Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2010
     
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. þ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes 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 þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of November 8, 2010 was 83,423,918.
 
 

 

 


 

PROSPECT CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
         
    Page  
 
       
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    26  
 
       
    43  
 
       
    65  
 
       
    65  
 
       
       
 
       
    66  
 
       
    66  
 
       
    66  
 
       
    67  
 
       
    67  
 
       
    67  
 
       
    68  
 
       
    70  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

2


Table of Contents

PART I: FINANCIAL INFORMATION
Item 1.  
Financial Statements
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2010 and June 30, 2010
(in thousands, except share and per share data)
                 
    September 30, 2010     June 30, 2010  
    (Unaudited)     (Audited)  
 
               
Assets (Note 11)
               
Investments at fair value:
               
Control investments (cost of $238,633 and $185,720, respectively)
  $ 258,831     $ 195,958  
Affiliate investments (cost of $64,429 and $65,082, respectively)
    70,254       73,740  
Non-control/Non-affiliate investments (cost of $503,333 and $477,957, respectively)
    501,092       478,785  
 
           
Total investments at fair value (cost of $806,395 and $728,759, respectively, Note 4)
    830,177       748,483  
 
           
 
               
Investments in money market funds
    21,040       68,871  
Cash
    1,062       1,081  
Receivables for:
               
Interest, net
    5,898       5,356  
Dividends
    1,751       1  
Other
    679       419  
Prepaid expenses
    297       371  
Deferred financing costs, net
    7,359       7,579  
Due from broker
    1,803        
Other assets
    534       534  
 
           
Total Assets
    870,600       832,695  
 
           
 
               
Liabilities
               
Credit facility payable (Note 11)
    46,600       100,300  
Dividends payable
    7,889       6,909  
Due to broker
    1,980        
Due to Prospect Administration (Note 8)
    407       294  
Due to Prospect Capital Management (Note 8)
    6,818       9,006  
Accrued expenses
    3,044       4,057  
Other liabilities
    1,038       705  
 
           
Total Liabilities
    67,776       121,271  
 
           
 
               
Net Assets
  $ 802,824     $ 711,424  
 
           
 
               
Components of Net Assets
               
Common stock, par value $0.001 per share (200,000,000 and 100,000,000 common shares authorized, respectively; 78,401,363 and 69,086,862 issued and outstanding, respectively) (Note 6)
  $ 78     $ 69  
Paid-in capital in excess of par (Note 6)
    894,568       805,918  
Distributions in excess of net investment income
    (11,536 )     (9,692 )
Accumulated realized losses on investments
    (104,068 )     (104,595 )
Unrealized appreciation on investments
    23,782       19,724  
 
           
Net Assets
  $ 802,824     $ 711,424  
 
           
 
               
Net Asset Value Per Share
  $ 10.24     $ 10.30  
 
           
See notes to consolidated financial statements.

 

3


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30, 2010 and 2009
(in thousands, except share and per share data)
(Unaudited)
                 
    For Three Months Ended September 30,  
    2010     2009  
Investment Income
               
Interest income: (Note 4)
               
Control investments (Net of foreign withholding tax of $0 and $32, respectively)
  $ 5,189     $ 4,591  
Affiliate investments
    2,950       849  
Non-control/Non-affiliate investments
    20,782       9,395  
 
           
Total interest income
    28,921       14,835  
 
           
 
               
Dividend income:
               
Control investments
    1,750       6,200  
Non-control/Non-affiliate investments
    440        
Money market funds
    4       18  
 
           
Total dividend income
    2,194       6,218  
 
           
 
               
Other income: (Note 5)
               
Control/affiliate investments
    1,771        
Affiliate investments
    147        
Non-control/Non-affiliate investments
    2,179       464  
 
           
Total other income
    4,097       464  
 
           
Total Investment Income
    35,212       21,517  
 
           
 
               
Operating Expenses
               
Investment advisory fees:
               
Base management fee (Note 8)
    4,276       3,209  
Income incentive fee (Note 8)
    5,249       3,080  
 
           
Total investment advisory fees
    9,525       6,289  
 
           
 
               
Interest and credit facility expenses
    2,261       1,374  
Legal fees
    310        
Valuation services
    217       120  
Audit, compliance and tax related fees
    216       262  
Allocation of overhead from Prospect Administration (Note 8)
    800       840  
Insurance expense
    71       63  
Directors’ fees
    64       64  
Other general and administrative expenses
    753       187  
 
           
Total Operating Expenses
    14,217       9,199  
 
           
Net Investment Income
    20,995       12,318  
 
           
 
               
Net realized gain on investments (Note 4)
    527        
Net change in unrealized appreciation (depreciation) on investments (Note 4)
    4,058       (18,696 )
 
           
Net Increase (Decrease) in Net Assets Resulting from Operations
  $ 25,580     $ (6,378 )
 
           
 
               
Net increase (decrease) in net assets resulting from operations per share (Note 7
and Note 9)
  $ 0.34     $ (0.13 )
 
           
Dividends declared per share
  $ 0.30     $ 0.41  
 
           
See notes to consolidated financial statements.

 

4


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Three Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(Unaudited)
                 
    For The Three Months Ended September 30,  
    2010     2009  
Increase (Decrease) in Net Assets from Operations:
               
Net investment income
  $ 20,995     $ 12,318  
Net realized gain on investments
    527        
Net change in unrealized appreciation (depreciation) on investments
    4,058       (18,696 )
 
           
Net Increase (Decrease) in Net Assets Resulting from Operations
    25,580       (6,378 )
 
           
 
               
Dividends to Shareholders
    (22,838 )     (19,548 )
 
           
 
               
Capital Share Transactions:
               
Net proceeds from capital shares sold
    86,435       98,833  
Less: Offering costs of public share offerings
    (308 )     (1,158 )
Reinvestment of dividends
    2,531       2,901  
 
           
Net Increase in Net Assets Resulting from Capital Share Transactions
    88,658       100,576  
 
           
 
               
Total Increase in Net Assets
    91,400       74,650  
Net assets at beginning of period
    711,424       532,596  
 
           
Net Assets at End of Period
  $ 802,824     $ 607,246  
 
           
 
               
Capital Share Activity:
               
Shares sold
    9,051,000       11,431,797  
Shares issued through reinvestment of dividends
    263,501       297,274  
 
           
Net increase in capital share activity
    9,314,501       11,729,071  
Shares outstanding at beginning of period
    69,086,862       42,943,084  
 
           
 
               
Shares Outstanding at End of Period
    78,401,363       54,672,155  
 
           
See notes to consolidated financial statements.

 

5


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended September 30, 2010 and 2009
(in thousands, except share data)
(Unaudited)
                 
    For The Three Months Ended September 30,  
    2010     2009  
Cash Flows from Operating Activities:
               
Net increase (decrease) in net assets resulting from operations
  $ 25,580     $ (6,378 )
Net realized gain on investments
    (527 )      
Net change in unrealized (appreciation) depreciation on investments
    (4,058 )     18,696  
Accretion of purchase discount on investments
    (4,305 )     (501 )
Amortization of deferred financing costs
    990       823  
 
               
Change in operating assets and liabilities
               
Payments for purchases of investments
    (137,797 )     (4,599 )
Payment-in-kind interest
    (3,154 )     (1,467 )
Proceeds from sale of investments and collection of investment principal
    68,148       24,241  
Purchases of cash equivalents
          (124,998 )
Sales of cash equivalents
          124,998  
Net investments in money market funds
    47,831       13,592  
Increase in interest receivable
    (542 )     (1,090 )
(Increase) decrease in dividends receivable
    (1,750 )     21  
(Increase) decrease in other receivables
    (260 )     257  
Decrease (increase) in prepaid expenses
    74       (712 )
Increase in due from broker
    (1,803 )      
Increase in due to broker
    1,980        
Increase (decrease) in due to Prospect Administration
    113       (685 )
(Decrease) increase in due to Prospect Capital Management
    (2,188 )     3  
Decrease in accrued expenses
    (1,013 )     (934 )
Increase in other liabilities
    333       236  
 
           
Net Cash (Used In) Provided By Operating Activities
    (12,348 )     41,503  
 
           
 
               
Cash Flows from Financing Activities:
               
Borrowings under credit facility
    93,200        
Payments under credit facility
    (146,900 )     (124,800 )
Financing costs paid and deferred
    (770 )     (653 )
Net proceeds from issuance of common stock
    86,435       98,833  
Offering costs from issuance of common stock
    (308 )     (1,158 )
Dividends paid
    (19,328 )     (16,647 )
 
           
Net Cash Provided By (Used In) Financing Activities
    12,329       (44,425 )
 
           
 
               
Total Decrease in Cash
    (19 )     (2,922 )
Cash balance at beginning of period
    1,081       9,942  
 
           
Cash Balance at End of Period
  $ 1,062     $ 7,020  
 
           
 
               
Cash Paid For Interest
  $ 982     $ 348  
 
           
 
               
Non-Cash Financing Activity:
               
Amount of shares issued in connection with dividend reinvestment plan
  $ 2,531     $ 2,901  
 
           
See notes to consolidated financial statements.

 

6


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
       
 
                               
LEVEL 3 PORTFOLIO INVESTMENTS:                                
       
 
                               
Control Investments (25.00% or greater of voting control)                                
       
 
                               
AIRMALL USA, Inc.
  Pennsylvania / Property Management  
Senior Secured Term Loan (12.00%,
due 6/30/2015)(3), (4)
  $ 30,000     $ 30,000     $ 30,000       3.7 %
       
Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015)
    12,631       12,631       12,631       1.6 %
       
Convertible Preferred Stock (9,919.684 shares)
            9,920       9,920       1.2 %
       
Common Stock (100 shares)
                  3,046       0.4 %
       
 
                         
       
 
            52,551       55,597       6.9 %
       
 
                         
Ajax Rolled Ring & Machine, Inc.
  South Carolina / Manufacturing  
Senior Secured Note — Tranche A (10.50%, due 4/01/2013)(3), (4)
    20,937       20,937       20,937       2.6 %
       
Subordinated Secured Note — Tranche B (11.50% plus 6.00% PIK, due 4/01/2013)(3), (4)
    13,840       13,840       10,046       1.3 %
       
Convertible Preferred Stock — Series A (6,142.6 shares)
            6,057             0.0 %
       
Unrestricted Common Stock (6 shares)
                        0.0 %
       
 
                         
       
 
            40,834       30,983       3.9 %
       
 
                         
AWCNC, LLC(20)
  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 (4.75% plus 3.25% default interest, in non-accrual status effective 03/02/2010,
past due)(4), (26)
    1,000       945       850       0.1 %
       
Senior Secured Term Loan B (8.25% plus 3.25% default interest, in non-accrual status effective 03/02/2010, past due)(4)
    1,612       1,500       1,370       0.2 %
       
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)
    8,713       707       18       0.0 %
       
Common Stock (100 shares)(22)
                        0.0 %
       
Warrants (33,750 warrants)(22)
                        0.0 %
       
 
                         
       
 
            3,152       2,238       0.3 %
       
 
                         
C&J Cladding LLC
  Texas / Metal Services and Minerals  
Membership Interest (400 units)(23)
            580       4,958       0.6 %
       
 
                         
       
 
            580       4,958       0.6 %
       
 
                         
Change Clean Energy Holdings, Inc. (“CCEHI” or “Biomass”)(5)
  Maine / Biomass Power  
Common Stock (1,000 shares)
            2,383             0.0 %
       
 
                         
       
 
            2,383             0.0 %
       
 
                         
Fischbein, LLC
  North Carolina / Machinery  
Senior Subordinated Debt (13.00% plus 5.50% PIK, due 5/01/2013)
    2,441       2,273       2,441       0.3 %
       
Membership Interest(25)
            1,899       9,715       1.2 %
       
 
                         
       
 
            4,172       12,156       1.5 %
       
 
                         
Freedom Marine Services LLC
  Louisiana / Shipping Vessels  
Subordinated Secured Note (16.00% PIK, due 12/31/2011)
    10,399       10,359       3,506       0.4 %
       
Net Profits Interest (22.50% payable on equity distributions)(7)
                        0.0 %
       
 
                         
       
 
            10,359       3,506       0.4 %
See notes to consolidated financial statements.

