pro497.htm
Filed
pursuant to Rule 497(e)
Registration No. 333-143819
PRELIMINARY
PROSPECTUS SUPPLEMENT
(To
Prospectus dated March 18, 2009)
1,500,000 Shares
Common
Stock
$8.20
per share
Prospect
Capital Corporation is a financial services company that lends to and invests in
middle market, privately-held companies. We are organized as an
externally-managed, non-diversified closed-end management investment company
that has elected to be treated as a business development company under the
Investment Company Act of 1940. Prospect Capital Management LLC manages our
investments, and Prospect Administration LLC provides the administrative
services necessary for us to operate.
We
are offering 1,500,000 shares of our common stock directly to
institutional investors. We have not retained any underwriter or placement
agent, and we will not pay any commission or underwriting discount in connection
with this offering. See “Plan of Distribution” beginning on page S–15
of this Prospectus Supplement for more information regarding this offering.
These shares are being offered at a discount from our most recently determined
net asset value per share pursuant to authority granted by our stockholders at
the annual meeting of shareholders held on February 12, 2009. Sales
of common stock at prices below net asset value per share dilute the interests
of existing stockholders, have the effect of reducing our net asset value per
share and may reduce our market price per share. See “Risk Factors”
beginning on page S–6 and “Sales of Common Stock Below Net Asset Value” on page
S–11 of this prospectus supplement and on page 84 of the accompanying
prospectus.
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“PSEC.” The last reported closing price for our common stock on March 18, 2009
was $8.72 per share, and our most recently determined net asset value per share
was $14.43.
This
prospectus supplement and the accompanying prospectus contain important
information you should know before investing in our securities. Please read it
before you invest and keep it for future reference. We file annual, quarterly
and current reports, proxy statements and other information about us with the
Securities and Exchange Commission, or the SEC. This information is available
free of charge by contacting us at 10 East 40th Street, 44th Floor,
New York, NY 10016 or by telephone at (212) 448-0702. The SEC maintains a
website at www.sec.gov where such information is available without charge upon
written or oral request. Our Internet website address is www.prospectstreet.com.
Information contained on our website is not incorporated by reference into this
prospectus supplement or the accompanying prospectus and you should not consider
information contained on our website to be part of this prospectus.
Investing
in our common stock involves risks. See “Risk Factors” beginning on
page S–6 of this prospectus supplement and on page 9 of the
accompanying prospectus.
Neither
the SEC nor any state securities commission, nor any other regulatory body, has
approved or disapproved of these securities or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Public
offering price
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$ |
8.20
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$ |
12,300,000
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Proceeds
to Prospect Capital Corporation, before expenses(1)
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$ |
8.20
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$ |
12,300,000
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(1)
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Before
deducting estimated offering expenses payable by us of approximately
$600,000.
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Preliminary
Prospectus Supplement dated March 18, 2009
PROSPECTUS
SUPPLEMENT
Prospectus
Summary
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S-1
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Risk
Factors
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S-6
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Use
of Proceeds
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S-7
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Capitalization
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S-8
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Distributions
and Price Range of Common Stock
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S-9
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Sales
of Common Stock Below Net Asset Value
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S-11
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Plan
of Distribution
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S-15
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Legal
Matters
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S-15
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Independent
Registered Public Accounting Firm
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S-15
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Available
Information
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S-15
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About
this Prospectus
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ii
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Prospectus
Summary
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1
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Selected
Condensed Financial Data
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7
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Risk
Factors
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9
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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Report
of Management on Internal Control Over Financial Reporting
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47
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Use
of Proceeds
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48
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Forward-Looking
Statements
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49
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Distributions
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51
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Price
Range of Common Stock
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53
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Business
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54
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Management
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60
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Certain
Relationships and Transactions
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78
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Control
Persons and Principal Stockholders
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79
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Portfolio
Companies
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80
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Determination
of Net Asset Value
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83
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Sales
of Common Stock Below Net Asset Value
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84
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Dividend
Reinvestment Plan
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88
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Material
U.S. Federal Income Tax Considerations
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90
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Description
of Our Capital Stock
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97
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Description
of Our Preferred Stock
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104
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Description
of Our Debt Securities
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105
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Description
of Our Warrants
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107
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Regulation
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109
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Custodian,
Transfer and Dividend Paying Agent and Registrar
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116
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Brokerage
Allocation and Other Practices
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117
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Plan
of Distribution
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118
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Legal
Matters
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120
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Independent
Registered Public Accounting Firm
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120
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Available
Information
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120
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Index
to Financial Statements
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F-1
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PROSPECTUS
SUMMARY
This
summary highlights some information from this prospectus supplement and the
accompanying prospectus, and it may not contain all of the information that is
important to you. To understand the terms of the common stock offered hereby,
you should read this prospectus
supplement and the accompanying prospectus carefully. Together, these documents
describe the specific terms of the shares we are offering. You should carefully
read the sections titled “Risk Factors” in this prospectus supplement and in the
accompanying prospectus and the documents identified in the section “Available
Information.”
The
terms “we,” “us,” “our,” “Company,” refer to Prospect Capital Corporation;
“Prospect Capital Management” and “Investment Advisor” refer to Prospect Capital
Management LLC; “Prospect Administration” and the “Administrator” refers to
Prospect Administration LLC.
The
Company
Prospect
Capital Corporation is a financial services company that primarily lends to 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, or 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.
Typically,
we concentrate on making investments in companies with annual revenues of less
than $500 million and enterprise values of less than $250 million. Our
typical investment involves a secured loan of less than $50 million with
some form of equity participation. From time to time, we acquire controlling
interests in companies in conjunction with making secured debt investments in
such companies. In most cases, companies in which we invest are privately held
at the time we invest in them. We refer to these companies as “target” or
“middle market” companies and these investments as “middle market
investments.”
We
seek to maximize total returns to our investors, including both current yield
and equity upside, by applying rigorous credit analysis and asset-based and
cash-flow based lending techniques to make and monitor our investments. A
majority of our investments to date have been in energy-related industries. We
have made no investments to date in the real estate or mortgage industries, and
we do not intend currently to focus on such investments.
As
of December 31, 2008, we held investments in 31 portfolio companies. The
aggregate fair value as of December 31, 2008 of investments in these
portfolio companies held on that date is approximately
$555.6 million. Our portfolio across all our long-term debt and
certain equity investments had an annualized current yield of 16.0% as of
December 31, 2008. The yield includes interest as well as
dividends.
Recent
Developments
On
January 20, 2009, we issued 148,200 shares of our common stock in connection
with the Dividend Reinvestment Plan.
On
January 21, 2009, Diamondback Operating LP (“Diamondback”) repaid the $9.2
million debt outstanding to us. We continue to hold net profit interests on
this investment.
On
February 12, 2009, our stockholders approved our ability to sell an unlimited
number of shares of our common stock at any level of discount from net asset
value, or NAV, per share during the twelve-month period following such
approval.
Common
stock offered by us
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1,500,000 shares.
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Common
stock outstanding
prior
to this offering
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29,786,128 shares.
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Common
stock outstanding after this offering
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31,286,128 shares.
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Use
of proceeds
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We
expect to use the net proceeds of this offering initially to maintain
balance sheet liquidity, involving repayment of all or a portion of the
amounts outstanding under our credit facility, investment in high quality
short-term debt instruments or a combination thereof, and thereafter to
make long-term investments in accordance with our investment objective.
See “Use of Proceeds” in this prospectus supplement.
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The
NASDAQ Global Select Market symbol
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PSEC
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Risk
factors
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See
“Risk Factors” in this prospectus supplement and the accompanying
prospectus and other information in this prospectus supplement and the
accompanying prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common
stock.
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Current
distribution rate
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For
our second fiscal quarter of 2009, our Board of Directors declared a
quarterly dividend of $0.40375 per share, representing our 17th
consecutive quarterly dividend increase and an annualized dividend yield
of approximately 14.6% based on our December 18, 2008 closing stock price
of $11.06 per share. Our dividend is subject to change or
discontinuance at any time in the discretion of our Board of Directors.
Our future earnings and operating cash flow may not be sufficient to
support a dividend.
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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. 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 supplement
contains a reference to fees or expenses paid by “you,” “us” or “Prospect
Capital,” 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:
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Sales
load (as a percentage of offering price)
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0.00%
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Offering expenses
borne by us (as a percentage of offering price)(1)
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4.88%
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Dividend
reinvestment plan expenses(2)
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None
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Total
stockholder transaction expenses (as a percentage of offering
price)
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4.88%
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Annual expenses (as a
percentage of net assets attributable to common stock):
(3)
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Combined base management fee (3.04%)(4)
and incentive fees payable under Investment Advisory Agreement (20% of
realized capital gains and 20% of pre-incentive fee net investment income)
(2.80%)(5)
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5.84%
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Interest payments on borrowed funds
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1.36%(6)
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Other expenses
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2.39%(7)
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Total annual expenses
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9.59%(5)(7)
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Example
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You
would pay the following expenses on a $1,000 investment, assuming a 5%
annual return
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$ |
113.48 |
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$ |
239.37 |
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$ |
360.77 |
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$ |
645.66 |
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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 required by the SEC
for this table, since no incentive fee is paid until the annual return exceeds
7%. 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 net
asset value, or 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” in the accompanying prospectus 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.
_______________________
(1)
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The
offering expenses of this offering are estimated to be approximately
$600,000.
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(2)
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The
expenses of the dividend reinvestment plan are included in “other
expenses.”
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(3)
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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 December 31, 2008. See “Capitalization” in this
prospectus supplement.
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(4)
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Our
base management fee is 2% of our gross assets (which include any amount
borrowed, i.e., total assets without deduction for any liabilities).
Assuming that we have borrowed $200 million (the size of our credit
facility), the 2% management fee of gross assets equals 3.04% of net
assets. See “Management — Management Services — Investment
Advisory Agreement” in the accompanying prospectus and footnote 7
below.
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(5)
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Based
on an annualized level of incentive fee paid during our quarter ended
December 31, 2008, all of which consisted of an income incentive
fee. For a more detailed discussion of the calculation of the
two-part incentive fee, see “Management — Management Services —
Investment Advisory Agreement” in the accompanying
prospectus.
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(6)
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We
may borrow additional money before and after the proceeds of this offering
are substantially invested, but, in general, will utilize debt to the
maximum extent reasonably possible before issuing additional equity. After
this offering, we will have an increased amount available for us under our
$200 million credit facility. For more information, see “Risk
Factors — Risks Relating To Our Business And Structure — Changes
in interest rates may affect our cost of capital and net investment
income” below and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of Operations —
Operating Expenses — Financial Condition, Liquidity and Capital
Resources” in the accompanying prospectus. The table above assumes that we
have borrowed $200 million under our credit facility, which is the
maximum amount available under the credit facility. If we do not borrow
amounts following this offering, our base management fee, as a percentage
of net assets attributable to common stock, will decrease from the
percentage shown in the table above, as borrowings will not represent a
proportion of our overall
assets.
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(7)
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“Other
expense” is based on our annualized expenses during our quarter ended
December 31, 2008. See “Management — Management Services —
Administration Agreement” in the accompanying
prospectus.
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RISK
FACTORS
Investing
in our common stock 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 supplement and in the accompanying prospectus,
before you decide whether to make an investment in our common stock. 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 net
asset value (“NAV”), and the trading price of our common stock could decline, we
could reduce or eliminate our dividend and you could lose all or part of your
investment.
Recent developments may increase the
risks associated with our business and an investment in us.
The
U.S. financial markets have been experiencing a high level of volatility,
disruption and distress, which was exacerbated by the failure of several major
financial institutions in the last few months of 2008. In addition,
the U.S. economy has entered a recession, which is likely to be severe and
prolonged. Similar conditions have occurred in the financial markets
and economies of numerous other countries and could worsen, both in the U.S. and
globally. These conditions have raised the level of many of the risks
described in the accompanying prospectus and could have an adverse effect on our
portfolio companies as well as on our business, financial condition, results of
operations, dividend payments, credit facility, access to capital, valuation of
our assets and our stock price.
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 obtained approval from our stockholders 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 certain circumstances during the one-year period ending
February 12, 2009 as described in the accompanying prospectus. 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. In addition, such sales may
adversely affect the price at which our common stock trades. For
additional information and hypothetical examples of these risks, see “Sales of
Common Stock Below Net Asset Value” in this prospectus supplement and in the
accompanying prospectus.
The
net proceeds from the sale of 1,500,000 shares of our common stock in this
offering will be $11,700,000 after deducting estimated offering expenses of
approximately $600,000 payable by us.
We
expect to use the net proceeds of this offering initially to maintain balance
sheet liquidity, involving repayment of all or a portion of amounts outstanding
under our credit facility, investment in high quality short-term debt
instruments or
a combination thereof, and thereafter to make long-term investments in
accordance with our investment objective. The revolving period for our credit
facility with Rabobank Nederland continues until June 6, 2009, with a term out
maturity to June 6, 2010. Interest under our credit facility is
charged at LIBOR plus 175 basis points. Additionally, Rabobank charges a fee on
the unused portion of the facility equal to 37.5 basis points per annum, or 50.0
basis points per annum if that unused portion is greater than 50% of the total
amount of the facility.
The
following table sets forth our capitalization as of December 31,
2008:
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on
an as-adjusted basis giving effect to the sale of 1,500,000 shares of our
common stock in this offering, at a net public offering price of $7.80 per
share, after deducting estimated offering expenses of approximately
$600,000 payable by us, and our receipt of the estimated net proceeds from
that sale.
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This
table should be read in conjunction with our “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our financial
statements and notes thereto included in this prospectus supplement and the
accompanying prospectus.
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As
adjusted
for
this
offering(1)(2)
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(Unaudited)
(In 000s, except shares and per share data)
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Long-term
debt, including current maturities:
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Borrowings
under senior credit facility
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$ |
138,667 |
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$ |
145,263 |
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Amount
owed to affiliates
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6,312 |
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6,312 |
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Total
long-term debt
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144,979 |
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151,575 |
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Stockholders'
equity:
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Common
stock, par value $0.001 per share (100,000,000 common shares
authorized;
29,637,928 shares outstanding actual, and 31,137,928 shares
outstanding
as adjusted
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30 |
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31 |
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Paid-in
capital in excess of par value
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442,838 |
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454,537 |
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Undistributed
net investment income
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|
13,122 |
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13,122 |
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Accumulated
realized losses on investments
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(12,311 |
) |
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(12,311 |
) |
Net
unrealized depreciation on investments
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(15,876 |
) |
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(15,876 |
) |
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Total
stockholders’ equity
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427,803 |
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439,503 |
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Total
capitalization
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$ |
572,782 |
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$ |
591,078 |
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(1) |
As
of March 18, 2009 we had approximately $145.3 million outstanding under
our credit facility, representing an additional $6.6 million of borrowings
subsequent to December 31, 2008. |
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(2)
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The
proceeds from the sale of our common stock in this offering may be used to
repay in part amounts outstanding under the credit
facility.
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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.
DISTRIBUTIONS
AND PRICE RANGE OF COMMON STOCK
We
have paid and intend to continue to distribute quarterly dividends to our
stockholders out of assets legally available for distribution. Our dividends, 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 although we intend that our cumulative
distributions over the course of the year will not exceed our taxable income by
more than an insignificant amount.
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
currently intend to distribute during each calendar year an amount at least
equal to the sum of:
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·
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98%
of our ordinary income for the calendar
year;
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·
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98%
of our capital gains in excess of capital losses for the one-year period
ending on October 31 of the calendar
year; and
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·
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any
ordinary income and net capital gains for preceding years that were not
distributed during such years.
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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. The tax of $532,825 was paid during the
quarter ended March 31, 2009.
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” in the accompanying prospectus. 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 will 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 each stockholder’s dividend will be
automatically reinvested in additional shares of our common stock, unless the
stockholder has specifically “opted out” of the dividend reinvestment plan so as
to receive cash dividends. See “Dividend Reinvestment Plan” in the
accompanying prospectus. 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
distributed to stockholders. For the fiscal year ended June 30, 2008,
we paid 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.
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 NAV per
share of common stock and the high and low closing 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.
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Premium
(Discount) of High to NAV
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Premium
(Discount) of Low to NAV
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Twelve
Months Ending June 30, 2005
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First
quarter
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$13.67
|
|
$15.45
|
|
$14.42
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13.0%
|
|
5.5%
|
|
--
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Second
quarter
|
13.74
|
|
15.15
|
|
11.63
|
|
10.3%
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|
(15.4)%
|
|
$0.100
|
Third
quarter
|
13.74
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|
13.72
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|
10.61
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|
(0.1)%
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|
(22.8)%
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|
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%
|
|
(11.4)%
|
|
0.280
|
Third
quarter
|
14.81
|
|
16.64
|
|
15.00
|
|
12.4%
|
|
1.3%
|
|
0.300
|
Fourth
quarter
|
15.31
|
|
17.05
|
|
15.83
|
|
11.4%
|
|
3.4%
|
|
0.340
|
Twelve
Months Ending June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
$14.86
|
|
$16.77
|
|
$15.30
|
|
12.9%
|
|
3.0%
|
|
$0.380
|
Second
quarter
|
15.24
|
|
18.79
|
|
15.60
|
|
23.3%
|
|
2.4%
|
|
0.385
|
Third
quarter
|
15.18
|
|
17.78
|
|
16.40
|
|
17.1%
|
|
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
|
|
$14.16
|
|
23.9%
|
|
(6.1)%
|
|
$0.3925
|
Second
quarter
|
14.58
|
|
17.17
|
|
11.22
|
|
17.8%
|
|
(23.0)%
|
|
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
|
|
(2.7)%
|
|
(24.0)%
|
|
0.4025
|
Second
quarter
|
14.43
|
|
13.08
|
|
6.39
|
|
(9.4%)
|
|
(55.7)%
|
|
0.40375
|
Third
quarter (to 3/18/09)
|
(3)
|
|
12.89
|
|
6.38
|
|
— (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 December 31,
2008.
|
On
March 18, 2009, the last reported sales price of our common stock was $8.72 per
share, and our most recently determined NAV per share was $14.43. As of
December 31, 2008, we had approximately 47 stockholders of
record.
