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EX-32.2 - EX-32.2 - PROSPECT CAPITAL CORPa12-8887_1ex32d2.htm
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EX-32.1 - EX-32.1 - PROSPECT CAPITAL CORPa12-8887_1ex32d1.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Quarter Ended March 31, 2012

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 814-00659

 

PROSPECT CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Maryland

 

43-2048643

 

 

 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

10 East 40th Street

 

 

 

44th Floor

 

 

 

New York, New York

 

10016

 

 

 

(Address of principal executive offices)

 

(Zip Code)

 

(212) 448-0702

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes    o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). oYes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x   Accelerated Filer  o   Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes    x No

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 10, 2012 was 122,008,994.

 


 



 

PROSPECT CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012
TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

Item 1.

FINANCIAL STATEMENTS

3

 

Consolidated Statements of Assets and Liabilities – March 31, 2012 (Unaudited) and
June 30, 2011 (Audited)

3

 

Consolidated Statements of Operations (Unaudited) - For the Three and Nine Months Ended
March 31, 2012 and 2011

4

 

Consolidated Statements of Changes in Net Assets (Unaudited) - For the Nine Months Ended
March 31, 2012 and 2011

5

 

Consolidated Statements of Cash Flows (Unaudited) - For the Nine Months Ended
March 31, 2012 and 2011

6

 

Consolidated Schedule of Investments – March 31, 2012 (Unaudited) and
June 30, 2011 (Audited)

7

 

Notes to Consolidated Financial Statements (Unaudited)

31

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

52

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

81

Item 4.

Controls and Procedures

81

 

 

 

PART II.

OTHER INFORMATION

81

Item 1.

Legal Proceedings

81

Item 1A.

Risk Factors

82

Item 2.

Unregistered Sales in Equity Securities and Use of Proceeds

83

Item 3.

Defaults Upon Senior Securities

83

Item 4.

Submission of Matters to a Vote of Security Holders

84

Item 5.

Other Information

84

Item 6.

Exhibits

84

 

Signatures

86

 

2



 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

March 31, 2012 and June 30, 2011

(in thousands, except share and per share data)

 

 

 

March 31,
2012

 

June 30,
2011

 

 

(Unaudited)

 

(Audited)

Assets (Note 4)

 

 

 

 

 

 

Investments at fair value:

 

 

 

 

 

 

Control investments (net cost of $232,459 and $262,301, respectively)

 

$

323,786

 

 

$

310,072

 

Affiliate investments (net cost of $59,606 and $56,833, respectively)

 

67,581

 

 

72,337

 

Non-control/Non-affiliate investments (net cost of $1,363,798 and $1,116,600, respectively)

 

1,300,213

 

 

1,080,601

 

Total investments at fair value (net cost of $1,655,863 and $1,435,734, respectively, Note 3)

 

1,691,580

 

 

1,463,010

 

 

 

 

 

 

 

 

Investments in money market funds

 

58,025

 

 

59,903

 

Cash

 

34,978

 

 

1,492

 

Receivables for:

 

 

 

 

 

 

Interest, net

 

12,407

 

 

9,269

 

Other

 

1,686

 

 

267

 

Prepaid expenses

 

154

 

 

101

 

Deferred financing costs

 

17,179

 

 

15,275

 

Total Assets

 

1,816,009

 

 

1,549,317

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Credit facility payable (Note 4)

 

121,000

 

 

84,200

 

Senior Convertible Notes (Note 5)

 

317,500

 

 

322,500

 

Prospect Capital InterNotes® (Note 6)

 

5,465

 

 

 

Dividends payable

 

12,372

 

 

10,895

 

Due to Broker

 

26,569

 

 

 

Due to Prospect Administration (Note 10)

 

362

 

 

212

 

Due to Prospect Capital Management (Note 10)

 

4,315

 

 

7,706

 

Accrued expenses

 

6,166

 

 

5,876

 

Other liabilities

 

3,454

 

 

3,571

 

Total Liabilities

 

497,203

 

 

434,960

 

Net Assets

 

$

1,318,806

 

 

$

1,114,357

 

 

 

 

 

 

 

 

Components of Net Assets

 

 

 

 

 

 

Common stock, par value $0.001 per share (200,000,000 common shares authorized; 121,923,931 and 107,606,690 issued and outstanding, respectively) (Note 7)

 

$

122

 

 

$

108

 

Paid-in capital in excess of par (Note 7)

 

1,348,996

 

 

1,196,741

 

Distributions in excess of net investment income

 

(1,602

)

 

(21,638

)

Accumulated net realized losses on investments

 

(64,427

)

 

(88,130

)

Net unrealized appreciation on investments

 

35,717

 

 

27,276

 

Net Assets

 

$

1,318,806

 

 

$

1,114,357

 

 

 

 

 

 

 

 

Net Asset Value Per Share

 

$

10.82

 

 

$

10.36

 

 

See notes to consolidated financial statements.

 

3


 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Nine Months Ended March 31, 2012 and 2011
(in thousands, except share and per share data)
(Unaudited)

 

 

 

For The Three Months Ended

 

 

For The Nine Months Ended

 

 

March 31,

 

 

March 31,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Investment Income

 

 

 

 

 

 

 

 

 

 

 

Interest Income: (Note 3)

 

 

 

 

 

 

 

 

 

 

 

Control investments

 

$

32,966

 

 

$

5,180

 

 

$

45,546

 

 

$

15,798

Affiliate investments

 

2,378

 

 

3,049

 

 

7,179

 

 

9,523

Non-control/Non-affiliate investments

 

37,602

 

 

26,275

 

 

107,636

 

 

65,466

Total interest income

 

72,946

 

 

34,504

 

 

160,361

 

 

90,787

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income:

 

 

 

 

 

 

 

 

 

 

 

Control investments

 

5,474

 

 

2,760

 

 

29,819

 

 

6,810

Non-control/Non-affiliate investments

 

2,002

 

 

 

 

4,843

 

 

1,508

Money market funds

 

1

 

 

3

 

 

2

 

 

10

Total dividend income

 

7,477

 

 

2,763

 

 

34,664

 

 

8,328

 

 

 

 

 

 

 

 

 

 

 

 

Other income: (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Control investments

 

13,768

 

 

2

 

 

14,386

 

 

1,787

Affiliate investments

 

11

 

 

22

 

 

85

 

 

176

Non-control/Non-affiliate investments

 

1,421

 

 

7,282

 

 

8,732

 

 

12,007

Total other income

 

15,200

 

 

7,306

 

 

23,203

 

 

13,970

Total Investment Income

 

95,623

 

 

44,573

 

 

218,228

 

 

113,085

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Investment advisory fees:

 

 

 

 

 

 

 

 

 

 

 

Base management fee (Note 10)

 

8,949

 

 

6,037

 

 

25,985

 

 

15,216

Income incentive fee (Note 10)

 

14,518

 

 

5,997

 

 

30,614

 

 

16,015

Total investment advisory fees

 

23,467

 

 

12,034

 

 

56,599

 

 

31,231

 

 

 

 

 

 

 

 

 

 

 

 

Interest and credit facility expenses

 

9,655

 

 

5,660

 

 

28,374

 

 

10,182

Legal fees

 

256

 

 

283

 

 

1,198

 

 

763

Valuation services

 

308

 

 

262

 

 

916

 

 

711

Audit, compliance and tax related fees

 

276

 

 

168

 

 

1,141

 

 

649

Allocation of overhead from Prospect Administration (Note 10)

 

2,910

 

 

1,669

 

 

5,143

 

 

3,309

Insurance expense

 

69

 

 

74

 

 

168

 

 

217

Directors’ fees

 

68

 

 

64

 

 

195

 

 

191

Other general and administrative expenses

 

542

 

 

403

 

 

2,037

 

 

1,801

Total Operating Expenses

 

37,551

 

 

20,617

 

 

95,771

 

 

49,054

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

58,072

 

 

23,956

 

 

122,457

 

 

64,031

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain on investments (Note 3)

 

24,812

 

 

2,078

 

 

23,703

 

 

7,094

Net change in unrealized appreciation /depreciation on investments (Note 3)

 

(32,675)

 

 

7,725

 

 

8,441

 

 

20,154

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Net Assets Resulting from Operations

 

$

50,209

 

 

$

33,759

 

 

$

154,601

 

 

$

91,279

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in net assets resulting from operations per share: (Note 9 and Note 14)

 

$

0.44

 

 

$

0.38

 

 

$

1.39

 

 

$

1.11

Dividends declared per share

 

$

0.30

 

 

$

0.30

 

 

$

0.91

 

 

$

0.91

 

See notes to consolidated financial statements.

 

4



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Nine Months Ended March 31, 2012 and 2011
(in thousands, except share data)
(Unaudited)

 

 

 

For The Nine Months Ended March 31,

 

 

2012

 

 

2011

 

Increase in Net Assets from Operations: 

 

 

 

 

 

 

Net investment income

 

$

122,457

 

 

$

64,031

 

Net realized gain on investments

 

23,703

 

 

7,094

 

Net change in unrealized appreciation on investments

 

8,441

 

 

20,154

 

Net Increase in Net Assets Resulting from Operations

 

154,601

 

 

91,279

 

 

 

 

 

 

 

 

Dividends to Shareholders

 

(102,421)

 

 

(75,541)

 

 

 

 

 

 

 

 

Capital Share Transactions: 

 

 

 

 

 

 

Proceeds from capital shares sold, net of underwriting costs

 

144,900

 

 

178,317

 

Less: Offering costs of public share offerings

 

(524)

 

 

(724)

 

Reinvestment of dividends

 

7,893

 

 

8,166

 

Net Increase in Net Assets Resulting from Capital Share Transactions 

 

152,269

 

 

185,759

 

 

 

 

 

 

 

 

Total Increase in Net Assets 

 

204,449

 

 

201,497

 

Net assets at beginning of period

 

1,114,357

 

 

711,424

 

Net Assets at End of Period 

 

$

1,318,806

 

 

$

912,921

 

 

 

 

 

 

 

 

Capital Share Activity: 

 

 

 

 

 

 

Shares sold

 

13,500,000

 

 

18,494,476

 

Shares issued through reinvestment of dividends

 

817,241

 

 

777,473

 

Net increase in capital share activity

 

14,317,241

 

 

19,271,949

 

Shares outstanding at beginning of period

 

107,606,690

 

 

69,086,862

 

 

 

 

 

 

 

 

Shares Outstanding at End of Period 

 

121,923,931

 

 

88,358,811

 

 

See notes to consolidated financial statements.

 

5



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended March 31, 2012 and 2011
(in thousands, except share data)
(Unaudited)

 

 

 

For The Nine Months Ended March 31,

 

 

 

 

2012

 

 

 

2011

 

Cash Flows from Operating Activities: 

 

 

 

 

 

 

Net increase in net assets resulting from operations

 

$

154,601

 

 

$

91,279

 

Net realized gain on investments

 

(23,703

)

 

(7,094

)

Net change in unrealized appreciation on investments

 

(8,441

)

 

(20,154

)

Accretion of purchase discount on investments

 

(3,741

)

 

(10,874

)

Amortization of deferred financing costs

 

7,174

 

 

3,628

 

 

 

 

 

 

 

 

Change in operating assets and liabilities 

 

 

 

 

 

 

Payments for purchases of investments

 

(542,846

)

 

(632,526

)

Proceeds from sale of investments and collection of investment principal

 

354,660

 

 

214,124

 

Net decrease (increase) of investments in money market funds

 

1,878

 

 

(26,048

)

Increase in interest receivable

 

(7,637

)

 

(13,882

)

Increase in dividends receivable

 

(75

)

 

(59

)

Increase in other receivables

 

(1,344

)

 

(142

)

Increase in prepaid expenses

 

(53

)

 

(125

)

Decrease in other assets

 

 

 

534

 

Increase in due to broker

 

26,569

 

 

 

Increase in due to Prospect Administration

 

150

 

 

1,162

 

Decrease in due to Prospect Capital Management

 

(3,391

)

 

(2,653

)

Increase in payable for securities purchased

 

 

 

31,984

 

Increase in accrued expenses

 

290

 

 

1,262

 

(Decrease) increase in other liabilities

 

(117

)

 

1,184

 

Net Cash Used In Operating Activities 

 

(46,026

)

 

(368,400

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities: 

 

 

 

 

 

 

Borrowings under Senior Convertible Notes (Note 5)

 

 

 

322,500

 

Repurchases under Senior Convertible Notes (Note 5)

 

(5,000

)

 

 

Borrowings under credit facility (Note 4)

 

615,800

 

 

259,100

 

Principal payments under credit facility (Note 4)

 

(579,000

)

 

(311,900

)

Borrowings under Prospect Capital InterNotes® (Note 6)

 

5,465

 

 

 

Financing costs paid and deferred

 

(9,078

)

 

(12,235

)

Proceeds from issuance of common stock, net of underwriting costs

 

144,900

 

 

178,317

 

Offering costs from issuance of common stock

 

(524

)

 

(724

)

Dividends paid

 

(93,051

)

 

(65,344

)

Net Cash Provided By Financing Activities

 

79,512

 

 

369,714

 

 

 

 

 

 

 

 

Total Increase in Cash 

 

33,486

 

 

1,314

 

Cash balance at beginning of period

 

1,492

 

 

1,081

 

Cash Balance at End of Period 

 

$

34,978

 

 

$

2,395

 

 

 

 

 

 

 

 

Cash Paid For Interest 

 

$

19,607

 

 

$

1,377

 

 

 

 

 

 

 

 

Non-Cash Financing Activity: 

 

 

 

 

 

 

Payment-in-kind interest

 

$

4,499

 

 

$

8,510

 

Amount of shares issued in connection with dividend reinvestment plan

 

$

7,893

 

 

$

8,166

 

 

See notes to consolidated financial statements.

 

6



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIRMALL USA, Inc. (27)

 

Pennsylvania / Property Management

 

Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/30/2015)(3), (4)

 

$  29,500

 

$  29,500

 

$  29,500

 

2.2%

 

 

 

Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015)

 

12,500

 

12,500

 

12,500

 

1.0%

 

 

 

Convertible Preferred Stock (9,919.684 shares)

 

 

 

9,920

 

5,803

 

0.4%

 

 

 

Common Stock (100 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

51,920

 

47,803

 

3.6%

 

Ajax Rolled Ring & Machine, Inc.

 

South Carolina / Manufacturing

 

Senior Secured Note — Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 4/01/2013)(3), (4)

 

20,277

 

20,277

 

20,277

 

1.5%

 

 

 

Subordinated Secured Note — Tranche B (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 6.00% PIK, due 4/01/2013)(3), (4)

 

15,035

 

15,035

 

15,035

 

1.1%

 

 

 

Convertible Preferred Stock — Series A (6,142.6 shares)

 

 

 

6,057

 

11,212

 

0.9%

 

 

 

Unrestricted Common Stock (6 shares)

 

 

 

 

11

 

0.0%

 

 

 

 

 

 

 

 

 

41,369

 

46,535

 

3.5%

 

AWCNC, LLC(19)

 

North Carolina / Machinery

 

Members Units — Class A (1,800,000 units)

 

 

 

 

 

0.0%

 

 

Members Units — Class B-1 (1 unit)

 

 

 

 

 

0.0%

 

 

Members Units — Class B-2 (7,999,999 units)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

0.0%

 

Borga, Inc.

 

California / Manufacturing

 

Revolving Line of Credit — $1,000 Commitment (5.00% (PRIME + 1.75%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4), (25)

 

1,000

 

945

 

936

 

0.1%

 

 

Senior Secured Term Loan B (8.50% (PRIME + 5.25%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4)

 

1,612

 

1,500

 

 

0.0%

 

 

Senior Secured Term Loan C (12.00% plus 4.00% PIK plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)

 

9,259

 

707

 

 

0.0%

 

 

Common Stock (100 shares)(21)

 

 

 

 

 

0.0%

 

 

Warrants (33,750 warrants)(21)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

3,152

 

936

 

0.1%

 

C&J Cladding LLC

 

Texas / Metal Services and Minerals

 

Membership Interest (400 units)(22)

 

 

 

580

 

5,231

 

0.4%

 

 

 

 

 

 

 

 

 

580

 

5,231

 

0.4%

 

 

See notes to consolidated financial statements.

 

 

7


 

 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Holdings, Inc.(8)

 

Texas / Gas Gathering and Processing

 

Senior Secured Note (18.00%, due 12/11/2016) (3)

 

$   25,000

 

$  25,000

 

$  25,000

 

1.8%

 

 

Junior Secured Note (18.00%, due 12/12/2016) (3)

 

12,000

 

12,000

 

12,000

 

0.9%

 

 

Senior Secured Note to Vessel Holdings LLC (18.00%, due 12/12/2016)

 

3,500

 

3,500

 

3,500

 

0.3%

 

 

Subordinated Secured Note to Freedom Marine Holdings, LLC (12.00% (LIBOR + 6.11% with 5.89% LIBOR floor) plus 4.00% PIK, in non-accrual status effective 10/1/2010, due 12/31/2011)

 

13,219

 

12,504

 

3,549

 

0.3%

 

 

Senior Secured Debt to Yatesville Coal Holdings, Inc. (Non-accrual status effective 1/01/2009, past due)

 

1,035

 

1,035

 

 

0.0%

 

 

Junior Secured Debt to Yatesville Coal Holdings, Inc. (Non-accrual status effective 1/01/2009, past due)

 

414

 

414

 

 

0.0%

 

 

 

 

 

Common Stock (100 shares)(3)

 

 

 

8,792

 

122,211

 

8.7%

 

 

 

 

 

 

 

 

 

63,245

 

166,260

 

12.6%

 

Integrated Contract Services, Inc.(9)

 

North Carolina / Contracting

 

Secured Promissory Notes (15.00%, in non-accrual status effective 12/22/2010, due 3/21/2012 – 12/31/2013) (10)

 

2,581

 

2,580

 

1,106

 

0.1%

 

 

Senior Demand Note (15.00%, in non-accrual status effective 11/1/2010, past due)(10)

 

1,170

 

1,170

 

 

0.0%

 

 

Senior Secured Note (7.00%  plus 7.00% PIK plus 6.00% default interest, in non-accrual status effective 10/09/2007, past due)

 

300

 

 

 

0.0%

 

 

Junior Secured Note (7.00%  plus 7.00% PIK plus 6.00% default interest, in non-accrual status effective 10/09/2007, past due)

 

11,520

 

11,520

 

 

0.0%

 

 

Preferred Stock — Series A (10 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

Common Stock (49 shares)

 

 

 

679

 

 

0.0%

 

 

 

 

 

 

 

 

 

15,949

 

1,106

 

0.1%

 

Manx Energy, Inc. (“Manx”)(12)

 

Kansas / Oil & Gas Production

 

Appalachian Energy Holdings, LLC (“AEH”) — Senior Secured First Lien Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)

 

2,388

 

2,000

 

 

0.0%

 

 

Coalbed, LLC — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)(6)

 

7,165

 

5,991

 

 

0.0%

 

 

Manx — Senior Secured Note (13.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)

 

3,550

 

3,550

 

 

0.0%

 

 

Manx — Preferred Stock (6,635 shares)

 

 

 

6,307

 

 

0.0%

 

 

Manx — Common Stock (17,082 shares)

 

 

 

1,170

 

 

0.0%

 

 

 

 

 

 

 

 

 

19,018

 

 

0.0%

 

NMMB Holdings, Inc. (24)

New York / Media

 

Senior Term Loan (14.00%, due 5/6/2016)

 

21,700

 

21,700

 

21,700

 

1.6%

 

 

Senior Subordinated Term Loan (15.00%, due 5/6/2016)

 

2,800

 

2,800

 

2,800

 

0.2%

 

 

Series A Preferred Stock (4,400 shares)

 

 

 

4,400

 

947

 

0.1%

 

 

 

 

 

 

 

 

 

28,900

 

25,447

 

1.9%

 

NRG Manufacturing, Inc.

 

Texas / Manufacturing

 

Escrow Receivable

 

11,492

 

 

6,302

 

0.5%

 

 

 

 

 

 

 

 

 

 

6,302

 

0.5%

 

 

 

8


 

 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nupla Corporation

 

California / Home & Office Furnishings, Housewares & Durable

 

Revolving Line of Credit — $2,000 Commitment (7.25% (PRIME + 4.00%), plus 2.00% default interest, due 9/04/2012)(4), (25)

 

$  1,093

 

$ 1,063

 

$ 1,093

 

0.1%

 

 

 

Senior Secured Term Loan A (8.00% (PRIME + 4.75%) plus 2.00% default interest, due 9/04/2012)(4)

 

4,130

 

494

 

4,130

 

0.3%

 

 

 

Senior Subordinated Debt (15.00% PIK, in non-accrual status effective 4/01/2009, due 3/04/2013)

 

4,373

 

 

500

 

0.0%

 

 

 

Preferred Stock — Class A (2,850 shares)

 

 

 

 

 

0.0%

 

 

 

Preferred Stock — Class B (1,330 shares)

 

 

 

 

 

0.0%

 

 

 

Common Stock (2,360,743 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

1,557

 

5,723

 

0.4%

 

R-V Industries, Inc.

 

Pennsylvania / Manufacturing

 

Warrants (200,000 warrants, expiring 6/30/2017)

 

 

 

1,682

 

4,950

 

0.4%

 

 

 

Common Stock (545,107 shares)

 

 

 

5,087

 

13,493

 

1.0%

 

 

 

 

 

 

 

 

 

6,769

 

18,443

 

1.4%

 

 

 

 

 

Total Control Investments

 

232,459

 

323,786

 

24.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate Investments (5.00% to 24.99% voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BNN Holdings Corp., (f/k/a Biotronic NeuroNetwork)

 

Michigan / Healthcare

 

Senior Secured Note (11.50% (LIBOR + 7.00% with 4.50% LIBOR floor) plus 1.00% PIK, due 2/21/2013)(3), (4)

 

26,227

 

26,227

 

26,227

 

2.0%

 

 

 

Preferred Stock Series A (9,925.455 shares)(13)

 

 

 

2,300

 

315

 

0.0%

 

 

 

Preferred Stock Series B (1,753.64 shares)(13)

 

 

 

579

 

79

 

0.0%

 

 

 

 

 

 

 

 

 

29,106

 

26,621

 

2.0%

 

Boxercraft

Incorporated

 

Georgia / Textiles & Leather

 

Senior Secured Term Loan A (9.50% (LIBOR + 6.50% with 3.00% LIBOR floor), due 9/16/2013)(3), (4)

 

1,919

 

1,770

 

1,919

 

0.1%

 

 

 

Senior Secured Term Loan B (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 9/16/2013)(3), (4)

 

4,712

 

4,200

 

4,712

 

0.4%

 

 

 

Senior Secured Term Loan C (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 9/16/2013)(3), (4)

 

2,283

 

2,283

 

2,283

 

0.2%

 

 

 

Subordinated Secured Term Loan (12.00% plus 3.00% PIK, due 3/16/2014)(3)

 

7,906

 

6,895

 

7,906

 

0.6%

 

 

 

Preferred Stock (1,000,000 shares)

 

 

 

 

1,112

 

0.1%

 

 

 

Common Stock (10,000 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

15,148

 

17,932

 

1.4%

 

Smart, LLC(14)

 

New York / Diversified / Conglomerate Service

 

Membership Interest

 

 

 

 

35

 

0.0%

 

 

 

 

 

 

 

 

 

 

35

 

0.0%

 

 

See notes to consolidated financial statements.

 

 

9


 

 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)

March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate Investments (5.00% to 24.99% voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sport Helmets Holdings, LLC(14)

 

New York / Personal & Nondurable Consumer Products

 

Revolving Line of Credit — $3,000 Commitment (4.08% (LIBOR + 3.50%), due 12/14/2013) (4), (25), (26)

 

$      —

 

$      —

 

$      —

 

0.0%

 

 

 

Senior Secured Term Loan A (4.08% (LIBOR + 3.50%), due 12/14/2013)(3), (4)

 

1,394

 

968

 

1,376

 

0.1%

 

 

 

Senior Secured Term Loan B (4.58%, (LIBOR + 4.00%) due 12/14/2013)(3), (4)

 

7,256

 

6,015

 

7,124

 

0.5%

 

 

 

Senior Subordinated Debt — Series A (12.00% plus 3.00% PIK, due 6/14/2014)(3)

 

7,724

 

6,719

 

7,724

 

0.6%

 

 

 

Senior Subordinated Debt — Series B (10.00% plus 5.00% PIK, due 6/14/2014)(3)

 

1,482

 

1,191

 

1,482

 

0.1%

 

 

 

Common Stock (20,974 shares)

 

 

 

459

 

5,287

 

0.4%

 

 

 

 

 

 

 

 

 

15,352

 

22,993

 

1.7%

 

 

 

 

 

Total Affiliate Investments

 

59,606

 

67,581

 

5.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADAPCO, Inc.

 

Florida / Ecological

 

Common Stock (5,000 shares)

 

 

 

141

 

216

 

0.0%

 

 

 

 

 

 

 

 

 

141

 

216

 

0.0%

 

Aircraft Fasteners International, LLC

 

California / Machinery

 

Convertible Preferred Stock (32,500 units)

 

 

 

396

 

465

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

396

 

465

 

0.0%

 

American Gilsonite Company

 

Utah / Specialty Minerals

 

Senior Subordinated Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/10/2016)(3), (4)

 

30,232

 

30,232

 

30,232

 

2.3%

 

 

 

Senior Subordinated Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/10/2016)(4)

 

7,500

 

7,500

 

7,500

 

0.6%

 

 

 

Membership Interest in AGC/PEP, LLC (99.9999%)(15)

 

 

 

 

5,059

 

0.4%

 

 

 

 

 

 

 

 

 

37,732

 

42,791

 

3.3%

 

Apidos CLO VIII, Ltd

 

Cayman Islands / Diversified Financial Services

 

Subordinated Notes (Residual Interest)

 

 

18,543

 

20,042

 

1.5%

 

 

 

 

 

 

 

 

 

18,543

 

20,042

 

1.5%

 

Babson CLO Ltd 2011-I

 

Cayman Islands / Diversified Financial Services

 

Subordinated Notes (Residual Interest)

 

 

32,116

 

32,331

 

2.5%

 

 

 

 

 

 

 

 

 

32,116

 

32,331

 

2.5%

 

Babson CLO Ltd 2012-IA

 

Cayman Islands / Diversified Financial Services

 

Subordinated Notes (Residual Interest)

 

 

26,569

 

26,569

 

2.0%

 

 

 

 

 

 

 

 

 

26,569

 

26,569

 

2.0%

 

Blue Coat Systems, Inc. (4)

Massachusetts / Software & Computer Services

 

Second Lien Term Loan (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 8/15/2018)

 

25,000

 

24,260

 

24,873

 

1.9%

 

 

 

 

 

 

 

 

24,260

 

24,873

 

1.9%

 

 

See notes to consolidated financial statements.

 

 

10


 

 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Byrider Systems Acquisition Corp.

 

Indiana / Auto Finance

 

Senior Subordinated Notes (12.00% plus 2.00% PIK, due 11/3/2016) (3)

 

$    25,424

 

$ 25,424

 

$  22,843

 

1.7%

 

 

 

 

 

 

 

 

 

25,424

 

22,843

 

1.7%

 

Caleel + Hayden, LLC (14)

 

Colorado / Personal & Nondurable Consumer Products

 

Membership Units (7,500 shares)

 

 

 

351

 

925

 

0.1%

 

 

Options in Mineral Fusion Natural Brands, LLC (11,662 options)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

351

 

925

 

0.1%

 

Capstone Logistics, LLC (4)

 

Georgia / Commercial Services

 

Senior Secured Term Loan A (7.50% (LIBOR + 5.50% with 2.00% LIBOR floor), due 9/16/2016)

 

33,942

 

33,942

 

33,942

 

2.6%

 

 

Senior Secured Term Loan B (13.50% (LIBOR + 11.50% with 2.00% LIBOR floor), due 9/16/2016)(3)

 

41,625

 

41,625

 

41,625

 

3.2%

 

 

 

 

 

 

 

 

 

75,567

 

75,567

 

5.8%

 

Cargo Airport Services USA, LLC

 

New York / Transportation

 

Senior Secured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 3/31/2016) (3), (4)

 

49,552

 

49,522

 

49,522

 

3.8%

 

 

Common Equity (1.5 units)

 

 

 

1,639

 

2,055

 

0.2%

 

 

 

 

 

 

 

 

 

51,161

 

51,577

 

4.0%

 

CIFC Funding 2011-I, Ltd. (4)

 

Cayman Islands / Diversified Financial Services

 

Secured Class D Notes (5.79% (LIBOR + 5.00%), due 1/19/2023)

 

19,000

 

14,720

 

16,995

 

1.3%

 

 

Unsecured Class E Notes (7.79% (LIBOR + 7.00%), due 1/19/2023)

 

15,400

 

12,444

 

13,667

 

1.0%

 

 

 

 

 

 

 

 

 

27,164

 

30,662

 

2.3%

 

Clearwater Seafoods LP

 

Canada / Food Products

 

Second Lien Term Loan (12.00%, due 2/4/2016) (3)

 

54,500

 

54,500

 

54,500

 

4.1%

 

 

 

 

 

 

 

 

 

54,500

 

54,500

 

4.1%

 

The Copernicus Group, Inc.