 

7


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     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       3.1 %
       
Junior Secured Note (18.00%, due 12/12/2016)
    12,000       12,000       12,000       1.5 %
       
Common Stock (100 shares)
            5,003       60,596       7.5 %
       
 
                         
       
 
            42,003       97,596       12.1 %
       
 
                         
Integrated Contract Services, Inc.(9)
  North Carolina / Contracting  
Senior Demand Note (15.00%, past due)(10)
    1,170       1,170       1,170       0.1 %
       
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       566       0.1 %
       
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       1,642       0.2 %
       
Preferred Stock — Series A (10 shares)
                        0.0 %
       
Common Stock (49 shares)
            679             0.0 %
       
 
                         
       
 
            16,512       3,378       0.4 %
       
 
                         
Iron Horse Coiled Tubing, Inc.(24)
  Alberta, Canada / Production Services  
Senior Secured Tranche 1 (Zero Coupon, in non-accrual status effective 1/01/2010, due 12/31/2016)
    615       396       615       0.1 %
       
Senior Secured Tranche 2 (Zero Coupon, in non-accrual status effective 1/01/2010, due 12/31/2016)
    2,337       2,338       2,338       0.3 %
       
Senior Secured Tranche 3 (1.00%, in non-accrual status effective 1/01/2010, due 12/31/2016)
    18,000       18,000       12,111       1.6 %
       
Common Stock (3,821 shares)
            268             0.0 %
       
 
                         
       
 
            21,002       15,064       2.0 %
       
 
                         
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)
    2,116       2,000       401       0.0 %
       
Coalbed, LLC — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)(6)
    6,347       5,991       1,202       0.1 %
       
Manx — Senior Secured Note (13.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)
    2,800       2,800       2,800       0.3 %
       
Manx — Preferred Stock (6,635 shares)
            6,308             0.0 %
       
Manx — Common Stock (3,416,335 shares)
            1,171             0.0 %
       
 
                         
       
 
            18,270       4,403       0.4 %
       
 
                         
NRG Manufacturing, Inc.
  Texas / Manufacturing  
Senior Secured Note (16.50%, due 8/31/2011)(3), (4)
    13,080       13,080       13,080       1.6 %
       
Common Stock (800 shares)
            2,317       4,494       0.6 %
       
 
                         
       
 
            15,397       17,574       2.2 %
       
 
                         
Nupla Corporation
  California / Home & Office Furnishings, Housewares & Durable  
Revolving Line of Credit — $2,000 Commitment (7.25% plus 2.00% default interest, due 9/04/2012)(4), (26)
    1,093       971       1,093       0.1 %
       
Senior Secured Term Loan A (8.00% plus 2.00% default interest, due 9/04/2012)(4)
    4,995       1,359       3,893       0.5 %
       
Senior Subordinated Debt (10.00% plus 5.00% PIK, in non-accrual status effective 4/01/2009, due 3/04/2013)
    3,368                   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 %
       
 
                         
       
 
            2,330       4,986       0.6 %
See notes to consolidated financial statements.

 

8


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
       
 
                               
LEVEL 3 PORTFOLIO INVESTMENTS:                                
       
 
                               
Control Investments (25.00% or greater of voting control)                                
       
 
                               
R-V Industries, Inc.
  Pennsylvania / Manufacturing  
Warrants (200,000 warrants, expiring 6/30/2017)
          $ 1,682     $ 1,380       0.2 %
       
Common Stock (545,107 shares)
            5,086       3,761       0.5 %
       
 
                         
       
 
            6,768       5,141       0.7 %
       
 
                         
Sidump’r Trailer Company, Inc.
  Nebraska / Automobile  
Revolving Line of Credit — $2,000 Commitment (7.25%, in non-accrual status effective 11/01/2008, due 1/10/2011)(4), (26)
  $ 1,025       479       443       0.1 %
       
Senior Secured Term Loan A (7.25%, in non-accrual status effective 11/01/2008, due 1/10/2011)(4)
    2,048       463             0.0 %
       
Senior Secured Term Loan B (8.75%, in-non-accrual status effective 11/01/2008, due 1/10/2011)(4)
    2,321                   0.0 %
       
Senior Secured Term Loan C (16.50% PIK, in non-accrual status effective 9/27/2008, due 7/10/2011)
    3,085                   0.0 %
       
Senior Secured Term Loan D (7.25%, in non-accrual status effective 11/01/2008, due 7/10/2011)(4)
    1,700                   0.0 %
       
Preferred Stock (49,843 shares)
                        0.0 %
       
Common Stock (64,050 shares)
                        0.0 %
       
 
                         
       
 
            942       443       0.1 %
       
 
                         
Yatesville Coal Holdings, Inc.(11)
  Kentucky / Mining, Steel, Iron and Non-Precious Metals and Coal Production  
Senior Secured Note (Non-accrual status effective 1/01/2009, due 12/31/2010)(4)
    10,000       1,035       808       0.1 %
       
Junior Secured Note (Non-accrual status effective 1/01/2009, due 12/31/2010)(4)
    42,180       343             0.0 %
       
Common Stock (1,000 shares)
                        0.0 %
       
 
                         
       
 
            1,378       808       0.1 %
       
 
                         
       
Total Control Investments
      238,633       258,831       32.2 %
       
 
                         
       
 
                               
Affiliate Investments (5.00% to 24.99% voting control)                                
       
 
                               
Biotronic NeuroNetwork
  Michigan / Healthcare  
Senior Secured Note (11.50% plus 1.00% PIK, due 2/21/2013)(3), (4)
    26,227       26,227       26,884       3.3 %
       
Preferred Stock (9,925.455 shares)(13)
            2,300       2,824       0.4 %
       
 
                         
       
 
            28,527       29,708       3.7 %
       
 
                         
Boxercraft Incorporated
  Georgia / Textiles & Leather  
Senior Secured Term Loan A (9.50%, due 9/16/2013)(3), (4)
    3,431       2,979       3,257       0.4 %
       
Senior Secured Term Loan B (10.00%, due 9/16/2013)(3), (4)
    4,794       3,876       4,478       0.6 %
       
Subordinated Secured Term Loan (12.00% plus 6.50% PIK, due 3/16/2014)(3)
    7,356       5,942       6,857       0.9 %
       
Preferred Stock (1,000,000 shares)
                  243       0.0 %
       
Common Stock (10,000 shares)
                        0.0 %
       
 
                         
       
 
            12,797       14,835       1.9 %
       
 
                         
See notes to consolidated financial statements.

 

9


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
       
 
                               
LEVEL 3 PORTFOLIO INVESTMENTS:                                
       
 
                               
Affiliate Investments (5.00% to 24.99% voting control)                                
       
 
                               
KTPS Holdings, LLC
  Colorado / Textiles & Leather  
Revolving Line of Credit — $1,500 Commitment (10.50%, due 1/31/2012)(26), (27)
  $ 1,250     $ 1,250     $ 1,250       0.2 %
       
Senior Secured Term Loan A (10.50%, due 1/31/2012)(3), (4)
    2,930       2,699       2,732       0.3 %
       
Senior Secured Term Loan B (12.00%, due 1/31/2012)(3)
    430       380       403       0.1 %
       
Senior Secured Term Loan C (12.00% plus 12.75% PIK, due 3/31/2012)(3)
    5,093       4,570       3,297       0.4 %
       
Membership Interest — Class A (730 units)
                        0.0 %
       
Membership Interest — Common (199,795 units)
                        0.0 %
       
 
                         
       
 
            8,899       7,682       1.0 %
       
 
                         
Smart, LLC(15)
  New York / Diversified / Conglomerate Service  
Membership Interest — Class B (1,218 units)
                        0.0 %
       
Membership Interest — Class D (1 unit)
                        0.0 %
       
 
                         
       
 
                        0.0 %
       
 
                         
Sport Helmets Holdings, LLC(15)
  New York / Personal & Nondurable Consumer Products  
Revolving Line of Credit — $3,000 Commitment (4.30%, due 12/14/2013)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (4.30%, due 12/14/2013)(3), (4)
    2,800       1,583       2,758       0.3 %
       
Senior Secured Term Loan B (4.80%, due 12/14/2013)(3), (4)
    7,369       5,268       6,106       0.8 %
       
Senior Subordinated Debt — Series A (12.00% plus 3.00% PIK, due 6/14/2014)(3)
    7,381       5,966       6,308       0.8 %
       
Senior Subordinated Debt — Series B (10.00% plus 5.00% PIK, due 6/14/2014)(3)
    1,374       981       1,100       0.1 %
       
Common Stock (20,554 shares)
            408       1,757       0.2 %
       
 
                         
       
 
            14,206       18,029       2.2 %
       
 
                         
       
Total Affiliate Investments
      64,429       70,254       8.8 %
       
 
                         
       
 
                               
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
       
 
                               
ADAPCO, Inc.
  Florida / Ecological  
Common Stock (5,000 shares)
            141       318       0.0 %
       
 
                         
       
 
            141       318       0.0 %
       
 
                         
Aircraft Fasteners International, LLC
  California / Machinery  
Revolving Line of Credit — $500 Commitment (9.50%, due 11/01/2012)(26), (27)
                        0.0 %
       
Senior Secured Term Loan (9.50%,
due 11/01/2012)(3), (4)
    4,451       4,451       4,188       0.5 %
       
Junior Secured Term Loan (12.00% plus 6.00% PIK, due 5/01/2013)(3)
    5,213       5,213       4,931       0.6 %
       
Convertible Preferred Stock (32,500 units)
            396       143       0.0 %
       
 
                         
       
 
            10,060       9,262       1.1 %
       
 
                         
American Gilsonite Company
  Utah / Specialty Minerals  
Senior Subordinated Note (12.00% plus 3.00% PIK,
due 3/14/2013)(3)
    14,783       14,783       14,931       1.9 %
       
Membership Interest in AGC/PEP, LLC (99.9999%)(16)
            1,031       4,737       0.6 %
       
 
                         
       
 
            15,814       19,668       2.5 %
       
 
                         
Arrowhead General Insurance Agency, Inc.(17)
  California / Insurance  
Senior Secured Term Loan (8.50%, due 8/08/2012)
    850       818       822       0.1 %
       
Junior Secured Term Loan (10.25% plus 2.50% PIK, due 2/08/2013)
    6,217       5,123       5,103       0.6 %
       
 
                         
       
 
            5,941       5,925       0.7 %
       
 
                         
See notes to consolidated financial statements.

 

10


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
       
 
                               
LEVEL 3 PORTFOLIO INVESTMENTS:                                
       
 
                               
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
       
 
                               
Caleel + Hayden, LLC (15)
  Colorado / Personal & Nondurable Consumer Products  
Membership Units (7,500 shares)
          $ 351     $ 794       0.1 %
       
Options in Mineral Fusion Natural Brands, LLC (11,662 options)
                        0.0 %
       
 
                         
       
 
            351       794       0.1 %
       
 
                         
Castro Cheese Company, Inc.
  Texas / Food Products  
Subordinated Secured Note (11.00% plus 2.00% PIK, due 2/28/2013)(3)
  $ 7,732       7,644       7,809       1.0 %
       
 
                         
       
 
            7,644       7,809       1.0 %
       
 
                         
Copernicus Group
  North Carolina / Healthcare  
Revolving Line of Credit — $500 Commitment (10.00%, due 10/08/2013)(4), (26)
    150       32       141       0.0 %
       
Senior Secured Term Loan A (10.00%, due 10/08/2013)(3), (4)
    5,650       4,950       5,307       0.7 %
       
Senior Subordinated Debt (10.00% plus 10.00% PIK, due 4/08/2014)
    13,732       11,829       13,667       1.7 %
       
Preferred Stock — Series A (1,000,000 shares)
            67       223       0.0 %
       
Preferred Stock — Series C (212,121 shares)
            212       265       0.0 %
       
 
                         
       
 
            17,090       19,603       2.4 %
       
 
                         
Deb Shops, Inc.(17)
  Pennsylvania / Retail  
Second Lien Debt (14.00% PIK, in non-accrual status effective 2/24/2009, due 10/23/2014)
    18,190       14,606       1,295       0.2 %
       
 
                         
       
 
            14,606       1,295       0.2 %
       
 
                         
Diamondback Operating, LP
  Oklahoma / Oil & Gas Production  
Net Profits Interest (15.00% payable on Equity distributions)(7)
                  191       0.0 %
       
 
                         
       
 
                  191       0.0 %
       
 
                         
EXL Acquisition Corporation
  South Carolina / Electronics  
Revolving Line of Credit — $1,000 Commitment (7.75%, due 06/24/2015)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (7.75%, due 6/24/2015)(3), (4)
    11,744       11,744       11,816       1.5 %
       
Senior Secured Term Loan B (12.00% plus 2.00% PIK, due 12/24/2015)(3)
    12,050       12,050       12,094       1.5 %
       
Common Stock — Class A (2,475 shares)
            437       415       0.1 %
       
Common Stock — Class B (25 shares)
            252       4       0.0 %
       
 
                         
       
 
            24,483       24,329       3.1 %
       
 
                         
Fairchild Industrial Products, Co.
  North Carolina / Electronics  
Preferred Stock — Class A (285.1 shares)
            377       655       0.1 %
       
Common Stock — Class B (28 shares)
            211       331       0.0 %
       
 
                         
       
 
            588       986       0.1 %
       
 
                         
H&M Oil & Gas, LLC
  Texas / Oil & Gas Production  
Senior Secured Note (13.00% plus 3.00% PIK, due 9/30/2010)
    59,561       59,561       44,593       5.6 %
       
Net Profits Interest (8.00% payable on Equity distributions)(7)
                  605       0.1 %
       
 
                         
       
 
            59,561       45,198       5.7 %
       
 
                         
Hoffmaster Group, Inc.
  Wisconsin / Durable Consumer Products  
Second Lien Term Loan (13.50%, due 6/2/2017)(3)
    20,000       20,000       20,400       2.5 %
       
 
                         
       
 
            20,000       20,400       2.5 %
       
 
                         
Hudson Products Holdings, Inc.(17)
  Texas / Manufacturing  
Senior Secured Term Loan (8.50%,
due 8/24/2015)(3), (4)
    6,365       5,759       5,243       0.7 %
       
 
                         
       
 
            5,759       5,243       0.7 %
       
 
                         
See notes to consolidated financial statements.