The
below table sets forth each class of our outstanding securities as of
December 31, 2008:
(1)
|
|
(2)
|
|
(3)
|
|
(4)
|
|
|
|
|
Amount
Held by
Registrant
or for
|
|
Amount
Outstanding
Exclusive
of Amount
Shown
Under (3)
|
Common
Stock
|
|
100,000,000
|
|
0
|
|
29,637,928
|
SALES
OF COMMON STOCK BELOW NET ASSET VALUE
At
our annual meeting of stockholders held on February 12, 2009, our stockholders
approved our ability to sell an unlimited number of shares of our common stock
at any level of discount from NAV per share during the 12 month period following
such approval. 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 are also permitted to sell shares of common stock below
NAV per share in rights offerings, although we will not do so under this
prospectus.
The
offering being made pursuant to this prospectus supplement is at a price below
our most recently determined NAV per share. In making a determination that this
offering is in our and our stockholders' best interests, our Board of Directors
considered a variety of factors including matters such as:
|
·
|
The
effect that the offering will have on our stockholders, including the
potential dilution they may experience as a result of the
offering;
|
|
·
|
The
amount per share by which the offering price per share and the net
proceeds per share are less than the most recently determined NAV per
share;
|
|
·
|
The
relationship of recent market prices of our common stock, which were lower
than the price at which shares are being offered, to NAV per share
and the potential impact of the offering on the market price per share of
our common stock;
|
|
·
|
Whether
the estimated offering price would closely approximate the market value of
our shares;
|
|
·
|
The
potential market impact of being able to raise capital during the current
financial market difficulties;
|
|
·
|
The
nature of any new investors anticipated to acquire shares in the
offering;
|
|
·
|
The
anticipated rate of return on and quality, type and availability of
investments; and
|
|
·
|
The
leverage available to us.
|
Our
Board of Directors also considered the fact that sales of common stock at a
discount will benefit our Advisor as the Advisor will earn additional investment
management fees on the proceeds of such offerings, as it would from the offering
of any other securities of the Company or from the offering of common stock at a
premium to NAV per share.
We will
not sell shares under a prospectus supplement to the post-effective amendment to
the registration statement of which this prospectus forms a part (the "current
amendment") if the cumulative dilution to the Company's NAV per share from
offerings under the current amendment exceeds 15%. This would be measured
separately for each offering pursuant to the current amendment by calculating
the percentage dilution or accretion to aggregate NAV from that offering and
then summing the percentage from each offering. For example, if our most
recently determined NAV at the time of the first offering is $15.00 and we have
30 million shares outstanding, sale of 6 million shares at net proceeds to us of
$7.50 per share (a 50% discount) would produce dilution of 8.33%. If we
subsequently determined that our NAV per share increased to $15.75 on the then
36 million shares outstanding and then made an additional offering, we could,
for example, sell approximately an additional 7.2 million shares at net proceeds
to us of $9.45 per share, which would produce dilution of 6.67%, before we would
reach the aggregate 15% limit. If we file a new post-effective amendment, the
threshold would reset.
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.
The following three headings and accompanying tables will explain and provide
hypothetical examples on the impact of an offering at a price less than NAV per
share on three different set of investors:
|
·
|
existing
shareholders who do not purchase any shares in the
offering;
|
|
|
|
|
·
|
existing shareholders who purchase a relative small amount of
shares in the offering or a relatively large amount of shares in the
offering; |
|
|
|
|
·
|
new investors who become shareholders by purchasing shares in the
offering. |
Impact
On Existing Stockholders Who Do Not Participate in the Offering
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. These shareholders may also experience a decline in the
market price of their shares, which often reflects to
some degree announced or potential increases and decreases in NAV per
share. This decrease could be more pronounced as the size of the
offering and level of discounts increases.
The
following chart illustrates the level of NAV dilution that would be experienced
by a stockholder who does not participate in the offering. It is not
possible to predict the level of market price decline that may
occur.
|
|
|
|
Following
Sale
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
|
Price per Share to
Public |
|
|
|
$ |
8.20 |
|
|
|
Net Proceeds per
Share to Issuer |
|
|
|
$ |
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
to NAV
|
|
|
|
|
|
|
|
|
Total Shares Outstanding
|
|
29,786,128
|
|
|
31,286,128
|
|
|
|
NAV
per Share
|
|
$ |
14.43
|
|
$ |
14.12
|
|
(2.20)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution
to Nonparticipating Stockholder
|
|
|
|
|
|
|
|
|
|
Shares
Held by Stockholder A
|
|
|
29.786
|
|
|
|
|
|
|
Percentage
Held by Stockholder A |
|
|
0.10% |
|
|
0.10%
|
|
(4.79)%
|
|
Total NAV Held by Stockholder A
|
|
$ |
429,940 |
|
$ |
420,466
|
|
(2.20)%
|
|
Total Investment by Stockholder A (Assumed to be $14.43 per
Share) |
|
$ |
429,940 |
|
$ |
429,940 |
|
|
|
Total Dilution to Stockholder A (Total NAV Less Total
Investment) |
|
$ |
|
|
$ |
(9,474 |
)
|
|
|
Investment
per Share Held by
Stockholder
A (Assumed to be $14.43 on Shares Held Prior to Sale)
|
|
$ |
14.43 |
|
$
|
14.43 |
|
0.00% |
|
NAV per Share Held by Stockholder A |
|
|
|
|
$ |
14.12 |
|
|
|
Dilution
per Share Held by Stockholder
A
(NAV
per Share Less
Investment per Share)
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
Percentage Dilution to Stockholder A (NAV per share Divided by
Investment per
Share)
|
|
|
|
|
|
|
|
|
(2.20)% |
|
Impact
On Existing Stockholders Who Do Participate in the Offering
Our
existing stockholders who participate in the offering 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 NAV
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 NAV dilution will decrease as the number of shares such stockholders
purchase increases. Existing stockholders who buy more than such
percentage will experience NAV dilution but will, in contrast to existing
stockholders who purchase less than their proportionate share of the offering,
experience an increase (often called accretion) in NAV per share over their
investment per share and will also experience 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 NAV dilution as
described above in such subsequent offerings. These shareholders may
also experience a decline in the market price of their shares, which often
reflects to
some degree announced or potential increases and decreases in NAV per
share. This decrease could be more pronounced as the size of the
offering and level of discounts increases.
The
following chart illustrates the level of dilution and accretion in the offering
for a stockholder that acquires shares equal to (1) 50% of its proportionate
share of the offering (i.e., 750 shares, which is 0.05% of the offering 1,500,000
shares rather than its 0.10% proportionate share) and (2) 150% of such
percentage (i.e. 2,250 shares, which is 0.15% of the offering rather than
its 0.10% proportionate share).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to Public |
|
|
|
|
$ |
8.20
|
|
|
|
|
|
$ |
8.20
|
|
|
|
|
Net Proceeds per Share to Issuer |
|
|
|
|
$ |
7.80
|
|
|
|
|
|
$ |
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares
Outstanding
|
|
29,786,128
|
|
|
31,286,128
|
|
|
|
|
|
31,286,128
|
|
|
|
|
NAV
per
Share
|
|
$ |
14.43 |
|
|
$ |
14.12 |
|
|
|
(2.20 |
)% |
|
$ |
14.12
|
|
|
|
(2.20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion
to Participating Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Stockholder A
|
|
|
29,786 |
|
|
|
30,536 |
|
|
|
2.52 |
% |
|
32,036
|
|
|
|
7.55 |
% |
Percentage
Held by Stockholder A
|
|
|
0.10 |
% |
|
|
0.10 |
% |
|
|
(2.40 |
)% |
|
|
0.10 |
% |
|
|
2.40 |
% |
Total NAV Held by Stockholder A
|
|
$ |
429,940 |
|
|
|
431,053 |
|
|
|
0.26 |
% |
|
$ |
452,227 |
|
|
|
5.18 |
% |
Total
Investment by Stockholder A (Assumed to be $14.43 per
Share on Shares
Held Prior to Sale)
|
|
|
|
|
|
$ |
436,090 |
|
|
|
|
|
|
$ |
448,390 |
|
|
|
|
|
Total Dilution/Accretion to Stockholder A (Total NAV
Less Total
Investment)
|
|
|
|
|
|
$ |
(5,037 |
) |
|
|
|
|
|
$ |
3,837 |
|
|
|
|
|
Investment
per Share Held by Stockholder A (Assumed to be $14.43
on Shares Held Prior to Sale)
|
|
$ |
14.43 |
|
|
$ |
14.28 |
|
|
|
(1.06 |
)% |
|
$ |
14.00 |
|
|
$ |
(3.03 |
)% |
NAV per Share Held by Stockholder A |
|
|
|
|
|
$ |
14.12 |
|
|
|
|
|
|
$ |
14.12 |
|
|
|
|
|
Dilution/Accretion
per Share Held by Stockholder A (NAV per Share Less
Investment per
Share)
|
|
|
|
|
|
$ |
(0.16 |
) |
|
|
|
|
|
$ |
(0.12 |
) |
|
$ |
|
|
Percentage Dilution/Accretion to Stockholder A (NAV per Share Divided
by Investment per
Share)
|
|
|
|
|
|
|
|
|
|
|
(1.17 |
)% |
|
|
|
|
|
|
0.85 |
% |
Impact
On New Investors
Investors
who are not currently stockholders and who participate in an offering below NAV
but whose investment per share is greater than the resulting NAV per share due
to selling compensation and expenses paid by the issuer will experience an
immediate decrease, albeit small, in the NAV of their shares and their NAV per
share compared to the price they pay for their shares. Investors who
are not currently stockholders and who participate in an offering below NAV
per share and whose investment per share is also less than the resulting NAV per
share due to selling compensation and expenses paid by the issuer being
significantly less than the discount 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. These investors may
also experience a decline in the market price of their shares, which often
reflects to some degree announced or potential increases and decreases in NAV
per share. This decrease could be more pronounced as the size of the
offering and level of discounts increases.
The following chart
illustrates the level of dilution or accretion for new investors that will be
experienced by a new investor who purchases the same percentage (0.10%) of the
shares in the offering as the stockholder in the prior examples held immediately
prior to the offering. These shareholders may also experience a
decline in the market price of their shares, which often reflects to some degree
announced or potential increases and decreases in NAV per share. This
decrease could be more pronounced as the size of the offering and level of
discounts increases. It is not possible to predict the level of
market price decline that may occur.
|
|
|
|
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
Price per Share to Public |
|
|
|
$ |
8.20
|
|
|
|
Net Proceeds per Share to Issuer |
|
|
|
$ |
7.80
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
|
|
|
|
|
|
Total
Shares
Outstanding
|
|
29,786,128
|
|
31,286,128
|
|
5.04
|
% |
NAV
per Share
|
|
$ |
14.43 |
|
$ |
14.12
|
|
|
(2.20 |
)% |
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion
to New Investor A
|
|
|
|
|
|
|
|
|
|
Shares
Held by Investor A
|
|
|
0 |
|
1,500
|
|
|
|
|
Percentage
Held by Investor A
|
|
|
0.00 |
% |
0.00%
|
|
|
|
|
Total
NAV Held by Investor A
|
|
$ |
0 |
|
$ |
21,174
|
|
|
|
|
Total Investment by Investor A (At Price to Public) |
|
|
|
|
$ |
12,300
|
|
|
|
|
Total Dilution/Accretion to Investor A (Total NAV Less Total
Investment) |
|
|
|
|
$ |
8,874
|
|
|
|
|
Investment per Share Held by Investor A |
|
$ |
0.00 |
|
$ |
8.20
|
|
|
|
|
NAV per Share Held by Investor A |
|
|
|
|
$ |
14.12
|
|
|
|
|
Dilution/Accretion
per Share Held by Investor
A (NAV per Share
Less
Investment per Share)
|
|
|
|
|
$ |
5.92
|
|
|
|
|
Percentage Dilution/Accretion to Investor A (NAV per
Share
Divided by
Investment per Share)
|
|
|
|
|
|
|
|
72.15 |
% |
PLAN
OF DISTRIBUTION
We
are selling the shares of our common stock under this prospectus supplement
directly to institutional investors in a negotiated transaction in which no
party is acting as an underwriter, dealer or agent. Subject to the terms of the
subscription agreements with these investors, we are offering to sell 1,500,000
shares of our common stock at a price of $8.20 per share in cash. We
determined the per share price through negotiations with potential
investors.
We
expect to have our transfer agent deliver the shares of our common stock after
we receive the payment of the total purchase price therefor in immediately
available funds.
Our
common stock is listed on the Nasdaq Global Market under the symbol
“PSEC.”
We
will bear all of the expenses that we incur in connection with the offering of
our shares of common stock under this prospectus supplement. We estimate the
total expenses payable by us in connection with the offering will be
approximately $600,000.
Certain
legal matters regarding the common stock offered hereby have
been passed upon for the Company by Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York, and Venable LLP as special Maryland counsel.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
BDO
Seidman LLP is the independent registered public accounting firm for 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 common stock offered by this prospectus supplement. The registration
statement contains additional information about us and the common stock being
registered by this prospectus supplement. 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.
No
dealer, salesperson or other individual has been authorized to give any
information or to make any representation other than those contained in this
prospectus supplement and, if given or made, such information or representations
must not be relied upon as having been authorized by us. This prospectus
supplement does not constitute an offer to sell or a solicitation of an offer to
buy any securities in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus supplement nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs or that information contained herein is
correct as of any time subsequent to the date hereof.
Prospectus
dated March 18, 2009
$500,000,000
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 rights to purchase
shares of common stock, preferred stock or debt securities, collectively, the
Securities, to provide us with additional capital. Securities may be
offered at prices and on terms to be disclosed in one or more supplements to
this prospectus. You should read this prospectus and the applicable
prospectus supplement carefully before you invest in our
Securities.
We may
offer shares of common stock at a discount to net asset value per share in
certain circumstances. Sales of common stock at prices below net
asset value per share dilute the interests of existing stockholders, have the
effect of reducing our net asset value per share and may reduce our market price
per share.
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. 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 March 17, 2009, the last
reported sales price for our common stock was $7.61.
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 March 18, 2009
Table
of Contents
Page
About this Prospectus
|
ii
|
Prospectus Summary
|
1
|
Selected Condensed Financial
Data
|
7
|
Risk Factors
|
9
|
Management's Discussion and
Analysis of Financial Condition and Results of Operations
|
26
|
Report of Management on Internal Control Over
Financial Reporting
|
47
|
Use of Proceeds
|
48
|
Forward-Looking Statements
|
49
|
Distributions
|
51
|
Price Range of Common Stock
|
53
|
Business
|
54
|
Management
|
60
|
Certain Relationships and
Transactions
|
78
|
Control Persons and Principal
Stockholders
|
79
|
Portfolio Companies
|
80
|
Determination of Net Asset
Value
|
83
|
Sales Of Common Stock Below Net Asset
Value
|
84
|
Dividend Reinvestment Plan
|
88
|
Material U.S. Federal Income Tax
Considerations
|
90
|
Description
of Our Capital
Stock
|
97
|
Description of Our Preferred
Stock
|
104
|
Description of Our Debt
Securities
|
105
|
Description of Our Warrants
|
107
|
Regulation
|
109
|
Custodian, Transfer and Dividend Paying Agent and
Registrar
|
116
|
Brokerage Allocation and Other
Practices
|
117
|
Plan
of Distribution
|
118
|
Legal Matters
|
120
|
Independent Registered Public Accounting
Firm
|
120
|
Available Information
|
120
|
Index to Financial
Statements
|
F-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, which we expect to use
initially to maintain balance sheet liquidity and thereafter to make long-term
investments in accordance with our investment objectives.
Our Securities may be offered directly to one or more purchasers, 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.
We may
offer shares of common stock at a discount to net asset value per share at
prices approximating market value less selling expenses upon approval of our
directors, including a majority of our independent directors, in certain
circumstances. See "Sales of Common Stock Below Net Asset Value" in this
prospectus and in the prospectus supplement, if applicable. Sales of
common stock at prices below net asset value per share dilute the interests of
existing stockholders, have the effect of reducing our net asset value per share
and may reduce our market price per share. We will not offer shares of
common stock at a discount to net asset value through a rights offering under
this prospectus.
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 initially to
maintain balance sheet liquidity, involving repayment of all or a portion
of amounts outstanding under our credit facility, investments in high
quality short-term debt instruments or a combination thereof, and
thereafter to make long-term investments in accordance with our investment
objective. 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
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|
|
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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 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. Securities may be
offered at prices and on terms described in one or more supplements to
this prospectus directly to one or more purchasers, 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."
|
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)
(2.8%)(6)
|
5.84
|
%
|
Interest
payments on borrowed funds
|
1.37
|
%(7)
|
Other
expenses
|
2.39
|
%(8)
|
Total
annual expenses
|
9.59
|
%(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.
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|
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|
|
|
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You
would pay the following expenses on a $1,000 investment, assuming a 5%
annual return
|
|
$ |
111.80 |
|
|
$ |
237.93 |
|
|
$ |
359.56 |
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|
$ |
644.99 |
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|
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%. 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.
