Equity Values: Stockholders' equity as of September 30, 2007: $302.01 million Net asset value per share as of September 30, 2007: $15.08 First Fiscal Quarter Portfolio Activity: Number of new portfolio companies invested: 3 Number of portfolio companies at end of period: 27 First Fiscal Quarter Operating Results: Net investment income excluding non-recurring items*: $8.75 million Net investment income per share excluding non-recurring items*: $0.44 Net investment income: $7.86 million Net realized and unrealized appreciation: $0.69 million Net increase in net assets resulting from operations: $8.55 million Dividends to shareholders per share: $0.3925 * See Supplemental Financial Information belowPORTFOLIO AND INVESTMENT ACTIVITY At September 30, 2007, the fair value of our portfolio of 27 long-term investments was approximately $352.3 million as compared to a fair value of $328.2 million at June 30, 2007. As of September 30, 2007, our portfolio generated a current yield of approximately 15.9% across all our long-term debt and equity investments. This current yield includes interest from all our long-term investments as well as dividends and net profits interest and royalties from certain portfolio companies. During the quarter ended September 30, 2007, we completed three new investments and follow on investments in existing portfolio companies, totaling approximately $40.4 million. The new investments included the following:
-- On July 31, 2007, we invested $15.0 million in senior secured financing in Wind River Resources Corp. and Wind River II Corp., an oil and gas production business based in Salt Lake City, Utah, and received a net profits interest in conjunction with our investment. -- On August 8, 2007, we invested $6.0 million in senior secured financing in Deep Down, Inc., a deepwater drilling services and manufacturing provider based in Houston, Texas, and received warrants in conjunction with our investment. -- On August 28, 2007, we invested $9.2 million in senior secured financing in Diamondback Operating, LP, an oil and gas production company based in Tulsa, Oklahoma, and received a net profits interest in conjunction with our investment.Additionally, on August 16, 2007, Arctic Acquisition Corp. completely repaid its loan with an additional prepayment premium of $461,000 for the loan. Including the prepayment premium but excluding warrants that we continue to hold, we have realized a 20% cash internal rate of return on this investment, representing a 1.25 times cash on cash return. Since the end of the first quarter of our fiscal year ending June 2008, we have made investments in five new portfolio companies, and the follow-on investment described below, aggregating approximately $62 million.
-- On October 9, 2007, we invested approximately $10 million in second lien secured financing for Resco Products, Inc., a leading refractory materials manufacturer and supplier based in Pittsburgh, Pennsylvania, with Hancock Park Associates acting as the private equity financial sponsor. -- On October 17, 2007, we made a $3 million follow-on secured debt investment in NRG Manufacturing, Inc. ("NRG") in support of NRG's acquisition of Dynafab Corporation ("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 provided approximately $5 million of second lien secured debt financing to an outsourced technical services provider based in Pennsylvania, with an affiliate of HM Capital Partners, L.P., whose principals were formerly affiliated with Hicks, Muse, Tate & Furst, Inc., acting as the private equity financial sponsor. -- On November 1, 2007, we invested approximately $14 million consisting of a second lien secured financing and a small equity co-investment in Maverick Healthcare, Inc. (d/b/a Preferred Homecare), a home healthcare services provider based in Mesa, Arizona, with Beecken Petty O'Keefe & Company acting as the private equity financial sponsor. -- On November 5, 2007, we invested approximately $18 million in second lien secured financing in Shearer's Foods, Inc., 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 million in Qualitest Pharmaceuticals, Inc., and affiliates, a leading manufacturer and distributor of generic pharmaceuticals based in Huntsville, Alabama, with Apax Partners as the private equity financial sponsor.As of today, we now have 32 portfolio companies aggregating approximately $410 million of assets, calculated as our September 30 investment portfolio plus additional investments net of repayments. LIQUIDITY AND FINANCIAL RESULTS At September 30, 2007, borrowings under our credit facility stood at approximately $60 million. On October 11, 2007, we priced a public offering of 3.5 million shares of common stock at $16.34 per share, raising $57.2 million in gross proceeds. Our borrowings now aggregate approximately $88 million under our credit facility. We are currently in discussions to increase the size of our $200 million facility. Our net investment income for the quarter ended September 30, 2007, was approximately $7.9 million, or approximately $8.7 million of adjusted net investment income before nonrecurring items. We have shown adjusted net investment income herein below by adding back approximately $1.1 million of non-recurring legal expenses, less any associated incentive fees, incurred in connection with an arbitration (the majority of these legal expenses we believe are now in the past). CONFERENCE CALL We will host a conference call Monday, November 12, 2007, at 11:00 am Eastern Time. The conference call dial-in number is (877) 407-0782. A recording of the conference call will be available for approximately 30 days. To hear a replay, call (877) 660-6853 and use Playback Access Account code 286 and Playback Conference ID code 261411.
CONSOLIDATED STATEMENTS OF NET ASSETS As of As of (in thousands) September 30, June 30, 2007 2007 (unaudited) (audited) Assets Cash and cash equivalents $ 11,348 $ 41,760 Investments in controlled entities at fair value (cost - $129,222 and $124,664, respectively) 145,645 139,292 Investments in affiliated entities at fair value (cost - $14,852 and $14,821, respectively) 14,631 14,625 Investments in non-controlled and non-affiliated entities, at fair value (cost - $205,462 and $186,712, respectively) 191,981 174,305 Interest receivable 3,073 2,139 Dividends receivable 64 263 Loan principal receivable 125 - Structuring fees receivable - 1,625 Other receivables 258 271 Prepaid expenses 651 471 Deferred financing fees 1,965 1,751 Total assets 369,741 376,502 Liabilities Credit facility payable 59,962 - Payable for securities purchased - 70,000 Accrued expenses 2,233 1,312 Due to Prospect Administration, LLC 418 330 Due to Prospect Capital Management, LLC 4,310 4,508 Other current liabilities 807 304 Total liabilities 67,730 76,454 Net Assets $ 302,011 $ 300,048 Components of Net Assets Common stock, par value $.001 per share, (100,000,000 and 100,000,000 common shares authorized, respectively; 20,021,138 and 19,949,065 issued and outstanding, respectively) $ 20 $ 20 Paid-in capital in excess of par 301,088 299,845 Undistributed (distributions in excess of) net investment income (4,057) (4,092) Realized gain 2,239 2,250 Net unrealized appreciation 2,721 2,025 Net Assets $ 302,011 $ 300,048 Net Asset Value Per Share $ 15.08 $ 15.04 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Three Months (in thousands) Ended Ended September 30, September 30, 2007 2006 Investment Income Interest income, controlled entities (net of foreign tax withholding of $89 and $-, respectively) $ 4,848 $ 2,246 Interest income, affiliated entities (net of foreign tax withholding of $35 and $110, respectively) 667 981 Interest income, non controlled and non-affiliated entities 7,317 2,079 Total interest income 12,832 5,306 Dividend income, controlled entities 1,450 850 Dividend income, money market funds 168 276 Total dividend income 1,618 1,126 Other income, affiliate investments 10 - Other income, non-controlled and non-affiliated entities 931 - Total other income 941 - Total investment income 15,391 6,432 Operating Expenses Investment advisory fees Base management fee 1,866 616 Income incentive fee 1,966 818 Total investment advisory fees 3,832 1,434 Interest expense and credit facility costs 1,238 662 Chief Compliance Officer and Sub-administration fees 186 119 Legal fees 1,206 280 Valuation services 113 93 Audit and tax related fees 250 292 Sarbanes-Oxley compliance expenses 10 45 Insurance expense 64 75 Directors fees 55 63 Other general and administrative expenses 572 95 Total operating expenses 7,526 3,158 Net investment income 7,865 3,274 Net realized gain (loss) on investments (11) 1,951 Net unrealized (depreciation) appreciation 696 (1,261) Net increase in net assets resulting from Operations $ 8,550 $ 3,964 Net increase in net assets per weighted average shares of common stock resulting from operations $ 0.43 $ 0.40 PER SHARE DATA Three Months Three Months Ended Ended September 30, September 30, 2007 2006 Net asset value, beginning of period $ 15.04 $ 15.31 Costs related to the secondary public offering - (0.47) Net investment income 0.39 0.33 Realized gain - 0.20 Net unrealized appreciation (depreciation) 0.04 (0.13) Dividend declared and paid (0.39) (0.38) Net asset value at end of period $ 15.08 $ 14.86SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED) (IN THOUSANDS) Please note that the following supplemental financial information represents a reconciliation of a GAAP measure (Net investment income) to a non-GAAP measure (Adjusted net investment income).
Three months Three months ended ended September 30, September 30, 2007 2006 ------------- ------------- Total investment income $ 15,391 $ 6,432 Total operating expenses 7,526 3,158 Net investment income 7,865 3,274 Add back non-recurring items 883 182 Adjusted net investment income $ 8,748 $ 3,456 Net investment income per weighted average common share $ 0.39 $ 0.33 Adjusted net investment income per weighted average common share $ 0.44 $ 0.35ABOUT PROSPECT CAPITAL CORPORATION Prospect Capital Corporation (www.prospectstreet.com) is a closed-end investment company that lends to and invests in private and microcap public businesses. Prospect Capital's investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. Prospect Capital has elected to be treated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We are required to comply with a series of regulatory requirements under the 1940 Act as well as applicable NASDAQ, federal and state rules and regulations. We have elected to be treated as a regulated investment company under the Internal Revenue Code of 1986. Failure to comply with any of the laws and regulations that apply to Prospect Capital could have an adverse effect on Prospect Capital and its shareholders. This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such statements, other than statements of historical fact, are highly likely to be affected by other unknowable future events and conditions, including elements of the future that are or are not under the Company's control, and that the Company may or may not have considered; accordingly, such statements cannot be guarantees or assurances of any aspect of future performance. Actual developments and results are highly likely to vary materially from these estimates and projections of the future. Such statements speak only as of the time when made, and the Company undertakes no obligation to update any such statement now or in the future.
Contact Information: Please send investment proposals to: Grier Eliasek President and Chief Operating Officer grier@prospectstreet.com Telephone (212) 448-0702