual status when principal or interest payments are past
due 90 days or more or when there is reasonable doubt that principal or interest
will be collected. Accrued interest is generally reversed when a loan
is placed on non-accrual status. Interest payments received on
non-accrual loans may be recognized as income or applied to principal depending
upon management's judgment. Non-accrual loans are restored to accrual
status when past due principal and interest is paid and in management's
judgment, are likely to remain current.
U.S. Federal and State Income Taxes
We
have elected to be treated as a regulated investment company and intend to
continue to comply with the requirements of the Internal Revenue Code of 1986
(the "Code"), applicable to regulated investment companies. We are
required to distribute at least 90% of our investment company taxable income and
intend to distribute (or retain through a deemed distribution) all of our
investment company taxable income and net capital gain to stockholders;
therefore, we have made no provision for income taxes. The character
of income and gains that we will distribute is determined in accordance with
income tax regulations that may differ from GAAP. Book and tax basis
differences relating to stockholder dividends and distributions and other
permanent book and tax differences are reclassified to paid-in
capital.
If
we do not distribute (or are not deemed to have distributed) at least 98% of our
annual taxable income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our annual taxable
income exceeds the distributions from such taxable income for the
year. To the extent that we determine that our estimated current year
annual taxable income will be in excess of estimated current year dividend
distributions from such taxable income, we accrue excise taxes, if any, on
estimated excess taxable income as taxable income is earned using an annual
effective excise tax rate. The annual effective excise tax rate is
determined by dividing the estimated annual excise tax by the estimated annual
taxable income.
We
adopted Financial Accounting Standards Board Interpretation No. 48 (''FIN 48''),
Accounting for Uncertainty in Income Taxes. 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 our
tax returns to determine whether the tax positions are ''more-likely-than-not''
of being sustained by the applicable tax authority. Tax positions not
deemed to meet the more-likely-than-not threshold are recorded as a tax benefit
or expense in the current year. Adoption of FIN 48 was applied to all
open tax years as of July 1, 2007. The adoption of FIN 48 did not
have an effect on our net asset value, financial condition or results of
operations as there was no liability for unrecognized tax benefits and no change
to our beginning net asset value. As of September 30, 2008 and for
the three-month period then ended, we did not have a liability for any
unrecognized tax benefits. Management's determinations regarding FIN
48 may be subject to review and adjustment at a later date based upon factors
including, but not limited to, an on-going analysis of tax laws, regulations and
interpretations thereof.
Dividends and
Distributions
Dividends
and distributions to common stockholders are recorded on the ex-dividend
date. The amount, if any, to be paid as a dividend is approved by our
Board of Directors each quarter and is generally based upon our management's
estimate of our earnings for the quarter. Net realized capital gains,
if any, are distributed at least annually.
Financing Costs
We
record origination expenses related to our credit facility as deferred financing
costs. These expenses are deferred and amortized as part of interest
expense using the straight-line method over the stated life of the
facility.
We
record registration expenses related to shelf filings as prepaid
assets. These expenses consist principally of SEC registration, legal
and accounting fees incurred through September 30, 2008 that are related to the
shelf filings that will be charged to capital upon the receipt of the capital or
charged to expense if not completed.
Guarantees and Indemnification
Agreements
We
follow FASB Interpretation Number 45, "Guarantor's" Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." ("FIN 45"). FIN 45 elaborates on the disclosure requirements
of a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
requires a guarantor to recognize, at the inception of a guarantee, for those
guarantees that are covered by FIN 45, the fair value of the obligation
undertaken in issuing certain guarantees. FIN 45 did not have a
material effect on the financial statements. Refer to Note 7 and Note
10 for further discussion of guarantees and indemnification
agreements.
Per Share
Information
Net
increase in net assets resulting from operations per common share are calculated
using the weighted average number of common shares outstanding for the period
presented. Diluted net increase in net assets resulting from
operations per share are not presented as there are no potentially dilutive
securities outstanding.
Reclassifications
The
line items reported in the consolidated financial statements for September 30,
2007 or June 30, 2008 may be reclassified to conform to the current year
presentation.
Recent Accounting
Pronouncements
In
March 2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133". SFAS 161 is intended to improve financial reporting for
derivative instruments by requiring enhanced disclosure that enables investors
to understand how and why the entity uses derivatives, how derivatives are
accounted for, and how derivative affect an entity's results of operations,
financial position, and cash flows. SFAS 161 becomes effective for
fiscal years beginning after November 15, 2008 and, therefore, is applicable for
our fiscal year beginning July 1, 2009. Our management does not
believe that the adoption of SFAS No. 161 will have a material impact on our
financial statements.
In
March 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP. This statement is effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. Our management does
not believe that the adoption of SFAS No. 162 will have a material impact on our
financial statements.
Note 3. Portfolio
Investments
At
September 30, 2008, we had $549,303 invested in 31 long-term portfolio
investments (including a net profits interest in Charlevoix Energy Trading LLC)
and at June 30, 2008, we had $497,530 invested in 29 long-term portfolio
investments (including a net profits interest in Charlevoix Energy Trading
LLC).
As
of September 30, 2008, we own controlling interests in Ajax Rolled Ring &
Machine, or Ajax, C&J Cladding, LLC, or C&J, Gas Solutions Holdings,
Inc., or GSHI, Integrated Contract Services, Inc., or Integrated, Iron Horse
Coiled Tubing, Inc., or Iron Horse, NRG Manufacturing, Inc., or NRG, R-V
Industries, Inc., or R-V, Worcester Energy Partners, Inc., or WEPI, and
Yatesville Coal Holdings, Inc., or Yatesville. As of September 30,
2008, we also own affiliated interests in Appalachian Energy Holdings, LLC, or
AEH, and Biotronic NeuroNetwork, or Biotronic. As of June 30, 2008,
we owned controlling interests in Ajax, C&J, GSHI, Integrated, Iron Horse,
NRG, R-V, WEPI, and Yatesville. As of June 30, 2008, we also owned an
affiliated interest in Appalachian Energy Holdings, LLC, or AEH.
The
fair values of our portfolio investments as of September 30, 2008 disaggregated
into the three levels of the FAS 157 valuation hierarchy are as
follows:
|
|
Quoted
Prices in Active Markets for Identical Securities (Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
|
|
Investments
at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
investments
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
202,324 |
|
|
$ |
202,324 |
|
Affiliate
investments
|
|
|
— |
|
|
|
— |
|
|
|
33,392 |
|
|
|
33,392 |
|
Non-control/Non-affiliate
investments
|
|
|
— |
|
|
|
— |
|
|
|
313,587 |
|
|
|
313,587 |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
549,303 |
|
|
$ |
549,303 |
|
Investments
in money market funds
|
|
|
28,658 |
|
|
|
— |
|
|
|
— |
|
|
|
28,658 |
|
Total
assets reported at fair
value
|
|
$ |
28,658 |
|
|
$ |
— |
|
|
$ |
549,303 |
|
|
$ |
577,961 |
|
The
aggregate value of Level 3 portfolio investments changed during the three months
ended September 30, 2008 as follows:
Change
in Portfolio Valuations Using Significant Unobservable Inputs (Level
3)
|
|
|
|
Fair
value at June 30, 2008
|
|
$ |
497,530 |
|
Total
gains (losses) reported in the Consolidated Statement of
Operations:
|
|
|
|
|
Included
in net investment income
|
|
|
|
|
Interest
income - accretion of original issue discount on
investments
|
|
|
1,770 |
|
Included
in realized gain/loss on investments
|
|
|
1,645 |
|
Included
in net change in unrealized appreciation/depreciation on
investments
|
|
|
(11,149 |
) |
Payments
for purchases of investments, payment-in-kind interest, and net profits
interests
|
|
|
70,456 |
|
Proceeds
from sale of investments and collection of investment
principal
|
|
|
(10,949 |
) |
Fair
value at September 30, 2008
|
|
$ |
549,303 |
|
The
amount of net unrealized gain (loss) included in the results of operations
for the three-month period ended September 30, 2008 attributable to Level
3 assets still held at September 30, 2008 and reported within the caption
Net change in unrealized
appreciation/depreciation in the Consolidated Statement of
Operations:
|
|
$ |
(6,678 |
) |
At
September 30, 2008 two loans extended to Integrated and one loan extended to
WEPI were on non-accrual status. The two loans to Integrated were
also on non-accrual status at June 30, 2008. The loan principal of
these loans amounted to $54,420 and $14,803 as of September 30, 2008, and June
30, 2008, respectively. The fair values of these investments
represent approximately 3.7% and 0.9% of our net assets as of September 30,
2008, and June 30, 2008, respectively. For the three months end
September 30, 2008, and September 30, 2007, the income foregone as a result of
not accruing interest on these debt investments amounted to $ 1,989 and $668,
respectively.
GSHI
has indemnified us against any legal action arising from its investment in Gas
Solutions, LP. We have incurred approximately $2,190 from the
inception of the investment in GSHI through September 30, 2008 for fees
associated with a legal action, and GSHI has reimbursed us for the entire
amount. Of the $2,190 reimbursement $277 and $10 are reflected as
dividend income: control investments on the accompanying Consolidated
Statements of Operations for the three months ended September 30, 2008 and
September 30, 2007, respectively. Additionally, certain other
expenses incurred by us which are attributable to GSHI have been reimbursed by
GSHI and are reflected as dividend income: control investments on the
accompanying Consolidated Statements of Operations as $1,620 and $812 for three
months ended September 30, 2008 and September 30, 2007,
respectively.
Debt
placements and interests in equity securities with an original cost basis of
approximately $70,456 and $40,394 were acquired during the three months ended
September 30, 2008 and September 30, 2007, respectively. Debt
repayments and sales of equity securities with a cost basis of approximately
$9,304 and $17,949 were made during the three months ended September 30, 2008
and September 30, 2007, respectively.
Note 4. Other Investment
Income
Other
investment income consists of structuring fees, overriding royalty interests,
settlement of net profits interest, deal deposits, administrative agent fee, and
other miscellaneous and sundry cash receipts. Income from such
sources was $13,520 and $941 for the three months ended September 30, 2008 and
September 30, 2007, respectively.
|
|
For
The Three Months Ended
|
|
|
|
|
|
|
|
|
Structuring
fees
|
|
$ |
687 |
|
|
$ |
809 |
|
Overriding
royalty
interests
|
|
|
158 |
|
|
|
76 |
|
Settlement
of net profits
interests
|
|
|
12,576 |
|
|
|
— |
|
Deal
deposit
|
|
|
82 |
|
|
|
36 |
|
Administrative
agent
fee
|
|
|
17 |
|
|
|
10 |
|
Miscellaneous
|
|
|
— |
|
|
|
10 |
|
Other
Investment Income
|
|
$ |
13,520 |
|
|
$ |
941 |
|
Note 5. Equity Offerings and
Related Expenses
We
did not issue any common stock during the three months ended September 30, 2008
and September 30, 2007. Our stockholders' equity accounts at
September 30, 2008 and June 30, 2008 reflect cumulative shares issued as of
those respective dates. Our common stock has been issued through
public offerings, a registered direct offering, through the exercise of
over-allotment options on the part of the underwriters, and through our Dividend
Reinvestment
Plan. When our common stock is issued, the related offering expenses
have been charged against paid-in capital in excess of par. All
underwriting fees and offering expenses were borne by us.
Note 6. Net Increase in Net
Assets per Common Share
The
following information sets forth the computation of net increase in net assets
resulting from operations per common share for the three months ended September
30, 2008 and September 30, 2007, respectively.
|
|
For
The Three Months Ended
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from
operations
|
|
$ |
13,998 |
|
|
$ |
8,550 |
|
Weighted
average common shares
outstanding
|
|
|
29,520,379 |
|
|
|
19,958,466 |
|
Net
increase in net assets resulting from operations per common
share
|
|
$ |
0.47 |
|
|
$ |
0.43 |
|
Note 7. Related Party
Agreements and Transactions
Investment Advisory
Agreement
We
have entered into an investment advisory and management agreement with Prospect
Capital Management (the "Investment Advisory Agreement") under which the
Investment Adviser, subject to the overall supervision of our Board of
Directors, manages the day-to-day operations of, and provides investment
advisory services to, us. Under the terms of the Investment Advisory
Agreement, our Investment Adviser: (i) determines the composition of
our portfolio, the nature and timing of the changes to our portfolio and the
manner of implementing such changes, (ii) identifies, evaluates and negotiates
the structure of the investments we make (including performing due diligence on
our prospective portfolio companies); and (iii) closes and monitors investments
we make.
Prospect
Capital Management's services under the Investment Advisory Agreement are not
exclusive, and it is free to furnish similar services to other entities so long
as its services to us are not impaired. For providing these services
the Investment Adviser receives a fee from us, consisting of two
components: a base management fee and an incentive
fee. The base management fee is calculated at an annual rate of 2.00%
on our gross assets (including amounts borrowed). For services
currently rendered under the Investment Advisory Agreement, the base management
fee is payable quarterly in arrears. The base management fee is
calculated based on the average value of our gross assets at the end of the two
most recently completed calendar quarters and appropriately adjusted for any
share issuances or repurchases during the current calendar quarter.
The
Investment Adviser had previously voluntarily agreed to waive 0.5% of the base
management fee if in the future the average amount of our gross assets for each
of the two most recently completed calendar quarters at that time, appropriately
adjusted for any share issuances, repurchases or other transactions during such
quarters, exceeds $750,000, for that portion of the average amount of our gross
assets that exceeds $750,000. The voluntary agreement by the
Investment Adviser for such waiver for each fiscal quarter after December 31,
2007 has been terminated by the Investment Adviser.
The
total base management fees incurred to the favor of Prospect Capital Management
for the three months ended September 30, 2008 and September 30, 2007 were
$2,823, and $1,866, respectively.
The
incentive fee has two parts. The first part, the income incentive
fee, is calculated and payable quarterly in arrears based on our pre-incentive
fee net investment income for the immediately preceding calendar
quarter. For this purpose, pre-incentive fee net investment income
means interest income, dividend income and any other income (including any other
fees (other than fees for providing managerial assistance), such as commitment,
origination, structuring, diligence and consulting fees and other fees that we
receive from portfolio companies) accrued during the calendar quarter, minus our
operating expenses for the quarter (including the base management fee, expenses
payable under the Administration Agreement described below, and any interest
expense and dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income
includes, in the case of investments with a deferred interest feature (such as
original issue discount, debt instruments with payment in kind interest and zero
coupon securities), accrued income that we have not yet received in
cash. Pre-incentive fee net investment income does not include any
realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation. Pre-incentive fee net investment
income, expressed as a rate of
return
on the value of our net assets at the end of the immediately preceding calendar
quarter, is compared to a "hurdle rate" of 1.75% per quarter (7.00%
annualized).
The
investment adviser had also voluntarily agreed that, in the event it is paid an
incentive fee at a time when our common stock is trading at a price below $15
per share for the immediately preceding 30 days (as adjusted for stock splits,
recapitalizations and other transactions), it will cause the amount of such
incentive fee payment to be held in an escrow account by an independent third
party, subject to applicable regulations. The Investment Adviser had
further agreed that this amount may not be drawn upon by the Investment Adviser
or any affiliate or any other third party until such time as the price of our
common stock achieves an average 30 day closing price of at least $15 per
share. The Investment Adviser also had voluntarily agreed to cause
30% of any incentive fee that it is paid and that is not otherwise held in
escrow to be invested in shares of our common stock through an independent
trustee. Any sales of such stock were to comply with any applicable
six month holding period under Section 16(b) of the Securities Act and all other
restrictions contained in any law or regulation, to the fullest extent
applicable to any such sale. These two voluntary agreements by the
Investment Adviser have been terminated by the Investment Adviser for all
incentive fees after December 31, 2007.
The
net investment income used to calculate this part of the incentive fee is also
included in the amount of the gross assets used to calculate the 2.00% base
management fee. We pay the Investment Adviser an income incentive fee
with respect to our pre-incentive fee net investment income in each calendar
quarter as follows:
·
|
no
incentive fee in any calendar quarter in which our pre-incentive fee net
investment income does not exceed the hurdle
rate;
|
·
|
100.00%
of our pre-incentive fee net investment income with respect to that
portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle
rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized
hurdle rate); and
|
·
|
20.00%
of the amount of our pre-incentive fee net investment income, if any, that
exceeds 125.00% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized assuming a 7.00% annualized hurdle
rate).
|
These
calculations are appropriately prorated for any period of less than three months
and adjusted for any share issuances or repurchases during the current
quarter.
The
second part of the incentive fee, the capital gains incentive fee, is determined
and payable in arrears as of the end of each calendar year (or upon termination
of the Investment Advisory Agreement, as of the termination date), and equals
20.00% of our realized capital gains for the calendar year, if any, computed net
of all realized capital losses and unrealized capital depreciation at the end of
such year. In determining the capital gains incentive fee payable to
the Investment Adviser, we calculate the aggregate realized capital gains,
aggregate realized capital losses and aggregate unrealized capital depreciation,
as applicable, with respect to each investment that has been in its
portfolio. For the purpose of this calculation, an "investment" is
defined as the total of all rights and claims which maybe asserted against a
portfolio company arising from our participation in the debt, equity, and other
financial instruments issued by that company. Aggregate realized
capital gains, if any, equals the sum of the differences between the aggregate
net sales price of each investment and the aggregate cost basis of such
investment when sold or otherwise disposed. Aggregate realized
capital losses equal the sum of the amounts by which the aggregate net sales
price of each investment is less than the aggregate cost basis of such
investment when sold or otherwise disposed. Aggregate unrealized
capital depreciation equals the sum of the differences, if negative, between the
aggregate valuation of each investment and the aggregate cost basis of such
investment as of the applicable calendar year-end. At the end of the
applicable calendar year, the amount of capital gains that serves as the basis
for our calculation of the capital gains incentive fee involves netting
aggregate realized capital gains against aggregate realized capital losses on a
since-inception basis and then reducing this amount by the aggregate unrealized
capital depreciation. If this number is positive, then the capital
gains incentive fee payable is equal to 20.00% of such amount, less the
aggregate amount of any capital gains incentive fees paid since
inception.
For
the three months ended September 30, 2008 and September 30, 2007, $5,875 and
$1,966, respectively, of income incentive fees were incurred. No
capital gains incentive fees were incurred for the three months ended September
30, 2008 and September 30, 2007.