 

North Carolina / Healthcare

 

Revolving Line of Credit — $1,000 Commitment (7.50% (LIBOR + 4.50% with 3.00% LIBOR floor), due 2/9/2016)(4), (25)

 

 

 

0.0%

 

 

Senior Secured Term Loan A (7.50% (LIBOR + 4.50% with 3.00% LIBOR floor), due 2/9/2016)(3), (4)

 

10,125

 

10,125

 

10,125

 

0.8%

 

 

Senior Secured Term Loan B (13.50% (LIBOR + 10.50% with 3.00% LIBOR floor), due 2/9/2016) (3), (4)

 

11,250

 

11,250

 

11,250

 

0.9%

 

 

Preferred Stock — Series A (1,000,000 shares)

 

 

 

67

 

1,533

 

0.1%

 

 

Preferred Stock — Series C (212,121 shares)

 

 

 

212

 

1,038

 

0.1%

 

 

 

 

 

 

 

 

 

21,654

 

23,946

 

1.9%

 

CRT MIDCO, LLC

 

Wisconsin / Media

 

Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2017)(3), (4)

 

73,875

 

73,875

 

71,921

 

5.5%

 

 

 

 

 

 

 

 

 

73,875

 

71,921

 

5.5%

 

Diamondback Operating, LP

 

Oklahoma / Oil & Gas Production

 

Net Profits Interest (15.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

0.0%

 

Empire Today, LLC(16)

 

Illinois / Durable Consumer Products

 

Senior Secured Note (11.375%, due 2/1/2017)

 

15,700

 

15,236

 

15,700

 

1.2%

 

 

 

 

 

 

 

 

 

15,236

 

15,700

 

1.2%

 

Fairchild Industrial Products, Co.

 

North Carolina / Electronics

 

Escrow Receivable

 

177

 

 

142

 

0.0%

 

 

 

 

 

 

 

 

 

 

142

 

0.0%

 

 

See notes to consolidated financial statements.

 

 

11



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fischbein, LLC

 

North Carolina / Machinery

 

Senior Subordinated Debt (12.00% plus 2.00% PIK, due 10/31/2016)

 

 $   3,396

 

$   3,396

 

$   3,396

 

0.3%

 

 

 

 

 

Escrow ReceivableEscrowEscrow

 

141

 

 

1,151

 

0.1%

 

 

 

 

 

Membership Class A (875,000 units)

 

 

 

875

 

1,823

 

0.1%

 

 

 

 

 

 

 

 

 

4,271

 

6,370

 

0.5%

 

Focus Brands, Inc. (4)

 

Georgia / Consumer Services

 

Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 8/21/2018)

 

15,000

 

14,703

 

14,703

 

1.1%

 

 

 

 

 

 

 

 

 

14,703

 

14,703

 

1.1%

 

H&M Oil & Gas, LLC

 

Texas / Oil & Gas Production

 

Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% PIK, plus 2.00% default interest, in non-accrual status effective 01/01/2011, past due)(4)

 

    62,340

 

  60,018

 

  30,271

 

2.3%

 

 

 

 

 

Net Profits Interest (8.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

60,018

 

30,271

 

2.3%

 

Hi-Tech Testing Service, Inc. and Wilson Inspection X-Ray Services, Inc.

 

Texas / Oil & Gas Equipment & Services

 

Senior Secured Term Loan (11.00%, due 9/26/2016)

 

  7,800

 

    7,574

 

    7,574

 

0.6%

 

 

 

 

 

 

 

 

 

7,574

 

7,574

 

0.6%

 

Hoffmaster Group, Inc.

 

Wisconsin / Durable Consumer Products

 

Second Lien Term Loan (11.00%  (LIBOR + 9.50% with 1.50% LIBOR floor), due 1/3/2019) (4)

 

  10,000

 

9,805

 

10,000

 

0.8%

 

 

 

 

 

 

 

 

 

9,805

 

10,000

 

0.8%

 

Hudson Products Holdings, Inc.(16)

 

Texas / Manufacturing

 

Senior Secured Term Loan (8.50% (PRIME + 4.50% with 4.00% PRIME floor), due 8/24/2015)(3), (4)

 

6,299

 

5,852

 

5,632

 

0.4%

 

 

 

 

 

 

 

 

 

5,852

 

5,632

 

0.4%

 

ICON Health & Fitness, Inc.(16)

 

Utah / Durable Consumer Products

 

Senior Secured Note (11.875% , due 10/15/2016) (3)

 

  43,100

 

43,373

 

43,100

 

3.3%

 

 

 

 

 

 

 

 

 

43,373

 

43,100

 

3.3%

 

IDQ Holdings, Inc.

 

Texas / Automobile

 

Senior Secured Note (11.50%, due 4/01/2017)

 

  12,500

 

12,250

 

12,250

 

0.9%

 

 

 

 

 

 

 

 

 

12,250

 

12,250

 

0.9%

 

Injured Workers Pharmacy LLC

 

Massachusetts / Healthcare

 

Second Lien Debt (12.00%  (LIBOR + 7.50% with 4.50% LIBOR floor) plus 1.00% PIK, due 11/04/2017) (3), (4)

 

  15,062

 

  15,062

 

  15,062

 

1.1%

 

 

 

 

 

 

 

 

 

15,062

 

15,062

 

1.1%

 

Iron Horse Coiled Tubing, Inc.(23)

 

Alberta, Canada / Production Services

 

Common Stock (3,821 shares)

 

 

 

268

 

2,040

 

0.2%

 

 

 

 

 

 

 

 

 

268

 

2,040

 

0.2%

 

JHH Holdings, Inc.

 

Texas / Healthcare

 

Second Lien Debt (12.00%  (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 6/23/2016) (3), (4)

 

  15,736

 

  15,736

 

  15,736

 

1.2%

 

 

 

 

 

 

 

 

 

15,736

 

15,736

 

1.2%

 

 

See notes to consolidated financial statements.

 

 

12



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LHC Holdings Corp.

 

Florida / Healthcare

 

Revolving Line of Credit — $750 Commitment (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 6/30/2012) (4), (25), (26)

 

$    —

 

 $      —

 

 $       —

 

0.0%

 

 

Senior Secured Term Loan A (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 6/30/2012)(3), (4)

 

   81

 

81

 

81

 

0.0%

 

 

Senior Subordinated Debt (12.00% plus 2.50% PIK, due 5/31/2013)(3)

 

4,465

 

4,291

 

4,465

 

0.3%

 

 

Membership Interest (125 units)

 

 

 

216

 

215

 

0.0%

 

 

 

 

 

 

 

 

 

4,588

 

4,761

 

0.3%

 

Maverick Healthcare, LLC

 

Arizona / Healthcare

 

Preferred Units (1,250,000 units)

 

 

 

    1,252

 

    1,656

 

0.1%

 

 

Common Units (1,250,000 units)

 

 

 

 

38

 

0.0%

 

 

 

 

 

 

 

 

 

1,252

 

1,694

 

0.1%

 

Medical Security Card Company, LLC(4)

 

Arizona / Healthcare

 

Revolving Line of Credit - $1,500 Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 2/1/2016) (25)

        —

 

 

         —

 

0.0%

 

 

First Lien Term Loan (11.25% (LIBOR + 8.75% with 2.50% LIBOR floor), due 2/1/2016)(3)

 

19,133

 

19,133

 

19,133

 

1.5%

 

 

 

 

 

 

 

 

 

19,133

 

19,133

 

1.5%

 

Mood Media Corporation(16), (3)

 

Canada / Media

 

Senior Subordinated Term Loan (10.25% (LIBOR + 8.75% with 1.50% LIBOR floor), due 11/6/2018)(4)

 

   15,000

 

  14,862

 

  14,852

 

1.1%

 

 

 

 

 

 

 

 

 

14,862

 

14,852

 

1.1%

 

National Bankruptcy Services, LLC (4)

 

Texas / Diversified Financial Services

 

Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 1.50% PIK, due 7/16/17)

 

    18,332

 

  18,332

 

  18,332

 

1.4%

 

 

 

 

 

 

 

 

 

18,332

 

18,332

 

1.4%

 

New Meatco Provisions, LLC

 

California / Food Products

 

Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 4.00%, PIK due 4/18/2016) (4)

13,510

 

13,510

 

7,634

 

0.6%

 

 

 

 

 

 

 

 

 

13,510

 

7,634

 

0.6%

 

Nobel Learning Communities, Inc.

 

Pennsylvania / Consumer Services

 

Subordinated Unsecured (11.50% plus 1.50% PIK, due 8/9/2017)

 

    15,109

 

  15,109

 

  15,109

 

1.1%

 

 

 

 

 

 

 

 

 

15,109

 

15,109

 

1.1%

 

Northwestern Management Services, LLC

 

Florida / Healthcare

 

Revolving Line of Credit — $1,500 Commitment (10.50% (PRIME + 6.75% with 3.75% PRIME floor), due 7/30/2015)(4), (25)

 

500

 

500

 

500

 

0.0%

 

 

Senior Secured Term Loan A (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 7/30/2015)(3), (4)

 

16,646

 

16,646

 

16,646

 

1.3%

 

 

Common Stock (50 shares)

 

 

 

371

 

855

 

0.1%

 

 

 

 

 

 

 

 

 

17,517

 

18,001

 

1.4%

 

Out Rage, LLC (4)

 

Wisconsin / Durable Consumer Products

 

Revolving Line of Credit - $1,500 Commitment (11.0% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/02/2013)(25)

 

       —

 

      —

 

         —

 

0.0%

 

 

Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/2/2015)

 

10,895

 

10,895

 

10,770

 

0.8%

 

 

 

 

 

 

 

 

 

10,895

 

10,770

 

0.8%

 

 

See notes to consolidated financial statements.

 

 

13



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pinnacle Treatment Centers, Inc.(4)

 

Pennsylvania / Healthcare

 

Revolving Line of Credit —$1,000 Commitment (8.0% (LIBOR + 5.00% with 3.00% LIBOR floor), due 1/10/2016) (25)

 

$     —

 

$       —

 

$       —

 

0.0%

 

 

Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 1/10/2016)(3)

 

17,713

 

17,713

 

17,713

 

1.3%

 

 

 

 

 

 

 

 

 

17,713

 

17,713

 

1.3%

 

Potters Holdings II, L.P.(16)

Pennsylvania / Manufacturing

 

Senior Subordinated Term Loan (10.25% (LIBOR + 8.50% with 1.75% LIBOR floor), due 11/6/2017)(3), (4)

 

15,000

 

14,798

 

15,000

 

1.1%

 

 

 

 

 

 

 

 

 

14,798

 

15,000

 

1.1%

 

Pre-Paid Legal Services, Inc.(16)

 

Oklahoma / Consumer Services

 

Senior Subordinated Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 12/31/2016)(3), (4)

 

5,000

 

5,000

 

5,000

 

0.4%

 

 

 

 

 

 

 

 

 

5,000

 

5,000

 

0.4%

 

Progrexion Holdings, Inc.(4),(28)

 

Utah / Consumer Services

 

Senior Secured Term Loan A (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 12/31/2014) (3)

 

34,948

 

34,948

 

34,948

 

2.6%

 

 

Senior Secured Term Loan B (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 12/31/2014)

 

28,587

 

28,587

 

28,587

 

2.2%

 

 

 

 

 

 

 

 

 

63,535

 

63,535

 

4.8%

 

Renaissance Learning, Inc.(16)

 

Wisconsin / Consumer Services

 

Second Lien Term Loan (12.00%  (LIBOR + 10.50% with 1.50% LIBOR floor), due 10/19/2018)(4)

 

6,000

 

5,770

 

6,000

 

0.5%

 

 

 

 

 

 

 

 

 

5,770

 

6,000

 

0.5%

 

Rocket Software, Inc. (4)

 

Massachusetts / Software & Computer Services

 

Second Lien Term Loan (10.25% (LIBOR + 8.75% with 1.50% LIBOR floor), due 2/08/2019)

 

15,000

 

14,704

 

14,735

 

1.1%

 

 

 

 

 

 

 

 

 

14,704

 

14,735

 

1.1%

 

Royal Adhesives & Sealants, LLC

 

Indiana / Chemicals

 

Senior Subordinated Unsecured Term Loan (12.00%  plus 2.00% PIK due 11/29/2016)

 

25,664

 

25,664

 

25,664

 

1.9%

 

 

 

 

 

 

 

 

 

25,664

 

25,664

 

1.9%

 

SG Acquisition, Inc. (4)

 

Georgia / Insurance

 

Senior Secured Term Loan A (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 3/18/2016)

 

27,544

 

27,544

 

27,544

 

2.1%

 

 

Senior Secured Term Loan B (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor),  due 3/18/2016)(3)

 

29,700

 

29,700

 

29,700

 

2.3%

 

 

Senior Secured Term Loan C (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 3/18/2016)

 

12,720

 

12,720

 

12,720

 

1.0%

 

 

Senior Secured Term Loan D (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor),  due 3/18/2016)

 

13,750

 

13,750

 

13,750

 

1.0%

 

 

 

 

 

 

 

 

 

83,714

 

83,714

 

6.4%

 

Seaton Corp.

 

Illinois / Business Services

 

Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2014) (3), (4)

 

3,288

 

3,148

 

3,288

 

0.2%

 

 

 

 

 

 

 

 

 

3,148

 

3,288

 

0.2%

 

 

See notes to consolidated financial statements.

 

 

14



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shearer’s Foods, Inc.

 

Ohio / Food Products

 

Junior Secured Debt (12.00% plus 3.75% PIK (3.75% LIBOR floor), due 3/31/2016)(3), (4)

 

$  37,289

 

$ 37,289

 

$ 37,289

 

2.8%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC - Common (2,000 units)(17)

 

 

 

2,000

 

1,257

 

0.1%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC 2 - Common (595 units)(17)

 

 

 

1,322

 

374

 

0.0%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC 3 - Preferred (67 units)(17)

 

 

 

673

 

825

 

0.1%

 

 

 

 

 

 

 

 

 

41,284

 

39,745

 

3.0%

 

Skillsoft Public Limited Company

 

Ireland / Software & Computer Services

 

Subordinated Unsecured (11.125%, due 06/01/2018)

 

15,000

 

14,916

 

15,000

 

1.1%

 

 

 

 

 

 

 

 

 

14,916

 

15,000

 

1.1%

 

Snacks Holding Corporation

 

Minnesota / Food Products

 

Senior Subordinated Unsecured Term Loan (12.00% plus 1.00% PIK, due 11/12/2017)

 

15,211

 

14,700

 

15,099

 

1.1%

 

 

 

 

 

Series A Preferred Stock  (4,021.45 shares)

 

 

 

56

 

42

 

0.0%

 

 

 

 

 

Series B Preferred Stock (1,866.10 shares)

 

 

 

56

 

42

 

0.0%

 

 

 

 

 

Warrant (to purchase 31,196.52 voting common shares, expires  11/12/2020)

 

 

 

479

 

354

 

0.0%

 

 

 

 

 

 

 

 

 

15,291

 

15,537

 

1.1%

 

SonicWALL, Inc.

 

California / Software & Computer Services

 

Subordinated Secured (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor), due 1/23/2017) (3), (4) 

 

23,000

 

22,983

 

23,000

 

1.7%

 

 

 

 

 

 

 

 

 

22,983

 

23,000

 

1.7%

 

Springs Window Fashions, LLC

 

Wisconsin /  Durable Consumer Products

 

Second Lien Term Loan (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 11/30/2017)(3), (4) 

 

35,000

 

35,000

 

35,000

 

2.7%

 

 

 

 

 

 

 

 

 

35,000

 

35,000

 

2.7%

 

ST Products, LLC

 

Pennsylvania/ Manufacturing

 

Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/16/2016)(3), (4)

 

23,493

 

23,493

 

23,493

 

1.8%

 

 

 

 

 

 

 

 

 

23,493

 

23,493

 

1.8%

 

Stauber Performance Ingredients, Inc.

 

California / Food Products

 

Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 1/21/2016)(3), (4)

 

22,058

 

22,058

 

22,058

 

1.7%

 

 

 

 

 

 

 

 

 

22,058

 

22,058

 

1.7%

 

Stryker Energy, LLC

 

Ohio / Oil & Gas Production

 

Subordinated Secured Revolving Credit Facility — $50,300 Commitment (8.50% (LIBOR + 7.00% with 1.50% LIBOR floor) plus 3.75% PIK, in non-accrual status effective 12/1/2011, due 12/01/2015) (4), (25)

 

33,129

 

32,711

 

 

0.0%

 

 

 

 

 

Overriding Royalty Interests(18)

 

 

 

 

1,677

 

0.1%

 

 

 

 

 

 

 

 

 

32,711

 

1,677

 

0.1%

 

Targus Group International, Inc.(16)

 

California / Durable Consumer Products

 

First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 5/25/2016) (3), (4)

 

23,820

 

23,403

 

23,820

 

1.8%

 

 

 

 

 

 

 

 

 

23,403

 

23,820

 

1.8%

 

Totes Isotoner Corporation

 

Ohio / Nondurable Consumer Products

 

Second Lien Term Loan (10.75%, (LIBOR + 9.25% with 1.50% LIBOR floor)  due 1/8/2018) (3), (4)

 

39,000

 

39,000

 

39,000

 

3.0%

 

 

 

 

 

 

 

 

 

39,000

 

39,000

 

3.0%

 

 

15



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

March 31, 2012 (Unaudited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 1 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. HealthWorks Holding Company, Inc.(16)

 

California / Healthcare

 

Second Lien Term Loan (10.50% (LIBOR + 9.00% with 1.50% LIBOR floor), due 6/15/2017) (3), (4)

 

$    25,000

 

$   25,000

 

$  25,000

 

1.9%

 

 

 

 

 

 

 

 

 

25,000

 

25,000

 

1.9%

 

VanDeMark Chemicals, Inc.(3)

 

New York / Chemicals

 

Senior Secured Term Loan Note (12.20% (LIBOR + 10.20% with 2.0% LIBOR floor), due 12/31/2014)(4)

 

30,695

 

30,695

 

30,695

 

2.3%

 

 

 

 

 

 

 

 

 

30,695

 

30,695

 

2.3%

 

Wind River Resources Corp. and Wind River II Corp.

 

Utah / Oil & Gas Production

 

Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% default interest on principal, 16.00% default interest on past due interest, in non-accrual status effective 12/01/2008, past due)(4)

 

15,000

 

15,000

 

3,308

 

0.3%

 

 

 

 

 

Net Profits Interest (5.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

15,000

 

3,308

 

0.3%

 

 

 

 

 

Total Non-control/Non-affiliate Investments (Level 3 Investments)

1,363,679

 

1,300,076

 

98.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Level 3 Portfolio Investments

 

1,655,744

 

1,691,443

 

128.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

Allied Defense Group, Inc.

 

Virginia / Aerospace & Defense

 

Common Stock (10,000 shares)

 

 

 

56

 

 

0.0%

 

 

 

 

 

 

 

 

 

56

 

 

0.0%

 

Dover Saddlery, Inc.

 

Massachusetts / Retail

 

Common Stock (30,974 shares)

 

 

 

63

 

137

 

0.0%

 

 

 

 

 

 

 

 

 

63

 

137

 

0.0%

 

 

 

 

 

Total Non-control/Non-affiliate Investments (Level 1 Investments)

119

 

137

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Portfolio Investments

1,655,863

 

1,691,580

 

128.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity Institutional Money Market Funds — Government Portfolio (Class I)

 

 

 

48,832

 

48,832

 

3.7%

 

Fidelity Institutional Money Market Funds — Government Portfolio (Class I) (3)

 

 

 

9,192

 

9,192

 

0.7%

 

Victory Government Money Market Funds

 

 

 

 

1

 

1

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Money Market Funds

58,025

 

58,025

 

4.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments

1,713,888

 

1,749,605

 

132.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

16



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIRMALL USA, Inc. (27)

Pennsylvania / Property Management

 

Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/30/2015)(3), (4)

 

$   30,000

 

$   30,000

 

$   30,000

 

2.7%

 

 

Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015)

 

12,500

 

12,500

 

12,500

 

1.1%

 

 

Convertible Preferred Stock (9,919.684 shares)

 

 

 

9,920

 

9,226

 

0.8%

 

 

Common Stock (100 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

52,420

 

51,726

 

4.6%

 

Ajax Rolled Ring & Machine, Inc.

 

South Carolina / Manufacturing

 

Senior Secured Note — Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 4/01/2013)(3), (4)

 

20,607

 

20,607

 

20,607

 

1.8%

 

 

 

Subordinated Secured Note — Tranche B (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 6.00% PIK, due 4/01/2013)(3), (4)

 

15,035

 

15,035

 

13,270

 

1.2%

 

 

 

Convertible Preferred Stock — Series A (6,142.6 shares)

 

 

 

6,057

 

 

0.0%

 

 

 

Unrestricted Common Stock (6 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

41,699

 

33,877

 

3.0%

 

AWCNC, LLC(19)

 

North Carolina / Machinery

 

Members Units — Class A (1,800,000 units)

 

 

 

 

 

0.0%

 

 

Members Units — Class B-1 (1 unit)

 

 

 

 

 

0.0%

 

 

Members Units — Class B-2 (7,999,999 units)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

0.0%

 

Borga, Inc.

 

California / Manufacturing

 

Revolving Line of Credit — $1,000 Commitment (5.00% (PRIME + 1.75%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4), (25)

 

1,000

 

945

 

1,000

 

0.1%

 

 

Senior Secured Term Loan B (8.50% (PRIME + 5.25%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4)

 

1,612

 

1,500

 

691

 

0.1%

 

 

Senior Secured Term Loan C (12.00% plus 4.00% PIK plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)

 

8,980

 

706

 

 

0.0%

 

 

Common Stock (100 shares)(21)

 

 

 

 

 

0.0%

 

 

Warrants (33,750 warrants)(21)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

3,151

 

1,691

 

0.2%

 

C&J Cladding LLC

 

Texas / Metal Services and Minerals

 

Membership Interest (400 units)(22)

 

 

 

580

 

4,699

 

0.4%

 

 

 

 

 

 

 

 

 

580

 

4,699

 

0.4%

 

Change Clean Energy Holdings, Inc. (“CCEHI” or “Biomass”)(5),(8)

 

Maine / Biomass Power

 

Common Stock (1,000 shares)

 

 

 

2,540

 

 

0.0%

 

 

 

 

 

 

 

 

 

2,540

 

 

0.0%

 

Freedom Marine Services LLC(20),(8)

 

Louisiana / Shipping Vessels

 

Subordinated Secured Note (12.00% (LIBOR + 6.11% with 5.89% LIBOR floor) plus 4.00% PIK, in non-accrual status effective 10/1/2010, due 12/31/2011)(4)

 

11,674

 

11,303

 

3,079

 

0.3%

 

 

 

 

 

Net Profits Interest (22.50% payable on equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

11,303

 

3,079

 

0.3%

 

 

See notes to consolidated financial statements.

 

17



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Solutions Holdings, Inc.(8), (3)

 

Texas / Gas Gathering and Processing

 

Senior Secured Note (18.00%, due 12/11/2016)

 

$

  25,000

 

$

  25,000

 

$

  25,000

 

2.2%

 

 

 

Junior Secured Note (18.00%, due 12/12/2016)

 

12,000

 

12,000

 

12,000

 

1.1%

 

 

 

Common Stock (100 shares)

 

 

 

5,003

 

68,406

 

6.2%

 

 

 

 

 

 

 

 

 

42,003

 

105,406

 

9.5%

 

Integrated Contract Services, Inc.(9)

 

North Carolina / Contracting

 

Secured Promissory Notes (15.00%, in non-accrual status effective 12/22/2010, due 3/21/2012 – 4/10/2013) (10)

 

1,708

 

1,708

 

1,708

 

0.2%

 

 

 

 

 

Senior Demand Note (15.00%, in non-accrual status effective 11/1/2010, past due)(10)

 

1,170

 

1,170

 

59

 

0.0%

 

 

 

 

 

Senior Secured Note (7.00%  plus 7.00% PIK plus 6.00% default interest, in non-accrual status effective 10/09/2007, past due)

 

960

 

660

 

 

0.0%

 

 

 

 

 

Junior Secured Note (7.00%  plus 7.00% PIK plus 6.00% default interest, in non-accrual status effective 10/09/2007, past due)

 

14,003

 

14,003

 

 

0.0%

 

 

 

 

 

Preferred Stock — Series A (10 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

Common Stock (49 shares)

 

 

 

679

 

 

0.0%

 

 

 

 

 

 

 

 

 

18,220

 

1,767

 

0.2%

 

Iron Horse Coiled Tubing, Inc.(23)

 

Alberta, Canada / Production Services

 

Senior Secured Tranche 2 (Zero Coupon, due 1/1/2016)

 

2,338

 

2,338

 

2,186

 

0.2%

 

 

 

Senior Secured Tranche 3 (2.00%, due 1/1/2016)

 

12,000

 

11,781

 

11,514

 

1.0%

 

 

 

 

 

Common Stock (3,821 shares)

 

 

 

268

 

1,657

 

0.2%

 

 

 

 

 

 

 

 

 

14,387

 

15,357

 

1.4%

 

Manx Energy, Inc. (“Manx”)(12)

 

Kansas / Oil & Gas Production

 

Appalachian Energy Holdings, LLC (“AEH”) — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)

 

2,248

 

2,000

 

 

0.0%

 

 

 

 

 

Coalbed, LLC — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)(6)

 

6,743

 

5,991

 

 

0.0%

 

 

 

 

 

Manx — Senior Secured Note (13.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)

 

3,550

 

3,550

 

1,312

 

0.1%

 

 

 

 

 

Manx — Preferred Stock (6,635 shares)

 

 

 

6,307

 

 

0.0%

 

 

 

 

 

Manx — Common Stock (3,416,335 shares)

 

 

 

1,171

 

 

0.0%

 

 

 

 

 

 

 

 

 

19,019

 

1,312

 

0.1%

 

NMMB Holdings, Inc.(24)

 

New York / Media

 

Revolving Line of Credit — $3,000 Commitment (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 5/6/2016)(4), (25)

 

 

 

 

0.0%

 

 

 

 

 

Senior Term Loan (14.00%, due 5/6/2016)

 

24,250

 

24,250

 

24,250

 

2.2%

 

 

 

 

 

Senior Subordinated Term Loan (15.00%, due 5/6/2016)

 

2,800

 

2,800

 

2,800

 

0.2%

 

 

 

 

 

Series A Preferred Stock (4,400 shares)

 

 

 

4,400

 

4,400

 

0.4%

 

 

 

 

 

 

 

 

 

31,450

 

31,450

 

2.8%

 

NRG Manufacturing, Inc.

 

Texas / Manufacturing

 

Senior Secured Note (16.50% (LIBOR + 11.00% with 5.50% LIBOR floor), due 8/31/2011)(3), (4)

 

13,080

 

13,080

 

13,080

 

1.2%

 

 

 

Common Stock (800 shares)

 

 

 

2,317

 

32,403

 

2.9%

 

 

 

 

 

 

 

 

 

15,397

 

45,483

 

4.1%

 

 

See notes to consolidated financial statements.

 

18



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control Investments (25.00% or greater of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nupla Corporation

 

California / Home & Office Furnishings, Housewares & Durable

 

Revolving Line of Credit — $2,000 Commitment (7.25% (PRIME + 4.00%) plus 2.00% default interest, due 9/04/2012)(4), (25)

 

$    1,093

 

$   1,014

 

$   1,093

 

0.1%

 

 

 

Senior Secured Term Loan A (8.00% (PRIME + 4.75%) plus 2.00% default interest, due 9/04/2012)(4)

 

4,538

 

902

 

4,538

 

0.4%

 

 

 

Senior Subordinated Debt (15.00% PIK, in non-accrual status effective 4/01/2009, due 3/04/2013)

 

3,910

 

 

478

 

0.0%

 

 

 

Preferred Stock — Class A (2,850 shares)

 

 

 

 

 

0.0%

 

 

 

Preferred Stock — Class B (1,330 shares)

 

 

 

 

 

0.0%

 

 

 

Common Stock (2,360,743 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

1,916

 

6,109

 

0.5%

 

R-V Industries, Inc.