 

11


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
       
 
                               
LEVEL 3 PORTFOLIO INVESTMENTS:                                
       
 
                               
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
       
 
                               
IEC Systems LP (“IEC”) /Advanced Rig Services LLC (“ARS”)
  Texas / Oilfield Fabrication  
IEC Senior Secured Note (12.00% plus 3.00% PIK, due 11/20/2012)(3), (4)
  $ 18,407     $ 18,407     $ 18,407       2.3 %
       
ARS Senior Secured Note (12.00% plus 3.00% PIK, due 11/20/2012)(3), (4)
    11,067       11,067       11,067       1.4 %
       
 
                         
       
 
            29,474       29,474       3.7 %
       
 
                         
Label Corp Holdings, Inc.
  Nebraska / Printing & Publishing  
Senior Secured Term Loan (8.50%,
due 8/08/2014)(3), (4)
    5,779       5,238       5,336       0.7 %
       
 
                         
       
 
            5,238       5,336       0.7 %
       
 
                         
LHC Holdings Corp.(17)
  Florida / Healthcare  
Revolving Line of Credit — $750 Commitment (9.00%, due 11/30/2012)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (8.50%, due 11/30/2012)(3), (4)
    1,940       1,940       1,793       0.2 %
       
Senior Subordinated Debt (12.00% plus 2.50% PIK, due 5/31/2013)(3)
    4,565       4,222       4,173       0.5 %
       
Membership Interest (125 units)
            216       173       0.0 %
       
 
                         
       
 
            6,378       6,139       0.7 %
       
 
                         
Mac & Massey Holdings, LLC
  Georgia / Food Products  
Senior Subordinated Debt (10.00% plus 5.75% PIK, due 2/10/2013)
    8,799       7,563       8,703       1.1 %
       
Membership Interest (250 units)
            133       387       0.0 %
       
 
                         
       
 
            7,696       9,090       1.1 %
       
 
                         
Maverick Healthcare, LLC
  Arizona / Healthcare  
Second Lien Debt (12.50% plus 3.50% PIK, due 4/30/2014)(3)
    13,239       13,239       13,364       1.7 %
       
Preferred Units (1,250,000 units)
            1,252       1,896       0.2 %
       
Common Units (1,250,000 units)
                        0.0 %
       
 
                         
       
 
            14,491       15,260       1.9 %
       
 
                         
Miller Petroleum, Inc.
  Tennessee / Oil & Gas Production  
Warrants, Common Stock (2,567,822 warrants, expiring 5/04/2010 to 3/31/2015) (14)
            150       1,153       0.1 %
       
 
                         
       
 
            150       1,153       0.1 %
       
 
                         
Northwestern Management Services, LLC
  Florida / Healthcare  
Revolving Line of Credit — $1,500 Commitment (10.50%, due 7/30/2015)(26)
                      0.0 %
       
Senior Secured Term Loan A (10.50%, due 7/30/2015)(3), (4)
    18,750       18,750       18,750       2.3 %
       
Common Stock (50 shares)
            371       631       0.1 %
       
 
                         
       
 
            19,121       19,381       2.4 %
       
 
                         
Prince Mineral Company, Inc. (3)
  New York / Metal Services and Minerals  
Junior Secured Term Loan (9.00%,
due 12/21/2012)(4)
    11,100       11,100       11,100       1.4 %
       
Senior Subordinated Debt (13.00% plus 2.00%, due 7/21/2013)
    12,322       1,540       12,322       1.5 %
       
 
                         
       
 
            12,640       23,422       2.9 %
       
 
                         
Progrexion Holdings, LLC(3), (4)
  Utah / Consumer Services  
Senior Secured Term Loan (11.0%, due 12/31/2014)
    35,910       35,910       35,910       4.5 %
       
 
                         
       
 
            35,910       35,910       4.5 %
       
 
                         
See notes to consolidated financial statements.

 

12


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            September 30, 2010  
                                    % of  
            Principal           Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
 
Qualitest Pharmaceuticals, Inc.(17)
  Alabama / Pharmaceuticals   Second Lien Debt (8.03%, due 4/30/2015)(3), (4)   $ 12,000     $ 11,957     $ 12,000       1.5 %
 
                                 
 
                    11,957       12,000       1.5 %
 
                                 
R-O-M Corporation
  Missouri / Automobile  
Revolving Line of Credit — $1,750 Commitment (4.50%, due 2/08/2013)(26), (27)
                        0.0 %
 
     
Senior Secured Term Loan A (4.50%, due 2/08/2013)(3), (4)
    4,240       3,729       4,173       0.6 %
 
     
Senior Secured Term Loan B (8.00%, due 5/08/2013)(3), (4)
    7,229       7,229       7,175       0.9 %
 
     
Senior Subordinated Debt (12.00% plus 3.00% PIK due 8/08/2013)(3)
    7,118       6,818       6,566       0.8 %
 
                                 
 
                    17,776       17,914       2.3 %
 
                                 
Seaton Corp
  Illinois / Business Services  
Subordinated Secured (12.50% plus 2.00% PIK, due 3/14/2014) (3), (4)
    12,296       12,073       12,664       1.6 %
 
                                 
 
                    12,073       12,664       1.6 %
 
                                 
Shearer’s Foods, Inc.
  Ohio / Food Products  
Junior Secured Debt (12.00% plus 3.00% PIK,
due 3/31/2016)(3)
    35,536       35,536       37,073       4.6 %
 
     
Membership Interest in Mistral Chip Holdings, LLC
(2,000 units)(18)
            2,000       6,460       0.8 %
 
     
Membership Interest in Mistral Chip Holdings, LLC 2
(595 units)(18)
            1,322       1,922       0.2 %
 
                                 
 
                    38,858       45,455       5.6 %
 
                                 
Skillsoft Public Limited Company
  Ireland / Software & Computer Services   Subordinated Unsecured (11.125%, due 06/01/2018)     15,000       14,904       15,000       1.9 %
 
                                 
 
                    14,904       15,000       1.9 %
 
                                 
SonicWALL, Inc.
  California / Software & Computer
Services
  Subordinated Secured (12.00%, due 1/23/2017) (4)     23,000       22,980       23,000       2.9 %
 
                                 
 
                    22,980       23,000       2.9 %
 
                                 
Stryker Energy, LLC
  Ohio / Oil & Gas Production  
Subordinated Secured Revolving Credit Facility (12.00% plus 3.00% PIK, due 12/01/2012)(3), (4)
    29,953       29,769       29,861       3.7 %
 
     
Overriding Royalty Interests(19)
                  2,744       0.3 %
 
                                 
 
                    29,769       32,605       4.0 %
 
                                 
TriZetto Group(17)
  California / Healthcare  
Subordinated Unsecured Note (12.00% plus 1.50% PIK, due 10/01/2016)(3)
    15,492       15,367       15,956       2.0 %
 
                                 
 
                    15,367       15,956       2.0 %
 
                                 
Unitek(17)
  Pennsylvania / Technical Services  
Second Lien Debt (13.08%, due 12/31/2013)(3), (4)
    11,500       11,394       11,500       1.4 %
 
                                 
 
                    11,394       11,500       1.4 %
 
                                 
Wind River Resources Corp. and Wind River II Corp.
  Utah / Oil & Gas Production  
Senior Secured Note (13.00% 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       8,701       1.1 %
 
     
Net Profits Interest (5.00% payable on Equity distributions)(7)
                        0.0 %
 
                                 
 
                    15,000       8,701       1.1 %
 
                                 
 
      Total Non-Control/Non-Affiliate Investments (Level 3 Investments)       503,214       500,981       62.4 %
 
                                 
 
                                       
 
      Total Level 3 Portfolio Investments       806,276       830,066       103.4 %
 
                                 
See notes to consolidated financial statements.

 

13


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                     
            September 30, 2010  
                                % of  
            Principal           Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value   Cost     Value(2)     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     $ 24       0.0 %
 
                             
 
                56       24       0.0 %
 
                             
Dover Saddlery, Inc.
  Massachusetts / Retail   Common Stock (30,974 shares)         63       87       0.0 %
 
                             
 
                63       87       0.0 %
 
                             
 
  Total Non-Control/Non-Affiliate Investments (Level 1 Investments)     119       111       0.0 %
 
                             
 
 
      Total Portfolio Investments     806,395       830,177       103.4 %
 
                             
 
SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments)                            
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)         8,457       8,457       1.6 %
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)(3)         12,582       12,582       1.1 %
Victory Government Money Market Funds         1       1       0.0 %
 
                             
 
      Total Money Market Funds     21,040       21,040       2.6 %
 
                             
 
 
      Total Investments     827,435       851,217       106.0 %
 
                             
See notes to consolidated financial statements.

 

14


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Control Investments (25.00% or greater of voting control)                                
 
Ajax Rolled Ring & Machine, Inc.
  South Carolina / Manufacturing  
Senior Secured Note — Tranche A (10.50%,
due 4/01/2013)(3), (4)
  $ 21,047     $ 21,047     $ 21,047       3.0 %
 
     
Subordinated Secured Note — Tranche B (11.50% plus 6.00% PIK, due 4/01/2013)(3), (4)
    16,306       16,306       9,857       1.3 %
 
     
Subordinated Secured Note — Tranche B (15.00%, due 10/30/2010)
    500       500             0.0 %
 
     
Convertible Preferred Stock — Series A (6,142.6 shares)
            6,057             0.0 %
 
     
Unrestricted Common Stock (6 shares)
                        0.0 %
 
                                 
 
                    43,910       30,904       4.3 %
 
                                 
AWCNC, LLC(20)
  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 (4.75% plus 3.25% default interest, in non-accrual status effective 03/02/2010, past due)(4), (26)
    1,000       945       850       0.1 %
 
     
Senior Secured Term Loan B (8.25% plus 3.25% default interest, in non-accrual status effective 03/02/2010, past due)(4)
    1,612       1,500       1,282       0.2 %
 
     
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)
    8,624       707             0.0 %
 
     
Common Stock (100 shares)(22)
                        0.0 %
 
     
Warrants (33,750 warrants)(22)
                        0.0 %
 
                                 
 
                    3,152       2,132       0.3 %
 
                                 
C&J Cladding LLC
  Texas / Metal Services and Minerals  
Membership Interest (400 units)(23)
            580       4,128       0.6 %
 
                                 
 
                    580       4,128       0.6 %
 
                                 
Change Clean Energy Holdings, Inc. (“CCEHI” or “Biomass”)(5)
  Maine / Biomass Power   Common Stock (1,000 shares)             2,383             0.0 %
 
                                 
 
                    2,383             0.0 %
 
                                 
Fischbein, LLC
  North Carolina / Machinery  
Senior Subordinated Debt (13.00% plus 5.50% PIK, due 5/01/2013)
    3,811       3,631       3,811       0.5 %
 
      Membership Interest(25)             1,899       4,812       0.7 %
 
                                 
 
                    5,530       8,623       1.2 %
 
                                 
Freedom Marine Services LLC
  Louisiana / Shipping Vessels  
Subordinated Secured Note (16.00% PIK, due 12/31/2011)(3)
    10,088       10,040       3,583       0.5 %
 
     
Net Profits Interest (22.50% payable on equity
distributions)(3), (7)
                        0.0 %
 
                                 
 
                    10,040       3,583       0.5 %
 
                                 
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       3.5 %
 
     
Junior Secured Note (18.00%, due 12/12/2016)
    7,500       7,500       7,500       1.1 %
 
     
Common Stock (100 shares)
            5,003       60,596       8.5 %
 
                                 
 
                    37,503       93,096       13.1 %
See notes to consolidated financial statements.

