nv148cza
As filed with the Securities and Exchange Commission on
October 20, 2009
Registration
No. 333-161764
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
Form N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
1 x
Post-Effective Amendment
No. o
(Check appropriate box or
boxes)
Prospect Capital
Corporation
(Exact Name of Registrant as
Specified in Charter)
10 East 40th Street, 44th Floor
New York, NY 10016
(Address of Principal Executive
Offices)
Telephone Number:
(212) 448-0702
(Area Code and Telephone
Number)
John F. Barry III
Brian H. Oswald
c/o Prospect
Capital Management, LLC
10 East 40th Street, 44th
Floor
New York, NY 10016
(212) 448-0702
(Name and Address of Agent for
Service)
Copies to:
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Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Telephone:
(212) 735-5000
Facsimile: (212)
777-2790
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Steven B. Boehm, Esq.
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Ave., NW
Washington, DC 20004
Telephone: (202) 383-0100
Facsimile: (202) 637-3593
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Approximate Date of Proposed Public
Offering: As soon as practicable after this
registration statement becomes effective and upon completion of
the merger described in the enclosed document.
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered(1)
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Price per Unit
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Offering Price(2)
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Fee(3)
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Common Stock, $0.001 par value
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8,616,433 shares
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$9.68
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$83,407,071
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$4,654.12
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(1) |
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The number of shares to be registered represents the maximum
number of shares of the registrants common stock estimated
to be issuable in connection with the merger agreement described
in the enclosed document. |
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(2) |
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Estimated solely for the purpose of calculating the registration
fee and calculated pursuant to Rules 457(c) and 457(f)(1)
under the Securities Act, the proposed maximum aggregate
offering price is equal to: (i) $9.68, the average of the
high and low prices per share of the registrants common
stock on September 1, 2009, as reported on the NASDAQ
Global Select Market, multiplied by (ii) 8,616,433, the
maximum number of shares of the registrants common stock
expected to be issued in connection with the terms of the merger
agreement. |
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(3) |
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Previously paid in connection with the initial filing of the
registration statement on September 4, 2009. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
Information
contained herein is subject to completion or amendment. A
registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective.
This document shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of
these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such
jurisdiction.
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SUBJECT
TO COMPLETION DATED OCTOBER , 2009
MERGER
PROPOSED YOUR VOTE IS VERY IMPORTANT
Dear Shareholder,
On August 3, 2009, Prospect Capital Corporation
(Prospect) and Patriot Capital Funding, Inc.
(Patriot) announced a strategic business combination
in which Patriot will merge with and into Prospect. If the
merger is completed, holders of Patriot common stock will have a
right to receive 0.3992 shares of Prospect common stock for each
share of Patriot common stock held immediately prior to the
merger. As more fully described in this document, the merger
agreement requires that Patriot declare a final
dividend prior to the closing of the merger in an amount equal
to its undistributed investment company taxable income (if any),
and the exchange ratio will be adjusted for any such dividend
that Patriot may declare prior to closing. In connection with
the merger, Prospect expects to issue approximately
8.6 million shares of common stock.
The market value of the merger consideration will fluctuate with
the market price of Prospect common stock. The following table
shows the closing sale prices of Prospect common stock and
Patriot common stock as reported on the NASDAQ Global Select
Market on July 31, 2009, the last trading day before public
announcement of the merger, and
on ,
2009, the last practicable trading day before the distribution
of this document. This table also shows the implied value of the
merger consideration proposed for each share of Patriot common
stock, which was calculated by multiplying the closing price of
Prospect common stock on those dates by 0.3992, the exchange
ratio (which will be adjusted for any dividends declared by
Patriot prior to the closing).
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Implied Value of One
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Prospect
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Patriot
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Share of Patriot
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Common Stock
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Common Stock
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Common Stock
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At July 31, 2009
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$
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10.02
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$
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1.95
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$
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4.00
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2009
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$
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$
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$
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The merger is intended to qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, or the
Code, and holders of Patriot common stock are not
expected to recognize any gain or loss for United States federal
income tax purposes upon the exchange of shares of Patriot
common stock for shares of Prospect common stock, except with
respect to any cash received in lieu of fractional shares of
Prospect common stock.
The market prices of both Prospect and Patriot common stock will
fluctuate before the merger. You should obtain current stock
price quotations for Prospect and Patriot common stock. Prospect
common stock is quoted on the NASDAQ Global Select Market under
the symbol PSEC. Patriot common stock is traded on
the NASDAQ Global Select Market under the symbol
PCAP.
At a special meeting of Patriot shareholders, Patriot
shareholders will be asked to vote on the adoption of the merger
agreement described in this document. Adoption of the merger
agreement requires the affirmative vote of the holders of a
majority of the outstanding shares of Patriot common stock
entitled to vote.
After careful consideration, the board of directors of
Patriot unanimously recommends that its shareholders vote FOR
adoption of the merger agreement.
This document describes the special meeting, the merger, the
documents related to the merger and other related matters.
Please carefully read this entire document, including Risk
Factors beginning on page 20 for a discussion of the
risks relating to the proposed merger. You also can obtain
information about Prospect and Patriot from documents that each
has filed with the Securities and Exchange Commission.
Sincerely,
RICHARD P. BUCKANAVAGE
President and Chief Executive Officer
Patriot Capital Funding, Inc.
The Securities and Exchange Commission has not approved or
disapproved the Prospect common stock to be issued under this
document or determined if this document is accurate or adequate.
Any representation to the contrary is a criminal offense.
The date of this document
is ,
2009, and it is first being mailed or otherwise delivered to
Patriot shareholders on or
about ,
2009.
Notice of
Special Meeting of Shareholders
To the Shareholders:
On November 18, 2009, Patriot Capital Funding, Inc.
(Patriot) will hold a special meeting of
shareholders (the special meeting) at the offices of
Edwards Angell Palmer & Dodge LLP at Three
Stamford Plaza, 301 Tresser Boulevard, Stamford,
Connecticut 06901, at 10:30 a.m. (Eastern Daylight
Time) to consider and vote upon the following matters:
1. A proposal to adopt the Agreement and Plan of Merger
(the merger agreement), dated as of August 3,
2009, by and between Patriot and Prospect Capital Corporation
(Prospect), as such merger agreement may be amended
from time to time; and
2. A proposal to approve the adjournment of the special
meeting, if necessary or appropriate, to solicit additional
proxies, in the event that there are not sufficient votes at the
time of the special meeting to adopt the foregoing proposal.
You have the right to receive notice of, and to vote at, the
special meeting if you were a shareholder of record at the close
of business on October 21, 2009. Whether or not you
expect to be present in person at the special meeting, please
sign the enclosed proxy and return it promptly in the envelope
provided. You may also vote by calling the proxy solicitor
at (866) 796-3439. Instructions are shown on the proxy card. If
you are present at the special meeting, you may change your vote
at any time. In the event there are not sufficient votes for a
quorum or to approve or ratify any of the foregoing proposals at
the time of the special meeting, the special meeting may be
adjourned in order to permit further solicitation of the proxies
by Patriot.
The Patriot board of directors has unanimously approved the
merger and the merger agreement and unanimously recommends that
Patriot shareholders vote FOR approval of the merger
agreement and the merger and FOR the adjournment of
the Patriot special meeting if necessary or appropriate to
permit further solicitation of proxies.
By order of the board of directors,
William E. Alvarez, Jr.
Secretary
Westport, CT
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2009
This is an important meeting. To ensure proper representation
at the meeting, please complete, sign, date and return the proxy
card in the enclosed, self-addressed envelope. Even if you vote
your shares prior to the meeting, you still may attend the
meeting and vote your shares in person.
TABLE OF
CONTENTS
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i
QUESTIONS
AND ANSWERS ABOUT THE PROPOSED MERGER
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Q: |
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When and where is the special meeting of shareholders? |
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A: |
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The special meeting of shareholders will take place on
November 18, 2009, at 10:30 a.m. (Eastern Daylight Time) at
the offices of Edwards Angell
Palmer & Dodge LLP at Three Stamford Plaza,
301 Tresser Boulevard, Stamford, Connecticut 06901. |
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What is happening at the special meeting? |
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Patriot shareholders are being asked to consider and vote on the
following items at the special meeting: |
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A proposal to adopt the merger agreement by and
between Patriot and Prospect, as such agreement may be amended
from time to time; and
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A proposal to approve the adjournment of the special
meeting, if necessary or appropriate, to solicit additional
proxies, in the event that there are not sufficient votes at the
time of the special meeting to adopt the foregoing proposal.
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What will happen in the proposed merger? |
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If the merger is approved, Patriot will merge with and into
Prospect. As a result of the merger: |
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Patriot will cease to exist; and
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Prospect will survive the merger and own and operate
the combined businesses of Prospect, Patriot and their
respective subsidiaries.
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How does Prospects investment objective and strategy
differ from Patriots? |
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Like Patriot, Prospect is a non-diversified, closed-end
management investment company that has elected to be regulated
as a business development company under the Investment Company
Act of 1940, or the 1940 Act. Prospects
investment objective is similar to Patriots and is to
provide both current income and capital appreciation through
debt and equity investments. Prospect and Patriot focus on
making investments in privately-held companies, although many of
Prospects investments are in energy companies. |
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Prospect concentrates on making investments in companies having
annual revenues of less than $500 million and enterprise
values of less than $250 million, which it refers to as
middle market companies. In most cases, these
companies are privately held or have thinly traded public
securities at the time Prospect invests in them. Prospects
investments primarily range between approximately
$5 million and $50 million each, although this
investment size may vary as the size of its capital base
changes. Patriots typical
investments are in a range of $3 million to
$20 million in companies with $10 million to
$30 million in annual revenues that operate in diverse
industries. |
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What will Patriot shareholders receive in the merger? |
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Subject to adjustment, each Patriot shareholder will receive
0.3992 shares of Prospect common stock for each share of Patriot
common stock owned. For example, if a Patriot shareholder
currently owns 100 shares of Patriot common stock, then, as
a result of the merger, the shareholder will receive 39 shares
of Prospect common stock, plus cash in lieu of the fractional
0.92 share of Prospect common stock, in exchange for the
shareholders 100 shares of Patriot common stock.
However, as more fully described in this document, the exchange
ratio will be adjusted for any dividend that Patriot may declare
prior to closing. Until the merger is completed, the value of
shares of Prospect common stock to be received in the merger
will continue to fluctuate. |
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On July 31, 2009, the last full trading day before the
public announcement of the proposed merger, the closing price of
Prospects common stock on the NASDAQ Global Select Market
was $10.02. Based upon this closing price, each share of Patriot
common stock had a value of $4.00 per share, and the aggregate
value of the stock consideration in the merger would have been
approximately $86.3 million.
On ,
2009, the most recent practicable date prior to the printing of
this document, the closing price of Prospects common stock
was $ , and the closing price of
Patriots shares of common stock on the |
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NASDAQ Global Select Market was $ .
Until the merger is completed, the value of shares of Prospect
common stock to be received in the merger will continue to
fluctuate. |
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Is the exchange ratio subject to any adjustment? |
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Yes. The exchange ratio will be adjusted for any dividend that
Patriot may declare prior to closing. In this regard, as a
regulated investment company, or RIC, under the
Code, Patriot generally does not have to pay corporate-level
federal income taxes on any net ordinary income or capital gains
that it distributes to its stockholders as dividends if it meets
certain
source-of-income,
income distribution and asset diversification requirements. As a
result, Patriot will be required, to the extent necessary, to
declare a dividend prior to the consummation of the merger in an
amount equal to its undistributed net ordinary income and
capital gains (if any) in order to preserve this favorable tax
treatment. See Managements Discussion and Analysis
of Financial Condition and Results of Operations of
Patriot Recent Developments and Note 11.
Income Taxes and Note 14. Subsequent
Events to Patriots unaudited financial statements
for a detailed discussion regarding Patriots undistributed
net ordinary income and capital gains. |
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The terms of the merger agreement anticipate that any such
dividends may be paid out in accordance with a recent revenue
procedure issued by the Internal Revenue Service, or the
IRS, pursuant to which up to 90% of the total
dividend may be paid in shares of common stock with the
remainder paid in cash. See Risk Factors Risks
Related to Prospect Prospect may in the future
choose to pay dividends in its own stock, in which case you may
be required to pay tax in excess of the cash you receive
and Risk Factors Risks Related to
Patriot Patriot may in the future choose to pay
dividends in its own stock, in which case you may be required to
pay tax in excess of the cash you receive. Any such
dividend, whether received in cash or common stock (including
common stock of Prospect) will be taxable to shareholders as
ordinary income (or capital gains, if such dividends are
properly designated as capital gain dividends). |
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If any such dividends are declared by Patriot prior to closing,
the exchange ratio will be adjusted as follows: |
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with respect to the cash portion of any such
dividends, the numerator used to determine the exchange ratio
will be reduced in an amount equal to the cash dividend
per share paid or payable with respect to each share of
Patriots common stock and, as a result, the aggregate
number of shares of Prospect common stock to be received by
Patriot shareholders in the merger will decrease
accordingly; and
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with respect to the stock portion of any such
dividends, the exchange ratio, after adjustment for any cash
dividends as discussed above, will be proportionally
adjusted to reflect any such dividends paid or payable in
stock and, as a result, the number of shares of Prospect common
stock to be issued for each outstanding share of Patriot common
stock will be reduced, but the aggregate number of shares of
Prospect common stock to be received by Patriot shareholders in
the merger will remain unchanged.
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For example, if (i) a Patriot shareholder currently owns
100 shares of Patriot common stock, (ii) Patriot
declares a $0.30 dividend per share prior to the closing of the
merger (of which $0.03 will be paid in cash and $0.27 will be
paid in stock), and (iii) the market price of
Patriots common stock for purposes of the IRS revenue
procedure described above is $4.00 per share, then, as a result
of the merger, the shareholder will receive 39 shares of
common stock of Prospect and cash in lieu of 0.89 share of
Prospect common stock in exchange for the shareholders
original 100 shares of Patriot common stock. |
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Is Prospect required to make any other payments in connection
with the merger? |
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Yes. Pursuant to the terms of the merger agreement, Prospect is
also required to repay (i) all principal and interest due
under Patriots second amended and restated securitization
revolving credit facility, or the Amended Securitization
Facility, which amounted to $112.7 million as of
September 30, 2009, and (ii) up to $1.35 million
in other costs, fees and expenses payable to the lenders under
the terms of the Amended Securitization Facility. These amounts
will be paid by Prospect to the lenders under Patriots
Amended Securitization Facility and will not be received by
Patriot shareholders. |
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Who will pay the expenses relating to the preparation of this
document and the solicitation of proxies? |
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All fees and expenses incurred in connection with the merger,
including the preparation of this document and the solicitation
of proxies will, to the extent such funds are available to
Patriot, be paid by Patriot |
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immediately prior to the consummation of the merger. However,
in the event the merger is not consummated, all fees and
expenses incurred in connection with the merger will be paid by
the party incurring such fees or expenses, other than that (i)
the costs and expenses of printing and mailing this document
will be paid by Patriot, (ii) all filing and other fees paid to
the SEC in connection with the merger will be paid by Prospect
and (iii) certain fees and expenses of up to $250,000 of
Prospect will be paid by Patriot in the circumstances described
under the section entitled Description of the Merger
Agreement Expenses; Termination Fees. |
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Are shareholders able to exercise dissenters rights? |
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No. Shareholders will not be entitled to exercise
dissenters rights with respect to any matter to be voted
upon at the special meeting. Any shareholder may abstain from or
vote against any of such matters. |
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When do you expect to complete the proposed merger? |
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We are working to complete the proposed merger in the fourth
quarter of 2009. We currently expect to complete the proposed
merger promptly following approval of the merger agreement at
the special meeting. |
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What are the U.S. federal income tax consequences of the
proposed merger? |
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The proposed merger is intended to qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the Code). Both Prospect and Patriot will
receive an opinion from Sutherland Asbill & Brennan
LLP, dated as of the closing date, regarding the
characterization of such merger as a reorganization
within the meaning of Section 368(a) of the Code. If the
merger so qualifies, in general, Patriot shareholders will
recognize no gain or loss for U.S. federal income tax
purposes to the extent such shareholders receive shares of
Prospect common stock in exchange for your shares of Patriot
common stock. Additionally, neither Prospect nor its
shareholders will recognize any gain or loss for
U.S. federal income tax purposes pursuant to the merger.
You are strongly urged to consult with your tax advisor to
determine the particular U.S. federal, state, local and foreign
income or other tax consequences of the proposed merger to you.
See U.S. Federal Income Tax Consequences of the
Merger. |
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Who must approve the merger agreement? |
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In addition to the approval by Patriots board of directors
(including its independent directors) and the board of directors
of Prospect, both of which have already been obtained, the
merger must be approved by Patriots shareholders. |
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What shareholder vote is required to approve the merger
agreement and the merger? |
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A: |
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The affirmative vote of the holders of a majority of the shares
of Patriots common stock outstanding and entitled to vote
is required to approve the merger agreement and the proposed
merger. Shareholders who abstain, fail to return their proxies
or do not otherwise vote by calling the proxy solicitor at
(866) 796-3439,
will have the same effect as if they were voted
against the merger agreement and the proposed merger. |
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Does Patriots board of directors recommend approval of
the merger proposal? |
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Yes. Patriots board of directors, including its
independent directors, unanimously approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement and recommends that Patriot shareholders vote
FOR approval of these matters. |
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What do I need to do now? |
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A: |
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We urge you to read carefully this document, including its
annexes. You also may want to review the documents referenced
under Where You Can Find More Information and
consult with your accounting, legal and tax advisors. |
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How do I vote my shares? |
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A: |
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You may indicate how you want to vote on your proxy card and
then sign and mail your proxy card in the enclosed return
envelope as soon as possible so that your shares may be
represented at the special meeting. You may also vote by calling
the proxy solicitor at
(866) 796-3439.
If you are a record shareholder, you may also attend the special
meeting in person instead of submitting a proxy. |
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Unless your shares are held in a brokerage account, if you sign,
date and send your proxy and do not indicate how you want to
vote, your proxy will be voted for the approval of
the merger agreement and the merger and for all
other proposals to be voted on at the special meeting. If your
shares are held in brokerage account, please see the answer to
the next question. |
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If you fail either to return your proxy card or vote by calling
the proxy solicitor at (866) 796-3439, or if you
abstain with respect to the merger, the effect will
be a vote against the merger. |
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With respect to any other matter to be voted on at the special
meeting, a vote to abstain will have the same effect
as a vote against such other matters. |
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If my shares are held in a brokerage account, or in
street name, will my broker vote my shares for
me? |
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A: |
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No. With respect to the merger and adjournment proposals, if you
do not provide your broker with instructions on how to vote your
street name shares, your broker will not be permitted to vote
them. |
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You should, therefore, provide your broker with instructions on
how to vote your shares or arrange to attend the special meeting
and vote your shares in person. If you do not provide your
broker with instructions or attend the special meeting it will
have the same effect as a vote against adoption of the merger
agreement. Shareholders are urged to utilize telephonic or
Internet voting if their broker has provided them with the
opportunity to do so. See your voting instruction form for
instructions. If your broker holds your shares and you attend
the special meeting in person, please bring a letter from your
broker identifying you as the beneficial owner of the shares and
authorizing you to vote your shares at the special meeting. |
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What do I do if I want to change my vote? |
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You may change your vote at any time before the vote takes place
at the special meeting. To do so, you may either complete and
submit a new proxy card or send a written notice stating that
you would like to revoke your proxy. You may also change your
vote if you voted by calling the proxy solicitor at (866)
796-3439 simply by re-voting. The last recorded vote will be
what is counted at the special meeting. In addition, you may
elect to attend the special meeting and vote in person, as
described above. |
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If my shares are represented by stock certificates, should I
send in my stock certificates now? |
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No. If the merger is completed and your shares of common
stock are represented by stock certificates, we will send you
written instructions for exchanging your stock certificates for
the appropriate number of Prospect common stock certificates. |
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Will a proxy solicitor be used? |
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Yes. Patriot has engaged the Altman Group, Inc. to assist
in the solicitation of proxies for the special meeting and
estimates it will pay the Altman Group, Inc. a maximum fee of
$24,000. In addition, Patriots officers and employees may
request the return of proxies by telephone or in person, but no
additional compensation will be paid to them. |
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Q: |
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Who can I contact with any additional questions? |
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A: |
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You may call the proxy solicitor with respect to any additional
questions at: |
THE ALTMAN GROUP, INC.
1200 Wall Street West, 3rd Fl.
Lyndhurst, NJ 07071
Call Toll-Free (866) 796-3439
Email: proxyinfo@altmangroup.com
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Where can I find more information about the companies? |
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A: |
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You can find more information about Patriot and Prospect in the
documents described under Where You Can Find More
Information on page 244. |
4
SUMMARY
This summary highlights material information from this
document. It may not contain all of the information that is
important to you. We urge you to carefully read the entire
document and the other documents to which we refer in order to
fully understand the proposed merger. See Where You Can
Find More Information. Unless otherwise noted, the term
Patriot refers to Patriot Capital Funding, Inc. and
Prospect refers to Prospect Capital Corporation.
Information
about the Companies
Patriot Capital Funding, Inc.
274 Riverside Avenue
Westport, CT 06880
(203) 429-2700
Patriot is specialty finance company that provides customized
financing solutions to small- to mid-sized companies.
Patriots ability to invest across a companys capital
structure, from senior secured loans to equity securities,
allows it to offer a comprehensive suite of financing solutions,
including one-stop financings. Patriots
one-stop financing typically includes a revolving
line of credit, one or more senior secured term loans and a
subordinated debt investment. Patriot also makes equity
co-investments of generally up to $3.0 million and
investments in broadly syndicated loans. Patriot primarily
finances privately-held companies in transactions initiated by
private equity sponsors.
Patriots investment objective is to generate both current
cash income and capital appreciation. To accomplish this
objective, Patriot seeks to provide its shareholders with
current income primarily from the interest on its debt
investments and related origination fees, and to enable its
shareholders to participate in the capital appreciation and
potential long-term growth of its portfolio companies through
warrants and other equity interests it acquires.
Patriot is an internally managed, closed-end investment company
that has filed an election to be treated as a business
development company under the 1940 Act. As a result, Patriot
does not have an investment adviser and is internally managed by
its management team under the supervision of its board of
directors. Therefore, Patriot does not pay investment advisory
fees, but instead Patriot pays the operating costs associated
with employing a management team and investment professionals.
Patriot has also elected to be treated for federal income tax
purposes as a RIC under Subchapter M of the Code.
Prospect Capital Corporation
10 East 40th Street, 44th Floor
New York, NY 10016
(212) 448-0702
Prospect is a financial services company that primarily lends to
and invests in middle market privately-held companies. Prospect
invests primarily in senior and subordinated debt and equity of
companies in need of capital for acquisitions, divestitures,
growth, development, project financing and recapitalization.
Prospect works with the management teams of such companies or
financial sponsors to seek investments with historical cash
flows, asset collateral or contracted pro-forma cash flows.
Typically, Prospect concentrates on making investments in
companies with annual revenues of less than $500 million
and enterprise values of less than $250 million.
Prospects typical investment involves a secured loan of
less than $50 million with some form of equity
participation. From time to time, Prospect acquires controlling
interests in companies in conjunction with making secured debt
investments in such companies. In most cases, companies in which
Prospect invests are privately held at the time it invests in
them.
Prospect seeks to maximize total returns to its investors,
including both current yield and equity upside, by applying
rigorous credit analysis and asset-based and cash-flow based
lending techniques to make and monitor its investments. A
majority of Prospects investments to date have been in
energy-related industries.
5
Prospect has made no investments to date in the real estate or
mortgage industries, and it does not intend currently to focus
on such investments.
Prospect is an externally managed, closed-end investment company
that has filed an election to be treated as a business
development company under the 1940 Act. Prospect Capital
Management, LLC serves as Prospects investment adviser and
manages its investments, and Prospect Administration, LLC serves
as Prospects administrator and provides the administrative
services necessary for it to operate. Prospect has also elected
to be treated for federal income tax purposes as a RIC under
Subchapter M of the Code.
Terms of
the Merger Agreement
Pursuant to the terms of the proposed merger, Patriot will be
merged with and into Prospect. Prospect will be the surviving
entity in the merger, and Patriot will no longer exist as a
separate corporation. As a result of the proposed merger, all
Patriots assets and liabilities immediately before the
merger will become assets and liabilities of Prospect
immediately after the merger, and Patriots wholly-owned
special purpose subsidiary, Patriot Capital Funding, LLC, will
become a direct subsidiary of Prospect.
After the merger and based on the number of shares of Prospect
common stock issued and outstanding on the date hereof, all
persons who owned shares of Patriots common stock before
the merger will own approximately 13.6% of Prospects
common stock outstanding immediately after the merger. As a
result of the merger, Prospect will continue the operations
conducted by it and Patriot before the merger.
The merger agreement is attached as Annex A to this
document and is incorporated by reference into this document.
Patriot encourages its shareholders to read the merger agreement
carefully and in its entirety, as it is the principal legal
document governing the proposed merger.
Patriot
Shareholders Will Receive Shares of Prospects Common Stock
in the Proposed Merger
If the proposed merger is consummated, each share of
Patriots common stock will be converted into the right to
receive 0.3992 of a share of Prospect common stock. Subject to
adjustment, each Patriot shareholder will receive 0.3992 shares
of Prospect common stock for each share of Patriot common stock
owned. However, as more fully described in this document, the
merger agreement requires that Patriot declare, to the extent
necessary, a final dividend prior to the closing of
the merger in an amount equal to its undistributed investment
company taxable income and net capital gain (if any), and the
exchange ratio will be adjusted for any such dividends that
Patriot may declare prior to closing. To the extent that Patriot
shareholders have shares represented by stock certificates, they
should not send in any stock certificates until they receive
written instructions to do so after the consummation of the
merger.
The closing prices and most recent net asset values per share of
Patriots common stock and Prospect common stock, as well
as the implied value of Patriots common stock based on the
exchange ratio of 0.3992 (which will be adjusted for any
dividends declared by Patriot prior to the closing), were, on
the date before the merger was announced and the most recent
date prior to mailing of this document, as follows:
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Implied Value of One
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Prospect
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Patriot
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Share of Patriot
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Common Stock
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Common Stock
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Common Stock
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Closing Price at July 31, 2009
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$
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10.02
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$
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1.95
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$
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4.00
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Net Asset Value per Share at June 30, 2009
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$
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12.40
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$
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7.66
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$
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4.95
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Closing Price
at , 2009
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$
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$
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$
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The term implied value refers to the value of the
Prospect common stock that Patriot shareholders would receive if
the merger took place on a given day, based on the market price
of Prospects common stock on such date. The value of
Prospects common stock to be received in the proposed
merger will continue to fluctuate and, as a result, Patriot
shareholders will not know the value of Prospects common
stock they will receive in the proposed merger at the time they
vote.
6
Reasons
for the Proposed Merger
In evaluating the merger proposal from Prospect, the Patriot
board of directors considered numerous factors, including the
ones described below, and, as a result, determined that the
proposed merger was in Patriots best interests and the
best interests of Patriots shareholders:
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Lack of Liquidity; Potential Impact on Tax
Status. Since Patriot can no longer borrow
amounts under the Amended Securitization Facility, and because
all principal, interest and fees collected from the debt
investments secured by the facility must be used to repay
amounts outstanding under the facility, Patriot has limited
liquidity and no potential sources of free cash flow. Thus,
there is no assurance that Patriot will have sufficient cash and
liquid assets to fund its operations and dividend distributions
to its shareholders, which failure could, among other things,
result in adverse tax consequences, including possible loss of
its status as a RIC under the Code. In addition, without a
strategic transaction, Patriot would likely be required to seek
bankruptcy protection in the relatively near future.
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Potential Actions by Patriots
Lenders. Substantially all of Patriots debt
investments are secured under the Amended Securitization
Facility. As a result of the occurrence of a termination event
(i.e., default) under the Amended Securitization Facility, the
lenders may, upon notice to Patriot, accelerate amounts
outstanding under the facility and exercise other rights and
remedies provided by the facility, including the right to sell
the collateral under the facility. In such event, the Patriot
board of directors is concerned that such forced sales of
assets, particularly in the current economic environment, may be
done at fire sale prices, thereby diminishing the amount of cash
available to distribute to shareholders.
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Thorough Review of Strategic
Alternatives. Patriot engaged in a thorough
review of the strategic alternatives available to Patriot,
including, among other things, negotiations with its lenders
under the Amended Securitization Facility, conversion to a bank
holding company, the formation of a Small Business Investment
Company subsidiary, a stock or cash merger, a significant equity
investment, a refinancing of Patriots debt, a purchase and
sale of Patriots assets, and a bankruptcy filing. In
furtherance of the evaluation and proposal solicitation process,
Patriot publicly announced that it was actively evaluating
strategic alternatives (thereby putting potential strategic
partners on notice that Patriot was open to discussing such
alternatives with interested parties), and, at Patriots
request, Patriots financial advisor, FBR Capital
Markets & Co., or FBR, contacted 133
potential strategic partners, including business development
companies, commercial finance companies, banks, private equity
funds, hedge funds and other potential strategic partners, to
assess whether they might be interested in pursuing a strategic
transaction with Patriot. Of the 133 potential strategic
partners contacted, 51 executed non-disclosure agreements with
Patriot and received confidential information concerning
Patriots business, management, assets, liabilities,
financial condition and results of operations. Of those 51
potential strategic partners, 22 submitted preliminary
indications of interest, and 12 were invited to perform in-depth
due diligence and submit final bids, eight of which submitted
final bids. Based on this lengthy and thorough process,
Patriots board of directors believes it has explored all
alternatives reasonably available to Patriot.