Administration
Agreement
We
have also entered into an Administration Agreement with Prospect Administration,
LLC ("Prospect Administration") under which Prospect Administration, among other
things, provides (or arranges for the provision of) administrative services and
facilities for us. For providing these services, we reimburse
Prospect Administration for our allocable portion of overhead incurred by
Prospect Administration in performing its obligations under the Administration
Agreement, including rent and our allocable portion of the costs of our chief
compliance officer and chief financial officer and their respective
staffs. Under this agreement, Prospect Administration furnishes us
with office facilities, equipment and clerical, bookkeeping and record keeping
services at such facilities. Prospect Administration also performs,
or oversees the performance of, our required administrative services, which
include, among other things, being responsible for the financial records that we
are required to maintain and preparing reports to our stockholders and reports
filed with the SEC. In addition, Prospect Administration assists us
in determining and publishing our net asset value, overseeing the preparation
and filing of our tax returns and the printing and dissemination of reports to
our stockholders, and generally oversees the payment of our expenses and the
performance of administrative and professional services rendered to us by
others. Under the Administration Agreement, Prospect Administration
also provides on our behalf managerial assistance to those portfolio companies
to which we are required to provide such assistance. The
Administration Agreement may be terminated by either party without penalty upon
60 days written notice to the other party. Prospect Administration is
a wholly owned subsidiary of our Investment Adviser.
The
Administration Agreement provides that, absent willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration and its
officers, managers, partners, agents, employees, controlling persons, members
and any other person or entity affiliated with it are entitled to
indemnification from us for any damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts reasonably paid in settlement)
arising from the rendering of Prospect Administration's services under the
Administration Agreement or otherwise as administrator for us.
Prospect
Administration, pursuant to the approval of our Board of Directors, has engaged
Vastardis Fund Services LLC ("Vastardis") to serve as our sub-administrator to
perform certain services required of Prospect Administration. Under
the sub-administration agreement, Vastardis provides us with office facilities,
equipment, clerical, bookkeeping and record keeping services at such
facilities. Vastardis also conducts relations with custodians,
depositories, transfer agents, dividend disbursing agents, other stockholder
servicing agents, accountants, attorneys, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and such other persons in any such other
capacity deemed to be necessary or desirable. Vastardis provides
reports to the Administrator and the Directors of its performance of obligations
and furnishes advice and recommendations with respect to such other aspects of
our business and affairs as it shall determine to be desirable. Under
the revised and renewed sub-administration agreement, Vastardis also provides
the service of William E. Vastardis as our Chief Financial Officer, or
CFO. We compensate Vastardis for providing us these services by the
payment of an asset-based fee with a $400 annual minimum, payable
monthly. Our service agreement was amended on September 24, 2008 so
that Mr. Vastardis will no longer serve as our CFO effective as of November 11,
2008. At that time, Brian H. Oswald, a managing director at Prospect
Administration, will assume the role of CFO.
Vastardis
does not provide any advice or recommendation relating to the securities and
other assets that we should purchase, retain or sell or any other investment
advisory services to us. Vastardis is responsible for the financial
and other records that either the Administrator on our behalf or we are required
to maintain and prepares reports to stockholders, and reports and other
materials filed with the SEC. In addition, Vastardis assists us in
determining and publishing our net asset value, overseeing the preparation and
filing of our tax returns, and the printing and dissemination of reports to our
stockholders, and generally overseeing the payment of our expenses and the
performance of administrative and professional services rendered to us by
others.
Under
the sub-administration agreement, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis, are not liable to the Administrator or us for any
action taken or omitted to be taken by Vastardis in connection with the
performance of any of its duties or obligations or otherwise as
sub-administrator for the Administrator on our behalf. The agreement
also provides that, absent willful misfeasance, bad faith or negligence in the
performance of Vastardis' duties or by reason of the reckless disregard of
Vastardis' duties and obligations, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis are entitled to indemnification
from
the Administrator and us. All damages, liabilities, costs and
expenses (including reasonable attorneys' fees and amounts reasonably paid in
settlement) incurred in or by reason of any pending, threatened or completed
action, suit, investigation or other proceeding (including an action or suit by
or in the right of the Administrator or us or our security holders) arising out
of or otherwise based upon the performance of any of Vastardis' duties or
obligations under the agreement or otherwise as sub-administrator for the
Administrator on our behalf are subject to such indemnification.
Managerial
Assistance
As
a business development company, we offer, and must provide upon request,
managerial assistance to certain of our portfolio companies. This
assistance could involve, among other things, monitoring the operations of our
portfolio companies, participating in board and management meetings, consulting
with and advising officers of portfolio companies and providing other
organizational and financial guidance. We have received $200 and $158
in managerial assistance fees for the three months ended September 30, 2008 and
September 30, 2007, respectively. These fees are paid to the
Administrator.
Note 8. Financial
Highlights
|
|
For
The Three Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Per Share Data(1):
|
|
|
|
|
|
|
Net
asset value at beginning of
period
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
Net
investment
income
|
|
|
0.80 |
|
|
|
0.39 |
|
Realized
gain
(loss)
|
|
|
0.05 |
|
|
|
— |
|
Net
unrealized (depreciation)
appreciation
|
|
|
(0.38 |
) |
|
|
0.04 |
|
Dividends
declared
|
|
|
(0.40 |
) |
|
|
(0.39 |
) |
Difference
due to
rounding
|
|
|
0.01 |
|
|
|
— |
|
Net
asset value at end of
period
|
|
$ |
14.63 |
|
|
$ |
15.08 |
|
Per
share market value at end of
period
|
|
$ |
12.81 |
|
|
$ |
17.02 |
|
Total
return based on market value(2)
|
|
|
0.25 |
% |
|
|
(0.36 |
%) |
Total
return based on net asset value(2)
|
|
|
3.71 |
% |
|
|
2.55 |
% |
Shares
outstanding at end of
period
|
|
|
29,520,379 |
|
|
|
20,021,138 |
|
Average
weighted shares outstanding for
period
|
|
|
29,520,379 |
|
|
|
19,958,466 |
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental
Data:
|
|
|
|
|
|
|
|
|
Net
assets at end of period (in
thousands)
|
|
$ |
431,739 |
|
|
$ |
302,011 |
|
Annualized
ratio of operating expenses to average net
assets
|
|
|
11.38 |
% |
|
|
9.82 |
% |
Annualized
ratio of net operating income to average net
assets
|
|
|
12.09 |
% |
|
|
10.68 |
% |
(1)
|
Financial
highlights are based on weighted average
shares.
|
(2)
|
Total
return based on market value is based on the change in market price per
share between the opening and ending market prices per share in each
period and assumes that dividends are reinvested in accordance with our
dividend reinvestment plan. Total return based on net asset
value is based upon the change in net asset value per share between the
opening and ending net asset values per share in each period and assumes
that dividends are reinvested in accordance with our dividend reinvestment
plan. The total returns are not
annualized.
|
|
|
For
The Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value at beginning of
year
|
|
$ |
15.04 |
|
|
$ |
15.31 |
|
|
$ |
14.59 |
|
|
$ |
(0.01 |
) |
Costs
related to the initial public offering
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
(0.21 |
) |
Costs
related to the secondary public offering
|
|
|
(0.07 |
) |
|
|
(0.06 |
) |
|
|
— |
|
|
|
— |
|
Net
investment
income
|
|
|
1.91 |
|
|
|
1.47 |
|
|
|
1.21 |
|
|
|
0.34 |
|
Realized
gain
(loss)
|
|
|
(0.69 |
) |
|
|
0.12 |
|
|
|
0.04 |
|
|
|
— |
|
Net
unrealized appreciation (depreciation)
|
|
|
(0.05 |
) |
|
|
(0.52 |
) |
|
|
0.58 |
|
|
|
0.90 |
|
Net
increase in net assets as a result of public offering
|
|
|
— |
|
|
|
0.26 |
|
|
|
— |
|
|
|
13.95 |
|
Dividends
declared
|
|
|
(1.59 |
) |
|
|
(1.54 |
) |
|
|
(1.12 |
) |
|
|
(0.38 |
) |
Net
asset value at end of
year
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
|
$ |
15.31 |
|
|
$ |
14.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share market value at end of
year
|
|
$ |
13.18 |
|
|
$ |
17.47 |
|
|
$ |
16.99 |
|
|
$ |
12.60 |
|
Total
return based on market value(2)
|
|
|
(15.90 |
%) |
|
|
12.65 |
% |
|
|
44.90 |
% |
|
|
(13.46 |
%) |
Total
return based on net asset value(2)
|
|
|
7.84 |
% |
|
|
7.62 |
% |
|
|
12.76 |
% |
|
|
7.40 |
% |
Shares
outstanding at end of
year
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
|
|
7,069,873 |
|
|
|
7,055,100 |
|
Average
weighted shares outstanding for year
|
|
|
23,626,642 |
|
|
|
15,724,095 |
|
|
|
7,056,846 |
|
|
|
7,055,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets at end of year (in
thousands)
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
|
$ |
108,270 |
|
|
$ |
102,967 |
|
Ratio
of operating expenses to average net assets
|
|
|
9.62 |
% |
|
|
7.36 |
% |
|
|
8.19 |
% |
|
|
5.52 |
% |
Ratio
of net operating income to average net assets
|
|
|
12.66 |
% |
|
|
9.71 |
% |
|
|
7.90 |
% |
|
|
8.50 |
% |
(1)
|
Financial
highlights are based on weighted average
shares.
|
(2)
|
Total
return based on market value is based on the change in market price per
share between the opening and ending market prices per share in each year
and assumes that dividends are reinvested in accordance with our dividend
reinvestment plan. Total return based on net asset value is
based upon the change in net asset value per share between the opening and
ending net asset values per share in each year and assumes that dividends
are reinvested in accordance with our dividend reinvestment
plan.
|
Note
9. Litigation
From
time to time, we may become involved in various investigations, claims and legal
proceedings that arise in the ordinary course of our business. These
matters may relate to intellectual property, employment, tax, regulation,
contract or other matters. The resolution of these matters as they
arise will be subject to various uncertainties and, even if such claims are
without merit, could result in the expenditure of significant financial and
managerial resources.
On
December 6, 2004, Dallas Gas Partners, L.P. ("DGP") served us with a complaint
filed November 30, 2004 in the U.S. District for the Southern District of Texas,
Galveston Division. DGP alleges that DGP was defrauded and that we
breached our fiduciary duty to DGP and tortiously interfered with DGP's contract
to purchase Gas Solutions, Ltd. (a subsidiary of our portfolio company, GSHI) in
connection with our alleged agreement in September 2004 to loan DGP funds with
which DGP intended to buy Gas Solutions, Ltd. for approximately
$26,000. The complaint sought relief not limited to
$100,000. On November 30, 2005, U.S. Magistrate Judge John R.
Froeschner of the U.S. District Court for the Southern District of Texas,
Galveston Division, issued a recommendation that the court grant our Motion for
Summary Judgment dismissing all claims by DGP. On February 21, 2006,
U.S. District Judge Samuel Kent of the U.S. District Court for the Southern
District of Texas, Galveston Division issued an order granting our Motion for
Summary Judgment dismissing all claims by DGP, against us. On May 16,
2007, the Court also granted us summary judgment on DGP's liability to us on our
counterclaim for DGP's breach of a release and covenant not to
sue. On January 4, 2008, the Court, Judge Melinda Harmon presiding,
granted our motion to dismiss all DGP's claims asserted against certain of our
officers and affiliates. On August 20, 2008, Judge Harmon entered a
Final Judgment dismissing all of DGP's claims. Our damage claims
against DGP remain pending.
In
May 2006, based in part on unfavorable due diligence and the absence of
investment committee approval, we declined to extend a loan for $10 million to a
potential borrower ("plaintiff"). Plaintiff was subsequently sued by
its own attorney in a local Texas court for plaintiff's failure to pay fees owed
to its attorney. In December 2006, plaintiff filed a cross-action
against us and certain affiliates (the "defendants") in the same local Texas
court, alleging, among other things, tortious interference with contract and
fraud. We petitioned the United States District Court for the
Southern District of New York (the "District Court") to compel arbitration and
to enjoin the Texas action. In February 2007, our motions were
granted. Plaintiff appealed that decision. On July 24,
2008, the Second Circuit Court of Appeals affirmed the judgment of the District
Court. The arbitration commenced in July 2007 and concluded in late
November 2007. Post-hearing briefings were completed in February
2008. On April 14, 2008, the arbitrator rendered an award in our
favor, rejecting all of plaintiff's claims. On April 18, 2008, we
filed a petition before the District Court to confirm the award, which is now
pending.
Note 10. Commitments and
Off-Balance Sheet Risks
From
time to time, we provide guarantees for portfolio companies for payments to
counterparties, usually as an alternative to investing additional
capital. Currently, agreements for two guarantees and one
indemnification are outstanding which are related to two portfolio companies
categorized as Control Investments – Whymore Coal Company, Inc., and North Fork
Collieries LLC, or North Fork; both of these companies have now been
consolidated as part of Yatesville. The two guarantees are related to
Whymore with one in the amount of $3,478 for equipment leases and another of
$416 for a "payment-over-time" contract for coal purchases. The
contingent indemnification obligation arose from our acquisition of the assets
of Traveler Coal, LLC, or Traveler, through our subsidiary, North
Fork. Specifically, as part of that acquisition, we have agreed to
indemnify the seller of those assets for personal guarantees that that seller
had extended on behalf of Traveler. The amount of this contingency
may reach $5,000. We also guarantee the obligation of WEPI as it
relates to the Cousineau Forest Products, Inc. acting as the fuel provider to
WEPI. The guaranty is limited to a maximum of $300.
We
also provide indemnifications to Prospect Administration and to Vastardis in
accordance with our respective agreements with those two service
providers. These indemnifications are described in further detail in
Note 7.
Note 11. Revolving Credit
Agreements
On
June 6, 2007, we closed on a $200,000 three-year revolving credit facility (as
amended on December 31, 2007) with Rabobank Nederland as administrative agent
and sole lead arranger (the "Rabobank Facility"). The Rabobank
Facility refinanced the $50,000 Facility with HSH Nordbank
AG. Interest on the Rabobank Facility is charged at LIBOR plus 175
basis points. Additionally, Rabobank charges a fee on the unused
portion of the facility. Through November 30, 2007, this fee is
assessed at the rate of 37.5 basis points per annum of the amount of that unused
portion; after that date, this rate increases to 50.0 basis points per annum if
that unused portion is greater than 50% of the total amount of the
facility. At September 30, 2008 and June 30, 2008, the investments
used as collateral for the Rabobank Facility had aggregate market values of
$406,984 and $369,418, respectively. These values represent 94.3% and
86.0% of net assets, respectively.
We
had drawn down $131,667 and $91,167 on the Rabobank Facility as of September 30,
2008 and June 30, 2008, respectively.
Note 12. Selected Quarterly
Financial Data
|
|
|
|
|
|
|
|
Net
Realized and Unrealized Gains (Losses) Operations
|
|
|
Net
Increase (Decrease) in Net Assets from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
2006
|
|
|
6,432 |
|
|
|
0.65 |
|
|
|
3,274 |
|
|
|
0.33 |
|
|
|
690 |
|
|
|
0.07 |
|
|
|
3,964 |
|
|
|
0.40 |
|
December
31,
2006
|
|
|
8,171 |
|
|
|
0.60 |
|
|
|
4,493 |
|
|
|
0.33 |
|
|
|
(1,553 |
) |
|
|
(0.11 |
) |
|
|
2,940 |
|
|
|
0.22 |
|
March
31,
2007
|
|
|
12,069 |
|
|
|
0.61 |
|
|
|
7,015 |
|
|
|
0.36 |
|
|
|
(2,039 |
) |
|
|
(0.10 |
) |
|
|
4,976 |
|
|
|
0.25 |
|
June
30,
2007
|
|
|
14,009 |
|
|
|
0.70 |
|
|
|
8,349 |
|
|
|
0.42 |
|
|
|
(3,501 |
) |
|
|
(0.18 |
) |
|
|
4,848 |
|
|
|
0.24 |
|
September
30,
2007
|
|
|
15,391 |
|
|
|
0.77 |
|
|
|
7,865 |
|
|
|
0.39 |
|
|
|
685 |
|
|
|
0.04 |
|
|
|
8,550 |
|
|
|
0.43 |
|
December
31,
2007
|
|
|
18,563 |
|
|
|
0.80 |
|
|
|
10,660 |
|
|
|
0.46 |
|
|
|
(14,346 |
) |
|
|
(0.62 |
) |
|
|
(3,686 |
) |
|
|
(0.16 |
) |
March
31,
2008
|
|
|
22,000 |
|
|
|
0.92 |
|
|
|
12,919 |
|
|
|
0.54 |
|
|
|
(14,178 |
) |
|
|
(0.59 |
) |
|
|
(1,259 |
) |
|
|
(0.05 |
) |
June
30,
2008
|
|
|
23,448 |
|
|
|
0.85 |
|
|
|
13,669 |
|
|
|
0.50 |
|
|
|
10,317 |
|
|
|
0.38 |
|
|
|
23,986 |
|
|
|
0.88 |
|
September
30,
2008
|
|
|
35,799 |
|
|
|
1.21 |
|
|
|
23,502 |
|
|
|
0.80 |
|
|
|
(9,504 |
) |
|
|
(0.33 |
) |
|
|
13,998 |
|
|
|
0.47 |
|
(1)
|
Per
share amounts are calculated using weighted average shares during
period.
|
Note 13. Subsequent
Events
On
October 9, 2008, our Board of Directors approved a share repurchase plan under
which we may repurchase up to $20,000 of our common stock at prices below our
net asset value as reported in our financial statements published for the year
ended June 30, 2008.
On
October 16, 2008, we issued 117,549 shares of our common stock in conjunction
with the Dividend Reinvestment Plan.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board
of Directors and Stockholders
Prospect
Capital Corporation
New
York, New York
We
have audited the accompanying consolidated statement of assets and liabilities
of Prospect Capital Corporation, including the schedule of investments as of
June 30, 2008 and 2007, and the related consolidated statements of income,
changes in net assets, and cash flows for each of the three years in the period
ended June 30, 2008, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of material
misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the consolidated financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Prospect Capital Corporation at June 30, 2008 and 2007, and the
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2008, and the financial highlights for each of the
periods presented in conformity with accounting principles generally accepted in
the United States of America.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Prospect Capital Corporation's
internal control over financial reporting as of June 30, 2008, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated September 4, 2008 expressed an unqualified opinion
thereon.