 

15


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Control Investments (25.00% or greater of voting control)                                
 
Integrated Contract Services, Inc.(9)
  North Carolina / Contracting  
Senior Demand Note (15.00%, past due)(10)
  $ 1,170     $ 1,170     $ 1,170       0.2 %
 
     
Senior Secured Note (7.00% plus 7.00% PIK plus 6.00% default interest, in non-accrual status effective 10/09/2007, past due)
    1,100       800       1,100       0.2 %
 
     
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       2,272       0.2 %
 
     
Preferred Stock — Series A (10 shares)
                        0.0 %
 
     
Common Stock (49 shares)
            679             0.0 %
 
                                 
 
                    16,652       4,542       0.6 %
 
                                 
Iron Horse Coiled Tubing, Inc.(24)
  Alberta, Canada / Production Services  
Senior Secured Tranche 1 (Zero Coupon, in non-accrual status
effective 1/01/2010, due 12/31/2016)
    615       396       615       0.1 %
 
     
Senior Secured Tranche 2 (Zero Coupon, in non-accrual status
effective 1/01/2010, due 12/31/2016)
    2,337       2,338       2,338       0.3 %
 
     
Senior Secured Tranche 3 (1.00%, in non-accrual status effective 1/01/2010, due 12/31/2016)
    18,000       18,000       9,101       1.3 %
 
     
Common Stock (3,821 shares)
            268             0.0 %
 
                                 
 
                    21,002       12,054       1.7 %
 
                                 
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)
    2,073       2,000       472       0.1 %
 
     
Coalbed, LLC — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)(6)
    6,219       5,991       1,414       0.2 %
 
     
Manx — Senior Secured Note (13.00%, in non-accrual status effective 1/19/2010, due 1/19/2013)
    2,800       2,800       2,800       0.4 %
 
     
Manx — Preferred Stock (6,635 shares)
            6,308             0.0 %
 
     
Manx — Common Stock (3,416,335 shares)
            1,171             0.0 %
 
                                 
 
                    18,270       4,686       0.7 %
 
                                 
NRG Manufacturing, Inc.
  Texas / Manufacturing  
Senior Secured Note (16.50%, due 8/31/2011)(3), (4)
    13,080       13,080       13,080       1.8 %
 
     
Common Stock (800 shares)
            2,317       7,031       1.0 %
 
                                 
 
                    15,397       20,111       2.8 %
 
                                 
Nupla Corporation
  California / Home & Office
Furnishings, Housewares & Durable
 
Revolving Line of Credit — $2,000 Commitment (7.25% plus 2.00% default interest, due 9/04/2012)(4), (26)
    1,093       958       1,093       0.1 %
 
     
Senior Secured Term Loan A (8.00% plus 2.00% default interest, due 9/04/2012)(4)
    5,139       1,503       3,301       0.5 %
 
     
Senior Subordinated Debt (10.00% plus 5.00% PIK, in non-accrual status effective 4/01/2009, due 3/04/2013)
    3,368                   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 %
 
                                 
 
                    2,461       4,394       0.6 %
 
                                 
R-V Industries, Inc.
  Pennsylvania / Manufacturing   Warrants (200,000 warrants, expiring 6/30/2017)             1,682       1,697       0.2 %
 
      Common Stock (545,107 shares)             5,086       4,626       0.7 %
 
                                 
 
                    6,768       6,323       0.9 %
 
                                 
See notes to consolidated financial statements.

 

16


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Control Investments (25.00% or greater of voting control)                                
 
Sidump’r Trailer Company, Inc.
  Nebraska / Automobile  
Revolving Line of Credit — $2,000 Commitment (7.25%, in non-accrual status effective 11/01/2008, due 1/10/2011)(4), (26)
  $ 1,025     $ 479     $ 574       0.1 %
       
Senior Secured Term Loan A (7.25%, in non-accrual status effective 11/01/2008, due 1/10/2011)(4)
    2,048       463             0.0 %
       
Senior Secured Term Loan B (8.75%, in-non-accrual status effective 11/01/2008, due 1/10/2011)(4)
    2,321                   0.0 %
       
Senior Secured Term Loan C (16.50% PIK, in non-accrual status effective 9/27/2008, due 7/10/2011)
    3,085                   0.0 %
       
Senior Secured Term Loan D (7.25%, in non-accrual status effective 11/01/2008, due 7/10/2011)(4)
    1,700                   0.0 %
       
Preferred Stock (49,843 shares)
                        0.0 %
       
Common Stock (64,050 shares)
                        0.0 %
       
 
                         
       
 
            942       574       0.1 %
       
 
                         
Yatesville Coal Holdings, Inc.(11)
  Kentucky / Mining, Steel, Iron and Non-Precious Metals and Coal Production  
Senior Secured Note (Non-accrual status effective 1/01/2009, due 12/31/2010)(4)
    10,000       1,035       808       0.1 %
       
Junior Secured Note (Non-accrual status effective 1/01/2009, due 12/31/2010)(4)
    41,931       95             0.0 %
       
Common Stock (1,000 shares)
                        0.0 %
       
 
                         
       
 
            1,130       808       0.1 %
       
 
                         
       
Total Control Investments
      185,720       195,958       27.5 %
       
 
                         
       
 
                               
Affiliate Investments (5.00% to 24.99% voting control)                                
 
Biotronic NeuroNetwork
  Michigan / Healthcare  
Senior Secured Note (11.50% plus 1.00% PIK, due 2/21/2013)(3), (4)
    26,227       26,227       26,744       3.8 %
       
Preferred Stock (9,925.455 shares)(13)
            2,300       2,759       0.4 %
       
 
                         
       
 
            28,527       29,503       4.2 %
       
 
                         
Boxercraft Incorporated
  Georgia / Textiles & Leather  
Revolving Line of Credit — $1,000 Commitment (9.00%, due 9/16/2013)(26), (27)
    1,000       1,000       1,000       0.1 %
       
Senior Secured Term Loan A (9.50%, due 9/16/2013)(3), (4)
    3,843       3,330       3,577       0.5 %
       
Senior Secured Term Loan B (10.00%, due 9/16/2013)(3), (4)
    4,822       3,845       4,386       0.6 %
       
Subordinated Secured Term Loan (12.00% plus 6.50% PIK, due 3/16/2014)(3)
    7,235       5,775       6,717       1.0 %
       
Preferred Stock (1,000,000 shares)
                  205       0.0 %
       
Common Stock (10,000 shares)
                        0.0 %
       
 
                         
       
 
            13,950       15,885       2.2 %
       
 
                         
KTPS Holdings, LLC
  Colorado / Textiles & Leather  
Revolving Line of Credit — $1,500 Commitment (10.50%, due 1/31/2012)(26), (27)
    1,000       1,000       1,000       0.1 %
       
Senior Secured Term Loan A (10.50%, due 1/31/2012)(3), (4)
    3,130       2,847       2,916       0.4 %
       
Senior Secured Term Loan B (12.00%, due 1/31/2012)(3)
    435       377       409       0.1 %
       
Senior Secured Term Loan C (12.00% plus 6.00% PIK, due 3/31/2012)(3)
    4,932       4,345       4,796       0.7 %
       
Membership Interest — Class A (730 units)
                        0.0 %
       
Membership Interest — Common (199,795 units)
                        0.0 %
       
 
                         
       
 
            8,569       9,121       1.3 %
       
 
                         
See notes to consolidated financial statements.

 

17


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Affiliate Investments (5.00% to 24.99% voting control)                                
 
Smart, LLC(15)
  New York / Diversified / Conglomerate Service  
Membership Interest — Class B (1,218 units)
          $     $       0.0 %
       
Membership Interest — Class D (1 unit)
                        0.0 %
       
 
                         
       
 
                        0.0 %
       
 
                         
Sport Helmets Holdings, LLC(15)
  New York / Personal & Nondurable Consumer Products  
Revolving Line of Credit — $3,000 Commitment (4.54%, due 12/14/2013)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (4.54%, due 12/14/2013)(3), (4)
  $ 3,025       1,658       2,993       0.4 %
       
Senior Secured Term Loan B (5.04%, due 12/14/2013)(3), (4)
    7,388       5,161       6,432       0.9 %
       
Senior Subordinated Debt — Series A (12.00% plus 3.00% PIK, due 6/14/2014)(3)
    7,325       5,857       6,734       0.9 %
       
Senior Subordinated Debt — Series B (10.00% plus 5.00% PIK, due 6/14/2014)(3)
    1,357       952       1,160       0.2 %
       
Common Stock (20,554 shares)
            408       1,912       0.3 %
       
 
                         
       
 
            14,036       19,231       2.7 %
       
 
                         
       
Total Affiliate Investments
      65.082       73,740       10.4 %
       
 
                         
       
 
                               
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
 
ADAPCO, Inc.
  Florida / Ecological  
Common Stock (5,000 shares)
            141       340       0.0 %
       
 
                         
       
 
            141       340       0.0 %
       
 
                         
Aircraft Fasteners International, LLC
  California / Machinery  
Revolving Line of Credit — $500 Commitment (9.50%, due 11/01/2012)(26), (27)
                        0.0 %
       
Senior Secured Term Loan (9.50%, due 11/01/2012)(3), (4)
    4,565       4,565       4,248       0.6 %
       
Junior Secured Term Loan (12.00% plus 6.00% PIK, due 5/01/2013)(3)
    5,134       5,134       4,807       0.7 %
       
Convertible Preferred Stock (32,500 units)
            396       98       0.0 %
       
 
                         
       
 
            10,095       9,153       1.3 %
       
 
                         
American Gilsonite Company
  Utah / Specialty Minerals  
Senior Subordinated Note (12.00% plus 3.00% PIK, due 3/14/2013)(3)
    14,783       14,783       14,931       2.1 %
       
Membership Interest in AGC/PEP, LLC (99.9999%)(16)
            1,031       3,532       0.5 %
       
 
                         
       
 
            15,814       18,463       2.6 %
       
 
                         
Arrowhead General Insurance Agency, Inc.(17)
  California / Insurance  
Senior Secured Term Loan (8.50%, due 8/08/2012)
    850       809       830       0.1 %
       
Junior Secured Term Loan (10.25% plus 2.50% PIK, due 2/08/2013)
    6,179       5,002       5,122       0.7 %
       
 
                         
       
 
            5,811       5,952       0.8 %
       
 
                         
Caleel + Hayden, LLC (15)
  Colorado / Personal & Nondurable Consumer Products  
Membership Units (7,500 shares)
            351       818       0.1 %
       
Options in Mineral Fusion Natural Brands, LLC (11,662 options)
                        0.0 %
       
 
                         
       
 
            351       818       0.1 %
       
 
                         
See notes to consolidated financial statements.