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Best Alternative Reasonably Available to
Patriot. Because Patriot publicly announced that
it was actively evaluating strategic alternatives, and contacted
such a large number of potential strategic partners to determine
their level of interest in a strategic transaction involving
Patriot, the Patriot board of directors strongly believes that,
of all possible alternatives, and based on the proposed
transactions submitted by potential strategic partners, the
transaction with Prospect represents the best alternative that
is reasonably available to Patriot. In making this
determination, the Patriot board of directors considered:
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the existing termination event under the Amended Securitization
Facility;
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the current financial condition of Patriot, particularly the
liquidity needed to fund its operations and, potentially, to
make required distributions to shareholders;
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the distinct possibility that Patriot will run out of available
cash in the near future;
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7
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the current trading price of Patriots common stock;
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the lack of progress in negotiations with lenders under the
Amended Securitization Facility;
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the other alternatives reasonably available to Patriot;
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the terms of the other proposals submitted, including the
proposed economic terms, the conditions to closing, the expected
timing of such transactions, and the likelihood of consummation;
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the financial terms of the Prospect proposal, including the
proposed exchange ratio and Prospects ability and
agreement to repay the full amount of principal and interest
outstanding under the Amended Securitization Facility;
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the fact that although the implied value of the merger
consideration of $4.00 proposed for each share of Patriot common
stock represented a discount to Patriots net asset value
for the quarter ended March 31, 2009 and the anticipated
net asset value for the quarter ended June 30, 2009, which
was based on information available to the board at the time
(which value was later confirmed), such discount was generally
comparable to the discount to net asset value at which many
other business development companies traded;
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the business and legal due diligence review of Prospects
operations, its portfolio companies and other corporate and
financial matters conducted over an extended period of time by
Patriot and its legal and financial advisors;
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the financial strength of Prospect;
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the lack of a financing contingency to closing in the Prospect
proposal; and
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the fact that no shareholder approval of Prospects
shareholders would be required.
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Strategic and Business Considerations. Because
the Patriot shareholders will be shareholders in Prospect
following the merger, Patriot shareholders stand to participate
in the future growth and prospects of the combined businesses of
Patriot and Prospect, without the limitations currently
restricting the operations of Patriot. Prospect is an
established company with a strong capital position and
performance history. The larger equity market capitalization of
the combined companies should help create earnings stability and
assist Prospect in its efforts to raise capital in the public
equity and debt markets.
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Terms of the Merger Agreement. The exchange
ratio of 0.3992 of a share of Prospect common stock to be
received in exchange for each share of Patriot common stock,
which is subject to certain adjustments, represents a 105%
premium to the closing price of Patriot common stock on
July 31, 2009, based on the closing price of Prospect
common stock on that date (which was the last trading day before
public announcement of the merger).
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Opinion of Patriots Financial
Advisor. The financial analysis reviewed and
discussed with the board of directors of Patriot by
representatives of FBR, as well as the oral opinion of FBR
rendered to the board of directors of Patriot on August 3,
2009 (which was subsequently confirmed in writing by delivery of
FBRs written opinion dated the same date) with respect to
the fairness, from a financial point of view, to the holders of
Patriot common stock of the exchange ratio set forth in the
merger agreement. See The Merger Proposal
Opinion of Patriots Financial Advisor
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Tax Free Treatment of Proposed Merger. The
proposed merger is expected to be treated as a tax-free
reorganization under Section 368(a) of the Code. If the
transaction so qualifies, Patriots shareholders generally
will not recognize gain or loss to the extent that they receive
shares of Prospect common stock in exchange for their shares of
Patriot common stock. See U.S. Federal Income Tax
Consequences of the Merger.
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Repayment of Amended Securitization
Facility. As part of the merger agreement,
Prospect will repay (i) all principal and interest due
under the Amended Securitization Facility, which amounted to
$112.7 million as of September 30, 2009, and
(ii) up to $1.35 million in other costs, fees and
expenses payable to the lenders under the terms of the Amended
Securitization Facility.
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8
Risks
Related to the Proposed Merger
Below are certain of the material risks related to the proposed
merger considered by Patriots board of directors:
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Market Price. The market value of the per
share merger consideration could decrease prior to the closing
of the proposed merger if the market price of Prospects
common stock decreases.
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Net Asset Value. The net asset value per share
of Patriots common stock, as of June 30, 2009, was
$7.66, an amount higher than the implied market value of the
merger consideration.
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Restrictions on Ability to Solicit Alternative
Offers. The restrictive non-solicitation
provisions contained in the merger agreement prohibit Patriot
from soliciting alternative offers from third parties, and
permit Patriot to consider bona fide alternative proposals from
third parties only in certain limited circumstances.
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Lack of Dissenters Rights. There are no
dissenters rights applicable to the proposed merger.
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Completion
of the Proposed Merger
It is expected that the proposed merger will be completed
shortly after Patriots shareholders approve the merger
agreement at the special meeting, assuming all regulatory
approvals and other required matters are completed at such time.
If approved by Patriots shareholders, Prospect and Patriot
will work to complete the proposed merger during the fourth
quarter of 2009. The merger agreement currently permits either
party to terminate the merger agreement if the merger is not
completed on or before December 15, 2009.
Recommendation
of the Board of Directors of Patriot
Patriots board of directors, including its independent
directors, believes that the proposed merger is advisable and in
the best interest of Patriots shareholders and unanimously
recommends that shareholders vote FOR approval of
the merger agreement.
Opinion
of Patriots Financial Advisor
On August 3, 2009, FBR rendered its oral opinion to the
board of directors of Patriot (which was subsequently confirmed
in writing by delivery of FBRs written opinion dated the
same date) to the effect that, as of August 3, 2009, the
exchange ratio set forth in the merger agreement was fair, from
a financial point of view, to the holders of Patriot common
stock.
FBRs opinion was directed to the board of directors of
Patriot, and only addressed the fairness, from a financial point
of view, to the holders of Patriot common stock of the exchange
ratio set forth in the merger agreement, and did not address any
other aspect or implication of the merger. The summary of
FBRs opinion in this document is qualified in its entirety
by reference to the full text of its written opinion, which is
included as Annex B to this document and sets forth the
procedures followed, assumptions made, qualifications and
limitations on the review undertaken and other matters
considered by FBR in preparing its opinion. However, neither
FBRs written opinion nor the summary of its opinion and
the related analyses set forth in this document are intended to
be, and they do not constitute, advice or a recommendation to
any holder of Patriot common stock as to how such holder should
vote or act with respect to any matter relating to the
merger.
Interests
of Patriots Management in the Proposed Merger
Certain of Patriots executive officers have interests in
the proposed merger that are different in certain respects and
may conflict with the interests of Patriots shareholders.
The Patriot board of directors was aware of these interests, and
considered these interests, among other matters, in evaluating
and negotiating the merger
9
agreement and the merger, and in recommending to the
shareholders that the merger agreement be adopted. These
interests of the executive officers include:
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Cancellation of all outstanding stock options in exchange for a
cash payment of $0.01 for each share of Patriot common stock for
which such option is exercisable.
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Vesting of all unvested shares of Patriot restricted stock and,
immediately prior to the effective time of the merger,
cancellation of a portion of such restricted shares held by each
executive officer in exchange for a cash payment from Prospect
at the same value as the merger consideration in an amount
sufficient to cover the federal, state and local taxes required
to be withheld from the executive officer upon the vesting of
the shares, with the remaining shares participating in the
merger on the same basis as other shares of Patriot common stock.
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Employment or severance agreements providing for severance
payments and benefits upon a qualifying termination of
employment following a change in control. The proposed merger
would constitute a change in control for this
purpose.
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As of October 16, 2009, Patriots directors and
executive officers beneficially owned in the aggregate
3,417,638 shares of Patriots common stock (including
shares of restricted stock that will vest in connection with the
consummation of the merger), representing 15.83% of
Patriots total outstanding shares. Each of Patriots
directors and executive officers has indicated that he intends
to vote his shares in favor of the merger agreement and the
proposed merger.
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U.S.
Federal Income Tax Consequences of the Merger
The merger is intended to qualify as a
reorganization within the meaning of
Section 368(a) of the Code. If the merger so qualifies, in
general, Patriot shareholders will recognize no gain or loss for
U.S. federal income tax purposes to the extent such
shareholders receive shares of Prospect common stock in exchange
for shares of Patriots common stock. Additionally, neither
Patriot nor its shareholders will recognize any gain or loss for
U.S. federal income tax purposes in connection with the
merger. It is a condition to the closing of the merger that
Prospect and Patriot receive an opinion from Sutherland, Asbill
and Brennan LLP, dated as of the closing date of the merger,
regarding the characterization of the merger as a reorganization
within the meaning of Section 368(a) of the Code. Tax
matters are complicated, and the tax consequences of the
proposed merger to you will depend on the facts of your own
situation. We urge you to contact your own tax advisor to
understand fully how the proposed merger will affect you,
including how any state, local or foreign tax laws may apply to
you.
Dividends
and Distributions
In order to maintain Patriots qualification as a RIC for
U.S. Federal income tax purposes, Patriot generally must
distribute to its shareholders annually at least 90% of its
investment company taxable income, which is
generally its net ordinary income plus the excess, if any, of
realized net short-term capital gains over realized net
long-term capital losses. As a result, Patriot will be required
to declare, to the extent necessary, a dividend prior to the
consummation of the merger in an amount equal to its
undistributed investment company taxable income and net capital
gain (if any) in order to preserve this favorable tax treatment
and to eliminate its liability for U.S. federal income tax.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations of Patriot
Recent Developments and Note 11. Income
Taxes and Note 14. Subsequent Events to
Patriots unaudited financial statements for a detailed
discussion regarding Patriots undistributed net ordinary
income and capital gains.
The terms of the merger agreement anticipate that any such
dividends may be paid out in accordance with a recent revenue
procedure issued by the Internal Revenue Service, or the
IRS, pursuant to which up to 90% of the total
dividend may be paid in shares of common stock and the remainder
will be paid in cash. Any such dividend, whether received in
cash or common stock (including common stock of Prospect) will
be taxable to shareholders as a ordinary income (or capital
gains, if such dividends are properly designated as capital gain
dividends). See Risk Factors Risks Related to
Prospect Prospect may in the future choose to
pay dividends in its own stock, in which case you may be
required to pay tax in excess of the cash you
10
receive and Risk Factors Risks Related
to Patriot Patriot may in the future choose to pay
dividends in its own stock, in which case you may be required to
pay tax in excess of the cash you receive.
Dissenters
Rights
Patriots shareholders will not be entitled to exercise
dissenters rights in connection with the proposed merger
under Delaware law.
Vote
Required to Approve the Merger Agreement
The affirmative vote of the holders of a majority of
Patriots outstanding shares entitled to vote is required
to approve the merger agreement and the proposed merger.
Shareholders who abstain, fail to return their proxies or do not
otherwise vote either in person or by calling the proxy
solicitor at
(866) 796-3439,
will have the same effect as if they were voted
against the merger agreement and the proposed merger.
Voting
Power of Patriots Management
On the record date, 21,584,251 shares of Patriots
common stock were outstanding, which includes shares of
restricted stock that will vest upon the merger, of which
3,380,320 shares, or 15.7% of the total outstanding shares,
were owned by Patriots executive officers and directors.
So long as the merger agreement is in effect, each of
Patriots executive officers and directors has indicated
his intention to vote his shares in favor of the merger
agreement and the proposed merger.
Conditions
to the Merger
The proposed merger will be completed only if specific
conditions, including, among other things, the following, are
met or waived by Patriots board of directors or the board
of directors of Prospect, as applicable:
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no legal prohibition on completion of the merger is in effect;
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the registration statement, of which this document is a part,
filed by Prospect with the SEC in connection with its offer and
sale of shares to Patriots shareholders in connection with
the merger is declared effective by the SEC;
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no pending suit, action or proceeding by any governmental entity
seeking to enjoin or otherwise interfere with the merger that
has a reasonable likelihood of success;
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receipt of payoff letters from the lenders under the Amended
Securitization Facility; and
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receipt of an opinion from Sutherland Asbill & Brennan
LLP to the effect that the merger will qualify as a
reorganization under Section 368(a) of the Code.
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See Description of the Merger Agreement
Conditions to the Merger for a discussion of conditions
that Prospect and Patriot must individually meet, or be waived
by the other party, in order for the proposed merger to be
consummated.
Termination
of the Merger Agreement
Patriot and Prospect may jointly agree to terminate the merger
agreement at any time. Either Patriot or Prospect may also
terminate the merger agreement if, among other things, any of
the following occurs:
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any regulatory authority of competent jurisdiction issues a
judgment, injunction, order, decree, or action permanently
restraining, enjoining or otherwise prohibiting the merger, and
the judgment, injunction, order, decree or other action becomes
final and nonappealable;
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the merger is not completed prior to December 15, 2009,
except that neither Patriot nor Prospect may terminate the
merger agreement if its willful and material breach is the
reason that the merger has not been completed;
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the required approval of the merger agreement by Patriot
shareholders is not obtained at the special meeting; or
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upon a violation or breach by the other party of any agreement,
covenant, representation or warranty or if any representation or
warranty of either party shall have become untrue, in either
case so that the conditions to the completion of the merger
would be incapable of being satisfied by the closing date and
such violation or breach has not been waived by the terminating
party.
|
In addition, the merger agreement may be terminated in the
following circumstances:
|
|
|
|
|
by Prospect, prior to receipt of Patriot shareholder approval,
within 10 days after the Patriot board of directors effects a
change of recommendation; or, in the case an alternative
proposal structured as a tender or exchange offer for Patriot
common stock commenced by a person unaffiliated with the buyer
is received; if the Patriot board of directors fails to issue
within 10 days after the public announcement of the
alternative proposal a public statement reaffirming the board
recommendation and recommending that Patriots shareholders
reject the alternative proposal; or if Patriot breaches any of
the no solicitation provisions of the merger agreement; and
|
|
|
|
by Patriot, if Patriot receives a superior proposal, the board
authorizes Patriot to enter into an agreement to consummate the
transaction contemplated by such superior proposal, and
concurrently with such termination, Patriot pays the termination
fee and enters into a definitive agreement to consummate the
transaction contemplated by the superior proposal; or if the
board effects a recommendation change in compliance with the no
solicitation provisions of the merger agreement.
|
Patriot will pay Prospect a termination fee in the amount of
$3.2 million or reimburse certain expenses and make certain
other payments in certain circumstances. See Description
of the Merger Agreement Termination of the Merger
Agreement.
Comparison
of Shareholder Rights
The rights of Patriots shareholders are currently governed
by Delaware law, and Patriots restated certificate of
incorporation and restated bylaws. When the proposed merger is
completed, Patriots shareholders will become shareholders
of Prospect, a Maryland corporation, and their rights will be
governed by Maryland law, and Prospects articles of
incorporation and bylaws. The rights of Patriots
shareholders and the rights of Prospect shareholders differ in
many respects. See Comparison of Shareholder Rights
for a discussion of the material differences between the rights
of Patriot shareholders and the rights of Prospect shareholders.
12
COMPARATIVE
FEES AND EXPENSE RATIOS
The purpose of the tables in this section is to assist you in
understanding the various costs and expenses that a shareholder
will bear directly or indirectly by investing in Patriot and
Prospects common stock and Prospects costs and
expenses that are expected to be incurred in the first year
following the merger.
Patriot
and Prospects Expenses
The tables below illustrate the change in operating expenses
expected as a result of the merger. The tables set forth
(i) the annualized fees, expenses and interest payments on
borrowed funds of Patriot for the year ended June 30, 2009;
(ii) the annualized fees, expenses, and interest payments
on borrowed funds of Prospect for the year ended June 30,
2009; and (iii) the pro forma annualized fees,
expenses and interest payments on borrowed funds of Prospect for
the year ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
Patriot
|
|
|
Prospect
|
|
|
Combined Prospect(1)
|
|
|
Shareholder transaction expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales load (as a percentage of offering price)
|
|
|
None(1
|
)
|
|
|
None(1
|
)
|
|
|
None(1
|
)
|
Dividend reinvestment plan expenses
|
|
|
None(2
|
)
|
|
|
None(2
|
)
|
|
|
None(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
Patriot
|
|
|
Prospect
|
|
|
Combined Prospect(1)(4)
|
|
|
Annual expenses (as a percentage of net assets
attributable to common stock):
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined base management fee and incentive
fees(3)
|
|
|
|
(5)
|
|
|
6.49
|
%
|
|
|
6.90
|
%
|
Interest expense on borrowed funds
|
|
|
4.70
|
%
|
|
|
1.42
|
%
|
|
|
1.44
|
%
|
Other expenses
|
|
|
4.31
|
%
|
|
|
1.95
|
%
|
|
|
2.61
|
%
|
Total annual expenses
|
|
|
9.01
|
%
|
|
|
9.86
|
%
|
|
|
10.95
|
%
|
|
|
|
(1) |
|
Purchases of shares of common stock of Patriot or Prospect on
the secondary market are not subject to sales charges but may be
subject to brokerage commissions or other charges. The table
does not include any sales load (underwriting discount or
commission) that shareholders may have paid in connection with
their purchase of shares of Patriot or Prospects common
stock. |
|
(2) |
|
The expenses of the dividend reinvestment plan are included in
other expenses. |
|
|
|
(3) |
|
Prospects base management fee is 2% of its gross assets
(which include any amount borrowed, i.e., total assets without
deduction for any liabilities). The combined base management fee
is zero, 3.08% and 3.40% for Actual Patriot, Actual Prospect and
Pro Forma Combined-Prospect, respectively. Incentive fees are
zero, 3.41% and 3.50% for Actual Patriot, Actual Prospect and
Pro Forma Combined-Prospect, respectively. |
|
|
|
(4) |
|
Average net assets attributable to common stock for the pro
forma combined is based on the summation of the Patriot and
Prospect average net assets attributable to common stock less
the pro forma adjustment to investments of $69.6 million. |
|
|
|
(5) |
|
Patriot does not have an investment adviser and is internally
managed by its management team under the supervision of its
board of directors. Therefore, Patriot does not pay investment
advisory fees, but instead pays the operating costs associated
with employing a management team to research, select and
supervise its investments. As a result, the estimate of the
annual expenses it incurs in connection with the employment of a
management team to research, select and supervise its
investments is included in the line item Other
expenses. |
13
Example
The following example is intended to help you compare the costs
of investing in Prospect pro forma after the merger with
the costs of investing in Patriot and Prospect before the
merger. An investor would pay the following expenses on a $1,000
investment in common shares, assuming (i) the operating
expense ratio for Patriot and Prospect (as a percentage of net
assets attributable to common shares) set forth in the table
above for years 1 through 10, (ii) borrowings under
Patriots Amended Securitization Facility of
$137.4 million and Prospects revolving credit
facility of $124.8 million prior to the merger,
(iii) borrowings under Prospects revolving credit
facility of $112.0 million after the merger, and
(iv) a 5% annual return throughout the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
Patriot
|
|
$
|
90
|
|
|
$
|
260
|
|
|
$
|
416
|
|
|
$
|
755
|
|
Prospect
|
|
$
|
64
|
|
|
$
|
191
|
|
|
$
|
313
|
|
|
$
|
604
|
|
Pro Forma Combined
Prospect(1)
|
|
$
|
75
|
|
|
$
|
218
|
|
|
$
|
355
|
|
|
$
|
668
|
|
|
|
|
(1) |
|
The pro forma combined row shown assumes the merger is
completed. |
While the example assumes, as required by the SEC, a 5% annual
return, Prospects performance will vary and may result in
a return greater or less than 5%. Additionally, Prospect has
assumed that the entire amount of such 5% annual return would
constitute ordinary income as Prospect has not historically
realized positive capital gains (computed net of all realized
capital losses and unrealized capital depreciation) on its
investments, nor does it expect to realize positive capital
gains in excess of realized capital losses and unrealized
capital depreciation in the foreseeable future. Because the
assumed 5% annual return is significantly below the hurdle rate
of 7% (annualized) that Prospect must achieve under its
investment advisory agreement to trigger the payment of an
income-based incentive fee, Prospect has assumed, for purposes
of the above example, that no income-based incentive fee would
be payable if it realized a 5% annual return on its investments.
Additionally, because Prospect has not historically realized
positive capital gains in excess of realized capital losses and
unrealized capital depreciation on its investments, it has
assumed that it will not trigger the payment of any capital
gains-based incentive fee in any of the indicated time periods.
If Prospect achieves sufficient returns on its investments,
including through the realization of capital gains, to trigger
an incentive fee of a material amount, both its expenses, and
returns to its investors after such expenses, would be higher
than reflected in the example. In addition, while the example
assumes reinvestment of all dividends and distributions at net
asset value, participants in Prospects dividend
reinvestment plan will receive a number of shares of Prospect
common stock, determined by dividing the total dollar amount of
the dividend payable to a participant by the market price per
share of Prospect common stock at the close of trading on the
valuation date for the dividend.
14
SELECTED
FINANCIAL DATA OF PATRIOT
You should read this selected consolidated financial data in
conjunction with the section entitled, Managements
Discussion and Analysis of Financial Condition and Results of
Operations of Patriot and the consolidated financial
statements and notes thereto of Patriot included elsewhere in
this document. The selected consolidated financial data at and
for the fiscal years ended December 31, 2008, 2007, 2006,
2005 and 2004 have been derived from Patriots audited
financial statements. The selected consolidated financial data
at and for the six months ended June 30, 2009 and 2008 have
been derived from unaudited financial data, but in the opinion
of Patriots management, reflects all adjustments
(consisting only of normal recurring adjustments) that are
necessary to present fairly the results for such interim
periods. Interim results at and for the six months ended
June 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2009.
Certain reclassifications have been made to the prior period
financial information to conform to the current period
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
16,128,632
|
|
|
$
|
21,123,051
|
|
|
$
|
40,140,087
|
|
|
$
|
37,147,275
|
|
|
$
|
25,387,709
|
|
|
$
|
13,035,673
|
|
|
$
|
4,616,665
|
|
Fees
|
|
|
454,698
|
|
|
|
355,784
|
|
|
|
1,409,613
|
|
|
|
1,280,361
|
|
|
|
270,176
|
|
|
|
366,830
|
|
|
|
241,870
|
|
Other investment income
|
|
|
8,804
|
|
|
|
420,269
|
|
|
|
749,704
|
|
|
|
534,901
|
|
|
|
848,449
|
|
|
|
46,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
16,592,134
|
|
|
|
21,899,104
|
|
|
|
42,299,404
|
|
|
|
38,962,537
|
|
|
|
26,506,334
|
|
|
|
13,449,342
|
|
|
|
4,858,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
1,759,961
|
|
|
|
2,605,499
|
|
|
|
3,973,030
|
|
|
|
5,410,075
|
|
|
|
3,877,525
|
|
|
|
2,481,761
|
|
|
|
1,326,576
|
|
Consulting
fees(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554,796
|
|
|
|
1,000,000
|
|
Interest
expense(2)
|
|
|
4,363,807
|
|
|
|
3,984,753
|
|
|
|
8,158,473
|
|
|
|
7,421,596
|
|
|
|
4,332,582
|
|
|
|
3,517,989
|
|
|
|
1,504,998
|
|
Professional fees
|
|
|
1,346,626
|
|
|
|
670,731
|
|
|
|
1,635,519
|
|
|
|
887,021
|
|
|
|
1,045,613
|
|
|
|
730,550
|
|
|
|
192,938
|
|
Prepayment
penalty(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,395,335
|
|
|
|
|
|
General and administrative expense
|
|
|
1,501,394
|
|
|
|
1,433,523
|
|
|
|
2,807,113
|
|
|
|
2,498,724
|
|
|
|
2,229,970
|
|
|
|
1,041,030
|
|
|
|
227,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
8,971,788
|
|
|
|
8,694,506
|
|
|
|
16,574,135
|
|
|
|
16,217,416
|
|
|
|
11,485,690
|
|
|
|
11,721,461
|
|
|
|
4,251,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
7,620,346
|
|
|
|
13,204,598
|
|
|
|
25,725,269
|
|
|
|
22,745,121
|
|
|
|
15,020,644
|
|
|
|
1,727,881
|
|
|
|
606,815
|
|
Net realized gain (loss) on investments
|
|
|
(12,013,473
|
)
|
|
|
(433,767
|
)
|
|
|
(882,588
|
)
|
|
|
91,601
|
|
|
|
(3,262,966
|
)
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
(16,870,174
|
)
|
|
|
(13,219,509
|
)
|
|
|
(39,992,921
|
)
|
|
|
(3,637,706
|
)
|
|
|
3,817,931
|
|
|
|
(2,965,175
|
)
|
|
|
(876,021
|
)
|
Net unrealized gain (loss) on interest rate swaps
|
|
|
861,737
|
|
|
|
216,783
|
|
|
|
(2,335,019
|
)
|
|
|
(775,326
|
)
|
|
|
12,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(20,401,564
|
)
|
|
$
|
(231,895
|
)
|
|
$
|
(17,485,259
|
)
|
|
$
|
18,423,690
|
|
|
$
|
15,588,570
|
|
|
$
|
(1,237,294
|
)
|
|
$
|
(269,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
$
|
(0.97
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
0.99
|
|
|
$
|
1.10
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.07
|
)
|
Earnings (loss) per share, diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
0.98
|
|
|
$
|
1.10
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.07
|
)
|
Weighted average shares outstanding, basic
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
20,713,540
|
|
|
|
18,670,904
|
|
|
|
14,145,200
|
|
|
|
7,253,632
|
|
|
|
3,847,902
|
|
Weighted average shares outstanding, diluted
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
20,713,540
|
|
|
|
18,830,213
|
|
|
|
14,237,952
|
|
|
|
7,253,632
|
|
|
|
3,847,902
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
283,929,237
|
|
|
$
|
322,410,700
|
|
|
$
|
322,370,748
|
|
|
$
|
384,725,753
|
|
|
$
|
257,812,235
|
|
|
$
|
138,302,852
|
|
|
$
|
65,766,667
|
|
Total assets
|
|
|
302,540,169
|
|
|
|
335,098,619
|
|
|
|
354,262,646
|
|
|
|
398,378,808
|
|
|
|
271,086,364
|
|
|
|
151,007,186
|
|
|
|
72,201,700
|
|
Total debt outstanding
|
|
|
137,365,363
|
|
|
|
116,100,000
|
|
|
|
162,600,000
|
|
|
|
164,900,000
|
|
|
|
98,380,000
|
|
|
|
21,650,000
|
|
|
|
42,645,458
|
|
Stockholders equity
|
|
|
160,495,644
|
|
|
|
208,621,626
|
|
|
|
180,117,170
|
|
|
|
221,597,684
|
|
|
|
164,108,629
|
|
|
|
127,152,365
|
|
|
|
27,311,918
|
|
Net asset value per common share
|
|
$
|
7.66
|
|
|
$
|
10.08
|
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
|
$
|
10.37
|
|
|
$
|
10.48
|
|
|
$
|
7.10
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield on debt
investments(4)
|
|
|
10.7
|
%
|
|
|
12.3
|
%
|
|
|
12.1
|
%
|
|
|
12.4
|
%
|
|
|
13.4
|
%
|
|
|
13.5
|
%
|
|
|
12.6
|
%
|
Number of portfolio companies
|
|
|
33
|
|
|
|
32
|
|
|
|
35
|
|
|
|
36
|
|
|
|
26
|
|
|
|
15
|
|
|
|
9
|
|
Number of employees
|
|
|
11
|
|
|
|
14
|
|
|
|
13
|
|
|
|
14
|
|
|
|
11
|
|
|
|
9
|
|
|
|
6
|
|
|
|
|
(1)
|
|
On July 27, 2005, Patriot
terminated the consulting agreements pursuant to which it
incurred these fees.
|
|
|
|
(2)
|
|
Patriots capital structure at
December 31, 2004 reflected a higher percentage of leverage
than it is permitted to incur as a business development company.