/s/ BDO
Seidman LLP
New
York, New York
September 4,
2008
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments
at fair value (cost of $496,805 and $326,197, respectively, Note
3)
|
|
|
|
|
|
|
Control
investments (cost of $203,661 and $130,493, respectively)
|
|
$ |
205,827 |
|
|
$ |
145,121 |
|
Affiliate
investments (cost of $5,609 and $14,821, respectively)
|
|
|
6,043 |
|
|
|
14,625 |
|
Non-control/Non-affiliate
investments (cost of $287,535 and $180,883, respectively)
|
|
|
285,660 |
|
|
|
168,476 |
|
Total
investments at fair value
|
|
|
497,530 |
|
|
|
328,222 |
|
Investments
in money market
funds
|
|
|
33,000 |
|
|
|
41,760 |
|
Cash
|
|
|
555 |
|
|
|
— |
|
Receivables
for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
4,094 |
|
|
|
2,139 |
|
Dividends
|
|
|
4,248 |
|
|
|
263 |
|
Loan
principal
|
|
|
71 |
|
|
|
— |
|
Structuring
Fees
|
|
|
— |
|
|
|
1,625 |
|
Other
|
|
|
567 |
|
|
|
271 |
|
Prepaid
expenses
|
|
|
273 |
|
|
|
471 |
|
Deferred
financing
costs
|
|
|
1,440 |
|
|
|
1,751 |
|
Total
Assets
|
|
$ |
541,778 |
|
|
$ |
376,502 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Credit
facility
payable
|
|
|
91,167 |
|
|
|
— |
|
Payable
for securities
purchased
|
|
|
— |
|
|
|
70,000 |
|
Dividends
payable
|
|
|
11,845 |
|
|
|
— |
|
Due
to Prospect Administration (Note
7)
|
|
|
695 |
|
|
|
330 |
|
Due
to Prospect Capital Management (Note
7)
|
|
|
5,946 |
|
|
|
4,508 |
|
Accrued
expenses
|
|
|
1,104 |
|
|
|
1,312 |
|
Other
liabilities
|
|
|
1,398 |
|
|
|
304 |
|
Total
Liabilities
|
|
|
112,155 |
|
|
|
76,454 |
|
Net
Assets
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
|
|
|
|
|
|
|
|
|
Components
of Net Assets
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share (100,000,000 and 100,000,000 common
shares authorized,
|
|
|
|
|
|
|
|
|
respectively;
29,520,379 and 19,949,065 issued and outstanding,
respectively)
|
|
$ |
30 |
|
|
$ |
20 |
|
Paid-in
capital in excess of
par
|
|
|
441,332 |
|
|
|
299,845 |
|
Undistributed
(distributions in excess of) net investment
income
|
|
|
1,508 |
|
|
|
(4,092 |
) |
Accumulated
realized gains (losses) on
investments
|
|
|
(13,972 |
) |
|
|
2,250 |
|
Unrealized
appreciation on
investments
|
|
|
725 |
|
|
|
2,025 |
|
Net
Assets
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
Net
Asset Value Per
Share
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Income
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Control
investments (Net of foreign withholding tax of $230, $178, and $0,
respectively)
|
|
$ |
21,709 |
|
|
$ |
13,500 |
|
|
$ |
4,838 |
|
Affiliate
investments (Net of foreign withholding tax of $70, $237, and $0,
respectively)
|
|
|
1,858 |
|
|
|
3,489 |
|
|
|
612 |
|
Non-control/Non-affiliate
investments
|
|
|
35,466 |
|
|
|
13,095 |
|
|
|
7,818 |
|
Total
interest income
|
|
|
59,033 |
|
|
|
30,084 |
|
|
|
13,268 |
|
Dividend
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
investments
|
|
|
11,327 |
|
|
|
3,400 |
|
|
|
3,099 |
|
Non-control/Non-affiliate
investments
|
|
|
— |
|
|
|
— |
|
|
|
289 |
|
Money
market funds
|
|
|
706 |
|
|
|
2,753 |
|
|
|
213 |
|
Total
dividend income
|
|
|
12,033 |
|
|
|
6,153 |
|
|
|
3,601 |
|
Other
Income: (See Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Control/Affiliate
investments
|
|
|
1,123 |
|
|
|
230 |
|
|
|
— |
|
Non-control/Non-affiliate
investments
|
|
|
7,213 |
|
|
|
4,214 |
|
|
|
— |
|
Total
other income
|
|
|
8,336 |
|
|
|
4,444 |
|
|
|
— |
|
Total
Investment Income
|
|
|
79,402 |
|
|
|
40,681 |
|
|
|
16,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
advisory fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
management fee (Note 7)
|
|
|
8,921 |
|
|
|
5,445 |
|
|
|
2,082 |
|
Income
incentive fee (Note 7)
|
|
|
11,278 |
|
|
|
5,781 |
|
|
|
1,786 |
|
Total
investment advisory fees
|
|
|
20,199 |
|
|
|
11,226 |
|
|
|
3,868 |
|
Interest
and credit facility
expenses
|
|
|
6,318 |
|
|
|
1,903 |
|
|
|
642 |
|
Chief
Financial, Chief Compliance Officer and Sub-administration
fees
|
|
|
859 |
|
|
|
567 |
|
|
|
385 |
|
Legal
fees
|
|
|
2,503 |
|
|
|
1,365 |
|
|
|
1,835 |
|
Valuation
services
|
|
|
577 |
|
|
|
395 |
|
|
|
193 |
|
Sarbanes-Oxley
compliance
expenses
|
|
|
66 |
|
|
|
101 |
|
|
|
120 |
|
Audit
and tax related
fees
|
|
|
404 |
|
|
|
498 |
|
|
|
365 |
|
Allocation
of overhead from Prospect Administration (Note 6)
|
|
|
2,139 |
|
|
|
532 |
|
|
|
310 |
|
Insurance
expense
|
|
|
256 |
|
|
|
291 |
|
|
|
365 |
|
Directors'
fees
|
|
|
253 |
|
|
|
230 |
|
|
|
220 |
|
Other
general and administrative
expenses
|
|
|
715 |
|
|
|
442 |
|
|
|
8 |
|
Total
Operating Expenses
|
|
|
34,289 |
|
|
|
17,550 |
|
|
|
8,311 |
|
Net
Investment Income
|
|
|
45,113 |
|
|
|
23,131 |
|
|
|
8,558 |
|
Net
realized gain (loss) on
investments
|
|
|
(16,222 |
) |
|
|
1,949 |
|
|
|
303 |
|
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
(1,300 |
) |
|
|
(8,352 |
) |
|
|
4,035 |
|
Net
Increase in Net Assets Resulting from Operations
|
|
$ |
27,591 |
|
|
$ |
16,728 |
|
|
$ |
12,896 |
|
Net
increase in net assets resulting from operations per
share:
|
|
$ |
1.17 |
|
|
$ |
1.06 |
|
|
$ |
1.83 |
|
Weighted
average shares of common stock outstanding:
|
|
|
23,626,642 |
|
|
|
15,724,095 |
|
|
|
7,056,846 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Net Assets from
Operations:
|
|
|
|
|
|
|
|
|
|
Net
investment
income
|
|
$ |
45,113 |
|
|
$ |
23,131 |
|
|
$ |
8,558 |
|
Net
realized gain (loss) on
investments
|
|
|
(16,222 |
) |
|
|
1,949 |
|
|
|
303 |
|
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
(1,300 |
) |
|
|
(8,352 |
) |
|
|
4,035 |
|
Net
Increase in Net Assets Resulting from Operations
|
|
|
27,591 |
|
|
|
16,728 |
|
|
|
12,896 |
|
Dividends to
Stockholders:
|
|
|
(39,513 |
) |
|
|
(27,542 |
) |
|
|
(7,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share
Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from shares sold, net of underwriting
fees
|
|
|
140,249 |
|
|
|
197,558 |
|
|
|
— |
|
Less: Other
offering costs of public share
offerings
|
|
|
(1,505 |
) |
|
|
(874 |
) |
|
|
70 |
|
Reinvestment
of
dividends
|
|
|
2,753 |
|
|
|
5,908 |
|
|
|
241 |
|
Net
Increase in Net Assets Resulting from Capital Share
Transactions
|
|
|
141,497 |
|
|
|
202,592 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Net
Assets:
|
|
|
129,575 |
|
|
|
191,778 |
|
|
|
5,303 |
|
Net
assets at beginning of
year
|
|
|
300,048 |
|
|
|
108,270 |
|
|
|
102,967 |
|
Net
Assets at End of Year
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
|
$ |
108,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share
Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
sold
|
|
|
9,400,000 |
|
|
|
12,526,650 |
|
|
|
— |
|
Shares
issued through reinvestment of
dividends
|
|
|
171,314 |
|
|
|
352,542 |
|
|
|
14,773 |
|
Net
increase in capital share
activity
|
|
|
9,571,314 |
|
|
|
12,879,192 |
|
|
|
14,773 |
|
Shares
outstanding at beginning of
year
|
|
|
19,949,065 |
|
|
|
7,069,873 |
|
|
|
7,055,100 |
|
Shares
Outstanding at End of Year
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
|
|
7,069,873 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Net Assets Resulting from Operations
|
|
$ |
27,591 |
|
|
$ |
16,728 |
|
|
$ |
12,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain (loss) on
investments
|
|
|
16,239 |
|
|
|
(1,947 |
) |
|
|
(303 |
) |
Net
change in unrealized appreciation (depreciation) on
investments
|
|
|
1,300 |
|
|
|
8,352 |
|
|
|
(4,035 |
) |
Accretion
of original issue discount on
investments
|
|
|
(2,095 |
) |
|
|
(1,808 |
) |
|
|
(910 |
) |
Amortization
of deferred financing
costs
|
|
|
727 |
|
|
|
1,264 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for purchases of
investments
|
|
|
(311,947 |
) |
|
|
(167,255 |
) |
|
|
(83,625 |
) |
Proceeds
from sale of
investments
|
|
|
127,212 |
|
|
|
38,407 |
|
|
|
9,954 |
|
Purchases
of cash
equivalents
|
|
|
(274,949 |
) |
|
|
(259,887 |
) |
|
|
(1,574,805 |
) |
Sales
of cash
equivalents
|
|
|
274,932 |
|
|
|
259,885 |
|
|
|
1,612,033 |
|
Net
investments in money market
funds
|
|
|
8,760 |
|
|
|
(40,152 |
) |
|
|
(20 |
) |
Decrease
(Increase) in interest
receivable
|
|
|
(1,955 |
) |
|
|
(500 |
) |
|
|
(1,446 |
) |
Decrease
(Increase) in dividends
receivable
|
|
|
(3,985 |
) |
|
|
(250 |
) |
|
|
— |
|
Decrease
(Increase) in loan principal
receivable
|
|
|
(71 |
) |
|
|
385 |
|
|
|
(385 |
) |
Decrease
(Increase) in receivable for securities
sold
|
|
|
— |
|
|
|
369 |
|
|
|
(369 |
) |
Decrease
(Increase) in receivable for structuring
fees
|
|
|
1,625 |
|
|
|
— |
|
|
|
— |
|
Decrease
(Increase) in other
receivables
|
|
|
(296 |
) |
|
|
(1,896 |
) |
|
|
201 |
|
Decrease
(Increase) in due from Prospect Administration
|
|
|
— |
|
|
|
28 |
|
|
|
(28 |
) |
Decrease
(Increase) in due from Prospect Capital Management
|
|
|
— |
|
|
|
5 |
|
|
|
(5 |
) |
Decrease
(Increase) in due from prepaid
expenses
|
|
|
198 |
|
|
|
(394 |
) |
|
|
(28 |
) |
Increase
(Decrease) in payables for securities purchased
|
|
|
(70,000 |
) |
|
|
32 |
|
|
|
(32 |
) |
Increase
(Decrease) in due to Prospect Administration
|
|
|
365 |
|
|
|
330 |
|
|
|
— |
|
Increase
(Decrease) in due to Prospect Capital Management
|
|
|
1,438 |
|
|
|
3,763 |
|
|
|
668 |
|
Increase
(Decrease) in accrued
expenses
|
|
|
(208 |
) |
|
|
469 |
|
|
|
25 |
|
Increase
(Decrease) in other
liabilities
|
|
|
1,094 |
|
|
|
182 |
|
|
|
75 |
|
Net Cash Used In Operating
Activities:
|
|
|
(204,025 |
) |
|
|
(143,890 |
) |
|
|
(29,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
under credit
facility
|
|
|
238,492 |
|
|
|
— |
|
|
|
— |
|
Payments
under credit
facility
|
|
|
(147,325 |
) |
|
|
(28,500 |
) |
|
|
28,500 |
|
Financing
costs paid and
deferred
|
|
|
(416 |
) |
|
|
(2,660 |
) |
|
|
(575 |
) |
Net
proceeds from shares
sold
|
|
|
140,249 |
|
|
|
197,558 |
|
|
|
— |
|
Less
offering costs of public share
offerings
|
|
|
(1,505 |
) |
|
|
(874 |
) |
|
|
70 |
|
Dividends
paid
|
|
|
(24,915 |
) |
|
|
(21,634 |
) |
|
|
(7,663 |
) |
Net Cash Provided By Financing
Activities:
|
|
|
204,580 |
|
|
|
143,890 |
|
|
|
20,332 |
|
Total
Increase in Cash
|
|
|
555 |
|
|
|
— |
|
|
|
(9,587 |
) |
Cash
balance at beginning of
year
|
|
|
— |
|
|
|
— |
|
|
|
9,587 |
|
Cash
Balance at End of Year
|
|
$ |
555 |
|
|
$ |
— |
|
|
$ |
— |
|
Cash
Paid For
Interest
|
|
$ |
4,942 |
|
|
$ |
639 |
|
|
$ |
— |
|
Non-Cash Financing
Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of shares issued in connection with dividend reinvestment
plan
|
|
$ |
2,753 |
|
|
$ |
5,908 |
|
|
$ |
241 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.00%
or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring &
Machine
|
|
South
Carolina/ Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares (7 total unrestricted common shares outstanding and 803.18
restricted common shares outstanding)
|
|
|
|
|
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
0.0% |
|
Preferred
shares (7,222.6 total preferred shares outstanding)
|
|
|
|
|
6,142.6 |
|
|
|
6,293 |
|
|
|
6,293 |
|
|
|
1.5% |
|
Senior
secured note, 10.50%, 4/01/2013(4)
|
|
|
|
$ |
21,890 |
|
|
|
21,890 |
|
|
|
21,890 |
|
|
|
5.1% |
|
Subordinated
secured note, 11.50% plus 6.00% PIK, 4/01/2013(4)
|
|
|
|
$ |
11,500 |
|
|
|
11,500 |
|
|
|
11,500 |
|
|
|
2.6% |
|
Total
|
|
|
|
|
|
|
|
|
39,683 |
|
|
|
39,683 |
|
|
|
9.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J Cladding
LLC(4)
|
|
Texas/Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
company units, expiring 3/30/2014 (600 total company units
outstanding)
|
|
|
|
|
400 |
|
|
|
580 |
|
|
|
2,222 |
|
|
|
0.5% |
|
Senior
secured note, 14.00%, 3/30/2012(12)
|
|
|
|
$ |
4,800 |
|
|
|
4,085 |
|
|
|
4,607 |
|
|
|
1.1% |
|
Total
|
|
|
|
|
|
|
|
|
4,665 |
|
|
|
6,829 |
|
|
|
1.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Solutions
Holdings, Inc.(3)
|
|
Texas/Gas
Gathering and Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (100 total common shares outstanding)
|
|
|
|
|
100 |
|
|
|
5,221 |
|
|
|
41,542 |
|
|
|
9.7% |
|
Subordinated
secured note, 18.00%, 12/22/2009(4)
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.7% |
|
Total
|
|
|
|
|
|
|
|
|
25,221 |
|
|
|
61,542 |
|
|
|
14.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Contract Services,
Inc.(5)
|
|
North
Carolina/ Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (100 total common shares outstanding)
|
|
|
|
|
49 |
|
|
|
491 |
|
|
|
— |
|
|
|
0.0% |
|
Series
A preferred shares (10 total Series A preferred shares
outstanding)
|
|
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Junior
secured note, 14.00%, 9/30/2010
|
|
|
|
$ |
14,003 |
|
|
|
14,003 |
|
|
|
3,030 |
|
|
|
0.7% |
|
Senior
secured note, 14.00%, 9/30/2010
|
|
|
|
$ |
800 |
|
|
|
800 |
|
|
|
800 |
|
|
|
0.2% |
|
Senior
demand note, 15.00%(6),
6/30/2009
|
|
|
|
$ |
1,170 |
|
|
|
1,170 |
|
|
|
1,170 |
|
|
|
0.3% |
|
Total
|
|
|
|
|
|
|
|
|
16,464 |
|
|
|
5,000 |
|
|
|
1.2% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Iron Horse Coiled Tubing,
Inc.