 

18


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:                                
 
Non-control/Non-affiliate Investments (less than 5.00% of voting control)                                
 
Castro Cheese Company, Inc.
  Texas / Food Products  
Subordinated Secured Note (11.00% plus 2.00% PIK, due 2/28/2013)(3)
  $ 7,692     $ 7,597     $ 7,769       1.1 %
       
 
                       
       
 
            7,597       7,769       1.1 %
       
 
                         
Copernicus Group
  North Carolina / Healthcare  
Revolving Line of Credit — $500 Commitment (10.00%, due 10/08/2013)(4), (26)
    150       22       150       0.0 %
       
Senior Secured Term Loan A (10.00%, due 10/08/2013)(3), (4)
    5,850       5,058       5,416       0.8 %
       
Senior Subordinated Debt (10.00% plus 10.00% PIK, due 4/08/2014)
    13,390       11,421       12,677       1.8 %
       
Preferred Stock — Series A (1,000,000 shares)
            67       104       0.0 %
       
Preferred Stock — Series C (212,121 shares)
            212       246       0.0 %
       
 
                         
       
 
            16,780       18,593       2.6 %
       
 
                         
Deb Shops, Inc.(17)
  Pennsylvania / Retail  
Second Lien Debt (14.00% PIK, in non-accrual status effective 2/24/2009, due 10/23/2014)
    17,562       14,606       2,051       0.3 %
       
 
                       
       
 
            14,606       2,051       0.3 %
       
 
                         
Diamondback Operating, LP
  Oklahoma / Oil & Gas Production  
Net Profits Interest (15.00% payable on Equity distributions)(7)
                  193       0.0 %
       
 
                         
       
 
                  193       0.0 %
       
 
                         
EXL Acquisition Corporation
  South Carolina / Electronics  
Revolving Line of Credit — $1,000 Commitment (7.75%, due 06/24/2015)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (7.75%, due 6/24/2015)(3), (4)
    12,250       12,250       12,250       1.7 %
       
Senior Secured Term Loan B (12.00% plus 2.00% PIK, due 12/24/2015)(3)
    12,250       12,250       12,250       1.7 %
       
Common Stock — Class A (2,475 shares)
            437       363       0.1 %
       
Common Stock — Class B (25 shares)
            252       103       0.0 %
       
 
                         
       
 
            25,189       24,966       3.5 %
       
 
                         
Fairchild Industrial Products, Co.(2)
  North Carolina / Electronics  
Preferred Stock — Class A (285.1 shares)
            377       435       0.1 %
       
Common Stock — Class B (28 shares)
            211       228       0.0 %
       
 
                         
       
 
            588       663       0.1 %
       
 
                         
H&M Oil & Gas, LLC
  Texas / Oil & Gas Production  
Senior Secured Note (13.00% plus 3.00% PIK, due 9/30/2010)
    59,107       59,107       48,867       6.9 %
       
 
                       
       
Net Profits Interest (8.00% payable on Equity distributions)(7)
                  827       0.1 %
       
 
                         
       
 
            59,107       49,694       7.0 %
       
 
                         
Hoffmaster Group, Inc.
  Wisconsin / Durable Consumer Products  
Second Lien Term Loan (13.50%, due 6/2/2017)(3)
    20,000       20,000       20,000       2.8 %
       
 
                       
       
 
            20,000       20,000       2.8 %
       
 
                         
Hudson Products Holdings, Inc.(17)
  Texas / Manufacturing  
Senior Secured Term Loan (8.00%, due 8/24/2015)(3), (4)
    6,365       5,734       5,314       0.7 %
       
 
                       
       
 
            5,734       5,314       0.7 %
       
 
                         
IEC Systems LP (“IEC”) /Advanced Rig Services LLC (“ARS”)
  Texas / Oilfield Fabrication  
IEC Senior Secured Note (12.00% plus 3.00% PIK, due 11/20/2012)(3), (4)
    19,008       19,008       19,008       2.7 %
       
ARS Senior Secured Note (12.00% plus 3.00% PIK, due 11/20/2012)(3), (4)
    11,421       11,421       11,421       1.6 %
       
 
                         
       
 
            30,429       30,429       4.3 %
       
 
                         
See notes to consolidated financial statements.

 

19


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:
 
Non-control/Non-affiliate Investments (less than 5.00% of voting control)
 
Impact Products, LLC
  Ohio / Home & Office Furnishings, Housewares & Durable  
Junior Secured Term Loan (6.38%, due 9/09/2012)(4)
  $ 7,300     $ 6,351     $ 7,290       1.0 %
       
Senior Subordinated Debt (10.00% plus 5.00% PIK, due 9/09/2012)
    5,548       5,300       5,548       0.8 %
       
 
                         
       
 
            11,651       12,838       1.8 %
       
 
                         
Label Corp Holdings, Inc.
  Nebraska / Printing & Publishing  
Senior Secured Term Loan (8.50%, due 8/08/2014)(3), (4)
    5,794       5,222       5,284       0.7 %
       
 
                         
       
 
            5,222       5,284       0.7 %
       
 
                         
LHC Holdings Corp.(17)
  Florida / Healthcare  
Revolving Line of Credit — $750 Commitment (9.00%, due 11/30/2012)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (9.00%, due 11/30/2012)(3), (4)
    2,015       2,015       1,839       0.3 %
       
Senior Subordinated Debt (12.00% plus 2.50% PIK, due 5/31/2013)(3)
    4,565       4,199       4,220       0.6 %
       
Membership Interest (125 units)
            216       217       0.0 %
       
 
                         
       
 
            6,430       6,276       0.9 %
       
 
                         
Mac & Massey Holdings, LLC
  Georgia / Food Products  
Senior Subordinated Debt (10.00% plus 5.75% PIK, due 2/10/2013)
    8,671       7,351       8,643       1.2 %
       
Membership Interest (250 units)
            145       390       0.1 %
       
 
                         
       
 
            7,496       9,033       1.3 %
       
 
                         
Maverick Healthcare, LLC
  Arizona / Healthcare  
Second Lien Debt (12.50% plus 3.50% PIK, due 4/30/2014)(3)
    13,122       13,122       13,247       1.9 %
       
Preferred Units (1,250,000 units)
            1,252       2,025       0.2 %
       
Common Units (1,250,000 units)
                        0.0 %
       
 
                         
       
 
            14,374       15,272       2.1 %
       
 
                         
Miller Petroleum, Inc.
  Tennessee / Oil & Gas Production  
Warrants, Common Stock (2,208,772 warrants, expiring 5/04/2010 to 3/31/2015)(14)
            150       1,244       0.2 %
       
 
                         
       
 
            150       1,244       0.2 %
       
 
                         
Northwestern Management Services, LLC
  Florida / Healthcare  
Revolving Line of Credit — $1,000 Commitment (4.36%, due 12/13/2012)(26), (27)
    350       350       350       0.0 %
       
Senior Secured Term Loan A (4.36%, due 12/13/2012)(3), (4)
    4,309       3,516       3,578       0.5 %
       
Senior Secured Term Loan B (4.86%, due 12/13/2012)(3), (4)
    1,219       904       956       0.1 %
       
Subordinated Secured Term Loan (12.00% plus 3.00%, due 6/13/2013)(3)
    2,971       2,468       2,606       0.4 %
       
Common Stock (50 shares)
            371       564       0.1 %
       
 
                         
       
 
            7,609       8,054       1.1 %
       
 
                         
Prince Mineral Company, Inc.
  New York / Metal Services and Minerals  
Junior Secured Term Loan (9.00%, due 12/21/2012)(4)
    11,150       11,150       11,150       1.6 %
       
Senior Subordinated Debt (13.00% plus 2.00%, due 7/21/2013)
    12,260       1,420       12,260       1.7 %
       
 
                         
       
 
            12,570       23,410       3.3 %
       
 
                         
Qualitest Pharmaceuticals, Inc.(17)
  Alabama / Pharmaceuticals  
Second Lien Debt (7.79%, due 4/30/2015)(3), (4)
    12,000       11,955       12,000       1.7 %
       
 
                         
       
 
            11,955       12,000       1.7 %
       
 
                         
See notes to consolidated financial statements.

 

20


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     Assets  
 
LEVEL 3 PORTFOLIO INVESTMENTS:
 
Non-control/Non-affiliate Investments (less than 5.00% of voting control)
 
Regional Management Corporation
  South Carolina / Financial Services  
Second Lien Debt (12.00% plus 2.00% PIK, due 6/29/2012)(3)
  $ 25,814     $ 25,814     $ 25,592       3.6 %
       
 
                         
       
 
            25,814       25,592       3.6 %
       
 
                         
Roll Coater Acquisition Corp.
  Indiana / Metal Services and Minerals  
Subordinated Secured Debt (10.25%, due 9/30/2010)
    6,268       6,102       6,082       0.9 %
       
 
                         
       
 
            6,102       6,082       0.9 %
       
 
                         
R-O-M Corporation   Missouri / Automobile  
Revolving Line of Credit — $1,750 Commitment (4.50%, due 2/08/2013)(26), (27)
                        0.0 %
       
Senior Secured Term Loan A (4.50%, due 2/08/2013)(3), (4)
    4,640       4,025       4,571       0.6 %
       
Senior Secured Term Loan B (8.00%, due 5/08/2013)(3), (4)
    7,251       7,251       7,078       1.0 %
       
Senior Subordinated Debt (12.00% plus 3.00% PIK due 8/08/2013)(3)
    7,118       6,799       6,392       0.9 %
       
 
                         
       
 
            18,075       18,041       2.5 %
       
 
                         
Seaton Corp
  Illinois / Business Services  
Subordinated Secured (12.50% plus 2.00% PIK, due 3/14/2011)
    12,296       12,060       12,132       1.7 %
       
 
                         
       
 
            12,060       12,132       1.7 %
       
 
                         
Shearer’s Foods, Inc.
  Ohio / Food Products  
Junior Secured Debt (12.00% plus 3.00% PIK, due 3/31/2016)(3)
    35,266       35,266       36,119       5.1 %
       
Membership Interest in Mistral Chip Holdings, LLC (2,000 units)(18)
            2,560       6,136       0.9 %
       
Membership Interest in Mistral Chip Holdings, LLC 2 (595 units)(18)
            762       1,825       0.2 %
       
 
                         
       
 
            38,588       44,080       6.2 %
       
 
                         
Skillsoft Public Limited Company
  Ireland / Prepackaged Software  
Subordinated Unsecured (11.125%, due 06/01/2018)
    15,000       14,903       15,000       2.2 %
       
 
                         
       
 
            14,903       15,000       2.2 %
       
 
                         
Stryker Energy, LLC
  Ohio / Oil & Gas Production  
Subordinated Secured Revolving Credit Facility (12.00%, due 12/01/2012)(3), (4)
    29,724       29,507       29,624       4.2 %
       
Overriding Royalty Interests(19)
                  2,768       0.4 %
       
 
                         
       
 
            29,507       32,392       4.6 %
       
 
                         
TriZetto Group(17)
  California / Healthcare  
Subordinated Unsecured Note (12.00% plus 1.50% PIK, due 10/01/2016)(3)
    15,434       15,306       15,895       2.2 %
       
 
                         
       
 
            15,306       15,895       2.2 %
       
 
                         
Unitek(17)
  Pennsylvania / Technical Services  
Second Lien Debt (13.08%, due 12/31/2013)(3), (4)
    11,500       11,387       11,615       1.7 %
       
 
                         
       
 
            11,387       11,615       1.7 %
       
 
                         
Wind River Resources Corp. and Wind River II Corp.
  Utah / Oil & Gas Production  
Senior Secured Note (13.00% plus 3.00% default interest, in non-accrual status effective 12/01/2008, due 7/31/2010)(4)
    15,000       15,000       8,779       1.2 %
       
Net Profits Interest (5.00% payable on Equity distributions)(7)
                        0.0 %
       
 
                         
       
 
            15,000       8,779       1.2 %
       
 
                         
       
Total Non-Control/Non-Affiliate Investments (Level 3 Investments)
      476,441       477,417       67.1 %
       
 
                         
 
                               
        Total Level 3 Portfolio Investments       727,243       747,115       105.0 %
       
 
                         
See notes to consolidated financial statements.

 

21


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
                                         
            June 30, 2010  
                                    % of  
            Principal             Fair     Net  
Portfolio Company   Locale / Industry   Investments(1)   Value     Cost     Value(2)     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     $ 38       0.0 %
       
 
                         
       
 
            56       38       0.0 %
       
 
                         
Dover Saddlery, Inc.
  Massachusetts / Retail  
Common Stock (30,974 shares)
            63       97       0.0 %
       
 
                         
       
 
            63       97       0.0 %
       
 
                         
LyondellBasell Industries N.V.(22)
  Netherlands / Chemical Company  
Class A Common Stock (26,961 shares)
            874       435       0.2 %
       
Class B Common Stock (49,421 shares)
            523       798       0.0 %
       
 
                         
       
 
            1,397       1,233       0.2 %
       
 
                         
       
Total Non-Control/Non-Affiliate Investments (Level 1 Investments)
      1,516       1,368       0.2 %
       
 
                         
 
       
Total Portfolio Investments
      728,759       748,483       105.2 %
       
 
                         
       
 
                               
SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments)        
       
 
                               
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)             62,183       62,183       8.8 %
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)(3)             6,687       6,687       0.9 %
Victory Government Money Market Funds             1       1       0.0 %
       
 
                         
       
Total Money Market Funds
      68,871       68,871       9.7 %
       
 
                         
       
 
                               
       
Total Investments
      797,630       817,354       114.9 %
       
 
                         
See notes to consolidated financial statements.