Patriot used a portion of the net proceeds it received from its
initial public offering to repay all of its outstanding
indebtedness, including the $3.4 million prepayment
penalty, at the time of its initial public offering. Patriot is
generally only allowed to borrow amounts such that its asset
coverage, as defined in the 1940 Act, equals at least 200% after
such borrowing.
|
|
|
|
(3)
|
|
The prepayment penalty was incurred
in connection with the repayment in full and termination of
Patriots $120.0 million financing agreement.
|
|
|
|
(4)
|
|
Computed using actual interest
income earned for the fiscal year, including amortization of
deferred financing fees and original issue discount, divided by
the weighted average fair value of debt investments.
|
16
SELECTED
FINANCIAL DATA OF PROSPECT
You should read the condensed financial information below with
the financial statements and notes thereto included in this
document. Financial information for the twelve months ended
June 30, 2009, 2008, 2007, 2006 and 2005 has been derived
from the audited financial statements for that period. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations of Prospect for more
information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except data relating to shares, per share and
number of
|
|
|
|
portfolio companies)
|
|
|
Performance Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
62,926
|
|
|
$
|
59,033
|
|
|
$
|
30,084
|
|
|
$
|
13,268
|
|
|
$
|
4,586
|
|
Dividend income
|
|
|
22,793
|
|
|
|
12,033
|
|
|
|
6,153
|
|
|
|
3,601
|
|
|
|
3,435
|
|
Other income
|
|
|
14,762
|
|
|
|
8,336
|
|
|
|
4,444
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
100,481
|
|
|
|
79,402
|
|
|
|
40,681
|
|
|
|
16,869
|
|
|
|
8,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and credit facility expenses
|
|
|
(6,161
|
)
|
|
|
(6,318
|
)
|
|
|
(1,903
|
)
|
|
|
(642
|
)
|
|
|
|
|
Investment advisory expense
|
|
|
(26,705
|
)
|
|
|
(20,199
|
)
|
|
|
(11,226
|
)
|
|
|
(3,868
|
)
|
|
|
(1,808
|
)
|
Other expenses
|
|
|
(8,452
|
)
|
|
|
(7,772
|
)
|
|
|
(4,421
|
)
|
|
|
(3,801
|
)
|
|
|
(3,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(41,318
|
)
|
|
|
(34,289
|
)
|
|
|
(17,550
|
)
|
|
|
(8,311
|
)
|
|
|
(5,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
59,163
|
|
|
|
45,113
|
|
|
|
23,131
|
|
|
|
8,558
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
(24,059
|
)
|
|
|
(17,522
|
)
|
|
|
(6,403
|
)
|
|
|
4,338
|
|
|
|
6,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations
|
|
$
|
35,104
|
|
|
$
|
27,591
|
|
|
$
|
16,728
|
|
|
$
|
12,896
|
|
|
$
|
8,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from
operations(1)
|
|
$
|
1.11
|
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
$
|
1.83
|
|
|
$
|
1.24
|
|
Distributions declared per share
|
|
$
|
(1.62
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.54
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.38
|
)
|
Average weighted shares outstanding for the period
|
|
|
31,559,905
|
|
|
|
23,626,642
|
|
|
|
15,724,095
|
|
|
|
7,056,846
|
|
|
|
7,055,100
|
|
Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
547,168
|
|
|
$
|
497,530
|
|
|
$
|
328,222
|
|
|
$
|
133,969
|
|
|
$
|
55,030
|
|
Other assets
|
|
|
119,857
|
|
|
|
44,248
|
|
|
|
48,280
|
|
|
|
4,511
|
|
|
|
48,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
667,025
|
|
|
|
541,778
|
|
|
|
376,502
|
|
|
|
138,480
|
|
|
|
103,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount drawn on credit facility
|
|
|
124,800
|
|
|
|
91,167
|
|
|
|
|
|
|
|
28,500
|
|
|
|
|
|
Amount owed to related parties
|
|
|
6,713
|
|
|
|
6,641
|
|
|
|
4,838
|
|
|
|
745
|
|
|
|
77
|
|
Other liabilities
|
|
|
2,916
|
|
|
|
14,347
|
|
|
|
71,616
|
|
|
|
965
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
134,429
|
|
|
|
112,155
|
|
|
|
76,454
|
|
|
|
30,210
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
|
$
|
300,048
|
|
|
$
|
108,270
|
|
|
|
102,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Activity Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of portfolio companies at period end
|
|
|
30
|
|
|
|
29
|
(2)
|
|
|
24
|
(2)
|
|
|
15
|
|
|
|
6
|
|
Acquisitions
|
|
$
|
98,305
|
|
|
$
|
311,947
|
|
|
$
|
167,255
|
|
|
$
|
83,625
|
|
|
$
|
79,018
|
|
Sales, repayments, and other disposals
|
|
$
|
27,007
|
|
|
$
|
127,212
|
|
|
$
|
38,407
|
|
|
$
|
9,954
|
|
|
$
|
32,083
|
|
Weighted-Average Yield at end of
period(3)
|
|
|
13.7
|
%
|
|
|
15.5
|
%
|
|
|
17.1
|
%
|
|
|
17.0
|
%
|
|
|
21.3
|
%
|
|
|
|
(1) |
|
Per share data is based on average weighted shares for the
period. |
|
|
|
(2) |
|
Includes a net profits interest in Charlevoix Energy Trading LLC
(Charlevoix), remaining after loan was paid. |
|
|
|
(3) |
|
Includes dividends from certain equity investments. |
17
UNAUDITED
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables set forth unaudited pro forma condensed
consolidated financial data for Prospect and Patriot as a
consolidated entity, giving effect to the merger as if it had
occurred on the dates indicated and after giving effect to
certain transactions that occurred subsequent to June 30,
2009. The unaudited pro forma condensed consolidated operating
data are presented as if the merger had been completed on
July 1, 2008. The unaudited pro forma condensed
consolidated balance sheet data at June 30, 2009 is
presented as if the merger had occurred as of that date. In the
opinion of management, all adjustments necessary to reflect the
effect of these transactions have been made. The merger will be
accounted for under the acquisition method of accounting as
provided by Statement of Financial Accounting Standard
No. 141(R), Business Combinations.
The unaudited pro forma condensed consolidated financial data
should be read together with the respective historical audited
and unaudited consolidated financial statements and financial
statement notes of Patriot and Prospect in this document. The
unaudited pro forma condensed consolidated financial data are
presented for comparative purposes only and do not necessarily
indicate what the future operating results or financial position
of Prospect will be following completion of the merger. The
unaudited pro forma condensed consolidated financial data does
not include adjustments to reflect any cost savings or other
operational efficiencies that may be realized as a result of the
merger of Patriot and Prospect or any future merger related
restructuring or integration expenses.
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
(In thousands except
|
|
|
|
|
|
|
data relating to
|
|
|
|
|
|
|
earnings per share)
|
|
|
|
|
|
Performance Data:
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
120,865
|
|
|
|
|
|
Fee income
|
|
|
1,508
|
|
|
|
|
|
Other income
|
|
|
15,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
137,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,947
|
)
|
|
|
|
|
Base management and income incentive fees
|
|
|
(38,024
|
)
|
|
|
|
|
General and administrative expenses
|
|
|
(14,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(60,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
77,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses)
|
|
|
(81,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(4,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
(0.09
|
)
|
|
|
|
|
Average weighted shares outstanding for the period
|
|
|
54,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
|
|
|
Assets and Liabilities Data:
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
743,491
|
|
|
|
|
|
Cash
|
|
|
69,979
|
|
|
|
|
|
Other assets
|
|
|
13,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
826,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
111,959
|
|
|
|
|
|
Other liabilities
|
|
|
15,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
127,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
699,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
UNAUDITED
PRO FORMA PER SHARE DATA
The following selected unaudited pro forma per share information
for the year ended June 30, 2009 reflects the merger and
related transactions as if they had occurred on July 1,
2008. The unaudited pro forma combined net asset value per
common share outstanding reflects the merger and related
transactions as if they had occurred on June 30, 2009 and
certain other transactions that occurred subsequent to
June 30, 2009.
Such unaudited pro forma combined per share information is based
on the historical financial statements of Prospect and Patriot
and on publicly available information and certain assumptions
and adjustments as discussed in the section entitled
Unaudited Pro Forma Condensed Consolidated Financial
Statements. This unaudited pro forma combined per share
information is provided for illustrative purposes only and is
not necessarily indicative of what the operating results or
financial position of Prospect or Patriot would have been had
the merger and related transactions been completed at the
beginning of the periods or on the dates indicated, nor are they
necessarily indicative of any future operating results or
financial position. The following should be read in connection
with the section entitled Unaudited Pro Forma Condensed
Consolidated Financial Statements and other information
included in or incorporated by reference into this document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparative Per Share Data
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Equivalent
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Prospect
|
|
|
Patriot
Share(3)
|
|
|
Year ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per share
|
|
$
|
1.11
|
|
|
$
|
(1.81
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.04
|
)
|
Distributions per share declared to
date(1)
|
|
$
|
1.6175
|
|
|
$
|
0.58
|
|
|
$
|
1.6175
|
|
|
$
|
0.65
|
|
Net asset value per
share(2)
|
|
$
|
12.40
|
|
|
$
|
7.66
|
|
|
$
|
11.06
|
|
|
$
|
4.42
|
|
Average weighted shares outstanding for the period
(in thousands)
|
|
|
31,560
|
|
|
|
20,847
|
|
|
|
54,348
|
|
|
|
|
|
|
|
|
(1) |
|
The historical distributions declared per share for Prospect and
Patriot is computed by dividing the distributions declared for
the year ended June 30, 2009 by their respective historical
weighted average shares outstanding. The pro forma combined
distributions declared is the distributions per share as
declared by Prospect. |
|
|
|
(2) |
|
The historical net asset value per share for Prospect and
Patriot as of June 30, 2009 are as previously reported by
the companies. The pro forma combined net asset value per share
as of June 30, 2009 is computed by dividing the pro forma
combined net assets by the pro forma combined number of shares
outstanding. In addition, the pro forma combined net asset value
per share as of June 30, 2009 reflects the write down of
the fair value of Patriots investments at June 30,
2009 to Prospects determination of the fair value of these
investments. Prospect, in conjunction with an independent
valuation agent, has determined that a fair value of
Patriots investments at June 30, 2009 that
approximates the total purchase price to be paid by Prospect to
acquire Patriot in connection with the proposed merger
transaction, which is approximately $69.6 million lower
than the fair value of those investments as previously
determined by Patriot, is appropriate. |
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The Patriot equivalent pro forma per share amount is calculated
by multiplying the combined pro forma share amounts by the
common stock exchange ratio of 0.3992. |
19
RISK
FACTORS
Risks
Related to the Merger
Patriot
and Prospect have agreed to a fixed exchange ratio, and, as a
result, the shares of Prospect common stock to be issued in the
merger may have a market value that is lower than
expected.
The exchange ratio of 0.3992 of a share of Prospect common stock
for each share of Patriot common stock was fixed on
August 3, 2009, the time of the signing of the merger
agreement, and is not subject to adjustment based on changes in
the trading price of Prospect or Patriot common stock before the
closing of the proposed merger. As a result, the market price of
Prospects common stock at the time of the merger may vary
significantly from the price on the date the merger agreement
was signed or from the price on either the date of this document
or the date of the special meeting. These variances may arise
due to, among other things:
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changes in the business, operations and prospects of Prospect or
Patriot;
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the financial condition of current or prospective portfolio
companies of Prospect or Patriot;
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interest rates, general market and economic conditions;
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market assessments of the likelihood that the proposed merger
will be completed and the timing of the merger; and
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market perception of the future profitability of the combined
company.
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These factors are generally beyond the control of Prospect and
Patriot. It should be noted that during the
12-month
period ending September 30, 2009, the closing price per
share of Prospects common stock varied from a low of $6.29
to a high of $13.08. Historical trading prices are not
necessarily indicative of future performance.
The
proposed merger is subject to the receipt of payoff letters from
the Amended Securitization Facility lenders that could delay
completion of the proposed merger, cause abandonment of the
merger or have other negative effects on Patriot and
Prospect.
Completion of the merger is subject to the receipt of payoff
letters from the Amended Securitization Facility lenders. A
substantial delay in obtaining such payoff letters, the failure
to obtain such payoff letters or the imposition of unfavorable
terms or conditions in connection with the receipt of such
payoff letters could have an adverse effect on the business,
financial condition or results of operations of Patriot and
Prospect, or may cause the abandonment of the merger. In this
regard, the merger agreement obligates Prospect to pay off
(i) all principal and interest due under the Amended
Securitization Facility, which amounted to $112.7 million
as of September 30, 2009, and (ii) up to
$1.35 million (the Fee Cap) in other costs,
fees and expenses payable to the lenders under the terms of the
Amended Securitization Facility. However, immediately subsequent
to Patriots entry into the merger agreement with Prospect,
the agent for the Amended Securitization Facility lenders
notified Patriot that the Amended Securitization Facility
lenders have not consented to the Fee Cap included in the merger
agreement nor do they intend to release their liens on
Patriots investments unless and until all costs, fees and
expenses payable to the lenders under the terms of the Amended
Securitization Facility are paid in full in cash. Although
Patriot intends to work with the Amended Securitization Facility
lenders to resolve this issue, if (i) the Amended
Securitization Facility lenders demand payment for costs, fees
and expenses that are substantially in excess of the Fee Cap
amount, (ii) Patriot does not have sufficient funds to pay
such excess amount and (iii) the Amended Securitization
Facility lenders refuse to provide Patriot with the payoff
letters required by the merger agreement, the merger may be
abandoned. If the merger is abandoned, Patriot may not have
sufficient liquidity to operate its business or pursue other
strategic transactions and, as a result, would likely be
required to seek bankruptcy protection.
20
Patriot
shareholders will experience a reduction in percentage ownership
and voting power with respect to their shares as a result of the
merger.
Patriot shareholders will experience a substantial reduction in
their respective percentage ownership interests and effective
voting power relative to their respective percentage ownership
interests in Patriot prior to the merger. If the merger is
consummated, based on the number of shares of Prospect common
stock issued and outstanding on the date hereof, Patriot
shareholders will own approximately 13.6% of the combined
entitys outstanding common stock. In addition, both prior
to and after completion of the merger, Prospect may issue
additional shares of common stock in public offerings, mergers
and acquisitions or otherwise (including at prices below its
current net asset value), all of which would further reduce the
percentage ownership of Prospect held by former Patriot
shareholders. In addition, the issuance or sale by Prospect of
shares of its common stock at a discount to net asset value
poses a risk of dilution to stockholders. In particular,
stockholders who do not purchase additional shares at or below
the discounted price in proportion to their current ownership
will experience an immediate decrease in net asset value per
share (as well as in the aggregate net asset value of their
shares if they do not participate at all). These stockholders
will also experience a disproportionately greater decrease in
their participation in Prospects earnings and assets and
their voting power than the increase Prospect experiences in its
assets, potential earning power and voting interests from such
issuance or sale. Shareholders may also experience a reduction
in the market price of Prospects common stock.
Termination
of the merger agreement could negatively impact
Patriot.
If the merger agreement is terminated, there may be various
consequences including:
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Patriots businesses may have been adversely impacted by
the failure to pursue other beneficial opportunities due to the
focus of management on the merger, without realizing any of the
anticipated benefits of completing the merger;
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the market price of Patriots common stock might decline to
the extent that the market price prior to termination reflects a
market assumption that the merger will be completed;
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Patriot may not be able to find a party willing to pay an
equivalent or more attractive price than the price Prospect has
agreed to pay in the merger; and
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Patriot may not have sufficient liquidity to operate its
business or pursue other strategic transactions and, as a
result, would likely be required to seek bankruptcy protection.
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Under
certain circumstances, Patriot is obligated to pay Prospect a
termination fee or other amounts upon termination of the merger
agreement.
No assurance can be given that the merger will be completed. The
merger agreement provides for the payment by Patriot of a
break-up fee
of $3.2 million or an expense reimbursement of up to
$250,000 if the merger is terminated by Patriot under certain
circumstances. In addition, in certain circumstances involving a
sale of Patriot to a third party within one year of termination
of the merger agreement, Patriot may be required make an
additional payment equal to the termination fee when combined
with any previously paid expense reimbursement. The obligation
to make that payment may adversely affect the ability of Patriot
to engage in another transaction in the event the merger is not
completed and may have an adverse impact on the financial
condition of Patriot. See Description of the Merger
Agreement Termination of the Merger Agreement
Expenses; Termination Fees for a discussion of the
circumstances that could result in the payment of a termination
fee.
The
merger agreement severely limits Patriots ability to
pursue alternatives to the merger.
The merger agreement contains no shop and other
provisions that, subject to limited exceptions, limit
Patriots ability to discuss, facilitate or commit to
competing third-party proposals to acquire all or a significant
part of Patriot. These provisions might discourage a potential
competing acquiror that might have an interest in acquiring all
or a significant part of Patriot from considering or proposing
that acquisition even if it were prepared to pay consideration
21
with a higher per share market price than that proposed in the
merger. Patriot can consider and participate in discussions and
negotiations with respect to an alternative proposal only in
very limited circumstances. Among other things, prior to Patriot
entering into any discussions with, or providing confidential
information to, a third party in connection with an alternative
proposal, the third party must enter into a confidentiality
agreement with Patriot, must provide evidence of its commitment
and ability to make a superior proposal for a sale or business
combination transaction with Patriot without material
contingencies, must agree to pay down in full the outstanding
balance under the Amended Securitization Facility at closing of
the relevant alternative sale or business combination
transaction, and must provide Patriot with funds in an amount
equal to the termination fee that would be payable upon the
occurrence of certain termination events, as discussed elsewhere
in this document.
The
merger is subject to closing conditions, including stockholder
approval, that, if not satisfied or waived, will result in the
merger not being completed, which may result in material adverse
consequences to Patriots business and
operations.
The merger is subject to closing conditions, including the
approval of Patriots shareholders that, if not satisfied,
will prevent the merger from being completed. The closing
condition that Patriots shareholders adopt the merger
agreement may not be waived under applicable law and must be
satisfied for the merger to be completed. Patriot currently
expects that all directors and executive officers of Patriot
will vote their shares of Patriot common stock in favor of the
proposals presented at the special meeting. If Patriots
shareholders do not adopt the merger agreement and the merger is
not completed, the resulting failure of the merger could have a
material adverse impact on Patriots business and
operations. In addition to the required approvals and consents
from governmental entities and the approval of Patriots
shareholders, the merger is subject to a number of other
conditions beyond Patriots control that may prevent, delay
or otherwise materially adversely affect its completion. Patriot
cannot predict whether and when these other conditions will be
satisfied.
Certain
executive officers and directors of Patriot have interests in
the completion of the proposed merger that may differ from or
conflict with the interests of Patriot
shareholders.
When considering the recommendation of the Patriot board of
directors to vote FOR adoption of the merger
agreement, Patriot shareholders should note that certain of the
executive officers and directors of Patriot have interests in
the merger that are different in certain respects from, and may
conflict with, the interests of other Patriot shareholders.
Patriot executive officers are entitled to receive certain
benefits upon completion of the merger, including accelerated
vesting and payout (in cash or merger consideration) of stock
options and restricted stock. In addition, pursuant to
employment or severance agreements they have with Patriot,
assuming qualifying terminations of employment following
completion of the merger, certain of Patriots executive
officers would receive severance payments and benefits. Based on
the assumptions set forth in The Merger
Proposal Interests of Patriots Directors and
Executive Officers in the Merger, Patriots executive
officers may be entitled to receive aggregate payments of up to
approximately $2,453,613 for accelerated vesting and payout of
stock options and restricted stock upon completion of the
merger. The maximum amounts that would be payable to
Patriots named executive officers in the aggregate under
each of their current employment agreements or severance
agreements assuming that certain conditions regarding change of
control and termination are met would be up to approximately
$11,704,415. Certain existing executive officers of Patriot may,
however, become paid employees of the merged company or its
external investment adviser. See The Merger
Proposal Interests of Patriots Directors and
Executive Officers in the Merger beginning on
page for a further description of these
interests, including the payments that each executive officer is
or may be entitled to receive upon completion of the merger.
Including shares of restricted stock that will vest upon the
merger, the directors and executive officers of Patriot, hold
approximately 15.83% of the beneficial and record ownership of
Patriots common stock as of October 16, 2009, and
intend to vote their shares in favor of the merger agreement and
the transactions contemplated by the merger.
22
Patriot
shareholders who do not timely exchange their Patriot common
stock certificates for Prospect common stock after the
completion of the merger will be deemed to have elected to
receive dividends and other distributions declared after the
completion of the merger with respect to Prospect common stock
in the form of Prospect common stock in accordance with
Prospects dividend reinvestment plan, and, as a result,
may suffer adverse tax consequences.
As soon as reasonably practicable after completion of the
merger, the exchange agent will mail a letter of transmittal to
each holder of a Patriot common stock certificate at the
effective time of the merger. This mailing will contain
instructions on how to surrender Patriot common stock
certificates in exchange for statements indicating book-entry
ownership of Prospect common stock and a check in the amount of
cash to be paid instead of fractional shares. Until Patriot
common stock is surrendered for exchange, any dividends or other
distributions declared after the completion of the merger with
respect to Prospect common stock into which shares of Patriot
common stock may have been converted will accrue, without
interest, but will not be paid. Prospect will pay to former
Patriot shareholders any unpaid dividends or other
distributions, without interest, only after they have duly
surrendered their Patriot stock certificates. In addition, the
merger agreement provides that any such unpaid dividends or
other distributions will be payable in the form of shares of
Prospects common stock in accordance with Prospects
dividend reinvestment plan. Because shareholders who receive
distributions in the form of stock generally will be subject to
the same federal, state and local tax consequences as
shareholders who elect to receive their distributions in cash,
Patriot shareholders who do not timely exchange their Patriot
common stock certificates for Prospect common stock after the
completion of the merger may suffer adverse tax consequences.
Prospect
may be unable to realize the benefits anticipated by the merger
or may take longer than anticipated to achieve such
benefits.
The realization of certain benefits anticipated as a result of
the merger will depend in part on the integration of
Patriots investment portfolio with Prospect and the
successful inclusion of Patriots investment portfolio in
Prospects financing operations. There can be no assurance
that Patriots business can be operated profitably or
integrated successfully into Prospects operations in a
timely fashion or at all. The dedication of management resources
to such integration may detract attention from the
day-to-day
business of Prospect and there can be no assurance that there
will not be substantial costs associated with the transition
process or there will not be other material adverse effects as a
result of these integration efforts. Such effects, including but
not limited to, incurring unexpected costs or delays in
connection with such integration and failure of Patriots
investment portfolio to perform as expected, could have a
material adverse effect on the financial results of Prospect.
Risks
Related to Prospect
Recent
developments may increase the risks associated with
Prospects business and an investment in
Prospect.
The U.S. financial markets have been experiencing a high
level of volatility, disruption and distress, which was
exacerbated by the failure of several major financial
institutions in the last few months of 2008. In addition, the
U.S. economy has entered a recession, which is likely to be
severe and prolonged. Similar conditions have occurred in the
financial markets and economies of numerous other countries and
could worsen, both in the U.S. and globally. These
conditions have raised the level of many of the risks described
in the risk factors contained in this document and could have an
adverse effect on Prospects portfolio companies as well as
on its business, financial condition, results of operations,
dividend payments, credit facility, access to capital, valuation
of its assets and its stock price.
Prospects
financial condition and results of operations will depend on its
ability to manage its future growth effectively.
Prospect Capital Management, Prospects external investment
adviser, has been registered as an investment adviser since
March 31, 2004, and Prospect has been organized as a
closed-end investment company
23
since April 13, 2004. As such, each entity is subject to
the business risks and uncertainties associated with any young
business enterprise, including the limited experience in
managing or operating a business development company under the
1940 Act. Prospects ability to achieve its investment
objective depends on its ability to grow, which depends, in
turn, on Prospect Capital Managements ability to continue
to identify, analyze, invest in and monitor companies that meet
its investment criteria. Accomplishing this result on a
cost-effective basis is largely a function of Prospect Capital
Managements structuring of investments, its ability to
provide competent, attentive and efficient services to Prospect
and its access to financing on acceptable terms. As Prospect
grows, it will need to continue to hire, train, supervise and
manage new employees. Failure to manage its future growth
effectively could have a materially adverse effect on its
business, financial condition and results of operations.
Prospect
is dependent upon Prospect Capital Managements key
management personnel for its future success.
Prospect depends on the diligence, skill and network of business
contacts of the senior management of Prospect Capital
Management. Prospect also depends, to a significant extent, on
Prospect Capital Managements access to the investment
professionals and the information and deal flow generated by
these investment professionals in the course of their investment
and portfolio management activities. The senior management team
of Prospect Capital Management evaluates, negotiates,
structures, closes, monitors and services Prospects
investments. Prospects success depends to a significant
extent on the continued service of the senior management team,
particularly John F. Barry III and M. Grier Eliasek. The
departure of any of the senior management team could have a
materially adverse effect on Prospects ability to achieve
its investment objective. In addition, Prospect can offer no
assurance that Prospect Capital Management will remain its
investment adviser or that it will continue to have access to
its investment professionals or its information and deal flow.
Prospect
operates in a highly competitive market for investment
opportunities.
A large number of entities compete with Prospect to make the
types of investments that it makes in target companies. Prospect
competes with other business development companies, public and
private funds, commercial and investment banks and commercial
financing companies. Additionally, because competition for
investment opportunities generally has increased among
alternative investment vehicles, such as hedge funds, those
entities have begun to invest in areas they have not
traditionally invested in, including investments in
middle-market companies. As a result of these new entrants,
competition for investment opportunities at middle-market
companies has intensified, a trend Prospect expects to continue.
Many of Prospects existing and potential competitors are
substantially larger and have considerably greater financial,
technical and marketing resources than it does. For example,
some competitors may have a lower cost of funds and access to
funding sources that are not available to Prospect. In addition,
some of its competitors may have higher risk tolerances or
different risk assessments, which could allow them to consider a
wider variety of investments and establish more or fuller
relationships with borrowers and sponsors than Prospect.
Furthermore, many of its competitors are not subject to the
regulatory restrictions that the 1940 Act imposes on it as a
business development company. Prospect cannot assure its
shareholders that the competitive pressures it faces will not
have a materially adverse effect on its business, financial
condition and results of operations. Also, as a result of
existing and increasing competition and its competitors ability
to provide a total package solution, it may not be able to take
advantage of attractive investment opportunities from time to
time, and it can offer no assurance that it will be able to
identify and make investments that are consistent with its
investment objective.
Prospect does not seek to compete primarily based on the
interest rates that it offers, and it believes that some of its
competitors make loans with interest rates that are comparable
to or lower than the rates it offers. Prospect may lose
investment opportunities if it does not match its
competitors pricing, terms and structure. If it matches
its competitors pricing, terms and structure, it may
experience decreased net interest income and increased risk of
credit loss.
24
Most
of Prospects portfolio investments are recorded at fair
value as determined in good faith by its board of directors and,
as a result, there is uncertainty as to the value of its
portfolio investments.
A large percentage of Prospects portfolio investments
consist of securities of privately held companies. Hence, market
quotations are generally not readily available for determining
the fair values of such investments. The determination of fair
value, and thus the amount of unrealized losses it may incur in
any year, is to a degree subjective, and Prospect Capital
Management has a conflict of interest in making the
determination. Prospect values these securities quarterly at
fair value as determined in good faith by its board of directors
based on input from Prospect Capital Management, a third party
independent valuation firm and its audit committee.
Prospects board of directors utilizes the services of an
independent valuation firm to aid it in determining the fair
value of any securities. The types of factors that may be
considered in determining the fair values of its investments
include the nature and realizable value of any collateral, the
portfolio companys ability to make payments and its
earnings, the markets in which the portfolio company does
business, comparison to publicly traded companies, discounted
cash flow, current market interest rates and other relevant
factors. Because such valuations, and particularly valuations of
private securities and private companies, are inherently
uncertain, the valuations may fluctuate significantly over short
periods of time due to changes in current market conditions. The
determinations of fair value by Prospects board of
directors may differ materially from the values that would have
been used if an active market and market quotations existed for
these investments. Prospects net asset value could be
adversely affected if the determinations regarding the fair
value of its investments were materially higher than the values
that it ultimately realize upon the disposal of such securities.
Senior
securities, including debt, expose Prospect to additional risks,
including the typical risks associated with
leverage.
Prospect currently uses its revolving credit facility to
leverage its portfolio and it expects in the future to borrow
from and issue senior debt securities to banks and other lenders
and may securitize certain of its portfolio investments.
With certain limited exceptions, as a business development
company, Prospect is only allowed to borrow amounts such that
its asset coverage, as defined in the 1940 Act, is at least 200%
after such borrowing. The amount of leverage that it employs
will depend on Prospect Capital Managements and
Prospects board of directors assessment of market
conditions and other factors at the time of any proposed
borrowing. There is no assurance that a leveraging strategy will
be successful. Leverage involves risks and special
considerations for shareholders, including:
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A likelihood of greater volatility in the net asset value and
market price of its common stock;
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Diminished operating flexibility as a result of asset coverage
or investment portfolio composition requirements that are more
stringent than those imposed by the 1940 Act;
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The possibility that investments will have to be liquidated at
less than full value or at inopportune times to comply with debt
covenants or to pay interest or dividends on the leverage;
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Increased operating expenses due to the cost of leverage,
including issuance and servicing costs;
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Convertible or exchangeable securities issued in the future may
have rights, preferences and privileges more favorable than
those of Prospects common stock; and
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Subordination to lenders superior claims on
Prospects assets as a result of which lenders will be able
to receive proceeds available in the case of its liquidation
before any proceeds are distributed to Prospects
shareholders.
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For example, the amount Prospect may borrow under its revolving
credit facility is determined, in part, by the fair value of its
investments. If the fair value of Prospects investments
declines, it may be forced to sell investments at a loss to
maintain compliance with its borrowing limits. Other debt
facilities Prospect may enter into in the future may contain
similar provisions. Any such forced sales would reduce
Prospects net asset value and also make it difficult for
the net asset value to recover.
25
Prospect Capital Management and Prospects board of
directors in their best judgment nevertheless may determine to
use leverage if they expect that the benefits to its
shareholders of maintaining the leveraged position will outweigh
the risks.
Changes
in interest rates may affect Prospects cost of capital and
net investment income.
A significant portion of the debt investments Prospect makes
bear interest at fixed rates and the value of these investments
could be negatively affected by increases in market interest
rates. In addition, as the interest rate on Prospects
revolving credit facility is at a variable rate based on an
index, an increase in interest rates would make it more
expensive to use debt to finance its investments. As a result, a
significant increase in market interest rates could both reduce
the value of its portfolio investments and increase its cost of
capital, which would reduce Prospects net investment
income.
Prospect
needs to raise additional capital to grow because it must
distribute most of its income.
Prospect needs additional capital to fund growth in its
investments. A reduction in the availability of new capital
could limit Prospects ability to grow. Prospect must
distribute at least 90% of its ordinary income and realized net
short-term capital gains in excess of realized net long-term
capital losses, if any, to its shareholders to maintain its RIC
status. As a result, such earnings are not available to fund
investment originations. Prospect has sought additional capital
by borrowing from financial institutions and may issue debt
securities or additional equity securities. If Prospect fails to
obtain funds from such sources or from other sources to fund its
investments, it could be limited in its ability to grow, which
may have an adverse effect on the value of its common stock. In
addition, as a business development company, Prospect is
generally required to maintain a ratio of at least 200% of total
assets to total borrowings, which may restrict its ability to
borrow in certain circumstances.
The
lack of liquidity in Prospects investments may adversely
affect its business.