 

Pennsylvania / Manufacturing

 

Warrants (200,000 warrants, expiring 6/30/2017)

 

 

 

1,682

 

2,178

 

0.2%

 

 

 

Common Stock (545,107 shares)

 

 

 

5,086

 

5,938

 

0.5%

 

 

 

 

 

 

 

 

 

6,768

 

8,116

 

0.7%

 

Yatesville Coal Holdings, Inc.(11),(8)

 

Kentucky / Mining, Steel, Iron and Non-Precious Metals and Coal Production

 

Senior Secured Note (Non-accrual status effective 1/01/2009, past due)(4)

 

1,035

 

1,035

 

 

0.0%

 

 

Junior Secured Note (Non-accrual status effective 1/01/2009, past due)(4)

 

413

 

413

 

 

0.0%

 

 

Common Stock (1,000 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

1,448

 

 

0.0%

 

 

 

 

 

Total Control Investments

 

262,301

 

310,072

 

27.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate Investments (5.00% to 24.99% voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BNN Holdings Corp., (f/k/a Biotronic NeuroNetwork)

 

Michigan / Healthcare

 

Senior Secured Note (11.50% (LIBOR + 7.00% with 4.50% LIBOR floor) plus 1.00% PIK, due 2/21/2013)(3), (4)

 

26,227

 

26,227

 

27,014

 

2.4%

 

 

 

Preferred Stock Series A (9,925.455 shares)(13)

 

 

 

2,300

 

5,597

 

0.6%

 

 

 

Preferred Stock Series B (1,753.64 shares)(13)

 

 

 

579

 

1,409

 

0.1%

 

 

 

 

 

 

 

 

 

29,106

 

34,020

 

3.1%

 

Boxercraft

Incorporated

 

Georgia / Textiles & Leather

 

Senior Secured Term Loan A (9.50% (LIBOR + 6.50% with 3.00% LIBOR floor), due 9/16/2013)(3), (4)

 

2,710

 

2,423

 

2,674

 

0.2%

 

 

 

Senior Secured Term Loan B (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 9/16/2013)(3), (4)

 

4,753

 

4,025

 

4,722

 

0.4%

 

 

 

Subordinated Secured Term Loan (12.00% plus 6.50% PIK, due 3/16/2014)(3)

 

7,727

 

6,483

 

7,766

 

0.8%

 

 

 

Preferred Stock (1,000,000 shares)

 

 

 

 

470

 

0.0%

 

 

 

Common Stock (10,000 shares)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

12,931

 

15,632

 

1.4%

 

Smart, LLC(14)

 

New York / Diversified / Conglomerate Service

 

Membership Interest — Class B (1,218 units)

 

 

 

 

 

0.0%

 

 

 

Membership Interest — Class D (1 unit)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.0%

 

 

See notes to consolidated financial statements.

 

19


 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate Investments (5.00% to 24.99% voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sport Helmets Holdings, LLC(14)

 

New York / Personal & Nondurable Consumer Products

 

Revolving Line of Credit — $3,000 Commitment (4.00% (LIBOR + 3.75%), due 12/14/2013) (4), (25), (26)

 

$        —

 

$        —

 

$        —

 

0.0%

 

 

 

Senior Secured Term Loan A (4.00% (LIBOR + 3.75%), due 12/14/2013)(3), (4)

 

2,125

 

1,326

 

2,107

 

0.2%

 

 

 

Senior Secured Term Loan B (4.50% (LIBOR + 4.25%), due 12/14/2013)(3), (4)

 

7,313

 

5,616

 

7,271

 

0.7%

 

 

 

Senior Subordinated Debt — Series A (12.00% plus 3.00% PIK, due 6/14/2014)(3)

 

7,550

 

6,318

 

7,550

 

0.7%

 

 

 

Senior Subordinated Debt — Series B (10.00% plus 5.00% PIK, due 6/14/2014)(3)

 

1,427

 

1,077

 

1,427

 

0.1%

 

 

 

Common Stock (20,974 shares)

 

 

 

459

 

4,330

 

0.3%

 

 

 

 

 

 

 

 

 

14,796

 

22,685

 

2.0%

 

 

 

 

 

Total Affiliate Investments

 

56,833

 

72,337

 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADAPCO, Inc.

 

Florida / Ecological

 

Common Stock (5,000 shares)

 

 

 

141

 

194

 

0.0%

 

 

 

 

 

 

 

 

 

141

 

194

 

0.0%

 

Aircraft Fasteners International, LLC

 

California / Machinery

 

Revolving Line of Credit — $500 Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 11/01/2012)(4) , (25), (26)

 

 

 

 

0.0%

 

 

 

Senior Secured Term Loan
(9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 11/01/2012)
(3), (4)

 

3,663

 

3,663

 

3,663

 

0.3%

 

 

 

Junior Secured Term Loan (12.00% plus 6.00% PIK, due 5/01/2013)(3)

 

4,900

 

4,900

 

4,900

 

0.5%

 

 

 

 

 

Convertible Preferred Stock (32,500 units)

 

 

 

396

 

280

 

0.0%

 

 

 

 

 

 

 

 

 

8,959

 

8,843

 

0.8%

 

American Gilsonite Company

 

Utah / Specialty Minerals

 

Senior Subordinated Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/10/2016) (3), (4)

 

30,169

 

30,169

 

30,169

 

2.7%

 

 

 

Membership Interest in AGC/PEP, LLC (99.9999%)(15)

 

 

 

 

4,158

 

0.4%

 

 

 

 

 

 

 

 

 

30,169

 

34,327

 

3.1%

 

Arrowhead General Insurance Agency, Inc.(16)

 

California / Insurance

 

Junior Secured Term Loan (11.25% (LIBOR + 9.50% with 1.75% LIBOR floor), due 9/30/2017) (4)

 

27,000

 

27,000

 

27,000

 

2.4%

 

 

 

 

 

 

 

 

 

27,000

 

27,000

 

2.4%

 

Byrider Systems Acquisition Corp.

 

Indiana / Auto Finance

 

Senior Subordinated Notes (12.00% plus 2.00% PIK, due 11/3/2016)

 

25,082

 

25,082

 

25,082

 

2.3%

 

 

 

 

 

 

 

 

 

25,082

 

25,082

 

2.3%

 

Caleel + Hayden, LLC (14)

 

Colorado / Personal & Nondurable Consumer Products

 

Membership Units (7,500 shares)

 

 

 

351

 

718

 

0.1%

 

 

 

Options in Mineral Fusion Natural Brands, LLC (11,662 options)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

351

 

718

 

0.1%

 

 

See notes to consolidated financial statements.

 

20


 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cargo Airport Services USA, LLC.

 

New York / Transportation

 

Revolving Line of Credit — $5,000 Commitment (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 3/31/2012)(4) ,(25)

 

$    4,935

 

$   4,935

 

$   4,935

 

0.4%

 

 

 

Senior Secured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 3/31/2016) (4)

 

52,669

 

52,669

 

53,459

 

4.8%

 

 

 

Common Equity (1.5 units)

 

 

 

1,500

 

1,824

 

0.2%

 

 

 

 

 

 

 

 

 

59,104

 

60,218

 

5.4%

 

Clearwater Seafoods LP

 

Canada / Food Products

 

Second Lien Term Loan (12.00%, due 2/4/2016)

 

45,000

 

45,000

 

45,000

 

4.0%

 

 

 

 

 

 

 

 

 

45,000

 

45,000

 

4.0%

 

The Copernicus Group, Inc.

 

North Carolina / Healthcare

 

Revolving Line of Credit — $1,000 Commitment (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor), due 2/9/2016)(4), (25)

 

 

 

0.0%

 

 

Senior Secured Term Loan A (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor), due 2/9/2016)(3), (4)

 

11,250

 

11,250

 

11,419

 

1.0%

 

 

Senior Secured Term Loan B (14.00% (LIBOR + 11.00% with 3.00% LIBOR floor), due 2/9/2016) (4)

 

11,250

 

11,250

 

11,419

 

1.0%

 

 

Preferred Stock — Series A (1,000,000 shares)

 

 

 

67

 

1,227

 

0.2%

 

 

Preferred Stock — Series C (212,121 shares)

 

 

 

212

 

317

 

0.0%

 

 

 

 

 

 

 

 

 

22,779

 

24,382

 

2.2%

 

CRT MIDCO, LLC.

 

Wisconsin / Media

 

Revolving Line of Credit — $7,500 Commitment (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2012)(4), (25)

 

 

 

 

0.0%

 

 

 

Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2017)(4)

 

75,000

 

75,000

 

75,000

 

6.7%

 

 

 

 

 

 

 

 

 

75,000

 

75,000

 

6.7%

 

Deb Shops, Inc.(16)

 

Pennsylvania / Retail

 

Second Lien Debt (14.00% PIK, in non-accrual status effective 2/24/2009, due 10/23/2014)

 

19,906

 

14,606

 

 

0.0%

 

 

 

 

 

 

 

 

 

14,606

 

 

0.0%

 

Diamondback Operating, LP

 

Oklahoma / Oil & Gas Production

 

Net Profits Interest (15.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

0.0%

 

Empire Today, LLC(16)

 

Illinois / Durable Consumer Products

 

Senior Secured Note (11.375%, due 2/1/2017)

 

7,500

 

7,424

 

7,500

 

0.7%

 

 

 

 

 

 

 

 

 

7,424

 

7,500

 

0.7%

 

Fairchild Industrial Products, Co.

 

North Carolina / Electronics

 

Preferred Stock — Class A (285.1 shares)

 

 

 

377

 

795

 

0.1%

 

 

 

Common Stock — Class B (28 shares)

 

 

 

211

 

579

 

0.1%

 

 

 

 

 

 

 

 

 

588

 

1,374

 

0.2%

 

Fischbein, LLC

 

North Carolina / Machinery

 

Senior Subordinated Debt (12.00% plus 2.00% PIK, due 10/31/2016)

 

3,345

 

3,345

 

3,345

 

0.3%

 

 

 

Membership Class A (875,000 units)

 

 

 

875

 

983

 

0.1%

 

 

 

 

 

 

 

 

 

4,220

 

4,328

 

0.4%

 

H&M Oil & Gas, LLC

 

Texas / Oil & Gas Production

 

Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor)plus 3.00% PIK, in non-accrual status effective 01/01/2011, past due)(4)

 

60,930

 

60,019

 

38,463

 

3.5%

 

 

 

Net Profits Interest (8.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

60,019

 

38,463

 

3.5%

 

 

See notes to consolidated financial statements.

 

21


 


 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hoffmaster Group, Inc.

 

Wisconsin / Durable Consumer Products

 

Second Lien Term Loan (13.50%, due 6/2/2017)(3)

 

$   20,000

 

$   20,000

 

$   20,400

 

1.8%

 

 

 

 

 

 

 

 

 

20,000

 

20,400

 

1.8%

 

Hudson Products Holdings, Inc.(16)

 

Texas / Manufacturing

 

Senior Secured Term Loan (8.50% (PRIME + 4.50% with 4.00% LIBOR floor), due 8/24/2015)(3), (4)

 

6,348

 

5,819

 

5,597

 

0.5%

 

 

 

 

 

 

 

 

 

5,819

 

5,597

 

0.5%

 

ICON Health & Fitness, Inc(16)

 

Utah / Durable Consumer Products

 

Senior Secured Note (11.875%, due 10/15/2016) (3)

 

43,100

 

43,407

 

45,040

 

4.0%

 

 

 

 

 

 

 

 

 

43,407

 

45,040

 

4.0%

 

IEC-Systems, LP (“IEC”) /Advanced

 

Texas / Oilfield Fabrication

 

IEC Senior Secured Note (12.00% (LIBOR + 6.00% with 6.00% LIBOR floor) plus 3.00% PIK, due 11/20/2012)(3), (4)

 

15,360

 

15,360

 

15,360

 

1.5%

 

Rig Services, LLC (“ARS”)

 

 

 

ARS Senior Secured Note (12.00% (LIBOR + 6.00% with 6.00% LIBOR floor) plus 3.00% PIK, due 11/20/2012)(3), (4)

 

7,716

 

7,716

 

7,716

 

0.7%

 

 

 

 

 

 

 

 

 

23,076

 

23,076

 

2.2%

 

JHH Holdings, Inc.

 

Texas / Healthcare

 

Senior Subordinated Debt (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 6/23/2016) (4)

 

15,439

 

15,439

 

15,439

 

1.5%

 

 

 

 

 

 

 

 

 

15,439

 

15,439

 

1.5%

 

LHC Holdings Corp.

 

Florida / Healthcare

 

Revolving Line of Credit — $750 Commitment (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 6/30/2012) (4), (25), (26)

 

 

 

 

0.0%

 

 

 

 

 

Senior Secured Term Loan A (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 6/30/2012)(3), (4)

 

1,052

 

1,052

 

1,041

 

0.1%

 

 

 

 

 

Senior Subordinated Debt (12.00% plus 2.50% PIK, due 5/31/2013)(3)

 

4,565

 

4,299

 

4,486

 

0.4%

 

 

 

 

 

Membership Interest (125 units)

 

 

 

216

 

219

 

0.0%

 

 

 

 

 

 

 

 

 

5,567

 

5,746

 

0.5%

 

Mac & Massey Holdings, LLC

 

Georgia / Food Products

 

Senior Subordinated Debt (10.00% plus 5.75% PIK, due 2/10/2013) (3)

 

9,188

 

8,250

 

9,188

 

0.8%

 

 

 

 

 

Membership Interest (250 units)

 

 

 

111

 

617

 

0.1%

 

 

 

 

 

 

 

 

 

8,361

 

9,805

 

0.9%

 

Maverick Healthcare,

 

Arizona / Healthcare

 

Preferred Units (1,250,000 units)

 

 

 

1,252

 

1,623

 

0.1%

 

LLC

 

 

 

Common Units (1,250,000 units)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

1,252

 

1,623

 

0.1%

 

Medical Security Card Company, LLC(4)

 

Arizona / Healthcare

 

Revolving Line of Credit - $1,500 Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 2/1/2016)(25)

 

 

 

 

0.0%

 

 

 

 

 

Senior Secured Term Loan (11.25% (LIBOR + 8.75% with 2.50% LIBOR floor), due 2/1/2016)(3)

 

20,500

 

20,500

 

20,500

 

1.8%

 

 

 

 

 

 

 

 

 

20,500

 

20,500

 

1.8%

 

Mood Media Corporation(16)

 

Canada / Media

 

Senior Subordinated Term Loan (10.25% (LIBOR + 8.75% with 1.50% LIBOR floor), due 11/6/2018)(4)

 

15,000

 

14,852

 

14,850

 

1.3%

 

 

 

 

 

 

 

 

 

14,852

 

14,850

 

1.3%

 

 

See notes to consolidated financial statements.

 

22



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value(2)

 

% of Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Meatco Provisions, LLC

 

California / Food Products

 

Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 4.00% PIK due 4/18/2016) (4)

 

$

13,106

 

$

 13,106

 

$

 13,106

 

1.2%

 

 

 

 

 

 

 

 

 

13,106

 

13,106

 

1.2%

 

Northwestern Management Services, LLC

 

Florida / Healthcare

 

Revolving Line of Credit — $1,500 Commitment (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 7/30/2015)(4) , (25)

 

 

 

 

0.0%

 

 

 

 

 

Senior Secured Term Loan A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 7/30/2015)(3), (4)

 

17,369

 

17,369

 

17,369

 

1.5%

 

 

 

 

 

Common Stock (50 shares)

 

 

 

371

 

565

 

0.1%

 

 

 

 

 

 

 

 

 

17,740

 

17,934

 

1.6%

 

Out Rage, LLC(4)

 

Wisconsin / Durable Consumer Products

 

Revolving Line of Credit - $1,500 Commitment (11.0% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/2/2015) (25) 

 

 

 

 

0.0%

 

 

 

 

 

Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/2/2015)

 

12,422

 

12,422

 

12,422

 

1.1%

 

 

 

 

 

 

 

 

 

12,422

 

12,422

 

1.1%

 

Pinnacle Treatment Centers, Inc(4).

 

Pennsylvania / Healthcare

 

Revolving Line of Credit —$1,000 Commitment (8.0% (LIBOR + 5.00% with 3.00% LIBOR floor), due 1/10/2016) (25)

 

250

 

250

 

250

 

0.0%

 

 

 

 

 

Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 1/10/2016)(3)

 

18,763

 

18,763

 

18,763

 

1.7%

 

 

 

 

 

 

 

 

 

19,013

 

19,013

 

1.7%

 

Potters Holdings II, L.P.(16)

 

Pennsylvania / Manufacturing

 

Senior Subordinated Term Loan (10.25% (LIBOR + 8.50% with 1.75% LIBOR floor), due 11/6/2017)(4)

 

15,000

 

14,779

 

14,775

 

1.4%

 

 

 

 

 

 

 

 

 

14,779

 

14,775

 

1.4%

 

Pre-Paid Legal Services, Inc(16)

 

Oklahoma / Consumer Services

 

Senior Subordinated Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 12/31/2016)(4)

 

5,000

 

5,000

 

5,000

 

0.4%

 

 

 

 

 

 

 

 

 

5,000

 

5,000

 

0.4%

 

Progressive Logistics Services, LLC(3) 

 

Georgia / Commercial Services

 

Senior Secured Term Loan A (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 1/6/2016)(4)

 

14,625

 

14,625

 

14,625

 

1.3%

 

 

 

 

 

Senior Secured Term Loan B (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor), due 1/6/2016)(4)

 

15,000

 

15,000

 

15,000

 

1.4%

 

 

 

 

 

 

 

 

 

29,625

 

29,625

 

2.7%

 

Progrexion Holdings, Inc(4),(28) 

 

Utah / Consumer Services

 

Senior Secured Term Loan A (10.75% (LIBOR + 8.75% with 2.00% LIBOR floor), due 12/31/2014) (3)

 

35,618

 

35,618

 

35,618

 

3.2%

 

 

 

 

 

Senior Secured Term Loan B (10.75% (LIBOR + 8.75% with 2.00% LIBOR floor), due 12/31/2014)

 

32,668

 

32,668

 

32,668

 

2.9%

 

 

 

 

 

 

 

 

 

68,286

 

68,286

 

6.1%

 

 

See notes to consolidated financial statements.

 

23



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011
(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ROM Acquisition Corporation

 

Missouri / Automobile

 

Revolving Line of Credit — $1,750 Commitment (4.25% (LIBOR + 3.25% with 1.00% LIBOR floor), due 2/08/2013)(4) , (25), (26)

 

$

 

$

 

$

 

0.0%

 

 

 

 

 

Senior Secured Term Loan A
(4.25% (LIBOR + 3.25% with 1.00% LIBOR floor), due 2/08/2013)
(3), (4)

 

2,932

 

2,684

 

2,895

 

0.3%

 

 

 

 

 

Senior Secured Term Loan B
(8.00% (LIBOR + 7.00% with 1.00% LIBOR floor), due 5/08/2013)
(3), (4)

 

7,187

 

7,187

 

7,187

 

0.6%

 

 

 

 

 

Senior Subordinated Debt (12.00% plus 3.00% PIK due 8/08/2013)(3)

 

7,208

 

6,971

 

7,280

 

0.7%

 

 

 

 

 

 

 

 

 

16,842

 

17,362

 

1.6%

 

Royal Adhesives & Sealants, LLC.

 

Indiana / Chemicals

 

Senior Subordinated Unsecured Term Loan (12.00% plus 2.00% PIK due 11/29/2016)

 

25,277

 

25,277

 

25,277

 

2.3%

 

 

 

 

 

 

 

 

 

25,277

 

25,277

 

2.3%

 

SG Acquisition, Inc. (4)

 

Georgia / Insurance

 

Senior Secured Term Loan A (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 3/18/2016)

 

29,925

 

29,925

 

30,224

 

2.7%

 

 

 

 

 

Senior Secured Term Loan B (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor), due 3/18/2016)(3)

 

29,925

 

29,925

 

30,224

 

2.7%

 

 

 

 

 

 

 

 

 

59,850

 

60,448

 

5.4%

 

Seaton Corp.

 

Illinois / Business Services

 

Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2014) (3), (4)

 

6,788

 

6,604

 

6,787

 

0.6%

 

 

 

 

 

 

 

 

 

6,604

 

6,787

 

0.6%

 

Shearer’s Foods, Inc.

 

Ohio / Food Products

 

Junior Secured Debt (12.00% plus 3.75% PIK (3.75% LIBOR floor), due 3/31/2016)(3), (4)

 

36,248

 

36,248

 

36,248

 

3.2%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC - Common (2,000 units)(17)

 

 

 

2,000

 

2,562

 

0.2%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC 2 - Common (595 units)(17)

 

 

 

1,322

 

762

 

0.1%

 

 

 

 

 

Membership Interest in Mistral Chip Holdings, LLC 3 - Preferred (67 units)(17)

 

 

 

673

 

674

 

0.1%

 

 

 

 

 

 

 

 

 

40,243

 

40,246

 

3.6%

 

Skillsoft Public Limited Company

 

Ireland / Software & Computer Services

 

Subordinated Unsecured (11.125%, due 06/01/2018)

 

15,000

 

14,908

 

15,000

 

1.3%

 

 

 

 

 

 

 

 

 

14,908

 

15,000

 

1.3%

 

Snacks Holding Corporation.

 

Minnesota / Food Products

 

Senior Subordinated Unsecured Term Loan (12.00% plus 1.00% PIK, due 11/12/2017)

 

15,059

 

14,502

 

15,059

 

1.4%

 

 

 

 

 

Series A Preferred Stock  (4,021.45 shares)

 

 

56

 

55

 

0.0%

 

 

 

 

 

Series B Preferred Stock (1,866.10 shares)

 

 

56

 

55

 

0.0%

 

 

 

 

 

Warrant (to purchase 31,196.52 voting common shares, expires  11/12/2020)

 

 

 

479

 

472

 

0.0%

 

 

 

 

 

 

 

 

 

15,093

 

15,641

 

1.4%

 

SonicWALL, Inc.

 

California / Software & Computer Services

 

Subordinated Secured (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor), due 1/23/2017) (3), (4)

 

23,000

 

22,982

 

23,000

 

2.1%

 

 

 

 

 

 

 

 

 

22,982

 

23,000

 

2.1%

 

 

See notes to consolidated financial statements.

 

24



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value(2)

 

% of
Net Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 3 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Springs Window Fashions, LLC

 

Wisconsin / Durable Consumer Products

 

Second Lien Term Loan (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 11/30/2017) (4)

 

$      35,000

 

$    35,000

 

$     35,000

 

3.1%

 

 

 

 

 

 

 

 

 

35,000

 

35,000

 

3.1%

 

ST Products, LLC

 

Pennsylvania/ Manufacturing

 

Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/16/2016) (4)

 

26,500

 

26,500

 

26,500

 

2.4%

 

 

 

 

 

 

 

 

 

26,500

 

26,500

 

2.4%

 

Stauber Performance Ingredients, Inc.

 

California / Food Products

 

Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 1/21/2016)(3), (4)

 

22,700

 

 22,700

 

22,700

 

2.0%

 

 

 

 

 

 

 

 

 

22,700

 

22,700

 

2.0%

 

Stryker Energy, LLC

 

Ohio / Oil & Gas Production

 

Subordinated Secured Revolving Credit Facility — $50,300 Commitment (8.50% (LIBOR + 7.00% with 1.50% LIBOR floor) plus 3.75% PIK, due 12/01/2015)(3), (4), (25)

 

30,699

 

30,624

 

21,750

 

1.9%

 

 

 

 

 

Overriding Royalty Interests(18)

 

 

 

 

2,168

 

0.2%

 

 

 

 

 

 

 

 

 

30,624

 

23,918

 

2.1%

 

Targus Group International, Inc(16)

 

California / Durable Consumer Products

 

First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 5/25/2016) (4)

 

24,000

 

23,526

 

24,000

 

2.1%

 

 

 

 

 

 

 

 

 

23,526

 

24,000

 

2.1%

 

U.S. HealthWorks Holding Company, Inc(16)

 

California / Healthcare

 

Second Lien Term Loan (10.50% (LIBOR + 9.00% with 1.50% LIBOR floor), due 6/15/2017) (4)

 

25,000

 

25,000

 

25,000

 

2.2%

 

 

 

 

 

 

 

 

 

25,000

 

25,000

 

2.2%

 

VPSI, Inc.

 

Michigan / Transportation

 

First Lien Senior Secured Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor), due 12/23/2015)(4)

 

17,646

 

17,646

 

17,646

 

1.6%

 

 

 

 

 

 

 

 

 

17,646

 

17,646

 

1.6%

 

Wind River Resources Corp. and Wind River II Corp.

 

Utah / Oil & Gas Production

 

Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% default interest on principal, 16.00% default interest on past due interest, in non-accrual status effective 12/01/2008, past due)(4)

 

15,000

 

 15,000

 

7,230

 

0.6%

 

 

 

 

 

Net Profits Interest (5.00% payable on Equity distributions)(7)

 

 

 

 

 

0.0%

 

 

 

 

 

 

 

 

 

15,000

 

7,230

 

0.6%

 

 

 

 

 

Total Non-control/Non-affiliate Investments (Level 3 Investments)

 

1,116,481

 

1,080,421

 

97.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Level 3 Portfolio Investments

 

1,435,615

 

1,462,830

 

131.3%

 

 

See notes to consolidated financial statements.

 

25



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 and June 30, 2011

(in thousands, except share data)

 

 

 

 

 

 

 

June 30, 2011 (Audited)

 

Portfolio Company

 

Locale / Industry

 

Investments(1)

 

Principal
Value

 

Cost

 

Fair
Value
(2)

 

% of
Net
Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEVEL 1 PORTFOLIO INVESTMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliate Investments (less than 5.00% of voting control)

 

Allied Defense Group, Inc.

 

Virginia / Aerospace & Defense

 

Common Stock (10,000 shares)

 

 

 

$      56

 

$     35

 

0.0%

 

 

 

 

 

 

 

 

 

56

 

35

 

0.0%

 

Dover Saddlery, Inc.

 

Massachusetts / Retail

 

Common Stock (30,974 shares)

 

 

 

63

 

145

 

0.0%

 

 

 

 

 

 

 

 

 

63

 

145

 

0.0%

 

 

 

Total Non-control/Non-affiliate Investments (Level 1 Investments)

 

119

 

180

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Portfolio Investments

 

1,435,734

 

1,463,010

 

131.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity Institutional Money Market Funds — Government Portfolio (Class I)

 

45,986

 

45,986

 

4.2%

 

Fidelity Institutional Money Market Funds — Government Portfolio (Class I) (3)

 

13,916

 

13,916

 

1.2%

 

Victory Government Money Market Funds

 

1

 

1

 

0.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Money Market Funds

 

59,903

 

59,903

 

5.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investments

 

1,495,637

 

1,522,913

 

136.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

26



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 (Unaudited) and June 30, 2011 (Audited)
(in thousands, except share data)

 

Endnote Explanations for the Consolidated Schedule of Investments as of March 31, 2012 and June 30, 2011

 

(1)

The securities in which Prospect Capital Corporation (“we”, “us” or “our”) has 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. As of March 31, 2012 and June 30, 2011, two of our portfolio investments, Allied Defense Group, Inc. (“Allied”) and Dover Saddlery, Inc. (“Dover”) were publically traded and classified as Level 1 within the valuation hierarchy established by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). As of March 31, 2012 and June 30, 2011, the fair value of our remaining portfolio investments was determined using significant unobservable inputs. ASC 820 classifies such inputs used to measure fair value as Level 3 within the valuation hierarchy. Our investments in money market funds are classified as Level 2. See Note 2 and Note 3 within the accompanying consolidated financial statements for further discussion.

 

 

(3)

Security, or portion thereof, is held by Prospect Capital Funding LLC, a bankruptcy remote special purpose entity, and is pledged as collateral for the revolving credit facility and such security is not available as collateral to our general creditors (See Note 4). The market values of these investments at March 31, 2012 and June 30, 2011 were $845,406 and $700,321, respectively; they represent 48.3% and 46.0% of total investments at fair value, respectively. Prospect Capital Funding LLC (See Note 1), our wholly-owned subsidiary, holds an aggregate market value of $845,406 and $631,915 of these investments as of March 31, 2012 and June 30, 2011, respectively.

 

 

(4)

Security, or portion thereof, has a floating interest rate which may be subject to a LIBOR or PRIME floor. Stated interest rate was in effect at March 31, 2012 and June 30, 2011.

 

 

(5)

There are several entities involved in the Biomass investment. As of June 30, 2011, we own directly 3,265 shares of common stock in CCEI, f/k/a Worcester Energy Partners, Inc., representing 100% of the issued and outstanding common stock. CCEI owns 100 shares of common stock in Precision Logging and Landclearing, Inc. (“PLL”), representing 100% of the issued and outstanding common stock.

 

As of June 30, 2011, we own directly 552 shares of common stock in Worcester Energy Co., Inc. (“WECO”), representing 100% of the issued and outstanding common stock.

 

Our 100% ownership of each of CCEI and WECO resulted from our successful bid, in December 2010, for the 49% of each of those stocks we did not own directly.

 

As of June 30, 2011, we own directly 100 shares of common stock in Worcester Energy Holdings, Inc. (“WEHI”), representing 100% of the issued and outstanding common stock. WEHI, in turn, owns 51 membership certificates in Biochips LLC (“Biochips”), which represents a 51% ownership stake.

 

During the quarter ended March 31, 2009, we created two new entities -  CCEHI and DownEast Power Company, LLC (“DEPC”) - in anticipation of the foreclosure proceedings against the three co-borrowers, WECO, CCEI and Biochips, on a note due to us that we had put on non-accrual status effective July 1, 2008.

 

As of June 30, 2011, we own 1,000 shares of CCEHI, representing 100% of the issued and outstanding stock, which in turn, owns a 100% of the membership interests in DEPC.