 

22


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
Endnote Explanations for the Consolidated Schedule of Investments as of September 30, 2010 and June 30, 2010
     
(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 September 30, 2010, 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 June 30, 2010, three of our portfolio investments, Allied, Dover and LyondellBasel Industries N.V., were publically traded and classified as Level 1 within the valuation hierarchy established by ASC 820. As of September 30, 2010 and June 30, 2010, 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 3 and Note 4 within the accompanying consolidated financial statements for further discussion.
 
(3)  
Security, or portion thereof, is held as collateral for the revolving credit facility (see Note 11). The market values of these investments at September 30, 2010 and June 30, 2010 were $604,330 and $512,244, respectively; they represent 71.0% and 62.7% of total investments at fair value, respectively.
 
(4)  
Security, or portion thereof, has a floating interest rate. Stated interest rate was in effect at September 30, 2010 and June 30, 2010.
 
(5)  
There are several entities involved in the Biomass investment. We own 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.
 
   
We own 282 shares of common stock in Worcester Energy Co., Inc. (“WECO”), which represents 51% of the issued and outstanding common stock. We own directly 1,665 shares of common stock in Change Clean Energy Inc. (“CCEI”), f/k/a Worcester Energy Partners, Inc., which represents 51% of the issued and outstanding common stock and the remaining 49% is owned by WECO. CCEI owns 100 shares of common stock in Precision Logging and Landclearing, Inc. (“Precision”), which represents 100% of the issued and outstanding common stock.
 
   
During the quarter ended March 31, 2009, we created two new entities in anticipation of the foreclosure proceedings against the co-borrowers (WECO, CCEI and Biochips) Change Clean Energy Holdings, Inc. (“CCEHI”) and DownEast Power Company, LLC (“DEPC”). 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 assets were subsequently assigned to DEPC. WECO, CCEI and Biochips are joint borrowers on the term note issued to Prospect Capital. Effective July 1, 2008, this loan was placed on non-accrual status.
 
   
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 $0 for all of these 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 no value for the CCEHI investment as of September 30, 2010 and June 30, 2010.
 
(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. As of September 30, 2010, our Board of Directors assessed a fair value of $1,202 for the loan position in Coalbed LLC, a decrease of $212 from the fair value as of June 30, 2010.
 
(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)  
Gas Solutions Holdings, Inc. is a wholly-owned investment of us.

 

23


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
Endnote Explanations for the Consolidated Schedule of Investments as of September 30, 2010 and June 30, 2010 (Continued)
     
(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 Coal Holdings, Inc. (“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 allows for a better utilization of the assets in the consolidated group.
 
   
At September 30, 2010 and at June 30, 2010, Yatesville owned 100% of the membership interest of North Fork. In addition, Yatesville held a $9,325 note receivable from North Fork as of those two respective dates.
 
   
At September 30, 2010 and at June 30, 2010, we owned 96% and 87%, respectively, of the common stock of Genesis and held a note receivable of $20,897 as of those two respective dates.
 
   
Yatesville held a note receivable of $4,261 from Unity at September 30, 2010 and at June 30, 2010.
 
   
There are several entities involved in Yatesville’s investment in Whymore at June 30, 2009. As of June 30, 2009, Yatesville owned 10,000 shares of common stock or 100% of the equity and held a $14,973 senior secured debt receivable from C&A, which owns the equipment. Yatesville owned 10,000 shares of common stock or 100% of the equity of E&L, which leases the equipment from C&A, employs the workers, is listed as the operator with the Commonwealth of Kentucky, mines the coal, receives revenues and pays all operating expenses. Yatesville owned 4,900 shares of common stock or 49% of the equity of Whymore, which applies for and holds permits on behalf of E&L. Yatesville also owned 4,285 Series A convertible preferred shares in each of C&A, E&L and Whymore. Whymore and E&L are guarantors under the C&A credit agreement with Yatesville.
 
   
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. In September 2009, Yatesville completed an auction for all of its equipment.
 
   
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 $808 as of September 30, 2010 and June 30, 2010.
 
(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, 11.677% of voting common shares.
 
(14)  
Total common shares outstanding of 33,434,838 as of September 7, 2010 from Miller Petroleum, Inc.’s (“Miller”) Quarterly Report on Form 10-Q filed on September 13, 2010. Total common shares outstanding of 33,389,383 as of July 22, 2010 from Miller’s Annual Report on Form 10-K filed on July 28, 2010 as applicable to our June 30, 2010 reporting date.

 

24


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS — (CONTINUED)
September 30, 2010 and June 30, 2010
(in thousands, except share data)
Endnote Explanations for the Consolidated Schedule of Investments as of September 30, 2010 and June 30, 2010 (Continued)
     
(15)  
A portion of the positions listed were issued by an affiliate of the portfolio company.
 
(16)  
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 4,932 vested an unvested management options) of American Gilsonite Holding Company which owns 100% of American Gilsonite Company.
 
(17)  
Syndicated investment which had been originated by another financial institution and broadly distributed.
 
(18)  
At September 30, 2010 and June 30, 2010, 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.
 
(19)  
The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower.
 
(20)  
On December 31, 2009, we sold our investment in Aylward Enterprises, LLC. AWCNC, LLC is the remaining holding company with zero assets and our remaining outstanding debt has no value of September 30, 2010 and June 30, 2010, respectively.
 
(21)  
There are several entities involved in the Appalachian Energy Holdings LLC (“AEH”) investment. We own warrants, the exercise of which will permit us to purchase 37,090 Class A common units of AEH at a nominal cost and in near-immediate fashion. We own 200 units of Series A preferred equity, 241 units of Series B preferred equity, and 500 units of Series C preferred equity of AEH. The senior secured notes are with C&S Operating LLC and East Cumberland L.L.C., both operating companies owned by AEH.
 
(22)  
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.
 
(23)  
We own 100% of C&J Cladding Holding Company, Inc., which owns 40% of the membership interests in C&J Cladding, LLC.
 
(24)  
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. From June 30, 2009 to September 30, 2010, our total ownership of Iron Horse decreased from 80.0% to 70.4%, respectively. As of September 30, 2010 and June 30, 2010, our Board of Directors assessed a fair value in Iron Horse of $15,064 and $12,054, respectively.
 
(25)  
We own 2,800,000 units in Class A Membership Interests and 372,094 units in Class A-1 Membership Interests.
 
(26)  
Undrawn committed revolvers incur a 0.50% commitment fee. As of September 30, 2010 and June 30, 2010, we have $10,982 and $10,382 of undrawn revolver commitments to our portfolio companies, respectively.
 
(27)  
Stated interest rates are based on September 30, 2010 and June 30, 2010 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.

 

25


Table of Contents

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
(In thousands, except share and per share data)
Note 1. Organization
References herein to “we”, “us” or “our” refer to Prospect Capital Corporation and its subsidiary unless the context specifically requires otherwise.
We were formerly known as Prospect Energy Corporation, a Maryland corporation. We were organized on April 13, 2004 and were funded in an initial public offering (“IPO”), completed on July 27, 2004. We are a closed-end investment company that has filed an election to be treated as a Business Development Company (“BDC”), under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we have qualified and have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code. We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, project financings, recapitalizations, and other purposes.
On May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital Funding, LLC, a Delaware limited liability company, for the purpose of holding certain of our loan investments in the portfolio which are used as collateral for our credit facility.
Note 2. Patriot Acquisition
On December 2, 2009, we acquired the outstanding shares of Patriot Capital Funding, Inc. (“Patriot”) common stock for $201,083. Under the terms of the merger agreement, Patriot common shareholders received 0.363992 shares of our common stock for each share of Patriot common stock, resulting in 8,444,068 shares of common stock being issued by us. In connection with the transaction, we repaid all the outstanding borrowings of Patriot, in compliance with the merger agreement.
On December 2, 2009, Patriot made a final dividend payment equal to its undistributed net ordinary income and capital gains of $0.38 per share. In accordance with a recent IRS revenue procedure, the dividend was paid 10% in cash and 90% in newly issued shares of Patriot’s common stock. The exchange ratio was adjusted to give effect to the final income distribution.
The merger has been accounted for as an acquisition of Patriot by Prospect Capital Corporation (“Prospect”) in accordance with acquisition method of accounting as detailed in ASC 805, Business Combinations (“ASC 805”). The fair value of the consideration paid was allocated to the assets acquired and liabilities assumed based on their fair values as the date of acquisition. As described in more detail in ASC 805, goodwill, if any, would have been recognized as of the acquisition date, if the consideration transferred exceeded the fair value of identifiable net assets acquired. As of the acquisition date, the fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, and we recognized the excess as a gain. A preliminary gain of $5,714 was recorded by Prospect in the quarter ended December 31, 2009 related to the acquisition of Patriot, which was revised in the fourth quarter of Fiscal 2010 to $7,708, when we settled severance accruals related to certain members of Patriot’s top management and finalized during the first quarter of Fiscal 2011, to $8,632, when we settled the remaining severance accruals related to the last two members of Patriot’s top management. Under ASC 805, the adjustment to our preliminary estimate was reflected in the three months ended December 31, 2009 (See Note 12). The acquisition of Patriot was negotiated in July 2009 with the purchase agreement being signed on August 3, 2009. Between July 2009 and December 2, 2009, our valuation of certain of the investments acquired from Patriot increased due to market improvement, which resulted in the recognition of the gain at closing.

 

26


Table of Contents

Purchase Price Allocation
The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values as summarized in the following table:
         
Cash (to repay Patriot debt)
  $ 107,313  
Cash (to fund purchase of restricted stock from former Patriot employees)
    970  
Common stock issued (1)
    92,800  
 
     
Total purchase price
    201,083  
 
     
Assets acquired:
       
Investments (2)
    207,126  
Cash and cash equivalents
    1,697  
Other assets
    3,859  
 
     
Assets acquired
    212,682  
Other liabilities assumed
    (2,967 )
 
     
Net assets acquired
    209,715  
 
     
Gain on Patriot acquisition (3)
  $ 8,632  
 
     
     
(1)  
The value of the shares of common stock exchanged with the Patriot common shareholders was based upon the closing price of our common stock on December 2, 2009, the price immediately prior to the closing of the transaction.
 
(2)  
The fair value of Patriot’s investments were determined by the Board of Directors in conjunction with an independent valuation agent. This valuation resulted in a purchase price which was $98,150 below the amortized cost of such investments. For those assets which are performing, Prospect will record the accretion to par value in interest income over the remaining term of the investment.
 
(3)  
The gain has been determined after the final payments of certain liabilities have been settled.
Condensed Statement of Net Assets Acquired
The following condensed statement of net assets acquired reflects the values assigned to Patriot’s net assets as of the acquisition date, December 2, 2009.
         
Investment securities
  $ 207,126  
Cash and cash equivalents
    1,697  
Other assets
    3,859  
 
     
Total assets
    212,682  
Other liabilities
    (2,967 )
 
     
Final fair value of net assets acquired
  $ 209,715  
 
     
The following unaudited pro forma condensed combined financial information does not purport to be indicative of actual financial position or results of our operations had the Patriot acquisition actually been consummated at the beginning of each period presented. Certain one-time charges have been eliminated. The pro forma adjustments reflecting the allocation of the purchase price of Patriot and the gain of $8,632 recognized on the Patriot Acquisition have been eliminated. Management has realized net operating synergies from this transaction. The pro forma condensed combined financial information does not reflect the potential impact of these synergies and does not reflect any impact of additional accretion which would have been recognized on the transaction, except for that which was recorded after the transaction was consummated on December 2, 2009.
         
    For the Three Months Ended  
    September 30, 2009  
Total Investment Income
  $ 29,567  
Net Investment Income
    13,677  
Net Increase (Decrease) in Net Assets Resulting from Operations
    (10,902 )
Net Increase (Decrease) in Net Assets Resulting from Operations per share
  $ (0.19 )

 

27


Table of Contents

Note 3. 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 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.