*
|
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 December 31, 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 3.04% 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 December 31, 2008, we paid
an incentive fee of $2.99 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 December 31, 2008) (in
thousands):
Prior
Quarter Net Asset Value
|
|
$ |
431,739 |
|
Quarterly
Hurdle Rate
|
|
|
1.75% |
|
Current
Quarter Hurdle
|
|
$ |
7,555 |
|
125%
of the Quarterly Hurdle Rate
|
|
|
2.1875% |
|
125%
of the Current Quarter Hurdle
|
|
$ |
9,444 |
|
Current
Quarter Pre Incentive Fee Net Investment Income
|
|
$ |
14,950 |
|
Incentive Fee ―
"Catch-Up"
|
|
$ |
1,889 |
|
Incentive
Fee ― 20% in excess of 125% of the Current Quarter Hurdle
|
|
$ |
1,101 |
|
Total
Current Quarter Incentive Fee
|
|
$ |
2,990 |
|
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
|
|
|
2.10% |
|
Incentive
fees payable under Investment Advisory Agreement (20% of realized capital
gains and 20% of pre-incentive fee net investment income)
|
|
|
2.80% |
|
Interest
payments on borrowed funds
|
|
None
|
|
Other
expenses
|
|
|
3.32% |
|
Total
annual expenses (estimated)
|
|
|
8.22% |
|
(8)
|
"Other
expenses" is based on our annualized expenses during our quarter ended
December 31, 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."
|
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 and six months ended December 31, 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 26 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
December 31,
|
|
|
For
the Six Months
ended
December 31,
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Performance Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
17,241
|
|
$
|
14,816
|
|
$
|
34,707
|
|
$
|
27,648
|
|
Dividend
income
|
|
4,665
|
|
|
2,466
|
|
|
9,388
|
|
|
4,084
|
|
Other
income
|
|
307
|
|
|
1,281
|
|
|
13,827
|
|
|
2,222
|
|
Total
investment income
|
|
22,213
|
|
|
18,563
|
|
|
58,012
|
|
|
33,954
|
|
Interest
and credit facility expenses
|
|
(1,965
|
)
|
|
(1,618
|
)
|
|
(3,483
|
)
|
|
(2,856)
|
|
Investment
advisory expense
|
|
(5,930
|
)
|
|
(4,777
|
)
|
|
(14,628
|
)
|
|
(8,609)
|
|
Other
expenses
|
|
(2,358
|
)
|
|
(1,508
|
)
|
|
(4,439
|
)
|
|
(3,964)
|
|
Total
expenses
|
|
(10,253
|
)
|
|
(7,903
|
)
|
|
(22,550
|
)
|
|
(15,429)
|
|
Net
investment income
|
|
11,960
|
|
|
10,660
|
|
|
35,462
|
|
|
18,525
|
|
Realized
and unrealized gains (losses)
|
|
(5,436
|
)
|
|
(14,346
|
)
|
|
(14,940
|
)
|
|
(13,661
|
)
|
Net
increase in net assets from operations
|
$
|
6,524
|
|
$
|
(3,686
|
)
|
$
|
20,522
|
|
$
|
4,864
|
|
Per Share Data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets from operations
|
$
|
0.22
|
|
$
|
(0.16
|
)
|
$
|
0.69
|
|
$
|
0.23
|
|
Distributions
declared per share
|
$
|
(0.40
|
)
|
$
|
(0.39
|
)
|
$
|
(0.80
|
)
|
$
|
(0.78)
|
|
Average
weighted shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
the
period
|
|
29,618,762
|
|
|
23,249,399
|
|
|
29,569,571
|
|
|
21,603,932
|
|
Assets and Liabilities
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
555,661
|
|
$
|
440,085
|
|
$
|
555,661
|
|
$
|
440,085
|
|
Other
assets
|
|
32,316
|
|
|
35,144
|
|
|
32,316
|
|
|
35,144
|
|
Total
assets
|
|
587,977
|
|
|
475,229
|
|
|
587,977
|
|
|
475,229
|
|
Amount
drawn on credit facility
|
|
138,667
|
|
|
107,042
|
|
|
138,667
|
|
|
107,042
|
|
Amount
owed to related parties
|
|
6,312
|
|
|
4,842
|
|
|
6,312
|
|
|
4,842
|
|
Other
liabilities
|
|
15,195
|
|
|
17,521
|
|
|
15,195
|
|
|
17,521
|
|
Total
liabilities
|
|
160,174
|
|
|
129,405
|
|
|
160,174
|
|
|
129,405
|
|
Net
assets
|
$
|
427,803
|
|
$
|
345,824
|
|
$
|
427,803
|
|
$
|
345,824
|
|
Investment Activity
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of portfolio companies at period end
|
|
31
|
(2)
|
|
32
|
(2)
|
|
31
|
(2)
|
|
32
|
(2)
|
Acquisitions
|
$
|
13,564
|
|
$
|
120,846
|
|
$
|
84,020
|
|
$
|
161,240
|
|
Sales,
repayments, and other disposals
|
$
|
2,128
|
|
$
|
19,223
|
|
$
|
13,077
|
|
$
|
37,172
|
|
Weighted-Average
Yield (3)
|
|
12.7
|
%
|
|
14.9
|
%
|
|
13.3
|
%
|
|
15.0
|
% |
(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.
At our
annual meeting of stockholders held on February 12, 2009, our stockholders
approved our ability to sell an unlimited number of shares of our common stock
at any level of discount from net asset value per share during the 12 month
period following such approval 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. They also may experience a reduction in the market price of our
common stock. 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
December 31, 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
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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 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
March 17, 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.
Market
Conditions
In 2008,
the financial services industry has been negatively affected by turmoil in the
global capital markets. What began in 2007 as a deterioration of credit quality
in subprime residential mortgages has spread rapidly to other credit
markets. Market liquidity and credit quality conditions are generally
weaker today than two years ago.
We
believe that Prospect Capital is well positioned to navigate through these
adverse market conditions. As a BDC, we are limited to a maximum 1 to 1 debt to
equity ratio, and as of December 31, 2008, our debt to equity ratio was 0.32 to
1. As of December 31, 2008, we have borrowed $138,667 against our credit
facility with Rabobank Nederland. The revolving period for this facility
continues until June 6, 2009, with a term out maturity on June 6, 2010, and we
expect to enter into a new extended facility prior to this date. While we are
optimistic, we cannot guarantee the completion of such extension.
We also
continue to generate liquidity through the realization of portfolio investments,
including the loan to Diamondback Operating L.P., such loan which was repaid in
January 2009. As is typical for our portfolio, we currently have investments in
various stages in the exit process that continue to draw interest from
prospective buyers.
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 December 31, 2008, June 30, 2008, December 31, 2007
and June 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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Each
portfolio company or investment is 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 value amount (discounted) calculated based on an
appropriate discounts rate. The measurement is based on the net
present 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 that quarter or for the
current quarter ended December 31, 2008.
FAS 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
December 31, 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 $55,747 at December 31, 2008.
Statement
of Assets and Liabilities Overview
During
the six months ended December 31, 2008, net assets have decreased by $1,820
from $429,623 as of June 30, 2008 to $427,803 as of December 31,
2008. This net decrease in assets resulted from a $20,522 increase
from operations, offset by $23,848 in dividends declared to our
stockholders. During this six-month period we recognized net
investment income of $35,462, net realized gains on investments of $1,661 and a
decrease in net
assets
due to changes in unrealized appreciation/ depreciation of investments of
$16,601. The result was the $20,522 increase in net assets resulting
from operations.
The
aggregate value of our portfolio investments was $555,661 and $497,530 as of
December 31, 2008 and June 30, 2008, respectively. During
the six months ended December 31, 2008, our net cost of investments
increased by $74,732, or 15.0%, as we invested in three 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. At December 31,
2008, we were invested in 31 long-term portfolio investments (including a net
profits interest remaining in 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 six months ended December 31, 2008, we completed three new investments
and several follow-on investments in existing portfolio companies, totaling
approximately $83,089. 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, September 8, 2008, and November 7, 2008 we made
follow-on secured debt investments of $400, $2,700, and $2,900 respectively in
Iron Horse Coiled Tubing, Inc., or Iron Horse, in support of the build out of
additional equipment.
On
December 10, 2008 we made a follow-on investment of $5,000 in Gas Solutions
Holdings, Inc., or GSHI or Gas Solutions for the repayment of third-party bank
senior credit facility.
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 six months ended December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2008
|
|
$ |
13,564 |
|
|
$ |
2,128 |
|
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
|
|
$ |
796,244 |
|
|
$ |
220,712 |
|
(1)
|
Includes
new deals, additional fundings, refinancings and PIK
interest.
|
(2)
|
Includes
scheduled principal payments, prepayments and
refinancings.
|
Investment
Holdings
As of
December 31, 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 16.0% and 15.6% across all our
long-term debt and certain equity investments as of December 31, 2008 and
December 31, 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
December 31, 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
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
|
|
$ |
216,448 |
|
|
|
37.4% |
|
|
$ |
150,156 |
|
|
|
32.3% |
|
Affiliate
|
|
|
31,721 |
|
|
|
5.5% |
|
|
|
5,288 |
|
|
|
1.2% |
|
Non-Control/Non-Affiliate
|
|
|
307,492 |
|
|
|
53.2% |
|
|
|
284,641 |
|
|
|
61.2% |
|
Money
Market
Funds
|
|
|
22,606 |
|
|
|
3.9% |
|
|
|
24,734 |
|
|
|
5.3% |
|
Total
Portfolio
|
|
$ |
578,267 |
|
|
|
100.0% |
|
|
$ |
464,819 |
|
|
|
100.0% |
|
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
December 31, 2008 and December 31, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market
Funds
|
|
$ |
22,606 |
|
|
|
3.9% |
|
|
$ |
24,734 |
|
|
|
5.3% |
|
Senior
Secured
Debt
|
|
|
247,009 |
|
|
|
42.7% |
|
|
|
251,258 |
|
|
|
54.1% |
|
Subordinated
Secured
Debt
|
|
|
198,736 |
|
|
|
34.4% |
|
|
|
28,157 |
|
|
|
27.6% |
|
Subordinated
Unsecured
Debt
|
|
|
13,930 |
|
|
|
2.4% |
|
|
|
— |
|
|
|
0.0% |
|
Preferred
Stock
|
|
|
8,804 |
|
|
|
1.5% |
|
|
|
1,388 |
|
|
|
0.3% |
|
Common
Stock
|
|
|
72,892 |
|
|
|
12.6% |
|
|
|
53,939 |
|
|
|
11.6% |
|
Membership
Interests
|
|
|
5,780 |
|
|
|
1.0% |
|
|
|
— |
|
|
|
0.0% |
|
Warrants
|
|
|
8,510 |
|
|
|
1.5% |
|
|
|
5,343 |
|
|
|
1.1% |
|
Total
Portfolio
|
|
$ |
578,267 |
|
|
|
100.0% |
|
|
$ |
464,819 |
|
|
|
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 December 31, 2008 and December 31, 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$ |
13,347 |
|
|
|
2.3% |
|
|
$ |
9,053 |
|
|
|
2.0% |
|
Midwest
US
|
|
|
77,239 |
|
|
|
13.4% |
|
|
|
46,990 |
|
|
|
10.1% |
|
Northeast
US
|
|
|
52,582 |
|
|
|
9.1% |
|
|
|
67,997 |
|
|
|
14.6% |
|
Southeast
US
|
|
|
122,121 |
|
|
|
21.1% |
|
|
|
79,810 |
|
|
|
17.2% |
|
Southwest
US
|
|
|
245,607 |
|
|
|
42.5% |
|
|
|
221,235 |
|
|
|
47.6% |
|
Western
US
|
|
|
44,765 |
|
|
|
7.7% |
|
|
|
15,000 |
|
|
|
3.2% |
|
Money
Market
Funds
|
|
|
22,606 |
|
|
|
3.9% |
|
|
|
24,734 |
|
|
|
5.3% |
|
Total
Portfolio
|
|
$ |
578,267 |
|
|
|
100.0% |
|
|
$ |
464,819 |
|
|
|
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 December 31, 2008 and December 31, 2007,
respectively:
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biomass
Power
|
|
$ |
10,900 |
|
|
|
1.9% |
|
|
$ |
24,413 |
|
|
|
5.3% |
|
Construction
Services
|
|
|
4,265 |
|
|
|
0.7% |
|
|
|
5,288 |
|
|
|
1.1% |
|
Contracting
|
|
|
5,000 |
|
|
|
0.9% |
|
|
|
5,000 |
|
|
|
1.1% |
|
Financial
Services
|
|
|
21,507 |
|
|
|
3.7% |
|
|
|
25,000 |
|
|
|
5.4% |
|
Food
Products
|
|
|
28,274 |
|
|
|
4.9% |
|
|
|
18,000 |
|
|
|
3.9% |
|
Gas
Gathering and Processing
|
|
|
77,158 |
|
|
|
13.3% |
|
|
|
47,500 |
|
|
|
10.2% |
|
Healthcare
|
|
|
54,839 |
|
|
|
9.5% |
|
|
|
13,750 |
|
|
|
3.0% |
|
Manufacturing
|
|
|
103,203 |
|
|
|
17.7% |
|
|
|
57,964 |
|
|
|
12.4% |
|
Metal
Services
|
|
|
9,195 |
|
|
|
1.6% |
|
|
|
6,076 |
|
|
|
1.3% |
|
Mining
and Coal Production
|
|
|
25,848 |
|
|
|
4.5% |
|
|
|
15,795 |
|
|
|
3.4% |
|
Oilfield
Fabrication
|
|
|
36,155 |
|
|
|
6.3% |
|
|
|
25,387 |
|
|
|
5.5% |
|
Oil
and Gas Production
|
|
|
110,549 |
|
|
|
19.1% |
|
|
|
134,796 |
|
|
|
29.0% |
|
Pharmaceuticals
|
|
|
9,692 |
|
|
|
1.7% |
|
|
|
11,941 |
|
|
|
2.6% |
|
Production
Services
|
|
|
13,347 |
|
|
|
2.3% |
|
|
|
22,993 |
|
|
|
4.9% |
|
Retail
|
|
|
10,139 |
|
|
|
1.8% |
|
|
|
14,555 |
|
|
|
3.1% |
|
Shipping
Vessels
|
|
|
6,993 |
|
|
|
1.2% |
|
|
|
6,700 |
|
|
|
1.4% |
|
Specialty
Minerals
|
|
|
17,248 |
|
|
|
3.0% |
|
|
|
— |
|
|
|
0.0% |
|
Technical
Services
|
|
|
11,349 |
|
|
|
2.0% |
|
|
|
4,927 |
|
|
|
1.1% |
|
Money
Market Funds
|
|
|
22,606 |
|
|
|
3.9% |
|
|
|
24,734 |
|
|
|
5.3% |
|
Total
Portfolio
|
|
$ |
578,267 |
|
|
|
100.0% |
|
|
$ |
464,819 |
|
|
|
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 December 31,
2008, the Audit Committee considered valuations from the independent valuation
firm and from management having an aggregate range of $511,622 to $593,857,
excluding money market investments.
In
determining the range of value for debt instruments, management and the
independent valuation firm generally shadow rated the investment and then based
upon the range of ratings, determined appropriate yields to maturity for a loan
rated as such. A discounted cash flow analysis was then prepared
using the appropriate yield to maturity as the discount rate, yielding the
ranges. For equity investments, the enterprise value was determined
by applying EBITDA multiples for similar recent investment sales. For
stressed equity investments, a liquidation analysis was prepared.
The Board
of Directors looked at several factors in determining where within the range to
value the asset including: recent operating and financial trends for
the asset, independent ratings obtained from third parties and comparable
multiples for recent sales of companies within the industry. The
composite of all these analysis, applied to each investment, was a total
valuation of $555,661, excluding money market investments.
Our
investments are generally lower middle market companies, outside of the
financial sector, with less than $30,000 of annual EBITDA. We believe
our market has experienced less volatility than others because we believe there
are more buy and hold investors who own these less liquid
investments. In addition, the middle market relies on less leverage
than the large capitalization marketplace, which we believe will result in less
financial distress.
During
the fiscal year ended June 30, 2008 and continuing through December 31, 2008,
several general economic factors have occurred 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. We have adjusted the value of fourteen debt investments
based upon such general changes in market interest rates including: AEH,
Biotronic, C&J, Deb Shops,
Inc.
(“Deb Shops”), Castro, H&M Oil & Gas, LLC, Freedom Marine Services LLC,
Maverick Healthcare LLC, Qualitest Pharmaceuticals, Inc. (“Qualitest”), Regional
Management Corp. (“RMC”), Resco Products, Inc. (“Resco”), Shearer’s Foods, Inc.,
Stryker Energy, LLC, and TriZetto.
Three
debt investments were made to companies that are not performing in line with
budget expectations. These investments (Conquest Cherokee, LLC, Iron
Horse, and Wind River Resources Corp. and Wind River II Corp.) 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 we have
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.
During
the past year, we have been in discussions with multiple interested purchasers
for Gas Solutions. While we wish to unlock the value in Gas
Solutions, we do not wish to enter into any agreement at any time that does not
recognize the long term value we see in Gas Solutions. As a well
hedged midstream asset, which will generate predictable and consistent cash
flows to us, Gas Solutions is a valuable asset that we wish to sell at a
value-maximizing price, or not at all. We continue discussions with
interested parties, but have a patient approach toward the
process. In addition, 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 $38,000 term loan to Gas
Solutions II Ltd, a wholly owned subsidiary of GSHI, the proceeds of which were
used to refinance all of Citibank’s approximately $8,000 of outstanding senior
secured debt as well as to make a $30,000 cash distribution to
GSHI. We had non-recourse access to this cash at GSHI. In
December 2008, we lent an additional $5,000 to GSHI which enabled the company to
repay the loan to the Royal Bank of Canada. Upon repayment, we now
hold a first lien position in GSHI, improving our leverage position with our
lender.
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 $21,200 of EBITDA for the
first ten months ending October 31, 2008. Annualizing the
current year results, this is an increase of 73.7% from the 2007
results.
In
determining the value of GSHI, we have utilized several valuation techniques to
determine the value of the investment. These techniques offer a wide
range of values. Our Board of Directors has determined the value to
be $77,158 for our debt and equity positions at December 31, 2008 based
upon a combination of a discounted cash flow analysis, a public comparables
analysis and review of recent indications of interest. GSHI is valued $47,126
above its amortized cost, compared to the $36,321 unrealized gain recorded at
June 30, 2008.
Integrated
Contract Services, Inc.
Our
investment in ICS 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. ICS owns the assets of ESA Environmental
Specialists, Inc. (“ESA”), and 100% of the stock of The Healing Staff
(“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, ICS, and provided funds for working capital on
October 9, 2007. In return for the ESA debt, we received senior
secured debt in ICS of equal amount to our ESA debt, preferred stock of ICS, and
49% of the ICS common stock. ICS subsequently ceased operations and
assigned the collateral back to us. ICS 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 ICS at $5,000, a reduction of $11,675 from its
amortized cost, compared to the $11,464 unrealized loss recorded at
June 30, 2008.