 

On March 11, 2009, we foreclosed on the assets formerly held by CCEI and Biochips with a successful credit bid of $6,000 to acquire the assets. The credit bid was assigned to DEPC and the assets subsequently were acquired by DEPC.

 

Biochips, WECO, CCEI, Precision and WEHI currently have no material operations and no significant assets. As of June 30, 2009, our Board of Directors assessed a fair value of zero for all of the equity positions and the loan position. We determined that the impairment of both CCEI and CCEHI as of June 30, 2009 was other than temporary and recorded a realized loss for the amount that the amortized cost exceeds the fair value at June 30, 2009. Our Board of Directors set value at zero for the Biomass investment as a whole as of June 30, 2011, respectively.

 

In December 2011, we formed New CCEI, Inc. (“New CCEI”) and contributed 100% of the equity of CCEI to New CCEI. After the contribution, CCEI converted into a limited liability company. On December 9, 2011, each of CCEH, PLL, WECO and WEHI merged with and into New CCEI. During the quarter ended December 31, 2011, New CCEI merged into Change Clean Energy Holdings, LLC and our ownership of New CCEI was transferred to Energy Solutions Holdings, Inc.

 

27



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 (Unaudited) and June 30, 2011 (Audited)
(in thousands, except share data)

 

Endnote Explanations for the Consolidated Schedule of Investments as of March 31, 2012 and June 30, 2011 (Continued)

 

(6)

During the quarter ended December 31, 2009, we created two new entities, Coalbed Inc. and Coalbed LLC, to foreclose on the outstanding senior secured loan and assigned rights and interests of Conquest Cherokee, LLC (“Conquest”), as a result of the deterioration of Conquest’s financial performance and inability to service debt payments. We own 1,000 shares of common stock in Coalbed Inc., representing 100% of the issued and outstanding common stock. Coalbed Inc., in turn owns 100% of the membership interest in Coalbed LLC.

 

 

 

On October 21, 2009, Coalbed LLC foreclosed on the loan formerly made to Conquest. On January 19, 2010, as part of the Manx rollup, the Coalbed LLC assets and loan was assigned to Manx, the holding company. Our Board of Directors set value at zero for the loan position in Coalbed LLC investment as of March 31, 2012 and June 30, 2011.

 

 

(7)

In addition to the stated returns, the net profits interest held will be realized upon sale of the borrower or a sale of the interests.

 

 

 (8)

During the quarter ended December 31, 2011, our ownership of Change Clean Energy Holdings, Inc. (“CCEHI”) and Change Clean Energy, Inc. (“CCEI”), Freedom Marine Holding, Inc. (“Freedom Marine”) and Yatesville Coal Holdings, Inc. (“Yatesville”) was transferred to Energy Solutions Holdings Inc. (f/k/a Gas Solutions Holdings Inc.) (“Energy Solutions”) to consolidate all of our energy holdings under one management team. We own 100% of Energy Solutions.

 

 

(9)

Entity was formed as a result of the debt restructuring of ESA Environmental Specialist, Inc. In early 2009, we foreclosed on the two loans on non-accrual status and purchased the underlying personal and real property. We own 1,000 shares of common stock in The Healing Staff (“THS”), f/k/a Lisamarie Fallon, Inc. representing 100% ownership. We own 1,500 shares of Vets Securing America, Inc. (“VSA”), representing 100% ownership. VSA is a holding company for the real property of Integrated Contract Services, Inc. (“ICS”) purchased during the foreclosure process.

 

 

(10)

Loan is with THS an affiliate of ICS.

 

 

(11)

On June 30, 2008, we consolidated our holdings in four coal companies into Yatesville, and consolidated the operations under one management team. As part of the transaction, the debt that we held of C&A Construction, Inc. (“C&A”), 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”) and North Fork were exchanged for 100% of the equity of Yatesville. This reorganization allowed for a better utilization of the assets in the consolidated group.

 

At June 30, 2011, Yatesville held a $9,326 note receivable from North Fork and owned 100% of the membership interest of East Kentucky Coal Holdings, Inc. (“East Kentucky”). North Fork was owned 100% by East Kentucky.

 

At June 30, 2011, we owned 100% of the common stock of Genesis and held a note receivable of $20,933.

 

Yatesville held a note receivable of $4,261 from Unity at June 30, 2011.

 

As of June 30, 2011, Yatesville owned 10,000 shares of common stock or 100% of the equity of C&A and held a $16,210 senior secured debt receivable from C&A.

 

As of June 30, 2011, Yatesville owned 10,000 shares of common stock or 100% of the equity of E&L. As June 30, 2011 Yatesville also owned 4,285 Series A convertible preferred shares in each of C&A and E&L.

 

In August 2009, Yatesville sold its 49% ownership interest in the common shares of Whymore to the 51% holder of the Whymore common shares (“Whymore Purchaser”). All reclamation liability was transferred to the Whymore Purchaser.

 

Yatesville currently has no material operations. During the quarter ended December 31, 2009, our Board of Directors determined that the impairment of Yatesville was other than temporary and we recorded a realized loss for the amount that the amortized cost exceeds the fair value. Our Board of Directors set the value of the remaining Yatesville investment at zero as of June 30, 2011.

 

On December 9, 2011, each of Genesis, E&L, C&A and East Kentucky merged with and into Yatesville. During the quarter ended December 31, 2011, our ownership of Yatesville merged into a subsidiary of Energy Solutions.

 

28



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 (Unaudited) and June 30, 2011 (Audited)
(in thousands, except share data)

 

Endnote Explanations for the Consolidated Schedule of Investments as of March 31, 2012 and June 30, 2011 (Continued)

 

(12)

On January 19, 2010, we modified the terms of our senior secured debt in AEH and Coalbed in conjunction with the formation of Manx Energy, a new entity consisting in the assets of AEH, Coalbed and Kinley Exploration. The assets of the three companies were brought under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring, and we continue to fully reserve any income accrued for Manx.

 

 

(13)

On a fully diluted basis represents 10.00% of voting common shares.

 

 

(14)

A portion of the positions listed were issued by an affiliate of the portfolio company.

 

 

(15)

We own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,037.65 out of a total of 83,818.69 shares (including 5,111 vested and unvested management options) of American Gilsonite Holding Company which owns 100% of American Gilsonite Company.

 

 

(16)

Syndicated investment which had been originated by another financial institution and broadly distributed.

 

 

(17)

At March 31, 2012 and June 30, 2011, Mistral Chip Holdings, LLC owns 44,800 shares of Chip Holdings, Inc. and Mistral Chip Holdings 2, LLC owns 11,975 shares in Chip Holdings, Inc. Chip Holdings, Inc. is the parent company of Shearer’s Foods, Inc. and has 67,936 shares outstanding before adjusting for management options.

 

 

(18)

The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower.

 

 

(19)

On December 31, 2009, we sold our investment in Aylward Enterprises, LLC. AWCNC, LLC is the remaining holding company with zero assets. Our remaining outstanding debt after the sale was written off on December 31, 2009 and no value has been assigned to the equity position as of March 31, 2012 and June 30, 2011.

 

 

(20)

As of June 30, 2011, we own 100% of Freedom Marine Holding, Inc. (“Freedom Marine”), which owns 100% of the common units of Jettco Marine Services LLC. During the quarter ended March 31, 2012, our ownership of Freedom Marine was transferred to Energy Solutions.

 

 

(21)

We own warrants to purchase 33,750 shares of common stock in Metal Buildings Holding Corporation (“Metal Buildings”), the former holding company of Borga, Inc. Metal Buildings Holding Corporation owned 100% of Borga, Inc.

 

On March 8, 2010, we foreclosed on the stock in Borga, Inc. that was held by Metal Buildings, obtaining 100% ownership of Borga, Inc.

 

 

(22)

We own 100% of C&J Cladding Holding Company, Inc., which owns 40% of the membership interests in C&J Cladding, LLC.

 

 

(23)

On January 1, 2010, we restructured our senior secured and bridge loans investment in Iron Horse Coiled Tubing, Inc. (“Iron Horse”) and we reorganized Iron Horse’s management structure. The senior secured loan and bridge loan were replaced with three new tranches of senior secured debt. During the period from June 30, 2011 to March 31, 2012, our fully diluted ownership of Iron Horse decreased from 57.8% to 5.0%, respectively, as we continued to transfer ownership interests to Iron Horse’s management as they repaid our outstanding debt. Iron Horse management has an option to repurchase our remaining interest for $2,040.

 

As of March 31, 2012 and June 30, 2011, our Board of Directors assessed a fair value in Iron Horse of $2,040 and $15,357, respectively.

 

 

(24)

On May 6, 2011, we made a secured first-lien $24,250 debt investment to NMMB Acquisition, Inc., a $2,800 secured debt and $4,400 equity investment to NMMB Holdings, Inc. We own 100% of the Series A Preferred Stock in NMMB Holdings, Inc. NMMB Holdings, Inc. owns 100% of the Convertible Preferred in NMMB Acquisition, Inc. NMMB Acquisition, Inc. has a 5.8% dividend rate which is paid to NMMB Holdings, Inc. Our fully diluted ownership in NMMB Holdings, Inc. is 100% as of March 31, 2012 and June 30, 2011. Our fully diluted ownership in NMMB Acquisition, Inc. is 83.5% and 94.7% as of March 31, 2012 and June 30, 2011, respectively.

 

29



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED)
March 31, 2012 (Unaudited) and June 30, 2011 (Audited)
(in thousands, except share data)

 

Endnote Explanations for the Consolidated Schedule of Investments as of March 31, 2012 and June 30, 2011 (Continued)

 

(25)

Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of March 31, 2012 and June 30, 2011, we have $27,828 and $35,822 of undrawn revolver commitments to our portfolio companies, respectively.

 

 

(26)

Stated interest rates are based on March 31, 2012 and June 30, 2011 one month Libor rates plus applicable spreads based on the respective credit agreements. Interest rates are subject to change based on actual elections by the borrower for a Libor rate contract or Base Rate contract when drawing on the revolver.

 

 

(27)

On July 30, 2010, we made a secured first-lien $30,000 debt investment to AIRMALL USA, Inc., a $12,500 secured second-lien to AMU Holdings, Inc., and 100% of the Convertible Preferred Stock and Common stock of AMU Holdings, Inc. Our Convertible Preferred Stock in AMU Holdings, Inc. has a 12.0% dividend rate which is paid from the dividends received from the underlying operating company, AIRMALL USA Inc. AMU Holdings, Inc. owns 100% of the common stock in AIRMALL USA, Inc.

 

 

(28)

Progrexion Marketing, Inc., Progrexion Teleservices, Inc., Progrexion ASG, Inc. Progrexion IP, Inc. and Efolks, LLC, are joint borrowers on our senior secured investment. Progrexion Holdings, Inc. and eFolks Holdings, Inc. are the guarantors of this debt investment.

 

30



 

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012
(Unaudited)
(In thousands, except share and per share data)

 

Note 1. Organization

 

References herein to “we”, “us” or “our” refer to Prospect Capital Corporation (“Prospect”) 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 of 1986 (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, recapitalizations and other purposes.

 

On May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the credit facility at PCF.

 

Note 2. Significant Accounting Policies

 

The following are significant accounting policies consistently applied by us:

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. The financial results of our portfolio investments are not consolidated in the financial statements.

 

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 PCF, 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

 

31



 

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 Risks

 

 

The Company’s investments are subject to a variety of risks. Those risks include the following:

 

Market Risk

 

Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.

 

Credit Risk

 

Credit risk represents the risk that the Company would incur if the counterparties failed to perform pursuant to the terms of their agreements with the Company.

 

Liquidity Risk

 

Liquidity risk represents the possibility that the Company may not be able to rapidly adjust the size of its positions in times of high volatility and financial stress at a reasonable price.

 

Interest Rate Risk

 

Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.

 

Prepayment Risk

 

Many of the Company’s debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the security and making the security less likely to be an income producing instrument.

 

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 with Prospect Capital Management (the “Investment Adviser”) proposing values within the valuation range presented by the independent valuation firm; and

 

32



 

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 shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and 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 ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. We adopted ASC 820 on a prospective basis beginning on July 1, 2008.

 

ASC 820 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 ASC 820 relate to the definition of fair value, the framework for measuring fair value, and the expanded disclosures about fair value measurements. ASC 820 applies to fair value measurements already required or permitted by other standards. In accordance with ASC 820, 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 ASC Subtopic 820-10-05-1, The Fair Value Option for Financial Assets and Financial Liabilities (“ASC 820-10-05-1”). ASC 820-10-05-1 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. We adopted this statement on July 1, 2008 and have elected not to value other assets and liabilities at fair value as would be permitted by ASC 820-10-05-1.

 

Senior Convertible Notes

 

We have recorded the Senior Convertible Notes (See Note 5) at their contractual amounts. The Senior Convertible Notes were analyzed for any features that would require its accounting to be bifurcated and they were determined to be immaterial.

 

Revenue Recognition

 

Realized gains or losses on the sale of investments are calculated using the specific identification method.

 

33



 

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. Accretion of such purchase discounts or premiums is calculated by the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. 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. The purchase discount for portfolio investments acquired from Patriot Capital Funding, Inc. (“Patriot”) was determined based on the difference between par value and fair market value as of December 2, 2009, and will continue to accrete until maturity or repayment of the respective loans.

 

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 interests are included in other income.

 

Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will not be collected in accordance with the terms of the investment. 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, 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 calendar year it is 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.

 

If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, 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 we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate for taxable years beginning before 2013 (but not for taxable years beginning thereafter, unless the relevant provisions are extended by legislation) to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Internal Revenue Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge of 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years.

 

We follow ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 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 ASC 740 was

 

34



 

applied to all open tax years as of July 1, 2007. The adoption of ASC 740 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 March 31, 2012 and for the three and nine months then ended, we did not have a liability for any unrecognized tax benefits. Management’s determinations regarding ASC 740 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 monthly dividend or distribution is approved by our Board of Directors quarterly 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, Prospect Capital InterNotes® and the Senior Convertible Notes as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method for our revolving credit facility and the effective interest method for our Prospect Capital InterNotes® and Senior Convertible Notes, over the respective expected life.

 

We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These prepaid assets will be charged to capital upon the receipt of an equity offering proceeds or charged to expense if no offering completed.

 

Guarantees and Indemnification Agreements

 

We follow ASC 460, Guarantees (“ASC 460”). ASC 460 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 ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.

 

Per Share Information

 

Net increase or decrease in net assets resulting from operations per common share are calculated using the weighted average number of common shares outstanding for the period presented. In accordance with ASC 946, Financial Services – Investment Companies, convertible securities are not considered in the calculation of net assets per share.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASC 2010-06”). ASU 2010-06 amends ASC 820-10 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective December 15, 2009, except for the disclosure about purchase, sales, issuances and settlements in the roll forward of activity in level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 (or July 1, 2011 for us) and for interim periods within those fiscal years. The adoption of the amended guidance in ASC 820-10 did not have a significant effect on our financial statements.

 

In February 2011, the FASB issued Accounting Standards Update 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”). ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 provides guidance to clarify whether the creditor has granted a concession and whether a debtor is experiencing

 

35



 

financial difficulties. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption or July 1, 2011 for us. The adoption of the amended guidance in ASU 2011-02 did not have a significant effect on our financial statements.

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification Topic 820, “Fair Value Measurements” (“ASC 820”) by: (1) clarifying that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of non-financial assets; (2) allowing a reporting entity to measure the fair value of the net asset or net liability position in a manner consistent with how market participants would price the net risk position, if certain criteria are met; (3) providing a framework for considering whether a premium or discount can be applied in a fair value measurement; (4) providing that the fair value of an instrument classified in a reporting entity’s shareholders’ equity is estimated from the perspective of a market participant that holds the identical item as an asset; and (5) expanding the qualitative and quantitative fair value disclosure requirements. The expanded disclosures include, for Level 3 items, a description of the valuation process and a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-4 also requires disclosures about the highest-and-best-use of a non-financial asset when this use differs from the asset’s current use and the reasons for such a difference. In addition, this ASU amends Accounting Standards Codification 820, “Fair Value Measurements,” to require disclosures to include any transfers between Level 1 and Level 2 of the fair value hierarchy. These amendments are effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The amendments of ASU 2011-04, when adopted, are not expected to have a material impact on our consolidated financial statements.

 

Note 3. Portfolio Investments

 

At March 31, 2012, we had invested in 78 long-term portfolio investments, which had an amortized cost of $1,655,863 and a fair value of $ 1,691,580 and at June 30, 2011, we had invested in 72 long-term portfolio investments, which had an amortized cost of $1,435,734 and a fair value of $1,463,010.

 

As of March 31, 2012, we own controlling interests in AIRMALL USA, Inc., Ajax Rolled Ring & Machine, Inc., AWCNC, LLC, Borga, Inc. (“Borga”), C&J Cladding, LLC, Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) (“Energy Solutions”), Integrated Contract Services, Inc. (“ICS”), Manx Energy, Inc. (“Manx”), NMMB Holdings, Inc., Nupla Corporation (“Nupla”) and R-V Industries, Inc. We also own an affiliated interest in BNN Holdings Corp. f/k/a Biotronic NeuroNetwork, Boxercraft Incorporated, Smart, LLC, and Sport Helmets Holdings, LLC.

 

The composition of our investments and money market funds as of March 31, 2012 and June 30, 2011 at cost and fair value was as follows:

 

 

 

 

March 31, 2012

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Revolving Line of Credit

 

$

2,508

 

$

2,529

 

$

7,144

 

$

7,278

 

Senior Secured Debt

 

851,475

 

796,732

 

822,582

 

789,981

 

Subordinated Secured Debt

 

568,594

 

510,936

 

491,188

 

448,675

 

Subordinated Unsecured Debt

 

70,389

 

70,872

 

54,687

 

55,336

 

CLO Debt

 

27,164

 

30,662

 

 

 

CLO Residual Interest

 

77,228

 

78,942

 

 

 

Equity

 

58,505

 

200,907

 

60,133

 

161,740

 

Total Investments

 

1,655,863

 

1,691,580

 

1,435,734

 

1,463,010

 

Money Market Funds

 

58,025

 

58,025

 

59,903

 

59,903

 

Total Investments and Money Market Funds

 

$

1,713,888

 

$

1,749,605

 

$

1,495,637

 

$

1,522,913

 

 

36



 

The fair values of our investments and money market funds as of March 31, 2012 disaggregated into the three levels of the ASC 820 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)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Investments at fair value

 

 

 

 

 

 

 

 

 

Revolving Line of Credit

 

$

 

$

 

$

2,529

 

$

2,529

 

Senior Secured Debt

 

 

 

796,732

 

796,732

 

Subordinated Secured Debt

 

 

 

510,936

 

510,936

 

Subordinated Unsecured Debt

 

 

 

70,872

 

70,872

 

CLO Debt

 

 

 

30,662

 

30,662

 

CLO Residual Interest

 

 

 

78,942

 

78,942

 

Equity

 

137

 

 

200,770

 

200,907

 

Total Investments

 

137

 

 

1,691,443

 

1,691,580

 

Money Market Funds

 

 

58,025

 

 

58,025

 

Total Investments and Money Market Funds

 

$

137

 

$

58,025

 

$

1,691,443

 

$

1,749,605

 

 

 

 

 

Fair Value Hierarchy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Investments at fair value

 

 

 

 

 

 

 

 

 

Control investments

 

$

 

$

 

$

323,786

 

$

323,786

 

Affiliate investments

 

 

 

67,581

 

67,581

 

Non-control/non-affiliate investments

 

137

 

 

1,300,076

 

1,300,213

 

 

 

137

 

 

1,691,443

 

1,691,580

 

Investments in money market funds

 

 

58,025

 

 

58,025

 

Total assets reported at fair value

 

$

137

 

$

58,025

 

$

1,691,443

 

$

1,749,605

 

 

 

The fair values of our investments and money market funds as of June 30, 2011 disaggregated into the three levels of the ASC 820 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)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Investments at fair value

 

 

 

 

 

 

 

 

 

Revolving Line of Credit

 

$

 

$

 

$

7,278

 

$

7,278

 

Senior Secured Debt

 

 

 

789,981

 

789,981

 

Subordinated Secured Debt

 

 

 

448,675

 

448,675

 

Subordinated Unsecured Debt

 

 

 

55,336

 

55,336

 

Equity

 

180

 

 

161,560

 

161,740

 

Total Investments

 

180

 

 

1,462,830

 

1,463,010

 

Money Market Funds

 

 

59,903

 

 

59,903

 

Total Investments and Money Market Funds

 

$

180

 

$

59,903

 

$

1,462,830

 

$

1,522,913

 

 

37



 

 

 

Fair Value Hierarchy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Investments at fair value

 

 

 

 

 

 

 

 

 

Control investments

 

$

 

$

 

$

310,072

 

$

310,072

 

Affiliate investments

 

 

 

72,337

 

72,337

 

Non-control/non-affiliate investments

 

180

 

 

1,080,421

 

1,080,601

 

 

 

180

 

 

1,462,830

 

1,463,010

 

Investments in money market funds

 

 

59,903

 

 

59,903

 

Total assets reported at fair value

 

$

180

 

$

59,903

 

$

1,462,830

 

$

1,522,913

 

 

 

The aggregate values of Level 3 portfolio investments changed during the nine months ended March 31, 2012 as follows:

 

 

 

Fair Value Measurements Using Unobservable Inputs (Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control
Investments

 

Affiliate
Investments

 

Non-Control/
Non-Affiliate
Investments

 

Total

 

 

 

 

 

 

 

 

 

 

 

Fair value as of June 30, 2011

 

$

310,072

 

$

72,337

 

$

1,080,421

 

$

1,462,830

 

Total realized loss (gain), net

 

36,939

 

 

(13,227

)

23,712

 

Change in unrealized appreciation (depreciation)

 

45,328

 

(7,529

)

(29,315

)

8,484

 

Net realized and unrealized gain (loss)

 

82,267

 

(7,529

)

(42,542

)

32,196

 

Purchases of portfolio investments

 

44,043

 

2,300

 

496,503

 

542,846

 

Payment-in-kind interest

 

219

 

407

 

3,873

 

4,499

 

Accretion of purchase discount

 

50

 

1,702

 

1,989

 

3,741

 

Repayments and sales of portfolio investments

 

(110,825

)

(1,636

)

(242,208

)

(354,669

)

Transfers within Level 3

 

(2,040

)

 

2,040

 

 

Transfers in (out) of Level 3

 

 

 

 

 

Fair value as of March 31, 2012

 

$

323,786

 

$

67,581

 

$

1,300,076

 

$

1,691,443

 

 

 

 

 

Fair Value Measurements Using Unobservable Inputs (Level 3)

 

 

 

Revolver

 

Senior
Secured Debt

 

Subordinated
Secured Debt

 

Subordinated
Unsecured
Debt

 

CLO Debt

 

CLO
Residual
Interest

 

Equity

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value as of June 30, 2011

 

  $

7,278

 

  $

789,981

 

  $

448,675

 

  $

55,336

 

  $

-

 

  $

-

 

  $

161,560

 

  $

1,462,830

 

Total realized loss (gain), net

 

-

 

(221)

 

(14,606)

 

-

 

-

 

-

 

38,539

 

23,712

 

Change in unrealized (depreciation) appreciation

 

(113)

 

(22,146)

 

(15,145)

 

(162)

 

3,499

 

1,714

 

40,837

 

8,484

 

Net realized and unrealized (loss) gain

 

(113)

 

(22,367)

 

(29,751)

 

(162)

 

3,499

 

1,714

 

79,376

 

32,196

 

Purchases of portfolio investments

 

1,500

 

259,414

 

161,243

 

15,000

 

27,072

 

77,228

 

1,389

 

542,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment-in-kind interest

 

-

 

219

 

3,632

 

648

 

-

 

-

 

-

 

4,499

 

Accretion of purchase discount

 

49

 

1,582

 

1,969

 

50

 

91

 

-

 

-

 

3,741

 

Repayments and sales of portfolio investments

 

(6,185)

 

(232,097)

 

(74,832)

 

-

 

-

 

-

 

(41,555)

 

(354,669)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers within Level 3

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers in (out) of Level 3

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

Fair value as of March 31, 2012

 

  $

2,529

 

  $

796,732

 

  $

510,936

 

  $

70,872

 

  $

30,662

 

  $

78,942

 

  $

200,770

 

  $

1,691,443

 

 

38



 

The aggregate values of Level 3 portfolio investments changed during the nine months ended March 31, 2011 as follows:

 

 

 

Fair Value Measurements Using Unobservable Inputs (Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control
Investments

 

Affiliate
Investments

 

Non-Control/
Non-Affiliate
Investments

 

Total

 

 

 

 

 

 

 

 

 

 

 

Fair value as of June 30, 2010

 

$

195,958

 

$

73,740

 

$

477,417

 

$

747,115

 

Total realized (loss) gain, net

 

(810

)

(549

)

8,050

 

6,691

 

Change in unrealized appreciation (depreciation)

 

29,232

 

5,502

 

(14,776

)

19,958

 

Net realized and unrealized gain (loss)

 

28,422

 

4,953

 

(6,726)

 

26,649

 

Purchases of portfolio investments

 

59,838

 

1,380

 

571,308

 

632,526

 

Payment-in-kind interest

 

2,291

 

1,081

 

5,138

 

8,510

 

Accretion of purchase discount

 

84

 

2,093

 

8,697

 

10,874

 

Repayments and sales of portfolio investments

 

(11,244

)

(12,493

)

(188,587

)

(212,324

)

Transfers within Level 3

 

 

 

 

 

Transfers in (out) of Level 3

 

 

 

 

 

Fair value as of March 31, 2011

 

$

275,349

 

$

70,754

 

$

867,247

 

$

1,213,350

 

 

 

 

Fair Value Measurements Using Unobservable Inputs (Level 3)

 

 

 

Revolving
Line of
Credit

 

Senior
Secured Debt

 

Subordinated
Secured Debt

 

Subordinated
Unsecured
Debt

 

Equity

 

Total

 

Fair value as of June 30, 2010

 

$

5,017

 

$

287,470

 

$

313,511

 

$

30,895

 

$

110,222

 

$

747,115

 

Total realized (loss) gain, net

 

 

(1,072)

 

 

 

7,763

 

6,691

 

Change in unrealized (depreciation) appreciation

 

(264)

 

(812)

 

(4,675)

 

201

 

25,508

 

19,958

 

Net realized and unrealized (loss) gain

 

(264)

 

(1,884)

 

(4,675)

 

201

 

33,271

 

26,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of portfolio investments

 

4,335

 

417,920

 

158,064

 

39,410

 

12,797

 

632,526

 

Payment-in-kind interest

 

 

1,858

 

6,445

 

207

 

 

8,510

 

Accretion of purchase discount

 

169

 

4,141

 

6,410

 

154

 

 

10,874

 

Repayments and sales of portfolio investments

 

(5,879)

 

(59,149)

 

(122,155)

 

(15,492)

 

(9,649)

 

(212,324)

 

Transfers within Level 3

 

 

 

 

 

 

 

Transfers in (out) of Level 3

 

 

 

 

 

 

 

Fair value as of March 31, 2011

 

$

3,378

 

$

650,356

 

$

357,600

 

$

55,375

 

$

146,641

 

$

1,213,350

 

 

For the nine months ended March 31, 2012 and 2011, the net change in unrealized appreciation on the investments that use Level 3 inputs was $40,899 and $22,889 for assets still held as of March 31, 2012 and 2011, respectively.

 

In December 2011, we completed a reorganization of Gas Solutions Holdings, Inc. renaming the company Energy Solutions and transferring ownership of other operating companies owned by us and operating within the energy industry. As part of the reorganization, our equity interests in Change Clean Energy Holdings, Inc. (“CCEHI”) and Change Clean Energy, Inc. (“CCEI”), Freedom Marine Holdings LLC (“Freedom Marine”) and Yatesville Coal Holdings, Inc. (“Yatesville”) was transferred to Energy Solutions to consolidate all of our energy holdings under one management team strategically expanding Energy Solutions across energy sectors.

 

On January 4, 2012, Energy Solutions sold its gas gathering and processing assets (“Gas Solutions”) for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $148,687 in cash and an additional $10,000 is being held in escrow. Currently, our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us will be required to be recognized as dividend income, in accordance with ASC 946, Financial Services – Investment Companies, as cash distributions are received from Energy Solutions to the extent there are current year earnings and profits sufficient to support such recognition.

 

39



 

As of March 31, 2012, the valuation methodology for Energy Solutions changed from a combination of a discounted cash flow analysis and a public comparables analyses to a current value method for the undistributed sale proceeds held at Energy Solutions.

 

As of March 31, 2012, the valuation methodology for New Meatco Provisions, LLC (“Meatco”) changed from a discounted cash flow analysis to a liquidation value analysis. As a result, and combined with declining financial results, the fair market value of Meatco decreased from $13,106 to $7,634 as of June 30, 2011 and March 31, 2012, respectively.