 

28


Table of Contents

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
Most 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 of our Investment Adviser and that of the independent valuation firm; and
 
  4)  
the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our Investment Adviser, the respective independent valuation firm and the audit committee.

 

29


Table of Contents

Investments are valued utilizing a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued 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 in the quarter ended September 30, 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, 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.
In April 2009, the FASB issued ASC Subtopic 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”). 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 for the three months ended September 30, 2010, did not have any effect on our net asset value, financial position or results of operations as there was no change to the fair value measurement principles set forth in ASC 820.
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.

 

30


Table of Contents

Revenue Recognition
Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. 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 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 principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, are likely to remain current.
Federal and State Income Taxes
We have elected to be treated as a regulated investment company and intend to continue to comply with the requirements of the Internal Revenue Code of 1986 (the “Code”), applicable to regulated investment companies. We are required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.
If we do not distribute (or are not deemed to have distributed) at least 98% of our annual taxable income in the 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.
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 September 30, 2010 and for the three 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.

 

31


Table of Contents

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 as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the effective interest method over the stated life of the facility.
We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission (“SEC”) registration 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 FASB 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. ASC 460 did not have a material effect on the financial statements.
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. Diluted net increase or decrease in net assets resulting from operations per share are not presented as there are no potentially dilutive securities outstanding.
Recent Accounting Pronouncements
In June 2009, the FASB issued ASC 860, Accounting for Transfers of Financial Assets — an amendment to FAS 140 (“ASC 860”). ASC 860 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets: the effects of a transfer on its financial position, financial performance, and cash flows: and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The adoption of this standard had no effect on our results of operation or our financial position.
In June 2009, the FASB issued ASC 810, Consolidation (“ASC 810”). ASC 810 is intended to (1) address the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in ASC 860, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provided timely and useful information about an enterprise’s involvement in a variable interest entity. ASC 810 is effective as of the beginning of our first annual reporting period that begins after November 15, 2009. The adoption of this standard had no effect on our results of operation or our financial position.
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 and for interim periods within those fiscal years. Our management does not believe that the adoption of the amended guidance in ASC 820-10 will have a significant effect on our financial statements.

 

32


Table of Contents

In February 2010, the FASB issued Accounting Standards Update 2010-10, Consolidation (Topic 810) - Amendments for Certain Investments Funds (“ASU 2010-10”), which defers the application of the consolidation guidance in ASC 810 for certain investments funds. The disclosure requirements continue to apply to all entities. ASU 2010-10 is effective as of the beginning of the first annual period that begins after November 15, 2009 and for interim periods within that first annual period. The adoption of this standard had no effect on our results of operation or our financial position.
In July 2010, the FASB issued Accounting Standards Update 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASC 2010-20”). The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. ASC 2010-20 is effective for interim periods and fiscal years ending after December 15, 2010. Our management does not believe that the adoption of the amended guidance in ASC 2010-20 will have a significant effect on our financial statements.
In August 2010, the FASB issued Accounting Standards Update 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules (“ASU 2010-21”). ASU 2010-21 amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. We are assessing the potential effect this guidance will have on our consolidated financial statements.
In August 2010, the FASB issued Accounting Standards Update 2010-22, Accounting for Various Topics - Technical Corrections to SEC Paragraphs (“ASU 2010-22”). ASU 2010-22 amends various SEC paragraphs based on external comments received and the issuance of Staff Accounting Bulletin (“SAB”) 112, which amends or rescinds portions of certain SAB topics. We are assessing the potential effect this guidance will have on our consolidated financial statements.
Note 4. Portfolio Investments
At September 30, 2010, we had invested in 57 long-term portfolio investments, which had an amortized cost of $806,395 and a fair value of $830,177 and at June 30, 2010, we had invested in 58 long-term portfolio investments, which had an amortized cost of $728,759 and a fair value of $748,483.
As of September 30, 2010, we own controlling interests in Airmall USA, Inc., Ajax Rolled Ring & Machine, Inc., AWCNC, LLC, Borga, Inc. (“Borga”), C&J Cladding, LLC, Change Clean Energy Holdings, Inc., Fischbein, LLC, Freedom Marine Services LLC, Gas Solutions Holdings, Inc. (“GSHI”), Integrated Contract Services, Inc. (“ICS”), Iron Horse Coiled Tubing, Inc. (“Iron Horse”), Manx Energy, Inc. (“Manx”), NRG Manufacturing, Inc., Nupla Corporation (“Nupla”), R-V Industries, Inc., Sidump’r Trailer Company, Inc. (“Sidump’r”) and Yatesville Coal Holdings, Inc. (“Yatesville”). We also own an affiliated interest in Biotronic NeuroNetwork, Boxercraft Incorporated, KTPS Holdings, LLC, Smart, LLC, and Sport Helmets Holdings, LLC.
The fair values of our portfolio investments as of September 30, 2010 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows:
                                 
            Significant              
    Quoted Prices in     Other     Significant        
    Active Markets for     Observable     Unobservable        
    Identical Securities     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
Investments at fair value
                               
Control investments
  $     $     $ 258,831     $ 258,831  
Affiliate investments
                70,254       70,254  
Non-control/non-affiliate investments
    111             500,981       501,092  
 
                       
 
    111             830,066       830,177  
Investments in money market funds
          21,040             21,040  
 
                       
Total assets reported at fair value
  $ 111     $ 21,040     $ 830,066     $ 851,217  
 
                       

 

33


Table of Contents

The aggregate values of Level 3 portfolio investments changed during the three months ended September 30, 2010 as follows:
                                 
    Fair Value Measurements Using Unobservable Inputs (Level 3)  
                    Non-Control/        
    Control     Affiliate     Non-Affiliate        
    Investments     Investments     Investments     Total  
Fair value as of June 30, 2010
  $ 195,958     $ 73,740     $ 477,417     $ 747,115  
Total realized gains
    123                   123  
Change in unrealized (depreciation) appreciation
    9,960       (2,833 )     (2,264 )     4,863 (1)
 
                       
Net realized and unrealized (loss) gain
    10,083       (2,833 )     (2,264 )     4,986  
Purchases of portfolio investments
    57,168       250       71,181       128,599  
Payment-in-kind interest
    32       629       3,644       4,305  
Accretion of original issue discount
    982       355       1,817       3,154  
Dispositions of portfolio investments
    (5,392 )     (1,887 )     (50,814 )     (58,093 )
Transfers within Level 3
                       
Transfers in (out) of Level 3
                       
 
                       
Fair value as of September 30, 2010
  $ 258,831     $ 70,254     $ 500,981     $ 830,066  
 
                       
     
(1)  
Relates to assets held at September 30, 2010
At September 30, 2010 and June 30, 2010, nine loan investments were on non-accrual status: Borga, Deb Shops, Inc., ICS, Iron Horse, Nupla, Manx, Sidump’r, Wind River Resources Corp. and Wind River II Corp. (“Wind River”), and Yatesville. The loan principal of these loans amounted to $164,711 and $163,653 as of September 30, 2010 and June 30, 2010, respectively. The fair values of these investments represent approximately 5.1% and 5.6% of our net assets as of September 30, 2010 and June 30, 2010, respectively. For the three months ended September 30, 2010 and September 30, 2009, the income foregone as a result of not accruing interest on non-accrual debt investments amounted to $3,058 and $4,448, respectively. At September 30, 2010, we held one asset on which payment of interest was 60 days past-due for which we continue to accrue interest, H&M Oil and Gas, LLC. The principal balance of this loan is $59,561 and the accrued interest receivable is $1,969 at September 30, 2010. We expect full repayment of principal and interest on this loan.
GSHI 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 GSHI through September 30, 2010 for fees associated with a legal action, and GSHI has reimbursed us for the entire amount. There were no such legal fees incurred or reimbursed for the three months ended September 30, 2010 and September 30, 2009. Additionally, certain other expenses incurred by us which are attributable to GSHI have been reimbursed by GSHI and are reflected as dividend income: control investments in the Consolidated Statements of Operations. For the three months ended September 30, 2010 and September 30, 2009, such reimbursements totaled as $540 and $1,231, respectively.
The original cost basis of debt placements and equity securities acquired, including follow-on investments for existing portfolio companies, totaled $137,797 and $4,599 during the three months ended September 30, 2010 and September 30, 2009, respectively. Debt repayments and sales of equity securities with a cost basis of approximately $68,148 and $24,241 were received during the three months ended September 30, 2010 and September 30, 2009, respectively.
During the quarter ended September 30, 2010, we recognized $4,047 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in this amount is $1,116 of accelerated accretion resulting from the repayment of Impact Products, LLC. We also recapitalized our debt investment in Northwestern Management Services, LLC. The $20,000 loan was issued at market terms comparable to 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 $1,612 of original purchase discount from the loan repayment which was recognized as interest income.

 

34


Table of Contents

Note 5. 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 months ended September 30, 2010 and September 30, 2009 were as follows:
                 
    For The Three Months  
    Ended  
    September 30,  
Income Source   2010     2009  
Structuring and amendment fees
  $ 3,957     $ 405  
Overriding royalty interests
    48       44  
Administrative agent fee
    92       15  
 
           
Other Investment Income
  $ 4,097     $ 464  
 
           
Note 6. Equity Offerings and Related Expenses
We issued 9,051,000 and 11,431,797 shares of our common stock in public and private offerings during the three months ended September 30, 2010 and September 30, 2009, respectively. The proceeds raised, the related underwriting fees, the offering expenses and the prices at which these shares were issued are as follows:
                                         
    Number of     Gross                    
    Shares     Proceeds     Underwriting     Offering     Offering  
Issuances of Common Stock   Issued     Raised     Fees     Expenses     Price  
 
                                       
September 29, 2010 - September 30, 2010(1)
    302,400     $ 2,986     $ 60     $ 203     $ 9.873  
 
                                       
July 22, 2010 - September 28, 2010(2)
    6,000,000     $ 58,403     $ 1,156     $ 103     $ 9.734  
 
                                       
July 1, 2010 - July 21, 2010(3)
    2,748,600     $ 26,799     $ 536     $     $ 9.749  
 
                                       
September 24, 2009 (4)
    2,807,111     $ 25,264     $     $ 840     $ 9.000  
 
                                       
August 20, 2009 (4)
    3,449,686     $ 29,322     $     $ 117     $ 8.500  
 
                                       
July 7, 2009
    5,175,000     $ 46,575     $ 2,329     $ 200     $ 9.000  
     
(1)  
On September 24, 2010, we established a new at-the-market program through which we may sell, from time to time and at our sole discretion 6,000,000 shares of our common stock. Through this program we issued 302,400 shares of our common stock at an average price of $9.87 per share, raising $2,986 of gross proceeds, from September 29, 2010 through September 30, 2010.
 
(2)  
On July 19, 2010, we established a new 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.
 
(3)  
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 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.
 
(4)  
Concurrent with the sale of these shares, we entered into a registration rights agreement in which we granted the purchasers certain registration rights with respect to the shares. We have filed with the SEC a post-effective amendment to the registration statement on Form N-2 which has been declared effective by the SEC.
Our shareholders’ equity accounts at September 30, 2010 and June 30, 2010 reflect cumulative shares issued as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, private offerings, 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.

 

35


Table of Contents

On October 9, 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to $20,000 of our common stock at prices below our net asset value as reported in our financial statements published for the year ended June 30, 2008. We have not made any purchases of our common stock during the period from October 9, 2008 to September 30, 2010 pursuant to this plan.
On August 26, 2010, we announced the declaration of monthly dividends in the following amounts and with the following dates:
   
$0.100625 per share for September 2010 to holders of record on September 30, 2010 with a payment date of October 29, 2010;
 
   
$0.100750 per share for October 2010 to holders of record on October 29, 2010 with a payment date of November 30, 2010.
Our Board of Directors, pursuant to the Maryland General Corporation Law, executed Articles of Amendment to increase the number of shares authorized for issuance from 100,000,000 to 200,000,000 in the aggregate. The amendment became effective August 31, 2010.
Note 7. Net Increase (Decrease) in Net Assets per Common Share
The following information sets forth the computation of net (decrease) increase in net assets resulting from operations per common share for the three months ended September 30, 2010 and September 30, 2009, respectively.
                 