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
continues to institute 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 $10,900 at December 31, 2008, a
reduction of $31,307 from its amortized cost, compared to the $22,141 unrealized
loss recorded at June 30, 2008.
Yatesville
Coal Holdings, Inc.
As we
previously discussed, 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 $25,848 at
December 31, 2008, a reduction of $18,253 from its amortized cost,
compared to the $14,694 unrealized loss recorded at June 30,
2008.
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 $200,000 of debt and our equity capital is currently comprised entirely of
common equity.
We had
$138,667 and $91,167 of borrowings at December 31, 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 |
|
|
$ |
138,667 |
|
|
$ |
200,000 |
|
|
$ |
91,167 |
|
|
$ |
200,000 |
|
|
$ |
— |
|
The
following table shows the contractual maturity of our revolving credit facility
at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility Payable
|
|
$ |
138,667 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
During
the quarter ended December 31, 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 December 31,
2008 June 30, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$ |
427,803 |
|
|
$ |
429,623 |
|
|
$ |
300,048 |
|
Shares
of common stock outstanding
|
|
|
29,637,928 |
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
Net
asset value per share
|
|
$ |
14.43 |
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
At
December 31, 2008, we had 29,637,928 of our common stock issued and
outstanding.
Results
of Operations
For the
three months ended December 31, 2008 and December 31, 2007, the net
increase (decrease) in net assets resulting from operations was $6,524 and
($3,686), respectively, representing $0.22 and ($0.16) per share,
respectively. We experienced a net realized and unrealized loss of
$5,436 or approximately $0.18 per share in the three months ended
December 31, 2008. This compares with the net realized and
unrealized loss of $14,346 during the three months ended December 31, 2007
or approximately ($0.62) per share.
For the
six months ended December 31, 2008 and December 31, 2007, the net increase in
net assets resulting from operations was $20,522 and $4,864, respectively,
representing $0.69 and $0.23 per share, respectively. We experienced a net
realized and unrealized loss of $14,940 or approximately $0.50 per share in the
six months ended December 31, 2008. This compares with the net realized and
unrealized loss of $13,661 during the six months ended December 31, 2007 or
approximately $0.63 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
details the various components of investment income and the related levels of
debt investment for the three and six months ended December 31, 2008 and
December 31, 2007:
|
|
For
The Three Months Ended December 31,
|
|
|
For
The Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
17,241 |
|
|
$ |
14,816 |
|
|
$ |
34,797 |
|
|
$ |
27,648 |
|
Dividend
income
|
|
|
4,665 |
|
|
|
2,466 |
|
|
|
9,388 |
|
|
|
4,084 |
|
Other
income
|
|
|
307 |
|
|
|
1,281 |
|
|
|
13,827 |
|
|
|
2,222 |
|
Total
investment income
|
|
$ |
22,213 |
|
|
$ |
18,563 |
|
|
$ |
58,012 |
|
|
$ |
33,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
debt principal of investments
|
|
$ |
537,101 |
|
|
$ |
396,741 |
|
|
$ |
517,421 |
|
|
$ |
360,824 |
|
Weighted-average
interest rate earned
|
|
|
12.74 |
% |
|
|
14.86 |
% |
|
|
13.34 |
% |
|
|
14.99 |
% |
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 $396,741 for the three months ended
December 31, 2007 to $537,101 for the three months ended December 31,
2008. Average interest income producing assets have increased from
$360,824 for the six months ended December 31, 2007 to $517,421 for the six
months ended December 31, 2008. While we have been able to increase
the gross amount of interest income, average yields on interest bearing assets
have decreased from 15.0% for the six months ended December 31, 2007 to
13.3% for six months ended December 31, 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 4.7% for the six months ended December 31,
2008.
The
increase in investment income is also driven by increases in income from
dividends. Dividend income has grown significantly from $2,466 to $4,665 for the
three months ended December 31, 2007 and December 31, 2008, respectively, and
from $4,084 to $9,388 for the six months ended December 31, 2007 and December
31, 2008, respectively. Much of the increases in dividend income is attributable
to dividends received as a result of our investment in GSHI which paid $4,000
and $1,600 for the three months ended December 31, 2008 and December 31, 2007,
respectively, and $8,000 and $2,450 for the six months ended December 31, 2008
and December 31, 2007, respectively. Dividends were also received from our
investments in Ajax and NRG.
The increase in investment
income is also the result of increases in income from other
sources. 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 management
and income 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 $10,253 and $7,903 for the
three months ended December 31, 2008 and December 31, 2007, respectively. For
the six months ended December 31, 2008 and December 31, 2007, they were $22,550
and $15,429, 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
management fee was $2,940 and $2,112 for the three months ended December 31,
2008 and December 31, 2007, respectively. It was $5,763 and $3,978 for the six
months ended December 31, 2008 and December 31, 2007, respectively. The
increases in this expense are directly related to our growth in total assets.
For the three months ended December 31, 2008 and December 31, 2007, we incurred
$2,990 and $2,665, respectively, of income incentive fees. For the six months
ended December 31, 2008 and December 31, 2007, we incurred $8,865 and $4,631,
respectively, of income incentive fees. The increases in the income incentive
fees are driven by increases in pre-base management fee net investment income of
$14,900 and $12,772 for the three months ended December 31, 2008 and December
31, 2007, respectively. Pre-base management fee net investment income
was $41,225 and $22,503 for the six months ended December 31, 2008 and December
31, 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 and six months ended December 31, 2008, we incurred $1,965 and $3,483,
respectively of expenses related to our credit facility. This compares with
expenses of $1,618 and $2,856 incurred during the three and six months ended
December 31, 2007. These expenses are related directly to the leveraging
capacity put into place for each of those periods and the levels of indebtedness
actually undertaken during those quarters.
The table
below describes the various credit facility expenses and the related indicators
of leveraging capacity and indebtedness during these periods.
|
|
For
The Three Months Ended December 31,
|
|
|
For
The Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
1,712 |
|
|
$ |
1,307 |
|
|
$ |
2,942 |
|
|
$ |
2,197 |
|
Amortization
of deferred financing costs
|
|
|
180 |
|
|
|
180 |
|
|
|
360 |
|
|
|
367 |
|
Commitment
and other fees
|
|
|
73 |
|
|
|
131 |
|
|
|
181 |
|
|
|
292 |
|
Total
|
|
$ |
1,965 |
|
|
$ |
1,618 |
|
|
$ |
3,483 |
|
|
$ |
2,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
debt outstanding
|
|
$ |
137,525 |
|
|
$ |
80,348 |
|
|
$ |
125,845 |
|
|
$ |
64,785 |
|
Weighted-average
interest rate incurred
|
|
|
4.95 |
% |
|
|
6.45 |
% |
|
|
4.65 |
% |
|
|
6.73 |
% |
Facility
amount at beginning of period
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
|
$ |
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 Capital, the sub-administrator to Prospect Administration,
have also grown as assets have grown. Legal costs decreased
significantly from $1,775 for the six months ended December 31, 2007 to $483 for
the six months ended December 31, 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 $16 and $(18,610) for the three months ended
December 31, 2008 and December 31, 2007, respectively. For the six months ended
December 31, 2008 and December 31, 2007, net realized gains (losses) were $1,661
and $(18,621), respectively. The net realized gain of $1,661 for the six months
ended December 31, 2008 was due primarily to the sale of the warrant related to
Deep Down, Inc. The net realized loss of $18,610 for the six months ended
December 31, 2007 was attributable primarily to our disposition of our
investments in Central Illinois Energy, LLC and Advantage Oilfield Group, Ltd.
(“AOG”) during the three months then ended.
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 ($5,452) and $4,264 for the three months ended December 31, 2008 and
December 31, 2007, respectively. For the three months ended December 31, 2008,
the $5,452 decrease in net assets from the net change in unrealized
appreciation/depreciation was driven primarily by write-downs to our investments
in Deb Shops, Iron Horse, Qualitest, RMC, Resco, WEPI, and Yatesville which were
partially offset by unrealized appreciation of our investment in GSHI. For the
three months ended December 31, 2007, the $4,264 increase in net assets from
such
changes
is attributable to write-ups of our investments in ESA Environmental
Specialists, Inc., Arctic Acquisition Corp. and C&J offset by write-downs
for our investments in Integrated, WECO, and Genesis Coal Corp.
For the
six months ended December 31, 2008 and December 31, 2007, net assets (decreased)
increased by ($16,601) and $4,960, respectively from changes in unrealized
appreciation/depreciation. The $16,601 decrease occurring during the six months
ended December 31, 2008 was attributable to unrealized depreciation recognized
for
our investments in Deb Shops, Iron Horse, Qualitest, RMC, Resco, WEPI, and
Yatesville partially offset by a write-up of our investment in GSHI. The $4,960
increase from changes in unrealized appreciation/depreciation for the six months
ended December 31, 2007 was the net result of write-ups of our investments in
ESA Environmental Specialists, Inc. and NRG by the disposition of AOG (which had
been previously valued below cost) offset by a write-down for our investment in
Integrated.
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
For the
three months ended December 31, 2008 and December 31, 2007, our operating
activities provided (used) $4,659 and ($102,990) of cash, respectively.
Financing activities (used) provided ($3,490) and $104,326 of cash during the
three months ended December 31, 2008 and December 31, 2007, respectively which
included the payments of dividends of $10,376 and $0, during the three months
ended December 31, 2008 and December 31, 2007, respectively.
For the
six months ended December 31, 2008 and December 31, 2007, our operating
activities used $23,126 and $155,568 of cash, respectively. Financing activities
provided $25,009 and $156,904 of cash during the six months ended December 31,
2008 and December 31, 2007, respectively which included the payments of
dividends of $22,221 and $6,587, during the six months ended December 31, 2008
and December 31, 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
December 31, 2008, we had a $200,000 revolving credit facility on which
$138,667 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 December 31, 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
December 31, 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 and management agreement and the administration
agreement and 2) the portfolio companies.
Developments
Since the End of the Fiscal Quarter
On
January 20, 2009, we issued 148,200 shares of our common stock in connection
with the Dividend Reinvestment Plan.
On
January 21, 2009, Diamondback repaid the $9,200 debt outstanding to us. We
continue to hold net profit interests on this investment.
On
February 12, 2009, our stockholders approved our ability to sell an unlimited
number of shares of our common stock at any level of discount from NAV per share
during the twelve-month period following such approval.
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 initially to
maintain balance sheet liquidity and thereafter to make long-term investments in
accordance with our investment objective. A supplement to this
prospectus relating to each offering will provide additional detail, to the
extent known at the time, regarding 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. 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 |
|
|
|
(0.3 |
)% |
|
|
(24.0 |
)% |
|
$ |
0.4025 |
|
Second
quarter
|
|
|
14.43 |
|
|
$ |
13.08 |
|
|
$ |
6.29 |
|
|
|
(9.4 |
)% |
|
|
(56.4 |
) |
|
|
0.40375 |
|
Third
quarter (to
3/17/09)
|
|
|
—(3) |
|
|
$ |
12.89 |
|
|
$ |
6.38 |
|
|
|
—(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 December 31,
2008.
|
On March
17, 2009, the last reported sales price of our common stock was $7.61 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 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:
|
1)
|
Each
portfolio company or investment is 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 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.
|
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 value amount (discounted) calculated based on an
appropriate discounts rate. The measurement is based on the net
present 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
that quarter or for the current quarter ended December 31, 2008.
FAS 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, 51
|
|
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
|
Andrew
C. Cooper, 47
|
|
Director
|
|
Class
II Director since February 2009; Term expires 2009
|
|
Mr.
Cooper is an entrepreneur, who over the last 11 years has founded, built,
run and sold three companies. He is Co-Chief Executive Officer
of Unison Site Management, Inc., a specialty finance company focusing on
cell site easements, and Executive Director of Brand Asset Digital, a
digital media marketing and distribution company. Prior to
that, Mr. Cooper focused on venture capital and investment banking for
Morgan Stanley for 14 years.
|
|
One
|
|
Unison
Site Management, LLC, Brand Asset Digital, LLC and Aquatic Energy,
LLC
|
(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.
|
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)
57
|
|
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).
Andrew C.
Cooper. Mr. Cooper has 24 years of experience in growth
company management, venture investing and investment banking. He has
a wide range of operational, marketing, technology, and debt and equity capital
raising expertise. Mr. Cooper is an entrepreneur, who over the last
11 years has founded, built, run and sold three companies. Prior to
that, Mr. Cooper focused on venture capital and investment banking for Morgan
Stanley for 14 years. He is Co-Chief Executive Officer of Unison Site
Management, Inc., a specialty finance company focusing on cell site easements,
and Executive Director of Brand Asset Digital, a digital media marketing and
distribution company. His current Board appointments include Unison
Site Management, LLC, Brand Asset Digital, LLC and Aquatic Energy,
LLC.
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, Cooper 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. Stark, Anderson and Cooper were added to
the Audit Committee concurrent with their election to the Board of Directors on
September 4, 2008, September 15, 2008 and February 12, 2009,
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 three persons: Messrs. Anderson,
Cooper 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, Anderson and Cooper were
added to the Nominating and Governance Committee concurrent with their election
to the Board of Directors on September 4, 2008, September 15, 2008 and February
12, 2009, 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(3)
|
|
None
|
|
None
|
|
None
|
Andrew
C. Cooper(4)
|
|
None
|
|
None
|
|
None
|
William
J. Gremp(5)
|
|
$86,250
|
|
None
|
|
$86,250
|
F.
Lee Liebolt, Jr.(6)
|
|
$80,000
|
|
None
|
|
$80,000
|
Walter
V.E. Parker(7)
|
|
$86,250
|
|
None
|
|
$86,250
|
Eugene
S. Stark(8)
|
|
None
|
|
None
|
|
None
|
Executive
Officers
|
|
|
|
|
|
|
William
E. Vastardis(9,10)
|
|
—
|
|
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)
|
Mr.
Anderson joined our Board of Directors on September 15,
2008.
|
(4)
|
Mr.
Cooper joined our Board of Directors on February 12,
2009.
|
(5)
|
Mr.
Gremp ceased being a member of the Board of Directors concurrent with his
resignation on December 10, 2008.
|
(6)
|
Mr.
Liebolt ceased being a member of the Board of Directors concurrent with
the election of directors at the Company's most recent annual meeting held
on February 12, 2009.
|
(7)
|
Mr.
Parker ceased being a member of the Board of Directors concurrent with his
resignation on December 12, 2008.
|
(8)
|
Mr.
Stark joined our Board of Directors on September 4,
2008.
|
(9)
|
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.
|
(10)
|
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, the independent directors 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 serve 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.
Effective
January 12, 2009, the independent directors who serve on both committees of the
Board receive an annual fee of $85,000 plus reimbursement of any reasonable
out-of-pocket expenses incurred, the independent directors who serve on one
committee of the Board receive an annual fee of $60,000 plus reimbursement of
any reasonable out-of-pocket expenses incurred and the independent directors who
do not serve on any committees of the board receive an annual fee of
$11,250.
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;
|
|
|
|
|
·
|
100.00%
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% 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
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
2:
|
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
$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
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
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 March 17, 2009, 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 March 17, 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
|
|
826,635
|
|
2.56%
|
All
officers and directors as a group (7 persons)(3)
|
|
Record
and beneficial
|
|
1,416,284
|
|
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
|
Andrew
C. Cooper
|
|
none
|
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
|
|
33.2
|
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
|
|
5.2
|
|
4.0
|
Gas
Solutions Holdings, Inc.
|
|
Gas
gathering and processing (Texas)
|
|
Senior
secured debt and common equity
|
|
First
priority lien on substantially all assets
|
|
Common
shares; Senior secured note, 18.00% due 12/22/2018
|
|
52.2
|
|
25.0
|
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 4/30/2009
|
|
0.0
|
|
13.3
|
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
|
|
10.6
|
|
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
|
|
10.9
|
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, 15.66% due 12/31/2010; Junior secured note,
15.66% due 12/31/2010
|
|
0.0
|
|
25.8
|
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, 6/17/2018, 11/30/2018;
Senior secured note Tranche A, 14.00% plus 3.00% PIK plus 3.00% default
interest due 1/31/2011; Senior secured note Tranche B, 14.00% plus 3.00%
PIK due 5/01/2009
|
|
0.1
|
|
4.1
|
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
|
|
2.6
|
|
24.9
|
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
|
|
2.3
|
|
14.9
|
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
|
|
7.1
|
Conquest
Cherokee LLC
|
|
Oil
and gas production (Tennessee)
|
|
Senior
secured debt, net profits interest and overriding royalty
interest
|
|
First
priority lien on substantially all assets
|
|
Overriding
royalty interest, 5.00%; net profits interest, 10.00% Senior secured note,
13.00% due 5/05/2009
|
|
0.0
|
|
9.4
|
Deb
Shops, Inc.
|
|
Retail
(Pennsylvania)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien note, 10.16% due
10/23/2014
|
|
0.0
|
|
10.1
|
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
|
|
7.0
|
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
|
|
48.8
|
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
|
|
36.2
|
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
|
|
1.4
|
|
12.1
|
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 12/31/2013
|
|
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, 8.96% due 4/30/2015
|
|
0.0
|
|
9.7
|
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
|
|
21.5
|
Resco
Products, Inc.
|
|
Manufacturing
(Pennsylvania)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien debt, 10.20% due 6/22/2014
|
|
0.0
|
|
8.2
|
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
|
|
3.5
|
|
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
|
|
28.6
|
TriZetto
Group
|
|
Healthcare
(California)
|
|
Subordinated
unsecured debt
|
|
Unsecured
|
|
Subordinated
unsecured note, 12.00% plus 1.50% PIK due 10/01/2016
|
|
0.0
|
|
13.9
|
Unitek
|
|
Technical
services (Pennsylvania)
|
|
Second
lien debt
|
|
Second
priority lien on substantially all assets
|
|
Second
lien debt, 14.50% 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 and net profit interest
|
|
First
priority lien on substantially all assets
|
|
Senior
secured note, 13.00% due 7/31/2010; net profit interest,
5.00%
|
|
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
At
our annual meeting of stockholders held on February 12, 2009, our stockholders
approved 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. 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 are permitted to sell shares of common
stock below NAV per share in rights offerings although we will not do so under
this prospectus. Any offering of common stock below NAV per share
will be designed to raise capital for investment in accordance with our
investment objective.