 

At March 31, 2012 nine loan investments were on non-accrual status: Borga, Freedom Marine, a subsidiary of Energy Solutions, H&M Oil and Gas, LLC (“H&M”), ICS, Manx, Nupla, Stryker Energy, LLC, Wind River Resources Corp. and Wind River II Corp. (“Wind River”) and Yatesville, a subsidiary of Energy Solutions. At June 30, 2011, nine loan investments were on non-accrual status: Borga, Deb Shops, Inc. (“Deb Shops”), Freedom Marine, H&M, ICS, Nupla, Manx, Wind River and Yatesville. The loan principal of these loans amounted to $170,055 and $154,752 as of March 31, 2012 and June 30, 2011, respectively. The fair value of these loans amounted to $39,670 and $54,020 as of March 31, 2012 and June 30, 2011, respectively. The fair values of these investments represent approximately 3.0% and 4.8% of our net assets as of March 31, 2012 and June 30, 2011, respectively. For the three months ended March 31, 2012 and March 31, 2011, the income foregone as a result of not accruing interest on non-accrual debt investments amounted to $6,366 and $3,518, respectively. For the nine months ended March 31, 2012 and March 31, 2011, the income foregone as a result of not accruing interest on non-accrual debt investments amounted to $18,363 and $10,085, respectively.

 

During the nine months ended March 31, 2012, Deb Shops filed for bankruptcy and a plan for reorganization was proposed. The plan, which is expected to be approved by the bankruptcy court, will eliminate our debt position with no payment to us. As a result, we determined that the impairment of Deb Shops was other-than-temporary and recorded a realized loss of $14,607 for the full amount of the amortized cost.

 

On December 28, 2011, we made a secured debt investment of $37,218 to support the recapitalization of NRG Manufacturing, Inc. (“NRG”). After the financing, we received repayment of the $13,080 loan that was previously outstanding and a dividend of $6,711 as a result of our equity holdings. In addition, we sold 392 shares of NRG common stock held by us back to NRG for $13,266, realizing a gain of $12,131.

 

On February 2, 2012, NRG was sold to an outside buyer for $123,258.  In conjunction with the sale, the $37,218 loan that was outstanding was repaid. We also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. Further, we received a $3,800 advisory fee for the transaction, which was recorded as other income in the quarter ending March 31, 2012. After expenses, including the make whole and advisory fees discussed above, $40,886 was available to be distributed to stockholders. While our 408 shares of NRG common stock represented 67.1% of the ownership, we received net proceeds of $25,991 as our contribution to the escrow amount was proportionately higher than the other shareholders. In connection with the sales, we recognized a realized gain of $24,810 during the quarter ended March 31, 2012. In total, we received proceeds of $93,977 at closing. In addition, there is $11,125 being held in escrow of which 80% is due to us upon release of the escrowed amounts. This will be recognized as additional gain if and when received.

 

Energy Solutions has indemnified us against any legal action arising from its investment in Gas Solutions, LP. We have incurred approximately $2,093 from the inception of the investment in Energy Solutions through March 31, 2012 for fees associated with a legal action, and Energy Solutions has reimbursed us for the entire amount. There were no such legal fees incurred or reimbursed for the three and nine months ended March 31, 2012 and March 31, 2011.

 

Additionally, certain other expenses incurred by us which are attributable to Energy Solutions have been reimbursed by Energy Solutions and are reflected as dividend income: control investments in the Consolidated Statements of Operations. For the three months ended March 31, 2012 and March 31, 2011, such reimbursements totaled approximately $640 and $1,423, respectively. For the nine months ended March 31, 2012 and March 31, 2011, such reimbursements totaled approximately $6,299 and $3,933, respectively.

 

The original cost basis of debt placements and equity securities acquired, including follow-on investments for existing portfolio companies, totaled $168,903 and $356,659 during the three months ended March 31, 2012 and March 31, 2011, respectively. These placements and acquisitions totaled $542,846 and $632,526 during the nine months ended March 31, 2012 and March 31, 2011, respectively. Debt repayments and sales of equity securities with a cost basis of $163,587 and $76,494 were received during the three months ended March 31, 2012 and March 31, 2011, respectively. These repayments and sales amounted to $330,957 and $207,030 during the nine months ended March 31, 2012 and March 31, 2011, respectively.

 

40



 

During the three and nine months ended March 31, 2012, we recognized $964 and $3,348 of interest income due to purchase discount accretion from the assets acquired from Patriot, respectively. Included in the $964 recorded during the three months ended March 31, 2012 is $726 of normal accretion and $238 of accelerated accretion resulting from the repayment of ROM Acquisition Corp (“ROM”). Included in the $3,348 recorded during the nine months ended March 31, 2012 is $2,417 of normal accretion and $931 of accelerated accretion resulting from the repayments of Mac & Massey Holdings, LLC and ROM.

 

During the three and nine months ended March 31, 2011, we recognized $4,739 and $10,092, respectively, of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $4,739 for the three months ended March 31, 2011, is $1,302 of normal accretion and $3,268 of accelerated accretion resulting from the recapitalization of our loans to Arrowhead General Insurance Agency, Inc. (“Arrowhead”) and The Copernicus Group, Inc. (“Copernicus”). Included in the $10,092 for the nine months ended March 31, 2011, is $3,979 of normal accretion, $1,116 of accelerated accretion resulting from the repayment of Impact Products, LLC, and $4,828 of accelerated accretion resulting from the recapitalization of our debt investments in Arrowhead, Copernicus and Northwestern Management Services, LLC (“Northwestern”). The restructured loans for Arrowhead, Copernicus and Northwestern were issued at market terms comparable other industry transactions. In accordance with ASC 320-20-35 the cost basis of the new loan was recorded at par value, which precipitated the acceleration of original purchase discount from the loan repayment which was recognized as interest income.

 

As of March 31, 2012, $5,286 of purchase discount from the assets acquired from Patriot remains to be accreted as interest income, of which $666 is expected to be amortized during the three months ending June 30, 2012.

 

As of March 31, 2012, $1,080,813 of our loans bear interest at floating rates, $1,041,651 of which have Libor floors ranging from 1.00% to 5.89%.

 

Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of March 31, 2012 and June 30, 2011, we have $27,828 and $35,822 of undrawn revolver commitments to our portfolio companies, respectively.

 

Note 4. Revolving Credit Agreements

 

On July 11, 2010, we closed an extension and expansion of our existing credit facility with a syndicate of lenders through PCF (the “2010 Facility”). The 2010 Facility, which had $325,000 total commitments as of June 30, 2011, included an accordion feature which allowed the Syndicated Facility to accept up to an aggregate total of $400,000 of commitments, a limit which was met on September 1, 2011. Interest on borrowings under the 2010 Facility was one-month Libor plus 325 basis points, subject to a minimum Libor floor of 100 basis points. Additionally, the lenders charged a fee on the unused portion of the 2010 Facility equal to either 75 basis points if at least half of the credit facility is used or 100 basis points otherwise.

 

On March 27, 2012, we renegotiated the Syndicated Facility and closed on an expanded five-year $650,000 revolving credit facility (the “2012 Facility”). The lenders have extended commitments of $410,000 under the 2012 Facility as of March 31, 2012; which was increased by $482,500 in April 2012 (See Note 15). The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders.

 

The 2012 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2012 Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the 2012 Facility. The 2012 Facility also requires the maintenance of a minimum liquidity requirement. At March 31, 2012, we were in compliance with the applicable covenants.

 

Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of March 31, 2012 and June 30, 2011, we had $376,137 and $255,673, respectively, available to us for borrowing under our 2012 Facility, of which the amount outstanding was

 

41



 

$121,000 and $84,200, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $482,500. At March 31, 2012, the investments used as collateral for the 2012 Facility had an aggregate market value of $845,406, which represents 64.1% of our net assets. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at market value as of March 31, 2012. The release of any assets from PCF requires the approval of the facility agent.

 

Concurrent with the extension of our 2012 Facility, in March 2012, we wrote off $304 of the unamortized debt issue costs associated with the previous credit facility, in accordance with ASC 470-50, Debt Modifications and Extinguishments. In connection with the origination and amendments of the 2012 Facility, we incurred $8,428 of fees, including $1,319 of fees carried over from the previous facility, which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $8,397 remains to be amortized.

 

During the three and nine months ended March 31, 2012, we recorded $4,484 and $12,783 of interest costs, unused fees and amortization of financing costs on our credit facility as interest expense, respectively.

 

Note 5. Senior Convertible Notes

 

On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 (“2015 Notes”) for net proceeds (after deducting underwriting expenses) of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at March 31, 2012 of 88.0902 and 88.1136 shares, respectively, of common stock per $1,000 principal amount of 2015 Notes, which is equivalent to a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2015 Notes will be increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101125 per share, subject to adjustment.

 

On February 18, 2011, we issued $172,500 in aggregate principal amount of our 5.50% senior convertible notes due 2016 (“2016 Notes”) for net proceeds following underwriting expenses of approximately $167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 of our 2016 Notes at a price of 97.5, including commissions. The transactions resulted in our recognizing $10 of loss in the quarter ended March 31, 2012. Interest on the remaining $167,500 of 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year, commencing August 15, 2011. The 2016 Notes mature on August 15, 2016 unless converted earlier. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at March 31, 2012 of 78.3699 and 78.3880 shares, respectively, of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2016 Notes will be increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101150 per share.

 

In no event will the total number of shares of common stock issuable upon conversion exceed 96.8992 per $1,000 principal amount of the 2015 Notes (the “conversion rate cap”), except that, to the extent we receive written guidance or a no-action letter from the staff of the Securities and Exchange Commission (the “Guidance”) permitting us to adjust the conversion rate in certain instances without regard to the conversion rate cap and to make the 2015 Notes convertible into certain reference property in accordance with certain reclassifications, business combinations, asset sales and corporate events by us without regard to the conversion rate cap, we will make such adjustments without regard to the conversion rate cap and will also, to the extent that we make any such adjustment without regard to the conversion rate cap pursuant to the Guidance, adjust the conversion rate cap accordingly. We will use our commercially reasonable efforts to obtain such Guidance as promptly as practicable.

 

Prior to obtaining the Guidance, we will not engage in certain transactions that would result in an adjustment to the conversion rate increasing the conversion rate beyond what it would have been in the absence of such transaction unless we have engaged in a reverse stock split or share combination transaction such that in our reasonable best estimation, the conversion rate following the adjustment for such transaction will not be any closer to the conversion rate cap than it would have been in the absence of such transaction.

 

Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Notes surrendered for

 

42



 

conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the 2015 Notes and 2016 Notes (collectively, “Senior Convertible Notes”).

 

No holder of Senior Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.

 

Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Notes upon a fundamental change at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Senior Convertible Notes through and including the maturity date.

 

In connection with the issuance of the Senior Convertible Notes, we incurred $10,562 of fees which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $8,289 remains to be amortized and is included within deferred financing costs of $17,179 on the consolidated statements of assets and liabilities.

 

During the three and nine months ended March 31, 2012, we recorded $5,133 and $15,553 of interest costs and amortization of financing costs on the Senior Convertible Notes as interest expense.

 

Note 6. Prospect Capital InterNotes®

 

On February 16, 2012, we entered into a Selling Agent Agreement (the “Selling Agent Agreement”) with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®  (the “InterNotes® Offering”). Additional agents appointed by us from time to time in connection with the InterNotes Offering may become parties to the Selling Agent Agreement.

 

These notes will be our direct unsecured senior obligations and will rank equally with all of our unsecured senior indebtedness from time to time outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

 

During the three months ended March 31, 2012, we issued $5,465 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $5,001. These notes were issued with stated interest rates ranging from 6.90% to 7.00% with an average rate of 6.97%. These notes mature on March 15, 2022.

 

43



 

Note 7. Equity Offerings, Offering Expenses, and Distributions

 

We issued 13,500,000 and 18,494,476 shares of our common stock during the nine months ended March 31, 2012 and March 31, 2011, respectively. The proceeds raised, the related underwriting fees, the offering expenses and the prices at which these shares were issued are as follows:

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Number of

 

Proceeds

 

Underwriting

 

Offering

 

Offering

 

Issuances of Common Stock

 

Shares

 

Raised

 

Fees

 

Expenses

 

Price

 

 

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the nine months ended March 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2012

 

12,000,000

 

$

131,400

 

$

1,560

 

$

360

 

$

10.950

 

 

 

 

 

 

 

 

 

 

 

 

 

July 18, 2011

 

1,500,000

 

$

15,225

 

$

165

 

$

165

 

$

10.150

 

 

 

 

 

 

 

 

 

 

 

 

 

During the nine months ended March 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 16, 2010 – December15, 2010(1)

 

4,513,920

 

$

45,147

 

$

904

 

$

459

 

$

10.000

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2010 – November 3, 2010(2)

 

5,231,956

 

$

51,597

 

$

1,033

 

$

163

 

$

9.861

 

 

 

 

 

 

 

 

 

 

 

 

 

July 22, 2010 – September 28, 2010(3)

 

6,000,000

 

$

58,403

 

$

1,156

 

$

103

 

$

9.734

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2010 – July 21, 2010(4)

 

2,748,600

 

$

26,799

 

$

536

 

$

 

$

9.749

 

 

(1) On November 10, 2010, we established a fourth at-the-market program through which we may sell, from time to time and at our sole discretion 9,750,000 shares of our common stock. Through this program we issued 4,513,920 shares of our common stock at an average price of $10.00 per share, raising $45,147 of gross proceeds, from November 16, 2010 through December 15, 2010. This program was suspected at that time.

(2) On September 24, 2010, we established a third at-the-market program through which we sold 5,231,956 shares of our common stock at an average price of $9.86 per share, raising $51,597 of gross proceeds, from September 29, 2010 through November 3, 2010.

(3) On July 19, 2010, we established a second at-the-market program through which we sold 6,000,000 shares of our common stock at an average price of $9.73 per share, raising $58,403 of gross proceeds, from July 22, 2010 through September 28, 2010.

(4) On March 17, 2010, we established an at-the-market program through which we sold 8,000,000 shares of our common stock. Through this program we issued 811,500 shares of our common stock at an average price of $12.60 per share, raising $10,230 of gross proceeds, from March 23, 2010 through March 31, 2010. Through this program we also issued 2,748,600 shares of our common stock at an average price of $9.75 per share, raising $26,799 of gross proceeds, from July 1, 2010 through July 21, 2010.

 

Our shareholders’ equity accounts at March 31, 2012 and June 30, 2011 reflect cumulative shares issued as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters and 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 August 24, 2011, our Board of Directors approved a share repurchase plan under which we may repurchase up to $100,000 of our common stock at prices below our net asset value. We have not made any purchases of our common stock during the period from August 24, 2011 to March 31, 2012 pursuant to this plan. Prior to any repurchase we are required to notify shareholders of our intention to purchase our common stock. This notice lasts for six months after notice is given.  Our last notice was delivered with our annual proxy mailing and expired on March 16, 2012.  In order to reactivate the share repurchase plan prior to any future purchases, a new notice would need to be mailed to shareholders.

 

On February 6, 2012, we announced the declaration of monthly dividends in the following amounts and with the following dates:

 

·

$0.101450 per share for February 2012 to holders of record on February 29, 2012 with a payment date of March 23, 2012;

 

44



 

·

$0.101475 per share for March 2012 to holders of record on March 30, 2012 with a payment date of April 20, 2012; and

 

 

·

$0.101500 per share for April 2012 to holders of record on April 30, 2012 with a payment date of May 24, 2012.

 

On October 21, 2011, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to $613,135 of additional debt and equity securities in the public market.

 

During the nine months ended March 31, 2012 and March 31, 2011, we issued 817,241 and 777,473 shares, respectively, of our common stock in connection with the dividend reinvestment plan.

 

At March 31, 2012, we have reserved 26,347,045 shares of our common stock for issuance upon conversion of the Senior Convertible Notes (See Note 5).

 

Note 8. 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 nine months ended March 31, 2012 and March 31, 2011 were as follows:

 

 

 

For The Three Months Ended
March 31,

 

For The Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

Income Source

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Structuring, advisory and amendment fees

 

$

15,085

 

$

7,191

 

$

22,853

 

$

13,689

 

Overriding royalty interests

 

23

 

45

 

140

 

143

 

Administrative agent fee

 

92

 

70

 

210

 

138

 

Other Investment Income

 

$

15,200

 

$

7,306

 

$

23,203

 

$

13,970

 

 

Note 9. Net Increase in Net Assets per Common Share

 

The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three and nine months ended March 31, 2012 and March 31, 2011, respectively.

 

 

 

For The Three Months Ended
March 31,

 

For The Nine Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2012

 

2011

 

Net increase in net assets resulting from operations

 

$

50,209

 

$

33,759

 

$

154,601

 

$

91,279

 

Weighted average common shares outstanding

 

114,146,939

 

88,200,916

 

110,868,177

 

82,112,300

 

Net increase in net assets resulting from operations per common share

 

$

0.44

 

$

0.38

 

$

1.39

 

$

1.11

 

 

Note 10. 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

 

45



 

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 total base management fees incurred to the favor of the Investment Adviser for the three months ended March 31, 2012 and March 31, 2011 were $8,949, and $6,037, respectively. The fees incurred for the nine months ended March 31, 2012 and March 31, 2011 were $25,985, and $15,216, 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, equal 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.

 

46



 

For the three months ended March 31, 2012 and March 31, 2011, income incentive fees of $14,518 and $5,997, respectively, were incurred. For the nine months ended March 31, 2012 and March 31, 2011, income incentive fees of $30,614 and $16,015, respectively, were incurred. No capital gains incentive fees were incurred for the three or nine months ended March 31, 2012 and March 31, 2011.

 

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 his staff. For the three months ended March 31, 2012 and 2011, the reimbursement was approximately $2,910 and $1,669, respectively. For the nine months ended March 31, 2012 and 2011, the reimbursement was approximately $5,143 and $3,309, respectively. 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.

 

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. As of March 31, 2012 and June 30, 2011, $362 and $45 of managerial assistance fees remain on the consolidated statements of assets and liabilities as a payable to the Administrator.

 

Note 11. 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. We are not aware of any such material litigation as of March 31, 2012.

 

Note 12. Proposed Investment

 

On March 19, 2012, we entered into a definitive agreement to provide debt and equity for the acquisition of the businesses of First Tower Corp. (‘‘First Tower’’), a private multiline specialty finance company based in Flowood, Mississippi with over 150 branch offices. We are acquiring 80.1% of First Tower for $110,200 of cash and 14,518,207 of our shares of common stock. We have the option, at our sole discretion, to substitute up to 100% cash in lieu of such 14,518,207 shares of our common stock at a price per share based on average trading prices prior to the closing date.

 

47



 

Completion of the acquisition is subject to regulatory approvals and is expected to close late in the quarter ended June 30, 2012.

 

Note 13. Financial Highlights

 

 

 

For The Three Months Ended

 

For The Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

March 31, 2011

 

March 31, 2012

 

March 31, 2011

 

Per Share Data(1): 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value at beginning of period

 

$

10.69

 

 

$

10.25

 

 

$

10.36

 

 

$

10.30

 

 

Net investment income

 

0.51

 

 

0.27

 

 

1.10

 

 

0.78

 

 

Net realized gain (loss)

 

0.22

 

 

0.02

 

 

0.21

 

 

0.09

 

 

Net unrealized (depreciation) appreciation

 

(0.29

)

 

0.09

 

 

0.08

 

 

0.25

 

 

Net decrease in net assets as a result of public offerings

 

 

 

 

 

 

 

(0.16

)

 

Dividends declared and paid

 

(0.31

)

 

(0.30

)

 

(0.93

)

 

(0.93

)

 

Net asset value at end of period

 

$

10.82

 

 

$

10.33

 

 

$

10.82

 

 

$

10.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share market value at beginning of period

 

$

9.29

 

 

$

10.80

 

 

$

10.11

 

 

$

10.80

 

 

Per share market value at end of period

 

$

10.98

 

 

$

12.21

 

 

$

10.98

 

 

$

12.21

 

 

Total return based on market value(2)

 

21.47

%

 

15.87

%

 

19.44

%

 

37.44

%

 

Total return based on net asset value(2)

 

4.02

%

 

3.29

%

 

14.85

%

 

8.94

%

 

Shares outstanding at end of period

 

121,923,931

 

 

88,358,811

 

 

121,923,931

 

 

88,358,811

 

 

Average weighted shares outstanding for period

 

114,146,939

 

 

88,200,916

 

 

110,868,177

 

 

82,112,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio / Supplemental Data: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets at end of period (in thousands)

 

$

1,318,806

 

 

$

912,921

 

 

$

1,318,806

 

 

$

912,921

 

 

Annualized ratio of operating expenses to average net assets

 

12.06

%

 

9.08

%

 

10.55

%

 

7.49

%

 

Annualized ratio of net operating income to average net assets

 

18.65

%

 

10.55

%

 

13.49

%

 

9.78

%

 

 

48



 

Note 13. Financial Highlights (continued)

 

 

 

Year

 

Year

 

Year

 

Year

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

June 30,
2011

 

June 30,
2010

 

June 30,
2009

 

June 30,
2008

 

June 30,
2007

 

Per Share Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value at beginning of period

 

$

10.30

 

 

$

12.40

 

 

$

14.55

 

 

$

15.04

 

 

$

15.31

 

 

Costs related to the secondary public offering

 

–     

 

 

–     

 

 

–     

 

 

(0.07

)

 

(0.06

)

 

Net investment income

 

1.10

 

 

1.13

 

 

1.87

 

 

1.91

 

 

1.47

 

 

Realized gain (loss)

 

0.19

 

 

(0.87

)

 

(1.24

)

 

(0.69

)

 

0.12

 

 

Net unrealized appreciation (depreciation)

 

0.09

 

 

0.07

 

 

0.48

 

 

(0.05

)

 

(0.52

)

 

Net (decrease) increase in net assets as a result of public offering

 

(0.08

)

 

(0.85

)

 

(2.11

)

 

–     

 

 

0.26

 

 

Net increase in net assets as a result of shares issued for Patriot acquisition

 

–     

 

 

0.12

 

 

–     

 

 

–     

 

 

–     

 

 

Dividends to shareholders

 

(1.24

)

 

(1.70

)

 

(1.15

)

 

(1.59

)

 

(1.54

)

 

Net asset value at end of period

 

$

10.36

 

 

$

10.30

 

 

$

12.40

 

 

$

14.55

 

 

$

15.04

 

 

 

Per share market value at end of period

 

$

10.11

 

 

$

9.65

 

 

$

9.20

 

 

$

13.18

 

 

$

17.47

 

 

Total return based on market value(2)

 

17.22

%

 

17.66

%

 

(18.60

%)

 

(15.90

%)

 

12.65

%

 

Total return based on net asset value(2)

 

12.54

%

 

(6.82

%)

 

(0.61

%)

 

7.84

%

 

7.62

%

 

Shares outstanding at end of period

 

107,606,690

 

 

69,086,862

 

 

42,943,084

 

 

29,520,379

 

 

19,949,065

 

 

Average weighted shares outstanding for period

 

85,978,757

 

 

59,429,222

 

 

31,559,905

 

 

23,626,642

 

 

15,724,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio / Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets at end of period (in thousands)

 

$

1,114,357

 

 

$

711,424

 

 

$

532,596

 

 

$

429,623

 

 

$

300,048

 

 

Annualized ratio of operating expenses to average net assets

 

8.47

%

 

7.54

%

 

9.03

%

 

9.62

%

 

7.36

%

 

Annualized ratio of net investment income to average net assets

 

10.60

%

 

10.69

%

 

13.14

%

 

12.66

%

 

9.71

%

 

 

(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.

 

49



 

Note 14. 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, 2009

 

$   21,517

 

$  0.43   

 

$ 12,318

 

$   0.25

$

(18,696)

$

    (0.38)

$

  (6,378)

$

    (0.13)

 

December 31, 2009(2)

 

31,801

 

0.55

 

19,258

 

0.33

 

(33,778)

 

(0.59)

 

(14,520)

 

(0.25)

 

March 31, 2010

 

32,005

 

0.50

 

18,974

 

0.30

 

6,966

 

0.11

 

25,940

 

0.41

 

June 30, 2010

 

29,236

 

0.44

 

16,640

 

0.25

 

(2,057)

 

(0.03)

 

14,583

 

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

35,212

 

0.47

 

20,995

 

0.28

 

4,585

 

0.06

 

25,580

 

0.34

 

December 31, 2010

 

33,300

 

0.40

 

19,080

 

0.23

 

12,860

 

0.16

 

31,940

 

0.38

 

March 31, 2011

 

44,573

 

0.51

 

23,956

 

0.27

 

9,803

 

0.11

 

33,759

 

0.38

 

June 30, 2011

 

56,391

 

0.58

 

30,190

 

0.31

 

(3,232)

 

(0.03)

 

26,959

 

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

55,342

 

0.51

 

27,877

 

0.26

 

12,023

 

0.11

 

39,900

 

0.37

 

December 31, 2011

 

67,263

 

0.61

 

36,508

 

0.33

 

27,984

 

0.26

 

64,492

 

0.59

 

March 31, 2012

 

95,623

 

0.84

 

58,072

 

0.51

 

(7,863)

 

(0.07)

 

50,209

 

0.44

 

 

 

 

 

(1)

 

Per share amounts are calculated using weighted average shares during period.

 

 

 

(2)

 

As adjusted for increase in earnings from Patriot.

 

 

Note 15. Subsequent Events

 

On April 4, 2012 and April 17, 2012, we closed increases to our commitments to our credit facility of $15,000 and $57,500. The commitments to the credit facility now stand at $482,500.

 

On April 2, 2012 we made an investment of $22,000 to purchase 51.2% of the subordinated notes in Galaxy XII CLO, Ltd.

 

In April 2012, we issued $8,516 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $8,329.

 

On April 16, 2012, we issued $130,000 in aggregate principal amount of 5.375% senior convertible notes due 2017 for net proceeds following underwriting expenses of approximately $126,425.

 

On April 16, 2012, we made a senior secured debt investment of $15,000 to support the acquisition of Nixon, Inc., a designer and distributor of watches and accessories.

 

On April 20, 2012 we made an investment of $43,195 to purchase 71.1% of the subordinated notes in Symphony CLO IX, Ltd.

 

On April 20, 2012, we issued 85,063 shares of our common stock in connection with the dividend reinvestment plan.

 

On May 1, 2012, we issued $100,000 in aggregate principal amount of 6.95% senior unsecured notes due 2022 for net proceeds following underwriting expenses of approximately $96,800.

 

On May 7, 2012, we announced the declaration of monthly dividends in the following amounts and with the following dates:

 

·                  $0.101525 per share for May 2012 to holders of record on May 31, 2012 with a payment date of June 22, 2012;

 

·                  $0.101550 per share for June 2012 to holders of record on June 29, 2012 with a payment date of July 24, 2012; and

 

50



 

·                  $0.101575 per share for July 2012 to holders of record on July 31, 2012 with a payment date of August 24, 2012; and

 

·                  $0.10160 per share for August 2012 to holders of record on August 31, 2012 with a payment date of September 21, 2012.

 

On May 8, 2012, SonicWALL, Inc. repaid the $23,000 loan receivable to us.

 

51



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

(All figures in this item are in thousands except share, per share and other data)

 

References herein to “we,” “us” or “our” refer to Prospect Capital Corporation and its subsidiary unless the context specifically requires otherwise.

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations.  Any discussion relating to specific investments or portfolio loans herein should be read in conjunction with endnote 3 to the Consolidated Schedule of Investments included in our financial statements in order to determine whether all or any portion of such investment or loan is owned by our wholly-owned bankruptcy remote special purpose subsidiary, Prospect Capital Funding LLC and, accordingly, held as collateral for the revolving credit facility.

 

Note on Forward Looking Statements

 

Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:

 

·                  our future operating results;

 

·                  our business prospects and the prospects of our portfolio companies;

 

·                  the impact of investments that we expect to make;

 

·                  our contractual arrangements and relationships with third parties;

 

·                  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;

 

·                  our expected financings and investments;

 

·                  the adequacy of our cash resources and working capital; and

 

·                  the timing of cash flows, if any, from the operations of our portfolio companies.

 

We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this report.

 

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (“SEC”), including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Overview

 

We are 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 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. From our July 27, 2004 inception to the fiscal year ended June 30, 2007, we invested primarily in industries related to the industrial/energy economy. Since then, we have widened our strategy to focus in other sectors of the economy and continue to reduce our exposure to the energy

 

52



 

industry, and our holdings in the energy and energy related industries now represent less than 10% of our investment portfolio.

 

The aggregate value of our portfolio investments was $1,691,580, and $1,463,010 as of March 31, 2012 and June 30, 2011, respectively. During the nine months ended March 31, 2012, our net cost of investments increased by $220,129, or 15.3%, as a result of nineteen new investments, several follow-on investments and a revolver advance, totaling $542,846, accrued payment-in-kind interest of $4,499 and accretion of purchase discount of $3,741, while we received full repayment on twelve investments, sold one investment, received several partial prepayments, amortization payments and a revolver repayment, totaling $354,660, including a net realized gain of $23,703. During the nine months ended March 31, 2012, Deb Shops, Inc. (“Deb Shops”) filed for bankruptcy and a plan for reorganization was proposed. The plan, which is expected to be approved by the bankruptcy court, will eliminate our debt position with no payment to us. As a result, we determined that the impairment of Deb Shops was other-than-temporary and recorded a realized loss of $14,607 for the full amount of the amortized cost. This realized loss was primarily offset by our sale of 392 shares of NRG common stock for which we realized a gain of $36,940.