|
|
Alberta,
Canada Production Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,093 total common shares outstanding)
|
|
|
|
|
643 |
|
|
|
268 |
|
|
|
49 |
|
|
|
0.0% |
|
Warrants
for common shares(7)
|
|
|
|
|
1,138 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 15.00%, 4/19/2009
|
|
|
|
$ |
9,250 |
|
|
|
9,094 |
|
|
|
9,073 |
|
|
|
2.1% |
|
Bridge
Loan, 15.00% plus 3.00% PIK,
12/11/2008
|
|
|
|
|
|
|
|
|
2,103 |
|
|
|
2,060 |
|
|
|
0.5% |
|
Total
|
|
|
|
|
|
|
|
|
11,465 |
|
|
|
11,182 |
|
|
|
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,000 total common shares outstanding)
|
|
|
|
|
800 |
|
|
$ |
2,317 |
|
|
$ |
8,656 |
|
|
|
2.0% |
|
Senior
secured note, 16.50%(8),
8/31/2011(4)
|
|
|
|
$ |
13,080 |
|
|
|
13,080 |
|
|
|
13,080 |
|
|
|
3.0% |
|
Total
|
|
|
|
|
|
|
|
|
15,397 |
|
|
|
21,736 |
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (800,000 total common shares outstanding)
|
|
|
|
|
545,107 |
|
|
|
5,031 |
|
|
|
8,064 |
|
|
|
1.9% |
|
Warrants,
common shares, expiring 6/30/2017
|
|
|
|
|
200,000 |
|
|
|
1,682 |
|
|
|
2,959 |
|
|
|
0.7% |
|
Senior
secured note, 15.00%, 6/30/2017(4)
|
|
|
|
$ |
7,526 |
|
|
|
5,912 |
|
|
|
7,526 |
|
|
|
1.8% |
|
Total
|
|
|
|
|
|
|
|
|
12,625 |
|
|
|
18,549 |
|
|
|
4.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester Energy
Partners, Inc.(9)
|
|
Maine/Biomass
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
|
— |
|
|
|
457 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 12.50%, 12/31/2012
|
|
|
|
$ |
37,388 |
|
|
|
37,264 |
|
|
|
15,579 |
|
|
|
3.6% |
|
Total
|
|
|
|
|
|
|
|
|
37,721 |
|
|
|
15,580 |
|
|
|
3.6% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Yatesville Coal
Holdings, Inc.(23)
|
|
Kentucky/
Mining and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (1,000 total common shares outstanding)
|
|
|
|
|
1,000 |
|
|
|
284 |
|
|
|
— |
|
|
|
0.0% |
|
Junior
secured note, 12.50%, 12/31/2010
|
|
|
|
$ |
30,136 |
|
|
|
30,136 |
|
|
|
15,726 |
|
|
|
3.7% |
|
Senior
secured note, 12.50%, 12/31/2010
|
|
|
|
$ |
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
2.3% |
|
Total
|
|
|
|
|
|
|
|
|
40,420 |
|
|
|
25,726 |
|
|
|
6.0% |
|
Total
Control Investments
|
|
|
|
|
|
|
|
|
203,661 |
|
|
|
205,827 |
|
|
|
48.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy
Holdings(10),
(4)
|
|
West
Virginia/ Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
– Class A common units, expiring 2/13/2016 (49,753 total class A common
units outstanding)
|
|
|
|
|
12,090 |
|
|
$ |
348 |
|
|
$ |
794 |
|
|
|
0.2% |
|
Series
A preferred equity (16,125 total series A preferred equity units
outstanding)
|
|
|
|
|
3,000 |
|
|
|
72 |
|
|
|
162 |
|
|
|
0.0% |
|
Series
B preferred equity (794 total series B preferred equity units
outstanding)
|
|
|
|
|
241 |
|
|
|
241 |
|
|
|
— |
|
|
|
0.0% |
|
Senior
Secured Debt Tranche A, 14.00% plus 3.00% PIK, 1/31/2011
|
|
|
|
$ |
3,003 |
|
|
|
3,003 |
|
|
|
3,003 |
|
|
|
0.7% |
|
Senior
Secured Debt Tranche B, 14.00% plus 3.00% PIK, 5/01/2009
|
|
|
|
$ |
1,945 |
|
|
|
1,945 |
|
|
|
2,084 |
|
|
|
0.5% |
|
Total
|
|
|
|
|
|
|
|
|
5,609 |
|
|
|
6,043 |
|
|
|
1.4% |
|
Total
Affiliate Investments
|
|
|
|
|
|
|
|
|
5,609 |
|
|
|
6,043 |
|
|
|
1.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Gilsonite Company
|
|
Utah/
Specialty Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
Interest in AGC\PEP, LLC (11)
|
|
|
|
|
99.9999 |
% |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
0.2% |
|
Subordinated
secured note, 12.00% plus 3.00%, 3/14/2013 (4)
|
|
|
|
$ |
14,632 |
|
|
|
14,632 |
|
|
|
14,632 |
|
|
|
3.4% |
|
Total
|
|
|
|
|
|
|
|
|
15,632 |
|
|
|
15,632 |
|
|
|
3.6% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Conquest Cherokee,
LLC(13),
(4)
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 5/05/2009(14)
|
|
|
|
$ |
10,200 |
|
|
|
10,125 |
|
|
|
9,923 |
|
|
|
2.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb Shops,
Inc.(4)
|
|
Pennsylvania/
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 10.69%, 10/23/2014(25)
|
|
|
|
$ |
15,000 |
|
|
$ |
14,577 |
|
|
$ |
13,428 |
|
|
|
3.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deep Down,
Inc.(4)
|
|
Texas/Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common shares, expiring 8/6/2012 (174,732,501 total common shares
outstanding)
|
|
|
|
|
4,960,585 |
|
|
|
— |
|
|
|
2,856 |
|
|
|
0.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback Operating,
LP(15),
(4)
|
|
Oklahoma/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 12.00% plus 2.00% PIK, 8/28/2011
|
|
|
|
$ |
9,200 |
|
|
|
9,200 |
|
|
|
9,108 |
|
|
|
2.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom Marine
Services LLC(15),
(4)
|
|
Louisiana/
Shipping
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 4.00% PIK(17),
12/31/2011
|
|
|
|
$ |
6,948 |
|
|
|
6,850 |
|
|
|
6,805 |
|
|
|
1.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M Oil & Gas,
LLC(15),
(4)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 6/30/2010(16)
|
|
|
|
$ |
50,500 |
|
|
|
50,500 |
|
|
|
50,500 |
|
|
|
11.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC Systems LP
("IEC")/Advance Rig Services LLC ("ARS")(4)
|
|
Texas/Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$ |
19,028 |
|
|
|
19,028 |
|
|
|
19,028 |
|
|
|
4.4% |
|
ARS
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$ |
5,825 |
|
|
|
5,825 |
|
|
|
5,825 |
|
|
|
1.4% |
|
Total
|
|
|
|
|
|
|
|
|
24,853 |
|
|
|
24,853 |
|
|
|
5.8% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Maverick
Healthcare Group, L.L.C.
(4)
|
|
Arizona/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
units (78,100,000 total common shares outstanding)
|
|
|
|
|
1,250,000 |
|
|
$ |
1,252 |
|
|
$ |
1,252 |
|
|
|
0.3% |
|
Preferred
units (78,100,000 total preferred shares outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 12.00% plus 1.50% PIK, 10/31/2014
|
|
|
|
$ |
12,500 |
|
|
|
12,500 |
|
|
|
12,500 |
|
|
|
2.9% |
|
Total
|
|
|
|
|
|
|
|
|
13,752 |
|
|
|
13,752 |
|
|
|
3.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller Petroleum, Inc.
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 5/4/2010 to 3/31/2013 (14,566,856 total common
shares outstanding)
|
|
|
|
|
1,571,191 |
|
|
|
150 |
|
|
|
111 |
|
|
|
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless Manufacturing
Co.(4)
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 11.50% plus 3.50% PIK, 4/30/2013
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest
Pharmaceuticals, Inc.(4)
|
|
Alabama/
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 12.45%(18),
4/30/2015
|
|
|
|
$ |
12,000 |
|
|
|
11,944 |
|
|
|
11,523 |
|
|
|
2.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Management
Corp.(4)
|
|
South
Carolina/
Financial
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$ |
25,000 |
|
|
|
25,000 |
|
|
|
23,699 |
|
|
|
5.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco Products,
Inc.(4)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 11.06%(19),
6/24/2014
|
|
|
|
$ |
9,750 |
|
|
|
9,574 |
|
|
|
9,574 |
|
|
|
2.2% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Shearer's Foods, Inc.
|
|
Ohio/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Mistral
Chip Holdings, LLC membership unit (45,300 total membership units
outstanding)(24)
|
|
|
|
|
2,000 |
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
|
|
0.5% |
|
Second
lien debt, 14.00%, 10/31/2013(4)
|
|
|
|
$ |
18,000 |
|
|
|
18,000 |
|
|
|
17,351 |
|
|
|
4.0% |
|
Total
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
19,351 |
|
|
|
4.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker Energy,
LLC(20),
(4)
|
|
Ohio/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
revolving credit facility, 12.00%(21),
11/30/2011
|
|
|
|
$ |
29,500 |
|
|
|
29,041 |
|
|
|
28,518 |
|
|
|
6.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek(4)
|
|
Pennsylvania/
Technical
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 12.75%(22),
12/27/2012
|
|
|
|
$ |
11,500 |
|
|
|
11,337 |
|
|
|
11,337 |
|
|
|
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Resources
Corp. and Wind River II Corp.(4)
|
|
Utah/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 7/31/2009
|
|
|
|
$ |
15,000 |
|
|
|
15,000 |
|
|
|
14,690 |
|
|
|
3.4% |
|
Total
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
287,535 |
|
|
|
285,660 |
|
|
|
66.4% |
|
Total
Portfolio
Investments
|
|
|
|
|
|
|
|
|
496,805 |
|
|
|
497,530 |
|
|
|
115.8% |
|
Money
Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity
Institutional Money market Funds – Government Portfolio (Class
I)
|
|
|
|
|
25,954,531 |
|
|
|
25,954 |
|
|
|
25,954 |
|
|
|
6.0% |
|
First
American Funds, Inc.- Prime Obligations Fund (Class A)(4)
|
|
|
|
|
7,045,610 |
|
|
|
7,046 |
|
|
|
7,046 |
|
|
|
1.6% |
|
Total
Money Market
Funds
|
|
|
|
|
|
|
|
|
33,000 |
|
|
|
33,000 |
|
|
|
7.6% |
|
Total
Investments
|
|
|
|
|
|
|
|
$ |
529,805 |
|
|
$ |
530,530 |
|
|
|
123.4% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2008
(in
thousands, except share data)
Endnote Explanations for the Schedule of
Investments as of June 30, 2008
____________________
(1)
|
The
securities in which we have invested were acquired in transactions that
were exempt from registration under the Securities Act of 1933, as
amended, or the "Securities Act." These securities may be
resold only in transactions that are exempt from registration under the
Securities Act.
|
|
|
(2)
|
Fair
value is determined by or under the direction of our Board of Directors
(Note 2).
|
|
|
(3)
|
Gas
Solutions Holdings, Inc. is a wholly-owned investment of
us.
|
|
|
(4)
|
Security,
or portion thereof, is held as collateral for the credit facility with
Rabobank Nederland (See Note 10). At June 30, 2008, the
value of these investments was $369,418 which represents 86.0% of net
assets.
|
|
|
(5)
|
Entity
was formed as a result of the debt restructuring of ESA Environmental
Specialist, Inc.
|
|
|
(6)
|
Loan
is with Lisamarie Fallon, Inc., (d/b/a The Healing Staff) an affiliate of
the Integrated Contract Services, Inc.
|
|
|
(7)
|
The
number of these warrants which are exercisable is contingent upon the
length of time that passes before the bridge loan is repaid, 224 shares on
August 11, 2008, 340 additional shares on October 11, 2008 and
574 additional shares on December 11, 2008.
|
|
|
(8)
|
Interest
rate is the greater of 16.5% or 12-Month LIBOR plus 11.0%; rate reflected
is as of June 30, 2008.
|
|
|
(9)
|
There
are several entities involved in the Worcester Energy Partners, Inc.
investment. We own 100 shares of common stock in Worcester
Energy Holdings, Inc., or WEHI, representing 100%. WEHI, in
turn, owns 51 membership certificates in Biochips LLC, which represents
51% ownership. We own 282 shares of common stock in Worcester
Energy Co., Inc., or WECO, which represents 51% ownership. We
own 1,665 shares of common stock in Worcester Energy Partners, Inc., or
WEPI, which represents 51% ownership. We also own 1,000 of
series A convertible preferred shares in WEPI. WECO, WEPI and
Biochips LLC are joint borrowers on the term note issued to Prospect
Capital. WEPI owns the equipment and operates the biomass
generation facility. Biochips LLC currently has no material
operations. WEPI owns 100 shares of common stock in Precision
Logging and Landclearing, Inc., or Precision, which represents 100%
ownership. Precision conducts all logging, processing and
delivery operations to supply fuel to the biomass generation
facility. As of March 31, 2008, our Board of Directors
assessed a fair value of $1 for all of these equity
positions.
|
|
|
(10)
|
There
are several entities involved in the Appalachian Energy
investment. We own warrants the exercise of which will permit
us to purchase 12,090 units of Class A common units of Appalachian Energy
Holdings LLC, or AEH, at a nominal cost and in a near-immediate
timeframe. We own 3,000 units of Series A preferred equity and
241 units of Series B preferred equity of AEH. The senior
secured notes are with C & S Operating LLC and East Cumberland L.L.C.,
both operating companies owned by Appalachian Energy Holdings
LLC.
|
|
|
(11)
|
We
own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,000 out of a
total of 64,027.25 shares of American Gilsonite Holding Company which owns
100% of American Gilsonite Company.
|
|
|
(12)
|
Interest
rate is the greater of 14.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2008.
|
|
|
(13)
|
We
have an overriding royalty interest and net profits interest in the
Portfolio Investment.
|
|
|
(14)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2008.
|
|
|
(15)
|
We
have a net profits interest in the Portfolio
Investment.
|
|
|
(16)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2008.
|
|
|
(17)
|
Interest
rate is the greater of 13.0% or 3-Month LIBOR plus 6.11%; rate reflected
is as of June 30, 2008.
|
|
|
(18)
|
Interest
rate is the greater of 12.5% or 3-Month LIBOR plus 7.5%; rate reflected is
as of June 30, 2008.
|
|
|
(19)
|
Interest
rate is 3-Month LIBOR plus 8.0%; rate reflected is as of June 30,
2008.
|
|
|
(20)
|
We
have an overriding royalty interest in the Portfolio
Investment.
|
|
|
(21)
|
Interest
rate is the greater of 12.0% or 12-Month LIBOR plus 7.0%; rate reflected
is as of June 30, 2008.
|
|
|
(22)
|
Interest
rate is the greater of 12.75% or 3-Month LIBOR plus 7.25%; rate reflected
is as of June 30, 2008.
|
|
|
(23)
|
On
June 30, 2008, we consolidated our holdings in four coal companies
into Yatesville Coal Holdings, Inc., or Yatesville, and consolidated the
operations under one management team. In the transaction, the
debt that we held of C&A Construction, Inc. (which is part of the
Whymore Coal Entities described below), Genesis Coal Corp., North Fork
Collieries LLC and Unity Virginia Holdings LLC were exchanged for newly
issued debt from Yatesville, and our ownership interests in C&A
Construction Inc., E&L Construction, Inc., Whymore Coal Company Inc.,
Genesis Coal Corp. and North Fork Collieries LLC were exchanged for 100%
of the equity of Yatesville. This reorganization allows for a
better utilization of the assets in the consolidated
group.
|
|
|
|
At
June 30, 2008, Yatesville owns 100% of the membership interest of
North Fork Collieries LLC. In addition, Yatesville holds a
$5,721 note receivable from North Fork Collieries LLC. Our
third party valuation consultant has estimated the value of the North Fork
Collieries LLC investment in a range from $10,940 to
$12,607.
|
|
|
|
Yatesville
owns 75% of the common stock of Genesis Coal Corp. and holds a note
receivable of $17,692 at June 30, 2008. Our third party
valuation consultant has estimated the value of the Genesis Coal Corp
investment in a range from $7,156 to $7,962.
|
|
|
|
Yatesville
holds a note receivable of $3,902 from Unity Virginia Holdings LLC at
June 30, 2008. Our third party valuation consultant has
estimated the value of the Unity Virginia Holdings, LLC investment at
zero.
|
|
|
|
There
are several entities involved in Yatesville's investment in the Whymore
Coal Entities at June 30, 2008. Yatesville owns 10,000
shares of common stock or 100% of the equity and holds a $12,822 senior
secured debt receivable from C&A Construction, Inc., or C&A, which
owns the equipment. Yatesville owns 10,000 shares of common
stock or 100% of the equity of E&L Construction, Inc., or E&L,
which leases the equipment from C&A, employs the workers, is listed as
the operator with the Commonwealth of Kentucky, mines the coal, receives
revenues and pays all operating expenses. Yatesville owns 4,900
shares of common stock or 49% of the equity of Whymore Coal Company, Inc.,
or Whymore, which applies for and holds permits on behalf of
E&L. Yatesville also own 4,285 Series A convertible
preferred shares in each of C&A, E&L and
Whymore. Additionally, Yatesville retains an option to purchase
the remaining 51% of Whymore. Whymore and E&L are
guarantors under the C&A credit agreement with
Yatesville. Our third party valuation consultant has estimated
the value of the Whymore Coal investment in a range from $4,463 to
$5,105.
|
(24)
|
Mistral
Chip Holdings, LLC owns 45,300 shares out of 50,500 total shares
outstanding of Chip Holdings, Inc., the parent company of Shearer's Foods,
Inc.
|
|
|
(25)
|
Interest
rate is 1-Month LIBOR plus 8.0%; rate reflected is as of June 30,
2008.
|
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
June 30,
2007
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Oilfield
Group Ltd.(23)
|
|
Alberta,
Canada/ Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares, Class A(3)
|
|
|
|
|
33 |
|
|
$ |
220 |
|
|
$ |
— |
|
|
|
0.0% |
|
Senior
secured note, 15.00% due 5/30/2009
|
|
|
|
$ |
17,321 |
|
|
|
16,930 |
|
|
|
9,880 |
|
|
|
3.3% |
|
Total
|
|
|
|
|
|
|
|
|
17,150 |
|
|
|
9,880 |
|
|
|
3.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J Cladding
LLC(23)
|
|
Texas/Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 3/30/2014
|
|
|
|
|
510 |
|
|
|
580 |
|
|
|
580 |
|
|
|
0.2% |
|
Senior
secured note, 14.00%(12)
due 3/31/2012
|
|
|
|
$ |
6,000 |
|
|
|
5,249 |
|
|
|
5,249 |
|
|
|
1.7% |
|
Total
|
|
|
|
|
|
|
|
|
5,829 |
|
|
|
5,829 |
|
|
|
1.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Solutions
Holdings, Inc.(4)
|
|
Texas/Gas
Gathering and Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
100 |
|
|
|
4,878 |
|
|
|
26,100 |
|
|
|
8.7% |
|
Subordinated
secured note, 18.00% due
12/22/2011(23)
|
|
|
|
$ |
18,400 |
|
|
|
18,400 |
|
|
|
18,400 |
|
|
|
6.1% |
|
Total
|
|
|
|
|
|
|
|
|
23,278 |
|
|
|
44,500 |
|
|
|
14.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Genesis Coal Corp.