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;
|
|
·
|
The amount per share by
which the offering
price per share and the net proceeds per share are less than the most
recently determined NAV per
share;
|
|
·
|
The relationship of recent market
prices of par common stock to NAV per share and the potential impact of
the offering on the market price per share of our common
stock;
|
|
·
|
Whether the estimated offering
price would closely approximate the market value of our
shares;
|
|
·
|
The potential market impact of
being able to raise capital during the current financial market
difficulties;
|
|
·
|
the nature of any new investors anticipated to
acquire shares in the
offering;
|
|
·
|
The anticipated rate of return on
and quality, type and availability of investments;
and
|
|
·
|
The leverage available to
us.
|
Our
Board of Directors would also consider the fact that sales of common stock at a
discount will benefit our Advisor as the Advisor will earn additional
investment management fees on the proceeds of such offerings, as it would from
the offering of any other securities of the Company or from the offering of
common stock at premium to NAV per share.
We will
not sell shares under a prospectus supplement to the post-effective amendment to
the registration statement of which this prospectus forms a part (the "current
amendment") if the cumulative dilution to the Company's NAV per share from
offerings under the current amendment exceeds 15%. This would be measured
separately for each offering pursuant to the current amendment by calculating
the percentage dilution or accretion to aggregate NAV from that offering and
then summing the percentage from each offering. For example, if our most
recently determined NAV at the time of the first offering is $15.00 and we have
30 million shares outstanding, sale of 6 million shares at net proceeds to us of
$7.50 per share (a 50% discount) would produce dilution of 8.33%. If we
subsequently determined that our NAV per share increased to $15.75 on the then
36 million shares outstanding and then made an additional offering, we could,
for example, sell approximately an additional 7.2 million shares at net proceeds
to us of $9.45 per share, which would produce dilution of 6.67%, before we would
reach the aggregate 15% limit. If we file a new post-effective amendment, the
threshold would reset.
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.
The
following three headings and accompanying tables will explain and provide
hypothetical examples on the impact of an offering at a price less than NAV per
share on three different set of investors:
|
·
|
existing shareholders who do not purchase any
shares in the offering;
|
|
|
|
|
·
|
existing shareholders who purchase a relative
small amount of shares in the offering or a relatively large amount
of shares in the offering; |
|
|
|
|
·
|
new investors who become shareholders by
purchasing shares in the
offering. |
Impact
On Existing Stockholders Who Do Not Participate in the Offering
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. These shareholders may also
experience a decline in the market price of their shares, which often reflects
to some degree announced or potential increases and decreases in NAV per
share. This decrease could be more pronounced as the size of the offering
and level of discounts increases.
The following chart illustrates the level of NAV 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. It
is not possible to predict the level of market price decline that may
occur.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Share to
Public |
|
|
|
|
$
|
15.00 |
|
|
-
|
|
|
$ |
14.21
|
|
|
-
|
|
|
$ |
12.63
|
|
|
-
|
|
Net Proceeds per Share to Issuer
|
|
|
|
|
$ |
14.25
|
|
|
-
|
|
|
$ |
13.50
|
|
|
-
|
|
|
$ |
12.00
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
0.00 |
% |
|
|
30,000 |
|
|
|
0.00 |
% |
|
|
30,000 |
|
|
|
0.00 |
% |
Percentage
Held by Stockholder A
|
|
|
0.10 |
% |
|
|
0.10 |
% |
|
|
(4.76 |
)% |
|
|
0.09 |
% |
|
|
(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 |
)% |
Total Investment by Stockholder A
(Assumed to Be $15.00
per Share)
|
|
$ |
450,000 |
|
|
$ |
450,000 |
|
|
|
|
|
|
$ |
450,000 |
|
|
|
|
|
|
$ |
450,000 |
|
|
|
|
|
Total Dilution to Stockholder A
(Total NAV Less Total
Investment)
|
|
|
|
|
|
$ |
(1,071 |
) |
|
|
|
|
|
$ |
(4,091 |
) |
|
|
|
|
|
$ |
(15,000 |
) |
|
|
|
|
Investment
per Share Held by
Stockholder A (Assumed to be
$15.00
per Share on Shares Held
Prior to Sale)
|
|
$ |
15.00 |
|
|
$ |
15.00 |
|
|
|
0.00 |
% |
|
$ |
15.00 |
|
|
|
0.00 |
% |
|
$ |
15.00 |
|
|
|
0.00 |
% |
NAV per Share Held by
Stockholder A
|
|
|
|
|
|
$ |
14.96 |
|
|
|
|
|
|
$ |
14.86 |
|
|
|
|
|
|
$ |
14.50 |
|
|
|
|
|
Dilution
per Share Held by
Stockholder A (NAV per Share
Less Investment per Share)
|
|
|
|
|
|
$ |
(0.04 |
) |
|
|
|
|
|
$ |
(0.14 |
) |
|
|
|
|
|
$ |
(0.50 |
) |
|
|
|
|
Percentage Dilution to Stockholder A
(NAV per Share Divided
by
Investment per
Share)
|
|
|
|
|
|
|
|
|
|
|
(0.24 |
)% |
|
|
|
|
|
|
(0.91 |
)% |
|
|
|
|
|
|
(3.33 |
)% |
Impact
On Existing Stockholders Who Do Participate in the Offering
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 NAVdilution 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 NAV dilution will decrease as the number of
shares such stockholders purchase increases. Existing stockholders
who buy more than such percentage will experience NAV dilution but will, in
contrast to existing stockholders who purchase less than their proportionate
share of the offering, experience an increase (often called accretion) in NAV
per share over their investment per share and will also experience
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 NAV dilution as described above in such subsequent
offerings. These shareholders may also experience a decline in the market
price of their shares, which often reflects to some degree announced or
potential increases and decreases in NAV per share. This decrease could be
more pronounced as the size of the offering and the level of discounts
increases.
The
following chart illustrates the level of dilution and accretion in the
hypothetical 20% discount offering from the prior chart (Example 3) for a
stockholder that acquires shares equal to (1) 50% of its proportionate share of
the offering (i.e., 3,000 shares, which is 0.05% of an offering of 6,000,000
shares) rather than its 0.10% proportionate share and (2) 150% of such
percentage (i.e. 9,000 shares, which is 0.15% of an offering of 6,000,000 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. It is not
possible to predict the level of market price decline that may
occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
per Share to Public
|
|
|
|
|
$ |
12.63
|
|
|
|
|
|
$ |
12.63
|
|
|
|
|
Net
Proceeds per Share to Issuer
|
|
|
|
|
$ |
12.00
|
|
|
|
|
|
$ |
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares Outstanding
|
|
|
30,000,000 |
|
|
|
36,000,000 |
|
|
|
20 |
% |
|
|
36,000,000 |
|
|
|
20 |
% |
NAV
per Share
|
|
$ |
15.00 |
|
|
$ |
14.50 |
|
|
|
(3.33 |
)% |
|
$ |
14.50 |
|
|
|
(3.33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion
to Participating Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Stockholder A
|
|
|
30,000 |
|
|
|
33,000 |
|
|
|
10 |
% |
|
|
39,000 |
|
|
|
30 |
% |
Percentage
Held by Stockholder A
|
|
|
0.10 |
% |
|
|
0.09 |
% |
|
|
(8.33 |
)% |
|
|
0.11 |
% |
|
|
8.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
NAV Held by Stockholder A
|
|
$ |
450,000 |
|
|
$ |
478,500 |
|
|
|
6.33 |
% |
|
$ |
565,500 |
|
|
|
25.67 |
% |
Total Investment by Stockholder A
(Assumed to be $15.00 per Share on Shares Held Prior to
Sale)
|
|
|
|
|
|
$ |
487,895 |
|
|
|
|
|
|
$ |
563,684 |
|
|
|
|
|
Total Dilution/Accretion to Stockholder A
(Total NAV Less Total Investment)
|
|
|
|
|
|
$ |
(9,395 |
) |
|
|
|
|
|
$ |
1,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
per Share Held by Stockholder A
(Assumed to Be $15.00 on Shares Held Prior to Sale)
|
|
$ |
15.00 |
|
|
$ |
14.78 |
|
|
|
(1.44 |
)% |
|
$ |
14.45 |
|
|
|
(3.64 |
)% |
NAV per Share Held by Stockholder A
|
|
|
|
|
|
$ |
14.50 |
|
|
|
|
|
|
$ |
14.50 |
|
|
|
|
|
Dilution/Accretion per Share Held by Stockholder A
(NAV per Share Less Investment per Share)
|
|
|
|
|
|
$ |
(0.28 |
) |
|
|
|
|
|
$ |
0.05 |
|
|
|
|
|
Percentage Dilution/Acccretion to Stockholder A
(NAV per Share Divided by Investment per Share)
|
|
|
|
|
|
|
|
|
|
|
(1.96 |
)% |
|
|
|
|
|
|
0.32 |
% |
Impact On New
Investors
Investors
who are not currently stockholders and who participate in an offering below NAV
but whose investment per share is greater than the resulting NAV per share due
to selling compensation and expenses paid by the issuer will experience an
immediate decrease, albeit small, in the NAV of their shares and their NAV per
share compared to the price they pay for their shares. Investors who
are not currently stockholders and who participate in an offering below NAV per
share and whose investment per share is also less than the resulting NAV per
share due to selling compensation and expenses paid by the issuer being
significantly less than the discount 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. These investors may
also experience a decline in the market price of their shares, which often
reflects to some degree announced or potential increases and decreases in NAV
per share. This decrease could be more pronounced as the size of the
offering and level of discounts increases.
The
following chart illustrates the level of dilution or 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. It is not possible to
predict the level of market price decline that may occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
per Share to Public
|
|
|
|
|
|
$ |
15.00 |
|
|
|
|
|
|
$ |
14.21 |
|
|
|
|
|
|
$ |
12.63 |
|
|
|
|
|
Net
Proceeds per Share to Issuer
|
|
|
|
|
|
$ |
14.25 |
|
|
|
|
|
|
$ |
13.50 |
|
|
|
|
|
|
$ |
12.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/Increase
to NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shares Outstanding
|
|
|
30,000,000 |
|
|
|
31,500,000 |
|
|
|
5 |
% |
|
|
33,000,000 |
|
|
|
10 |
% |
|
|
36,000,000 |
|
|
|
20 |
% |
NAV per
Share
|
|
$ |
15.00 |
|
|
$ |
14.96 |
|
|
|
(0.24 |
)% |
|
$ |
14.86 |
|
|
|
(0.91 |
)% |
|
$ |
14.50 |
|
|
|
(3.33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution/Accretion
to New Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Held by Investor A
|
|
|
0 |
|
|
|
1,500 |
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
Percentage
Held by Investor A
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
0.01 |
% |
|
|
|
|
|
|
0.02 |
% |
|
|
|
|
Total
NAV Held by Investor A
|
|
$ |
0 |
|
|
$ |
22,446 |
|
|
|
|
|
|
$ |
44,591 |
|
|
|
|
|
|
$ |
87,000 |
|
|
|
|
|
Total
Investment by Investor A
(At Price to Public)
|
|
|
|
|
|
$ |
22,500 |
|
|
|
|
|
|
$ |
42,632 |
|
|
|
|
|
|
$ |
75,789 |
|
|
|
|
|
Total
Dilution/Accretion to Investor A (Total NAV Less Total
Investment)
|
|
|
|
|
|
$ |
(54 |
) |
|
|
|
|
|
$ |
1,959 |
|
|
|
|
|
|
$ |
11,211 |
|
|
|
|
|
Investment
per Share Held by Investor A
|
|
$ |
0 |
|
|
$ |
15.00 |
|
|
|
|
|
|
$ |
14.21 |
|
|
|
|
|
|
$ |
12.63 |
|
|
|
|
|
NAV
per Share Held by Investor A
|
|
|
|
|
|
$ |
14.96 |
|
|
|
|
|
|
$ |
14.86 |
|
|
|
|
|
|
$ |
14.50 |
|
|
|
|
|
Dilution/Accretion
per Share Held by Investor A (NAV per Share Less Investment per
Share)
|
|
|
|
|
|
$ |
(0.04 |
) |
|
|
|
|
|
$ |
0.65 |
|
|
|
|
|
|
$ |
1.87 |
|
|
|
|
|
Percentage
Dilution/Accretion to Investor A (NAV per Share Divided by Investment per
Share)
|
|
|
|
|
|
|
|
|
|
|
(0.24 |
) |
|
|
|
|
|
|
4.60 |
% |
|
|
|
|
|
|
14.79 |
% |
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 administratr 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:
·
|
a citizen or individual resident
of the United States;
|
·
|
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;
|
·
|
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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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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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.
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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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(3)
Amount
Held
by
the Company
or
for its Account
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(4)
Amount
Outstanding Exclusive of Amount Shown Under (3)
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Common
Stock
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100,000,000
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0
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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:
·
|
one-tenth or more but less than
one-third,
|
·
|
one-third or more but less than a
majority, or
|
·
|
a majority or more of all voting
power.
|
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:
·
|
any person who beneficially owns
10% or more of the
voting power of the corporation's shares;
or
|
·
|
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.
|
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:
·
|
80% of the votes entitled to be
cast by holders of outstanding shares of voting stock of the corporation;
and
|
·
|
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.
|
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:
·
|
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;
|
·
|
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;
|
·
|
any provisions relating to the
redemption of the shares of such
series;
|
·
|
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;
|
·
|
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.
|
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:
·
|
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;
|
·
|
the date or dates on which
principal will be payable;
|
·
|
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;
|
·
|
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;
|
·
|
whether the series of debt
securities are issuable in certificated
form;
|
·
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any provisions for defeasance
or covenant
defeasance;
|
·
|
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;
|
·
|
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
|
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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·
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the aggregate number of such
warrants;
|
·
|
the price or prices at which such
warrants will be issued;
|
·
|
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;
|
·
|
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;
|
·
|
the date on which the right to
exercise such warrants will commence and the date on which such right will
expire;
|
·
|
whether such warrants will be
issued in registered form or bearer
form;
|
·
|
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;
|
·
|
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;
|
·
|
if applicable, a discussion of
certain U.S.
Federal income tax considerations;
and
|
·
|
any other terms of such warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such warrants.
|
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:
|
(1)
|
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:
|
|
(a)
|
is
organized under the laws of, and has its principal place of business in,
the United States;
|
|
(b)
|
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
|
|
(c)
|
satisfies
any of the following:
|
|
1.
|
does
not have any class of securities with respect to which a broker or dealer
may extend margin credit;
|
|
2.
|
is
controlled by a business development company or a group of companies
including a business development company and the business development
company has an affiliated person who is a director of the eligible
portfolio company;
|
|
|
|
|
3.
|
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;
|
|
4.
|
does
not have any class of securities listed on a national securities exchange;
or
|
|
5.
|
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.
|
|
(2)
|
Securities
in companies that were eligible portfolio companies when we made our
initial investment if certain other requirements are
satisfied.
|
|
(3)
|
Securities
of any eligible portfolio company which we
control.
|
|
(4)
|
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.
|
|
(5)
|
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.
|
|
(6)
|
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.
|
|
(7)
|
Cash,
cash equivalents, U.S. government securities or high-quality debt
securities maturing in one year or less from the time of
investment.
|
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:
·
|
copies of its proxy voting polices
and procedures;
|
·
|
copies of all proxy
statements;
|
·
|
records of all votes cast by
Prospect Capital Management;
|
·
|
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
|
·
|
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.
|
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 pursuant to this prospectus and a prospectus supplement
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. We will not sell shares of common stock in
a rights offering at a price below NAV per share under this prospectus. 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.
|
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, any obligations by the underwriters 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 8%. 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.
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
outside of 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.
AVAILABLE
INFORMATION
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 – December
31, 2008 and June 30, 2008
|
F-2
|
CONSOLIDATED
STATEMENTS OF OPERATIONS – For
the Three and Six Months Ended December 31, 2008 and 2007
|
F-3
|
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS – For
the Six Months Ended December 31, 2008 and 2007
|
F-4
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS – For
the Six Months Ended December 31, 2008 and 2007
|
F-5
|
CONSOLIDATED
SCHEDULE OF INVESTMENTS – December
31, 2008 and June 30, 2008
|
F-6
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – December
31, 2008
|
F-22
|
|
|
AUDITED
FINANCIAL STATEMENTS
|
|
|
|
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES – June
30, 2008 and 2007
|
F-37
|
CONSOLIDATED
STATEMENTS OF OPERATIONS – For
the Years Ended June 30, 2008, 2007 and 2006
|
F-38
|
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS – For
the Years Ended June 30, 2008, 2007 and 2006
|
F-39
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS – For
the Years Ended June 30, 2008, 2007 and 2006
|
F-40
|
CONSOLIDATED
SCHEDULE OF INVESTMENTS – June
30, 2008
|
F-41
|
CONSOLIDATED
SCHEDULE OF INVESTMENTS – June
30, 2007
|
F-50
|
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
December
31, 2008 and June 30, 2008
(in
thousands, except share and per share data)
|
|
December
31, 2008 (Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investments at fair value (cost of $571,537 and $496,805, respectively,
Note 3)
|
|
|
|
|
|
|
Control
investments (cost of $216,242 and $203,661, respectively)
|
|
$ |
216,448 |
|
|
$ |
205,827 |
|
Affiliate
investments (cost of $33,496 and $5,609, respectively)
|
|
|
31,721 |
|
|
|
6,043 |
|
Non-control/Non-affiliate
investments (cost of $321,799 and $287,535, respectively)
|
|
|
307,492 |
|
|
|
285,660 |
|
Total
investments at fair value
|
|
|
555,661 |
|
|
|
497,530 |
|
|
|
|
|
|
|
|
|
|
Investments in money market funds
|
|
|
22,606 |
|
|
|
33,000 |
|
Cash
|
|
|
2,438 |
|
|
|
555 |
|
Receivables for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
4,430 |
|
|
|
4,094 |
|
Dividends
|
|
|
19 |
|
|
|
4,248 |
|
Loan
principal
|
|
|
— |
|
|
|
71 |
|
Managerial
assistance
|
|
|
405 |
|
|
|
380 |
|
Prepaid
prospective deal expenses
|
|
|
86 |
|
|
|
— |
|
Other
|
|
|
204 |
|
|
|
187 |
|
Prepaid expenses
|
|
|
778 |
|
|
|
273 |
|
Deferred financing costs
|
|
|
1,350 |
|
|
|
1,440 |
|
Total
Assets
|
|
|
587,977 |
|
|
|
541,778 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Credit facility payable
|
|
|
138,667 |
|
|
|
91,167 |
|
Dividends payable
|
|
|
11,966 |
|
|
|
11,845 |
|
Due to Prospect Administration (Note 7)
|
|
|
683 |
|
|
|
695 |
|
Due to Prospect Capital Management (Note 7)
|
|
|
5,629 |
|
|
|
5,946 |
|
Accrued expenses
|
|
|
2,101 |
|
|
|
1,104 |
|
Other liabilities
|
|
|
1,128 |
|
|
|
1,398 |
|
Total
Liabilities
|
|
|
160,174 |
|
|
|
112,155 |
|
Net
Assets
|
|
$ |
427,803 |
|
|
$ |
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; 29,637,928 and 29,520,379 issued
and outstanding, respectively)
|
|
$ |
30 |
|
|
$ |
30 |
|
Paid-in capital in excess of par
|
|
|
442,838 |
|
|
|
441,332 |
|
Undistributed net investment income
|
|
|
13,122 |
|
|
|
1,508 |
|
Accumulated realized losses on investments
|
|
|
(12,311 |
) |
|
|
(13,972 |
) |
Unrealized (depreciation) appreciation on investments
|
|
|
(15,876 |
) |
|
|
725 |
|
Net
Assets
|
|
$ |
427,803 |
|
|
$ |
429,623 |
|
Net
Asset Value Per
Share
|
|
$ |
14.43 |
|
|
$ |
14.55 |
|
See
notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Three and Six Months Ended December 31, 2008 and 2007
(in
thousands, except share and per share data)
(Unaudited)
|
|
For
The Three Months Ended
December
31,
|
|
|
For
The Six Months Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
investments (Net of foreign withholding tax of $62, $69, $109, and $158,
respectively)
|
|
$ |
5,075 |
|
|
$ |
5,285 |
|
|
$ |
11,797 |
|
|
$ |
10,348 |
|
Affiliate
investments (Net of foreign withholding tax of $0, $35, $0, and $70,
respectively)
|
|
|
1,075 |
|
|
|
655 |
|
|
|
1,635 |
|
|
|
1,322 |
|
Non-control/Non-affiliate
investments
|
|
|
11,091 |
|
|
|
8,876 |
|
|
|
21,365 |
|
|
|
15,978 |
|
Total
interest income
|
|
|
17,241 |
|
|
|
14,816 |
|
|
|
34,797 |
|
|
|
27,648 |
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
investments
|
|
|
4,584 |
|
|
|
2,200 |
|
|
|
9,168 |
|
|
|
3,650 |
|
Money
market funds
|
|
|
81 |
|
|
|
266 |
|
|
|
220 |
|
|
|
434 |
|
Total
dividend income
|
|
|
4,665 |
|
|
|
2,466 |
|
|
|
9,388 |
|
|
|
4,084 |
|
Other income: (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control/Affiliate
investments
|
|
|
87 |
|
|
|
— |
|
|
|
831 |
|
|
|
10 |
|
Non-control/Non-affiliate
investments
|
|
|
220 |
|
|
|
1,281 |
|
|
|
12,996 |
|
|
|
2,212 |
|
Total
other income
|
|
|
307 |
|
|
|
1,281 |
|
|
|
13,827 |
|
|
|
2,222 |
|
Total
Investment Income
|
|
|
22,213 |
|
|
|
18,563 |
|
|
|
58,012 |
|
|
|
33,954 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
management fee (Note 7)
|
|
|
2,940 |
|
|
|
2,112 |
|
|
|
5,763 |
|
|
|
3,978 |
|
Income
incentive fee (Note 7)
|
|
|
2,990 |
|
|
|
2,665 |
|
|
|
8,865 |
|
|
|
4,631 |
|
Total
investment advisory fees
|
|
|
5,930 |
|
|
|
4,777 |
|
|
|
14,628 |
|
|
|
8,609 |
|
Interest and credit facility expenses
|
|
|
1,965 |
|
|
|
1,618 |
|
|
|
3,483 |
|
|
|
2,856 |
|
Sub-administration fees (including former Chief Financial Officer and
Chief Compliance Officer)
|
|
|
217 |
|
|
|
206 |
|
|
|
467 |
|
|
|
392 |
|
Legal fees
|
|
|
184 |
|
|
|
569 |
|
|
|
483 |
|
|
|
1,775 |
|
Valuation services
|
|
|
110 |
|
|
|
120 |
|
|
|
422 |
|
|
|
233 |
|
Audit, compliance and tax related fees
|
|
|
306 |
|
|
|
43 |
|
|
|
629 |
|
|
|
293 |
|
Allocation of overhead from Prospect Administration (Note
7)
|
|
|
588 |
|
|
|
260 |
|
|
|
1,176 |
|
|
|
520 |
|
Insurance expense
|
|
|
63 |
|
|
|
64 |
|
|
|
124 |
|
|
|
128 |
|
Directors' fees
|
|
|
62 |
|
|
|
55 |
|
|
|
143 |
|
|
|
110 |
|
Other general and administrative expenses
|
|
|
295 |
|
|
|
191 |
|
|
|
462 |
|
|
|
503 |
|
Tax expense
|
|
|
533 |
|
|
|
— |
|
|
|
533 |
|
|
|
10 |
|
Total
Operating Expenses
|
|
|
10,253 |
|
|
|
7,903 |
|
|
|
22,550 |
|
|
|
15,429 |
|
Net
Investment Income
|
|
|
11,960 |
|
|
|
10,660 |
|
|
|
35,462 |
|
|
|
18,525 |
|
Net realized gain (loss) on investments
|
|
|
16 |
|
|
|
(18,610 |
) |
|
|
1,661 |
|
|
|
(18,621 |
) |
Net change in unrealized appreciation/depreciation on
investments
|
|
|
(5,452 |
) |
|
|
4,264 |
|
|
|
(16,601 |
) |
|
|
4,960 |
|
Net
Increase (Decrease) in Net Assets Resulting from
Operations
|
|
$ |
6,524 |
|
|
$ |
(3,686 |
) |
|
$ |
20,522 |
|
|
$ |
4,864 |
|
Net increase (decrease) in net assets resulting from operations per share:
(Note 6)
|
|
$ |
0.22 |
|
|
$ |
(0.16 |
) |
|
$ |
0.69 |
|
|
$ |
0.23 |
|
Dividends declared per share:
|
|
$ |
0.40 |
|
|
$ |
0.39 |
|
|
$ |
0.80 |
|
|
$ |
0.78 |
|
See
notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
For
the Six Months Ended December 31, 2008 and 2007
(in
thousands, except share data)
(Unaudited)
|
|
For
The Six Months Ended
December
31,
|
|
|
|
|
|
|
|
|
Increase
in Net Assets from Operations:
|
|
|
|
|
|
|
Net
investment
income
|
|
$ |
35,462 |
|
|
$ |
18,525 |
|
Net
realized gain (loss) on
investments
|
|
|
1,661 |
|
|
|
(18,621 |
) |
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
(16,601 |
) |
|
|
4,960 |
|
Net
Increase in Net Assets Resulting from
Operations
|
|
|
20,522 |
|
|
|
4,864 |
|
Dividends
to
Shareholders:
|
|
|
(23,848 |
) |
|
|
(17,200 |
) |
|
|
|
|
|
|
|
|
|
Capital
Share Transactions:
|
|
|
|
|
|
|
|
|
Net
proceeds from capital shares
sold
|
|
|
— |
|
|
|
57,436 |
|
Less:
Offering costs of public share
offerings
|
|
|
— |
|
|
|
(567 |
) |
Reinvestment
of
dividends
|
|
|
1,506 |
|
|
|
1,243 |
|
Net
Increase in Net Assets Resulting from Capital Share
Transactions
|
|
|
1,506 |
|
|
|
58,112 |
|
|
|
|
|
|
|
|
|
|
Total
(Decrease) Increase in Net
Assets:
|
|
|
(1,820 |
) |
|
|
45,776 |
|
Net
assets at beginning of
period
|
|
|
429,623 |
|
|
|
300,048 |
|
Net
Assets at End of
Period
|
|
$ |
427,803 |
|
|
$ |
345,824 |
|
|
|
|
|
|
|
|
|
|
Capital
Share Activity:
|
|
|
|
|
|
|
|
|
Shares
sold
|
|
|
— |
|
|
|
3,700,000 |
|
Shares
issued through reinvestment of
dividends
|
|
|
117,549 |
|
|
|
72,073 |
|
Net
increase in capital share
activity
|
|
|
117,549 |
|
|
|
3,772,073 |
|
Shares
outstanding at beginning of
period
|
|
|
29,520,379 |
|
|
|
19,949,065 |
|
Shares
Outstanding at End of
Period
|
|
|
29,637,928 |
|
|
|
23,721,138 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Months Ended December 31, 2008 and 2007
(in
thousands, except share data)
(Unaudited)
|
|
For
The Six Months Ended
December
31,
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
increase in net assets resulting from
operations
|
|
$ |
20,522 |
|
|
$ |
4,864 |
|
Net
realized (gain) loss on
investments
|
|
|
(1,661 |
) |
|
|
18,621 |
|
Net
change in unrealized appreciation/depreciation on
investments
|
|
|
16,601 |
|
|
|
(4,960 |
) |
Accretion
of original issue discount on
investments
|
|
|
(2,128 |
) |
|
|
(1,442 |
) |
Amortization
of deferred financing
costs
|
|
|
360 |
|
|
|
367 |
|
Gain
on settlement of net profits
interest
|
|
|
(12,576 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Payments
for purchases of
investments
|
|
|
(70,513 |
) |
|
|
(160,517 |
) |
Payment-In-Kind
interest
|
|
|
(931 |
) |
|
|
(722 |
) |
Proceeds
from sale of investments and collection of investment
principal
|
|
|
13,077 |
|
|
|
37,172 |
|
Purchases
of cash
equivalents
|
|
|
(19,999 |
) |
|
|
(189,960 |
) |
Sales
of cash
equivalents
|
|
|
19,999 |
|
|
|
189,945 |
|
Net
decrease investments in money market
funds
|
|
|
10,394 |
|
|
|
17,026 |
|
Increase
in interest
receivable
|
|
|
(336 |
) |
|
|
(1,266 |
) |
Decrease
in dividends
receivable
|
|
|
4,229 |
|
|
|
193 |
|
Decrease
(increase) in loan principal
receivable
|
|
|
71 |
|
|
|
(115 |
) |
Increase
in receivable for securities
sold
|
|
|
— |
|
|
|
(3,100 |
) |
Decrease
in receivable for structuring
fees
|
|
|
— |
|
|
|
1,625 |
|
Increase
in receivable for managerial
assistance
|
|
|
(25 |
) |
|
|
— |
|
Increase
in receivable for potential deal
expenses
|
|
|
(86 |
) |
|
|
— |
|
Increase
in other
receivables
|
|
|
(17 |
) |
|
|
(11 |
) |
(Increase)
decrease in prepaid
expenses
|
|
|
(505 |
) |
|
|
173 |
|
Decrease
in payables for securities
purchased
|
|
|
— |
|
|
|
(64,396 |
) |
Decrease
in due to Prospect
Administration
|
|
|
(12 |
) |
|
|
(128 |
) |
(Decrease)
increase in due to Prospect Capital
Management
|
|
|
(317 |
) |
|
|
132 |
|
Increase
in accrued
expenses
|
|
|
997 |
|
|
|
72 |
|
Decrease
(increase) in other
liabilities
|
|
|
(270 |
) |
|
|
859 |
|
Net
Cash Used In Operating
Activities:
|
|
|
(23,126 |
) |
|
|
(155,568 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
under credit
facility
|
|
|
54,500 |
|
|
|
161,367 |
|
Payments
under credit
facility
|
|
|
(7,000 |
) |
|
|
(54,325 |
) |
Financing
costs paid and
deferred
|
|
|
(270 |
) |
|
|
(420 |
) |
Net
proceeds from issuance of common
stock
|
|
|
— |
|
|
|
57,436 |
|
Offering
costs from issuance of common
stock
|
|
|
— |
|
|
|
(567 |
) |
Dividends
paid
|
|
|
(22,221 |
) |
|
|
(6,587 |
) |
Net
Cash Provided By Financing
Activities:
|
|
|
25,009 |
|
|
|
156,904 |
|
Total
Increase in
Cash
|
|
|
1,883 |
|
|
|
1,336 |
|
Cash
balance at beginning of
period
|
|
|
555 |
|
|
|
— |
|
Cash
Balance at End of
Period
|
|
$ |
2,438 |
|
|
$ |
1,336 |
|
Cash
Paid For
Interest
|
|
$ |
2,862 |
|
|
$ |
1,992 |
|
Non-Cash
Financing Activity:
|
|
|
|
|
|
|
|
|
Amount
of shares issued in connection with dividend reinvestment
plan
|
|
$ |
1,506 |
|
|
$ |
1,243 |
|
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring & Machine
|
|
South
Carolina/ Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted
common shares (7 total unrestricted common shares issued and outstanding
and 803.18 restricted common shares issued and
outstanding)
|
|
|
|
|
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
0.0 |
% |
Series
A convertible preferred shares (7,222.6 total preferred shares issued and
outstanding)
|
|
|
|
|
6,142.6 |
|
|
|
6,113 |
|
|
|
6,113 |
|
|
|
1.4 |
% |
Senior
secured note – Tranche A,10.50%, 4/01/2013 (4), (28)
|
|
|
|
$ |
21,707 |
|
|
|
21,707 |
|
|
|
21,707 |
|
|
|
5.1 |
% |
Subordinated
secured note – Tranche B, 11.50% plus 6.00% PIK, 4/01/2013 (4),
(29)
|
|
|
|
$ |
11,500 |
|
|
|
11,500 |
|
|
|
11,500 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
39,320 |
|
|
|
39,320 |
|
|
|
9.2 |
% |
C&J Cladding LLC (4)
|
|
Texas/Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common units, expiring 3/30/2014 (1,000 total company units
outstanding)
|
|
|
|
|
400 |
|
|
|
580 |
|
|
|
5,152 |
|
|
|
1.2 |
% |
Senior
secured note, 14.00%, 3/30/2012 (12)
|
|
|
|
$ |
4,050 |
|
|
|
3,546 |
|
|
|
4,043 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
4,126 |
|
|
|
9,195 |
|
|
|
2.1 |
% |
Gas Solutions Holdings, Inc. (3)
|
|
Texas/Gas
Gathering and Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (100 total common shares outstanding)
|
|
|
|
|
100 |
|
|
|
5,032 |
|
|
|
52,158 |
|
|
|
12.2 |
% |
Senior
secured note, 18.00%, 12/22/2018 (4)
|
|
|
|
$ |
25,000 |
|
|
|
25,000 |
|
|
|
25,000 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
30,032 |
|
|
|
77,158 |
|
|
|
18.0 |
%
|
Integrated Contract Services, Inc. (5)
|
|
North
Carolina/ Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (100 total common shares outstanding)
|
|
|
|
|
49 |
|
|
|
702 |
|
|
|
— |
|
|
|
0.0 |
% |
Series
A preferred shares (10 total Series A preferred shares
outstanding)
|
|
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
Junior
secured note, stated rate 7.00% plus 7.00% PIK, in non-accrual status
effective 10/09/2007, matures 9/30/2010
|
|
|
|
$ |
14,003 |
|
|
|
14,003 |
|
|
|
3,030 |
|
|
|
0.7 |
% |
Senior
secured note, stated rate 7.00% plus 7.00% PIK, in non-accrual status
effective 10/09/2007, matures 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 |
% |
|
|
|
|
|
|
|
|
|
16,675 |
|
|
|
5,000 |
|
|
|
1.2 |
% |
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Control Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron Horse Coiled Tubing, Inc.
|
|
Alberta,
Canada/ Production Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (2,231 total class A common shares outstanding)
|
|
|
|
|
1,781 |
|
|
$ |
268 |
|
|
$ |
— |
|
|
|
0.0 |
% |
Senior
secured note, 15.00%, 4/19/2009
|
|
|
|
$ |
9,250 |
|
|
|
9,185 |
|
|
|
5,165 |
|
|
|
1.2 |
% |
Bridge
Loan, 15.00% plus 3.00% PIK, 4/30/2009
|
|
|
|
$ |
8,182 |
|
|
|
8,182 |
|
|
|
8,182 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
17,635 |
|
|
|
13,347 |
|
|
|
3.1 |
% |
NRG Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,000 total common shares issued and outstanding)
|
|
|
|
|
800 |
|
|
|
2,316 |
|
|
|
10,609 |
|
|
|
2.5 |
% |
Senior
secured note, 16.50%, 8/31/2011 (4), (8)
|
|
|
|
$ |
13,080 |
|
|
|
13,080 |
|
|
|
13,080 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
15,396 |
|
|
|
23,689 |
|
|
|
5.6 |
% |
R-V Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (750,000 total common shares issued and
outstanding)
|
|
|
|
|
545,107 |
|
|
|
5,068 |
|
|
|
8,772 |
|
|
|
2.1 |
% |
Warrants,
common shares, expiring 6/30/2017 (200,000 total common shares
outstanding)
|
|
|
|
|
200,000 |
|
|
|
1,682 |
|
|
|
3,219 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
6,750 |
|
|
|
11,991 |
|
|
|
2.9 |
% |
Worcester Energy Partners, Inc. (9)
|
|
Maine/Biomass
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
ownership
|
|
|
|
|
— |
|
|
|
1,368 |
|
|
|
— |
|
|
|
0.0 |
% |
Senior
secured note, stated rate 12.50%, in non-accrual status effective
7/01/2008, matures 12/31/2012
|
|
|
|
$ |
40,939 |
|
|
|
40,839 |
|
|
|
10,900 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
42,207 |
|
|
|
10,900 |
|
|
|
2.5 |
% |
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 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 |
|
|
$ |
433 |
|
|
$ |
— |
|
|
|
0.0 |
% |
Junior
secured note, 15.66%, 12/31/2010
|
|
|
|
$ |
33,668 |
|
|
|
33,668 |
|
|
|
15,848 |
|
|
|
3.7 |
% |
Senior
secured note, 15.66%, 12/31/2010
|
|
|
|
$ |
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
44,101 |
|
|
|
25,848 |
|
|
|
6.0 |
% |
Total Control Investments
|
|
|
|
|
|
|
|
|
216,242 |
|
|
|
216,448 |
|
|
|
50.6 |
% |
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 (64,968 total fully-diluted
class A common units outstanding)
|
|
|
|
|
6,065 |
|
|
|
176 |
|
|
|
— |
|
|
|
0.0 |
% |
Warrants
- Class A common units, expiring 6/17/2018 (64,968 total fully-diluted
class A common units outstanding)
|
|
|
|
|
6,025 |
|
|
|
172 |
|
|
|
— |
|
|
|
0.0 |
% |
Warrants
– Class A common units, expiring 11/30/2018 (64,968 total fully-diluted
class A common units outstanding)
|
|
|
|
|
3,125 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
Series
A preferred equity (1,075 total series A preferred equity units
outstanding)
|
|
|
|
|
200 |
|
|
|
88 |
|
|
|
— |
|
|
|
0.0 |
% |
Series
B preferred equity (794 total series B preferred equity units
outstanding)
|
|
|
|
|
241 |
|
|
|
241 |
|
|
|
53 |
|
|
|
0.0 |
% |
Series
C preferred equity (62.5 total series C preferred equity units
outstanding)
|
|
|
|
|
62.5 |
|
|
|
63 |
|
|
|
63 |
|
|
|
0.0 |
% |
Senior
Secured Debt Tranche A, 14.00% plus 3.00% PIK plus 3.00% default interest,
1/31/2011
|
|
|
|
$ |
2,371 |
|
|
|
2,371 |
|
|
|
2,195 |
|
|
|
0.5 |
% |
Senior
Secured Debt Tranche B, 14.00% plus 3.00% PIK plus 3.00% default interest,
5/01/2009
|
|
|
|
$ |
1,990 |
|
|
|
1,990 |
|
|
|
1,954 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
5,101 |
|
|
|
4,265 |
|
|
|
1.0 |
% |
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotronic NeuroNetwork
|
|
Michigan/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
shares (85,000 total preferred shares outstanding) (26)
|
|
|
|
|
9,925.455 |
|
|
$ |
2,300 |
|
|
$ |
2,575 |
|
|
|
0.6 |
% |
Senior
secured note, 11.50% plus 1.00% PIK, 2/21/2013 (4), (27)
|
|
|
|
$ |
26,095 |
|
|
|
26,095 |
|
|
|
24,881 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
28,395 |
|
|
|
27,456 |
|
|
|
6.4 |
% |
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
33,496 |
|
|
|
31,721 |
|
|
|
7.4 |
% |
Non-Control/Non-Affiliate Investments (less than 5.00% of voting
control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Gilsonite Company
|
|
Utah/Specialty
Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
interest units in AGC\PEP, LLC (11)
|
|
|
|
|
99.9999 |
% |
|
|
1,031 |
|
|
|
2,313 |
|
|
|
0.5 |
% |
Subordinated
secured note, 12.00% plus 3.00% PIK, 3/14/2013 (4)
|
|
|
|
$ |
14,783 |
|
|
|
14,783 |
|
|
|
14,935 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
15,814 |
|
|
|
17,248 |
|
|
|
4.0 |
% |
Castro Cheese Company, Inc.(4)
|
|
Texas/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
secured note, 11.00% plus 2.00% PIK, 2/28/2013
|
|
|
|
$ |
7,463 |
|
|
|
7,326 |
|
|
|
7,124 |
|
|
|
1.7 |
% |
Conquest Cherokee, LLC (13), (4)
|
|
Tennessee/
Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 13.00%, 5/05/2009 (14)
|
|
|
|
$ |
10,200 |
|
|
|
10,168 |
|
|
|
9,357 |
|
|
|
2.2 |
% |
Deb Shops, Inc. (4)
|
|
Pennsylvania/
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
lien debt, 10.16%, 10/23/2014 (25)
|
|
|
|
$ |
15,000 |
|
|
|
14,600 |
|
|
|
10,139 |
|
|
|
2.4 |
% |
Diamondback Operating, LP (15), (4)
|
|
Oklahoma/
Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured note, 12.00% plus 2.00% PIK, 8/27/2011
|
|
|
|
$ |
9,200 |
|
|
|
9,200 |
|
|
|
10,010 |
|
|
|
2.3 |
% |
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/ Shares Ownership %
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate Investments (less than 5.00% of voting
control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom Marine Services LLC (15), (4)
|
|
Louisiana/
Shipping Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 12.00% plus 4.00% PIK, 12/31/2011 (17)
|
|
|
|
$ |
7,091 |
|
|
$ |
7,004 |
|
|
$ |
6,993 |
|
|
|
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 |
|
|
|
48,823 |
|
|
|
11.4 |
% |
IEC Systems LP ("IEC")/
Advanced Rig Services LLC ("ARS") (4)
|
|
Texas/Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
(30)
|
|
|
|
$ |
22,612 |
|
|
|
22,612 |
|
|
|
22,612 |
|
|
|
5.3 |
% |
ARS
senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
(30)
|
|
|
|
$ |
13,543 |
|
|
|
13,543 |
|
|
|
13,543 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
36,155 |
|
|
|
36,155 |
|
|
|
8.5 |
% |
Maverick Healthcare, LLC (4)
|
|
Arizona/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
units (79,000,000 total class A common units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
1,252 |
|
|
|
1,353 |
|
|
|
0.3 |
% |
Preferred
units (79,000,000 total preferred units outstanding)
|
|
|
|
|
1,250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
Second
lien debt, 12.00% plus 1.50% PIK, 4/30/2014
|
|
|
|
$ |
12,596 |
|
|
|
12,596 |
|
|
|
12,100 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
13,848 |
|
|
|
13,453 |
|
|
|
3.1 |
% |
Miller Petroleum, Inc.
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
common shares, expiring 5/04/2010 to 12/31/2013 (15,616,856 total common
shares outstanding) (32)
|
|
|
|
|
1,753,357 |
|
|
|
150 |
|
|
|
139 |
|
|
|
0.0 |
% |
Peerless Manufacturing Co. (4)
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
secured note, 11.50% plus 3.50% PIK, 4/29/2013
|
|
|
|
$ |
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
4.7 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate Investments (less than 5.00% of voting
control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest Pharmaceuticals, Inc. (4)
|
|
Alabama/
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 8.96%,
4/30/2015 (18)
|
|
|
|
$ |
12,000 |
|
|
$ |
11,946 |
|
|
$ |
9,692 |
|
|
|
2.3 |
% |
Regional Management Corp. (4)
|
|
South
Carolina/
Financial
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured note,
12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$ |
25,170 |
|
|
|
25,170 |
|
|
|
21,507 |
|
|
|
5.0 |
% |
Resco Products, Inc. (4)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 10.20%,
6/22/2014 (19)
|
|
|
|
$ |
9,750 |
|
|
|
9,584 |
|
|
|
8,203 |
|
|
|
1.9 |
% |
Shearer's Foods, Inc.
|
|
Ohio/
Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership interest units in
Mistral Chip Holdings, LLC (45,300 total membership units outstanding)
(24)
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
3,467 |
|
|
|
0.8 |
% |
Second lien debt, 14.00%,10/31/2013 (4)
|
|
|
|
$ |
18,000 |
|
|
|
18,000 |
|
|
|
17,683 |
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
21,150 |
|
|
|
4.9 |
% |
Stryker Energy, LLC (20), (4)
|
|
Ohio/
Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured revolving
credit facility, 12.00%, 12/01/2011 (21)
|
|
|
|
$ |
29,500 |
|
|
|
29,095 |
|
|
|
28,633 |
|
|
|
6.7 |
% |
TriZetto Group
|
|
California/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated unsecured note,
12.00% plus 1.50% PIK, 10/01/2016 (4)
|
|
|
|
$ |
15,036 |
|
|
|
14,890 |
|
|
|
13,930 |
|
|
|
3.3 |
% |
Unitek (4)
|
|
Pennsylvania/
Technical
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt,
14.50%,12/31/2013 (22)
|
|
|
|
$ |
11,500 |
|
|
|
11,349 |
|
|
|
11,349 |
|
|
|
2.7 |
% |
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
December
31, 2008 (unaudited)
|
|
Portfolio
Investments (1)
|
|
|
|
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)
(15)
|
|
Utah/
Oil
and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured note, 13.00%,
7/31/2010 (31)
|
|
|
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
$ |
13,587 |
|
|
|
3.2 |
% |
Total Non-Control/Non-Affiliate
Investments
|
|
|
|
|
|
|
|
|
321,799 |
|
|
|
307,492 |
|
|
|
71.9 |
% |
Total Portfolio
Investments
|
|
|
|
|
|
|
|
|
571,537 |
|
|
|
555,661 |
|
|
|
129.9 |
% |
Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money
Market Funds - Government Portfolio (Class I)
|
|
|
|
|
17,982,598 |
|
|
|
17,982 |
|
|
|
17,982 |
|
|
|
4.2 |
% |
Fidelity Institutional Money
Market Funds - Government Portfolio (Class I) (4)
|
|
|
|
|
4,623,710 |
|
|
|
4,624 |
|
|
|
4,624 |
|
|
|
1.1 |
% |
Total Money Market
Funds
|
|
|
|
|
|
|
|
|
22,606 |
|
|
|
22,606 |
|
|
|
5.3 |
% |
Total Investments
|
|
|
|
|
|
|
|
$ |
594,143 |
|
|
$ |
578,267 |
|
|
|
135.2 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
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 issued and
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 |
% |
|
|
|
|
|
|
|
|
|
39,683 |
|
|
|
39,683 |
|
|
|
9.2 |
% |
C&J
Cladding LLC (4)
|
|
Texas/
Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common 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 |
% |
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
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%,
6/30/2009 (6)
|
|
|
|
$ |
1,170 |
|
|
|
1,170 |
|
|
|
1,170 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
16,464 |
|
|
|
5,000 |
|
|
|
1.2 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
Control Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
2,103 |
|
|
|
2,060 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
11,465 |
|
|
|
11,182 |
|
|
|
2.6 |
% |
NRG
Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (1,000 total common shares issued and 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 |
% |
|
|
|
|
|
|
|
|
|
15,397 |
|
|
|
21,736 |
|
|
|
5.0 |
% |
R-V
Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares (800,000 total common shares issued and
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 |
% |
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
37,721 |
|
|
|
15,580 |
|
|
|
3.6 |
% |
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 |
% |
|
|
|
|
|
|
|
|
|
40,420 |
|
|
|
25,726 |
|
|
|
6.0 |
% |
Total Control
Investments
|
|
|
|
|
|
|
|
|
203,661 |
|
|
|
205,827 |
|
|
|
48.0 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
15,632 |
|
|
|
15,632 |
|
|
|
3.6 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate Investments (less than 5.00% of voting
control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 8/06/2012 (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 |
% |
IEC
Systems LP ("IEC")/ Advanced 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 |
% |
|
|
|
|
|
|
|
|
|
24,853 |
|
|
|
24,853 |
|
|
|
5.8 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments
(less
than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick
Healthcare, LLC (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 |
% |
|
|
|
|
|
|
|
|
|
13,752 |
|
|
|
13,752 |
|
|
|
3.2 |
% |
Miller
Petroleum, Inc.
|
|
Tennessee/
Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants,
common shares, expiring 5/04/2010 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 |
% |
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 |
% |
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
19,351 |
|
|
|
4.5 |
% |
See
notes to consolidated financial statements.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS – (CONTINUED)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
Portfolio
Investments (1)
|
|
|
|
Par
Value/
Shares
Ownership
%
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate
Investments
(less
than 5.00% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker
Energy, LLC (20), (4)
|
|
Ohio/
Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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)
December
31, 2008 and June 30, 2008
(in
thousands, except share data)
Endnote Explanations for the
Consolidated Schedule of Investments as of December 31, 2008 and June 30, 2008
_________________________
(1)
|
The
securities in which Prospect Capital Corporation ("we", "us" or "our")
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
(see 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 market values of these investments
at December 31, 2008 and June 30, 2008 were $415,825 and $369,418,
respectively; they represent 97.2% 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 - December 31, 2008 or June 30, 2008, as
applicable.
|
(9)
|
There
are several entities involved in the Worcester Energy Partners, Inc.
("WEPI") 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., 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.
("Precision"), which represents 100% ownership. Precision conducts all
logging, processing and delivery operations to supply fuel to the biomass
generation facility. As of December 31, 2008, our Board of Directors
assessed a fair value of $0 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 Holdings LLC
("AEH") investment. We own warrants the exercise of which will permit us
to purchase 15,215 units of Class A common units of AEH at a nominal cost
and in near-immediate fashion. We own 200 units of Series A preferred
equity, 241 units of Series B preferred equity, and 62.5 units of Series C
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 AEH.
|
(11)
|
We
own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,038 out of a total of
65,232 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 - December 31, 2008 or June 30, 2008, as
applicable.
|
(13)
|
In
addition to the stated returns, we also hold overriding royalty interests
on which we receive payment based upon operations of the borrower and net
profit interests which will be realized upon sale of the borrower or a
sale of the interests.
|
(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 - December 31, 2008 or
June 30, 2008, as applicable.
|
(15)
|
In
addition to the stated returns, we also hold net profit interests which
will be realized upon sale of the borrower or a sale of the
interests.
|
(16)
|
Interest
rate is the greater of 13.0% or 12-Month LIBOR plus 7.5%; rate reflected
is as of the reporting date - December 31, 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 - December 31, 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 - December 31, 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 - December 31, 2008 or June 30, 2008, as
applicable.
|
(20)
|
In
addition to the stated returns, we also hold overriding royalty interests
on which we receive payment based upon operations of the
borrower.
|
(21)
|
Interest
rate is the greater of 12.0% or 12-Month LIBOR plus 7.0%; rate reflected
is as of the reporting date - December 31, 2008 or June 30, 2008, as
applicable.
|
(22)
|
As
of December 31, 2008 and June 30, 2008, interest rate is the greater of
14.50% and 12.75%, respectively, or 3-Month LIBOR plus 7.25%; rate
reflected is as of the reporting date – December 31, 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. ("Yatesville"), and consolidated the
operations under one management team. In the transaction, the debt that we
held of C&A Construction, Inc. ("C&A") (which is part of the
Whymore Coal Entities described below), Genesis Coal Corp. ("Genesis"),
North Fork Collieries LLC ("North Fork") and Unity Virginia Holdings LLC
("Unity") were exchanged for newly issued debt from Yatesville, and our
ownership interests in C&A, E&L Construction, Inc. ("E&L"),
Whymore Coal Company Inc. ("Whymore"), Genesis and North Fork were
exchanged for 100% of the equity of Yatesville. This reorganization allows
for a better utilization of the assets in the consolidated
group.
At
December 31, 2008 and at June 30, 2008, Yatesville owned 100% of the
membership interest of North Fork. In addition, Yatesville held a $5,984
and $5,721, respectively, note receivable from North Fork as of those two
respective dates.
At
December 31, 2008 and at June 30, 2008, Yatesville owned 81% and 75%,
respectively, of the common stock of Genesis and held a note receivable of
$19,802 and $17,692, respectively, as of those two respective
dates.
Yatesville held a
note receivable of $4,078 and $3,902, respectively, from Unity at December
31, 2008 and at June
30, 2008.
There are several entities involved in
Yatesville's investment in the Whymore Coal Entities at December 31, 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 $13,805 and $12,822, respectively, senior
secured debt receivable from C&A, which owns the equipment. Yatesville
owned 10,000 shares of common stock or 100% of the equity of 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, 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 - December 31, 2008 or June 30, 2008, as
applicable.
|
(26)
|
On
a fully diluted basis represents, 11.677% 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 - December 31, 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 - December 31, 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 - December 31, 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 - December 31, 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 - December 31, 2008 or
June 30, 2008, as applicable.
|
(32)
|
Total
common shares outstanding of 15,616,856 as of October 31, 2008 from Miller
Petroleum, Inc.'s Quarterly Report on Form 10-Q filed on December 12,
2008.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 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
("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 ("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
("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 ("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 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.
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.
|
Each
portfolio company or investment is 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 value amount (discounted) calculated based on an appropriate
discount rate. The measurement is based on the net present 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 ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("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 or
for the current quarter ended December 31, 2008.
FAS
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 us 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 GAAP 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 Statement of Financial Accounting Standards No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115" ("FAS 159"). FAS 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 FAS 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.
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. At December 31, 2008,
we have elected to retain a portion of our annual taxable income and have
accrued $533 for the excise tax that will be paid with the filing of the
return.
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
December 31, 2008 and for the three and six months 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 Securities and Exchange Commission ("SEC")
registration, legal and accounting fees incurred through December 31, 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
Certain
reclassifications have been made in the presentation of prior consolidated
financial statements to conform to the presentation as of and for the three and
six months ended December 31, 2008.
Recent Accounting
Pronouncements
In
March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133" ("FAS 161"). FAS 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 derivatives affect an entity's results of
operations, financial position, and cash flows. FAS 161 becomes effective for
fiscal years beginning after November 15, 2008; therefore, is applicable for our
fiscal year beginning July 1, 2009. Our management does not believe that the
adoption of FAS 161 will have a material impact on our financial
statements.
In
March 2008, the FASB issued Statement of Financial Accounting Standards No.162,
"The Hierarchy of Generally Accepted Accounting Principles" ("FAS 162"). FAS 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 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 FAS
162 will have a material impact on our financial statements.
Note 3. Portfolio
Investments
At
December 31, 2008, we had $555,661 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 December 31, 2008, we own controlling interests in Ajax Rolled Ring &
Machine ("Ajax"), C&J Cladding, LLC ("C&J"), Gas Solutions Holdings,
Inc. ("GSHI"), Integrated Contract Services, Inc. ("Integrated"), Iron Horse
Coiled Tubing, Inc. ("Iron Horse"), NRG Manufacturing, Inc. ("NRG"), R-V
Industries, Inc. ("R-V"), Worcester Energy Partners, Inc. ("WEPI") and
Yatesville Coal Holdings, Inc. ("Yatesville"). As of December 31, 2008, we also
own affiliated interests in Appalachian Energy Holdings, LLC ("AEH") and
Biotronic NeuroNetwork ("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
AEH.
The
fair values of our portfolio investments as of December 31, 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
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
216,448 |
|
|
$ |
216,448 |
|
Affiliate investments
|
|
|
— |
|
|
|
— |
|
|
|
31,721 |
|
|
|
31,721 |
|
Non-control/Non-affiliate investments
|
|
|
— |
|
|
|
— |
|
|
|
307,492 |
|
|
|
307,492 |
|
|
|
|
— |
|
|
|
— |
|
|
|
555,661 |
|
|
|
555,661 |
|
Investments in money market funds
|
|
|
22,606 |
|
|
|
— |
|
|
|
— |
|
|
|
22,606 |
|
Total assets reported at fair value
|
|
$ |
22,606 |
|
|
$ |
— |
|
|
$ |
555,661 |
|
|
$ |
578,267 |
|
The
aggregate values of Level 3 portfolio investments changed during the three and
six months ended December 31, 2008 as follows:
|
|
For
the Periods Ended
December
31, 2008
|
|
|
|
|
|
|
|
|
Change in Portfolio Valuations using Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
Fair value at beginning of period: September 30, 2008 and June 30, 2008,
respectively
|
|
$ |
549,303 |
|
|
$ |
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
|
|
|
358 |
|
|
|
2,128 |
|
Included in realized gain/loss on investments
|
|
|
16 |
|
|
|
1,661 |
|
Included in net change in unrealized appreciation/depreciation on
investments
|
|
|
(5,452 |
) |
|
|
(16,601 |
) |
Payments for purchases of investments, payment-in-kind interest, and net
profits interests
|
|
|
13,564 |
|
|
|
84,020 |
|
Proceeds from sale of investments and collection of investment
principal
|
|
|
(2,128 |
) |
|
|
(13,077 |
) |
Fair value at December 31, 2008
|
|
$ |
555,661 |
|
|
$ |
555,661 |
|
The amount of net unrealized gain (loss) included in the results of
operations attributable to Level 3 assets still held at December 31, 2008
and reported within the caption Net change in unrealized
appreciation/depreciation in the Consolidated Statement of
Operations:
|
|
$ |
(5,452 |
) |
|
$ |
(12,130 |
) |
At
December 31, 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 $55,742 and $14,803 as of December 31, 2008, and June 30, 2008, respectively.
The fair values of these investments represent approximately 3.4% and 0.9% of
our net assets as of December 31, 2008 and June 30, 2008, respectively. For the
three months ended December 31, 2008, and December 31, 2007, the income foregone
as a result of not accruing interest on these debt investments amounted to
$2,528 and $682, respectively. For the six months ended December 31, 2008, and
December 31, 2007, the income foregone as a result of not accruing interest on
these debt investments amounted to $4,983 and $682, respectively.
GSHI
has indemnified us against any legal action arising from its investment in Gas
Solutions, LP. We have incurred approximately $2,096 from the inception of the
investment in GSHI through December 31, 2008 for fees associated with a legal
action, and GSHI has reimbursed us for the entire amount. Of the $2,096
reimbursement $41 and $11 are reflected as dividend income: control investments
in the Consolidated Statements of Operations for the three months ended December
31, 2008 and December 31, 2007, respectively; $182 and $21 are reflected as
dividend income: control investments for the six months ended December 31, 2008
and December 31, 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 in the Consolidated
Statements of Operations. For the three months ended December 31, 2008 and
December 31, 2007, such reimbursements totaled as $1,895 and $907, respectively.
For the six months ended December 31, 2008 and December 31, 2007, reimbursements
totaled $3,515 and $1,719, respectively.
The
original cost basis of debt placements and equity securities acquired totaled to
approximately $13,564 and $120,846 during the three months ended December 31,
2008 and December 31, 2007, respectively. These placements and acquisitions
totaled to approximately $84,020 and $161,239 during the six months ended
December 31, 2008 and December 31, 2007, respectively. Debt repayments and sales
of equity securities with a cost basis of approximately $2,112 and $19,223 were
made during the three months ended December 31, 2008 and December 31, 2007,
respectively. These repayments and sales amounted to $11,416 and $37,172 during
the six months ended December 31, 2008 and December 31, 2007,
respectively.
Note 4. Other Investment
Income
Other
investment income consists of structuring fees, overriding royalty interests,
settlement of net profit interests, deal deposits, administrative agent fee, and
other miscellaneous and sundry cash receipts. Income from such sources for the
three and six months ended December 31, 2008 and December 31, 2007 were as
follows:
|
|
For
The Three Months Ended
December
31,
|
|
|
For
The Six Months Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structuring
fees
|
|
$ |
87 |
|
|
$ |
1,132 |
|
|
$ |
774 |
|
|
$ |
1,941 |
|
Overriding
royalty
interests
|
|
|
173 |
|
|
|
138 |
|
|
|
331 |
|
|
|
214 |
|
Settlement
of net profits
interests
|
|
|
— |
|
|
|
— |
|
|
|
12,576 |
|
|
|
— |
|
Deal
deposit
|
|
|
(20 |
) |
|
|
— |
|
|
|
62 |
|
|
|
36 |
|
Administrative
agent
fee
|
|
|
18 |
|
|
|
11 |
|
|
|
35 |
|
|
|
21 |
|
Miscellaneous
|
|
|
49 |
|
|
|
— |
|
|
|
49 |
|
|
|
10 |
|
Other
Investment
Income
|
|
$ |
307 |
|
|
$ |
1,281 |
|
|
$ |
13,827 |
|
|
$ |
2,222 |
|
Note 5. Sale and Purchases of Common
Stock
We
did not issue any common stock during the six months ended December 31, 2008. We
issued 3,700,000 shares of common stock during the six months ended December 31,
2007 through a public offering. The proceeds raised, the related underwriting
fees, the offering expenses and the prices at which these shares were issued are
as follows:
Issuances
of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
13, 2007 over-allotment
|
|
|
200,000 |
|
|
$ |
3,268 |
|
|
$ |
163 |
|
|
$ |
— |
|
|
$ |
16.340 |
|
October
17,
2007
|
|
|
3,500,000 |
|
|
|
57,190 |
|
|
|
2,859 |
|
|
|
567 |
|
|
|
16.340 |
|
Our
shareholders' equity accounts at December 31, 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.
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. We have not made any purchases of our common stock during
the three months ended December 31, 2008 pursuant to this plan.
Note 6. Net Increase (Decrease) in Net
Assets per Common Share
The
following information sets forth the computation of net increase (decrease) in
net assets resulting from operations per common share for the three and six
months ended December 31, 2008 and December 31, 2007, respectively.
|
|
For
The Three Months Ended
December
31,
|
|
|
For
The Six Months Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from
operations
|
|
$ |
6,524 |
|
|
$ |
(3,686 |
) |
|
$ |
20,522 |
|
|
$ |
4,864 |
|
Weighted average common shares outstanding
|
|
|
29,618,762 |
|
|
|
23,249,399 |
|
|
|
29,569,571 |
|
|
|
21,603,932 |
|
Net
increase (decrease) in net assets resulting from operations
per common share
|
|
|
0.22 |
|
|
|
(0.16 |
) |
|
|
0.69 |
|
|
|
0.23 |
|
Note 7. Related Party Agreements and
Transactions
Investment Advisory
Agreement
We
have entered into an investment advisory and management agreement (the
"Investment Advisory Agreement") with Prospect Capital Management (the
"Investment Adviser") 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.
The
Investment Adviser'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. 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
total base management fees incurred to the favor of the Investment Adviser for
the three months ended December 31, 2008 and December 31, 2007 were $2,940, and
$2,112, respectively. The fees incurred for the six months ended December 31,
2008 and December 31, 2007 were $5,763, and $3,978, 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
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 December 31, 2008 and December 31, 2007, $2,990 and
$2,665, respectively, of income incentive fees were incurred. For the six months
ended December 31, 2008 and December 31, 2007, $8,865 and $4,631, respectively,
of income incentive fees were incurred. No capital gains incentive fees were
incurred for the three or six months ended December 31, 2008 and December 31,
2007.
Administration
Agreement
We
have also entered into an Administration Agreement with Prospect Administration,
LLC ("Prospect Administration" or the "Administrator") 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.
Overhead
expenses allocated to us by Prospect Administration amounted to $588 and $260
for the three months ended December 31, 2008 and December 31, 2007,
respectively. These allocations totaled $1,176 and $520 for the six months ended
December 31, 2008 and December 31, 2007, respectively.
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 provided the service of William E.
Vastardis as our Chief Financial Officer ("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 no longer served as our CFO effective as of
November 11, 2008. At that time, Brian H. Oswald, a managing director at
Prospect Administration, assumed 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. For the three months ended December 31, 2008 and December
31, 2007, managerial assistance fees amounted to $215 and $290, respectively.
For the six months ended December 31, 2008 and December 31, 2007, managerial
assistance fees amounted to $416 and $448, respectively. These fees are paid to
the Administrator.
Note 8. Financial
Highlights
|
|
For
The Three Months Ended
|
|
|
For
The Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value at beginning of period
|
|
$ |
14.63 |
|
|
$ |
15.08 |
|
|
$ |
14.55 |
|
|
$ |
15.04 |
|
Costs
related to the secondary public offering
|
|
|
— |
|
|
|
(0.02 |
) |
|
|
— |
|
|
|
(0.02 |
) |
Net
investment income
|
|
|
0.40 |
|
|
|
0.46 |
|
|
|
1.20 |
|
|
|
0.86 |
|
Net
realized gain (loss)
|
|
|
— |
|
|
|
(0.80 |
) |
|
|
0.06 |
|
|
|
(0.86 |
) |
Net
unrealized appreciation (depreciation)
|
|
|
(0.18 |
) |
|
|
0.18 |
|
|
|
(0.56 |
) |
|
|
0.23 |
|
Share
issued for dividend reinvestments
|
|
|
(0.01 |
) |
|
|
— |
|
|
|
(0.01 |
) |
|
|
— |
|
Net
increase in net assets as a result of public offering
|
|
|
— |
|
|
|
0.07 |
|
|
|
— |
|
|
|
0.11 |
|
Dividends
declared
|
|
|
(0.40 |
) |
|
|
(0.39 |
) |
|
|
(0.80 |
) |
|
|
(0.78 |
) |
Difference
due to rounding
|
|
|
(0.01 |
) |
|
|
— |
|
|
|
(0.01 |
) |
|
|
— |
|
Net
asset value at end of period
|
|
$ |
14.43 |
|
|
$ |
14.58 |
|
|
$ |
14.43 |
|
|
$ |
14.58 |
|
Per
share market value at end of period
|
|
$ |
11.97 |
|
|
$ |
13.05 |
|
|
$ |
11.97 |
|
|
$ |
13.05 |
|
Total
return based on market value (2)
|
|
|
(3.41 |
%) |
|
|
(20.98 |
%) |
|
|
(3.17 |
%) |
|
|
(21.26 |
%) |
Total
return based on net asset value (2)
|
|
|
1.96 |
% |
|
|
(0.36 |
%) |
|
|
5.74 |
% |
|
|
2.18 |
% |
Shares
outstanding at end of period
|
|
|
29,637,928 |
|
|
|
23,721,138 |
|
|
|
29,637,928 |
|
|
|
23,721,138 |
|
Average
weighted shares outstanding for period
|
|
|
29,618,762 |
|
|
|
23,249,399 |
|
|
|
29,569,571 |
|
|
|
21,603,932 |
|
Ratio
/ Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets at end of period (in thousands)
|
|
$ |
427,803 |
|
|
$ |
345,824 |
|
|
$ |
427,803 |
|
|
$ |
345,824 |
|
Annualized
ratio of operating expenses to
average net assets
|
|
|
9.34 |
% |
|
|
9.79 |
% |
|
|
10.14 |
% |
|
|
9.71 |
% |
Annualized
ratio of net operating income to
average net assets
|
|
|
11.33 |
% |
|
|
13.13 |
% |
|
|
16.86 |
% |
|
|
11.79 |
% |
______________________
(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 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 loss (gain)
|
|
|
(0.69 |
) |
|
|
0.12 |
|
|
|
0.04 |
|
|
|
— |
|
|
|
— |
|
Net unrealized depreciation (appreciation)
|
|
|
(0.05 |
) |
|
|
(0.52 |
) |
|
|
0.58 |
|
|
|
0.90 |
|
|
|
— |
|
Net increase in net assets as a result of public offering
|
|
|
— |
|
|
|
0.26 |
|
|
|
— |
|
|
|
13.95 |
|
|
|
— |
|
Difference 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 |
% |
|
|
— |
|
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 $10,000 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 contingent indemnification are
outstanding which are related to two portfolio companies categorized as Control
Investments – Whymore and North Fork; both of these companies have now been
consolidated as part of Yatesville. The two guarantees are related to Whymore.
As of December 31, 2008, these guarantees are in the amount of $2,792 for
equipment leases and $222 for a "payment-over-time" contract for coal purchases.
The contingent indemnification obligation arose from our acquisition of the
assets of Traveler Coal, LLC ("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 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"). 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. 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 Rabobank Facility to LIBOR plus 250 basis points. At December 31,
2008 and June 30, 2008, the investments used as collateral for the Rabobank
Facility had aggregate market values of $415,825 and $369,418, respectively.
These values represent 97.2% and 86.0% of net assets, respectively.
We
had drawn down $138,667 and $91,167 on the Rabobank Facility as of December 31,
2008 and June 30, 2008, respectively.
Note 12. Selected Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
Net
Realized and Unrealized
Gains
(Losses)
|
|
|
Net
Increase (Decrease) in Net Assets from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
September
30, 2008
|
|
|
35,799 |
|
|
|
1.21 |
|
|
|
23,502 |
|
|
|
0.80 |
|
|
|
(9,504 |
) |
|
|
(0.33 |
) |
|
|
13,998 |
|
|
|
0.47 |
|
December
31, 2008
|
|
|
22,213 |
|
|
|
0.75 |
|
|
|
11,960 |
|
|
|
0.40 |
|
|
|
(5,436 |
) |
|
|
(0.18 |
) |
|
|
6,524 |
|
|
|
0.22 |
|
______________________
(1)
|
Per
share amounts are calculated using weighted average shares during
period.
|
Note 13. Subsequent
Events
On
January 20, 2009, we issued 148,200 shares of our common stock in connection
with the Dividend Reinvestment Plan.
On
January 21, 2009, Diamondback repaid the $9,200 debt outstanding to us. We
continue to hold net profit interests on this investment.
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)
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
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)
|
|
Year
Ended
|
|
|
|
|
June
30,
2008
|
|
|
|
June
30,
2007
|
|
|
|
June
30,
2006
|
|
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)
|
Year
Ended
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2006
|
|
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
Shareholders:
|
|
(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)
|
Year
Ended
|
|
|
June
30,
2008
|
|
June
30,
2007
|
|
June
30,
2006
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
|
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”)/
|
|
Texas/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Rig Services LLC (“ARS”) (4)
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
Ownership
%
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
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
|
|
Utah/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River II Corp.
(4)
|
|
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.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June
30, 2008
(in
thousands, except share data)
(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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
|
Par
Value/
Shares
|
|
|
Cost
|
|
|
Fair
Value
(2)
|
|
%
of Net Assets
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
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
|
|
West
Virginia/
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC (10)
(23)
|
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
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)
Portfolio
Investments (1)
|
|
Locale/Industry
|
|
Par
Value/
Shares
|
|
Cost
|
|
Fair
Value
(2)
|
|
%
of Net
Assets
|
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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULE OF INVESTMENTS, CONTINUED
June
30, 2007
(in
thousands, except share data)
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.
|
|
|
|
b)
|
Valuation:
|
|
|
|
|
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
|
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
|
|
|
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.
|
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
|
|
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.
|
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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
‘‘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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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.
|
For the Year
Ended
|
|
|
|
June
30,
2008
|
|
|
June
30,
2007
|
|
|
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
|
|
Number
of
Shares
Issued
|
|
Gross
Proceeds
Raised
|
|
Underwriting
Fees
|
|
Offering
Expenses
|
|
Offering
Price
|
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.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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.
|
For
the Year Ended
|
|
June
30, 2008
|
|
June
30, 2007
|
|
June
30, 2006
|
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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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 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,
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
Note
8. Financial Highlights
|
Year
Ended
June
30,
2008
|
|
Year
Ended
June
30,
2007
|
|
Year
Ended
June
30,
2006
|
|
Year
Ended
June
30,
2005
|
|
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
|
%
|
|
|
—
|
|
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
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
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 judgement 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 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.
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in
thousands, except share and per share data)
Note
11. Selected Quarterly Financial Data (Unaudited)
|
|
Investment
Income
|
|
Net
Investment Income
|
|
Net
Realized and
Unrealized
Gains
(Losses)
|
|
Net
Increase
(Decrease)
in
Net Assets
from
Operations
|
|
Quarter
Ended
|
|
Total
|
|
Per
Share
(1)
|
|
Total
|
|
Per
Share
(1)
|
|
Total
|
|
Per
Share
(1)
|
|
Total
|
|
Per
Share
(1)
|
|
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.
F-72
$500,000,000
Common
Stock
Preferred
Stock
Warrants
Debt
Securities
_____________________
PROSPECTUS
March
18, 2009