    For The Three Months Ended  
    September 30,  
    2010     2009  
Net increase (decrease) in net assets resulting from operations
  $ 25,580     $ (6,378 )
Weighted average common shares outstanding
    74,177,194       49,804,906  
 
           
Net increase (decrease) in net assets resulting from operations per common share
  $ 0.34     $ (0.13 )
 
           
Note 8. Related Party Agreements and Transactions
Investment Advisory Agreement
We have entered into an investment advisory and management agreement with Prospect Capital Management (the “Investment Advisory Agreement”) under which the Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, our Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make.
Prospect Capital Management’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services the Investment Adviser receives a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our gross assets (including amounts borrowed). For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter.
The total base management fees incurred to the favor of the Investment Adviser for the three months ended September 30, 2010 and September 30, 2009 were $4,276, and $3,209, respectively.

 

36


Table of Contents

The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment in kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.75% per quarter (7.00% annualized).
The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base management fee. We pay the Investment Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
   
no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
 
   
100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate); and
 
   
20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate).
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in its portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which maybe asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equals the sum of the differences between the aggregate net sales price of each investment and the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception.
For the three months ended September 30, 2010 and September 30, 2009, $5,249 and $3,080, respectively, of income incentive fees were incurred. No capital gains incentive fees were incurred for the three months ended September 30, 2010 and September 30, 2009.

 

37


Table of Contents

Administration Agreement
We have also entered into an Administration Agreement with Prospect Administration, LLC (“Prospect Administration”) under which Prospect Administration, among other things, provides (or arranges for the provision of) administrative services and facilities for us. For providing these services, we reimburse Prospect Administration for our allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of our chief compliance officer and chief financial officer and their respective staffs. For the three months ended September 30, 2010 and 2009, the reimbursement was approximately $800 and $840, 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.
Prospect Administration, pursuant to the approval of our Board of Directors, engaged Vastardis Fund Services LLC (“Vastardis”) to serve as our sub-administrator to perform certain services required of Prospect Administration. Under the sub-administration agreement, Vastardis provided us with office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities. Vastardis also conducted relations with custodians, depositories, transfer agents, dividend disbursing agents, other stockholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. Vastardis provided reports to the Administrator and the Directors of its performance of obligations and furnished advice and recommendations with respect to such other aspects of our business and affairs as it shall determine to be desirable. Under the sub-administration agreement, Vastardis also provided the service of William E. Vastardis as our Chief Financial Officer (“CFO”). We compensated Vastardis for providing us these services by the payment of an asset-based fee with a $400 annual minimum, payable monthly. Our service agreement was amended on September 28, 2008 so that Mr. Vastardis no longer served as our CFO effective as of November 11, 2008. At that time, Brian H. Oswald, a managing director at Prospect Administration, assumed the role of CFO.
On April 30, 2009 we gave a 60-day notice to Vastardis of termination of our agreement to provide sub-administration services effective June 30, 2009. We entered into a new consulting services agreement for the period from July 1, 2009 until the filing of our Form 10-K for the year ended June 30, 2009. We paid Vastardis a total of $30 for services rendered in conjunction with preparation of Form 10-K under the new agreement. All services previously provided by Vastardis were assumed by Prospect Administration beginning on July 1, 2009.
Managerial Assistance
As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We billed $254 and $215 of managerial assistance fees for the three months ended September 30, 2010 and June 30, 2010, respectively, of which $360 and $247 remains on the consolidated statement of assets and liabilities as of September 30, 2010, and June 30, 2010, respectively. These fees are paid to the Administrator when received. We simultaneously accrue a payable to the Administrator for the same amounts, which remain on the consolidated statements of assets and liabilities.

 

38


Table of Contents

Note 9. Financial Highlights
                 
    For The Three Months Ended  
    September 30,  
    2010     2009  
Per Share Data(1):
               
Net asset value at beginning of period
  $ 10.30     $ 12.40  
Net investment income
    0.28       0.25  
Net realized gain
    0.01        
Net unrealized appreciation (depreciation )
    0.05       (0.38 )
Net decrease in net assets as a result of public offerings
    (0.09 )     (0.77 )
Dividends declared and paid
    (0.31 )     (0.39 )
 
           
Net asset value at end of period
  $ 10.24     $ 11.11  
 
           
Per share market value at end of period
  $ 9.71     $ 10.71  
Total return based on market value(2)
    3.74 %     20.84 %
Total return based on net asset value(2)
    2.50 %     (7.00 %)
Shares outstanding at end of period
    78,401,363       54,672,155  
Average weighted shares outstanding for period
    74,177,194       49,804,906  
Ratio / Supplemental Data:
               
Net assets at end of period
  $ 802,824     $ 607,246  
Annualized ratio of operating expenses to average net assets
    7.51 %     7.59 %
Annualized ratio of net operating income to average net assets
    11.09 %     10.02 %

 

39


Table of Contents

Note 9. Financial Highlights (continued)
                                         
    Year     Year     Year     Year     Year  
    Ended     Ended     Ended     Ended     Ended  
    June 30, 2010     June 30, 2009     June 30, 2008     June 30, 2007     June 30, 2006  
Per Share Data(1):
                                       
Net asset value at beginning of period
  $ 12.40     $ 14.55     $ 15.04     $ 15.31     $ 14.59  
Costs related to the initial public offering
                            0.01  
Costs related to the secondary public offering
                (0.07 )     (0.06 )      
Net investment income
    1.13       1.87       1.91       1.47       1.21  
Realized (loss) gain
    (0.87 )     (1.24 )     (0.69 )     0.12       0.04  
Net unrealized appreciation (depreciation)
    0.07       0.48       (0.05 )     (0.52 )     0.58  
Net (decrease) increase in net assets as a result of public offering
    (0.85 )     (2.11 )           0.26        
Net increase in net assets as a result of shares issued for Patriot acquisition
    0.12                          
Dividends declared and paid
    (1.70 )     (1.15 )     (1.59 )     (1.54 )     (1.12 )
 
                             
Net asset value at end of period
  $ 10.30     $ 12.40     $ 14.55     $ 15.04     $ 15.31  
 
                             
 
                                       
Per share market value at end of period
  $ 9.65     $ 9.20     $ 13.18     $ 17.47     $ 16.99  
Total return based on market value(2)
    17.66 %     (18.60 %)     (15.90 %)     12.65 %     44.90 %
Total return based on net asset value(2)
    (6.82 %)     (0.61 %)     7.84 %     7.62 %     12.76 %
Shares outstanding at end of period
    69,086,862       42,943,084       29,520,379       19,949,065       7,069,873  
Average weighted shares outstanding for period
    59,429,222       31,559,905       23,626,642       15,724,095       7,056,846  
 
                                       
Ratio / Supplemental Data:
                                       
Net assets at end of period (in thousands)
  $ 711,424     $ 532,596     $ 429,623     $ 300,048     $ 108,270  
Annualized ratio of operating expenses to average net assets
    7.54 %     9.03 %     9.62 %     7.36 %     8.19 %
Annualized ratio of net investment income to average net assets
    10.69 %     13.14 %     12.66 %     9.71 %     7.90 %
     
(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.
Note 10. 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 litigation as of September 30, 2010.

 

40


Table of Contents

Note 11. Revolving Credit Agreements
On June 6, 2007, we closed on a $200,000 three-year revolving credit facility (as amended on December 31, 2007) with Rabobank Nederland (“Rabobank”) as administrative agent and sole lead arranger (the “Rabobank Facility”).
On June 25, 2009, we completed a first closing on an expanded $250,000 revolving credit facility (the “Syndicated Facility”). The new Syndicated Facility, which had $175,000 total commitments as of June 30, 2009, included an accordion feature which allows the Syndicated Facility to accept up to an aggregate total of $250,000 of commitments for which we solicited additional commitments from other lenders for an additional $35,000 raising the commitments to $210,000. The revolving period ended on June 11, 2010, when we closed on our expanded revolving credit facility.
On June 11, 2010, we closed an extension and expansion of our revolving credit facility with a syndicate of lenders. The lenders have extended commitments of $240,000 under the new credit facility as of September 30, 2010. The new credit facility includes an accordion feature which allows the facility to be increased to up to $300,000 of commitments in the aggregate to the extent additional or existing lenders commit to increase the commitments. We will seek to add additional lenders in order to reach the maximum size; although no assurance can be given we will be able to do so. As we make additional investments which are eligible to be pledged under the credit facility, we will generate additional availability to the extent such investments are eligible to be placed into the borrowing base. The revolving period of the credit facility extends through June 2012, with an additional one year amortization period (with distributions allowed) after the completion of the revolving period. During such one year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one year amortization period, the remaining balance will become due if required by the lenders.
The Syndicated 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 Syndicated 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 Syndicated Facility. The Syndicated Facility also requires the maintenance of a minimum liquidity requirement. At September 30, 2010, we were in compliance with the applicable covenants.
Interest on borrowings under the credit facility is one-month LIBOR plus 325 basis points, subject to a minimum Libor floor of 100 basis points. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 75 basis points if at least half of the credit facility is used or 100 basis points otherwise. As of September 30, 2010 and June 30, 2010, we had $235,101 and $180,678 available to us for borrowing under our credit facility, of which $46,600 and $100,300 was outstanding, respectively. As we make additional investments which are eligible to be pledged under the credit facility, we will generate additional availability to the extent such investments are eligible to be placed into the borrowing base. At September 30, 2010, the investments used as collateral for the Syndicated Facility had an aggregate market value of $604,330, which represents 75.3% of net assets.
In connection with the origination and amendments of the Syndicated Facility, we incurred $8,547 of fees, including $3,224 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.

 

41


Table of Contents

Note 12. Selected Quarterly Financial Data (Unaudited)
                                                                 
                                    Net Realized and     Net Increase (Decrease)  
                                    Unrealized     in Net Assets from  
    Investment Income     Net Investment Income     Gains (Losses)     Operations  
Quarter Ended   Total     Per Share(1)     Total     Per Share(1)     Total     Per Share(1)     Total     Per Share(1)  
September 30, 2007
    15,391       0.77       7,865       0.39       685       0.04       8,550       0.43  
December 31, 2007
    18,563       0.80       10,660       0.46       (14,346 )     (0.62 )     (3,686 )     (0.16 )
March 31, 2008
    22,000       0.92       12,919       0.54       (14,178 )     (0.59 )     (1,259 )     (0.05 )
June 30, 2008
    23,448       0.85       13,669       0.50       10,317       0.38       23,986       0.88  
 
                                                               
September 30, 2008(2)
    35,799       1.21       23,502       0.80       (9,504 )     (0.33 )     13,998       0.47  
December 31, 2008
    22,213       0.75       11,960       0.40       (5,436 )     (0.18 )     6,524       0.22  
March 31, 2009
    20,669       0.69       11,720       0.39       3,611       0.12       15,331       0.51  
June 30, 2009
    21,800       0.59       11,981       0.32       (12,730 )     (0.34 )     (749 )     (0.02 )
 
                                                               
September 30, 2009
    21,517       0.43       12,318       0.25       (18,696 )     (0.38 )     (6,378 )     (0.13 )
December 31, 2009(3)
    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  
     
(1)  
Per share amounts are calculated using weighted average shares during period.
 
(2)  
Additional income for this quarter was driven by other investment income from the settlement of net profits interests on IEC Systems LP and Advanced Rig Services LLC for $12,576.
 
(3)  
As adjusted for increase in gain from Patriot acquisition. See Note 2.
Note 13. Subsequent Events
On October 29, 2010, we issued 92,999 shares of our common stock in connection with the dividend reinvestment plan.
During the period from October 1, 2010 to November 3, 2010, we issued 4,929,556 shares of our common stock at an average price of $9.86 per share, and raised $48,611 of gross proceeds, under our at-the-market program. Net proceeds were $47,639 after 2% commission to the broker-dealer on shares sold.
On October 12, 2010, we made a senior secured debt investment of $32,500 in ICON Health & Fitness, Inc., a leading manufacturer and marketer of branded health and fitness equipment.
On October 29, 2010, Castro Cheese Company, Inc. repaid the $7,732 loan receivable to us.
On November 1, 2010, we announced an increase in commitments to our credit facility of $20,000. The commitments to the credit facility now stand at $260,000.
On November 3, 2010, TriZetto Group repaid the $15,492 loan receivable to us.
On November 8, 2010, we announced the declaration of monthly dividends in the following amounts and with the following dates: