OPERATING RESULTS HIGHLIGHTS Equity Values: Net assets as of September 30, 2009: $607.25 million Net asset value per share as of September 30, 2009: $11.11 First Fiscal Quarter Operating Results: Net investment income: $12.32 million Net investment income per share: $0.25 Dividends declared to shareholders per share: $0.4075
PORTFOLIO AND INVESTMENT ACTIVITY At September 30, 2009, the fair value of our portfolio of 29 long-term investments was approximately $510.8 million. During the quarter ended September 30, 2009, two additional investments, Peerless and C&J, have been repaid, generating a 19% cash-on-cash internal rate of return in each case, not including a 40% equity stake which we continue to hold in C&J. On August 3, 2009, we announced our entering into a definitive agreement to acquire Patriot, including assets with an amortized cost of approximately $311 million, for a purchase price of approximately $197 million, or 63% of amortized cost. We are purchasing Patriot with our common stock plus cash to repay all Patriot debt, anticipated to be approximately $110.5 million when the acquisition closes. At September 30, 2009, Patriot had reduced its debt balance to $112.7 million and will continue to amortize the loan balance through cash sweeps until the closing, which is anticipated on or about December 2, 2009. The merger agreement calls for our common shares to be exchanged at a ratio of approximately 0.3992 for each Patriot share, or 8,616,467 shares of our common stock for 21,584,251 Patriot shares, with such exchange ratio decreased for any tax distributions Patriot may declare before closing. On November 3, 2009, Patriot announced that it would be making a final dividend to Patriot shareholders equal to its undistributed net ordinary income and capital gains. Patriot has estimated that this final dividend will be approximately $0.38 per share, with the final amount determined at closing. In accordance with a recent IRS revenue procedure, the Patriot final dividend will be payable up to 10% in cash and at least 90% in newly issued shares of Patriot's common stock. If $0.038 of the dividend is distributed as cash, the total number of shares to be issued by Prospect in the Patriot merger will be reduced to 8,534,111 shares. The acquisition of Patriot is at a discount to the principal balance of the debt securities being acquired. We expect income accretion of this discount on a quarterly basis and anticipate a majority of this accretion to be income not subject to Prospect shareholder taxation due to the stock-for-stock nature of the transaction. Our net investment income accretion assumptions assume no early repayments. Early repayments would accelerate the recognition of such accretion income. We have also not assumed repricings of any legacy Patriot loans with Patriot borrowers in our assumptions, and such upward repricings to current higher market pricing would also provide upside to our future income. The Patriot acquisition reflects our previously articulated strategy of identifying and closing on opportunities created by the marketplace credit dislocation, including opportunities to acquire financial companies and portfolios with attractive assets but with liquidity issues created by lenders seeking reduced exposure and equity owners seeking exit opportunities, even at potentially steep discounts. We are currently evaluating a number of other portfolios, both public and private, where our ability to provide liquidity has the potential for significant reward. In addition, the Patriot acquisition will approximately double our number of portfolio companies to approximately 59 companies, thereby expanding our diversification by company, by industry, by geography, and by business owner. Approximately 70% of the acquired asset value is in companies where Patriot has a senior secured position. Our gross assets will also expand by more than 30%, providing anticipated scaling benefits as a consolidator in the industry. Primary investment activity in the marketplace has increased substantially in recent weeks, and we are currently evaluating a significant number of potential investments, some of which have the potential to close before year end. Such transactions are primary senior secured investments with double digit coupons, sometimes coupled with equity upside through co-investments or warrants, and diversified by sector. Gas Solutions continues to generate free cash flows, with no third party debt. We are discussing opportunities for potential monetization of our position. LIQUIDITY AND FINANCIAL RESULTS On June 25, 2009, we completed a first closing on an expanded syndicated revolving credit facility (the "Facility"). The Facility includes an accordion feature which allows the Facility to accept up to an aggregate total of $250 million of commitments. Since that initial closing with two lenders, we have added three additional lenders to the facility and currently have commitments totaling $195 million. We continue to solicit additional commitments from other lenders to fill out the facility, and multiple lenders are performing due diligence toward committing to our facility. The facility has an investment grade Moody's rating of A2. As of September 30, 2009, we had zero outstanding borrowings under our credit facility, for which we had available credit of approximately $89 million based on currently pledged assets, as well as cash-equivalent instruments of approximately $92 million. Our credit availability will increase with the pledging of additional assets from the Patriot acquisition. Our unleveraged balance sheet is a source of significant strength in comparison with many overleveraged competitors. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently grow our revolving credit facility and evaluate term debt solutions driven by our Facility's investment grade facility rating. We are actively exploring both Facility and corporate term debt solutions as the credit markets improve in both demand and pricing. We also continue to generate liquidity through stock offerings and the realization of portfolio investments. From March through September 2009, we completed stock offerings aggregating 24,374,297 shares of our common stock, raising approximately $206.0 million in gross proceeds. Two recent offerings were completed in an unregistered format pending declaration of effectiveness of our shelf amendment with disclosure for the Patriot acquisition, and such effectiveness has now been granted. In the second quarter of the fiscal year ended June 30, 2009, we announced the authorization by our board of directors to repurchase up to $20 million of our outstanding stock. To date, we have not made any such repurchases, but we continue to maintain the flexibility to do so should we deem such purchases to be in the best interest of our shareholders. CONFERENCE CALL The Company will host a conference call on Tuesday, November 10, 2009, at 11:00 a.m. Eastern Time. The conference call dial-in number will be 800-860-2442. A recording of the conference call will be available for approximately 30 days. To hear a replay, call 877-344-7529 and use passcode 435501.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2009 and June 30, 2009
(in thousands, except share and per share data)
September 30, June 30,
2009 2009
(Unaudited) (Audited)
--------- ---------
Assets
Investments at fair value (cost of $513,750 and
$531,424, respectively)
Control investments (cost of $188,886 and
$187,105, respectively) $ 198,043 $ 206,332
Affiliate investments (cost of $33,555 and
$33,544, respectively) 31,790 32,254
Non-control/Non-affiliate investments (cost of
$291,309 and $310,775, respectively) 280,965 308,582
--------- ---------
Total investments at fair value 510,798 547,168
--------- ---------
Investments in money market funds 85,143 98,735
Cash 7,020 9,942
Receivables for:
Interest, net 4,652 3,562
Dividends 7 28
Other 314 571
Prepaid expenses 780 68
Deferred financing costs, net 6,781 6,951
--------- ---------
Total Assets 615,495 667,025
--------- ---------
Liabilities
Credit facility payable -- 124,800
Due to Prospect Administration 157 842
Due to Prospect Capital Management 5,874 5,871
Accrued expenses 1,447 2,381
Other liabilities 771 535
--------- ---------
Total Liabilities 8,249 134,429
--------- ---------
Net Assets $ 607,246 $ 532,596
========= =========
Components of Net Assets
Common stock, par value $0.001 per share (100,000,000
and 100,000,000 common shares authorized,
respectively; 54,672,155 and 42,943,084 issued
and outstanding, respectively) $ 55 $ 43
Paid-in capital in excess of par 646,271 545,707
Undistributed net investment income 16,922 24,152
Accumulated realized losses on investments (53,050) (53,050)
Unrealized (depreciation) appreciation on investments (2,952) 15,744
--------- ---------
Net Assets $ 607,246 $ 532,596
========= =========
Net Asset Value Per Share $ 11.11 $ 12.40
========= =========
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30, 2009 and 2008
(in thousands, except share and per share data)
(Unaudited)
For Three Months Ended
--------------------------
September September
30, 2009 30, 2008
------------ ------------
Investment Income
Interest income:
Control investments (Net of foreign
withholding tax of $32 and $47,
respectively) $ 4,591 $ 6,722
Affiliate investments 849 560
Non-control/non-affiliate investments 9,395 10,274
------------ ------------
Total interest income 14,835 17,556
------------ ------------
Dividend income:
Control investments 6,200 4,584
Money market funds 18 139
------------ ------------
Total dividend income 6,218 4,723
------------ ------------
Other income:
Control/affiliate investments -- 744
Non-control/non-affiliate investments 464 12,776
------------ ------------
Total other income 464 13,520
------------ ------------
Total Investment Income 21,517 35,799
------------ ------------
Operating Expenses
Investment advisory fees:
Base management fee 3,209 2,823
Income incentive fee 3,080 5,875
------------ ------------
Total investment advisory fees 6,289 8,698
------------ ------------
Interest and credit facility expenses 1,374 1,518
Sub-administration fees (including former Chief
Financial Officer and Chief Compliance
Officer) -- 250
Legal fees -- 597
Valuation services 120 160
Audit, compliance and tax related fees 262 177
Allocation of overhead from Prospect
Administration 840 588
Insurance expense 63 61
Directors’ fees 64 81
Other general and administrative expenses 187 167
------------ ------------
Total Operating Expenses 9,199 12,297
------------ ------------
Net Investment Income 12,318 23,502
------------ ------------
Net realized gain on investments -- 1,645
Net change in unrealized depreciation on
investments (18,696) (11,149)
------------ ------------
Net (Decrease) Increase in Net Assets
Resulting from Operations $ (6,378) $ 13,998
============ ============
Net (decrease) increase in net assets resulting
from operations per share: $ (0.13) $ 0.47
============ ============
Dividends declared per share: $ 0.41 $ 0.40
============ ============
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
ROLLFORWARD OF NET ASSET VALUE PER SHARE
For the Three Months Ended September 30, 2009 and 2008
(in actual dollars)
(Unaudited)
For The Three
Months Ended
September 30,
--------------------
2009 2008
--------- ---------
Per Share Data:
Net asset value at beginning of period $ 12.40 $ 14.55
Net investment income 0.25 0.80
Realized gain - 0.05
Net unrealized depreciation (0.38) (0.38)
Net decrease in net assets as a result of public
offerings (0.77) -
Dividends declared and paid (0.39) (0.39)
--------- ---------
Net asset value at end of period $ 11.11 $ 14.63
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ABOUT 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. Our investment objective is to generate both current income and
long-term capital appreciation through debt and equity investments.
We have 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 us could have an adverse effect on us and our shareholders.
This press release contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, whose safe harbor
for forward-looking statements does not apply to business development
companies. 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 our
control, and that we 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 we undertake no
obligation to update any such statement now or in the future.