 

Compared to the end of last fiscal year (ended June 30, 2011), net assets increased by $204,449 or 18.3% during the nine months ended March 31, 2012, from $1,114,357 to $1,318,806. This increase resulted from the issuance of new shares of our common stock (less offering costs) in the amount of $144,376, dividend reinvestments of $7,893, and another $154,601 from operations. These increases, in turn, were offset by $102,421 in dividend distributions to our stockholders. The $154,601 increase in net assets resulting from operations is net of the following: net investment income of $122,457, net realized gain on investments of $23,703 and an increase in net assets due to changes in net unrealized appreciation of investments of $8,441.

 

Third Quarter Highlights

 

Investment Transactions

 

On January 4, 2012, Energy Solutions Holdings, Inc. (“Energy Solutions”) sold its gas gathering and processing assets (“Gas Solutions”) for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $148,687 in cash and an additional $10,000 is being held in escrow. Currently, our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us will be required to be recognized as dividend income, in accordance with ASC 946, Financial Services — Investment Companies, as cash distributions are received from Energy Solutions to the extent there are current year earnings and profits sufficient to support such recognition.

 

On January 9, 2012, Arrowhead General Insurance Agency, Inc. (“Arrowhead”) repaid the $27,000 loan receivable to us.

 

On January 12, 2012, we made a follow-on investment of $16,500 to purchase 86.8% of the secured Class D Notes in CIFC Funding 2011-I, Ltd (“CIFC”). The secured Class D Notes bear interest in cash at Libor plus 5.0% and has a final maturity date on January 19, 2023.

 

On January 17, 2012, we provided $18,332 of secured second-lien financing to National Bankruptcy Solutions (“NBS”), a financial services processing company purchased by a leading private equity sponsor. The second lien note bears interest in cash at the greater of 12.00% or Libor plus 9.0% and interest in kind of 1.50% and has a final maturity of July 16, 2017.

 

On January 31, 2012, Aircraft Fasteners International, LLC (“AFI”) repaid the $7,441 loan receivable to us.

 

On February 2, 2012, NRG Manufacturing, Inc. (“NRG”) was sold to an outside buyer for $123,258.  In conjunction with the sale, the $37,218 loan that was outstanding was repaid. We also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. Further, we received a $3,800 advisory fee for the transaction, which was recorded as other income in the quarter ending March 31, 2012. After expenses, including the make whole and advisory fees discussed above, $40,886 was available to be distributed to stockholders. While our 408 shares of NRG common stock represented 67.1% of the ownership, we received net proceeds of $25,991 as our contribution to the escrow amount was proportionately higher than the other

 

53



 

shareholders. In connection with the sales, we recognized a realized gain of $24,810 in the results for the quarter ended March 31, 2012. In total, we received proceeds of $93,977 at closing. In addition, there is $11,125 being held in escrow of which 80% is due to us upon release of the escrowed amounts. This will be recognized as additional gain if and when received.

 

On February 10, 2012, we provided $15,000 of secured second-lien financing to Rocket Software, Inc. (“Rocket Software”), a leading global infrastructure software company. The second lien note bears interest in cash at the greater of 10.25% or Libor plus 8.75% and has a final maturity of February 8, 2019.

 

On February 15, 2012, we provided $25,000 of secured second-lien financing to Blue Coat Systems, Inc. (“Blue Coat”), a leading provider of Web security and wide area network (WAN) optimization solutions. The second lien note bears interest in cash at the greater of 11.50% or Libor plus 10.0% and has a final maturity of August 15, 2018.

 

On February 24, 2012, we made a follow-on investment of $7,856 to purchase 23.9% of the unrated subordinated notes to Apidos CLO VIII, Ltd (“Apidos”).

 

On February 28, 2012, we made a senior secured follow-on investment of $9,500 in Clearwater Seafoods LP (“Clearwater”) to finance the repayment of a senior secured note due to mature in 2012 and settle outstanding claims senior to our own investment. The second lien note bears interest in cash at 12.00% and has a final maturity of February 4, 2016.

 

On February 29, 2012, we provided $15,000 of secured second-lien financing to Focus Brands, Inc. (“Focus”), a leading franchiser and operator of restaurants, cafes, ice cream stores and retail bakeries. The second lien note bears interest in cash at the greater of 10.25% or Libor plus 9.00% and has a final maturity on August 21, 2018.

 

On March 1, 2012, we made a senior secured follow-on investment of $27,500 in SG Acquisition Inc. (“Safe-Guard”) to support a recapitalization. As of March 31, 2012, our investment is $26,470 structured as $12,720 of Term Loan C and $13,750 of Term Loan D first lien notes. The Term Loan C note bears interest in cash at the greater of 8.50% or Libor plus 6.50% and has a final maturity of March 18, 2016. The Term Loan D notes bears interest in cash at the greater of 14.50% or Libor plus 12.50% and has a final maturity of March 18, 2016.

 

On March 14, 2012, we made an investment of $26,569 to purchase 74.4% of the unrated subordinated notes in Babson CLO Ltd 2012-I (“Babson 2012”).

 

On March 16, 2012, VPSI, Inc. (“VPSI”) repaid the $16,598 loan receivable to us.

 

On March 19, 2012, we entered into a definitive agreement to provide debt and equity for the acquisition of the businesses of First Tower Corp. (‘‘First Tower’’), a private multiline specialty finance company based in Flowood, Mississippi with over 150 branch offices. We are acquiring 80.1% of First Tower for $110,200 of cash and 14,518,207 of our shares of common stock. We have the option, at our sole discretion, to substitute up to 100% cash in lieu of such 14,518,207 shares of our common stock at a price per share based on average trading prices prior to the closing date. Completion of the acquisition (the ‘‘First Tower Acquisition’’) is subject to regulatory approvals and is expected to close late in the quarter ended June 30, 2012.

 

On March 23, 2012, Anchor Hocking, LLC (“Anchor Hocking”) repaid the $20,444 loan receivable to us.

 

On March 27, 2012, we provided $12,500 of senior secured financing to IDQ Holdings, Inc. (“IDQ”), a manufacturer of a refrigerant refill kits for automobile air conditioners. The senior secured note bears interest in cash at 11.50% and has a final maturity of April 1, 2017.

 

On March 30, 2012, ROM Acquisition Corporation (“ROM”) repaid the $31,638 loan receivable to us.

 

Revolving Credit Facility

 

On March 27, 2012, we renegotiated the Syndicated Facility and closed on an expanded five-year $650,000 revolving credit facility (the “2012 Facility”). The lenders have extended commitments of $410,000 under the 2012 Facility as of March 31, 2012; which was increased by $482,500 in April 2012 (See Recent Developments). The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate.

 

54



 

Senior Convertible Notes

 

Between January 30, 2012 and February 2, 2012, we repurchased $5,000 of our 5.50% senior convertible notes due 2016 (“2016 Notes”) at a price of 97.5, including commissions. The transactions will result in our recognizing $10 of loss in the quarter ended March 31, 2012.

 

Prospect Capital InterNotes®

 

During the three months ended March 31, 2012, we issued $5,465 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $5,001.

 

Equity Issuance

 

On October 21, 2011, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to $618,600 of additional debt and equity securities in the public market as of March 31, 2012.

 

On January 25, 2012, February 17, 2012 and March 23, 2012, we issued shares of our common stock in connection with the dividend reinvestment plan of 85,252, 69,864 and 77,764, respectively.

 

On February 28, 2012, we completed a public stock offering of 12,000,000 shares of our common stock at $10.95 per share, raising $131,400 of gross proceeds and $129,480 of net proceeds.

 

Dividend

 

On February 6, 2012, we announced the declaration of monthly dividends in the following amounts and with the following dates:

 

·                  $0.101450 per share for February 2012 to holders of record on February 29, 2012 with a payment date of March 23, 2012;

 

·                  $0.101475 per share for March 2012 to holders of record on March 30, 2012 with a payment date of April 20, 2012; and

 

·                  $0.101500 per share for April 2012 to holders of record on April 30, 2012 with a payment date of May 24, 2012.

 

Investment Holdings

 

As of March 31, 2012, we continue to pursue our investment strategy and continue to diversify the portfolio. In May 2007, we changed our name to “Prospect Capital Corporation” and terminated our policy to invest at least 80% of our net assets in energy companies. Since that time, we have reduced our exposure to the energy industry, and our holdings in the energy and energy related industries now represent less than 10% of our investment portfolio.

 

At March 31, 2012, approximately $1,691,580 or 128.3% of our net assets are invested in 78 long-term portfolio investments and 4.4% of our net assets are invested in money market funds.

 

During the nine months ended March 31, 2012, we originated $547,345 of new investments. Our origination efforts are focused primarily on secured lending, to reduce the risk in the portfolio, investing primarily in first lien loans, though we also continue to close selected junior debt and equity investments. In addition to targeting investments senior in corporate capital structures with our new originations, we have also increased our origination business mix of third party private equity sponsor owned companies, which tend to have more third party equity capital supporting our debt investments than non-sponsor transactions. Our performing loan portfolio’s annualized current yield increased from 12.3% as of June 30, 2011 to 12.6% as of March 31, 2012 across all long-term debt investments. We expect Prospect’s current asset yield may continue to decline modestly as we continue to reduce credit risk. Generally, we have seen a decrease in interest rates on loans issued during our fiscal year ended June 30, 2011 and the nine months ending March 31, 2012 in comparison to the rates in effect prior to June 30, 2010 as we continue to reduce the risk profile of the portfolio. Monetization of other equity positions that we hold is not included in this yield calculation. In many of our portfolio companies, we hold equity positions, ranging from minority interests to majority stakes, which we expect over

 

55



 

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 March 31, 2012, we own controlling interests in AIRMALL USA, Inc. (“AIRMALL”), Ajax Rolled Ring & Machine, Inc. (“Ajax”), AWCNC, LLC, Borga, Inc., C&J Cladding LLC, Energy Solutions, Integrated Contract Services, Inc. (“ICS”), Manx Energy, Inc. (“Manx”), NMMB Holdings, Inc. (“NMMB”), Nupla Corporation (“Nupla”) and R-V Industries, Inc. (“R-V”). We also own an affiliated interest in BNN Holdings Corp. f/k/a Biotronic NeuroNetwork (“Biotronic”), Boxercraft Incorporated (“Boxercraft”), Smart, LLC, and Sport Helmets Holdings, LLC (“Sport Helmets”).

 

The following is a summary of our investment portfolio by level of control at March 31, 2012 and June 30, 2011, respectively:

 

 

 

March 31, 2012

 

June 30, 2011

 

Level of Control

 

Cost

 

Percent
of Portfolio

 

Fair
Value

 

Percent
of
Portfolio

 

Cost

 

Percent
of
Portfolio

 

Fair
Value

 

Percent
of Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Control

 

$

  232,459

 

14.0%

 

$

  323,786

 

19.1%

 

$

  262,301

 

18.3%

 

$

  310,072

 

21.2

%

Affiliate

 

59,606

 

3.6%

 

67,581

 

4.0%

 

56,833

 

4.0%

 

72,337

 

4.9

%

Non-control/Non-affiliate

 

1,363,798

 

82.4%

 

1,300,213

 

76.9%

 

1,116,600

 

77.7%

 

1,080,601

 

73.9

%

Total Portfolio

 

$

 1,655,863

 

100.0%

 

$

  1,691,580

 

100.0%

 

$

  1,435,734

 

100.0%

 

$

  1,463,010

 

100.0

%

 

56



 

The following is our investment portfolio presented by type of investment at March 31, 2012 and June 30, 2011, respectively:

 

 

 

March 31, 2012

 

June 30, 2011

 

 

 

 

 

 

 

Type of Investment

 

Cost

 

Percent
of
Portfolio

 

Fair
Value

 

Percent
of
Portfolio

 

Cost

 

Percent
of
Portfolio

 

Fair
Value

 

Percent
of Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Line of Credit

 

$

     2,508

 

0.2%

 

$

     2,529

 

0.1%

 

$

     7,144

 

0.5%

 

$

     7,278

 

0.5%

 

Senior Secured Debt

 

851,475

 

51.4%

 

796,732

 

47.2%

 

822,582

 

57.3%

 

789,981

 

54.0%

 

Subordinated Secured Debt

 

568,594

 

34.3%

 

510,936

 

30.2%

 

491,188

 

34.2%

 

448,675

 

30.7%

 

Subordinated Unsecured Debt

 

70,389

 

4.3%

 

70,872

 

4.2%

 

54,687

 

3.8%

 

55,336

 

3.8%

 

CLO Debt

 

27,164

 

1.7%

 

30,662

 

1.8%

 

 

—%

 

 

—%

 

CLO Residual Interest

 

77,228

 

4.7%

 

78,942

 

4.7%

 

 

—%

 

 

—%

 

Preferred Stock

 

31,490

 

1.9%

 

24,160

 

1.4%

 

31,979

 

2.2%

 

25,454

 

1.7%

 

Common Stock

 

18,725

 

1.1%

 

138,669

 

8.2%

 

19,865

 

1.4%

 

116,076

 

7.9%

 

Membership Interests

 

6,017

 

0.3%

 

15,744

 

0.9%

 

6,128

 

0.4%

 

15,392

 

1.1%

 

Overriding Royalty Interests

 

 

—%

 

1,677

 

0.1%

 

 

—%

 

2,168

 

0.1%

 

Escrows Receivable

 

 

—%

 

15,269

 

0.9%

 

 

—%

 

 

—%

 

Warrants

 

2,273

 

0.1%

 

5,388

 

0.3%

 

2,161

 

0.2%

 

2,650

 

0.2%

 

Total Portfolio

 

$

 1,655,863

 

100.0%

 

$

1,691,580

 

100.0%

 

$

1,435,734

 

100.0%

 

$

1,463,010

 

100.0%

 

 

The following is our investments in debt securities presented by type of security at March 31, 2012 and June 30, 2011, respectively:

 

 

 

March 31, 2012

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level of Control

 

Cost

 

Percent
of

Debt
Securities

 

Fair
Value

 

Percent
of

Debt 
Securities

 

Cost

 

Percent
of

Debt
Securities

 

Fair
Value

 

Percent
of

Debt
Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Lien

 

$

  861,292

 

56.7%

 

$

  807,167

 

57.2%

 

$

  902,031

 

65.6%

 

$

  854,975

 

65.7%

 

Second Lien

 

561,285

 

36.9%

 

503,030

 

35.6%

 

418,883

 

30.5%

 

390,959

 

30.0%

 

Unsecured

 

70,389

 

4.6%

 

70,872

 

5.0%

 

54,687

 

4.0%

 

55,336

 

4.3%

 

CLO Debt

 

27,164

 

1.8%

 

30,662

 

2.2%

 

 

—%

 

 

—%

 

Total Debt Securities

 

$

 1,520,130

 

100.0%

 

$

 1,411,731

 

100.0%

 

$

  1,375,601

 

100.0%

 

$

  1,301,270

 

100.0%

 

 

57



 

The following is our investment portfolio presented by geographic location of the investment at March 31, 2012 and June 30, 2011, respectively:

 

 

 

March 31, 2012

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic Location

 

Cost

 

Percent
of Portfolio

 

Fair
Value

 

Percent
of
Portfolio

 

Cost

 

Percent
of
Portfolio

 

Fair
Value

 

Percent
of Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

$     69,630

 

4.2%

 

$ 71,392

 

4.2%

 

$     74,239

 

5.2%

 

$      75,207

 

5.1%

 

Cayman Islands

 

104,392

 

6.3%

 

109,604

 

6.5%

 

 

—%

 

 

—%

 

Ireland

 

14,916

 

0.9%

 

15,000

 

0.9%

 

14,908

 

1.0%

 

15,000

 

1.0%

 

Midwest US

 

381,227

 

23.0%

 

323,766

 

19.1%

 

358,540

 

25.0%

 

340,251

 

23.4%

 

Northeast US

 

309,999

 

18.8%

 

330,789

 

19.6%

 

242,039

 

16.9%

 

234,628

 

16.0%

 

Southeast US

 

312,130

 

18.8%

 

300,042

 

17.7%

 

234,528

 

16.3%

 

208,226

 

14.2%

 

Southwest US

 

191,870

 

11.6%

 

279,617

 

16.5%

 

189,436

 

13.2%

 

266,004

 

18.2%

 

Western US

 

271,699

 

16.4%

 

261,370

 

15.5%

 

322,044

 

22.4%

 

323,694

 

22.1%

 

Total Portfolio

 

$ 1,655,863

 

100.0%

 

$ 1,691,580

 

100.0%

 

$  1,435,734

 

100.0%

 

$  1,463,010

 

100.0%

 

 

58



 

The following is our investment portfolio presented by industry sector of the investment at March 31, 2012 and June 30, 2011, respectively:

 

 

 

March 31, 2012 

 

June 30, 2011  

 

 

 

 

 

 

 

 

 

 

Industry

 

Cost

 

Percent
of

Portfolio

 

Fair
Value

 

Percent
of
Portfolio

 

Cost

 

Percent
of
Portfolio

 

Fair
Value

 

Percent
of Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace and Defense

 

$

             56

 

—%

 

$

  —

 

—%

 

$

   56

 

—%

 

$

  35

 

—%

Automobile / Auto Finance

 

37,674

 

2.3%

 

35,093

 

2.1%

 

41,924

 

2.9%

 

42,444

 

2.9%

Biomass Power(1)

 

 

—%

 

 

—%

 

2,540

 

0.2%

 

 

—%

Business Services

 

3,148

 

0.2%

 

3,288

 

0.2%

 

6,604

 

0.5%

 

6,787

 

0.5%

Chemicals

 

56,359

 

3.4%

 

56,359

 

3.3%

 

25,277

 

1.8%

 

25,277

 

1.7%

Commercial Services

 

80,567

 

4.9%

 

80,567

 

4.8%

 

34,625

 

2.4%

 

34,625

 

2.4%

Consumer Services

 

99,117

 

6.0%

 

99,347

 

5.9%

 

68,286

 

4.8%

 

68,286

 

4.7%

Contracting

 

15,949

 

1.0%

 

1,106

 

0.0%

 

18,220

 

1.3%

 

1,767

 

0.1%

Diversified Financial Services

 

122,724

 

7.4%

 

127,936

 

7.6%

 

 

—%

 

 

—%

Diversified / Conglomerate Service

 

 

—%

 

35

 

0.0%

 

 

—%

 

 

—%

Durable Consumer Products

 

137,712

 

8.3%

 

138,390

 

8.2%

 

141,779

 

9.9%

 

144,362

 

9.9%

Ecological

 

141

 

—%

 

216

 

—%

 

141

 

—%

 

194

 

—%

Electronics

 

 

—%

 

142

 

—%

 

588

 

—%

 

1,374

 

0.1%

Energy(1)

 

63,245

 

3.8%

 

166,260

 

9.9%

 

 

—%

 

 

—%

Food Products

 

146,643

 

8.9%

 

139,474

 

8.2%

 

144,503

 

10.1%

 

146,498

 

10.0%

Gas Gathering and Processing(1)

 

 

—%

 

 

—%

 

42,003

 

2.9%

 

105,406

 

7.2%

Healthcare

 

166,761

 

10.1%

 

167,667

 

9.9%

 

156,396

 

10.9%

 

163,657

 

11.2%

Home and Office Furnishings, Housewares and Durable

 

1,557

 

0.1%

 

5,723

 

0.3%

 

1,916

 

0.1%

 

6,109

 

0.4%

Insurance

 

83,714

 

5.1%

 

83,714

 

4.9%

 

86,850

 

6.0%

 

87,448

 

6.0%

Machinery

 

4,667

 

0.3%

 

6,835

 

0.4%

 

13,179

 

0.9%

 

13,171

 

0.9%

Manufacturing

 

95,433

 

5.8%

 

116,341

 

6.9%

 

114,113

 

7.9%

 

136,039

 

9.3%

Media

 

117,637

 

7.1%

 

112,220

 

6.6%

 

121,302

 

8.4%

 

121,300

 

8.3%

Metal Services and Minerals

 

580

 

—%

 

5,231

 

0.3%

 

580

 

—%

 

4,699

 

0.3%

Mining, Steel, Iron and Non-Precious Metals and Coal Production(1)

 

 

—%

 

 

—%

 

1,448

 

0.1%

 

 

—%

Oil and Gas Equipment Services

 

7,574

 

0.5%

 

7,574

 

0.4 %

 

 

—%

 

 

—%

Oil and Gas Production

 

126,747

 

7.6%

 

35,256

 

2.2 %

 

124,662

 

8.7%

 

70,923

 

4.8%

Oilfield Fabrication

 

 

—%

 

 

—%

 

23,076

 

1.6%

 

23,076

 

1.6%

Personal and Nondurable Consumer Products

 

54,703

 

3.2%

 

62,918

 

3.7%

 

15,147

 

1.1%

 

23,403

 

1.6%

Production Services

 

268

 

0.0%

 

2,040

 

0.1%

 

14,387

 

1.0%

 

15,357

 

1.0%

Property Management

 

51,920

 

3.1%

 

47,803

 

2.8%

 

52,420

 

3.7%

 

51,726

 

3.5%

Retail

 

63

 

—%

 

137

 

—%

 

14,669

 

1.0%

 

145

 

0.0%

Shipping Vessels(1)

 

 

—%

 

 

—%

 

11,303

 

0.8%

 

3,079

 

0.2%

Software & Computer Services

 

76,863

 

4.6%

 

77,608

 

4.7%

 

37,890

 

2.7%

 

38,000

 

2.7%

Specialty Minerals

 

37,732

 

2.3%

 

42,791

 

2.5%

 

30,169

 

2.1%

 

34,327

 

2.3%

Textiles and Leather

 

15,148

 

0.9%

 

17,932

 

1.1%

 

12,931

 

0.9%

 

15,632

 

1.1%

Transportation

 

51,161

 

3.1%

 

51,577

 

3.0%

 

76,750

 

5.3%

 

77,864

 

5.3%

     Total Portfolio

 

$

  1,655,863

 

100.0%

 

$

  1,691,580

 

100.0%

 

$

  1,435,734

 

100.0%

 

$

  1,463,010

 

100.0%

 

(1)                          During the quarter ended December 31, 2011, our ownership of Change Clean Energy Holdings, Inc. (“CCEHI”) and Change Clean Energy, Inc. (“CCEI”), Freedom Marine Holdings, LLC (“Freedom Marine”) and Yatesville Coal Holdings, Inc. (“Yatesville”) was transferred to Energy Solutions to consolidate all of our energy holdings under one management team.

 

59



 

Portfolio Investment Activity

 

During the nine months ended March 31, 2012, we acquired $449,264 of new investments, completed follow-on investments in existing portfolio companies, totaling approximately $92,082, funded $1,500 of revolver advances, and recorded PIK interest of $4,499, resulting in gross investment originations of $547,345. The more significant of these investments are described briefly in the following:

 

On July 1, 2011, we made a senior secured follow-on investment of $2,300 in Boxercraft to support the acquisition of Jones & Mitchell, a supplier of college-licensed apparel. The first lien note bears interest in cash at Libor plus 7.50% and has a final maturity on September 16, 2013.

 

On July 8, 2011, we made a senior secured investment of $39,000 to support the recapitalization of Totes Isotoner Corporation (“Totes”). The second lien note bears interest in cash at the greater of 10.75% or Libor plus 9.25% and has a final maturity on January 8, 2018.

 

On August 5, 2011 and September 7, 2011, we made senior secured follow-on investments of $3,850 and $11,800, respectively, in ROM to support the acquisitions of Havis Lighting Solutions, a supplier of products primarily used by emergency response and police vehicles, and the acquisition of a leading manufacturer of personal safety products for the transportation and industrial markets. The first lien notes bear interest in cash at the greater of 10.50% or Libor plus 9.50% and has a final maturity on May 8, 2013.

 

On August 9, 2011, we provided a $15,000 term loan to support the acquisition of Nobel Learning Communities, Inc., a leading national operator of private schools. The unsecured note bears interest in cash at 11.50% and interest in kind of 1.50% and has a final maturity on August 9, 2017.

 

On August 9, 2011, we made an investment of $32,116 to purchase 66.2% of the unrated subordinated notes in Babson CLO Ltd 2011-I (“Babson”).

 

On September 16, 2011, we acted as the facility agent and lead lender of a syndication of lenders that collectively provided $132,000 in senior secured financing to support the financing of Capstone Logistics, LLC (“Capstone”), a leading logistics company. This company provides a broad array of logistics services to a diverse group of blue chip customers in the grocery, food service, retail, and specialty automotive industries. As of March 31, 2012 our investment is $75,567 structured as $33,942 of Term Loan A and $41,625 of Term Loan B first lien notes. After the financing, we received repayment of the loan that was outstanding for Progressive Logistics Services, LLC (“PLS”). The Term Loan A notes bear interest in cash at the greater of 7.50% or Libor plus 5.50% and has a final maturity on September 16, 2016. The Term Loan B notes bear interest in cash at the greater of 13.50% or Libor plus 11.50% and has a final maturity on September 16, 2016.

 

On September 30, 2011, we provided a $23,000 senior secured loan to support the recapitalization of Anchor Hocking, a leading designer, manufacturer, and marketer of high quality glass products for the retail, food service, and OEM channels. The second lien note bears interest in cash at the greater of 10.50% or Libor plus 9.00% and has a final maturity on September 27, 2016.

 

On October 13, 2011 and October 19, 2011, we made investments of $9,319 and $1,358, respectively, to purchase 32.9% of the unrated subordinated notes to Apidos.

 

On October 24, 2011, we made a secured second lien investment of $6,000 in Renaissance Learning, Inc., a leading provider of technology based school improvement and student assessment programs. The second lien loan bears interest in cash at the greater of 12.0% or Libor plus 10.50% and has a final maturity on October 19, 2018.

 

On October 28, 2011, we made a follow-on investment of $8,200 in Empire Today, LLC. The follow-on first lien note bears interest in cash at 11.375% and has a final maturity on February 1, 2017.

 

On November 4, 2011, we made a secured second lien investment of $15,000 to support the acquisition of Injured Workers Pharmacy, LLC, a specialty pharmacy services company, in a private equity backed transaction. The secured loan bears interest in cash at the greater of 12.0% or Libor plus 7.50% and has a final maturity on November 4, 2017.

 

60



 

On December 2, 2011, we made a secured second-lien follow-on investment of $7,500 to American Gilsonite Company (“American Gilsonite”) for a dividend recapitalization. After the financing, we received a $1,383 dividend as a result of our equity holdings in American Gilsonite. The second lien note bears interest in cash at the greater of 12.0% or Libor plus 10.0% and interest in kind of 2.5% and has a final maturity on March 10, 2016.

 

On December 22, 2011, we made a secured first lien investment of $31,083 to VanDeMark Chemicals, Inc (“VanDeMark”), a specialty chemical manufacturer. The secured loan bears interest in cash at the greater of 12.2% or Libor plus 10.2% and has a final maturity on December 31, 2014.

 

On December 22, 2011, we made an investment of $17,900 to purchase 13.2% of the secured Class D Notes and 86.0% of the unsecured Class E Notes in CIFC. The $2,500 secured Class D Notes bear interest in cash at Libor plus 5.0% and has a final maturity date on January 19, 2023. The $15,400 unsecured Class E Notes bear interest in cash at Libor plus 7.0% and has a final maturity on January 19, 2023.

 

On December 28, 2011, we made a secured first-lien follow-on investment of $4,750 in Energy Solutions in order to facilitate the acquisition of a new vessel by Vessel Holdings LLC, a subsidiary of Freedom Marine. We invested $1,250 of equity in Energy Solutions and $3,500 of debt to Vessel Holdings LLC. The first lien note bears interest in cash at 18.0% and has a final maturity of December 12, 2016.

 

On December 28, 2011, we made a secured debt investment of $10,000 to support the acquisition of Hoffmaster Group, Inc. After the financing we received a repayment of the loan that was previously outstanding. The $10,000 second lien note bears interest in cash at the greater of 11.0% or Libor plus 9.50% and has a final maturity date of January 3, 2019.

 

On December 28, 2011, we made a secured debt investment of $37,218 to support the recapitalization of NRG Manufacturing, Inc. (“NRG”). After the financing, we received repayment of the $13,080 loan that was previously outstanding and a dividend of $6,711 as a result of our equity holdings. In addition, we sold 392 shares of NRG common stock for $13,266, realizing a gain of $12,131. Our remaining 408 shares of NRG common stock held by us back to NRG were sold on February 2, 2012. The secured first lien note bears interest at 15.0% and has a final maturity on December 27, 2016.

 

On December 30, 2011, we provided $8,000 of senior secured debt to Hi-Tech Testing Service, Inc. and Wilson Inspection X-Ray Services, Inc, a provider of non-destructive testing services to detect leaks and other defects in pipes, vessels, and related equipment for the oil and gas pipeline, chemical and paper and pulp industries. The secured note bears interest in cash at 11.0% and has a final maturity of September 26, 2016.

 

On January 12, 2012, we made a follow-on investment of $16,500 to purchase 86.8% of the secured Class D Notes in CIFC. The secured Class D Notes bear interest in cash at Libor plus 5.0% and has a final maturity date on January 19, 2023.

 

On January 17, 2012, we provided $18,332 of secured second-lien financing to NBS, a financial services processing company purchased by a leading private equity sponsor. The second lien note bears interest in cash at the greater of 12.00% or Libor plus 9.0% and interest in kind of 1.50% and has a final maturity of July 17, 2017.

 

On February 10, 2012, we provided $15,000 of secured second-lien financing to Rocket Software, a leading global infrastructure software company. The second lien note bears interest in cash at the greater of 10.25% or Libor plus 8.75% and has a final maturity of February 8, 2019.

 

On February 15, 2012, we provided $25,000 of secured second-lien financing to Blue Coat, a leading provider of Web security and wide area network (WAN) optimization solutions. The second lien note bears interest in cash at the greater of 11.50% or Libor plus 10.0% and has a final maturity of August 15, 2018.

 

On February 24, 2012, we made a follow-on investment of $7,856 to purchase 23.9% of the unrated subordinated notes to Apidos.

 

On February 28, 2012, we made a senior secured follow-on investment of $9,500 in Clearwater to finance the repayment of a senior secured note due to mature in 2012 and settle outstanding claims senior to our own investment. The second lien note bears interest in cash at 12.00% and has a final maturity of February 4, 2016.

 

61



 

On February 29, 2012, we provided $15,000 of secured second-lien financing to Focus, a leading franchiser and operator of restaurants, cafes, ice cream stores and retail bakeries. The second lien note bears interest in cash at the greater of 10.25% or Libor plus 9.00% and has a final maturity on August 21, 2018.

 

On March 1, 2012, we made a senior secured follow-on investment of $27,500 in Safe-Guard to support a recapitalization. As of March 31, 2012, our investment is $26,470 structured as $12,720 of Term Loan C and $13,750 of Term Loan D first lien notes. The Term Loan C note bears interest in cash at the greater of 8.50% or Libor plus 6.50% and has a final maturity of March 18, 2016. The Term Loan D notes bears interest in cash at the greater of 14.50% or Libor plus 12.50% and has a final maturity of March 18, 2016.

 

On March 14, 2012, we made an investment of $26,569 to purchase 74.4% of the unrated subordinated notes in Babson 2012.

 

On March 27, 2012, we provided $12,500 of senior secured financing to IDQ, a manufacturer of a refrigerant refill kits for automobile air conditioners. The senior secured note bears interest in cash at 11.50% and has a final maturity of April 1, 2017.

 

During the nine months ended March 31, 2012, we closed-out ten positions which are briefly described below.

 

On October 31, 2011, IEC-Systems, LP/Advanced Rig Services, LLC repaid the $20,909 loan receivable to us.

 

On November 21, 2011, we received an equity distribution from the sale of our shares of Fairchild Industrial Products, Co. common and preferred stock, realizing $1,549 of gross proceeds and a total gain of $960 on settlement of the investment.

 

On December 29, 2011, Iron Horse Coiled Tubing, Inc (“Iron Horse”) repaid the $11,338 loan receivable to us.

 

On December 30, 2011, we exited our investment in Mac & Massey Holdings, LLC (“Mac & Massey”) and received $10,239 for repayment of the $9,323 loan receivable to us and monetization of our equity position, resulting in a realized gain of $820. We recognized $694 of accelerated purchase discount accretion in the quarter ended December 31, 2011.

 

On January 9, 2012, Arrowhead repaid the $27,000 loan receivable to us.

 

On January 31, 2012, AFI repaid the $7,441 loan receivable to us.

 

On February 2, 2012, NRG was sold to an outside buyer for $123,258.  In conjunction with the sale, the $37,218 loan that was outstanding was repaid. We also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. Further, we received a $3,800 advisory fee for the transaction, which was recorded as other income in the quarter ending March 31, 2012. After expenses, including the make whole and advisory fees discussed above, $40,886 was available to be distributed to stockholders. While our 408 shares of NRG common stock represented 67.1% of the ownership, we received net proceeds of $25,991 as our contribution to the escrow amount was proportionately higher than the other shareholders. In connection with the sales, we recognized a realized gain of $24,810 in the results for the quarter ended March 31, 2012. In total, we received proceeds of $93,977 at closing. In addition, there is $11,125 being held in escrow of which 80% is due to us upon release of the escrowed amounts. This will be recognized as additional gain when and if received.

 

On March 16, 2012, VPSI repaid the $16,598 loan receivable to us.

 

On March 23, 2012, Anchor Hocking repaid the $20,444 loan receivable to us.

 

On March 30, 2012, ROM repaid the $31,638 loan receivable to us.

 

In addition to the repayments noted above, during the nine months ended March 31, 2012 we received principal amortization payments of $18,948 on several loans, and $26,254 of partial prepayments related to AFI, Anchor Hocking, Cargo Airport Services USA (“CAS”), LLC, Iron Horse, LHC Holdings Corp. (“LHC”), NMMB, Pinnacle Treatment Centers Inc, Progrexion Holdings, Inc (“Progrexion”), Safe-Guard, Seaton Corp and ST Products LLC.

 

62



 

During the nine months ended March 31, 2011, we also received principal amortization payments of $12,584 on several loans, and $12,640 of partial prepayments related to AIRMALL, AFI, Ajax, EXL Acquisition Corporation, Fischbein LLC (“Fischbein”), Iron Horse, LHC, Nupla and Progrexion.

 

On January 4, 2012, Energy Solutions sold Gas Solutions for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $148,687 in cash and an additional $10,000 is being held in escrow. Currently, our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us will be required to be recognized as dividend income, in accordance with ASC 946, Financial Services – Investment Companies, as cash distributions are received from Energy Solutions to the extent there are current year earnings and profits sufficient to support such recognition.

 

During the three and nine months ended March 31, 2012, we recognized $964 and $3,348 of interest income due to purchase discount accretion from the assets acquired from Patriot, respectively. Included in the $964 recorded during the three months ended March 31, 2012 is $726 of normal accretion and $238 of accelerated accretion resulting from the repayment of ROM. Included in the $3,348 recorded during the nine months ended March 31, 2012 is $2,417 of normal accretion and $931 of accelerated accretion resulting from the repayments of Mac & Massey and ROM. As of March 31, 2012, $5,286 of purchase discount from the assets acquired from Patriot remains to be accreted as interest income, of which $666 is expected to be amortized during the three months ending June 30, 2012.

 

During the three and nine months ended March 31, 2011, we recognized $4,739 and $10,092, respectively, of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $4,739 for the three months ended March 31, 2011, is $1,302 of normal accretion and $3,268 of accelerated accretion resulting from the recapitalization of our loans Arrowhead and The Copernicus Group Inc. (“Copernicus”). Included in the $10,092 for the nine months ended March 31, 2011, is $3,979 of normal accretion, $1,116 of accelerated accretion resulting from the repayment of Impact Products LLC, and $4,828 of accelerated accretion resulting from the recapitalization of our debt investments in Arrowhead, Copernicus and Northwestern Management Services, LLC. The restructured loans for Arrowhead, Copernicus and Northwestern were issued at market terms comparable other industry transactions. In accordance with ASC 320-20-35 the cost basis of the new loan was recorded at par value, which precipitated the acceleration of original purchase discount from the loan repayment which was recognized as interest income.

 

63



 

The following is a quarter-by-quarter summary of our investment activity:

 

Quarter-End

 

Acquisitions(1)

 

Dispositions(2)

 

 

 

 

 

 

 

March 31, 2012

 

$

170,073

 

 

$

188,399

 

 

December 31, 2011

 

154,697

 

 

120,206

 

 

September 30, 2011

 

222,575

 

 

46,055

 

 

June 30, 2011

 

312,301

 

 

62,367

 

 

March 31, 2011

 

359,152

 

 

76,494

 

 

December 31, 2010

 

140,933

 

 

62,915

 

 

September 30, 2010

 

140,951

 

 

67,621

 

 

June 30, 2010

 

88,973

 

 

39,883

 

 

March 31, 2010

 

59,311

 

 

26,603

 

 

December 31, 2009(3)

 

210,438

 

 

45,494

 

 

September 30, 2009

 

6,066

 

 

24,241

 

 

June 30, 2009

 

7,929

 

 

3,148

 

 

March 31, 2009

 

6,356

 

 

10,782

 

 

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

 

$

2,675,999

 

 

$

994,920

 

 

 

 

(1)            Includes new deals, additional fundings, refinancings and PIK interest.

(2)            Includes scheduled principal payments, prepayments and refinancings.

(3)            The $210,438 of acquisitions for the quarter ended December 31, 2009 includes $207,126 of portfolio investments acquired from Patriot.

 

Investment Valuation

 

In determining the fair value of our portfolio investments at March 31, 2012 the Audit Committee considered valuations from the independent valuation firm and from management having an aggregate range of $1,673,726 to $1,771,739, 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. As a second method, management and the independent valuation firm use a market approach to establish a blended required rate of return based on position of  the debt instrument within the total capitalization of the portfolio company. 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

 

64



 

multiples for recent sales of companies within the industry. The composite of all these analysis, applied to each investment, was a total valuation of $1,691,580, excluding money market investments.

 

Our portfolio companies are generally middle market companies, outside of the financial sector, with less than $50,000 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.

 

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 investments in our portfolio are under enhanced scrutiny by our senior management and our Board of Directors and are discussed below.

 

Ajax Rolled Ring & Machine, Inc.

 

We acquired a controlling equity interest in Ajax in a recapitalization of Ajax that was closed on April 4, 2008. We funded $22,000 of senior secured term debt, $11,500 of subordinated term debt and $6,300 of equity as of that closing. During the fiscal year ended June 30, 2010, we funded an additional $3,530 of secured subordinated debt to refinance a third-party revolver provider and provide working capital. Ajax repaid $3,461 of this secured subordinated debt during the quarter ended September 30, 2010. As of March 31, 2012, we control 77.68% of the fully-diluted common and preferred equity. The principal balance of our senior debt to Ajax was $20,277 and new debt was $15,035 as of March 31, 2012.

 

Ajax forges seamless steel rings sold to various customers. The rings are used in a range of industrial applications, including in construction equipment and wind power turbines. Ajax’s business is cyclical, and the business experienced a significant rebound in 2010 and 2011 following the decline in 2009 due to the global macroeconomic crisis. Ajax’s EBITDA has experienced a 133% and 76% year-over-year improvement in 2010 and 2011, respectively.

 

The Board of Directors increased the fair value of our investment in Ajax to $46,535 as of March 31, 2012, a premium of $5,166 from its amortized cost, compared to the $7,822 unrealized depreciation recorded at June 30, 2011.

 

Energy Solutions Holdings Inc. (f/k/a Gas Solutions Holdings, Inc.)

 

Gas Solutions Holdings, Inc. (“Gas Solutions”) is an investment that we completed in September 2004 in which we own 100% of the equity. Gas Solutions is a midstream gathering and processing business located in east Texas. We have provided additional capital for growth initiatives, acquisitions and other capital needs subsequent to our initial investment.

 

In December 2011, we completed a reorganization of Gas Solutions renaming the company Energy Solutions and transferring ownership of other operating companies owned by us and operating within the energy industry with the intent of strategically expanding Energy Solutions operations across energy sectors. As part of the reorganization, we transferred our equity interests in CCEHI, CCEI, Freedom Marine and Yatesville to Energy Solutions. On December 28, 2011, we made a follow-on investment of $4,750 to support the acquisition of a new vessel by Vessel Holdings LLC, a subsidiary of Freedom Marine.

 

On January 4, 2012, Energy Solutions sold its gas gathering and processing assets (“Gas Solutions”) for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. Our loans to and investment in Energy Solutions remain outstanding as Energy Solutions and will continue as a portfolio company of Prospect managing other energy-related subsidiaries. The cash balances of Energy Solutions continue to collateralize our loan positions.

 

In determining the value of Energy Solutions, we have utilized two valuation techniques to determine the value of the investment. Our Board of Directors has determined the value to be $166,260 for our debt and equity positions at March 31, 2012 based upon a combination of a current value method for the cash balances of Energy Solutions and a liquidation analysis for our interests in CCEHI, CCEI, Freedom Marine and Yatesville. At March 31, 2012 and June 30, 2011, Energy Solutions, including the underlying portfolio companies affected by the reorganization, was valued at $103,015 and $51,491 above its amortized cost, respectively.

 

65



 

Integrated Contract Services, Inc.

 

ICS is an investment that we entered into in April 2007. Prior to January 2009, ICS owned 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.

 

In January 2009, we foreclosed on the real and personal property of ICS. Through this foreclosure process, we gained 100% ownership of THS and certain ESA assets. THS provides outsourced medical staffing and security staffing services to governmental and commercial enterprises. In November 2009, THS was informed that the U.S. Air Force would not exercise its option to renew its contract. THS continues to solicit new contracts to replace the revenue lost when the Air Force contract ended. As part of its strategy to recovery from the loss of the Air Force contract, in 2010 THS started a new business, Vets Securing America, Inc. (“VSA”), to provide out-sourced security guards staffed primarily using retired military veterans. During the year ended June 30, 2011 and the nine months ended March 31, 2012, we made follow-on secured debt investments of $1,708 and $874, respectively, to support the ongoing operations of THS and VSA. There were no additional fundings during the three months ended March 31, 2012. In October 2011, we sold a building acquired from ESA for $894. In January 2012, we received $2,250 towards an ESA litigation settlement. The proceeds from both of these transactions were used to reduce the outstanding loan balance due to us.

 

Based upon an analysis of the liquidation value of the ESA assets and the enterprise value of THS/VSA, our Board of Directors determined the fair value of our investment in ICS to be $1,106 at March 31, 2012, a reduction of $14,843 from its amortized cost, compared to the $16,453 unrealized loss recorded at June 30, 2011.

 

Manx Energy, Inc.

 

On January 19, 2010, we modified the terms of our senior secured debt in Appalachian Energy Holdings LLC (“AEH”) and Coalbed LLC (“Coalbed”) in conjunction with the formation of Manx, a new entity consisting of the assets of AEH, Coalbed and Kinley Exploration. The assets of the three companies were combined under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring, and we continue to fully reserve any income accrued for Manx. During the year ended June 30, 2011, we made a follow-on secured debt investments of $750 in Manx to support ongoing operations.

 

The Board of Directors decreased the fair value of our investment in Manx to zero as of March 31, 2012, a reduction of $19,018 from its amortized cost, compared to the $17,707 unrealized loss recorded at June 30, 2011.

 

Equity positions in the portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results. Three of our portfolio companies experienced such volatility due to improved operating results and experienced meaningful increases in valuation during the three and nine months ended March 31, 2012 — Ajax, Energy Solutions and R-V. The valuation of Ajax increased due to improved operating results and emergent customer base. The value of our equity position in Ajax has increased to $11,223 as of March 31, 2012, a premium of $5,166 to its cost, compared to the $6,057 unrealized loss recorded at June 30, 2011. The valuation of Energy Solutions increased due to the sale of the company’s equity interests in the underlying Gas Solutions entities in January 2012. The current value of undistributed sale proceeds held at Energy Solutions has resulted in a significant increase in valuation during the nine months ended March 31, 2012. The value of our equity position in Energy Solutions, including our equity positions in the underlying portfolio companies affected by the reorganization and contingent consideration agreement, has increased to $122,211 as of March 31, 2012, a premium of $113,419 to its cost, compared to the $60,863 unrealized gain recorded at June 30, 2011. The valuation of R-V has increased due to improved operating results. The value of our equity position in R-V has increased to $18,443 as of March 31, 2012, a premium of $11,674 to its cost, compared to the $1,348 unrealized gain recorded at June 30, 2011. Five of the other controlled investments have been valued at discounts to the original investment. Six of the control investments are valued at

 

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premiums to the original investment amounts. Overall, at March 31, 2012, the control investments are valued at $91,327 above their amortized cost.

 

We hold four affiliate investments at March 31, 2012. The affiliate investments reported strong operating results with valuations remaining relatively consistent from June 30, 2011. Our equity investment in Biotronic experienced the most meaningful decrease in valuation as prior to June 30, 2011 we anticipated that the company would be sold at a substantial premium to our cost basis. This sales process was discontinued during the nine months ended March 31, 2012 as the buyer and Biotronic could not agree to terms acceptable to each party. The value of our equity position in Biotronic has decreased to $394 as of March 31, 2012, a discount of $2,485 to its amortized cost, compared to the $4,127 unrealized gain recorded at June 30, 2011. The other three affiliate investments are valued at amortized cost or higher. Overall, at March 31, 2012, affiliate investments are valued $7,975 above their amortized cost.

 

With the Non-control/Non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments, the fair value is limited on the high side to each loan’s par value, plus any prepayment premia that could be imposed. Many of the debt investments in this category have not experienced a significant change in value, as they were previously valued at or near par value. The exception to this categorization relates to investments which were acquired in the Patriot Acquisition, many of which were acquired at significant discounts to par value, and any changes in operating results or interest rates can have a significant effect on the value of such investments. During the nine months ended March 31, 2012, our investment in Stryker experienced the most meaningful decrease in valuation due to declining operating results and a reduction in current natural gas prices. The value of our investment in Stryker Energy, LLC (“Stryker”) has decreased to $1,677 as of March 31, 2012, a discount of $31,034 to its amortized cost, compared to the $6,706 unrealized loss recorded at June 30, 2011. The decrease was due primarily to a drop in natural gas prices during the quarter ended December 31, 2011 and continuing to March 31, 2012. During the nine months ended March 31, 2012, our investment in H&M Oil & Gas, LLC (“H&M”) also experienced a significant decrease in valuation due to declining operating results. The value of our investment in H&M has decreased to $30,271 as of March 31, 2012, a discount of $29,747 to its amortized cost, compared to the $21,556 unrealized loss recorded at June 30, 2011. Other Non-control/Non-affiliate investments did not experience significant changes in operations. The remaining investments did not experience significant changes in valuation. Overall, at March 31, 2012, Non-control/Non-affiliate investments are valued $63,585 below their amortized cost.

 

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 currently consists of a revolving credit facility availing us of the ability to borrow debt subject to borrowing base determinations, Senior Convertible Notes, which we issued in December 2010 and February 2011, Prospect Capital InterNotes®, which we may issue from time to time, and our equity capital, which is comprised entirely of common equity. The following table shows the Revolving Credit Facility, Senior Convertible Notes and Prospect Capital InterNotes® amounts and outstanding borrowings at March 31, 2012 and June 30, 2011:

 

 

 

 

As of March 31, 2012

 

As of June 30, 2011

 

 

Maximum Draw Amount

 

 

Amount Outstanding

 

Maximum Draw Amount

 

Amount Outstanding

Revolving Credit Facility

 

$

410,000

 

$

121,000

 

$

325,000

 

$

84,200

Senior Convertible Notes

 

$

317,500

 

$

317,500

 

$

322,500

 

$

322,500

Prospect Capital InterNotes®

 

$

5,465

 

$

5,465

 

$

 

$

 

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The following table shows the contractual maturity of our Revolving Credit Facility and Senior Convertible Notes at March 31, 2012:

 

 

 

Payments Due By Period

 

 

 

Less Than
1 Year

 

 

1 - 3 Years

 

 

More Than
3 Years

 

 

Revolving Credit Facility

 

$

 

$

 

$

121,000

 

Senior Convertible Notes

 

$

 

$

 

$

317,500

 

Prospect Capital InterNotes®

 

$

 

$

 

$

5,465

 

 

We have and expect to continue to fund a portion of our cash needs through borrowings from banks, issuances of securities, including secured, unsecured and convertible debt securities and preferred stock, or issuances of common equity. For flexibility, we maintain a universal shelf registration statement that allows for the public offering and sale of our debt securities, common stock, preferred stock and warrants to purchase such securities in an amount up to $618,600. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.

 

Revolving Credit Facility

 

On July 11, 2010, we closed an extension and expansion of our existing credit facility with a syndicate of lenders through PCF (the “2010 Facility”). The 2010 Facility, which had $325,000 total commitments as of June 30, 2011, included an accordion feature which allowed the Syndicated Facility to accept up to an aggregate total of $400,000 of commitments, a limit which was met on September 1, 2011. Interest on borrowings under the 2010 Facility was s one-month Libor plus 325 basis points, subject to a minimum Libor floor of 100 basis points. Additionally, the lenders charged a fee on the unused portion of the 2010 Facility equal to either 75 basis points if at least half of the credit facility is used or 100 basis points otherwise.

 

On March 27, 2012, we renegotiated the Syndicated Facility and closed on an expanded five-year $650,000 revolving credit facility (the “2012 Facility”). The lenders have extended commitments of $410,000 under the 2012 Facility as of March 31, 2012; which was increased by $482,500 in April 2012 (See Recent Developments). The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders.

 

The 2012 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2012 Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the 2012 Facility. The 2012 Facility also requires the maintenance of a minimum liquidity requirement. At March 31, 2012, we were in compliance with the applicable covenants.

 

Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of March 31, 2012 and June 30, 2011, we had $376,137 and $255,673, respectively, available to us for borrowing under our 2012 Facility, of which the amount outstanding was $121,000 and $84,200, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $482,500. At March 31, 2012, the investments used as collateral for the 2012 Facility had an aggregate market value of $845,406, which represents 64.1% of our net assets. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at market value as of March 31, 2012. The release of any assets from PCF requires the approval of the facility agent.

 

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Concurrent with the extension of our 2012 Facility, in March 2012, we wrote off $304 of the unamortized debt issue costs associated with the previous credit facility, in accordance with ASC 470-50, Debt Modifications and Extinguishments. In connection with the origination and amendments of the 2012 Facility, we incurred $8,428 of fees, including $1,319 of fees carried over from the previous facility, which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $8,397 remains to be amortized.

 

During the three and nine months ended March 31, 2012, we recorded $4,484 and $12,783 of interest costs, unused fees and amortization of financing costs on our credit facility as interest expense, respectively.

 

Senior Convertible Notes

 

On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 (“2015 Notes”) for net proceeds following underwriting expenses of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at March 31, 2012 of 88.0902 and 88.1136 shares of common stock, respectively, per $1,000 principal amount of 2015 Notes, which is equivalent to a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2015 Notes will be increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 cents per share, subject to adjustment.

 

On February 18, 2011, we issued $172,500 in aggregate principal amount of our 2016 Notes for net proceeds following underwriting expenses of approximately $167,325. Between January 30, 2012 and February 2, 2012, we repurchased $4,963 of our 2016 Notes at a price of 97.5, including commissions. The transactions resulted in our recognizing $10 of loss in the quarter ended March 31, 2012. Interest on the 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year, commencing August 15, 2011. The 2016 Notes mature on August 15, 2016 unless converted earlier. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at March 31, 2012 of 78.3699 and 78.3880 shares, respectively, of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2016 Notes will be increased when monthly cash dividends paid to common shares exceed the rate of $0.101150 per share.

 

In no event will the total number of shares of common stock issuable upon conversion exceed 96.8992 per $1,000 principal amount of the 2015 Notes (the “conversion rate cap”), except that, to the extent we receive written guidance or a no-action letter from the staff of the Securities and Exchange Commission (the “Guidance”) permitting us to adjust the conversion rate in certain instances without regard to the conversion rate cap and to make the 2015 Notes convertible into certain reference property in accordance with certain reclassifications, business combinations, asset sales and corporate events by us without regard to the conversion rate cap, we will make such adjustments without regard to the conversion rate cap and will also, to the extent that we make any such adjustment without regard to the conversion rate cap pursuant to the Guidance, adjust the conversion rate cap accordingly. We will use our commercially reasonable efforts to obtain such Guidance as promptly as practicable.

 

Prior to obtaining the Guidance, we will not engage in certain transactions that would result in an adjustment to the conversion rate increasing the conversion rate beyond what it would have been in the absence of such transaction unless we have engaged in a reverse stock split or share combination transaction such that in our reasonable best estimation, the conversion rate following the adjustment for such transaction will not be any closer to the conversion rate cap than it would have been in the absence of such transaction.

 

Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the 2015 Notes and 2016 Notes (collectively, “Senior Convertible Notes”).

 

No holder of Senior Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The

 

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5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.

 

Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Notes upon a fundamental change at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Senior Convertible Notes through and including the maturity date.

 

In connection with the issuance of the Senior Convertible Notes, we incurred $10,562 of fees which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $8,289 remains to be amortized and is included within deferred financing costs of $17,179 on the consolidated statements of assets and liabilities.

 

During the three and nine months ended March 31, 2012, we recorded $5,133 and $15,553 of interest costs and amortization of financing costs on the Senior Convertible Notes as interest expense.

 

Prospect Capital InterNotes®

 

On February 16, 2012, we entered into a Selling Agent Agreement (the ‘‘Selling Agent Agreement’’) with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®  (the ‘‘InterNotes Offering’’). Additional agents appointed by the Company from time to time in connection with the InterNotes Offering may become parties to the Selling Agent Agreement.

 

These notes will be our direct unsecured senior obligations and will rank equally with all of our unsecured senior indebtedness from time to time outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

 

During the three months ended March 31, 2012, we issued $5,465 in aggregate principal amount of our Senior Unsecured Notes for net proceeds of approximately $5,001.

 

Net Asset Value

 

During the nine months ended March 31, 2012, we raised $144,376 of additional equity, net of offering costs, by issuing 13,500,000 shares of our common stock. The following table shows the calculation of net asset value per share as of March 31, 2012 and June 30, 2011:

 

 

 

As of March 31, 2012

 

As of June 30, 2011

 

Net Assets

 

$

1,318,806

 

$

1,114,357

 

Shares of common stock outstanding

 

121,923,931

 

107,606,690

 

Net asset value per share

 

$

10.82

 

$

10.36

 

 

At March 31, 2012, we had 121,923,931 of our common stock issued and outstanding.

 

Results of Operations

 

Net increase in net assets resulting from operations for the three months ended March 31, 2012 and 2011 was $50,209 and $33,759, respectively, representing $0.44 and $0.38 per weighted average share, respectively. During the three months ended March 31, 2012, we experienced net unrealized and realized losses of $7,863 or approximately $0.07 per weighted average share primarily from significant write-downs of our investments in Airmall, H&M and Stryker. These instances of depreciation were partially offset by the sale of NRG for which we realized a gain of $24,810 and unrealized appreciation of our investments in Ajax, Babson, CIFC, Energy Solutions and R-V.  Net investment income increased on a weighted average per share basis from $0.27 to $0.51 for the three months ended March 31, 2011 and 2012, respectively. This increase is primarily due the sale of our investment in NRG for which we received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending

 

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March 31, 2012, and $13,765 of structuring and advisory fees recognized during the quarter ended March 31, 2012 from our investments in Energy Solutions and NRG. During the three months ended March 31, 2011, we experienced net unrealized and realized gains of $9,803 or approximately $0.11 per weighted average share primarily from significant write-ups of our investments in Biotronic, NRG and Sport Helmets, and our sale of Miller Petroleum, Inc. (“Miller”) common stock for which we realized a gain of $2,561. These instances of appreciation were partially offset by unrealized depreciation in AIRMALL, Copernicus and Shearer’s Foods, Inc. (“Shearer’s”).

 

Net increase in net assets resulting from operations for the nine months ended March 31, 2012 and 2011 was $154,601 and $91,279, respectively, representing $1.39 and $1.11 per weighted average share, respectively. During the nine months ended March 31, 2012, we experienced net unrealized and realized gains of $32,144 or approximately $0.29 per weighted average share primarily from significant write-ups of our investments in Ajax, Energy Solutions and R-V, and our sale of NRG for which we realized a gain of $36,940. These instances of unrealized appreciation were partially offset by unrealized depreciation in Airmall, Biotronic, H&M, New Meatco Provisions, LLC (“Meatco”), NMMB, Stryker, Wind River Resources Corp. and Wind River II Corp. (“Wind River”) and the impairment of Deb Shops due to bankruptcy for which we recorded a realized loss for the full amount of the amortized cost. Net investment income increased on a weighted average per share basis from $0.78 to $1.10 for the nine months ended March 31, 2011 and 2012, respectively. This increase is primarily due to an increase in dividend income received from Energy Solutions and NRG, the sale of our investment in NRG for which we received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012, and $13,765 of structuring and advisory fees recognized during the quarter ended March 31, 2012 from our investments in Energy Solutions and NRG. During the nine months ended March 31, 2011, we experienced net unrealized and realized gains of $27,248 or approximately $0.34 per weighted average share primarily from significant write-ups of our investments in Ajax, Biotronic, Fischbein, Iron Horse, NRG, Nupla and Sport Helmets, and our sale of Miller common stock for which we realized a gain of $7,976. These instances of unrealized appreciation were partially offset by unrealized depreciation in H&M, ICS, Shearer’s and Stryker.

 

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. These companies are typically not issuing securities rated investment grade, have limited resources, have limited operating history, have concentrated product lines or customers, 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, fees generated from 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 settlement of net profits interests, overriding royalty interests and structuring fees, was $95,623 and $44,573 for the three months ended March 31, 2012 and March 31, 2011, respectively. Investment income was $218,208 and $113,085 for the nine months ended, March 31, 2012 and March 31, 2011, respectively. During the three and nine months ended March 31, 2012, the increase in investment income is primarily the result of a larger income producing portfolio and the deployment of additional capital in revenue-producing assets through increased origination and increased dividends and other income received from Energy Solutions and NRG. The following table describes the various components of investment income and the related levels of debt investments:

 

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For The Three Months Ended
March 31,

 

For The Nine Months Ended
March 31,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Interest income

 

$

72,946

 

$

34,504

 

$

160,361

 

$

90,787

Dividend income

 

7,477

 

2,763

 

34,664

 

8,328

Other income

 

15,200

 

7,306

 

23,203

 

13,970

Total investment income

 

$

95,623

 

$

44,573

 

$

218,208

 

$

113,085

 

 

 

 

 

 

 

 

 

Average debt principal of performing investments

 

$

1,413,572

 

$

906,327

 

$

1,371,807

 

$

779,494

Weighted-average interest rate earned

 

20.41% 

 

15.23% 

 

15.30%  

 

15.30% 

 

Average interest income producing assets have increased from $906,327 for the three months ended March 31, 2011 to $1,413,572 for the three months ended March 31, 2012. The average yield on interest bearing assets increased from 15.23% for the three months ended March 31, 2011 to 20.41% for the three months ended March 31, 2012. Average interest income producing assets have increased from $779,494 for the nine months ended March 31, 2011 to $1,371,807 for the nine months ended March 31, 2012. The increase in annual returns is primarily the result of the sale of our investment in NRG for which we received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. Without this adjustment, the weighted average interest rates earned on debt investments would have been 12.88% and 12.73% for the three and nine months ended March 31, 2012, respectively. The remaining decrease in annual returns is primarily the result of accretion on the assets acquired from Patriot on which we recognized $964 and $4,739 during the three months ended March 31, 2012 and March 31, 2011, respectively, and $3,348 and $10,092 during the nine months ended March 31, 2012 and March 31, 2011, respectively. Without these adjustments, the weighted average interest rates earned on debt investments would have been 12.41% and 13.55% for the nine months ended March 31, 2012 and 2011, respectively. Generally, we have seen a decrease in interest rates on loans issued during our fiscal year 2011 and the three and nine months ending March 31, 2012 in comparison to the rates in effect prior to March 31, 2011 as we continue to reduce the risk profile of the portfolio. The average yield on interest bearing assets increased from 13.23% for the three months ended December 31, 2011 to 20.41% for the three months ended March 31, 2012. The increase is the result of the $26,936 NRG make-whole fee mentioned above. Without this adjustment, the weighted average interest rates earned on debt investments would have been 13.23% for three months ended December 31, 2011 and 12.88% for the three months ended March 31, 2012.

 

Investment income is also generated from dividends and other income. Dividend income increased from $2,763 for the three months ended March 31, 2011 to $7,477 for the three months ended March 31, 2012. This $4,714 increase in dividend income is primarily attributed to an increase in the level of dividends received from our investment in NRG due to increased profits generated by the portfolio company prior to its sale. We received dividends from NRG of $5,100 and $200 during the three months ended March 31, 2012 and March 31, 2011, respectively. Dividend income increased from $8,328 for the nine months ended March 31, 2011 to $34,664 for the nine months ended March 31, 2012. This $26,336 increase in dividend income is primarily attributed to an increase in the level of dividends received during the respective three and nine month periods from our investments in Energy Solutions and NRG due to increased profits generated by the portfolio companies. We received dividends from NRG of $15,011 and $400 during the nine months ended March 31, 2012 and March 31, 2011, respectively. We received dividends from Energy Solutions of $14,600 and $6,350 during the nine months ended March 31, 2012 and March 31, 2011, respectively. No dividend was received from Energy Solutions during the three months ended March 31, 2012. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us will be required to be recognized as dividend income, in accordance with ASC 946, Financial Services – Investment Companies, as cash distributions are received from Energy Solutions to the extent there are current year earnings and profits sufficient to support such recognition.

 

Other income is generated primarily from structuring fees. Comparing the three months ended March 31, 2011 to the three months ended March 31, 2012, income from other sources increased from $7,306 to $15,200, respectively. Comparing the nine months ended March 31, 2011 to the nine months ended March 31, 2012, income from other sources increased from $13,970 to $23,203, respectively. These increases are primarily due to $13,765 of structuring and advisory fees recognized during the quarter ended March 31, 2012 from our investments in Energy Solutions and NRG. This increase is partially offset by a decrease in structuring fees related to new originations. We recognized $1,192 of

 

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structuring fees during the three months ended March 31, 2012 from new originations, in comparison to $7,190 of structuring fees recognized during the three months ended March 31, 2011 primarily related to Arrowhead, CAS, Clearwater, Progressive, Progrexion, Safe-Guard and Stauber Performance Ingredients, Inc. originations. We recognized $8,547 of structuring fees during the nine months ended March 31, 2012 primarily from the Capstone, Totes and VanDeMark originations, in comparison to $12,865 of structuring fees recognized during the nine months ended March 31, 2011 primarily related to AIRMALL, Arrowhead, CAS, Progrexion, Progressive, Royal Adhesives & Sealants, LLC and Safe-Guard.

 

Operating Expenses

 

Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing 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 Prospect Capital Management (the “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 $37,551 and $20,617 for the three months ended March 31, 2012 and March 31, 2011, respectively. Operating expenses were $95,771 and $49,054 for the nine months ended March 31, 2012 and March 31, 2011, respectively.

 

The base investment advisory expenses were $8,949 and $6,037 for the three months ended March 31, 2012 and March 31, 2011, respectively. The base investment advisory expenses were $25,985 and $15,216 for the nine months ended March 31, 2012 and March 31, 2011, respectively. This increase is directly related to our growth in total assets. For the three months ended March 31, 2012 and March 31, 2011, we incurred $14,518 and $5,997, respectively, of income incentive fees. For the nine months ended March 31, 2012 and March 31, 2011, we incurred $30,614 and $16,015, respectively, of income incentive fees. The $8,521 and $14,599 increase in the income incentive fee for the respective three-month and nine-month periods are driven by an increase in pre-incentive fee net investment income of $42,637 and $73,025 for the respective three-month and nine-month periods primarily due to an increase in interest income from a larger asset base and increased interest, dividend and other income generated by our investments in Energy Solutions and NRG. In conjunction with the sale of NRG, we received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. Excluding the $26,938 make-whole fee from NRG our income incentive fee would have been $9,131 and $25,227 for the three and nine months ended March 31, 2012, respectively. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement.

 

During the three and nine months ended March 31, 2012, we incurred $9,655 and $28,374, respectively, of expenses related to our Syndicated Facility, InterNotes® and Senior Convertible Notes. This compares with expenses of $5,660 and $10,182 incurred during the three and nine months ended March 31, 2011, respectively. 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 expenses of our Syndicated Facility, InterNotes® and Senior Convertible Notes and the related indicators of leveraging capacity and indebtedness during these periods.

 

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For The Three Months Ended
March 31,

 

For The Nine Months Ended
March 31,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Interest on borrowings

 

$

6,407

 

$

3,470

 

$

19,655

 

$

4,930

Amortization of deferred financing costs

 

2,680

 

1,494

 

7,174

 

3,628

Undrawn facility fees

 

568

 

696

 

1,545

 

1,624

Total

 

$

9,655

 

$

5,660

 

$

28,374

 

$

10,182

 

 

 

 

 

 

 

 

 

Weighted-average debt outstanding

 

$

481,363

 

$

237,280

 

$

491,824

 

$

121,084

Weighted-average interest rate on borrowings (excluding amortization and undrawn facility fees)

 

5.27%  

 

5.85%  

 

5.23%  

 

5.35%  

Facility amount at beginning of period

 

$

400,000

 

$

285,000

 

$

325,000

 

$

210,000

 

The increase in interest expense for the three and nine months ended March 31, 2012 is primarily due to the issuance of Senior Convertible Notes on December 21, 2010 and February 18, 2011 for which we incurred $4,674 and $14,132 of interest expense, respectively. Due to the extension of tenor of our investments, we issued the Senior Convertible Notes at a higher interest rate and significantly increased the average maturity of our debt outstanding to better match our portfolio and leverage.

 

As our asset base has grown and we have added complexity to our capital raising activities, 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 two years, Prospect Administration has increased staffing levels along with costs passed through. The allocation of overhead expense from Prospect Administration was $2,910 and $1,669 for the three months ended March 31, 2012 and 2011. The allocation of overhead expense from Prospect Administration was $5,143 and $3,309 for the nine months ended March 31, 2012 and 2011. 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. Other allocated expenses from Prospect Administration will continue to increase along with the increase in staffing and asset base.

 

Total operating expenses, net of investment advisory fees, allocation of overhead from Prospect Administration and interest costs (“Other Operating Expenses”), were $1,519 and $1,254 for the three months ended March 31, 2012 and 2011, respectively. Other Operating Expenses were $5,655 and $4,332 for the nine months ended March 31, 2012 and 2011, respectively. The $1,323 increase in Other Operating Expenses for the respective nine-month period is primarily due to increased size of our portfolio, for which we have incurred higher costs for legal and valuation services and administrative expenses.

 

Net Investment Income

 

Net investment income represents the difference between investment income and operating expenses. Our net investment income (“NII”) was $58,072 and $23,956 for the three months ended March 31, 2012 and March 31, 2011, respectively, or $0.51 per share and $0.27 per share, respectively. The $34,116 increase for the three months ended March 31, 2012 is due to a $51,050 increase in investment income offset by an increase in operating expenses of $16,934. The $51,050 increase in investment income is primarily due to increases of $38,442 and $7,894 in interest income and other income, respectively, due to the increased size of our portfolio for which we have recognized additional interest income and an increased level of structuring and advisory fees recognized primarily from our investments in Energy Solutions and NRG. In conjunction with the sale of NRG we also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. The offsetting $16,934 increase in operating expenses is primarily due to an $11,433 increase in advisory fees due to the growing size of our portfolio and related income, $3,995 of additional interest and credit facility expenses and a $1,241 increase in overhead allocated from Prospect Administration.

 

Our NII was $122,457 and $64,031 for the nine months ended March 31, 2012 and March 31, 2011, respectively, or $1.10 per share and 0.78 per share, respectively. The $58,426 increase for the nine months ended March 31, 2012 is primarily due to a $105,143 increase in investment income offset by an increase in operating expenses of $46,717. The

 

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$105,143 increase in investment income is primarily due to increases of increases of $69,574 and $26,336 in interest income and dividend income, respectively, due to the increased size of our portfolio for which we have recognized additional interest income and an increased level of dividends received primarily from our investments in Energy Solutions and NRG. In conjunction with the sale of NRG we also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the quarter ending March 31, 2012. The offsetting $46,717 increase in operating expenses is primarily due to a $25,368 increase in advisory fees due to the growing size of our portfolio and related income, and $18,192 of additional interest and credit facility expenses.

 

Net Realized Gain, Increase in Net Assets from Net Changes in Unrealized (Depreciation) Appreciation

 

Net realized gain was $23,703 and $7,094 for the nine months ended March 31, 2012 and March 31, 2011, respectively. The net realized gain for the three months ended March 31, 2012 was due primarily to the sale of NRG common stock for which we realized a gain of $36,940. For the nine months ended March 31, 2012 this gain was offset by our impairment of Deb Shops. During the nine months ended March 31, 2012, Deb Shops filed for bankruptcy and a plan for reorganization was proposed. The plan, which is expected to be approved by the bankruptcy court, will eliminate our debt position with no payment to us. As a result, we determined that the impairment of Deb Shops was other-than-temporary and recorded a realized loss of $14,607 for the full amount of the amortized cost. The net realized gain for the three and nine months ended March 31, 2011 was due primarily to the sale of our common stock in Miller.

 

Net increase in net assets from changes in unrealized (depreciation) appreciation was ($32,675) and $7,725 for the three months ended March 31, 2012 and March 31, 2011, respectively. For the three months ended March 31, 2012, the $32,675 decrease in net assets from the net change in unrealized (depreciation) appreciation was primarily driven by significant write-downs of our investments in Airmall, H&M and Stryker as well as the elimination of the unrealized appreciation resulting from the sale of NRG mentioned above. These instances of depreciation were partially offset by unrealized appreciation of our investments in Ajax, Babson, CIFC, Energy Solutions and R-V. For the three months ended March 31, 2011, the $7,725 increase in net assets from the net change in unrealized appreciation (depreciation) was driven by significant write-ups of approximately $17,982 related to our investments in Biotronic, NRG and Sport Helmets. These instances of unrealized appreciation were partially offset by unrealized depreciation of approximately $10,536 related to our investments in AIRMALL, Copernicus and Shearer’s.

 

Net increase in net assets from changes in unrealized appreciation was $8,441 and $20,154 for the nine months ended March 31, 2012 and March 31, 2011, respectively. For the nine months ended March 31, 2012, the $8,441 increase in net assets from the net change in unrealized appreciation was driven by significant write-ups of our investments in Ajax, Energy Solutions and R-V as well as the elimination of unrealized depreciation resulting from the other-than-temporary impairment of Deb Shops mentioned above. These instances of unrealized appreciation were partially offset by unrealized depreciation in Airmall, Biotronic, H&M, Meatco, NMMB, Stryker, Wind River and the elimination of unrealized appreciation resulting from the sale of NRG mentioned above. For the nine months ended March 31, 2011, the $20,154 increase in net assets from the net change in unrealized appreciation (depreciation) was driven by significant write-ups of approximately $39,561 related to our investments in Ajax, Biotronic, Fischbein, Iron Horse, NRG, Nupla and Sport Helmets. These instances of unrealized appreciation were partially offset by unrealized depreciation of approximately $18,292 related to our investments in H&M, ICS, Shearer’s and Stryker.

 

Financial Condition, Liquidity and Capital Resources

 

For the nine months ended March 31, 2012 and March 31, 2011, our operating activities used $46,026 and $368,400 of cash, respectively. Financing activities provided $79,512 and $369,714 of cash during the nine months ended March 31, 2012 and March 31, 2011, respectively, which included the payments of dividends of $93,051 and $65,345, during the nine months ended March 31, 2012 and March 31, 2011, respectively.

 

Our primary uses of funds have been to continue to invest in our investments in portfolio companies, to add new companies to our investment portfolio, repay outstanding borrowings and to make cash distributions to holders of our common stock.

 

Our primary sources of funds have been issuances of debt and equity. 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. During the nine months ended March 31, 2012, we borrowed $615,800 and made repayments totaling $579,000 under our revolving credit facility. As of March 31, 2012,

 

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we had $121,000 outstanding borrowings on our revolving credit facility and $317,500 outstanding on our Senior Convertible notes (See Note 5 to our consolidated financial statements).

 

On March 19, 2012, we entered into a definitive agreement to provide debt and equity for the acquisition of the businesses of First Tower, a private multiline specialty finance company based in Flowood, Mississippi with over 150 branch offices. We are acquiring 80.1% of First Tower for $110,200 of cash and 14,518,207 of our shares of common stock. We have the option, at our sole discretion, to substitute up to 100% cash in lieu of such 14,518,207 shares of our common stock at a price per share based on average trading prices prior to the closing date. We anticipate that any cash payments will be funded by draws against our credit facility. Completion of the First Tower Acquisition is subject to regulatory approvals and is expected to close late in the quarter ended June 30, 2012.

 

Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of March 31, 2012 and June 30, 2011, we have $27,828 and $35,822 of undrawn revolver commitments to our portfolio companies, respectively.

 

On October 21, 2011, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to $750,000 of additional equity securities.

 

We also continue to generate liquidity through public and private stock offerings.

 

On July 18, 2011, we issued 1,500,000 shares in connection with the exercise of an overallotment option granted with the June 21, 2011 offering of 10,000,000 shares which were delivered June 24, 2011, raising an additional $15,225 of gross proceeds and $14,895 of net proceeds.

 

On February 28, 2012, we issued 12,000,000 shares of our common stock, raising an additional $131,400 of gross proceeds and $129,514 of net proceeds.

 

Off-Balance Sheet Arrangements

 

At March 31, 2012, 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.

 

Recent Developments

 

On April 4, 2012 and April 17, 2012, we closed increases to our commitments to our credit facility of $15,000 and $57,500. The commitments to the credit facility now stand at $482,500.

 

On April 2, 2012 we made an investment of $22,000 to purchase 51.2% of the subordinated notes in Galaxy XII CLO, Ltd.

 

In April 2012, we issued $8,516 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $8,329.

 

On April 16, 2012, we issued $130,000 in aggregate principal amount of 5.375% senior convertible notes due 2017 for net proceeds following underwriting expenses of approximately $126,425.

 

On April 16, 2012, we made a senior secured debt investment of $15,000 to support the acquisition of Nixon, Inc., a designer and distributor of watches and accessories.

 

On April 20, 2012 we made an investment of $43,195 to purchase 71.1% of the subordinated notes in Symphony CLO IX, Ltd.

 

On April 20, 2012, we issued 85,063 shares of our common stock in connection with the dividend reinvestment plan.

 

On May 1, 2012, we issued $100,000 in aggregate principal amount of 6.95% senior unsecured notes due 2022 for net proceeds following underwriting expenses of approximately $96,800.

 

On May 7, 2012, we announced the declaration of monthly dividends in the following amounts and with the following dates:

 

·                  $0.101525 per share for May 2012 to holders of record on May 31, 2012 with a payment date of June 22, 2012;

 

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·                  $0.101550 per share for June 2012 to holders of record on June 29, 2012 with a payment date of July 24, 2012; and

 

·                  $0.101575 per share for July 2012 to holders of record on July 31, 2012 with a payment date of August 24, 2012; and

 

·                  $0.10160 per share for August 2012 to holders of record on August 31, 2012 with a payment date of September 21, 2012.

 

On May 8, 2012, SonicWALL, Inc. repaid the $23,000 loan receivable to us.

 

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 (“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 investment company or an operating company which provides substantially all of its services and benefits to us. Our December 31, 2011 and June 30, 2011 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.

 

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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 engaged by our Board of Directors;

 

2) the independent valuation firm conducts independent appraisals and makes their own independent assessment;

 

3) the audit committee of our Board of Directors reviews and discusses the preliminary valuation with our Investment Adviser proposing values within the valuation range presented by the independent valuation firm; 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.

 

Effective July 1, 2008, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.

 

ASC 820 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.

 

In April 2009, the FASB issued ASC 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“ASC 820-10-65”). This update provides further clarification for ASC 820 in markets that are not active and provides additional guidance for determining when the volume of trading level of activity for an asset or liability has significantly decreased and for identifying circumstances that indicate a transaction is not orderly. ASC 820-10-65 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 820-10-65 did not have any effect on our net asset value, financial position or results of operations for the three and nine months ended March 31, 2012, as there was no change to the fair value measurement principles set forth in ASC 820.

 

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASC 2010-06”). ASC 2010-06 amends ASC 820-10 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. ASC 2010-06 is effective December 15, 2009, except for the disclosure about purchase, sales, issuances and settlements in the roll forward of activity in level 3 fair value measurements. The adoption of ASC 2010-06 for the three and nine months ended March 31, 2012, did not have any effect on our financial statements.

 

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 “Internal Revenue 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

 

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relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.

 

If we do not distribute at least 98% of our annual income and 98.2% of our capital gains in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains 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.

 

If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, 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 we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate for taxable years beginning before 2013 (but not for taxable years beginning thereafter, unless the relevant provisions are extended by legislation) to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Internal Revenue Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge of 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years.

 

We adopted FASB ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 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 ASC 740 was applied to all open tax years as of July 1, 2007. The adoption of ASC 740 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 March 31, 2012 and for the three and nine months then ended, we did not have a liability for any unrecognized tax benefits. Management’s determinations regarding ASC 740 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.

 

Valuation of Other Financial Assets and Financial Liabilities

 

In February 2007, FASB issued ASC Subtopic 820-10-05-1, The Fair Value Option for Financial Assets and Financial Liabilities (“ASC 820-10-05-1”). ASC 820-10-05-1 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. We adopted this statement on July 1, 2008 and have elected not to value other assets and liabilities at fair value as would be permitted by ASC 820-10-05-1.

 

Senior Convertible Notes

 

We have recorded the Senior Convertible Notes (See Note 5) at their contractual amounts. The Senior Convertible Notes were analyzed for any features that would require its accounting to be bifurcated and they were determined to be immaterial.

 

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

 

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interest income over the respective terms of the applicable loans. Accretion of such purchase discounts or premiums is calculated by the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. 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. The purchase discount for portfolio investments acquired from Patriot Capital Funding, Inc. (“Patriot”) was determined based on the difference between par value and fair market value as of December 2, 2009, and will continue to accrete until maturity or repayment of the respective loans.

 

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 interests are included in other income.

 

Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will not be collected in accordance with the terms of the investment. 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.

 

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 or distribution 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, Prospect Capital InterNotes® and the Senior Convertible Notes as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method for our revolving credit facility and the effective interest method for our Prospect Capital InterNotes® and Senior Convertible Notes, over the respective expected life.

 

We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These prepaid assets will be charged to capital upon the receipt of an equity offering proceeds or charged to expense if no offering completed.

 

Guarantees and Indemnification Agreements

 

We follow ASC 460, Guarantees (“ASC 460”). ASC 460 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 ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.

 

Per Share Information

 

Net increase or decrease in net assets resulting from operations per common share are calculated using the weighted average number of common shares outstanding for the period presented. In accordance with ASC 946, Financial Services – Investment Companies, convertible securities are not considered in the calculation of net assets per share.

 

Recent Accounting Pronouncements

 

In February 2011, the FASB issued Accounting Standards Update 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”). ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following

 

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exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 provides guidance to clarify whether the creditor has granted a concession and whether a debtor is experiencing financial difficulties. The adoption of ASC 2010-06 for the three and nine months ended March 31, 2012, did not have any effect on our financial statements.

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amends Accounting Standards Codification Topic 820, “Fair Value Measurements” (“ASC 820”) by: (1) clarifying that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of non-financial assets; (2) allowing a reporting entity to measure the fair value of the net asset or net liability position in a manner consistent with how market participants would price the net risk position, if certain criteria are met; (3) providing a framework for considering whether a premium or discount can be applied in a fair value measurement; (4) providing that the fair value of an instrument classified in a reporting entity’s shareholders’ equity is estimated from the perspective of a market participant that holds the identical item as an asset; and (5) expanding the qualitative and quantitative fair value disclosure requirements. The expanded disclosures include, for Level 3 items, a description of the valuation process and a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-4 also requires disclosures about the highest-and-best-use of a non-financial asset when this use differs from the asset’s current use and the reasons for such a difference. In addition, this ASU amends Accounting Standards Codification 820, “Fair Value Measurements,” to require disclosures to include any transfers between Level 1 and Level 2 of the fair value hierarchy. These amendments are effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The amendments of ASU 2011-04, when adopted, are not expected to have a material impact on our consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are subject to financial market risks, including changes in interest rates and equity price risk. Some of the loans in our portfolio have floating interest rates.

 

We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the three months ended March 31, 2012, we did not engage in hedging activities.

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to allow timely decisions regarding required disclosure of any material information relating to the Company that is required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934.

 

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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 such of these matters as may 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. We are not aware of any such litigation as of March 31, 2012.

 

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Item 1A. Risk Factors

 

There have been no material changes to our risk factors as previously disclosed in our most recent 10-K filing.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table reflects the history of shares issued under the dividend reinvestment plan:

 

Record Date/Issuance Date

 

Shares Issued

 

Aggregate Offering Price
(in 000s)

 

% of Dividend

 

 

 

 

 

 

 

March 23, 2006 / March 30, 2006

 

6,841

 

$

 111

 

5.2%

June 23, 2006 / June 30, 2006

 

7,932

 

130

 

5.4%

September 22, 2006 / September 29, 2006

 

80,818

 

1,273

 

26.2%

December 29, 2006 / January 5, 2007

 

108,047

 

1,850

 

25.5%

March 23, 2007 / March 30, 2007

 

93,843

 

1,595

 

20.8%

June 22, 2007 / June 29, 2007

 

69,834

 

1,190

 

15.3%

September 19, 2007 / September 28, 2007

 

72,073

 

1,243

 

15.9%

March 31, 2008 / April 16, 2008

 

99,241

 

1,510

 

14.4%

September 30, 2008 / October 16, 2008

 

117,549

 

1,506

 

12.7%

December 31, 2008 / January 20, 2009

 

148,200

 

1,774

 

14.8%

March 31, 2009 / April 20, 2009

 

214,456

 

1,827

 

14.4%

July 8, 2009 / July 20, 2009

 

297,274

 

2,901

 

14.8%

October 8, 2010 / October 19, 2009

 

233,523

 

2,457

 

11.0%

December 31, 2009 / January 25, 2010

 

236,985

 

2,896

 

11.2%

March 31, 2010 / April 23, 2010

 

248,731

 

2,962

 

11.2%

June 30, 2010 / July 30, 2010

 

83,875

 

822

 

11.9%

July 30, 2010 / August 31, 2010

 

89,620

 

833

 

11.4%

August 31, 2010 / September 30, 2010

 

90,006

 

876

 

11.5%

September 30, 2010 / October 29, 2010

 

92,999

 

913

 

11.6%

October 29, 2010 / November 30, 2010

 

87,941

 

865

 

10.0%

November 30, 2010 / December 31, 2010

 

89,603

 

970

 

10.9%

December 31, 2010 / January 31, 2011

 

84,155

 

958

 

10.8%

January 31, 2011 / February 28, 2011

 

83,021

 

1,004

 

11.3%

February 28, 2011 / March 31, 2011

 

76,253

 

926

 

10.4%

March 31, 2011 / April 30, 2011

 

76,377

 

917

 

10.3%

April 29, 2011 / May 31, 2011

 

78,689

 

909

 

9.2%

May 31, 2011 / June 24, 2011

 

92,813

 

941

 

9.5%

June 30, 2011 / July 22, 2011

 

102,890

 

1,041

 

9.6%

July 31, 2011 / August 26, 2011

 

106,869

 

931

 

8.4%

August 31, 2011 / September 23, 2011

 

100,634

 

845

 

7.6%

September 30, 2011 / October 25, 2011

 

89,078

 

853

 

7.7%

October 31, 2011 / November 22, 2011

 

94,213

 

868

 

7.8%

November 30, 2011 / December 22, 2011

 

90,677

 

854

 

7.7%

December 30, 2011 / January 25, 2012

 

85,252

 

896

 

8.1%

January 31, 2012 / February 17, 2012

 

69,864

 

771

 

6.9%

February 29, 2012 / March 23, 2012

 

77,764

 

833

 

6.7%

March 30, 2012 / April 20, 2012

 

85,063

 

930

 

7.5%

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

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Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the third quarter of the fiscal year ended June 30, 2012.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (according to the number assigned to them in Item 601 of Regulation S-K):

 

2.1

Master Purchase and Sale and Contribution Agreement, dated as of March 19, 2012, by and among the Registrant, First Tower Corp., certain other entities related to the Registrant and certain shareholders of First Tower Corp. (1)

 

 

4.1

Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee (2)

 

 

4.2

First Supplemental Indenture dated as of March 1, 2012, to the Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee (2)

 

 

4.3

Form of 7.00% Prospect Capital InterNote® due 2022 (included as part of Exhibit 4.2)

 

 

4.4

Second Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee (3)

 

 

4.5

Joinder Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Original Trustee, and U.S. Bank National Association, as Series Trustee (3)

 

 

4.6

Form of 6.900% Prospect Capital InterNote® due 2022 (included as part of Exhibit 4.4)

 

 

4.7

Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee (4)

 

 

11

Computation of Per Share Earnings (included in the notes to the financial statements contained in this report)

 

  

12

Computation of Ratios (included in the notes to the financial statements contained in this report)

 

 

22.1

Proxy Statement (5)

 

 

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

  

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

32.1*

Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

  

32.2*

Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

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*

Filed herewith.

 

 

(1)

Incorporated by reference from the Registrant’s Form 8-K filed on March 21, 2012.

 

 

(2)

Incorporated by reference from Post-Effective Amendment No. 1 of the Registrant’s Registration Statement, filed on March 1, 2012.

 

 

(3)

Incorporated by reference from Post-Effective Amendment No. 2 of the Registrant’s Registration Statement, filed on March 8, 2012.

 

 

(4)

Incorporated by reference from Post-Effective Amendment No. 3 of the Registrant’s Registration Statement, filed on March 14, 2012.

 

 

(5)

Incorporated by reference from the Registrant’s Proxy Statement filed on September 16, 2011.

 

85



 

SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 2012.

 

 

PROSPECT CAPITAL CORPORATION

 

 

 

 

By:

/s/ John F. Barry III

 

 

John F. Barry III

 

 

Chief Executive Officer and Chairman of the Board

 

86