|
|
Kentucky/Mining
and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
63 |
|
|
|
23 |
|
|
|
1 |
|
|
|
0.0% |
|
Warrants,
preferred shares, expiring 2/9/2016
|
|
|
|
|
1,000 |
|
|
|
33 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 16.40%(5)
due 12/31/2010
|
|
|
|
$ |
14,533 |
|
|
|
14,408 |
|
|
|
11,423 |
|
|
|
3.8% |
|
Total
|
|
|
|
|
|
|
|
|
14,464 |
|
|
|
11,425 |
|
|
|
3.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
800 |
|
|
|
2,315 |
|
|
|
11,785 |
|
|
|
3.9% |
|
Senior
secured note, 16.50%(6)
due 8/31/2013(23)
|
|
|
|
$ |
10,080 |
|
|
|
10,080 |
|
|
|
10,080 |
|
|
|
3.4% |
|
Total
|
|
|
|
|
|
|
|
|
12,395 |
|
|
|
21,865 |
|
|
|
7.3% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2007
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
545,107 |
|
|
$ |
4,985 |
|
|
$ |
4,985 |
|
|
|
1.6% |
|
Warrants,
common shares, expiring 6/30/2017
|
|
|
|
|
200,000 |
|
|
|
1,682 |
|
|
|
1,682 |
|
|
|
0.6% |
|
Senior
secured note, 15.00% due 6/30/2017(23)
|
|
|
|
$ |
14,526 |
|
|
|
12,844 |
|
|
|
12,844 |
|
|
|
4.3% |
|
Total
|
|
|
|
|
|
|
|
|
19,511 |
|
|
|
19,511 |
|
|
|
6.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whymore Coal Company,
Inc.(7)
|
|
Kentucky/Mining
and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
Various
|
|
|
|
111 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 16.42%(8)
due 12/31/2010
|
|
|
|
$ |
11,022 |
|
|
|
11,022 |
|
|
|
7,063 |
|
|
|
2.4% |
|
Total
|
|
|
|
|
|
|
|
|
11,133 |
|
|
|
7,064 |
|
|
|
2.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester Energy
Partners, Inc.(9)
|
|
Maine/Biomass
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
Various
|
|
|
|
137 |
|
|
|
1 |
|
|
|
0.0% |
|
Senior
secured note, 12.50% due 12/31/2012
|
|
|
|
$ |
26,774 |
|
|
|
26,596 |
|
|
|
25,046 |
|
|
|
8.3% |
|
Total
|
|
|
|
|
|
|
|
|
26,733 |
|
|
|
25,047 |
|
|
|
8.3% |
|
Total
Control
Investments
|
|
|
|
|
|
|
|
|
130,493 |
|
|
|
145,121 |
|
|
|
48.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy
Holdings LLC(10)(23)
|
|
West
Virginia/ Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred shares
|
|
|
|
|
200 |
|
|
|
104 |
|
|
|
104 |
|
|
|
0.0% |
|
Warrants,
expiring 2/14/2016
|
|
|
|
|
6,065 |
|
|
|
348 |
|
|
|
152 |
|
|
|
0.1% |
|
Senior
secured note, 14.00%, plus 3.00% PIK
due
1/31/2011
|
|
|
|
$ |
5,358 |
|
|
|
5,169 |
|
|
|
5,169 |
|
|
|
1.7% |
|
Total
|
|
|
|
|
|
|
|
|
5,621 |
|
|
|
5,425 |
|
|
|
1.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron Horse Coiled
Tubing, Inc.(23)
|
|
Alberta,
Canada/ Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
93 |
|
|
$ |
268 |
|
|
$ |
268 |
|
|
|
0.1% |
|
Senior
secured note, 15.00% due 4/19/2009
|
|
|
|
$ |
9,250 |
|
|
|
8,932 |
|
|
|
8,932 |
|
|
|
3.0% |
|
Total
|
|
|
|
|
|
|
|
|
9,200 |
|
|
|
9,200 |
|
|
|
3.1% |
|
Total
Affiliate
Investments
|
|
|
|
|
|
|
|
|
14,821 |
|
|
|
14,625 |
|
|
|
4.9% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2007
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments (less than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arctic Acquisition
Corp.(11)(23)
|
|
Texas/Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 7/19/2012
|
|
|
|
|
596,251 |
|
|
|
507 |
|
|
|
507 |
|
|
|
0.2% |
|
Warrants,
Series A redeemable preferred shares, expiring 7/19/2012
|
|
|
|
|
1,054 |
|
|
|
507 |
|
|
|
507 |
|
|
|
0.2% |
|
Senior
secured note, 13.00% due 7/19/2009
|
|
|
|
$ |
13,301 |
|
|
|
12,656 |
|
|
|
12,656 |
|
|
|
4.2% |
|
Total
|
|
|
|
|
|
|
|
|
13,670 |
|
|
|
13,670 |
|
|
|
4.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Illinois
Energy, LLC(23)
|
|
Illinois/
Biofuels/
Ethanol
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 15.35%(13)
due 3/31/2014
|
|
|
|
$ |
8,000 |
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
2.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest Cherokee,
LLC(14)(23)
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%(15)
due 5/5/2009
|
|
|
|
$ |
10,200 |
|
|
$ |
10,046 |
|
|
$ |
10,046 |
|
|
|
3.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESA Environmental
Specialist, Inc.(23)
|
|
North
Carolina/ Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 4/11/2017
|
|
|
|
|
1,059 |
|
|
|
1 |
|
|
|
— |
|
|
|
0.0% |
|
Senior
secured note, 14.00% (16)
due 4/11/2011
|
|
|
|
$ |
12,200 |
|
|
|
12,200 |
|
|
|
4,428 |
|
|
|
1.5% |
|
Senior
secured note, 14.00% (16)
due 6/7/2008
|
|
|
|
$ |
1,575 |
|
|
|
1,575 |
|
|
|
572 |
|
|
|
0.2% |
|
Total
|
|
|
|
|
|
|
|
|
13,776 |
|
|
|
5,000 |
|
|
|
1.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evolution Petroleum
Corp.(17)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares, unregistered
|
|
|
|
|
139,926 |
|
|
|
20 |
|
|
|
378 |
|
|
|
0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M Oil & Gas,
LLC(18)(23)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%(19)
due 6/30/2010
|
|
|
|
$ |
45,000 |
|
|
|
45,000 |
|
|
|
45,000 |
|
|
|
15.0% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2007
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jettco Marine Services
LLC(18)
(23)
|
|
Louisiana/
Shipping
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00%(20),
plus 4.0% PIK due 12/31/2011
|
|
|
|
$ |
6,671 |
|
|
|
6,553 |
|
|
|
6,553 |
|
|
|
2.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken-Tex Energy
Corp.(14)
(23)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00% due 6/4/2010
|
|
|
|
$ |
10,750 |
|
|
|
10,750 |
|
|
|
10,750 |
|
|
|
3.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller Petroleum, Inc.
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 5/4/2010 to 6/30/2012
|
|
|
|
|
1,206,859 |
|
|
|
150 |
|
|
|
22 |
|
|
|
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Management
Corp.(23)
|
|
South
Carolina/ Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00%, plus 2.0% PIK due 6/29/2012
|
|
|
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
$ |
25,000 |
|
|
|
8.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker Energy,
LLC(21)
|
|
Ohio/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
revolving credit facility, 12.43% (22)
due 11/30/2011
|
|
|
|
$ |
29,500 |
|
|
|
28,942 |
|
|
|
28,942 |
|
|
|
9.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLOGH,
L.P.(21)
|
|
Texas/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, Due 10/23/2009
|
|
|
|
$ |
15,291 |
|
|
|
15,105 |
|
|
|
15,105 |
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unity Virginia Holdings,
LLC
|
|
Virginia/Mining
and Coal Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 15.00%, plus 15.00% PIK due 1/31/2009
|
|
|
|
$ |
3,580 |
|
|
|
3,871 |
|
|
|
10 |
|
|
|
0.0% |
|
Total
Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
|
180,883 |
|
|
|
168,476 |
|
|
|
56.2% |
|
Total
Portfolio
Investments
|
|
|
|
|
|
|
|
|
326,197 |
|
|
|
328,222 |
|
|
|
109.4% |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June 30,
2007
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity
Institutional Money Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
– Government Portfolio (Class I)
|
|
|
|
|
38,227,118 |
|
|
|
38,227 |
|
|
|
38,227 |
|
|
|
12.7% |
|
First
American Funds, Inc. – Prime Obligations Fund (Class A)
|
|
|
|
|
289,000 |
|
|
|
289 |
|
|
|
289 |
|
|
|
0.1% |
|
First
American Funds, Inc. – Prime Obligations Fund (Class Y)
|
|
|
|
|
3,243,731 |
|
|
|
3,244 |
|
|
|
3,244 |
|
|
|
1.1% |
|
Total
Money Market
Funds
|
|
|
|
|
|
|
|
|
41,760 |
|
|
|
41,760 |
|
|
|
13.9% |
|
Total
Investments
|
|
|
|
|
|
|
|
$ |
367,957 |
|
|
$ |
369,982 |
|
|
|
123.3% |
|
See
notes to consolidated financial statements.
Endnote
Explanations for the Schedule of Investments as of June 30,
2007
(1)
|
The
securities in which we have invested were acquired in transactions that
were exempt from registration under the Securities Act of 1933, as
amended, or the "Securities Act." These securities may be
resold only in transactions that are exempt from registration under the
Securities Act.
|
|
|
(2)
|
Fair
value is determined by or under the direction of our Board of Directors
(Note 2).
|
|
|
(3)
|
We
have the right to purchase 184 shares of Class A common shares at a
purchase price of $1.00 per share in the event of a default under the
credit agreement.
|
|
|
(4)
|
Gas
Solutions Holdings, Inc. is a wholly-owned investment of
us.
|
|
|
(5)
|
Interest
rate is the greater of 15.0% or 6-Month LIBOR plus 11.0%; rate reflected
is as of June 30, 2007.
|
|
|
(6)
|
Interest
rate is the greater of 16.5% or 12-Month LIBOR plus 11.0%; rate reflected
is as of June 30, 2007.
|
|
|
(7)
|
There
are several entities involved in the Whymore investment. The
senior secured debt is with C&A Construction, Inc. ("C&A"), which
owns the equipment. E&L Construction, Inc. ("E&L")
leases the equipment from C&A, employs the workers, is listed as the
operator with the Commonwealth of Kentucky, mines the coal, receives
revenues and pays all operating expenses. Whymore Coal Company,
Inc. ("Whymore") applies for and holds permits on behalf of E&L.
Whymore and E&L are guarantors under the C&A credit agreement with
us. We own 10,000 shares of common stock of C&A (100%
ownership), 10,000 shares of common stock of E&L (100% ownership), and
4,900 shares of common stock of Whymore (49% ownership). We own
4,285 Series A convertible preferred shares in each of C&A, E&L
and Whymore. Additionally, we retain an option to purchase the
remaining 51% of Whymore. As of June 30, 2007, our Board
of Directors assessed a fair value of $1 for all of these equity
positions.
|
|
|
(8)
|
Interest
rate is the greater of 15.0% or 5-Year US Treasury Note plus 11.5%; rate
reflected is as of June 30, 2007.
|
|
|
(9)
|
There
are several entities involved in the Worcester Energy Company, Inc.
investment. We own 100 shares of common stock in Worcester
Energy Holdings, Inc. ("WEHI") representing 100%. WEHI, in
turn, owns 51 membership certificates in Biochips LLC, which represents
51% ownership. We own 282 shares of common stock in Worcester
Energy Co., Inc. ("WECO"), which represents 51% ownership. We
own 1,665 shares of common stock in Worcester Energy Partners, Inc.
("WEPI"), which represents 51% ownership. We also own 1,000 of
series A convertible preferred shares in WEPI. WECO, WEPI and
Biochips LLC are joint borrowers on the term note issued by
us. WEPI owns the equipment and operates the biomass generation
facility. Biochips LLC currently has no material
operations. As of June 30, 2007, our Board of Directors
assessed a fair value of $1 for all of these equity
positions.
|
|
|
(10)
|
There
are several entities involved in the Appalachian Energy Holdings
("Appalachian Energy") investment. We own 100 shares of Class A
common stock of AEH Investment Corp. ("AEH"), 200 shares of Series A
preferred stock of AEH and 6,065 warrants, expiring 2/14/2016 to purchase
Class A common stock. The senior secured note is with C & S
Operating LLC and East Cumberland L.L.C., both operating companies owned
by Appalachian Energy Holdings LLC. AEH owns Appalachian
Energy.
|
|
|
(11)
|
The
Portfolio Investment does business as Cougar Pressure
Control.
|
|
|
(12)
|
Interest
rate is the greater of 14.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2007.
|
|
|
(13)
|
Interest
rate is LIBOR plus 10.0%; rate reflected is as of June 30,
2007.
|
|
|
(14)
|
We
have an overriding royalty interest and net profits interest in the
Portfolio Investment.
|
|
|
(15)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2007.
|
|
|
(16)
|
Interest
rate is the greater of 14.0% or 1-Month LIBOR plus 8.5%; rate reflected is
as of June 30, 2007.
|
|
|
(17)
|
Formerly
known as Natural Gas Systems, Inc.
|
|
|
(18)
|
We
have a net profits interest in the Portfolio
Investment.
|
|
|
(19)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of June 30, 2007.
|
|
|
(20)
|
Interest
rate is the greater of 13.0% or 3-Month LIBOR plus 6.11%; rate reflected
is as of June 30, 2007.
|
|
|
(21)
|
We
have an overriding royalty interest in Portfolio
Investment.
|
|
|
(22)
|
Interest
rate is the greater of 12.0% or 12-Month LIBOR plus 7.0%; rate reflected
is as of June 30, 2007.
|
|
|
(23)
|
Security,
or portion thereof, is held as collateral for the credit facility with
Rabobank Nederland (See Note 10). At June 30, 2007, the
value of these investments was $195,966, which represents 65.3% of net
assets.
|
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2008
(in
thousands, except share and per share data)
Note
1. Organization
References
herein to "we", "us" or "our" refer to Prospect Capital Corporation and its
subsidiary unless the context specifically requires otherwise.
We
were formerly known as Prospect Energy Corporation, a Maryland
corporation. We were organized on April 13, 2004 and were funded
in an initial public offering, or IPO, completed on July 27,
2004. We are a closed-end investment company that has filed an
election to be treated as a Business Development Company, or BDC, under the
Investment Company Act of 1940 (the "1940 Act"). As a BDC, we have
qualified and have elected to be treated as a regulated investment company, or
RIC, under Subchapter M of the Internal Revenue Code. We invest
primarily in senior and subordinated debt and equity of companies in need of
capital for acquisitions, divestitures, growth, development, project financings,
recapitalizations, and other purposes.
On
May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital
Funding, LLC, a Delaware limited liability company, for the purpose of holding
certain of our loan investments in the portfolio which are used as collateral
for our credit facility.
Note
2. Significant Accounting
Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reported period. Changes in
the economic environment, financial markets, creditworthiness of our portfolio
companies and any other parameters used in determining these estimates could
cause actual results to differ.
The
statements include portfolio investments at fair value of $497,530 and $328,222
at June 30, 2008 and June 30, 2007, respectively. At
June 30, 2008 and June 30, 2007, 115.8% and 109.4%, respectively, of
our net assets represented portfolio investments whose fair values have been
determined by the Board of Directors in good faith in the absence of readily
available market values. Because of the inherent uncertainty of
valuation, the Board of Directors' determined values may differ significantly
from the values that would have been used had a ready market existed for the
investments, and the differences could be material.
The
following are significant accounting policies consistently applied by
us:
Consolidation
Under
the 1940 Act rules, the regulations pursuant to Article 6 of Regulation
S-X, and the American Institute of Certified Public Accountants' Audit and
Accounting Guide for Investment Companies, we are precluded from consolidating
any entity other than another investment company or an operating company which
provides substantially all of its services and benefits to us. Our
June 30, 2008 financial statements include our accounts and the accounts of
Prospect Capital Funding, LLC, our only wholly-owned, closely- managed
subsidiary that is also an investment company. All intercompany
balances and transactions have been eliminated in consolidation.
Investments
a)
|
Security
transactions are recorded on a trade-date
basis.
|
|
1)
|
Investments
for which market quotations are readily available are valued at such
market quotations.
|
|
2)
|
Short-term
investments that mature in 60 days or less, such as United States
Treasury Bills, are valued at amortized cost, which approximates fair
value. The amortized cost method involves recording a security
at its cost (i.e., principal amount
plus any premium and less any discount) on the date of purchase and
thereafter amortizing/accreting that difference between the principal
amount due at maturity and cost assuming a constant yield to maturity as
determined at the time of purchase. Short-term securities that
mature in more than 60 days are valued at current market quotations
by an independent pricing service or at the mean between the bid and ask
prices obtained from at least two brokers or dealers (if available, or
otherwise by a principal market maker or a primary market
dealer). Investments in money market mutual funds are valued at
their net asset value as of the close of business on the day of
valuation.
|
|
3)
|
It
is expected that most of the investments in our portfolio will not have
actively traded markets. Debt and equity securities which do
not have actively traded markets are valued with the assistance of an
independent valuation service using a documented valuation policy and a
valuation process that is consistently applied under the direction of our
Board of Directors. The factors that may be taken into account
in fairly valuing investments include, as relevant, the portfolio
company's ability to make payments, its estimated earnings and projected
discounted cash flows, the nature and realizable value of any collateral,
the sensitivity of the investments to fluctuations in interest rates,
changes in the market interest rates, the financial environment in which
the portfolio company operates, comparisons to securities of similar
publicly traded companies, changes in interest rates for similar debt
instruments, and other relevant factors. Due to the inherent
uncertainty of determining the fair value of investments that are not
actively traded, the fair value of these investments may differ
significantly from the values that would have been used had an actively
traded market existed for such investments, and any such differences could
be material.
|
|
4)
|
In
September 2006, the Financial Accounting Standards Board ("FASB") issued a
new pronouncement addressing fair value measurements, Statement of
Financial Accounting Standards Number 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value measurements. SFAS 157 becomes effective for fiscal years
beginning after November 15, 2007; therefore, its first applicability
to us will be for our upcoming fiscal year beginning July 1,
2008. We do not believe that the adoption of SFAS 157 will
materially impact the amounts reported in our financial statements,
however, additional disclosures will be required about the inputs used to
develop the measurements and the effect of certain of the measurements
reported to changes in net assets for a fiscal
period.
|
|
5)
|
In
February 2007, FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115". SFAS 159 permits an entity to elect
fair value as the initial and subsequent measurement attribute for many of
assets and liabilities for which the fair value option has been elected
and similar assets and liabilities measured using another measurement
attribute. SFAS 159 becomes effective for fiscal years
beginning after November 15, 2007 and, therefore, is applicable for
our upcoming fiscal year beginning July 1, 2008. Our
management does not believe that the adoption of SFAS No. 159 will
have a material impact on our financial
statements.
|
|
6)
|
In
March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133". SFAS 161 is intended to improve financial
reporting for derivative instruments by requiring enhanced disclosure that
enables investors to understand how and why the entity uses derivatives,
how derivatives are accounted for, and how derivative affect an entity's
results of operations, financial position, and cash flows. SFAS
161 becomes effective for fiscal years beginning after November 15,
2008 and, therefore, is applicable for our fiscal year beginning
July 1, 2009. Our management does not believe that the
adoption of SFAS No. 161 will have a material impact on our financial
statements.
|
|
7)
|
In
March 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS 162 identifies the sources of
accounting principles and the framework for
|
|
|
selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with US
GAAP. This statement is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Our management does
not believe that the adoption of SFAS No. 162 will have a material
impact on our financial
statements.
|
c)
|
Realized
gains or losses on the sale of investments are calculated using the
specific identification method.
|
d)
|
Interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing and/or
commitment fees associated with investments in portfolio companies are
accreted into interest income over the respective terms of the applicable
loans. Upon the prepayment of a loan or debt security, any
prepayment penalties and unamortized loan origination, closing and
commitment fees are recorded as interest
income.
|
e)
|
Dividend
income is recorded on the ex-dividend
date.
|
f)
|
Structuring
fees and similar fees are recognized as income as earned, usually when
paid. Structuring fees, excess deal deposits, net profits
interests and overriding royalty interest are included in other
income.
|
g)
|
Loans
are placed on non-accrual status when principal or interest payments are
past due 90 days or more or when there is reasonable doubt that
principal or interest will be collected. Accrued interest is
generally reversed when a loan is placed on non-accrual
status. Interest payments received on non-accrual loans may be
recognized as income or applied to principal depending upon management's
judgment. Non-accrual loans are restored to accrual status when
past due principal and interest is paid and in management's judgment, are
likely to remain current. As of June 30, 2008,
approximately 0.9% of our net assets are in non-accrual
status.
|
U.S.Federal and State Income
Taxes
We
have elected to be treated as a regulated investment company and intend to
continue to comply with the requirements of the Internal Revenue Code of 1986
(the "Code"), applicable to regulated investment companies. We are
required to distribute at least 90% of our investment company taxable income and
intend to distribute (or retain through a deemed distribution) all of our
investment company taxable income and net capital gain to stockholders;
therefore, we have made no provision for income taxes. The character
of income and gains that we will distribute is determined in accordance with
income tax regulations that may differ from GAAP. Book and tax basis
differences relating to stockholder dividends and distributions and other
permanent book and tax differences are reclassified to paid-in
capital.
If
we do not distribute (or are not deemed to have distributed) at least 98% of our
annual taxable income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our annual taxable
income exceeds the distributions from such taxable income for the
year. To the extent that we determine that our estimated current year
annual taxable income will be in excess of estimated current year dividend
distributions from such taxable income, we accrue excise taxes, if any, on
estimated excess taxable income as taxable income is earned using an annual
effective excise tax rate. The annual effective excise tax rate is
determined by dividing the estimated annual excise tax by the estimated annual
taxable income.
We
adopted Financial Accounting Standards Board Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes. 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 our tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not
threshold are recorded as a tax benefit or expense in the current
year. Adoption of FIN 48 was applied to all open tax years as of
July 1, 2007. The adoption of FIN 48 did not have an effect on
our net asset value, financial condition or results of operations as there was
no liability for unrecognized tax benefits and no change to our beginning net
asset value. As of June 30, 2008 and for the year then ended, we
did not have a liability for any unrecognized tax
benefits. Management's determinations regarding FIN 48 may be subject
to review and adjustment
at
a later date based upon factors including, but not limited to, an on-going
analysis of tax laws, regulations and interpretations
thereof.
Dividends and
Distributions
Dividends
and distributions to common stockholders are recorded on the ex-dividend
date. The amount, if any, to be paid as a dividend is approved by our
Board of Directors each quarter and is generally based upon our management's
estimate of our earnings for the quarter. Net realized capital gains,
if any, are distributed at least annually.
Financing Costs
We
record origination expenses related to our credit facility as deferred financing
costs. These expenses are deferred and amortized as part of interest
expense using the straight-line method over the stated life of the
facility.
We
record registration expenses related to shelf filings as prepaid
assets. These expenses consist principally of SEC registration, legal
and accounting fees incurred through June 30, 2008 that are related to the
shelf filings that will be charged to capital upon the receipt of the capital or
charged to expense if not completed.
Guarantees and Indemnification
Agreements
We
follow FASB Interpretation Number 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." ("FIN 45"). FIN 45 elaborates on the disclosure
requirements of a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also
requires a guarantor to recognize, at the inception of a guarantee, for those
guarantees that are covered by FIN 45, the fair value of the obligation
undertaken in issuing certain guarantees. FIN 45 did not have a
material effect on the financial statements. Refer to Note 3 and Note
7 for further discussion of guarantees and indemnification
agreements.
Per Share Information
Net
increase in net assets resulting from operations per common share, or Basic
Earnings Per Share, are calculated using the weighted average number of common
shares outstanding for the period presented. Diluted earnings per
share are not presented as there are no potentially dilutive securities
outstanding.
Reclassifications
Certain
reclassifications have been made in the presentation of the 2007 and 2006
consolidated financial statements to conform to the current year
presentation.
Note
3. Portfolio
Investments
At
June 30, 2008, 115.8% of our net assets or about $497,530 was invested in
29 long-term portfolio investments (including a net profits interest in
Charlevoix Energy Trading LLC) and 7.6% of our net assets was invested in money
market funds. The remainder (23.4%) of our net assets represented
liabilities in excess of other assets. At June 30, 2007, 109.4%
of our net assets or about $328,222 was invested in 24 long-term portfolio
investments (including a net profits interest in Charlevoix Energy Trading LLC)
and 13.9% of our net assets was invested in money market funds. The
remainder (23.3%) of our net assets represented liabilities in excess of other
assets. We are a non-diversified company within the meaning of the
1940 Act. We classify our investments by level of
control. As defined in the 1940 Act, control investments are those
where there is the ability or power to exercise a controlling influence over the
management or policies of a company. Control is generally deemed to
exist when a company or individual owns more than 25% or more of the voting
securities of an investee company. Affiliated investments and
affiliated companies are defined by a lesser degree of influence and are deemed
to exist through ownership of 5% or more but less than 25% of the outstanding
voting securities of another person. As of June 30, 2008, we own
controlling interests in Ajax Rolled Ring & Machine, or Ajax, C&J
Cladding, LLC, or C&J, Gas Solutions Holdings, Inc., or GSHI, Integrated
Contract Services, Inc., or Integrated, Iron Horse Coiled Tubing, Inc., or Iron
Horse, NRG Manufacturing, Inc., or NRG, R-V Industries, Inc., or R-V, Worcester
Energy Partners,
Inc.,
or WEPI, and Yatesville Coal Holdings, Inc., or Yatesville. We also
own an affiliated interest in Appalachian Energy Holdings, LLC, or
AEH. We have no other controlled or affiliated
investments.
GSHI
has indemnified us against any legal action arising from its investment in Gas
Solutions, LP. We have incurred approximately $1,914 from the
inception of the investment in GSHI through June 30, 2008 for fees
associated with a legal action, and GSHI has reimbursed us for the entire
amount. Of the $1,914 reimbursement $118, $178, and $941 are
reflected as Dividend income: Control investments on the accompanying
Consolidated Statements of Operations for the years ended June 30, 2008,
June 30, 2007 and June 30, 2006,
respectively. Additionally, certain other expenses incurred by us
which are attributable to GSHI have been reimbursed by GSHI and are reflected as
Dividend income: Control investments on the accompanying Consolidated
Statements of Operations as $4,589, $2,578, and $2,226 for the years ended
June 30, 2008, June 30, 2007 and June 30, 2006,
respectively.
Debt
placements and interests in equity securities with an original cost basis of
approximately $311,947, $167,255, and $83,625 were acquired during the years
ended June 30, 2008, June 30, 2007 and June 30, 2006,
respectively. Debt repayments and sales of equity securities with a
cost basis of approximately $143,434, $36,458, and $9,651 were made during the
years ended June 30, 2008, June 30, 2007 and June 30, 2006,
respectively.
From
time to time, we provide guarantees for portfolio companies for payments to
counterparties, usually as an alternative to investing additional
capital. Currently, agreements for two guarantees and one
indemnification are outstanding which are related to two portfolio companies
categorized as Control Investments – Whymore Coal Company, Inc., now
consolidated as part of Yatesville, and North Fork Collieries LLC, or North
Fork. The two guarantees are related to Whymore with one in the
amount of $3,478 for equipment leases and another of $416 for a
"payment-over-time" contract for coal purchases. The contingent
indemnification obligation arose from our acquisition of the assets of Traveler
Coal, LLC, or Traveler, through our subsidiary, North
Fork. Specifically, as part of that acquisition, we have agreed to
indemnify the seller of those assets for personal guarantees that that seller
had extended on behalf of Traveler. The amount of this contingency
may reach $5,000. We also guarantee the obligation of WEPI as it
relates to the Cousineau Forest Products, Inc. acting as the fuel provider to
WEPI. The guaranty is limited to a maximum of $300.
Note
4. Other Investment
Income
Other
investment income consists of structuring fees, overriding royalty interests,
prepayment penalty on net profits interest, deal deposits, administrative agent
fee, and other miscellaneous and sundry cash receipts. Income from
such sources was $8,336 and $4,444 for the years ended June 30, 2008 and
June 30, 2007, respectively. There was no such income for the
year ended June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structuring
fees
|
|
$ |
4,751 |
|
|
$ |
2,574 |
|
|
$ |
— |
|
Overriding
royalty
interests
|
|
|
1,819 |
|
|
|
196 |
|
|
|
— |
|
Prepayment
penalty on net profits
interests
|
|
|
1,659 |
|
|
|
986 |
|
|
|
— |
|
Deal
deposit
|
|
|
49 |
|
|
|
688 |
|
|
|
— |
|
Administrative
agent
fee
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
Miscellaneous
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
Other
Investment Income
|
|
$ |
8,336 |
|
|
$ |
4,444 |
|
|
$ |
— |
|
Note 5.
Equity Offerings and Related
Expenses
During
the year ended June 30, 2008, we issued 9,400,000 shares of our common
stock through public offerings, a registered direct offering, and through the
exercises of an over-allotment options on the part of the
underwriters. Offering expenses were charged against paid-in capital
in excess of par. All underwriting fees and offering expenses were
borne by us. The proceeds raised, the related underwriting fees, the
offering expenses, and the prices at which common stocks were issued since
inception are detailed in the table which follows:
Issuances
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
2,
2008
|
|
|
3,250,000 |
|
|
$ |
48,425 |
|
|
$ |
2,406 |
|
|
$ |
254 |
|
|
$ |
14.900 |
|
March
31,
2008
|
|
|
1,150,000 |
|
|
$ |
17,768 |
|
|
$ |
759 |
|
|
$ |
350 |
|
|
$ |
15.450 |
|
March
28,
2008
|
|
|
1,300,000 |
|
|
|
19,786 |
|
|
|
— |
|
|
|
350 |
|
|
|
15.220 |
|
November
13, 2007
over-allotment
|
|
|
200,000 |
|
|
$ |
3,268 |
|
|
$ |
163 |
|
|
$ |
— |
|
|
$ |
16.340 |
|
October
17,
2007
|
|
|
3,500,000 |
|
|
|
57,190 |
|
|
|
2,860 |
|
|
|
551 |
|
|
|
16.340 |
|
January
11, 2007
over-allotment
|
|
|
810,000 |
|
|
$ |
14,026 |
|
|
$ |
688 |
|
|
$ |
— |
|
|
$ |
17.315 |
(1) |
December
13,
2006
|
|
|
6,000,000 |
|
|
|
106,200 |
|
|
|
5,100 |
|
|
|
279 |
|
|
|
17.700 |
|
August
28, 2006
over-allotment
|
|
|
745,650 |
|
|
$ |
11,408 |
|
|
$ |
566 |
|
|
$ |
— |
|
|
$ |
15.300 |
|
August
10,
2006
|
|
|
4,971,000 |
|
|
|
76,056 |
|
|
|
3,778 |
|
|
|
595 |
|
|
|
15.300 |
|
August
27, 2004
over-allotment
|
|
|
55,000 |
|
|
$ |
825 |
|
|
$ |
58 |
|
|
$ |
2 |
|
|
$ |
15.000 |
|
July
27,
2004
|
|
|
7,000,000 |
|
|
|
105,000 |
|
|
|
7,350 |
|
|
|
1,385 |
|
|
|
15.000 |
|
____________________
(1)
|
We
declared a dividend of $0.385 per share between offering and
over-allotment dates.
|
Note
6. Net Increase in Net Assets per Common Share
The
following information sets forth the computation of net increase in net assets
resulting from operations per common share for the years ended June 30,
2008, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from
operations
|
|
$ |
27,591 |
|
|
$ |
16,728 |
|
|
$ |
12,896 |
|
Weighted
average common shares
outstanding
|
|
|
23,626,642 |
|
|
|
15,724,095 |
|
|
|
7,056,846 |
|
Net
increase in net assets resulting from operations per common
share
|
|
$ |
1.17 |
|
|
$ |
1.06 |
|
|
$ |
1.83 |
|
Note
7. Related Party Agreements and
Transactions
Investment Advisory
Agreement
We
have entered into an investment advisory and management agreement with Prospect
Capital Management (the "Investment Advisory Agreement") under which the
Investment Adviser, subject to the overall supervision of our Board of
Directors, manages the day-to-day operations of, and provides investment
advisory services to, us. Under the terms of the Investment Advisory
Agreement, our Investment Adviser: (i) determines the composition of
our portfolio, the nature and timing of the changes to our portfolio and the
manner of implementing such changes, (ii) identifies, evaluates and negotiates
the structure of the investments we make (including performing due diligence on
our prospective portfolio companies); and (iii) closes and monitors investments
we make.
Prospect
Capital Management's services under the Investment Advisory Agreement are not
exclusive, and it is free to furnish similar services to other entities so long
as its services to us are not impaired. For providing these services
the Investment Adviser receives a fee from us, consisting of two
components: a base management fee and an incentive
fee. The base management fee is calculated at an annual rate of 2.00%
on our gross assets (including amounts borrowed). For services
currently rendered under the Investment Advisory Agreement, the base management
fee is payable quarterly in arrears. The base management fee is
calculated based on the average value of our gross assets at the end of the two
most recently completed calendar quarters and appropriately adjusted for any
share issuances or repurchases during the current calendar quarter.
The
Investment Adviser had previously voluntarily agreed to waive 0.5% of the base
management fee if in the future the average amount of our gross assets for each
of the two most recently completed calendar quarters at that time, appropriately
adjusted for any share issuances, repurchases or other transactions during such
quarters, exceeds $750,000,000, for that portion of the average amount of our
gross assets that exceeds $750,000,000. The voluntary agreement by
the Investment Adviser for such waiver for each fiscal quarter after
December 31, 2007 has been terminated by the Investment
Adviser.
The
total base management fees earned by and paid to Prospect Capital Management for
the years ended June 30, 2008, June 30, 2007 and June 30, 2006
were $8,921, $5,445, and $2,082, respectively.
The
incentive fee has two parts. The first part, the income incentive
fee, is calculated and payable quarterly in arrears based on our pre-incentive
fee net investment income for the immediately preceding calendar
quarter. For this purpose, pre-incentive fee net investment income
means interest income, dividend income and any other income (including any other
fees (other than fees for providing managerial assistance), such as commitment,
origination, structuring, diligence and consulting fees and other fees that we
receive from portfolio companies) accrued during the calendar quarter, minus our
operating expenses for the quarter (including the base management fee, expenses
payable under the Administration Agreement described below, and any interest
expense and dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income
includes, in the case of investments with a deferred interest feature (such as
original issue discount, debt instruments with payment in kind interest and zero
coupon securities), accrued income that we have not yet received in
cash. Pre-incentive fee net investment income does not include any
realized capital gains, realized capital losses or unrealized capital
appreciation or depreciation. Pre-incentive fee net investment
income, expressed as a rate of return on the value of our net assets at the end
of the immediately preceding calendar quarter, is compared to a "hurdle rate" of
1.75% per quarter (7.00% annualized).
Previously,
our Investment Adviser had voluntarily agreed that for each fiscal quarter from
January 1, 2005 to March 31, 2007, the quarterly hurdle rate was to be
equal to the greater of (a) 1.75% and (b) a percentage equal to the sum of 25.0%
of the daily average of the "quoted treasury rate" for each month in the
immediately preceding two quarters plus 0.50%. "Quoted treasury rate"
means the yield to maturity (calculated on a semi-annual bond equivalent basis)
at the time of computation for Five Year U.S. Treasury notes with a constant
maturity (as compiled and published in the most recent U.S. Federal Reserve
Statistical Release H). These calculations were to be appropriately
prorated for any period of less than three months and adjusted for any share
issuances or repurchases during the current quarter. The voluntary
agreement by the Investment Adviser that the hurdle rate be fluctuating for each
fiscal quarter after January 1, 2005 (as discussed above) was terminated by
the Investment Adviser as of the June 30, 2007, quarter. The
investment adviser had also voluntarily agreed that, in the event it is paid an
incentive fee at a time when our common stock is trading at a price below $15
per share for the immediately preceding 30 days (as adjusted for stock
splits, recapitalizations and other transactions), it will cause the amount of
such incentive fee payment to be held in an escrow account by an independent
third party, subject to applicable regulations. The Investment
Adviser had further agreed that this amount may not be drawn upon by the
Investment Adviser or any affiliate or any other third party until such time as
the price of our common stock achieves an average 30 day closing price of
at least $15 per share. The Investment Adviser also had voluntarily
agreed to cause 30% of any incentive fee that it is paid and that is not
otherwise held in escrow to be invested in shares of our common stock through an
independent trustee. Any sales of such stock were to comply with any
applicable six month holding period under Section 16(b) of the Securities
Act and all other restrictions contained in any law or regulation, to the
fullest extent applicable to any such sale. These two voluntary
agreements by the Investment Adviser have been terminated by the Investment
Adviser for all incentive fees after December 31, 2007.
The
net investment income used to calculate this part of the incentive fee is also
included in the amount of the gross assets used to calculate the 2.00% base
management fee. We pay the Investment Adviser an income incentive fee
with respect to our pre-incentive fee net investment income in each calendar
quarter as follows:
|
·
|
no
incentive fee in any calendar quarter in which our pre-incentive fee net
investment income does not exceed the hurdle rate;
|
|
|
|
|
·
|
100.00%
of our pre-incentive fee net investment income with respect to that
portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle
rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized
hurdle rate); and
|
|
|
|
|
·
|
20.00%
of the amount of our pre-incentive fee net investment income, if any, that
exceeds 125.00% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized assuming a 7.00% annualized hurdle
rate).
|
These
calculations are appropriately prorated for any period of less than three months
and adjusted for any share issuances or repurchases during the current
quarter.
The
second part of the incentive fee, the capital gains incentive fee, is determined
and payable in arrears as of the end of each calendar year (or upon termination
of the Investment Advisory Agreement, as of the termination date), and equals
20.00% of our realized capital gains for the calendar year, if any, computed net
of all realized
capital
losses and unrealized capital depreciation at the end of such
year. In determining the capital gains incentive fee payable to the
Investment Adviser, we calculate the aggregate realized capital gains, aggregate
realized capital losses and aggregate unrealized capital depreciation, as
applicable, with respect to each investment that has been in its
portfolio. For the purpose of this calculation, an "investment" is
defined as the total of all rights and claims which maybe asserted against a
portfolio company arising from our participation in the debt, equity, and other
financial instruments issued by that company. Aggregate realized
capital gains, if any, equals the sum of the differences between the aggregate
net sales price of each investment and the aggregate cost basis of such
investment when sold or otherwise disposed. Aggregate realized
capital losses equal the sum of the amounts by which the aggregate net sales
price of each investment is less than the aggregate cost basis of such
investment when sold or otherwise disposed. Aggregate unrealized
capital depreciation equals the sum of the differences, if negative, between the
aggregate valuation of each investment and the aggregate cost basis of such
investment as of the applicable calendar year-end. At the end of the
applicable calendar year, the amount of capital gains that serves as the basis
for our calculation of the capital gains incentive fee involves netting
aggregate realized capital gains against aggregate realized capital losses on a
since-inception basis and then reducing this amount by the aggregate unrealized
capital depreciation. If this number is positive, then the capital
gains incentive fee payable is equal to 20.00% of such amount, less the
aggregate amount of any capital gains incentive fees paid since
inception.
$11,278,
$5,781, and $1,786 income incentive fees were earned for the years ended
June 30, 2008, June 30, 2007 and June 30, 2006,
respectively. No capital gains incentive fees were earned for years
ended June 30, 2008, June 30, 2007 and June 30,
2006.
Administration
Agreement
We
have also entered into an Administration Agreement with Prospect Administration,
LLC ("Prospect Administration") under which Prospect Administration, among other
things, provides (or arranges for the provision of) administrative services and
facilities for us. For providing these services, we reimburse
Prospect Administration for our allocable portion of overhead incurred by
Prospect Administration in performing its obligations under the Administration
Agreement, including rent and our allocable portion of the costs of our chief
compliance officer and chief financial officer and their respective
staffs. Under this agreement, Prospect Administration furnishes us
with office facilities, equipment and clerical, bookkeeping and record keeping
services at such facilities. Prospect Administration also performs,
or oversees the performance of, our required administrative services, which
include, among other things, being responsible for the financial records that we
are required to maintain and preparing reports to our stockholders and reports
filed with the SEC. In addition, Prospect Administration assists us
in determining and publishing our net asset value, overseeing the preparation
and filing of our tax returns and the printing and dissemination of reports to
our stockholders, and generally oversees the payment of our expenses and the
performance of administrative and professional services rendered to us by
others. Under the Administration Agreement, Prospect Administration
also provides on our behalf managerial assistance to those portfolio companies
to which we are required to provide such assistance. The
Administration Agreement may be terminated by either party without penalty upon
60 days' written notice to the other party. Prospect
Administration is a wholly owned subsidiary of our Investment
Adviser.
The
Administration Agreement provides that, absent willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration and its
officers, managers, partners, agents, employees, controlling persons, members
and any other person or entity affiliated with it are entitled to
indemnification from us for any damages, liabilities, costs and expenses
(including reasonable attorneys' fees and amounts reasonably paid in settlement)
arising from the rendering of Prospect Administration's services under the
Administration Agreement or otherwise as administrator for us.
Prospect
Administration, pursuant to the approval of our Board of Directors, has engaged
Vastardis Fund Services LLC ("Vastardis") to serve as our sub-administrator to
perform certain services required of Prospect Administration. This
engagement began in May 2005 and ran on a month-to-month basis at the rate of
$25 annually, payable monthly. Under the sub-administration
agreement, Vastardis provides us with office facilities, equipment, clerical,
bookkeeping and record keeping services at such facilities. Vastardis
also conducts relations with custodians, depositories, transfer agents, dividend
disbursing agents, other stockholder servicing agents, accountants, attorneys,
underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and
such other persons in any such other capacity deemed to be necessary or
desirable. Vastardis provides reports to the Administrator and the
Directors of its performance of obligations and furnishes advice and
recommendations with respect to such other
aspects
of our business and affairs as it shall determine to be
desirable. Under the revised and renewed sub-administration
agreement, Vastardis also provides the service of William E. Vastardis as our
Chief Financial Officer, or CFO. This service was formerly provided
at the rate of $225 annually, payable monthly. In May 2006, the
engagement was revised and renewed as an asset-based fee with a $400 annual
minimum, payable monthly. Vastardis does not provide any advice or
recommendation relating to the securities and other assets that we should
purchase, retain or sell or any other investment advisory services to
us. Vastardis is responsible for the financial and other records that
either the Administrator on our behalf or we are required to maintain and
prepares reports to stockholders, and reports and other materials filed with the
SEC. In addition, Vastardis assists us in determining and publishing
our net asset value, overseeing the preparation and filing of our tax returns,
and the printing and dissemination of reports to our stockholders, and generally
overseeing the payment of our expenses and the performance of administrative and
professional services rendered to us by others.
Under
the sub-administration agreement, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis, are not liable to the Administrator or us for any
action taken or omitted to be taken by Vastardis in connection with the
performance of any of its duties or obligations or otherwise as
sub-administrator for the Administrator on our behalf. The agreement
also provides that, absent willful misfeasance, bad faith or negligence in the
performance of Vastardis' duties or by reason of the reckless disregard of
Vastardis' duties and obligations, Vastardis and its officers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with Vastardis are entitled to indemnification from the Administrator
and us. All damages, liabilities, costs and expenses (including
reasonable attorneys' fees and amounts reasonably paid in settlement) incurred
in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Administrator or us or our security holders) arising out of or
otherwise based upon the performance of any of Vastardis' duties or obligations
under the agreement or otherwise as sub-administrator for the Administrator on
our behalf are subject to such indemnification.
Managerial
Assistance
As
a business development company, we offer, and must provide upon request,
managerial assistance to certain of our portfolio companies. This
assistance could involve, among other things, monitoring the operations of our
portfolio companies, participating in board and management meetings, consulting
with and advising officers of portfolio companies and providing other
organizational and financial guidance. We have received $692, $452,
$193 in managerial assistance fees for the years ended June 30, 2008,
June 30, 2007, and June 30, 2006, respectively. These fees
are paid to the Administrator.
Note
8. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended June 30, 2004(3)
|
|
Per
Share Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value at beginning of period
|
|
$ |
15.04 |
|
|
$ |
15.31 |
|
|
$ |
14.59 |
|
|
$ |
(0.01 |
) |
|
$ |
— |
|
Costs
related to the initial public offering
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
|
|
(0.21 |
) |
|
|
— |
|
Costs
related to the secondary public offering
|
|
|
(0.07 |
) |
|
|
(0.06 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net
investment
income
|
|
|
1.91 |
|
|
|
1.47 |
|
|
|
1.21 |
|
|
|
0.34 |
|
|
|
— |
|
Realized
gain
(loss)
|
|
|
(0.69 |
) |
|
|
0.12 |
|
|
|
0.04 |
|
|
|
— |
|
|
|
— |
|
Net
unrealized appreciation (depreciation)
|
|
|
(0.05 |
) |
|
|
(0.52 |
) |
|
|
0.58 |
|
|
|
0.90 |
|
|
|
— |
|
Net
increase in net assets as a result of public offering
|
|
|
— |
|
|
|
0.26 |
|
|
|
— |
|
|
|
13.95 |
|
|
|
— |
|
Dividends
declared and
paid
|
|
|
(1.59 |
) |
|
|
(1.54 |
) |
|
|
(1.12 |
) |
|
|
(0.38 |
) |
|
|
— |
|
Net
asset value at end of
period
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
|
$ |
15.31 |
|
|
$ |
14.59 |
|
|
$ |
— |
|
Per
share market value at end of period
|
|
$ |
13.18 |
|
|
$ |
17.47 |
|
|
$ |
16.99 |
|
|
$ |
12.60 |
|
|
$ |
— |
|
Total
return based on market value(2)
|
|
|
(15.90 |
%) |
|
|
12.65 |
% |
|
|
44.90 |
% |
|
|
(13.46 |
%) |
|
|
— |
|
Total
return based on net asset value(2)
|
|
|
7.84 |
% |
|
|
7.62 |
% |
|
|
12.76 |
% |
|
|
7.40 |
% |
|
|
— |
|
Shares
outstanding at end of period
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
|
|
7,069,873 |
|
|
|
7,055,100 |
|
|
|
— |
|
Average
weighted shares outstanding for period
|
|
|
23,626,642 |
|
|
|
15,724,095 |
|
|
|
7,056,846 |
|
|
|
7,055,100 |
|
|
|
— |
|
Ratio
/ Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets at end of period (in thousands)
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
|
$ |
108,270 |
|
|
$ |
102,967 |
|
|
$ |
— |
|
Annualized
ratio of operating expenses to average net assets
|
|
|
9.62 |
% |
|
|
7.36 |
% |
|
|
8.19 |
% |
|
|
5.52 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended June 30, 2004(3)
|
|
Annualized
ratio of net operating income to average net assets
|
|
|
12.66 |
% |
|
|
9.71 |
% |
|
|
7.90 |
% |
|
|
8.50 |
% |
|
|
— |
|
(1)
|
Financial
highlights are based on weighted average
shares.
|
(2)
|
Total
return based on market value is based on the change in market price per
share between the opening and ending market prices per share in each
period and assumes that dividends are reinvested in accordance with our
dividend reinvestment plan. Total return based on net asset
value is based upon the change in net asset value per share between the
opening and ending net asset values per share in each period and assumes
that dividends are reinvested in accordance with our dividend reinvestment
plan. The total returns are not
annualized.
|
(3)
|
Financial
Highlights as of June 30, 2004 are considered not applicable as the
initial offering of common stock did not occur as of this
date.
|
Note
9. Litigation
From
time to time, we may become involved in various investigations, claims and legal
proceedings that arise in the ordinary course of our business. These
matters may relate to intellectual property, employment, tax, regulation,
contract or other matters. The resolution of these matters as they
arise will be subject to various uncertainties and, even if such claims are
without merit, could result in the expenditure of significant financial and
managerial resources.
On
December 6, 2004, Dallas Gas Partners, L.P. ("DGP") served us with a
complaint filed November 30, 2004 in the U.S. District for the Southern
District of Texas, Galveston Division. DGP alleges that DGP was
defrauded and that we breached our fiduciary duty to DGP and tortiously
interfered with DGP's contract to purchase Gas Solutions, Ltd. (a subsidiary of
our portfolio company, GSHI) in connection with our alleged agreement in
September 2004 to loan DGP funds with which DGP intended to buy Gas Solutions,
Ltd. for approximately $26,000. The complaint sought relief not
limited to $100,000. On November 30, 2005, U.S. Magistrate Judge
John R. Froeschner of the U.S. District Court for the Southern District of
Texas, Galveston Division, issued a recommendation that the court grant our
Motion for Summary Judgment dismissing all claims by DGP. On
February 21, 2006, U.S. District Judge Samuel Kent of the U.S. District
Court for the Southern District of Texas, Galveston Division issued an order
granting our Motion for Summary Judgment dismissing all claims by DGP, against
us. On May 16, 2007, the Court also granted us summary judgment
on DGP's liability to us on our counterclaim for DGP's breach of a release and
covenant not to sue. On January 4, 2008, the Court, Judge
Melinda Harmon presiding, granted our motion to dismiss all DGP's claims
asserted against certain of our officers and affiliates. On
August 20, 2008, Judge Harmon entered a Final Judgment dismissing all of
DGP's claims. Our damage claims against DGP remain
pending.
In
May 2006, based in part on unfavorable due diligence and the absence of
investment committee approval, we declined to extend a loan for $10 million
to a potential borrower ("plaintiff"). Plaintiff was subsequently
sued by its own attorney in a local Texas court for plaintiff's failure to pay
fees owed to its attorney. In December 2006, plaintiff filed a
cross-action against us and certain affiliates (the "defendants") in the same
local Texas court, alleging, among other things, tortious interference with
contract and fraud. We petitioned the United States District Court
for the Southern District of New York (the "District Court") to compel
arbitration and to enjoin the Texas action. In February 2007, our
motions were granted. Plaintiff appealed that decision. On
July 24, 2008, the Second Circuit Court of Appeals affirmed the judgment of
the District Court. The arbitration commenced in July 2007 and
concluded in late November 2007. Post-hearing briefings were
completed in February 2008. On April 14, 2008, the arbitrator
rendered an award in our favor, rejecting all of plaintiff's
claims. On April 18, 2008, we filed a petition before the
District Court to confirm the award, which is now pending.
Note 10. Revolving Credit
Agreements
On
February 21, 2006, we entered into a $20,000 senior secured revolving
credit facility (the "Previous Credit Facility") with Bank of Montreal as
administrative agent and Harris Nesbitt Corp. as sole lead arranger and sole
book runner. The Previous Credit Facility supplemented our equity
capital and provided funding for additional portfolio
investments. All amounts borrowed under the Previous Credit Facility
would have matured, and all accrued and unpaid interest thereunder would have
been due and payable within six months of the date of the
borrowing. The Previous Credit Facility had a termination date of
August 21, 2006. On May 11, 2006, the Previous Credit
Facility was increased to $30,000.
On
July 26, 2006, we closed a $50,000 revolving credit facility (the
"Facility") with HSH Nordbank AG as administrative agent and sole lead arranger,
replacing the $30,000 Previous Credit Facility. This Facility was
used, together with our equity capital, to make additional long-term
investments. Interest on borrowings under the Facility is charged, at
our option, at either (i) LIBOR plus the applicable spread, ranging from 200 to
250 basis points (the refinanced facility being at 250 basis points over LIBOR),
or (ii) the greater of the lender prime rate or the U.S. Federal funds effective
rate plus 50 to 100 basis points. The applicable spread decreases as
our equity base increases.
On
June 6, 2007, we closed on a $200,000 three-year revolving credit facility
(as amended on December 31, 2007) with Rabobank Nederland as administrative
agent and sole lead arranger (the "Rabobank Facility"). The Rabobank
Facility refinanced the $50,000 Facility with HSH Nordbank
AG. Interest on the Rabobank Facility is charged at LIBOR plus 175
basis points. Additionally, Rabobank charges a fee on the unused
portion of the facility. Through November 30, 2007, this fee is
assessed at the rate of 37.5 basis points per annum of the amount of that unused
portion; after that date, this rate increases to 50.0 basis points per annum if
that unused portion is greater than 50% of the total amount of the
facility. At June 30, 2008, the investments used as collateral
for the Rabobank Facility had an aggregate market value of $369,418, which
represents 86.0% of net assets.
As
of June 30, 2008, we had drawn down $91,167 on the Rabobank
Facility.
Note 11. Selected Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
Net
Realized and Unrealized Gains (Losses)
|
|
|
Net
Increase (Decrease) in Net Assets from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
2005
|
|
|
3,109 |
|
|
|
0.44 |
|
|
|
1,415 |
|
|
|
0.20 |
|
|
|
58 |
|
|
|
0.01 |
|
|
|
1,473 |
|
|
|
0.21 |
|
December
31,
2005
|
|
|
3,935 |
|
|
|
0.56 |
|
|
|
2,040 |
|
|
|
0.29 |
|
|
|
488 |
|
|
|
0.07 |
|
|
|
2,528 |
|
|
|
0.36 |
|
March
31,
2006
|
|
|
4,026 |
|
|
|
0.57 |
|
|
|
2,126 |
|
|
|
0.30 |
|
|
|
829 |
|
|
|
0.12 |
|
|
|
2,955 |
|
|
|
0.42 |
|
June
30,
2006
|
|
|
5,799 |
|
|
|
0.82 |
|
|
|
2,977 |
|
|
|
0.42 |
|
|
|
2,963 |
|
|
|
0.42 |
|
|
|
5,940 |
|
|
|
0.84 |
|
September
30,
2006
|
|
|
6,432 |
|
|
|
0.65 |
|
|
|
3,274 |
|
|
|
0.33 |
|
|
|
690 |
|
|
|
0.07 |
|
|
|
3,964 |
|
|
|
0.40 |
|
December
31,
2006
|
|
|
8,171 |
|
|
|
0.60 |
|
|
|
4,493 |
|
|
|
0.33 |
|
|
|
(1,553 |
) |
|
|
(0.11 |
) |
|
|
2,940 |
|
|
|
0.22 |
|
March
31,
2007
|
|
|
12,069 |
|
|
|
0.61 |
|
|
|
7,015 |
|
|
|
0.36 |
|
|
|
(2,039 |
) |
|
|
(0.10 |
) |
|
|
4,976 |
|
|
|
0.26 |
|
June
30,
2007
|
|
|
14,009 |
|
|
|
0.70 |
|
|
|
8,349 |
|
|
|
0.42 |
|
|
|
(3,501 |
) |
|
|
(0.18 |
) |
|
|
4,848 |
|
|
|
0.24 |
|
September
30,
2007
|
|
|
15,391 |
|
|
|
0.77 |
|
|
|
7,865 |
|
|
|
0.39 |
|
|
|
685 |
|
|
|
0.04 |
|
|
|
8,550 |
|
|
|
0.43 |
|
December
31,
2007
|
|
|
18,563 |
|
|
|
0.80 |
|
|
|
10,660 |
|
|
|
0.46 |
|
|
|
(14,346 |
) |
|
|
(0.62 |
) |
|
|
(3,686 |
) |
|
|
(0.16 |
) |
March
31,
2008
|
|
|
22,000 |
|
|
|
0.92 |
|
|
|
12,919 |
|
|
|
0.54 |
|
|
|
(14,178 |
) |
|
|
(0.59 |
) |
|
|
(1,259 |
) |
|
|
(0.05 |
) |
June
30,
2008
|
|
|
23,448 |
|
|
|
0.85 |
|
|
|
13,669 |
|
|
|
0.50 |
|
|
|
10,317 |
|
|
|
0.38 |
|
|
|
23,986 |
|
|
|
0.88 |
|
____________________
(1)
|
Per
share amounts are calculated using weighted average shares during
period.
|
Note 12. Subsequent Events
On
July 3, 2008, we exercised our warrant for 4,960,585 shares of common stock
in Deep Down, Inc. As permitted by the terms of the warrant, we
elected to make this exercise on a cashless basis entitling us to 2,618,129
common shares. On August 1, 2008, we sold all the shares
acquired receiving $1,649 of net proceeds.
On
August 1, 2008, we provided $7,400 in debt financing to Castro Cheese
Company, Inc., or Castro, based in Houston, Texas. Castro is a
leading manufacturer, marketer, and distributor of Hispanic cheeses and
creams.
On
August 4, 2008, we provided $15,000 in debt financing to support the
take-private acquisition of the TriZetto Group, or TriZetto. TriZetto
is a leading healthcare information technology company.
On
August 26, 2008, we provided a $26,000 senior secured debt financing and
co-invested $2,300 in equity alongside Great Point Partners, LLC ("Great Point")
in its growth recapitalization of BNN Holdings Corp. d/b/a Biotronic
NeuroNetwork ("Biotronic"), based in Ann Arbor, Michigan. Biotronic
is the largest independent national provider of intra-operative
neurophysiological monitoring services.
On
August 27, 2008, R-V Industries repaid the $7,526 debt that it owed
us.
$500,000,000
(COMPANY
LOGO)
Common
Stock
Preferred
Stock
Warrants
Debt
Securities
_________________________
PROSPECTUS
_________________________
,
2009
PART C — OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS
AND EXHIBITS
(1)
Financial Statements
The
following statements of Prospect Capital Corporation (the "Company" or the
"Registrant") are included in Part A of this Registration
Statement:
INDEX
TO FINANCIAL STATEMENTS
Financial
Statements |
|
PAGE
|
|
|
|
UNAUDITED
FINANCIAL STATEMENTS
|
|
|
Consolidated
Statements of Assets and Liabilities as of September 30, 2008 (Unaudited)
and June 30, 2008
|
|
|
Consolidated
Statements of Operations (Unaudited) — For the Three Months Ended
September 30, 2008 and September 30, 2007
|
|
|
Consolidated
Statements of Changes in Net Assets (Unaudited) — For the Three Months
Ended September 30, 2008 and September 30, 2007
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) — For the Three Months Ended
September 30, 2008 and September 30, 2007
|
|
|
Consolidated
Schedule of Investments as of September 30, 2008 (Unaudited) and June 30,
2008 (Audited)
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
AUDITED
FINANCIAL STATEMENTS
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Consolidated
Statements of Assets and Liabilities as of June 30, 2008 and June 30,
2007
|
|
|
Consolidated
Statements of Operations — For the Years Ended June 30, 2008, June 30,
2007 and June 30, 2006
|
|
|
Consolidated
Statements of Changes in Net Assets — For the Years Ended June 30, 2008,
June 30, 2007 and June 30, 2006
|
|
|
Consolidated
Statements of Cash Flows — For the Years Ended June 30, 2008, June 30,
2007 and June 30, 2006
|
|
|
Consolidated
Schedule of Investments as of June 30, 2008
|
|
|
Consolidated
Schedule of Investments as of June 30, 2007
|
|
|
Notes
to Financial Statements
|
|
|
(2)
Exhibits
Exhibit No.
|
Description
|
(a)(1)
|
Articles
of Incorporation1
|
(a)(2)
|
Articles
of Amendment and Restatement2
|
(a)(3)
|
Articles
of Amendment5
|
(b)(1)
|
Bylaws2
|
(b)(2)
|
Amended
and Restated Bylaws2
|
(c)
|
Not
Applicable
|
(d)(1)
|
Form
of Share Certificate2
|
(d)(2)
|
Form
of Indenture†
|
(e)
|
Form
of Dividend Reinvestment Plan2
|
(f)
|
Not
Applicable
|
(g)
|
Form
of Investment Advisory Agreement between Registrant and Prospect Capital
Management LLC2
|
Exhibit No.
|
Description
|
|
|
|
LLC2
|
(h)
|
Underwriting
Agreement†
|
(i)
|
Not
Applicable
|
(j)
|
Form
of Custodian Agreement3
|
(k)(1)
|
Form
of Administration Agreement between Registrant and Prospect Administration
LLC2
|
(k)(2)
|
Form
of Transfer Agency and Registrar Services Agreement3
|
(k)(3)
|
Form
of Trademark License Agreement between the Registrant and Prospect Capital
Management2
|
(k)(4)
|
Loan
and Servicing Agreement dated June 6, 2007 among Prospect Capital Funding,
LLC, Prospect Capital Corporation, and Coöperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland," New York Branch5
|
(k)(5)
|
First
Amendment to Loan and Servicing Agreement dated December 31, 2007
among Prospect Capital Funding LLC, Prospect Capital Corporation and
Coöperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch7
|
(l)(1)
|
Opinion
and Consent of Clifford Chance US LLP, counsel for Registrant5
|
(l)(2)
|
Opinion
and Consent of Venable LLP, as special Maryland counsel for
Registrant5
|
(m)
|
Not
Applicable
|
(n)
|
Consent
of independent registered public accounting firm for
Registrant
|
(o)
|
Not
Applicable
|
(p)
|
Not
Applicable
|
(q)
|
Not
Applicable
|
(r)
|
Code
of Ethics6
|
1
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's
Registration Statement under the Securities Act of 1933, as amended, on
Form N-2 (File No. 333-114552), filed on April 16,
2004.
|
2
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's
Pre-effective Amendment No. 2 to the Registration Statement under the
Securities Act of 1933, as amended, on Form N-2 (File
No. 333-114552), filed on July 6,
2004.
|
3
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's
Pre-effective Amendment No. 3 to the Registration Statement under the
Securities Act of 1933, as amended, on Form N-2 (File
No. 333-114552), filed on July 23,
2004.
|
4
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's Form
8-K under the Securities Act of
1933.
|
5
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's
Pre-effective Amendment No. 3 to the Registration Statement under the
Securities Act of 1933, as amended, on Form N-2 (File
No. 333-143819), filed on September 5,
2007.
|
6
|
Incorporated
by reference to the corresponding exhibit number to the Registrant's
Pre-effective Amendment No. 2 to the Registration Statement under the
Securities Act of 1933, as amended, on Form N-2 (File
No. 333-114552), filed on July 6,
2004.
|
7
|
Incorporated
by reference to Exhibit 10.8 of the Registrant's Form 10-Q filed
on February 11, 2008.
|
†
|
To
be filed by amendment.
|
ITEM 26. MARKETING
ARRANGEMENTS
The
information contained under the heading "Plan of Distribution" on this
Registration Statement is incorporated herein by reference and any information
concerning any underwriters will be contained in the accompanying prospectus
supplement, if any.
ITEM 27. OTHER EXPENSES OF
ISSUANCE AND DISTRIBUTION**
|
|
|
|
Commission
registration
fee
|
|
$ |
15,350 |
|
NASDAQ
Global Select Additional Listing
Fees
|
|
|
22,500 |
|
FINRA
filing
fee
|
|
|
50,500 |
|
Accounting
fees and
expenses
|
|
|
50,000 |
|
Legal
fees and
expenses
|
|
|
750,000 |
|
Printing
and
engraving
|
|
|
700,000 |
|
Financial
advisory
fee
|
|
|
10,000 |
|
Miscellaneous
fees and
expenses
|
|
|
15,000 |
|
Total
|
|
$ |
1,613,350 |
|
** These
amounts are estimates.
All
of the expenses set forth above shall be borne by the Company.
ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL
As
of September 30 , 2008, the Registrant owns a controlling interest in the
following companies: a 100% interest in Gas Solutions Holdings, Inc., a Delaware
corporation; a 49% interest in Integrated Contract Services, Inc., a Delaware
corporation; a 79.83% interest in Iron Horse Coiled Tubing, Inc., an Alberta
corporation; a 80% interest in NRG Manufacturing, Inc., a Texas corporation; a
74.51% interest in R-V Industries, Inc., a Pennsylvania corporation; a 76.5%
interest in Ajax Acquisitions Corp., a Delaware Corporation; a 100% interest in
Worcester Energy Holdings, Inc., a Maine corporation (as well as an indirect
controlling interest in Biochips LLC, a Maine limited liability company 51%
owned by Worcester Energy Holdings, Inc.); a 51% interest in Worcester
Energy Corporation, a Maine corporation; a 51% interest in Worcester
Energy Partners, Inc., a Delaware corporation (as well as an indirect
controlling interest in Precision Logging & Landclearing, Inc., a Delaware
corporation 100% owned by Worcester Energy Partners, Inc.); and a 100% interest
in Yatesville Coal Holdings, Inc., a Delaware corporation (as well
as indirect controlling interests in Eastern Kentucky Coal Holdings, Inc.,
a Delaware corporation, North Fork Collieries LLC, a Delaware corporation,
E&L Construction Inc., a Kentucky corporation and C&A Construction Inc.,
a Kentucky corporation, each of which is 100% owned by Yatesville, and Genesis
Coal Corp., a Kentucky corporation 78% owned by Yatesville).
Prospect
Capital Management LLC, a Delaware limited liability company, owns
shares of the Registrant, representing 1.25% of the common stock
outstanding. Without conceding that Prospect Capital Management
controls the Registrant, an affiliate of Prospect Capital Management is the
general partner of, and may be deemed to control, the following
entities:
|
|
Jurisdiction
of
Organization
|
Prospect
Street Ventures I, LLC
|
|
Delaware
|
Prospect
Management Group LLC
|
|
Delaware
|
Prospect
Street Broadband LLC
|
|
Delaware
|
Prospect
Street Energy LLC
|
|
Delaware
|
Prospect
Administration LLC
|
|
Delaware
|
|
|
|
ITEM 29. NUMBER OF HOLDERS OF
SECURITIES
The
following table sets forth the approximate number of record holders of our
common stock at November 30, 2008.
|
|
|
Common
Stock, par value $.001 per share
|
|
47
|
ITEM
30. INDEMNIFICATION
Maryland
law permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter contains such a
provision which eliminates directors' and officers' liability to the maximum
extent permitted by Maryland law, subject to the requirements of the 1940
Act.
Our
charter authorizes us, to the maximum extent permitted by Maryland law and
subject to the requirements of the 1940 Act, to obligate ourselves to indemnify
any present or former director or officer or any individual who, while a
director or officer and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her service in any
such capacity and to pay or reimburse their reasonable expenses in advance of
final disposition of a proceeding. Our bylaws obligate us, to the
maximum extent permitted by Maryland law and subject to the requirements of the
1940 Act, to indemnify any present or former director or officer or any
individual who, while a director or officer and at our request, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a director,
officer, partner or trustee and who is made, or threatened to be made, a party
to the proceeding by reason of his or her service in any such capacity from and
against any claim or liability to which that person may become subject or
which
that person may incur by reason of his or her service in any such capacity and
to pay or reimburse their reasonable expenses in advance of final disposition of
a proceeding. The charter and bylaws also permit us to indemnify and
advance expenses to any person who served a predecessor of us in any of the
capacities described above and any of our employees or agents or any employees
or agents of our predecessor. In accordance with the 1940 Act, we
will not indemnify any person for any liability to which such person would be
subject by reason of such person's willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Maryland
law requires a corporation (unless its charter provides otherwise, which our
charter does not) to indemnify a director or officer who has been successful, on
the merits or otherwise, in the defense of any proceeding to which he or she is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made, or threatened to be
made, a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (1) was committed in
bad faith or (2) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that a personal benefit
was improperly received, unless in either case a court orders indemnification,
and then only for expenses. In addition, Maryland law permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his or her good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation and (b) a written undertaking
by him or her or on his or her behalf to repay the amount paid or reimbursed by
the corporation if it is ultimately determined that the standard of conduct was
not met.
The
Investment Advisory Agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
reckless disregard of its duties and obligations, Prospect Capital Management
LLC (the "Adviser") and its officers, managers, agents, employees, controlling
persons, members and any other person or entity affiliated with it are entitled
to indemnification from the Company for any damages, liabilities, costs and
expenses (including reasonable attorneys' fees and amounts reasonably paid in
settlement) arising from the rendering of the Adviser's services under the
Investment Advisory Agreement or otherwise as an Investment Adviser of the
Company.
The
Administration Agreement provides that, absent willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration LLC and its
officers, manager, agents, employees, controlling persons, members and any other
person or entity affiliated with it are entitled to indemnification from the
Company for any damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) arising from the
rendering of Prospect Administration LLC's services under the Administration
Agreement or otherwise as administrator for the Company.
The
Administrator is authorized to enter into one or more sub-administration
agreements with other service providers (each a "Sub-Administrator") pursuant to
which the Administrator may obtain the services of the service providers in
fulfilling its responsibilities hereunder. Any such
sub-administration agreements shall be in accordance with the requirements of
the 1940 Act and other applicable U.S. Federal and state law and shall contain a
provision requiring the Sub-Administrator to comply with the same restrictions
applicable to the Administrator.
ITEM 31. BUSINESS AND OTHER
CONNECTIONS OF INVESTMENT ADVISER
A
description of any other business, profession, vocation or employment of a
substantial nature in which the Adviser, and each managing member, director or
executive officer of the Adviser, is or has been during the past two fiscal
years, engaged in for his or her own account or in the capacity of director,
officer, employee, partner or trustee, is set forth in Part A of this
Registration Statement in the section entitled "Management." Additional
information regarding the Adviser and its officers and directors is set forth in
its Form ADV, as filed with the Securities and Exchange Commission (SEC File
No.801-62969), and is incorporated herein by reference.
ITEM 32. LOCATION OF ACCOUNTS
AND RECORDS
All
accounts, books and other documents required to be maintained by Section 31(a)
of the Investment Company Act of 1940, and the rules thereunder are maintained
at the offices of:
(1)
the Registrant, Prospect Capital Corporation, 10 East 40th Street, 44th Floor,
New York, NY 10016;
(2)
the Transfer Agent, American Stock Transfer & Trust Company;
(3)
the Custodian, U.S. Bank National Association; and
(4)
the Adviser, Prospect Capital Management LLC, 10 East 40th Street, 44th Floor,
New York, NY 10016.
ITEM 33. MANAGEMENT
SERVICES
Not
Applicable.
ITEM
34. UNDERTAKINGS
1. The
Registrant undertakes to suspend the offering of shares until the prospectus is
amended if (1) subsequent to the effective date of its registration statement,
the net asset value declines more than ten percent from its net asset value as
of the effective date of the registration statement; or (2) the net asset value
increases to an amount greater than the net proceeds as stated in the
prospectus.
2. Any
securities not taken in a rights offering by stockholders are to be reoffered to
the public, an undertaking to supplement the prospectus, after the expiration of
the subscription period, to set forth the results of the subscription offer, the
transactions by underwriters during the subscription period, the amount of
unsubscribed securities to be purchased by underwriters, and the terms of any
subsequent reoffering thereof. If any public offering by the
underwriters of the securities being registered is to be made on terms differing
from those set forth on the cover page of the prospectus, we will file a
post-effective amendment to set forth the terms of such offering.
3. The
Registrant undertakes that:
|
(a)
|
to
file, during any period in which offers or sales are being made, a
post-effective amendment to the registration
statement:
|
|
(1)
|
to
include any prospectus required by Section 10(a)(3) of the 1933
Act;
|
|
(2)
|
to
reflect in the prospectus any facts or events after the effective date of
the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement;
and
|
|
(3)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
|
(b)
|
that,
for the purpose of determining any liability under the 1933 Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
those securities at that time shall be deemed to be the initial bona fide
offering thereof;
|
|
(c)
|
to
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering;
|
|
(d)
|
that,
for the purpose of determining liability under the 1933 Act to any
purchaser, each prospectus filed pursuant to Rule 497(b), (c), (d) or (e)
under the 1933 Act as part of a registration statement relating to an
offering, other than prospectuses filed in reliance on Rule 430A under the
1933 Act,
|
|
|
shall
be deemed to be part of and included in the registration statement as of
the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use;
and
|
|
(e)
|
that,
for the purpose of determining liability of the Registrant under the 1933
Act to any purchaser in the initial distribution of securities: The
undersigned Registrant undertakes that in a primary offering of securities
of the undersigned Registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by
means of any of the following communications, the undersigned Registrant
will be a seller to the purchaser and will be considered to offer or sell
such securities to the purchaser: (1) any preliminary prospectus or
prospectus of the undersigned Registrant relating to the offering required
to be filed pursuant to Rule 497 under the 1933 Act; (2) the portion of
any advertisement pursuant to Rule 482 under the 1933 Act relating to the
offering containing material information about the undersigned Registrant
or its securities provided by or on behalf of the undersigned Registrant;
and (3) any other communication that is an offer in the offering made by
the undersigned Registrant to the
purchaser.
|
|
(f)
|
to
file a post-effective amendment to the registration statement in
connection with any offering of common shares at a price, net of
underwriting discounts or commissions, below the Registrant's net asset
value per share or in connection with the issuance of rights or
warrants.
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, in the State of
New York, on the 29th day of January, 2009.
|
PROSPECT
CAPITAL CORPORATION
|
|
|
|
|
|
By:
|
/s/ John F.
Barry III |
|
|
John F. Barry III
|
|
|
Chief Executive Officer and
|
|
|
Chairman of the Board of Directors
|
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities indicated on January
29, 2009. This document may be executed by the signatories hereto on
any number of counterparts, all of which constitute one and the same
instrument.
Signature
|
|
Title
|
|
|
|
/s/ John F. Barry III |
|
Chief
Executive Officer and Chairman of the Board of Directors
(principal
executive officer)
|
John F. Barry III
|
|
|
|
|
/s/ M. Grier Eliasek |
|
Chief
Operating Officer and Director
|
M. Grier Eliasek
|
|
|
|
|
|
/s/ Brian H. Oswald |
|
Chief
Financial Officer, Treasurer and Secretary
(principal
financial and accounting officer)
|
Brian H. Oswald
|
|
|
|
|
/s/ Graham D.S. Anderson |
|
Director
|
Graham D.S. Anderson
|
|
|
|
|
|
/s/ F. Lee Liebolt, Jr. |
|
Director
|
F. Lee Liebolt, Jr.
|
|
|
|
|
|
/s/ Eugene S. Stark |
|
Director
|
Eugene S. Stark
|
|
|
EXHIBIT
INDEX
|
|
|
99.N |
|
Consent
of Independent Registered Public Accounting Firm* |
|
|
|