Prospect generally makes investments in private companies.
Substantially all of these securities are subject to legal and
other restrictions on resale or are otherwise less liquid than
publicly traded securities. The illiquidity of Prospects
investments may make it difficult for it to sell such
investments if the need arises. In addition, if Prospect is
required to liquidate all or a portion of its portfolio quickly,
it may realize significantly less than the value at which it has
previously recorded its investments. In addition, Prospect may
face other restrictions on its ability to liquidate an
investment in a portfolio company to the extent that Prospect or
Prospect Capital Management has material non-public information
regarding such portfolio company.
Prospect
may experience fluctuations in its quarterly
results.
Prospect could experience fluctuations in its quarterly
operating results due to a number of factors, including the
interest or dividend rates payable on the debt or equity
securities it acquires, the default rate on debt securities, the
level of its expenses, variations in and the timing of the
recognition of realized and unrealized gains or losses, the
degree to which it encounters competition in its markets, the
seasonality of the energy industry, weather patterns, changes in
energy prices and general economic conditions. As a result of
these factors, results for any period should not be relied upon
as being indicative of performance in future periods.
Prospects
most recent net asset value was calculated on June 30, 2009
and its net asset value when calculated on September 30,
2009 may be higher or lower.
Prospects most recently estimated net asset value per
share is $11.22 on an as adjusted basis solely to give effect to
its payment of the July dividend recorded on ex-dividend date of
July 6, 2009 and the issuance of common shares on
July 20, 2009 in connection with its dividend reinvestment
plan, and issuances on July 7, 2009, August 20, 2009
and September 24, 2009 in an underwritten common and two
unregistered direct common stock offerings, versus $12.40
determined by Prospects Board of Directors on
June 30, 2009. Net asset value as of September 30,
2009 may be higher or lower than $11.22 based on potential
changes in
26
valuations. Prospects Board of Directors determines the
fair value of Prospects portfolio investments on a
quarterly basis in connection with the preparation of quarterly
financial statements and based on input from an independent
valuation firm, its Investment Advisor and the audit committee
of its Board of Directors.
Sales
of substantial amounts of Prospects securities in the
public market may have an adverse effect on the market price of
its securities.
As of September 30, 2009, Prospect has
54,672,155 shares of common stock outstanding. Sales of
substantial amounts of its securities or the availability of
such securities for sale could adversely affect the prevailing
market price of its securities. If this occurs and continues, it
could impair Prospects ability to raise additional capital
through the sale of securities should it desire to do so.
Potential
conflicts of interest could impact Prospects investment
returns.
Prospects executive officers and directors, and the
executive officers of Prospect Capital Management may serve as
officers, directors or principals of entities that operate in
the same or related lines of business as it does or of
investment funds managed by its affiliates. Accordingly, they
may have obligations to investors in those entities, the
fulfillment of which might not be in Prospects best
interests or those of its shareholders. Nevertheless, it is
possible that new investment opportunities that meet
Prospects investment objectives may come to the attention
of one of these entities in connection with another investment
advisory client or program, and, if so, such opportunity might
not be offered, or otherwise made available, to Prospect.
However, as an investment adviser, Prospect Capital Management
has a fiduciary obligation to act in the best interests of its
clients, including Prospect. To that end, if Prospect Capital
Management or its affiliates manage any additional investment
vehicles or client accounts in the future, Prospect Capital
Management will endeavor to allocate investment opportunities in
a fair and equitable manner over time so as not to discriminate
unfairly against any client. If Prospect Capital Management
chooses to establish another investment fund in the future, when
the investment professionals of Prospect Capital Management
identify an investment, they will have to choose which
investment fund should make the investment.
In the course of Prospects investing activities, it pays a
base management and incentive fees to Prospect Capital
Management in accordance with the terms of an investment
advisory agreement, and reimburses Prospect Capital Management
for certain expenses it incurs. As a result of these
arrangements, there may be times when the senior management team
of Prospect Capital Management has interests that differ from
those of Prospects shareholders, giving rise to a conflict.
Prospect Capital Management receives a quarterly income
incentive fee based, in part, on Prospects pre-incentive
fee net investment income, if any, for the immediately preceding
calendar quarter. This income incentive fee is subject to a
fixed quarterly hurdle rate before providing an income incentive
fee return to Prospect Capital Management. This fixed hurdle
rate was determined when then current interest rates were
relatively low on a historical basis. Thus, if interest rates
rise, it would become easier for Prospects investment
income to exceed the hurdle rate and, as a result, more likely
that Prospect Capital Management will receive an income
incentive fee than if interest rates on its investments remained
constant or decreased. Subject to the receipt of any requisite
shareholder approval under the 1940 Act, Prospects board
of directors may readjust the hurdle rate by amending the
investment advisory agreement between it and Prospect Capital
Management.
The income incentive fee payable by Prospect is computed and
paid on income that may include interest that has been accrued
but not yet received in cash. If a portfolio company defaults on
a loan that has a deferred interest feature, it is possible that
interest accrued under such loan that has previously been
included in the calculation of the income incentive fee will
become uncollectible. If this happens, Prospect Capital
Management is not required to reimburse Prospect for any such
income incentive fee payments. If Prospect does not have
sufficient liquid assets to pay this incentive fee or
distributions to shareholders on such accrued income, it may be
required to liquidate assets in order to do so. This fee
structure could give rise to a conflict of interest for Prospect
Capital Management to the extent that it may encourage Prospect
Capital Management to favor debt financings that provide for
deferred interest, rather than current cash payments of interest.
27
Prospect has entered into a royalty-free license agreement with
Prospect Capital Management. Under this agreement, Prospect
Capital Management agrees to grant Prospect a non-exclusive
license to use the name Prospect Capital. Under the
license agreement, Prospect has the right to use the
Prospect Capital name for so long as Prospect
Capital Management or one of its affiliates remains
Prospects investment adviser. In addition, Prospect rents
office space from Prospect Administration, an affiliate of
Prospect Capital Management, and pays Prospect Administration
its allocable portion of overhead and other expenses incurred by
Prospect Administration in performing its obligations as
administrator under an administration agreement between Prospect
and Prospect Administration, including rent and Prospects
allocable portion of the costs of its chief financial officer
and chief compliance officer and their respective staffs. This
may create conflicts of interest that Prospects board of
directors monitors.
Prospects
incentive fee could induce Prospect Capital Management to make
speculative investments.
The incentive fee payable by Prospect to Prospect Capital
Management may create an incentive for Prospect Capital
Management to make investments on Prospects behalf that
are more speculative or involve more risk than would be the case
in the absence of such compensation arrangement. The way in
which the incentive fee payable is determined (calculated as a
percentage of the return on invested capital) may encourage
Prospect Capital Management to use leverage to increase the
return on Prospects investments. Increased use of leverage
and this increased risk of replacement of that leverage at
maturity, would increase the likelihood of default, which would
disfavor holders of Prospects common stock. Similarly,
because Prospect Capital Management will receive an incentive
fee based, in part, upon net capital gains realized on
Prospects investments, Prospect Capital Management may
invest more than would otherwise be appropriate in companies
whose securities are likely to yield capital gains, as compared
to income producing securities. Such a practice could result in
Prospects investing in more speculative securities than
would otherwise be the case, which could result in higher
investment losses, particularly during economic downturns.
The incentive fee payable by Prospect to Prospect Capital
Management could create an incentive for Prospect Capital
Management to invest on Prospects behalf in instruments,
such as zero coupon bonds, that have a deferred interest
feature. Under these investments, Prospect would accrue interest
income over the life of the investment but would not receive
payments in cash on the investment until the end of the term.
Prospects net investment income used to calculate the
income incentive fee, however, includes accrued interest. For
example, accrued interest, if any, on Prospects
investments in zero coupon bonds will be included in the
calculation of its incentive fee, even though it will not
receive any cash interest payments in respect of payment on the
bond until its maturity date. Thus, a portion of this incentive
fee would be based on income that it may not have yet received
in cash and in the event of default may never receive.
Changes
in laws or regulations governing Prospects operations may
adversely affect its business.
Prospect and its portfolio companies are subject to regulation
by laws at the local, state and U.S. Federal levels. These
laws and regulations, as well as their interpretation, may be
changed from time to time. Accordingly, changes in these laws or
regulations could have a materially adverse effect on
Prospects business.
Prospect
may in the future choose to pay dividends in its own stock, in
which case its shareholders may be required to pay tax in excess
of the cash they receive.
Prospect may distribute taxable dividends that are payable in
part in its stock. Under a recently issued IRS revenue
procedure, up to 90% of any such taxable dividend for 2009 could
be payable in its stock. Taxable stockholders receiving such
dividends would be required to include the full amount of the
dividend as ordinary income (or as long-term capital gain to the
extent such distribution is properly designated as a capital
gain dividend) to the extent of its current and accumulated
earnings and profits for United States federal income tax
purposes. As a result, a U.S. stockholder may be required
to pay tax with respect to such dividends in excess of any cash
received. If a U.S. stockholder sells the stock it receives
as a dividend in order to pay this tax, it may be subject to
transaction fees (e.g., broker fees or transfer agent fees) and
the sales proceeds may be less than the amount included in
income with respect to the dividend, depending on the market
price
28
of Prospects stock at the time of the sale. Furthermore,
with respect to
non-U.S. stockholders,
Prospect may be required to withhold U.S. tax with respect
to such dividends, including in respect of all or a portion of
such dividend that is payable in stock. In addition, if a
significant number of Prospects stockholders determine to
sell shares of its stock in order to pay taxes owed on
dividends, it may put downward pressure on the trading price of
Prospects stock.
Prospect
Capital Management and its senior management team have limited
experience managing a business development company under the
1940 Act.
The 1940 Act imposes numerous constraints on the operations of
business development companies. For example, business
development companies are, with narrow exceptions, required to
invest at least 70% of their total assets in securities of
certain privately held, thinly traded or distressed
U.S. companies, cash, cash equivalents,
U.S. government securities and other high quality debt
investments that mature in one year or less. Prospect Capital
Management and its senior management teams limited
experience in managing a portfolio of assets under such
constraints may hinder their ability to take advantage of
attractive investment opportunities and, as a result, achieve
Prospects investment objective. In addition,
Prospects investment strategies differ in some ways from
those of other investment funds that have been managed in the
past by the investment advisers investment professionals.
A
failure on Prospects part to maintain its status as a
business development company would significantly reduce its
operating flexibility.
If Prospect does not continue to qualify as a business
development company, it might be regulated as a registered
closed-end investment company under the 1940 Act.
Prospects failure to qualify as a business development
company would make it subject to additional regulatory
requirements, which may significantly decrease its operating
flexibility by limiting its ability to employ leverage.
If
Prospect fails to qualify as a RIC, it will have to pay
corporate-level taxes on its income, and its income available
for distribution would be reduced.
To maintain its qualification for U.S. Federal income tax
purposes as a RIC under Subchapter M of the Code, and obtain RIC
tax treatment, Prospect must meet certain source of income,
asset diversification and annual distribution requirements.
The source of income requirement is satisfied if Prospect
derives at least 90% of its annual gross income from interest,
dividends, payments with respect to certain securities loans,
gains from the sale or other disposition of stock, securities or
options thereon or foreign currencies, or other income derived
with respect to its business of investing in such stock,
securities or currencies, and net income from interests in
qualified publicly traded partnerships, as defined
in the Code.
The annual distribution requirement for a RIC is satisfied if
Prospect distributes at least 90% of its investment company
taxable income (which generally is its ordinary income and
realized net short-term capital gains in excess of realized net
long-term capital losses), if any, to its shareholders on an
annual basis. Because Prospect uses debt financing, it is
subject to certain asset coverage ratio requirements under the
1940 Act and financial covenants that could, under certain
circumstances, restrict it from making distributions necessary
to qualify for RIC tax treatment. If it is unable to obtain cash
from other sources, Prospect may fail to qualify for RIC tax
treatment and, thus, may be subject to corporate-level income
tax.
To maintain its qualification as a RIC, Prospect must also meet
certain asset diversification requirements at the end of each
calendar quarter. Failure to meet these tests may result in its
having to dispose of certain investments quickly in order to
prevent the loss of RIC status. Because most of its investments
are in private companies, any such dispositions could be made at
disadvantageous prices and may result in substantial losses.
If Prospect fails to qualify as a RIC for any reason or become
subject to corporate income tax, the resulting corporate taxes
could substantially reduce its net assets, the amount of income
available for
29
distribution, and the actual amount of its distributions. Such a
failure would have a materially adverse effect on Prospect and
its shareholders.
Regulations
governing Prospects operation as a business development
company affect its ability to raise, and the way in which it
raises, additional capital.
Prospect has incurred indebtedness under its revolving credit
facility and, in the future, may issue preferred stock
and/or
borrow additional money from banks or other financial
institutions, which it refers to collectively as senior
securities, up to the maximum amount permitted by the 1940
Act. Under the provisions of the 1940 Act, Prospect is
permitted, as a business development company, to incur
indebtedness or issue senior securities only in amounts such
that its asset coverage, as defined in the 1940 Act, equals at
least 200% after each issuance of senior securities. If the
value of its assets declines, it may be unable to satisfy this
test, which could prohibit it from paying dividends and could
prohibit Prospect from qualifying as a RIC. If Prospect cannot
satisfy this test, it may be required to sell a portion of its
investments or sell additional shares of common stock at a time
when such sales may be disadvantageous in order to repay a
portion of its indebtedness. In addition, issuance of additional
common stock could dilute the percentage ownership of its
current shareholders in it.
As a business development company regulated under provisions of
the 1940 Act, Prospect is not generally able to issue and sell
its common stock at a price below the current net asset value
per share. If its common stock trades at a discount to net asset
value, this restriction could adversely affect its ability to
raise capital. Prospect may, however, sell its common stock, or
warrants, options or rights to acquire its common stock, at a
price below the current net asset value of its common stock in
certain circumstances, including if (1) the holders of a
majority of its shares (or, if less, at least 67% of a quorum
consisting of a majority of its shares) and a similar majority
of the holders of its shares who are not affiliated persons of
it approve the sale of its common stock at a price that is less
than the current net asset value, and (2) a majority of its
directors who have no financial interest in the transaction and
a majority of its independent directors (a) determine that
such sale is in its and its shareholders best interests
and (b) in consultation with any underwriter or
underwriters of the offering, make a good faith determination as
of a time either immediately prior to the first solicitation by
it or on its behalf of firm commitments to purchase such shares,
or immediately prior to the issuance of such shares, that the
price at which such shares are to be sold is not less than a
price which closely approximates the market value of such
shares, less any distributing commission or discount.
To generate cash for funding new investments, Prospect pledged a
substantial portion of its portfolio investments under its
revolving credit facility. These assets are not available to
secure other sources of funding or for securitization.
Prospects ability to obtain additional secured or
unsecured financing on attractive terms in the future is
uncertain.
Alternatively, Prospect may securitize its future loans to
generate cash for funding new investments. To securitize loans,
it may create a wholly owned subsidiary and contribute a pool of
loans to such subsidiary. This could include the sale of
interests in the loans by the subsidiary on a non-recourse basis
to purchasers who it would expect to be willing to accept a
lower interest rate to invest in investment grade loan pools.
Prospect would retain a portion of the equity in the securitized
pool of loans. An inability to successfully securitize its loan
portfolio could limit its ability to grow its business and fully
execute its business strategy, and could decrease its earnings,
if any. Moreover, the successful securitization of its loan
portfolio exposes it to a risk of loss for the equity it retains
in the securitized pool of loans and might expose it to losses
because the residual loans in which it does not sell interests
may tend to be those that are riskier and more likely to
generate losses. A successful securitization may also impose
financial and operating covenants that restrict its business
activities and may include limitations that could hinder its
ability to finance additional loans and investments or to make
the distributions required to maintain its status as a RIC under
Subchapter M of the Code. The 1940 Act may also impose
restrictions on the structure of any securitizations.
30
Prospects
common stock may trade at a discount to its net asset value per
share.
Common stock of business development companies, like that of
closed-end investment companies, frequently trades at a discount
to current net asset value. Recently, Prospects common
stock has traded at a discount to its net asset value. The risk
that its common stock may continue to trade at a discount to its
net asset value is separate and distinct from the risk that its
net asset value per share may decline.
If
Prospect sells common stock at a discount to its net asset value
per share, shareholders who do not participate in such sale will
experience immediate dilution in an amount that may be
material.
At Prospects annual meeting of shareholders held on
February 12, 2009, its shareholders approved its ability to
sell an unlimited number of shares of its common stock at any
level of discount from net asset value per share during the
12 month period following such approval. The issuance or
sale by Prospect of shares of its common stock at a discount to
net asset value poses a risk of dilution to its shareholders. In
particular, shareholders who do not purchase additional shares
at or below the discounted price in proportion to their current
ownership will experience an immediate decrease in net asset
value per share (as well as in the aggregate net asset value of
their shares if they do not participate at all). These
shareholders will also experience a disproportionately greater
decrease in their participation in Prospects earnings and
assets and their voting power than the increase Prospect
experiences in its assets, potential earning power and voting
interests from such issuance or sale. They may also experience a
reduction in the market price of its common stock. In addition,
sales of common stock at a discount to net asset value will
benefit Prospects investment advisor because the
investment advisor will earn additional investment management
fees on the proceeds of such offerings, as it would from the
offering of any other securities of Prospect or from the
offering of Prospects common stock at a premium to net
asset value per share.
Prospect
may have difficulty paying its required distributions if it
recognizes income before or without receiving cash representing
such income.
For U.S. federal income tax purposes, Prospect includes in
income certain amounts that it has not yet received in cash,
such as original issue discount, which may arise if it receives
warrants in connection with the making of a loan or possibly in
other circumstances, or
payment-in-kind
interest, which represents contractual interest added to the
loan balance and due at the end of the loan term. Such original
issue discount, which could be significant relative to its
overall investment activities, or increases in loan balances as
a result of
payment-in-kind
arrangements, are included in its taxable income before it
receives any corresponding cash payments. Prospect also may be
required to include in taxable income certain other amounts that
it does not receive in cash. While Prospect focuses primarily on
investments that will generate a current cash return, its
investment portfolio currently includes, and it may continue to
invest in, securities that do not pay some or all of their
return in periodic current cash distributions.
The income incentive fee payable by Prospect is computed and
paid on income that may include interest that has been accrued
but not yet received in cash. If a portfolio company defaults on
a loan that is structured to provide accrued interest, it is
possible that accrued interest previously used in the
calculation of the income incentive fee will become
uncollectible.
Since in some cases Prospect may recognize taxable income before
or without receiving cash representing such income, it may have
difficulty meeting the tax requirement to distribute at least
90% of its ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if
any, to maintain RIC tax treatment. Accordingly, Prospect may
have to sell some of its investments at times it would not
consider advantageous, raise additional debt or equity capital
or reduce new investment originations to meet these distribution
requirements. If Prospect is not able to obtain cash from other
sources, it may fail to qualify for RIC treatment and thus
become subject to corporate-level income tax.
Prospects
ability to enter into transactions with its affiliates is
restricted.
Prospect is prohibited under the 1940 Act from knowingly
participating in certain transactions with its affiliates
without the prior approval of its independent directors. Any
person that owns, directly or indirectly,
31
5% or more of its outstanding voting securities is
Prospects affiliate for purposes of the 1940 Act and
Prospect is generally prohibited from buying or selling any
security or other property from or to such affiliate, absent the
prior approval of its independent directors. The 1940 Act also
prohibits joint transactions with an affiliate,
which could include investments in the same portfolio company
(whether at the same or different times), without prior approval
of its independent directors. Prospect is prohibited from buying
or selling any security or other property from or to Prospect
Capital Management and its affiliates and persons with whom
Prospect is in a control relationship, or entering into joint
transactions with any such person, absent the prior approval of
the SEC.
Prospect
may not realize gains or income from its
investments.
Prospect seeks to generate both current income and capital
appreciation. However, the securities it invests in may not
appreciate and, in fact, may decline in value, and the issuers
of debt securities it invests in may default on interest
and/or
principal payments. Accordingly, it may not be able to realize
gains from its investments, and any gains that it does realize
may not be sufficient to offset any losses it experience.
Prospects portfolio is currently concentrated in a limited
number of portfolio companies in the energy industry, which
subject it to a risk of significant loss if any of these
companies defaults on its obligations under any of the
securities that it holds or if the energy industry experiences a
downturn.
As of June 30, 2009, Prospect had invested in a number of
companies in the energy and energy related industries. A
consequence of this lack of diversification is that the
aggregate returns it realizes may be significantly and adversely
affected if a small number of such investments perform poorly or
if it needed to write down the value of any one investment.
Beyond its income tax diversification requirements, it does not
have fixed guidelines for diversification, and its investments
are concentrated in relatively few portfolio companies. In
addition, to date Prospect has concentrated on making
investments in the energy industry. While it expects to be less
focused on the energy and energy related industries in the
future, Prospect anticipates that it will continue to have
significant holdings in the energy and energy related
industries. As a result, a downturn in the energy industry could
materially and adversely affect it.
The
energy industry is subject to many risks.
Prospect has a significant concentration in the energy industry.
Prospects definition of energy, as used in the context of
the energy industry, is broad, and different sectors in the
energy industry may be subject to variable risks and economic
pressures. As a result, it is difficult to anticipate the impact
of changing economic and political conditions on Prospects
portfolio companies and, as a result, its financial results. The
revenues, income (or losses) and valuations of energy companies
can fluctuate suddenly and dramatically due to any one or more
of the following factors:
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Commodity Pricing Risk. Energy companies in
general are directly affected by energy commodity prices, such
as the market prices of crude oil, natural gas and wholesale
electricity, especially for those that own the underlying energy
commodity. In addition, the volatility of commodity prices can
affect other energy companies due to the impact of prices on the
volume of commodities transported, processed, stored or
distributed and on the cost of fuel for power generation
companies. The volatility of commodity prices can also affect
energy companies ability to access the capital markets in
light of market perception that their performance may be
directly tied to commodity prices. Historically, energy
commodity prices have been cyclical and exhibited significant
volatility. Although Prospect generally prefers risk controls,
including appropriate commodity and other hedges, by certain of
its portfolio companies, if available, some of its portfolio
companies may not engage in hedging transactions to minimize
their exposure to commodity price risk. For those companies that
engage in such hedging transactions, they remain subject to
market risks, including market liquidity and counterparty
creditworthiness. In addition, such companies may also still
have exposure to market prices if such companies do not produce
volumes or other contractual obligations in accordance with such
hedging contracts.
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Regulatory Risk. The profitability of energy
companies could be adversely affected by changes in the
regulatory environment. The businesses of energy companies are
heavily regulated by U.S. Federal, state
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and local governments in diverse ways, such as the way in which
energy assets are constructed, maintained and operated and the
prices energy companies may charge for their products and
services. Such regulation can change over time in scope and
intensity. For example, a particular by-product of an energy
process may be declared hazardous by a regulatory agency, which
can unexpectedly increase production costs. Moreover, many state
and U.S. Federal environmental laws provide for civil
penalties as well as regulatory remediation, thus adding to the
potential liability an energy company may face. In addition, the
deregulation of energy markets and the unresolved regulatory
issues related to some power markets such as California create
uncertainty in the regulatory environment as rules and
regulations may be adopted on a transitional basis. Prospect
cannot assure its shareholders that the deregulation of energy
markets will continue and if it continues, whether its impact on
energy companies profitability will be positive.
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Production Risk. The profitability of energy
companies may be materially impacted by the volume of crude oil,
natural gas or other energy commodities available for
transporting, processing, storing, distributing or power
generation. A significant decrease in the production of natural
gas, crude oil, coal or other energy commodities, due to the
decline of production from existing facilities, import supply
disruption, depressed commodity prices, political events,
Organization of Petroleum Exporting Countries actions or
otherwise, could reduce revenue and operating income or increase
operating costs of energy companies and, therefore, their
ability to pay debt or dividends.
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Demand Risk. A sustained decline in demand for
crude oil, natural gas, refined petroleum products and
electricity could materially affect revenues and cash flows of
energy companies. Factors that could lead to a decrease in
market demand include a recession or other adverse economic
conditions, an increase in the market price of the underlying
commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such products.
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Depletion and Exploration Risk. A portion of
any one energy companys assets may be dedicated to natural
gas, crude oil
and/or coal
reserves and other commodities that naturally deplete over time.
Depletion could have a materially adverse impact on such
companys ability to maintain its revenue. Further,
estimates of energy reserves may not be accurate and, even if
accurate, reserves may not be fully utilized at reasonable
costs. Exploration of energy resources, especially of oil and
gas, is inherently risky and requires large amounts of capital.
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Weather Risk. Unseasonable extreme weather
patterns could result in significant volatility in demand for
energy and power. In addition, hurricanes, storms, tornados,
floods, rain, and other significant weather events could disrupt
supply and other operations at its portfolio companies as well
as customers or suppliers to such companies. This volatility may
create fluctuations in earnings of energy companies.
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Operational Risk. Energy companies are subject
to various operational risks, such as failed drilling or well
development, unscheduled outages, underestimated cost
projections, unanticipated operation and maintenance expenses,
failure to obtain the necessary permits to operate and failure
of third-party contractors (for example, energy producers and
shippers) to perform their contractual obligations. In addition,
energy companies employ a variety of means of increasing cash
flow, including increasing utilization of existing facilities,
expanding operations through new construction, expanding
operations through acquisitions, or securing additional
long-term contracts. Thus, some energy companies may be subject
to construction risk, acquisition risk or other risk factors
arising from their specific business strategies.
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Competition Risk. The progress in deregulating
energy markets has created more competition in the energy
industry. This competition is reflected in risks associated with
marketing and selling energy in the evolving energy market and a
competitors development of a lower-cost energy or power
source, or of a lower cost means of operations, and other risks
arising from competition.
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Valuation Risk. Since mid-2001, excess power
generation capacity in certain regions of the United States has
caused substantial decreases in the market capitalization of
many energy companies. While such prices have recovered to some
extent, Prospect can offer no assurance that such decreases in
market capitalization will not recur, or that any future
decreases in energy company valuations will be insubstantial or
temporary in nature.
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Terrorism Risk. Since the
September 11th attacks, the U.S. government has
issued public warnings indicating that energy assets,
specifically those related to pipeline infrastructure,
production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity. The
continued threat of terrorism and related military activity will
likely increase volatility for prices of natural gas and oil and
could affect the market for products and services of energy
companies. In addition, any future terrorist attack or armed
conflict in the United States or elsewhere may undermine
economic conditions in the United States in general.
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Financing Risk. Some of Prospects
portfolio companies rely on the capital markets to raise money
to pay their existing obligations. Their ability to access the
capital markets on attractive terms or at all may be affected by
any of the risks associated with energy companies described
above, by general economic and market conditions or by other
factors. This may in turn affect their ability to satisfy their
obligations with it.
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Prospects
investments in prospective portfolio companies may be risky and
it could lose all or part of its investment.
Some of Prospects portfolio companies have relatively
short or no operating histories. These companies are and will be
subject to all of the business risk and uncertainties associated
with any new business enterprise, including the risk that these
companies may not reach their investment objective and the value
of Prospects investment in them may decline substantially
or fall to zero.
In addition, investment in the middle market companies that
Prospect is targeting involves a number of other significant
risks, including:
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these companies may have limited financial resources and may be
unable to meet their obligations under their securities that
Prospect holds, which may be accompanied by a deterioration in
the value of their securities or of any collateral with respect
to any securities and a reduction in the likelihood of it
realizing on any guarantees it may have obtained in connection
with its investment;
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they may have shorter operating histories, narrower product
lines and smaller market shares than larger businesses, which
tend to render them more vulnerable to competitors actions
and market conditions, as well as general economic downturns;
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because many of these companies are privately held companies,
public information is generally not available about these
companies. As a result, Prospect will depend on the ability of
Prospect Capital Management to obtain adequate information to
evaluate these companies in making investment decisions. If
Prospect Capital Management is unable to uncover all material
information about these companies, it may not make a fully
informed investment decision, and Prospect may lose money on its
investments;
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they are more likely to depend on the management talents and
efforts of a small group of persons; therefore, the death,
disability, resignation or termination of one or more of these
persons could have a materially adverse impact on
Prospects portfolio company and, in turn, on Prospect;
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they may have less predictable operating results, may from time
to time be parties to litigation, may be engaged in changing
businesses with products subject to a risk of obsolescence and
may require substantial additional capital to support their
operations, finance expansion or maintain their competitive
position; and
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they may have difficulty accessing the capital markets to meet
future capital needs.
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In addition, Prospects executive officers, directors and
Prospect Capital Management could, in the ordinary course of
business, be named as defendants in litigation arising from
proposed investments or from its investments in the portfolio
companies.
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Economic
recessions or downturns could impair Prospects portfolio
companies and harm its operating results.
The U.S. and most other economies have entered a
recessionary period, which may be prolonged and severe.
Prospects portfolio companies will generally be affected
by the conditions and overall strength of the national, regional
and local economies, including interest rate fluctuations,
changes in the capital markets and changes in the prices of
their primary commodities and products. These factors also
impact the amount of residential, industrial and commercial
growth in the energy industry. Additionally, these factors could
adversely impact the customer base and customer collections of
Prospects portfolio companies.
As a result, many of Prospects portfolio companies may be
susceptible to economic slowdowns or recessions and may be
unable to repay their loans or meet other obligations during
these periods. Therefore, Prospects non-performing assets
are likely to increase, and the value of its portfolio is likely
to decrease, during these periods. Adverse economic conditions
also may decrease the value of collateral securing some of
Prospects loans and the value of its equity investments.
Economic slowdowns or recessions could lead to financial losses
in its portfolio and a decrease in revenues, net income and
assets. Unfavorable economic conditions also could increase
Prospects funding costs, limit its access to the capital
markets or result in a decision by lenders not to extend credit
to it. These events could prevent Prospect from increasing
investments and harm its operating results.
A portfolio companys failure to satisfy financial or
operating covenants imposed by Prospect or other lenders could
lead to defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio
companys ability to meet its obligations under the debt or
equity securities that Prospect holds. Prospect may incur
expenses to the extent necessary to seek recovery upon default
or to negotiate new terms, which may include the waiver of
certain financial covenants, with a defaulting portfolio
company. In addition, if one of its portfolio companies were to
go bankrupt, even though it may have structured its interest as
senior debt or preferred equity, depending on the facts and
circumstances, including the extent to which it actually
provided managerial assistance to that portfolio company, a
bankruptcy court might re-characterize its debt or equity
holding and subordinate all or a portion of its claim to those
of other creditors.
The
lack of liquidity in Prospects investments may adversely
affect its business.
Prospect makes investments in private companies. A portion of
these investments may be subject to legal and other restrictions
on resale, transfer, pledge or other disposition or will
otherwise be less liquid than publicly traded securities. The
illiquidity of its investments may make it difficult for
Prospect to sell such investments if the need arises. In
addition, if Prospect is required to liquidate all or a portion
of its portfolio quickly, it may realize significantly less than
the value at which it has previously recorded its investments.
In addition, Prospect faces other restrictions on its ability to
liquidate an investment in a business entity to the extent that
it or its investment adviser has or could be deemed to have
material non-public information regarding such business entity.
Prospect
may have limited access to information about privately held
companies in which it invests.
Prospect invests primarily in privately-held companies.
Generally, little public information exists about these
companies, and it is required to rely on the ability of Prospect
Capital Managements investment professionals to obtain
adequate information to evaluate the potential returns from
investing in these companies. These companies and their
financial information are not subject to the Sarbanes-Oxley Act
and other rules that govern public companies. If Prospect is
unable to uncover all material information about these
companies, it may not make a fully informed investment decision,
and it may lose money on its investment.
Prospect
may not be in a position to control a portfolio investment when
it is a debt or minority equity investor and its management may
make decisions that could decrease the value of its
investment.
Prospect makes both debt and minority equity investments in
portfolio companies. As a result, it is subject to the risk that
a portfolio company may make business decisions with which it
disagrees, and the
35
management of such company, as representatives of the holders of
their common equity, may take risks or otherwise act in ways
that do not serve its interests. As a result, a portfolio
company may make decisions that could decrease the value of its
portfolio holdings.
Prospects
portfolio companies may incur debt or issue equity securities
that rank equally with, or senior to, its investments in such
companies.
Prospect may invest in mezzanine debt and dividend-paying equity
securities issued by its portfolio companies. Prospects
portfolio companies usually have, or may be permitted to incur,
other debt, or issue other equity securities, that rank equally
with, or senior to, the securities in which it invests. By their
terms, such instruments may provide that the holders are
entitled to receive payment of dividends, interest or principal
on or before the dates on which it is entitled to receive
payments in respect of the securities in which it invests. Also,
in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of
securities ranking senior to its investment in that portfolio
company would typically be entitled to receive payment in full
before it receives any distribution in respect of its
investment. After repaying the senior security holders, the
portfolio company may not have any remaining assets to use for
repaying its obligation to Prospect. In the case of securities
ranking equally with securities in which Prospect invests, it
would have to share on an equal basis any distributions with
other security holders in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
Prospect
may not be able to fully realize the value of the collateral
securing its debt investments.
Although a substantial amount of Prospects debt
investments are protected by holding security interests in the
assets of the portfolio companies, it may not be able to fully
realize the value of the collateral securing its investments due
to one or more of the following factors:
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Prospects debt investments are primarily made in the form
of mezzanine loans, therefore its liens on the collateral, if
any, are subordinated to those of the senior secured debt of the
portfolio companies, if any. As a result, it may not be able to
control remedies with respect to the collateral;
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the collateral may not be valuable enough to satisfy all of the
obligations under Prospects secured loan, particularly
after giving effect to the repayment of secured debt of the
portfolio company that ranks senior to its loan;
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bankruptcy laws may limit Prospects ability to realize
value from the collateral and may delay the realization process;
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Prospects rights in the collateral may be adversely
affected by the failure to perfect security interests in the
collateral;
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the need to obtain regulatory and contractual consents could
impair or impede how effectively the collateral would be
liquidated and could affect the value received; and
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some or all of the collateral may be illiquid and may have no
readily ascertainable market value. The liquidity and value of
the collateral could be impaired as a result of changing
economic conditions, competition, and other factors, including
the availability of suitable buyers.
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Prospects
investments in foreign securities may involve significant risks
in addition to the risks inherent in U.S.
investments.
Prospects investment strategy contemplates potential
investments in securities of foreign companies. Investing in
foreign companies may expose it to additional risks not
typically associated with investing in U.S. companies.
These risks include changes in exchange control regulations,
political and social instability, expropriation, imposition of
foreign taxes, less liquid markets and less available
information than is generally the case in the United States,
higher transaction costs, less government supervision of
exchanges, brokers and issuers, less developed bankruptcy laws,
difficulty in enforcing contractual obligations, lack of uniform
accounting and auditing standards and greater price volatility.
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Although currently most of Prospects investments are, and
Prospect expects that most of its investments will be,
U.S. dollar-denominated, Prospects investments that
are denominated in a foreign currency will be subject to the
risk that the value of a particular currency will change in
relation to one or more other currencies. Among the factors that
may affect currency values are trade balances, the level of
short-term interest rates, differences in relative values of
similar assets in different currencies, long-term opportunities
for investment and capital appreciation, and political
developments.
Prospect
may expose itself to risks if it engages in hedging
transactions.
Prospect may employ hedging techniques to minimize certain
investment risks, such as fluctuations in interest and currency
exchange rates, but it can offer no assurance that such
strategies will be effective. If it engages in hedging
transactions, it may expose itself to risks associated with such
transactions. Prospect may utilize instruments such as forward
contracts, currency options and interest rate swaps, caps,
collars and floors to seek to hedge against fluctuations in the
relative values of its portfolio positions from changes in
currency exchange rates and market interest rates. Hedging
against a decline in the values of its portfolio positions does
not eliminate the possibility of fluctuations in the values of
such positions or prevent losses if the values of such positions
decline. However, such hedging can establish other positions
designed to gain from those same developments, thereby
offsetting the decline in the value of such portfolio positions.
Such hedging transactions may also limit the opportunity for
gain if the values of the portfolio positions should increase.
Moreover, it may not be possible to hedge against an exchange
rate or interest rate fluctuation that is so generally
anticipated that it is not able to enter into a hedging
transaction at an acceptable price.
The success of Prospects hedging transactions depends on
its ability to correctly predict movements, currencies and
interest rates. Therefore, while it may enter into such
transactions to seek to reduce currency exchange rate and
interest rate risks, unanticipated changes in currency exchange
rates or interest rates may result in poorer overall investment
performance than if it had not engaged in any such hedging
transactions. The degree of correlation between price movements
of the instruments used in a hedging strategy and price
movements in the portfolio positions being hedged may vary.
Moreover, for a variety of reasons, Prospect may not seek to
establish a perfect correlation between such hedging instruments
and the portfolio holdings being hedged. Any such imperfect
correlation may prevent it from achieving the intended hedge and
expose it to risk of loss. In addition, it may not be possible
to hedge fully or perfectly against currency fluctuations
affecting the value of securities denominated in
non-U.S. currencies.
Prospects
board of directors may change its operating policies and
strategies without prior notice or shareholder approval, the
effects of which may be adverse to Prospect and could impair the
value of its shareholders investment.
Prospects board of directors has the authority to modify
or waive its current operating policies and its strategies
without prior notice and without shareholder approval. Prospect
cannot predict the effect any changes to its current operating
policies and strategies would have on its business, financial
condition, and value of its common stock. However, the effects
might be adverse, which could negatively impact its ability to
pay dividends and cause shareholders to lose all or part of
their investment.
Investing
in Prospects securities may involve a high degree of
risk.
The investments Prospect makes in accordance with its investment
objective may result in a higher amount of risk than alternative
investment options and volatility or loss of principal.
Prospects investments in portfolio companies may be
speculative and aggressive, and therefore, an investment in its
shares may not be suitable for someone with low risk tolerance.
37
The
market price of Prospects securities may fluctuate
significantly.
The market price and liquidity of the market for Prospects
securities may be significantly affected by numerous factors,
some of which are beyond its control and may not be directly
related to its operating performance. These factors include:
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significant volatility in the market price and trading volume of
securities of business development companies or other companies
in the energy industry, which are not necessarily related to the
operating performance of these companies;
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changes in regulatory policies or tax guidelines, particularly
with respect to RICs or business development companies;
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loss of RIC qualification;
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changes in earnings or variations in operating results;
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changes in the value of its portfolio of investments;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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departure of one or more of Prospect Capital Managements
key personnel;
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operating performance of companies comparable to it;
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changes in prevailing interest rates;
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litigation matters;
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general economic trends and other external factors; and
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loss of a major funding source.
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There
is a risk that shareholders may not receive dividends or that
Prospects dividends may not grow over time.
Prospect has made and intends to continue to make distributions
on a quarterly basis to its shareholders out of assets legally
available for distribution. Prospect cannot assure shareholders
that it will achieve investment results or maintain a tax status
that will allow or require any specified level of cash
distributions or
year-to-year
increases in cash distributions. In addition, due to the asset
coverage test applicable to it as a business development
company, it may be limited in its ability to make distributions.
Provisions
of the Maryland General Corporation Law and of Prospects
charter and bylaws could deter takeover attempts and have an
adverse impact on the price of its common stock.
Prospects charter and bylaws and the Maryland General
Corporation Law contain provisions that may have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a premium price for its shareholders
or otherwise be in their best interest. These provisions may
prevent shareholders from being able to sell shares of its
common stock at a premium over the current of prevailing market
prices.
Prospects charter provides for the classification of its
board of directors into three classes of directors, serving
staggered three-year terms, which may render a change of control
or removal of its incumbent management more difficult.
Furthermore, any and all vacancies on its board of directors
will be filled generally only by the affirmative vote of a
majority of the remaining directors in office, even if the
remaining directors do not constitute a quorum, and any director
elected to fill a vacancy will serve for the remainder of the
full term until a successor is elected and qualifies.
Prospects board of directors is authorized to create and
issue new series of shares, to classify or reclassify any
unissued shares of stock into one or more classes or series,
including preferred stock and,
38
without shareholder approval, to amend its charter to increase
or decrease the number of shares of common stock that it has
authority to issue, which could have the effect of diluting a
shareholders ownership interest. Prior to the issuance of
shares of common stock of each class or series, including any
reclassified series, Prospects board of directors is
required by its governing documents to set the terms,
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series of shares of stock.
Prospects charter and bylaws also provide that its board
of directors has the exclusive power to adopt, alter or repeal
any provision of its bylaws, and to make new bylaws. The
Maryland General Corporation Law also contains certain
provisions that may limit the ability of a third party to
acquire control of Prospect, such as:
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The Maryland Business Combination Act, which, subject to certain
limitations, prohibits certain business combinations between
Prospect and an interested shareholder (defined
generally as any person who beneficially owns 10% or more of the
voting power of the common stock or an affiliate thereof) for
five years after the most recent date on which the shareholder
becomes an interested shareholder and, thereafter, imposes
special minimum price provisions and special shareholder voting
requirements on these combinations; and
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The Maryland Control Share Acquisition Act, which provides that
control shares of a Maryland corporation (defined as
shares of common stock which, when aggregated with other shares
of common stock controlled by the shareholder, entitles the
shareholder to exercise one of three increasing ranges of voting
power in electing directors) acquired in a control share
acquisition (defined as the direct or indirect acquisition
of ownership or control of control shares) have no
voting rights except to the extent approved by shareholders by
the affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter, excluding all interested
shares of common stock.
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The provisions of the Maryland Business Combination Act will not
apply, however, if Prospects board of directors adopts a
resolution that any business combination between it and any
other person will be exempt from the provisions of the Maryland
Business Combination Act. Although its board of directors has
adopted such a resolution, there can be no assurance that this
resolution will not be altered or repealed in whole or in part
at any time. If the resolution is altered or repealed, the
provisions of the Maryland Business Combination Act may
discourage others from trying to acquire control of Prospect.
As permitted by Maryland law, Prospects bylaws contain a
provision exempting from the Maryland Control Share Acquisition
Act any and all acquisitions by any person of its common stock.
Although its bylaws include such a provision, such a provision
may also be amended or eliminated by its Board of Directors at
any time in the future, provided that Prospect will notify the
Division of Investment Management at the SEC prior to amending
or eliminating this provision.
Risks
Related to Patriot
An
event of termination occurred under Patriots Amended
Securitization Facility which allows Patriots lenders to
accelerate repayment of the outstanding obligations under the
facility and exercise other rights and remedies provided by the
Amended Securitization Facility, including the right to sell the
collateral under the Amended Securitization
Facility.
On April 3, 2009, a termination event (i.e., default)
occurred under Patriots Amended Securitization Facility.
As a result of the occurrence of the termination event under the
Amended Securitization Facility, Patriot can no longer make
additional advances under the Amended Securitization Facility.
In addition, the interest rate payable under the Amended
Securitization Facility increased from the commercial paper rate
plus 1.75% to the prime rate plus 3.75%. Also, the terms of the
Amended Securitization Facility require that all principal,
interest and fees collected from the debt investments secured by
the Amended Securitization Facility must be used to pay down
amounts outstanding under the Amended Securitization Facility
within 24 months following the date of the termination
event. Substantially all of Patriots debt investments are
secured under the Amended Securitization Facility. The Amended
Securitization Facility also permits the lenders, upon notice to
Patriot, to accelerate amounts outstanding under the Amended
Securitization Facility and exercise other rights and remedies
provided by the Amended Securitization Facility, including the
right to sell the
39
collateral under the Amended Securitization Facility. As of the
date hereof, Patriot has not received any such notice from the
lenders; however, there can be no assurance that they will not
accelerate repayment in the future. Patriot does not have
sufficient cash resources to repay these obligations should the
lenders accelerate these obligations. Acceleration of the
amounts outstanding under the Amended Securitization Facility
could have a material adverse impact on Patriots
liquidity, financial condition and operations.
There
is substantial doubt about Patriots ability to continue as
a going concern.
Patriots independent registered public accounting firm has
issued an opinion on its consolidated financial statements that
states that the consolidated financial statements were prepared
assuming Patriot will continue as a going concern and further
states that the uncertainty regarding the renewal of its
liquidity facility raises substantial doubt about Patriots
ability to continue as a going concern. On April 3, 2009, a
termination event occurred under its Amended Securitization
Facility. As a result of the occurrence of the termination event
under the Amended Securitization Facility, Patriot can no longer
make additional advances under the Amended Securitization
Facility. Also, the terms of the Amended Securitization Facility
require that all principal, interest and fees collected from the
debt investments secured by the Amended Securitization Facility
must be used to pay down amounts outstanding under the Amended
Securitization Facility within 24 months following the date
of the termination event.
Because substantially all of Patriots debt investments are
secured by its Amended Securitization Facility, Patriot cannot
provide any assurance that it would have sufficient cash and
liquid assets to fund normal operations and dividend
distributions to its shareholders during the period of time when
it is required to repay amounts outstanding under the Amended
Securitization Facility if such amounts became due.
We are
currently in a period of capital markets disruption and
recession and Patriot does not expect these conditions to
improve in the near future. These conditions could adversely
affect Patriots financial position and operating results
and impair its portfolio companies financial positions and
operating results, which could, in turn, harm Patriots
financial position and operating results.
The capital markets have been experiencing extreme volatility
and disruption since mid-2007 and the U.S. economy has
entered into a recession. Disruptions in the capital markets
have increased the spread between the yields realized on
risk-free and higher risk securities, resulting in illiquidity
in parts of the capital markets. Patriot believe these
conditions may continue for a prolonged period of time or worsen
in the future. A prolonged period of market illiquidity may have
an adverse effect on Patriots business, financial
condition, and results of operations. Unfavorable economic
conditions also could increase Patriots funding costs,
limit its access to the capital markets or result in a decision
by lenders not to extend credit to Patriot. These events,
including the non-renewal of the liquidity facility, could limit
Patriots investment originations, limit its ability to
grow and pay dividends and negatively impact its operating
results.
In addition, many of Patriots portfolio companies are
susceptible to economic slowdowns or recessions. An economic
slowdown or recession, including the current one and any future
slowdowns or recessions, may affect the ability of
Patriots portfolio companies to repay their loans or
engage in a liquidity event such as a sale, recapitalization or
initial public offering. Patriots nonperforming assets are
likely to increase and the value of its portfolio is likely to
decrease during these periods. Adverse economic conditions also
may decrease the value of any collateral securing some of its
loans. These conditions could lead to losses of value in
Patriots portfolio and a decrease in its revenues, net
income and assets.
Because
Patriot must distribute at least 90% of its taxable income to
its shareholders in connection with its election to be treated
as a RIC, Patriot will continue to need additional capital to
finance its growth. If additional funds are unavailable or not
available on favorable terms, Patriots ability to grow
will be impaired.
In order to qualify for treatment as a RIC under
Subchapter M of the Code, Patriot must distribute annually
to its shareholders at least 90% of its investment company
taxable income. As a result, Patriot will likely need to raise
capital from other sources to grow its business. As a business
development company, Patriot generally is required to meet a
coverage ratio of total assets, less liabilities and
indebtedness not
40
represented by senior securities to total senior securities,
which includes all of its borrowings and any preferred stock
Patriot may issue in the future, of at least 200%. This
requirement limits the amount that Patriot may borrow. Because
Patriot will continue to need capital to grow its investment
portfolio, this limitation may prevent it from incurring debt
and require it to raise additional equity at a time when it may
be disadvantageous to do so. Patriot cannot assure its
shareholders that debt and equity financing will be available to
it on favorable terms, if at all. If additional funds are not
available to Patriot, it could be forced to curtail or cease new
investment activities, and its net asset value could decline.
Regulations
governing Patriots operation as a business development
company will affect its ability to, and the way in which it,
raises additional capital.
Patriots business will require capital. Patriot may
acquire additional capital from the following sources:
Senior Securities and Other
Indebtedness. Patriot may issue debt securities
or preferred stock
and/or
borrow money from banks or other financial institutions, which
is referred to collectively as senior securities, up to the
maximum amount permitted by the 1940 Act. If Patriot issues
senior securities, including debt or preferred stock, it will be
exposed to additional risks, including the following:
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Under the provisions of the 1940 Act, Patriot is permitted, as a
business development company, to issue senior securities only in
amounts such that its asset coverage, as defined in the 1940
Act, equals at least 200% after each issuance of senior
securities. If the value of Patriots assets declines, it
may be unable to satisfy this test. If that happens, Patriot
will not be permitted to issue additional debt securities or
preferred stock
and/or make
additional borrowings from banks or other financial institutions
until it is able to satisfy this test.
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Any amounts that Patriot uses to service its debt or make
payments on preferred stock will not be available for dividends
to its common shareholders.
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It is likely that any senior securities or other indebtedness
Patriot issues will be governed by an indenture or other
instrument containing covenants restricting its operating
flexibility. Additionally, some of these securities or other
indebtedness may be rated by rating agencies, and in obtaining a
rating for such securities and other indebtedness, Patriot may
be required to abide by operating and investment guidelines that
further restrict operating and financial flexibility.
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Patriot and, indirectly, its shareholders will bear the cost of
issuing and servicing such securities and other indebtedness.
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Preferred stock or any convertible or exchangeable securities
that Patriot issues in the future may have rights, preferences
and privileges more favorable than those of its common stock,
including separate voting rights and could delay or prevent a
transaction or a change in control to the detriment of the
holders of its common stock.
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Additional Common Stock. Patriot is not
generally able to issue and sell its common stock at a price
below net asset value per share. Patriot may, however, sell its
common stock, warrants, options or rights to acquire its common
stock, at a price below the current net asset value of the
common stock if its board of directors determines that such sale
is in its best interests and that of its shareholders, and its
shareholders approve such sale. In any such case, the price at
which Patriots securities are to be issued and sold may
not be less than a price which, in the determination of its
board of directors, closely approximates the market value of
such securities (less any distributing commission or discount).
Patriot may also make rights offerings to its shareholders at
prices per share less than the net asset value per share,
subject to applicable requirements of the 1940 Act. If Patriot
raises additional funds by issuing more common stock or senior
securities convertible into, or exchangeable for, its common
stock, the percentage ownership of its shareholders at that time
would decrease and they may experience dilution. Moreover,
Patriot can offer no assurance that it will be able to issue and
sell additional equity securities in the future, on favorable
terms or at all.
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Securitization of Loans. In addition to
issuing securities to raise capital, Patriot will continue to
seek to securitize its loans to generate cash for funding new
investments. To securitize loans, Patriot would generally create
a wholly-owned subsidiary and contribute a pool of loans to the
subsidiary. This could include the sale of interests in the
subsidiary on a non-recourse basis to purchasers who Patriot
would expect to be willing to accept a lower interest rate to
invest in investment grade loan pools, and it retains a portion
of the equity in the securitized pool of loans. An inability to
successfully securitize Patriots loan portfolio could
limit its ability to grow its business, fully execute its
business strategy and adversely affect its earnings, if any.
Moreover, the securitization of Patriots loan portfolio
might expose it to losses as the residual loans in which it does
not sell interests will tend to be those that are riskier and
more apt to generate losses.
Patriot
is dependent upon its key investment personnel for its future
success.
Patriot depends on the diligence, skill and network of business
contacts of the investment professionals it employs for the
sourcing, evaluation, negotiation, structuring and monitoring of
its investments. Patriots future success will also depend,
to a significant extent, on the continued service and
coordination of its senior management team, particularly,
Richard P. Buckanavage, its president and chief executive
officer, and Timothy W. Hassler, its chief investment
officer. The departure of Mr. Buckanavage, Mr. Hassler
or any member of Patriots senior management team could
have a material adverse effect on its ability to achieve its
investment objective. In addition, if both of
Messrs. Buckanavage and Hassler cease to be employed by
Patriot, the lender under its Amended Securitization Facility
could, absent a waiver or cure, terminate the facility.
Patriots
business model depends to a significant extent upon strong
referral relationships with private equity sponsors, and its
inability to maintain or develop these relationships, or the
failure of these relationships to generate investment
opportunities, could adversely affect its
business.
Patriot expects that members of its management team will
maintain their relationships with private equity sponsors, and
it will rely to a significant extent upon these relationships to
provide it with potential investment opportunities. If
Patriots management team fails to maintain its existing
relationships or develop new relationships with other sponsors
or sources of investment opportunities, it will not be able to
grow its investment portfolio. In addition, individuals with
whom members of Patriots management team have
relationships are not obligated to provide it with investment
opportunities, and, therefore, there is no assurance that such
relationships will generate investment opportunities for it.
Patriot
operates in a competitive market for investment
opportunities.
Patriot competes for investments with other business development
companies and other investment funds (including private equity
funds and mezzanine funds), as well as traditional financial
services companies such as commercial banks and other sources of
funding. Many of Patriots competitors are substantially
larger and have considerably greater financial, technical and
marketing resources than it does. For example, some competitors
may have a lower cost of funds and access to funding sources
that are not available to Patriot, including from federal
government agencies through federal rescue programs such as the
U.S. Department of the Treasurys Financial Stability
Plan (which was formerly known as the Trouble Asset Relief
Program). In addition, some of Patriots competitors may
have higher risk tolerances or different risk assessments. These
characteristics could allow Patriots competitors to
consider a wider variety of investments, establish more
relationships and offer better pricing and more flexible
structuring than it. Patriot may lose investment opportunities
if it does not match its competitors pricing, terms and
structure. If Patriot is forced to match its competitors
pricing, terms and structure, it may not be able to achieve
acceptable returns on its investments or may bear substantial
risk of capital loss. Furthermore, many of Patriots
competitors have greater experience operating under, or are not
subject to, the regulatory restrictions that the 1940 Act
imposes on it as a business development company.
Patriot cannot assure its shareholders that the competitive
pressures it faces will not have a material adverse effect on
its business, financial condition and results of operations.
Also, as a result of this competition, Patriot may not be able
to take advantage of attractive investment opportunities from
time to
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time, and it cannot assure its shareholders that it will
continue to be able to identify and make investments that are
consistent with its investment objective.
Patriot
will be subject to corporate-level income tax if it fails to
maintain its status as a RIC under Subchapter M of the
Code.
To maintain RIC tax treatment under the Code, Patriot must meet
the following annual distribution, income source and asset
diversification requirements.
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The annual distribution requirement for a RIC will be satisfied
if Patriot distributes to its shareholders on an annual basis at
least 90% of its investment company taxable income (which is
generally net ordinary income and realized net short-term
capital gains in excess of realized net long-term capital
losses), if any. In light of the termination event that occurred
under the Amended Securitization Facility on April 3, 2009,
it may not be possible for Patriot to continue to comply with
the annual distribution requirement. If Patriot is unable to
satisfy this requirement, it could fail to qualify as a RIC
under Subchapter M of the Code and thus become subject to
corporate-level income tax.
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The income source requirement will be satisfied if Patriot
obtains at least 90% of its income for each year from dividends,
interest, and gains from the sale of stock or securities or
similar sources.
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The asset diversification requirement will be satisfied if
Patriot meets certain asset diversification requirements at the
end of each quarter of its taxable year. Failure to meet those
requirements may result in Patriot having to dispose of certain
investments quickly or delay the closing of new investments in
order to prevent the loss of RIC status and could result in a
loss of business. Because most of Patriots investments
will be in private companies, and therefore will be relatively
illiquid, any such dispositions could be made at disadvantageous
prices and could result in substantial losses.
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If Patriot fails to qualify as a RIC under Subchapter M of the
Code for any reason and is subject to corporate income tax, the
resulting corporate taxes could substantially reduce its net
assets, the amount of income available for distribution and the
amount of its distributions.
Patriot
may in the future choose to pay dividends in its own stock, in
which case its shareholders may be required to pay tax in excess
of the cash they receive.
Patriot may distribute taxable dividends that are payable in
part in its stock. Under a recently issued IRS revenue
procedure, up to 90% of any such taxable dividend for 2009 could
be payable in stock. Taxable shareholders receiving such
dividends would be required to include the full amount of the
dividend as ordinary income (or as long-term capital gain to the
extent such distribution is properly designated as a capital
gain dividend) to the extent of Patriots current and
accumulated earnings and profits for United States federal
income tax purposes. As a result, a U.S. shareholder may be
required to pay tax with respect to such dividends in excess of
any cash received. If a U.S. shareholder sells the stock it
receives as a dividend in order to pay this tax, the sales
proceeds may be less than the amount included in income with
respect to the dividend, depending on the market price of
Patriots stock at the time of the sale. Furthermore, with
respect to
non-U.S. shareholders,
Patriot may be required to withhold U.S. tax with respect
to such dividends, including in respect of all or a portion of
such dividend that is payable in stock. In addition, if a
significant number of Patriots shareholders determine to
sell shares of its stock in order to pay taxes owed on
dividends, it may put downward pressure on the trading price of
its stock.
Patriot
may have difficulty paying its required distributions if its
recognizes income before or without receiving cash representing
such income.
For federal income tax purposes, Patriot will include in income
certain amounts that it has not yet received in cash, such as
original issue discount, which may arise if it receives warrants
in connection with the origination of a loan or possibly in
other circumstances, such as in connection with the receipt of
contractual
payment-in-kind,
or PIK, interest or dividends, which represents contractually
deferred interest added to the loan balance that is generally
due at the end of the loan term or contractually deferred
dividends added to
43
Patriots equity investment in the portfolio company. Such
original issue discount or contractual
payment-in-kind
arrangements will result in the recognition of income before
Patriot receives any corresponding cash payments. Patriot also
may be required to include in income certain other amounts that
it will not receive in cash.
Since, in certain cases, Patriot may recognize income before or
without receiving cash representing such income, it may have
difficulty meeting the annual distribution requirement necessary
to qualify as a RIC under subchapter M of the Code. Accordingly,
Patriot may have to (i) sell some of its investments at
times and/or
at prices it would not consider advantageous, (ii) raise
additional debt or equity capital or (iii) reduce new
investment originations for this purpose. If Patriot is not able
to obtain cash from other sources, it may fail to qualify for
RIC tax treatment and thus become subject to corporate-level
income tax.
Patriot
borrows money, which magnifies the potential for gain or loss on
amounts invested and may increase the risk of investing in
it.
Borrowings, also known as leverage, magnify the potential for
gain or loss on amounts invested and, therefore, increase the
risks associated with investing in Patriot. Patriot borrows from
and issues senior debt securities to banks and other lenders.
Holders of these senior securities have fixed dollar claims on
its assets that are superior to the claims of its common
shareholders. If the value of Patriots assets increases,
then leveraging would cause the net asset value attributable to
its common stock to increase more sharply than it would have had
it not leveraged. Conversely, if the value of its assets
decreases, leveraging would cause net asset value to decline
more sharply than it otherwise would have had it not leveraged.
Similarly, any increase in Patriots income in excess of
interest payable on the borrowed funds would cause its net
income to increase more than it would without the leverage,
while any decrease in Patriots income would cause net
income to decline more sharply than it would have had it not
borrowed. Such a decline could negatively affect Patriots
ability to make common stock dividend payments. Leverage is
generally considered a speculative investment technique.
At June 30, 2009, Patriot had $137.4 million of
indebtedness outstanding, which had a weighted average
annualized interest cost of 7.5% for the quarter ended
June 30, 2009. In order for Patriot to cover these
annualized interest payments on indebtedness, Patriot must
achieve annual returns on its assets of at least 3.5%.
Illustration. The following table illustrates
the effect of leverage on returns from an investment in
Patriots common stock assuming various annual returns, net
of expenses. The calculations in the table below are
hypothetical and actual returns may be higher or lower than
those appearing below. The calculation assumes
(i) $302.5 million in total assets, (ii) a
weighted average cost of funds of 7.5%,
(iii) $137.4 million in debt outstanding and
(iv) $160.5 million in stockholders equity.
Assumed
Return on Patriots Portfolio
(net of expenses)
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−10%
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−5%
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0%
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5%
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10%
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Corresponding return to shareholder
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−25
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%
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−16
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%
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−6
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%
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3
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%
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12
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%
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Changes
in interest rates may affect Patriots cost of capital and
net investment income.
Because Patriot borrows to fund its investments, a portion of
its income is dependent upon the difference between the interest
rate at which it borrows funds and the interest rate at which it
invests these funds. A portion of Patriots investments
will have fixed interest rates, while a portion of its
borrowings will likely have floating interest rates. As a
result, a significant change in market interest rates could have
a material adverse effect on Patriots net investment
income. In periods of rising interest rates, Patriots cost
of funds could increase, which would reduce its net investment
income. Patriot may hedge against interest rate fluctuations by
using standard hedging instruments such as futures, options and
forward contracts, subject to applicable legal requirements,
including without limitation, all necessary registrations (or
exemptions from registration) with
44
the Commodity Futures Trading Commission. These activities may
limit Patriots ability to participate in the benefits of
lower interest rates with respect to the hedged portfolio.
Adverse developments resulting from changes in interest rates or
hedging transactions could have a material adverse effect on
Patriots business, financial condition and results of
operations. Also, Patriot has limited experience in entering
into hedging transactions, and it will initially have to rely on
outside parties with respect to the use of such financial
instruments or develop such expertise internally.
A
significant portion of Patriots investment portfolio is
and will continue to be recorded at fair value as determined in
good faith by its board of directors and, as a result, there is
and will continue to be uncertainty as to the value of its
portfolio investments.
Under the 1940 Act, Patriot is required to carry its portfolio
investments at market value or, if there is no readily available
market value, at fair value as determined by its board of
directors. Patriot is not permitted to maintain a general
reserve for anticipated losses. Instead, Patriot is required by
the 1940 Act to specifically value each individual investment
and record an unrealized loss for any asset Patriot believes has
decreased in value. Typically there is not a public market for
the securities of the privately-held companies in which Patriot
has invested and will generally continue to invest. As a result,
Patriot values its investments in privately-held companies on a
quarterly basis based on a determination of their fair value
made in good faith and in accordance with the written guidelines
established by its board of directors. In accordance with
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements, Patriot principally
utilizes the market approach to estimate the fair value of its
equity investments where there is not a readily available market
and it principally utilize the income approach to estimate the
fair value of its debt investments where there is not a readily
available market. Under the market approach, Patriot estimates
the enterprise value of the portfolio companies in which it
invests. There is no one methodology to estimate enterprise
value and, in fact, for any one portfolio company, enterprise
value is best expressed as a range of fair values from which
Patriot derives a single estimate of enterprise value. To
estimate the enterprise value of a portfolio company, Patriot
analyzes various factors, including the portfolio companys
historical and projected financial results. Patriot generally
requires portfolio companies to provide annual audited and
quarterly and monthly unaudited financial statements, as well as
annual projections for the upcoming fiscal year. Typically,
private companies are valued based on multiples of EBITDA
(Earnings Before Interest, Taxes, Depreciation and
Amortization), cash flows, net income, revenues, or in limited
cases, book value. The private equity industry uses financial
measures such as EBITDA in order to assess a portfolio
companys financial performance and to value a portfolio
company. When using EBITDA to determine enterprise value,
Patriot may adjust EBITDA for non-recurring items. Such
adjustments are intended to normalize EBITDA to reflect the
portfolio companys earnings power. Adjustments to EBITDA
may include compensation to previous owners, acquisition,
recapitalization, restructuring related items and, one-time
non-recurring income or expense items.
Under the income approach, Patriot generally prepares and
analyzes discounted cash flow models based on its projections of
the future free cash flows of the business. Patriot also uses
bond yield models to determine the present value of the future
cash flow streams of its debt investments. Patriot reviews
various sources of transactional data, including private mergers
and acquisitions involving debt investments with similar
characteristics, and assesses the information in the valuation
process.
The types of factors that may be considered in determining the
fair value of Patriots investments include the nature and
realizable value of any collateral, the portfolio companys
earnings and its ability to make payments on its indebtedness,
the markets in which the portfolio company does business,
comparison to publicly traded companies, discounted cash flow
and other relevant factors. Because such valuations, and
particularly valuations of private securities and private
companies, are inherently uncertain, may fluctuate over short
periods of time and may be based on estimates, Patriots
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. Patriots net asset value could be
adversely affected if its determinations regarding the fair
value of its investments were materially higher than the values
that it ultimately realizes upon the disposal of such securities.
45
The
lack of liquidity in Patriots investments may adversely
affect its business.
Patriot generally makes investments in private companies.
Substantially all of these securities are subject to legal and
other restrictions on resale or are otherwise less liquid than
publicly traded securities. The illiquidity of Patriots
investments may make it difficult for Patriot to sell such
investments if the need arises. In addition, if Patriot is
required to liquidate all or a portion of its portfolio quickly,
it may realize significantly less than the value at which it had
previously recorded its investments. Patriot may also face other
restrictions on its ability to liquidate an investment in a
portfolio company to the extent that it has material non-public
information regarding such portfolio company.
Patriot
may experience fluctuations in its quarterly
results.
Patriot could experience fluctuations in its quarterly operating
results due to a number of factors, including its ability to
make investments in companies that meet its investment criteria,
the interest rate payable on the debt securities Patriot
acquires, the level of its expenses, prepayments of its debt
securities, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which
Patriot encounters competition in its markets and general
economic conditions. As a result of these factors, results for
any period should not be relied upon as being indicative of
performance in future periods.
Changes
in laws or regulations governing Patriots operations may
adversely affect its business.
Patriot and its portfolio companies are subject to local, state
and federal laws and regulations. These laws and regulations, as
well as their interpretation, may be changed from time to time.
Accordingly, any change in these laws or regulations could have
a material adverse affect on its business.
Patriots
board of directors may change its operating policies and
strategies without prior notice or shareholder approval, the
effects of which may be adverse.
Patriots board of directors has the authority to modify or
waive its current operating policies and strategies without
prior notice and without shareholder approval. Patriot cannot
predict the effect any changes to its current operating policies
and strategies would have on its business, operating results and
value of its stock. However, the effects might be adverse, which
could negatively impact its ability to pay dividends and cause
its shareholders to lose all or part of their investment.
Patriots
investments in portfolio companies may be risky, and it could
lose all or part of its investment.
Investing in small- to mid-sized companies involves a number of
significant risks. Among other things, these companies:
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may have limited financial resources and may be unable to meet
their obligations under their debt instruments that Patriot
holds, which may be accompanied by a deterioration in the value
of any collateral and a reduction in the likelihood of it
realizing any guarantees that it may have obtained in connection
with its investment;
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may have shorter operating histories, narrower product lines and
smaller market shares than larger businesses, which tend to
render them more vulnerable to competitors actions and
market conditions, as well as general economic downturns;
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are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on its portfolio company and, in
turn, on it;
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generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk
of obsolescence, and may require substantial additional capital
to support their operations, finance expansion or maintain their
competitive position. In addition, Patriots executive
officers and directors may, in the ordinary
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course of business, be named as defendants in litigation arising
from its investments in the portfolio companies; and
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generally have less publicly available information about their
businesses, operations and financial condition. Patriot is
required to rely on the ability of its management team and
investment professionals to obtain adequate information to
evaluate the potential returns from investing in these
companies. If Patriot is unable to uncover all material
information about these companies, it may not make a fully
informed investment decision, and may lose all or part of its
investment.
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Patriots
portfolio is and may continue to be concentrated in a limited
number of portfolio companies and industries, which will subject
it to a risk of significant loss if any of these companies
defaults on its obligations under any of its debt instruments or
by a downturn in the particular industry.
Patriots portfolio is and may continue to be concentrated
in a limited number of portfolio companies and industries.
Beyond the asset diversification requirements associated with
Patriots qualification as a RIC, it does not have fixed
guidelines for diversification, and while Patriot is not
targeting any specific industries, its investments are, and
could continue to be, concentrated in relatively few industries.
As a result, the aggregate returns Patriot realizes may be
significantly adversely affected if a small number of
investments perform poorly or if Patriot needs to write down the
value of any one investment. Additionally, a downturn in any
particular industry in which Patriot is invested could also
significantly impact the aggregate returns it realizes.
Price
declines and illiquidity in the large corporate leverage loan
market have adversely affected, and may continue to adversely
affect, the fair value of Patriots syndicated loan
portfolio, reducing its net asset value through increased net
unrealized depreciation.
The continuing unprecedented declines in prices and illiquidity
in the large corporate leverage loan market have resulted in
significant unrealized depreciation in Patriots syndicated
loan portfolio. Conditions in the large corporate leverage loan
market may continue to deteriorate which could cause pricing
levels to continue to decline. As a result, Patriot may continue
to suffer additional unrealized losses and could incur
significant realized losses in future periods in connection with
the sale of its syndicated loans, which could have a material
adverse impact on its business, financial condition and results
of operations.
Patriots
portfolio companies may incur debt that ranks equally with, or
senior to, its investments in such companies.
Patriot invests primarily in senior secured loans, junior
secured loans and subordinated debt issued by small- to
mid-sized companies. Patriots portfolio companies may
have, or may be permitted to incur, other debt that ranks
equally with, or senior to, the debt in which it invests. By
their terms, such debt instruments may entitle the holders to
receive payment of interest or principal on or before the dates
on which Patriot is entitled to receive payments with respect to
the debt instruments in which it invests. Also, in the event of
insolvency, liquidation, dissolution, reorganization or
bankruptcy of a portfolio company, holders of debt instruments
ranking senior to Patriots investment in that portfolio
company would typically be entitled to receive payment in full
before it receives any distribution. After repaying such senior
creditors, such portfolio company may not have any remaining
assets to use for repaying its obligation to Patriot. In the
case of debt ranking equally with debt instruments in which
Patriot invests, it would have to share on an equal basis any
distributions with other creditors holding such debt in the
event of an insolvency, liquidation, dissolution, reorganization
or bankruptcy of the relevant portfolio company.
Second
priority liens on collateral securing loans that Patriot makes
to its portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and it.
Certain loans that Patriot makes to portfolio companies may be
secured on a second priority basis by the same collateral
securing senior secured debt of such companies. The first
priority liens on the collateral will secure the portfolio
companys obligations under any outstanding senior debt and
may secure certain other
47
future debt that may be permitted to be incurred by the
portfolio company under the agreements governing the loans. The
holders of obligations secured by the first priority liens on
the collateral will generally control the liquidation of and be
entitled to receive proceeds from any realization of the
collateral to repay their obligations in full before Patriot. In
addition, the value of the collateral in the event of
liquidation will depend on market and economic conditions, the
availability of buyers and other factors. There can be no
assurance that the proceeds, if any, from the sale or sales of
all of the collateral would be sufficient to satisfy the loan
obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens
on the collateral. If such proceeds are not sufficient to repay
amounts outstanding under the loan obligations secured by the
second priority liens, then Patriot, to the extent not repaid
from the proceeds of the sale of the collateral, will only have
an unsecured claim against the portfolio companys
remaining assets, if any.
The rights Patriot may have with respect to the collateral
securing the loans it makes to its portfolio companies with
senior debt outstanding may also be limited pursuant to the
terms of one or more intercreditor agreements that Patriot
enters into with the holders of senior debt. Under such an
intercreditor agreement, at any time that obligations that have
the benefit of the first priority liens are outstanding, any of
the following actions that may be taken in respect of the
collateral will be at the direction of the holders of the
obligations secured by the first priority liens: the ability to
cause the commencement of enforcement proceedings against the
collateral; the ability to control the conduct of such
proceedings; the approval of amendments to collateral documents;
releases of liens on the collateral; and waivers of past
defaults under collateral documents. Patriot may not have the
ability to control or direct such actions, even if its rights
are adversely affected.
There
may be circumstances where Patriots debt investments could
be subordinated to claims of other creditors or it could be
subject to lender liability claims.
Even though Patriot may have structured certain of its
investments as senior loans, if one of its portfolio companies
were to go bankrupt, depending on the facts and circumstances,
including the extent to which it actually provided managerial
assistance to that portfolio company, a bankruptcy court might
re-characterize its debt investment and subordinate all or a
portion of its claim to that of other creditors. Patriot may
also be subject to lender liability claims for actions taken by
it with respect to a borrowers business or instances where
Patriot exercises control over the borrower. It is possible that
Patriot could become subject to a lenders liability claim,
including as a result of actions taken in rendering significant
managerial assistance.
Patriot
may not control any of its portfolio companies.
Patriot may not control any of its portfolio companies, even
though it may have board representation or board observation
rights and its debt agreements may contain certain restrictive
covenants. As a result, Patriot is subject to the risk that a
portfolio company in which it invests may make business
decisions with which it disagrees and the management of such
company, as representatives of the equity shareholders, may take
risks or otherwise act in ways that do not serve its interests
as debt investors.
Defaults
by Patriots portfolio companies will harm its operating
results.
A portfolio companys failure to satisfy financial or
operating covenants imposed by Patriot or other lenders could
lead to defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize the
portfolio companys ability to meet its obligations under
the debt investments that Patriot holds. Patriot may incur
expenses to the extent necessary to seek recovery upon default
or to negotiate new terms with a defaulting portfolio company.
Prepayments
of Patriots debt investments by its portfolio companies
could adversely impact its results of operations and reduce its
return on equity.
Patriot is subject to the risk that the investments it makes in
its portfolio companies may be repaid prior to maturity. When
this occurs, Patriot will generally reinvest these proceeds in
temporary investments, pending their future investment in new
portfolio companies. These temporary investments will typically
have
48
substantially lower yields than the debt being prepaid and
Patriot could experience significant delays in reinvesting these
amounts. Any future investment in a new portfolio company may
also be at lower yields than the debt that was repaid. As a
result, Patriots results of operations could be materially
adversely affected if one or more of its portfolio companies
elects to prepay amounts owed to it. Additionally, prepayments
could negatively impact Patriots return on equity, which
could result in a decline in the market price of its common
stock.
Patriot
may not realize gains from its equity investments.
Certain investments that Patriot has made in the past and may
make in the future include warrants or other equity securities.
In addition, Patriot may from time to time make non-control,
equity co-investments in companies in conjunction with private
equity sponsors. Patriots goal is ultimately to realize
gains upon its disposition of such equity interests. However,
the equity interests Patriot receives may not appreciate in
value and, in fact, may decline in value. Accordingly, Patriot
may not be able to realize gains from its equity interests, and
any gains that it does realize on the disposition of any equity
interests may not be sufficient to offset any other losses it
experiences. Patriot also may be unable to realize any value if
a portfolio company does not have a liquidity event, such as a
sale of the business, recapitalization or public offering, which
would allow it to sell the underlying equity interests.
There
is a risk that Patriots shareholders may not receive
dividends or that Patriots dividends may not grow over
time.
Patriot cannot assure its shareholders that it will achieve
investment results that will allow it to make a specified level
of cash distributions or
year-to-year
increases in cash distributions. As a result of the termination
event that occurred under the Amended Securitization Facility on
April 3, 2009, Patriot is required to dedicate a
significant portion of its operating cash flow to repay the
principal amount outstanding under the Amended Securitization
Facility by April 2011. As a result, it may be required to
severely limit or otherwise cease making cash distributions to
its shareholders. In addition, due to the asset coverage test
applicable to it as a business development company and financial
covenants contained in its loan agreements, Patriot may be
limited in its ability to make distributions.
Investing
in Patriots shares may involve an above average degree of
risk.
The investments Patriot makes in accordance with its investment
objective may result in a higher amount of risk than alternative
investment options and volatility or loss of principal.
Patriots investments in portfolio companies may be highly
speculative and aggressive, and therefore, an investment in its
shares may not be suitable for someone with lower risk tolerance.
The
market price of Patriots common stock may fluctuate
significantly.
The market price and liquidity of the market for shares of
Patriots common stock may be significantly affected by
numerous factors, some of which are beyond its control and may
not be directly related to its operating performance. These
factors include:
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significant volatility in the market price and trading volume of
securities of business development companies or other companies
in its sector, which are not necessarily related to the
operating performance of these companies;
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changes in regulatory policies, accounting pronouncements or tax
guidelines, particularly with respect to RICs or business
development companies;
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loss of RIC status for U.S. federal income tax purposes;
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changes in earnings or variations in operating results;
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changes in the value of its portfolio of investments;
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49
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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departure of its key personnel;
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operating performance of companies comparable to it;
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general economic trends and other external factors; and
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loss of a major funding source.
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Shares
of closed-end investment companies, including business
development companies, may trade at a discount to their net
asset value.
Shares of closed-end investment companies, including business
development companies, may trade at a discount from net asset
value. This characteristic of closed-end investment companies
and business development companies is separate and distinct from
the risk that Patriots net asset value per share may
decline. Patriot cannot predict whether its common stock will
trade at, above or below net asset value. In recent quarters,
the price of its common stock has traded at prices below its net
asset value. It should be noted that share prices of many other
business development companies have also traded at prices below
their net asset value.
In addition, if Patriots common stock trades below net
asset value, it will generally not be able to issue additional
common stock at the market price unless its shareholders approve
such a sale and its board of directors makes certain
determinations.
Patriots
common stock could be delisted from the NASDAQ Global Select
Market if it is unable to maintain its compliance with NASDAQ
listing requirements.
In recent months, many public companies whose securities trade
on the NASDAQ Global Select Market have experienced significant
volatility and sharp declines in their stock prices. In general,
in order to meet NASDAQs continued listing standards, the
closing bid of a companys common stock must be at least
$1.00 per share.
If the closing bid price per share for Patriots common
stock were to fall below $1.00 per share for 30 consecutive
business days, it would receive notification from NASDAQ
indicating that it is not in compliance with NASDAQ Marketplace
Rule 4450(a)(5). In accordance with NASDAQ Marketplace
Rule 4450(e)(2), Patriot would then be provided 180
calendar days to regain compliance.
To regain compliance with the minimum bid price requirement, the
closing bid price of Patriots common stock must remain at
$1.00 per share or more for a minimum of ten consecutive
business days. If Patriot were unable to regain compliance, it
would be able to apply to list its common stock on the NASDAQ
Capital Market and NASDAQ will determine whether it meets the
NASDAQ Capital Market initial listing criteria as set forth in
NASDAQ Marketplace Rule 4310(c), except for the minimum bid
price requirement. If Patriot was able to meet the NASDAQ
Capital Market initial listing criteria, NASDAQ may notify it
that it has been granted an additional 180 calendar days to come
into compliance with the minimum bid price requirement. If
Patriot were not able to meet the initial listing criteria,
NASDAQ may provide it with written notification that its common
stock would be delisted. At that time, Patriot would be
permitted to appeal NASDAQs determination to delist its
common stock to a NASDAQ Listings Qualifications Panel.
Delisting from the NASDAQ could have an adverse effect on
Patriots business and on the trading of its common stock.
If a delisting of Patriots common stock from NASDAQ were
to occur, its common stock would trade on the
Over-the-Counter
Bulletin Board or on the pink sheets maintained
by the National Quotation Bureau, Inc. Such alternatives
generally are considered to be less efficient markets, and
Patriots stock price, as well as the liquidity of its
common stock, could be affected adversely.
50
Terrorist
attacks, acts of war or natural disasters may affect any market
for Patriots common stock, impact the businesses in which
it invests and harm its business, operating results and
financial condition.
Terrorist acts, acts of war or natural disasters may disrupt
Patriots operations, as well as the operations of the
businesses in which it invests. Such acts have created, and
continue to create, economic and political uncertainties and
have contributed to global economic instability. Future
terrorist activities, military or security operations, or
natural disasters could further weaken the domestic/global
economies and create additional uncertainties, which may
negatively impact the businesses in which Patriot invests
directly or indirectly and, in turn, could have a material
adverse impact on its business, operating results and financial
condition. Losses from terrorist attacks and natural disasters
are generally uninsurable.
Certain
provisions of Patriots restated certificate of
incorporation and restated bylaws as well as the Delaware
General Corporation Law could deter takeover attempts and have
an adverse impact on the price of its common
stock.
Patriots restated certificate of incorporation and its
restated bylaws as well as the Delaware General Corporation Law
contain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for it. These
anti-takeover provisions may inhibit a change in control in
circumstances that could give the holders of Patriots
common stock the opportunity to realize a premium over the
market price for its common stock.
51
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this document may constitute
forward-looking statements because they relate to future events
or future performance or financial condition. These
forward-looking statements may include statements as to:
|
|
|
|
|
the likelihood that the proposed merger is completed and the
anticipated timing of the completion of the proposed merger;
|
|
|
|
the period following the completion of the merger and the
transactions contemplated by the merger agreement;
|
|
|
|
the ability of Patriot and Prospects businesses to
successfully integrate if the proposed merger is
completed; and
|
|
|
|
Patriots future operating results and business prospects
if the proposed merger is not completed;
|
In addition, words such as anticipate,
believe, expect and intend
indicate a forward-looking statement, although not all
forward-looking statements include these words. The
forward-looking statements contained in this document involve
risks and uncertainties. Actual results could differ materially
from those implied or expressed in the forward-looking
statements for any reason, including the factors set forth in
Risk Factors and elsewhere in this document.
The forward-looking statements included in this document have
been based on information available to Patriot and Prospect on
the date of this document, as appropriate, and Patriot and
Prospect assume no obligation to update any such forward-looking
statements. Although Patriot and Prospect undertake no
obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or
otherwise, you are advised to consult any additional disclosures
that Patriot and Prospect may make directly to you or through
reports that Patriot and Prospect in the future may file with
the SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
The forward-looking statements in this document are excluded
from the safe harbor protection provided by Section 27A of
the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.
52
THE
SPECIAL MEETING
Date,
Time and Place of the Special Meeting
The special meeting of Patriot shareholders will take place on
November 18, 2009, at 10:30 a.m. (Eastern Daylight
Time), at the offices of Edwards Angell
Palmer & Dodge LLP at Three Stamford Plaza,
301 Tresser Boulevard, Stamford, Connecticut 06901.
Purpose
of the Special Meeting
Patriot shareholders are being asked to consider and vote on the
following items at the special meeting:
|
|
|
|
|
A proposal to adopt the Agreement and Plan of Merger, dated as
of August 3, 2009, by and between Patriot and Prospect, as
such agreement may be amended from time to time; and
|
|
|
|
A proposal to approve the adjournment of the meeting, if
necessary or appropriate, to solicit additional proxies, in the
event that there are not sufficient votes at the time of the
meeting to adopt the foregoing proposal.
|
See The Merger Proposal and Description of the
Merger Agreement.
Patriots board of directors, including the independent
directors, unanimously recommends that shareholders vote
FOR approval of the merger agreement and the
transactions contemplated by the merger agreement.
Record
Date
Only holders of record of Patriots common stock at the
close of business on October 21, 2009, the record date, are
entitled to notice of and to vote at the special meeting. On the
record date, approximately 20,950,501 shares of common
stock were issued and outstanding and held by
approximately
holders of record.
Quorum
and Adjournments
A quorum is required to be present in order to conduct business
at the special meeting. A quorum will be present if a majority
of the votes entitled to be cast are present, in person or by
proxy. Proxies properly executed and marked with a positive
vote, a negative vote or an abstention will be considered to be
present at the special meeting for purposes of determining
whether a quorum is present for the transaction of all business
at the special meeting.
Shareholders will also be asked to consider a proposal to
adjourn or postpone of the meeting for the solicitation of
additional votes, if necessary. Any such adjournment will only
be permitted if approved by the holders of shares representing a
majority of the votes present in person or by proxy at the
special meeting, whether or not a quorum exists. Abstentions
will be treated for purposes of the adjournment vote as votes
cast against the adjournment.
Vote
Required
Holders of record of Patriots common shares on the record
date are entitled to one vote per share.
Merger proposal. The affirmative vote of the
holders of a majority of Patriots outstanding shares
entitled to vote is required to approve the merger agreement and
the proposed merger. Shareholders who abstain, fail to return
their proxies or do not otherwise vote, will be voting
against the merger agreement and the proposed
merger. Brokers who hold shares of stock in street name cannot
vote those shares if the brokers are not provided with voting
instructions in accordance with their procedures, and this would
also be counted as a vote against the merger
proposal.
53
Voting of
Management
At the close of business on October 19, 2009,
Patriots executive officers and directors owned and were
entitled to vote 3,417,638 shares of Patriots common
stock, representing 15.83% of Patriots outstanding shares
of common stock on that date. None of Patriots executive
officers or directors has entered into any voting agreement
relating to the proposed merger; however, each of Patriots
executive officers and directors has indicated that he intends
to vote his shares of common stock in favor of the approval of
the merger and the merger agreement as long as the merger
agreement is in effect.
Voting of
Proxies
All shares represented by properly executed proxies received in
time for the special meeting will be voted at the special
meeting in the manner specified by the shareholders giving those
proxies. Properly executed proxies that do not contain voting
instructions will be voted for the approval of each
matter to be voted on at the special meeting, including approval
of the proposed merger and the merger agreement. Shareholders
may also vote by calling the proxy solicitor at
(866) 796-3439.
Patriot does not expect that any matters other than those
discussed above will be brought before the special meeting. If,
however, other matters are properly presented at the special
meeting, the individuals named as proxies will vote on such
matters in their discretion.
Revocability
of Proxies
Submitting a proxy on the enclosed form does not preclude a
shareholder from voting in person at the special meeting. A
shareholder may revoke a proxy at any time before it is voted by
filing with Patriot a duly executed revocation of proxy, by
submitting a duly executed proxy to Patriot with a later date,
by re-voting by calling the proxy solicitor at
(866) 796-3439, or by appearing at the special meeting and
voting in person. Shareholders may revoke a proxy by any of
these methods, regardless of the method used to deliver a
shareholders previous proxy. Attendance at the special
meeting without voting will not itself revoke a proxy.
Solicitation
of Proxies
Patriot will bear the expenses incurred in connection with the
printing and furnishing of this document to its shareholders. In
addition to solicitation by mail, Patriots executive
officers, who will not be specially compensated, may solicit
proxies from Patriots shareholders by telephone,
facsimile, telegram or other electronic means or in person.
Patriot has retained The Altman Group, Inc. to assist in the
solicitation of proxies from shareholders for a maximum fee of
$24,000. Arrangements may also be made with brokerage houses and
other custodians, nominees and fiduciaries for the forwarding of
solicitation materials to the beneficial owners of shares held
of record by these persons, and Patriot will reimburse them for
their reasonable
out-of-pocket
expenses.
Patriot will mail a copy of this document, including the Notice
of Annual Meeting and the proxy card included in these
materials, to each holder of record of its common stock on the
record date.
Dissenters
Rights
Shareholders do not have the right to exercise dissenters
rights with respect to any matter to be voted upon at the
special meeting, including approval of the merger agreement.
54
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prospect announced on August 3, 2009 that it intends to
acquire the outstanding shares of Patriot common stock. The
merger agreement provides that the holders of Patriots
common stock will receive the right to receive
0.3992 shares of Prospects common stock. This is
estimated to result in approximately 8.6 million shares of
common stock being issued by Prospect. In connection with the
transaction, Prospect will repay all the outstanding borrowings
of Patriot, in compliance with the merger agreement. The
unaudited pro forma condensed combined financial information has
been derived from and should be read in conjunction with the
historical consolidated combined financial statements and the
related notes of both Patriot and Prospect, which are included
elsewhere in this document.
The following unaudited pro forma condensed combined financial
information and explanatory notes illustrate the effect of the
merger on Prospects financial position and results of
operations based upon the companies respective historical
financial positions and results of operations under the
acquisition method of accounting with Prospect treated as the
acquirer. Under this method of accounting, the assets and
liabilities of Patriot will be recorded by Prospect at their
estimated fair values as of the date the merger is completed.
The unaudited pro forma condensed combined financial information
of Prospect and Patriot reflects the unaudited combined
condensed balance sheet as of June 30, 2009 and the
unaudited combined condensed income statements for the year
ended June 30, 2009, updated where more timely information
is available. The condensed consolidated balance sheet as of
June 30, 2009 assumes the acquisition took place on that
date. The condensed consolidated statements of income for the
year ended June 30, 2009 assumes the acquisition took place
on July 1, 2008. The unaudited pro forma condensed combined
balance sheet also reflects the impact of certain transactions
that occurred subsequent to June 30, 2009.
The unaudited pro forma condensed combined financial
information is presented for illustrative purposes only and does
not indicate the financial results of the combined companies had
the companies actually been combined at the beginning of each
period presented, nor the impact of possible business model
changes. The unaudited pro forma condensed combined financial
information also does not consider any potential impacts of
current market conditions on revenues, expense efficiencies,
asset dispositions, and share repurchases, among other factors.
In addition, as explained in more detail in the accompanying
notes to the unaudited pro forma condensed combined financial
information, the allocation of the pro forma purchase price
reflected in the unaudited pro forma condensed combined
financial information is subject to adjustment and may vary
significantly from the actual purchase price allocation that
will be recorded upon completion of the merger.
55
Prospect
Capital Corp and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
Unaudited
June 30, 2009
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
|
|
|
Prospect
|
|
|
Patriot(A)
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Assets and Liabilities Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
|
|
547,168
|
|
|
|
265,931
|
|
|
|
(69,608
|
)(E)
|
|
|
743,491
|
|
Cash
|
|
|
108,677
|
|
|
|
5,075
|
|
|
|
97,674
|
(B)
|
|
|
69,979
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,647
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,800
|
)(D)
|
|
|
|
|
Other Assets
|
|
|
11,180
|
|
|
|
2,332
|
|
|
|
|
|
|
|
13,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
667,025
|
|
|
|
273,338
|
|
|
|
(113,381
|
)
|
|
|
826,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
124,800
|
|
|
|
111,959
|
|
|
|
(124,800
|
)(D)
|
|
|
111,959
|
|
|
|
|
|
|
|
|
|
|
|
|
111,959
|
(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111,959
|
)(E)
|
|
|
|
|
Other Liabilities
|
|
|
9,629
|
|
|
|
5,606
|
|
|
|
|
|
|
|
15,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
134,429
|
|
|
|
117,565
|
|
|
|
(124,800
|
)
|
|
|
127,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
532,596
|
|
|
|
155,773
|
|
|
|
97,674
|
(B)
|
|
|
699,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,647
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,608
|
)(E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Pro Forma Condensed Consolidated
Financial Statements.
56
Prospect
Capital Corp and Subsidiaries
Pro Forma Condensed Consolidated Income Statement
Unaudited
Year Ended June 30, 2009
(In Thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
Pro Forma
|
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Performance Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income
|
|
|
85,719
|
|
|
|
35,146
|
|
|
|
|
(F)
|
|
|
120,865
|
|
Fee Income
|
|
|
|
|
|
|
1,508
|
|
|
|
|
|
|
|
1,508
|
|
Other Income
|
|
|
14,762
|
|
|
|
338
|
|
|
|
|
|
|
|
15,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
100,481
|
|
|
|
36,992
|
|
|
|
|
|
|
|
137,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(6,161
|
)
|
|
|
(8,537
|
)
|
|
|
6,751
|
(G)
|
|
|
(7,947
|
)
|
Base Management Fees
|
|
|
(11,915
|
)
|
|
|
|
|
|
|
(6,825
|
)(H)
|
|
|
(18,740
|
)
|
Income Incentive Fees
|
|
|
(14,790
|
)
|
|
|
|
|
|
|
(4,494
|
)(I)
|
|
|
(19,284
|
)
|
General and Administrative Expenses
|
|
|
(8,452
|
)
|
|
|
(8,314
|
)
|
|
|
2,398
|
(J)
|
|
|
(14,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
(41,318
|
)
|
|
|
(16,851
|
)
|
|
|
(2,170
|
)
|
|
|
(60,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
59,163
|
|
|
|
20,141
|
|
|
|
(2,170
|
)
|
|
|
77,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Gain/(Loss)
|
|
|
(39,078
|
)
|
|
|
(12,462
|
)
|
|
|
|
|
|
|
(51,540
|
)
|
Unrealized Gain/(Loss)
|
|
|
15,019
|
|
|
|
(45,334
|
)
|
|
|
|
|
|
|
(30,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gain/(Loss)
|
|
|
(24,059
|
)
|
|
|
(57,796
|
)
|
|
|
|
|
|
|
(81,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
35,104
|
|
|
|
(37,655
|
)
|
|
|
(2,170
|
)
|
|
|
(4,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding
|
|
|
31,560
|
|
|
|
20,847
|
|
|
|
1,941
|
(K)
|
|
|
54,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
1.11
|
|
|
|
(1.81
|
)
|
|
|
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Pro Forma Condensed Consolidated
Financial Statements.
57
Prospect
Capital Corporation and Subsidiaries
Pro Forma Schedule of Investments
Unaudited
As of June 30, 2009
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Pro Forma Prospect(1)
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring & Machine
|
|
Manufacturer of seamless rolled rings
|
|
Senior Secured Note - Tranche A (10.5%, due 4/13)
|
|
$
|
21,487
|
|
|
$
|
21,487
|
|
|
|
|
|
|
|
|
|
|
$
|
21,487
|
|
|
$
|
21,487
|
|
(Manufacturing)
|
|
|
|
Subordinated Secured Note - Tranche B (17.5%, due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/13)(2)
|
|
|
11,675
|
|
|
|
10,151
|
|
|
|
|
|
|
|
|
|
|
|
11,675
|
|
|
|
10,151
|
|
|
|
|
|
Series A Convertible Preferred Shares (6,143 shares)
|
|
|
6,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,057
|
|
|
|
|
|
|
|
|
|
Unrestricted Common Shares (6 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit (5.3%, due 2/12)(3)
|
|
|
|
|
|
|
|
|
|
|
3,956
|
|
|
|
3,956
|
|
|
|
3,956
|
|
|
|
3,956
|
|
(Machinery)
|
|
|
|
Senior Secured Term Loan A (6.0%, due 2/12)(3)
|
|
|
|
|
|
|
|
|
|
|
8,019
|
|
|
|
411
|
|
|
|
8,019
|
|
|
|
411
|
|
|
|
|
|
Senior Subordinated Debt (22.0%, due 8/12)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
6,747
|
|
|
|
|
|
|
|
6,747
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note (8.0%, due 2/13)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
Membership Interest (1,250,000 units)
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
C&J Cladding LLC
|
|
Cladding services for deep-strata and sub-sea drilling components
|
|
Senior Secured Note (14.0%, due 3/12)
|
|
|
2,722
|
|
|
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
2,722
|
|
|
|
3,308
|
|
(Metal Services)
|
|
|
|
Warrants (400 warrants, expiring 3/14)
|
|
|
580
|
|
|
|
3,825
|
|
|
|
|
|
|
|
|
|
|
|
580
|
|
|
|
3,825
|
|
|
|
Change Clean Energy Holdings, Inc. (CCEHI)
(Biomass Power)
|
|
Owner of non-operating wood fired biomass power plant
|
|
Common Shares (1,000 shares)
|
|
|
2,530
|
|
|
|
2,530
|
|
|
|
|
|
|
|
|
|
|
|
2,530
|
|
|
|
2,530
|
|
|
|
Encore Legal Solutions, Inc.
|
|
Legal document management services
|
|
Junior Secured Term Loan A (11.0%, due 12/10)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
4,020
|
|
|
|
3,081
|
|
|
|
4,020
|
|
|
|
3,081
|
|
(Printing & Publishing)
|
|
|
|
Junior Secured Term Loan B (14.0%, due 12/10)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
7,391
|
|
|
|
|
|
|
|
7,391
|
|
|
|
|
|
|
|
|
|
Common Stock (20,000 shares)
|
|
|
|
|
|
|
|
|
|
|
5,159
|
|
|
|
|
|
|
|
5,159
|
|
|
|
|
|
|
|
Fischbein, LLC
|
|
Designer and manufacturer of packaging equipment
|
|
Senior Subordinated Debt (16.5%, due 5/13)(2)
|
|
|
|
|
|
|
|
|
|
|
3,554
|
|
|
|
3,542
|
|
|
|
3,554
|
|
|
|
3,542
|
|
(Machinery)
|
|
|
|
Membership Interest - Class A (2,800,000 units)
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
|
|
2,984
|
|
|
|
2,800
|
|
|
|
2,984
|
|
|
|
Gas Solutions Holdings, Inc.
|
|
Owner and operator of a gas gathering and processing system
|
|
Senior Secured Note (18.0%, due 12/18)
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
25,000
|
|
(Gas Gathering and Distribution)
|
|
|
|
Junior Secured Note (18.0%, due 12/18)
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
Common Shares (100 shares)
|
|
|
5,003
|
|
|
|
55,187
|
|
|
|
|
|
|
|
|
|
|
|
5,003
|
|
|
|
55,187
|
|
|
|
Integrated Contract Services, Inc.
|
|
Provider of contract management services
|
|
Senior Demand Note (15.0%, due 6/09)
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
1,170
|
|
|
|
1,170
|
|
(Contracting)
|
|
|
|
Senior Secured Note (14.0% plus 6.0% default interest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
past due)(2)(3)
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
Junior Secured Note (14.0% plus 6.0% default interest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
past due)(2)(3)
|
|
|
14,003
|
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
|
|
14,003
|
|
|
|
3,030
|
|
|
|
|
|
Series A Preferred shares (10 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (49 shares)
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
679
|
|
|
|
|
|
|
|
Iron Horse Coiled Tubing, Inc.
|
|
Provider of fracing services to oil and gas producers
|
|
Bridge Loan (18.0%, due 12/09)(2)
|
|
|
9,826
|
|
|
|
9,602
|
|
|
|
|
|
|
|
|
|
|
|
9,826
|
|
|
|
9,602
|
|
(Production Services)
|
|
|
|
Senior Secured Note (15.0% due 12/09)
|
|
|
9,250
|
|
|
|
3,004
|
|
|
|
|
|
|
|
|
|
|
|
9,250
|
|
|
|
3,004
|
|
|
|
|
|
Common Shares (1,781 shares)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
L.A. Spas, Inc.
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit (8.8%, due 12/09)
|
|
|
|
|
|
|
|
|
|
|
1,175
|
|
|
|
|
|
|
|
1,175
|
|
|
|
|
|
(Chemicals, Plastics & Rubber)
|
|
|
|
Senior Secured Term Loan (8.8%, due 12/09)(3)
|
|
|
|
|
|
|
|
|
|
|
4,092
|
|
|
|
|
|
|
|
4,092
|
|
|
|
|
|
|
|
|
|
Charge-off of cost of impaired loan(4)(3)
|
|
|
|
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt (17.5%, due 1/10)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
7,908
|
|
|
|
|
|
|
|
7,908
|
|
|
|
|
|
|
|
|
|
Charge-off of cost of impaired loan(4)
|
|
|
|
|
|
|
|
|
|
|
(7,908
|
)
|
|
|
|
|
|
|
(7,908
|
)
|
|
|
|
|
|
|
|
|
Common Stock (1,125,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants (13,828 warrants)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
NRG Manufacturing, Inc.
|
|
Manufacturer and fabricator of steel structures and vessels
|
|
Senior Secured Note (16.5%, due 8/11)
|
|
|
13,080
|
|
|
|
13,080
|
|
|
|
|
|
|
|
|
|
|
|
13,080
|
|
|
|
13,080
|
|
(Manufacturing)
|
|
|
|
Common shares (1,000 shares)
|
|
|
2,317
|
|
|
|
19,294
|
|
|
|
|
|
|
|
|
|
|
|
2,317
|
|
|
|
19,294
|
|
|
|
Nupla Corporation
|
|
Manufacturer and marketer of professional high-grade
|
|
Revolving Line of Credit (9.3%, due 9/12)(3)
|
|
|
|
|
|
|
|
|
|
|
1,082
|
|
|
|
1,081
|
|
|
|
1,082
|
|
|
|
1,081
|
|
(Home & Office Furnishings, Housewares &
Durable
|
|
fiberglass-handled striking and digging tools
|
|
Senior Secured Term Loan A (10.0%, due 9/12)(3)
|
|
|
|
|
|
|
|
|
|
|
5,106
|
|
|
|
5,106
|
|
|
|
5,106
|
|
|
|
5,106
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, due 3/13)(2)(3)
|
|
|
|
|
|
|
|
|
|
|
3,143
|
|
|
|
1,106
|
|
|
|
3,143
|
|
|
|
1,106
|
|
|
|
|
|
Preferred Stock Class A (475 shares)
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class B (1,045 shares)
|
|
|
|
|
|
|
|
|
|
|
1,132
|
|
|
|
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
Common Stock (1,140,584 shares)
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
R-V Industries, Inc.
|
|
Manufacturer of custom equipment
|
|
Warrants (200,000 warrants, expiring 6/17)
|
|
|
1,682
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
1,682
|
|
|
|
4,500
|
|
(Manufacturing)
|
|
|
|
Common Shares (545,107 shares)
|
|
|
5,086
|
|
|
|
12,267
|
|
|
|
|
|
|
|
|
|
|
|
5,086
|
|
|
|
12,267
|
|
|
|
See accompanying Notes to Pro Forma Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Prospect
Capital Corporation and Subsidiaries
Pro Forma Schedule of Investments Continued
Unaudited
As of June 30, 2009
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Pro Forma Prospect(1)
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Sidumpr Trailer Company, Inc.
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit (7.3%, due 1/11)
|
|
|
|
|
|
|
|
|
|
|
934
|
|
|
|
934
|
|
|
|
934
|
|
|
|
934
|
|
(Automobile)
|
|
|
|
Senior Secured Term Loan A (7.3%, due 1/11)
|
|
|
|
|
|
|
|
|
|
|
2,037
|
|
|
|
1,501
|
|
|
|
2,037
|
|
|
|
1,501
|
|
|
|
|
|
Senior Secured Term Loan B (8.8%, due 1/11)
|
|
|
|
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C (16.5%, due 7/11)(2)
|
|
|
|
|
|
|
|
|
|
|
2,254
|
|
|
|
|
|
|
|
2,254
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D (7.3%, due 7/11)
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
|
|
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
Preferred Stock (49,635.5 shares)
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
Common Stock (64,050 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yatesville Coal Holdings, Inc.
|
|
Mining operation of coal
|
|
Senior Secured Note (15.7%, due 12/10)(3)
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
(Mining and Coal Production)
|
|
|
|
Junior Secured Note (15.7%, due 12/10)(3)
|
|
|
38,463
|
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
38,463
|
|
|
|
3,097
|
|
|
|
|
|
Common Stock (1,000 shares)
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
$
|
187,105
|
|
|
$
|
206,332
|
|
|
$
|
65,124
|
|
|
$
|
23,702
|
|
|
$
|
252,229
|
|
|
$
|
230,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy Holdings LLC
|
|
Acquirer and operator of small and medium sized
|
|
Senior Secured Debt Tranche A (17.0% plus 3.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Construction Services)
|
|
energy services companies
|
|
default interest, due 1/11)(2)(3)
|
|
|
1,891
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
1,891
|
|
|
|
2,052
|
|
|
|
|
|
Senior Secured Debt Tranche B (17.0% plus 3.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
default interest, past due)(2)(3)
|
|
|
1,955
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
1,955
|
|
|
|
356
|
|
|
|
|
|
Series C Preferred Equity (500 units)
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Series B Preferred Equity (241 units)
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
Series A Preferred Equity (200 units)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
Warrants (25,000 warrants, expiring 11/18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants (6,025 warrants, expiring 6/18)
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
Warrants (6,065 warrants, expiring 2/16)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
Biotronic Neuro Network
|
|
Provider of neurophysiological monitoring services to surgeons
|
|
Senior Secured Note (12.5%, due 2/13)(2)
|
|
|
26,227
|
|
|
|
27,007
|
|
|
|
|
|
|
|
|
|
|
|
26,227
|
|
|
|
27,007
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Preferred Shares (9,925.455 shares)
|
|
|
2,300
|
|
|
|
2,839
|
|
|
|
|
|
|
|
|
|
|
|
2,300
|
|
|
|
2,839
|
|
|
|
Boxercraft Incorporated
|
|
Supplier of spiritwear and campus apparel
|
|
Revolving Line of Credit (9.0%, due 9/13)
|
|
|
|
|
|
|
|
|
|
|
777
|
|
|
|
777
|
|
|
|
777
|
|
|
|
777
|
|
(Textiles & Leather)
|
|
|
|
Senior Secured Term Loan A (9.5%, due 9/13)
|
|
|
|
|
|
|
|
|
|
|
4,445
|
|
|
|
4,445
|
|
|
|
4,445
|
|
|
|
4,445
|
|
|
|
|
|
Senior Secured Term Loan B (10.0%, due 9/13)
|
|
|
|
|
|
|
|
|
|
|
4,886
|
|
|
|
4,886
|
|
|
|
4,886
|
|
|
|
4,886
|
|
|
|
|
|
Senior Secured Term Loan C (18.5%, due 3/14)(2)
|
|
|
|
|
|
|
|
|
|
|
6,715
|
|
|
|
6,715
|
|
|
|
6,715
|
|
|
|
6,715
|
|
|
|
|
|
Preferred Stock (1,000,000 shares)
|
|
|
|
|
|
|
|
|
|
|
1,080
|
|
|
|
700
|
|
|
|
1,080
|
|
|
|
700
|
|
|
|
|
|
Common Stock (10,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
|
|
Manufacturer and distributor of specialty pet products
|
|
Revolving Line of Credit (11.3%, due 1/12)
|
|
|
|
|
|
|
|
|
|
|
1,489
|
|
|
|
1,489
|
|
|
|
1,489
|
|
|
|
1,489
|
|
(Textiles & Leather)
|
|
|
|
Senior Secured Term Loan A (11.3%, due 1/12)
|
|
|
|
|
|
|
|
|
|
|
3,829
|
|
|
|
3,829
|
|
|
|
3,829
|
|
|
|
3,829
|
|
|
|
|
|
Senior Secured Term Loan B (12.0%, due 1/12)
|
|
|
|
|
|
|
|
|
|
|
451
|
|
|
|
451
|
|
|
|
451
|
|
|
|
451
|
|
|
|
|
|
Senior Secured Term Loan C (18.0%, due 3/12)(2)
|
|
|
|
|
|
|
|
|
|
|
4,553
|
|
|
|
4,321
|
|
|
|
4,553
|
|
|
|
4,321
|
|
|
|
|
|
Membership Interest - Class A (730.02 units)
|
|
|
|
|
|
|
|
|
|
|
730
|
|
|
|
168
|
|
|
|
730
|
|
|
|
168
|
|
|
|
|
|
Membership Interest - Common (199,795.08 units)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC(5)
|
|
Provider of tuition management services
|
|
Membership Interest - Class B (1,218 units)
|
|
|
|
|
|
|
|
|
|
|
1,281
|
|
|
|
|
|
|
|
1,281
|
|
|
|
|
|
(Diversified/Conglomerate Service)
|
|
|
|
Membership Interest - Class D (1 unit)
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
Sport Helmets Holdings, LLC(5)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A (5.0%, due 12/13)
|
|
|
|
|
|
|
|
|
|
|
4,041
|
|
|
|
3,759
|
|
|
|
4,041
|
|
|
|
3,759
|
|
(Personal & Nondurable Consumer Products)
|
|
|
|
Senior Secured Term Loan B (5.5%, due 12/13)
|
|
|
|
|
|
|
|
|
|
|
7,371
|
|
|
|
6,857
|
|
|
|
7,371
|
|
|
|
6,857
|
|
|
|
|
|
Senior Subordinated Debt - Series A (15.0%, due 6/14)(2)
|
|
|
|
|
|
|
|
|
|
|
7,012
|
|
|
|
6,399
|
|
|
|
7,012
|
|
|
|
6,399
|
|
|
|
|
|
Senior Subordinated Debt - Series B (15.0%, due 6/14)(2)
|
|
|
|
|
|
|
|
|
|
|
1,290
|
|
|
|
1,179
|
|
|
|
1,290
|
|
|
|
1,179
|
|
|
|
|
|
Common Stock (20,000 shares)
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
1,399
|
|
|
|
2,000
|
|
|
|
1,399
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
$
|
33,544
|
|
|
$
|
32,254
|
|
|
$
|
52,240
|
|
|
$
|
47,374
|
|
|
$
|
85,784
|
|
|
$
|
79,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc.
|
|
Distributor of specialty chemicals and contract
|
|
Revolving Line of Credit (10.3%, due 7/11)
|
|
|
|
|
|
|
|
|
|
|
1,787
|
|
|
|
1,787
|
|
|
|
1,787
|
|
|
|
1,787
|
|
(Ecological)
|
|
application services
|
|
Senior Secured Term Loan A (10.3%, due 6/11)
|
|
|
|
|
|
|
|
|
|
|
7,643
|
|
|
|
7,643
|
|
|
|
7,643
|
|
|
|
7,643
|
|
|
|
|
|
Common Stock (5,000 shares)
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
159
|
|
|
|
500
|
|
|
|
159
|
|
|
|
See accompanying Notes to Pro Forma Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
Prospect
Capital Corporation and Subsidiaries
Pro Forma Schedule of Investments Continued
Unaudited
As of June 30, 2009
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Pro Forma Prospect(1)
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Aircraft Fasteners International, LLC
|
|
Distributor of fasteners and related hardware for use in
|
|
Senior Secured Term Loan (4.4%, due 11/12)
|
|
|
|
|
|
|
|
|
|
|
5,288
|
|
|
|
5,209
|
|
|
|
5,288
|
|
|
|
5,209
|
|
(Machinery)
|
|
aerospace, electronics and defense industries
|
|
Junior Secured Term Loan (14.0%, due 5/13(2)
|
|
|
|
|
|
|
|
|
|
|
5,304
|
|
|
|
5,304
|
|
|
|
5,304
|
|
|
|
5,304
|
|
|
|
|
|
Convertible Preferred Stock (32,000 shares)
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
436
|
|
|
|
235
|
|
|
|
436
|
|
|
|
American Gilsonite Company
|
|
Miner and distributor of Gilsonite
|
|
Senior Subordinated Note (15.0%, due 3/13)(2)
|
|
|
14,783
|
|
|
|
15,073
|
|
|
|
|
|
|
|
|
|
|
|
14,783
|
|
|
|
15,073
|
|
(Specialty Minerals)
|
|
|
|
Membership Interest Units in AGCPEP, LLC (99.9999%)
|
|
|
1,031
|
|
|
|
3,851
|
|
|
|
|
|
|
|
|
|
|
|
1,031
|
|
|
|
3,851
|
|
|
|
Allied Defense Group, Inc.
|
|
Diversified defense company
|
|
Common Stock (4,000 shares)
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
123
|
|
|
|
463
|
|
|
|
123
|
|
(Aerospace & Defense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance Agency, Inc.
(Insurance)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan (12.8%, due 2/13)(2)
|
|
|
|
|
|
|
|
|
|
|
5,013
|
|
|
|
4,700
|
|
|
|
5,013
|
|
|
|
4,700
|
|
|
|
Borga, Inc.
|
|
Manufacturer of pre-fabricated metal building systems
|
|
Revolving Line of Credit (8.0%, due 5/10)
|
|
|
|
|
|
|
|
|
|
|
796
|
|
|
|
796
|
|
|
|
796
|
|
|
|
796
|
|
(Mining, Steel, Iron & Nonprecious Metals)
|
|
|
|
Senior Secured Term Loan B (11.5%, due 5/10)
|
|
|
|
|
|
|
|
|
|
|
1,612
|
|
|
|
1,612
|
|
|
|
1,612
|
|
|
|
1,612
|
|
|
|
|
|
Senior Secured Term Loan C (19.0%, due 5/10)(2)
|
|
|
|
|
|
|
|
|
|
|
8,255
|
|
|
|
2,142
|
|
|
|
8,255
|
|
|
|
2,142
|
|
|
|
|
|
Common Stock Warrants (33,750 warrants)
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC
|
|
Provider of proprietary branded professional skincare
|
|
Junior Secured Term Loan B (9.8%, due 11/11)
|
|
|
|
|
|
|
|
|
|
|
9,884
|
|
|
|
9,884
|
|
|
|
9,884
|
|
|
|
9,884
|
|
(Personal & Nondurable Consumer Products)
|
|
and cosmetic products to physicians and spa communities
|
|
Senior Subordinated Debt (16.5%, due 11/12)
|
|
|
|
|
|
|
|
|
|
|
6,198
|
|
|
|
6,260
|
|
|
|
6,198
|
|
|
|
6,260
|
|
|
|
|
|
Common Stock (7,500 shares)
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
536
|
|
|
|
750
|
|
|
|
536
|
|
|
|
|
|
Options in Mineral Fusion Natural Brands, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,662 options)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castro Cheese Company, Inc.
|
|
Manufacturer, packager and distributor of cheese
|
|
Junior Secured Note (13.0%, due 2/13)(2)
|
|
|
7,413
|
|
|
|
7,637
|
|
|
|
|
|
|
|
|
|
|
|
7,413
|
|
|
|
7,637
|
|
(Food Products)
|
|
products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest Cherokee, LLC
|
|
Developer of gas reserves
|
|
Senior Secured Note (13.0% plus 4.0% default interest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Oil and Gas Production)
|
|
|
|
past due)(3)
|
|
|
10,191
|
|
|
|
6,855
|
|
|
|
|
|
|
|
|
|
|
|
10,191
|
|
|
|
6,855
|
|
|
|
|
|
Overriding Royalty Interests
|
|
|
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
CS Operating, LLC
|
|
Provider of maintenance, repair and replacement of
|
|
Revolving Line of Credit (8.0%, due 1/13)
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
195
|
|
|
|
195
|
|
|
|
195
|
|
(Buildings & Real Estate)
|
|
HVAC, electrical, plumbing, and foundation repair
|
|
Senior Secured Term Loan A (6.8%, due 7/12)
|
|
|
|
|
|
|
|
|
|
|
1,625
|
|
|
|
1,625
|
|
|
|
1,625
|
|
|
|
1,625
|
|
|
|
|
|
Senior Subordinated Debt (16.5%, due 1/13)(2)
|
|
|
|
|
|
|
|
|
|
|
2,673
|
|
|
|
2,673
|
|
|
|
2,673
|
|
|
|
2,673
|
|
|
|
Copernicus Group
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit (8.8%, due 10/13)
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
133
|
|
|
|
133
|
|
|
|
133
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Senior Secured Term Loan A (8.8%, due 10/13)
|
|
|
|
|
|
|
|
|
|
|
7,524
|
|
|
|
7,524
|
|
|
|
7,524
|
|
|
|
7,524
|
|
|
|
|
|
Senior Subordinated Debt (16.0%, due 4/14)
|
|
|
|
|
|
|
|
|
|
|
12,189
|
|
|
|
11,308
|
|
|
|
12,189
|
|
|
|
11,308
|
|
|
|
|
|
Preferred Stock - Series A (1,000,000 shares)
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
800
|
|
|
|
1,000
|
|
|
|
800
|
|
|
|
Copperhead Chemical Company, Inc.
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt (21.0%, due 1/13)(2)
|
|
|
|
|
|
|
|
|
|
|
3,782
|
|
|
|
3,782
|
|
|
|
3,782
|
|
|
|
3,782
|
|
(Chemicals, Plastics & Rubber)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc.
|
|
Direct marketer of checks and other financial products
|
|
Senior Secured Term Loan (3.3%, due 12/13)
|
|
|
|
|
|
|
|
|
|
|
1,614
|
|
|
|
1,424
|
|
|
|
1,614
|
|
|
|
1,424
|
|
(Printing & Publishing)
|
|
and services
|
|
Junior Secured Term Loan (6.6%, due 12/14)
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
1,150
|
|
|
|
2,000
|
|
|
|
1,150
|
|
|
|
Deb Shops, Inc.
|
|
Apparel retailer
|
|
Second Lien Debt (8.7%, due 10/14)
|
|
|
14,623
|
|
|
|
6,272
|
|
|
|
|
|
|
|
|
|
|
|
14,623
|
|
|
|
6,272
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback Operating, LP
|
|
Oil and gas drilling
|
|
Net Profits Interest (15.0% payable on Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Oil and Gas Production)
|
|
|
|
distributions)
|
|
|
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
Dover Saddlery, Inc.
|
|
Equestrian products catalog retailer
|
|
Common Stock (30,974 shares)
|
|
|
|
|
|
|
|
|
|
|
148
|
|
|
|
53
|
|
|
|
148
|
|
|
|
53
|
|
(Retail Stores)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employbridge Holding Company
|
|
A provider of specialized staffing services
|
|
Junior Secured Term Loan (9.3%, due 10/13)(3)
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
(Personal, Food & Miscellaneous Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A (5.0%, due 3/11)
|
|
|
|
|
|
|
|
|
|
|
2,455
|
|
|
|
2,358
|
|
|
|
2,455
|
|
|
|
2,358
|
|
(Electronics)
|
|
|
|
Senior Secured Term Loan B (5.2%, due 3/12)
|
|
|
|
|
|
|
|
|
|
|
4,172
|
|
|
|
4,005
|
|
|
|
4,172
|
|
|
|
4,005
|
|
|
|
|
|
Senior Secured Term Loan C (5.7%, due 3/12)
|
|
|
|
|
|
|
|
|
|
|
2,566
|
|
|
|
2,463
|
|
|
|
2,566
|
|
|
|
2,463
|
|
|
|
|
|
Senior Secured Term Loan D (15.0%, due 3/12)
|
|
|
|
|
|
|
|
|
|
|
6,123
|
|
|
|
6,123
|
|
|
|
6,123
|
|
|
|
6,123
|
|
|
|
|
|
Common Stock - Class A (2,475 shares)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
347
|
|
|
|
2
|
|
|
|
347
|
|
|
|
|
|
Common Stock - Class B (25 shares)
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
297
|
|
|
|
292
|
|
|
|
297
|
|
|
|
See accompanying Notes to Pro Forma Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Prospect
Capital Corporation and Subsidiaries
Pro Forma Schedule of Investments Continued
Unaudited
As of June 30, 2009
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Pro Forma Prospect(1)
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Fairchild Industrial Products, Co.
|
|
Manufacturer of industrial controls and power
|
|
Senior Secured Term Loan A (3.6%, due 7/10)
|
|
|
|
|
|
|
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
(Electronics)
|
|
transmission products
|
|
Senior Secured Term Loan B (5.4%, due 1/11)
|
|
|
|
|
|
|
|
|
|
|
4,330
|
|
|
|
4,330
|
|
|
|
4,330
|
|
|
|
4,330
|
|
|
|
|
|
Senior Subordinated Debt (14.8%, due 7/11)
|
|
|
|
|
|
|
|
|
|
|
5,426
|
|
|
|
5,426
|
|
|
|
5,426
|
|
|
|
5,426
|
|
|
|
|
|
Preferred Stock - Class A (378.4 shares)
|
|
|
|
|
|
|
|
|
|
|
366
|
|
|
|
373
|
|
|
|
366
|
|
|
|
373
|
|
|
|
|
|
Common Stock - Class B (27.5 shares)
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
289
|
|
|
|
122
|
|
|
|
289
|
|
|
|
Freedom Marine Services LLC
|
|
Operator of offshore supply vessels
|
|
Subordinated Secured Note (16.0%, due 12/11)(2)
|
|
|
7,160
|
|
|
|
7,152
|
|
|
|
|
|
|
|
|
|
|
|
7,160
|
|
|
|
7,152
|
|
(Shipping Vessels)
|
|
|
|
Net Profits Interest (22.5% payable on Equity distributions)
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
H&M Oil & Gas, LLC
|
|
Developer of oil and gas holdings
|
|
Senior Secured Note (13.0%, due 6/10)
|
|
|
49,688
|
|
|
|
49,697
|
|
|
|
|
|
|
|
|
|
|
|
49,688
|
|
|
|
49,697
|
|
(Oil and Gas Production)
|
|
|
|
Net Profits Interest (8.0% payable on Equity distributions)
|
|
|
|
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,682
|
|
|
|
Hudson Products Holdings, Inc.
|
|
Manufactures and designs air-cooled heat exchanger
|
|
Senior Secured Term Loan (8.0%, due 8/15)
|
|
|
|
|
|
|
|
|
|
|
7,241
|
|
|
|
6,774
|
|
|
|
7,241
|
|
|
|
6,774
|
|
(Mining, Steel, Iron & Nonprecious Metals)
|
|
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC Systems LP (IEC)/Advanced Rig Services LLC
|
|
Provider of electrical and rig-up services
|
|
ARS senior Secured Note (15.0%, due 11/12)(2)
|
|
|
12,836
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
12,836
|
|
|
|
13,092
|
|
(ARS)
(Oilfield Fabrication)
|
|
|
|
IEC senior Secured Note (15.0%, due 11/12)(2)
|
|
|
21,411
|
|
|
|
21,839
|
|
|
|
|
|
|
|
|
|
|
|
21,411
|
|
|
|
21,839
|
|
|
|
Impact Products, LLC
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan (6.4%, due 9/12)
|
|
|
|
|
|
|
|
|
|
|
8,808
|
|
|
|
8,808
|
|
|
|
8,808
|
|
|
|
8,808
|
|
(Machinery)
|
|
|
|
Senior Subordinated Debt (15.0%, due 9/12)
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
5,522
|
|
|
|
5,522
|
|
|
|
5,522
|
|
|
|
Label Corp Holdings, Inc.
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan (8.0%, due 8/14)
|
|
|
|
|
|
|
|
|
|
|
6,168
|
|
|
|
5,669
|
|
|
|
6,168
|
|
|
|
5,669
|
|
(Printing & Publishing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp.
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A (4.6%, due 11/12)
|
|
|
|
|
|
|
|
|
|
|
3,675
|
|
|
|
3,570
|
|
|
|
3,675
|
|
|
|
3,570
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Senior Subordinated Debt (14.5%, due 5/13)
|
|
|
|
|
|
|
|
|
|
|
4,523
|
|
|
|
4,523
|
|
|
|
4,523
|
|
|
|
4,523
|
|
|
|
|
|
Membership Interest (125,000 units)
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
185
|
|
|
|
125
|
|
|
|
185
|
|
|
|
Mac & Massey Holdings, LLC
|
|
Broker and distributor of ingredients to manufacturers of food
|
|
Senior Subordinated Debt (15.8%, due 2/13)(2)
|
|
|
|
|
|
|
|
|
|
|
8,158
|
|
|
|
8,158
|
|
|
|
8,158
|
|
|
|
8,158
|
|
(Grocery)
|
|
products
|
|
Common Stock (250 shares)
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
383
|
|
|
|
235
|
|
|
|
383
|
|
|
|
Maverick Healthcare, LLC
|
|
Provider of home healthcare products and services
|
|
Second Lien Debt (13.5%, due 4/14)(2)
|
|
|
12,691
|
|
|
|
12,816
|
|
|
|
|
|
|
|
|
|
|
|
12,691
|
|
|
|
12,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Preferred Units (1,250,000 units)
|
|
|
1,252
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
1,252
|
|
|
|
1,300
|
|
|
|
|
|
Common Units (1,250,000 units)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller Petroleum, Inc.
|
|
Developer of oil and gas holdings
|
|
Warrants (15,811,856 warrants, expiring 5/10 to 6/14)
|
|
|
150
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
241
|
|
(Oil and Gas Production)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwestern Management Services, LLC
|
|
Provider of dental services
|
|
Revolving Line of Credit (7.8%, due 12/12)
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
118
|
|
|
|
118
|
|
|
|
118
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Senior Secured Term Loan A (6.3%, due 12/12)
|
|
|
|
|
|
|
|
|
|
|
5,157
|
|
|
|
5,157
|
|
|
|
5,157
|
|
|
|
5,157
|
|
|
|
|
|
Senior Secured Term Loan B (6.8%, due 12/12)
|
|
|
|
|
|
|
|
|
|
|
1,221
|
|
|
|
1,221
|
|
|
|
1,221
|
|
|
|
1,221
|
|
|
|
|
|
Junior Secured Term Loan (17.0%, due 6/13)(2)
|
|
|
|
|
|
|
|
|
|
|
2,861
|
|
|
|
2,861
|
|
|
|
2,861
|
|
|
|
2,861
|
|
|
|
|
|
Common Stock (500 shares)
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
465
|
|
|
|
500
|
|
|
|
465
|
|
|
|
Peerless Manufacturing Co.
|
|
Manufacturer of industrial control and filtration
|
|
Subordinated Secured Note (15.0%, due 4/13)(2)
|
|
|
20,000
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
20,400
|
|
(Manufacturing)
|
|
systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prince Mineral Company, Inc.
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan (6.1%, due 12/12)
|
|
|
|
|
|
|
|
|
|
|
11,096
|
|
|
|
10,752
|
|
|
|
11,096
|
|
|
|
10,752
|
|
(Metals & Minerals)
|
|
|
|
Senior Subordinated Debt (14.0%, due 7/13)(2)
|
|
|
|
|
|
|
|
|
|
|
11,994
|
|
|
|
11,994
|
|
|
|
11,994
|
|
|
|
11,994
|
|
|
|
Qualitest Pharmaceuticals, Inc.
|
|
Manufacturer of generic prescription pharmaceuticals
|
|
Second Lien Debt (8.1%, due 4/15)
|
|
|
11,949
|
|
|
|
11,452
|
|
|
|
|
|
|
|
|
|
|
|
11,949
|
|
|
|
11,452
|
|
(Pharmaceuticals)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quartermaster, Inc.
|
|
Retailer of uniforms and tactical equipment to law
|
|
Revolving Line of Credit (6.5%, due 12/10)
|
|
|
|
|
|
|
|
|
|
|
2,986
|
|
|
|
2,986
|
|
|
|
2,986
|
|
|
|
2,986
|
|
(Retail)
|
|
enforcement and security professionals
|
|
Senior Secured Term Loan A (5.7%, due 12/10)
|
|
|
|
|
|
|
|
|
|
|
2,496
|
|
|
|
2,496
|
|
|
|
2,496
|
|
|
|
2,496
|
|
|
|
|
|
Senior Secured Term Loan B (7.0%, due 12/10)
|
|
|
|
|
|
|
|
|
|
|
2,518
|
|
|
|
2,518
|
|
|
|
2,518
|
|
|
|
2,518
|
|
|
|
|
|
Senior Secured Term Loan C (15.0%, due 12/11)(2)
|
|
|
|
|
|
|
|
|
|
|
3,431
|
|
|
|
3,431
|
|
|
|
3,431
|
|
|
|
3,431
|
|
|
|
Regional Management Corp.
|
|
Provider of non-prime consumer installment loans
|
|
Second Lien Debt (14.0%, due 6/12)(2)
|
|
|
25,424
|
|
|
|
23,073
|
|
|
|
|
|
|
|
|
|
|
|
25,424
|
|
|
|
23,073
|
|
(Financial Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco Products, Inc.
|
|
Manufacturer of refractory products
|
|
Second Lien Debt (8.67%, due 6/14)
|
|
|
9,594
|
|
|
|
9,750
|
|
|
|
|
|
|
|
|
|
|
|
9,594
|
|
|
|
9,750
|
|
(Manufacturing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Pro Forma Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Prospect
Capital Corporation and Subsidiaries
Pro Forma Schedule of Investments Continued
Unaudited
As of June 30, 2009
(In Thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Prospect
|
|
|
Patriot
|
|
|
Pro Forma Prospect(1)
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
R-O-M Corporation
|
|
Manufacturer of doors, ramps and bulk heads for fire
|
|
Senior Secured Term Loan A (3.1%, due 2/13)
|
|
|
|
|
|
|
|
|
|
|
5,994
|
|
|
|
5,696
|
|
|
|
5,994
|
|
|
|
5,696
|
|
(Automobile)
|
|
trucks and food transportation
|
|
Senior Secured Term Loan B (4.6%, due 5/13)
|
|
|
|
|
|
|
|
|
|
|
8,256
|
|
|
|
7,845
|
|
|
|
8,256
|
|
|
|
7,845
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, due 8/13)
|
|
|
|
|
|
|
|
|
|
|
7,073
|
|
|
|
7,073
|
|
|
|
7,073
|
|
|
|
7,073
|
|
|
|
Shearers Foods, Inc.
|
|
Manufacturer of snack foods
|
|
Second Lien Debt (14.0%, due 10/13)
|
|
|
18,000
|
|
|
|
18,360
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
18,360
|
|
(Food Products)
|
|
|
|
Membership Interest Units in Mistral Chip Holdings, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000 units)
|
|
|
2,000
|
|
|
|
3,419
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
3,419
|
|
|
|
Stryker Energy, LLC
|
|
Developer of oil and gas holdings
|
|
Subordinated Secured Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Oil and Gas Production)
|
|
|
|
(12.0%, due 12/11)
|
|
|
29,154
|
|
|
|
29,554
|
|
|
|
|
|
|
|
|
|
|
|
29,154
|
|
|
|
29,554
|
|
|
|
|
|
Overriding Royalty Interests
|
|
|
|
|
|
|
2,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,918
|
|
|
|
TriZetto Group
|
|
Developer of software for healthcare payers
|
|
Subordinated Unsecured Note (13.5%, due 10/16)(2)
|
|
|
15,065
|
|
|
|
16,331
|
|
|
|
|
|
|
|
|
|
|
|
15,065
|
|
|
|
16,331
|
|
(Healthcare, Education & Childcare)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek
|
|
Outsourced satellite and cable installation services
|
|
Second Lien Debt (13.1%, due 12/13)
|
|
|
11,360
|
|
|
|
11,730
|
|
|
|
|
|
|
|
|
|
|
|
11,360
|
|
|
|
11,730
|
|
(Technical Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Resources Corp. and Wind River II Corp.
|
|
Developer of oil and gas holdings
|
|
Senior Secured Note (13.0% plus 3.0% default interest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Oil and Gas Production)
|
|
|
|
due 7/10)(3)
|
|
|
15,000
|
|
|
|
12,644
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
12,644
|
|
|
|
|
|
Net Profits Interest (5.0% payable on Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
distributions)
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
$
|
310,775
|
|
|
$
|
308,582
|
|
|
$
|
227,017
|
|
|
$
|
212,853
|
|
|
$
|
537,792
|
|
|
$
|
521,435
|
|
|
|
Pro Forma Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Repayments and Loan Settlements subsequent to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,067
|
)
|
|
|
(17,998
|
)
|
|
|
(33,067
|
)
|
|
|
(17,998
|
)
|
Expected Fair Value Determination Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,608
|
)
|
|
|
Total Investments
|
|
|
|
|
|
$
|
531,424
|
|
|
$
|
547,168
|
|
|
$
|
311,314
|
|
|
$
|
265,931
|
|
|
$
|
842,738
|
|
|
$
|
743,491
|
|
|
|
|
|
|
(1)
|
|
Upon consummation of the merger and
in accordance with Statement of Financial Accounting Standards
No. 141(R), Business Combinations, Prospect
will be required to determine the fair value of each of
Patriots investments and record such fair value as the
cost basis and initial fair value of each such investment in
Prospects financial statements. In this regard,
Prospects management, in conjunction with the assistance
of an independent valuation firm, has preliminarily determined
that the aggregate fair value of Patriots investments
approximates the $198.1 million purchase price to be paid
by Prospect to acquire Patriot in connection with the merger,
which is approximately $69.6 million less than the fair
value of Patriots investments at June 30, 2009. As a
result, such adjustment has been reflected in a single line item
below entitled Expected Fair Value Determination
Adjustment. However, a final determination of the fair
value of Patriots investments will be made after the
merger is completed and, as a result, the actual amount of this
adjustment may vary from the preliminary amount set forth
herein. Thus, the information set forth in the columns below
reflect historical amounts and have not been individually
adjusted to reflect the write down of the fair value of
Patriots investments to conform to Prospects
preliminary determination of the fair value of such investments.
|
|
|
|
(2)
|
|
Interest rate includes
payment-in-kind
(PIK) interest.
|
|
|
|
(3)
|
|
Loan is on non-accrual status.
|
|
|
|
(4)
|
|
All or a portion of the loan is
considered permanently impaired and, accordingly, the charge-off
of the principal balance has been recorded as a realized loss
for financial reporting purposes.
|
See accompanying Notes to Pro Forma
Condensed Consolidated Financial Statements.
Prospect
Capital Corp and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial
Statements
Unaudited
(In Thousands, except share and per share data)
|
|
Note 1
|
Basis of
Pro Forma Presentation
|
The unaudited pro forma condensed combined financial information
related to the merger is included as of and for the year ended
June 30, 2009. As indicated in Exhibit 99.1 to
Prospects
Form 8-K
dated August 5, 2009, Prospect agreed to acquire Patriot
for approximately $198,000. This purchase price was calculated
based upon an estimated price of Prospect common stock of $10.00
per share and an estimated debt outstanding at closing of
$110,500. The purchase price will be adjusted for the actual
debt outstanding when the merger is consummated. The pro forma
adjustments included herein reflect the conversion of Patriot
common stock into Prospect common stock using an exchange ratio
of 0.3992 of a share of Prospect common stock, with such
exchange ratio to give effect to any tax distributions and any
dividends that Patriot may declare before closing, for each of
the approximately 21.6 million shares of Patriot common
stock.
The merger will be accounted for as an acquisition of Patriot by
Prospect in accordance with the acquisition method of accounting
as detailed in Statement of Financial Accounting Standards
No. 141(R), Business Combinations
(FAS 141(R)). The fair value of the
consideration paid is allocated to the assets acquired and
liabilities assumed based on their fair values as of the date of
acquisition. As described in more detail in FAS 141(R),
goodwill, if any, is recognized as of the acquisition date, for
the excess of the consideration transferred over the fair value
of identifiable net assets acquired. If the total acquisition
date fair value of the identifiable net assets acquired exceeds
the fair value of the consideration transferred, the excess is
recognized as a gain. In connection with the merger of Patriot
and Prospect, the estimated fair value of the net assets
acquired is anticipated to equal the purchase price, and based
on Prospects preliminary purchase price allocation, no
gain will be recorded by Prospect in the period the merger is
completed.
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.
Prospects financial statements include its accounts and
the accounts of Prospect Capital Funding, LLC, Prospects
only wholly-owned, closely-managed subsidiary that is also an
investment company. All intercompany balances and transactions
have been eliminated in consolidation.
In determining the value of the assets to be acquired, Statement
of Financial Standards No. 157, Fair Value
Measurements, (SFAS 157), will be
utilized. Under FAS 157, investments are valued utilizing a
market approach, an income approach, or both approaches, as
appropriate. The market approach uses prices and other relevant
information generated by market transactions involving identical
or comparable assets or liabilities (including a business). The
income approach uses valuation techniques to convert future
amounts (for example, cash flows or earnings) to a single
present value amount (discounted) calculated based on an
appropriate discount rate. The measurement is based on the net
present value indicated by current market expectations about
those future amounts. In following these approaches, the types
of factors that Prospect may take into account in fair value
pricing its 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 companys 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.
63
Prospect
Capital Corp and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial
Statements (Continued)
Unaudited
(In Thousands, except share and per share data)
FAS 157 classifies the inputs used to measure these fair
values into the following hierarchy:
Level 1: Quoted prices in active markets
for identical assets or liabilities, accessible by Prospect 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. Prospects
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. FAS 157
applies to fair value measurements already required or permitted
by other standards. In accordance with FAS 157, the fair
value of Prospects investments is defined as the price
that it 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.
Substantially all of the assets held by Prospect and Patriot are
level 3 assets.
Certain other transactions which affect the purchase price and
the ability to consummate the transaction but occurred
subsequent to June 30, 2009 have been adjusted for in the
unaudited condensed pro forma balance sheet. These include
common stock issuances and debt repayments by Prospect and loan
repayments received and settlements by Patriot. Prospect does
not anticipate any realignment of the portfolio other than in
connection with repayments by borrowers.
The unaudited pro forma condensed combined financial information
includes preliminary estimated adjustments to record the assets
and liabilities of Patriot at their respective estimated fair
values and represents Prospects managements
estimates based on available information. The pro forma
adjustments included herein may be revised as additional
information becomes available and as additional analyses are
performed. The final allocation of the purchase price will be
determined after the merger is completed and after completion of
a final analysis to determine the estimated fair values of
Patriots assets and liabilities. Accordingly, the final
purchase accounting adjustments and integration charges may be
materially different from the pro forma adjustments presented in
this document. Increases or decreases in the estimated fair
values of the net assets, commitments, and other items of
Patriot as compared to the information shown in this document
may change the amount of the purchase price allocated to
goodwill or recognized as income in accordance with
FAS 141(R).
The unaudited pro forma condensed combined financial information
is presented in this document is for illustrative purposes only
and does not necessarily indicate the results of operations or
the combined financial position that would have resulted had the
merger been completed at the beginning of the applicable period
presented, nor the impact of possible business model changes as
a result of current market conditions which may impact revenues,
expense efficiencies, asset dispositions, share repurchases and
other factors. Additionally, the unaudited pro forma condensed
combined financial information is not indicative of the results
of operations in future periods or the future financial position
of the combined company.
|
|
Note 2
|
Preliminary
Purchase Accounting Allocations
|
The unaudited pro forma condensed combined financial information
for the merger includes the unaudited pro forma condensed
combined balance sheet as of June 30, 2009 assuming the
merger was completed on
64
Prospect
Capital Corp and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial
Statements (Continued)
Unaudited
(In Thousands, except share and per share data)
June 30, 2009. The unaudited pro forma condensed combined
income statements for the year ended June 30, 2009 were
prepared assuming the merger was completed on July 1, 2008.
The unaudited pro forma condensed combined financial information
reflects the issuance of approximately 8.6 million shares
of Prospect common stock in connection with the merger.
The merger will be accounted for using the purchase method of
accounting; accordingly, Prospects cost to acquire Patriot
will be allocated to the assets and liabilities of Patriot at
their respective fair values estimated by Prospect as of the
acquisition date. Accordingly, the pro forma 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)
|
|
$
|
111,959
|
|
Common Stock issued
|
|
|
86,165
|
|
|
|
|
|
|
Total Purchase Price
|
|
|
198,124
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Investments
|
|
|
196,323
|
|
Cash and cash equivalents
|
|
|
5,075
|
|
Other assets
|
|
|
2,332
|
|
|
|
|
|
|
Assets acquired
|
|
|
203,730
|
|
Other Liabilities assumed
|
|
|
(5,606
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
198,124
|
|
|
|
|
|
|
|
|
Note 3
|
Preliminary
Pro Forma Adjustments
|
The preliminary pro forma purchase accounting allocation
included in the unaudited pro forma condensed combined financial
information is as follows :
|
|
A |
To reflect Patriots June 30, 2009 balance sheet,
updated for estimated changes subsequent to June 30, 2009
to the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCAP
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
PCAP
|
|
|
|
June 30, 2009
|
|
|
Adjustments(AA)
|
|
|
June 30, 2009
|
|
|
Investment Securities
|
|
$
|
283,929
|
|
|
$
|
(17,998
|
)
|
|
$
|
265,931
|
|
Cash and cash equivalents
|
|
|
8,150
|
|
|
|
(3,075
|
)
|
|
|
5,075
|
|
Other Assets
|
|
|
10,461
|
|
|
|
(8,129
|
)
|
|
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
302,540
|
|
|
$
|
(29,202
|
)
|
|
$
|
273,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
137,365
|
|
|
$
|
(25,406
|
)
|
|
$
|
111,959
|
|
Other Liabilities
|
|
|
4,680
|
|
|
|
926
|
|
|
|
5,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
142,045
|
|
|
|
(24,480
|
)
|
|
|
117,565
|
|
Net Assets
|
|
|
160,495
|
|
|
|
(4,722
|
)
|
|
|
155,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
302,540
|
|
|
$
|
(29,202
|
)
|
|
$
|
273,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Prospect
Capital Corp and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial
Statements (Continued)
Unaudited
(In Thousands, except share and per share data)
|
|
|
|
(AA)
|
Primarily the result of sale of certain investments
subsequent to June 30, 2009 and the use of the proceeds to
repay outstanding borrowings.
|
|
|
|
|
B
|
To record the sale of 5,175,000, 3,449,687, and
2,807,111 shares of Prospect common stock on July 7,
2009, August 20, 2009 and September 24, 2009,
respectively. The sale of equity resulted in raising
approximately $97,674 of cash.
|
|
|
|
|
C
|
To record the Prospect cash distribution paid on July 20,
2009.
|
|
|
|
|
D
|
To record the repayment of Prospects outstanding
borrowings of approximately $124,800 with the cash on hand and
raised from the equity raises (Note 2).
|
|
|
|
|
E
|
To reflect the acquisition of Patriot by the issuance of
approximately 8.6 million shares of Prospect common stock
and the payment of $111,959, which will be used to pay Patriot
outstanding borrowings. The $111,959 is expected to be funded by
borrowing on Prospects credit line. Below reflects the
allocation of purchase price on the basis of the fair value of
assets acquired and liabilities assumed:
|
|
|
|
|
|
Components of Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Patriot
|
|
|
Pro Forma
|
|
|
Pro
|
|
|
|
June 30, 2009
|
|
|
Adjustments
|
|
|
Forma
|
|
|
Cash (to repay Patriot Debt)
|
|
$
|
111,959
|
|
|
$
|
|
|
|
$
|
111,959
|
|
Common Stock issued
|
|
|
86,165
|
|
|
|
|
|
|
|
86,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Price
|
|
|
198,124
|
|
|
|
|
|
|
|
198,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
265,931
|
|
|
|
(69,608
|
)(AA)
|
|
|
196,323
|
|
Cash and cash equivalents
|
|
|
5,075
|
|
|
|
|
|
|
|
5,075
|
|
Other assets
|
|
|
2,332
|
|
|
|
|
|
|
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
273,338
|
|
|
|
(69,608
|
)
|
|
|
203,730
|
|
Other liabilities assumed
|
|
|
(5,606
|
)
|
|
|
|
|
|
|
(5,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
267,732
|
|
|
$
|
(69,608
|
)
|
|
$
|
198,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(AA)
|
To reflect the write down of Patriots fair value of its
investments to Prospects determination of fair value.
Prospect in conjunction with an independent valuation agent has
determined that a fair value approximating the value of the
purchase price, which is approximately $69,608 less than the
value determined by Patriot, is appropriate. Patriots fair
values, some of which have been determined in conjunction with
an independent valuation agent, were derived utilizing different
market assumptions than those utilized by Prospect.
|
|
|
|
|
F
|
The purchase price of the investments being acquired from
Patriot is below the amortized cost of such investments. As a
result, subsequent to the acquisition date Prospect will record
the accretion to par value in interest income over the term of
the investment. Interest income has not been adjusted to reflect
the accretion to par value for the periods presented. The
accretion for the first 12 months after acquisition is
estimated to be approximately $17,000.
|
66
Prospect
Capital Corp and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial
Statements (Continued)
Unaudited
(In Thousands, except share and per share data)
|
|
|
|
G
|
To reflect the reduction of Patriot interest expense for the
year ended June 30, 2009 as though the repayment of the
$111,959 occurred on July 1, 2008.
|
|
|
|
|
H
|
Base management fees were computed based on 2% of average assets
per Prospects investment advisory agreement with Prospect
Capital Management, LLC.
|
|
|
|
|
I
|
Incentive management fees were recomputed based on the formula
in Prospects investment advisory agreement with Prospect
Capital Management, LLC.
|
|
|
|
|
J
|
Adjustments to general and administrative expenses were made to
reflect investment professionals being retained by Prospect
Capital Management, LLC and covered by the management fees.
|
|
|
|
|
K
|
Weighted average shares have been adjusted to reflect the
following:
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
|
Prospect Weighted Average Shares Outstanding
|
|
|
31,560
|
|
Estimated shares issued to fund the repayment of Patriots
Debt (reflected as outstanding for the period presented)
|
|
|
14,172
|
|
Estimated shares issued in connection with the Merger, including
any shares issued in satisfaction of any restricted stock
agreements (reflected as outstanding for the period presented)
|
|
|
8,616
|
|
|
|
|
|
|
Prospect Adjusted Weighted Average Shares Outstanding
|
|
|
54,348
|
|
|
|
|
|
|
67
CAPITALIZATION
The following table sets forth
Prospects capitalization as of June 30, 2009:
|
|
|
|
|
on an as adjusted basis giving effect to Prospects
dividend paid and the distribution of shares in connection with
its dividend reinvestment plan on July 20, 2009, its sale
of 5,175,000 shares of Prospects common stock on
July 7, 2009, at a net price of $8.51 per share after
deducting offering expenses payable by Prospect and the sale of
6,256,797 shares of Prospects common stock in two
private offerings on August 20, 2009 and September 24,
2009, with net proceeds to us of $53.6 million, and
reductions of borrowings under its credit facility; and
|
|
|
|
|
|
on an as further adjusted basis giving effect to the
transactions noted in the prior column and the proposed merger
with Patriot.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
As Adjusted for
|
|
|
|
|
|
|
|
|
|
Reductions of
|
|
|
|
|
|
|
|
|
|
Borrowings and
|
|
|
As Further
|
|
|
|
|
|
|
Issuances and
|
|
|
Adjusted for
|
|
|
|
|
|
|
Dividends Paid
|
|
|
the Proposed
|
|
|
|
Actual
|
|
|
After June 30, 2009
|
|
|
Merger(3)
|
|
|
|
(In thousands, except shares and per share data)
|
|
|
|
(Unaudited)
|
|
|
Long-term debt, including current maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under senior credit facility
|
|
$
|
124,800
|
|
|
$
|
|
(1)
|
|
$
|
111,959
|
|
Amount owed to affiliates
|
|
|
6,713
|
|
|
|
6,713
|
|
|
|
6,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
131,513
|
|
|
|
6,713
|
|
|
|
118,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 common
shares authorized; 42,943,084 shares outstanding actual,
54,672,155(2)
shares outstanding as adjusted and
63,288,588(3)
shares outstanding as further adjusted for the proposed merger)
|
|
|
43
|
|
|
|
55
|
|
|
|
63
|
|
Paid-in capital in excess of par value
|
|
|
545,707
|
|
|
|
646,271
|
|
|
|
732,427
|
|
Undistributed net investment income
|
|
|
24,152
|
|
|
|
4,604
|
(4)
|
|
|
4,604
|
|
Accumulated realized losses on investments
|
|
|
(53,050
|
)
|
|
|
(53,050
|
)
|
|
|
(53,050
|
)
|
Net unrealized depreciation on investments
|
|
|
15,744
|
|
|
|
15,744
|
|
|
|
15,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
532,596
|
|
|
|
613,624
|
|
|
|
699,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
664,109
|
|
|
$
|
620,337
|
|
|
$
|
818,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2009, Prospect had no borrowings
outstanding under its credit facility, representing a
$124.8 million reduction of borrowings subsequent to
June 30, 2009. |
|
|
|
(2) |
|
Includes 297,274 shares of Prospects common stock
issued on July 20, 2009 in connection with its dividend
reinvestment plan, 5,175,000 shares in connection with the
sale of Prospects common stock on July 7, 2009,
3,449,686 shares in connection with the sale of
Prospects common stock on August 20, 2009 and
2,807,111 shares in connection with the sale of
Prospects common stock on September 24, 2009
resulting in net proceeds of $100.6 million to Prospect of
which $12,000 was recorded as common stock and
$100.6 million as paid-in capital in excess of par value. |
|
|
|
(3) |
|
On August 3, 2009, Prospect entered into a merger agreement
with Patriot. The merger agreement contemplates the merger of
Patriot with and into Prospect, with Prospect as the surviving
entity. In the merger, each outstanding share of Patriot common
stock will be converted into the right to receive approximately
0.3992 shares of common stock of Prospect, subject the
payment of cash in lieu of fractional shares of |
68
|
|
|
|
|
Prospect common stock resulting from the application of the
foregoing exchange ratio. The table reflects
8,616,433 shares of Prospect common stock being issued in
exchange for the 21,584,251 shares of Patriot common stock
then outstanding at an assumed price of $10.00 per share and the
borrowing of $111,959,000 for Prospects credit facility to
repay the anticipated outstanding borrowing on the Patriot
credit facility. |
|
|
|
(4) |
|
Reflects dividend of $19.5 million paid by Prospect on
July 20, 2009 reducing undistributed net investment income. |
69
THE
MERGER PROPOSAL
The discussion in this document, which includes all of the
material terms of the proposed merger and the principal terms of
the merger agreement, is subject to, and is qualified in its
entirety by reference to, the merger agreement, a copy of which
is attached as Annex A to this document and is
incorporated by reference in this document.
General
Description of the Merger
Pursuant to the merger agreement, at the effective time Patriot
will merge with and into Prospect with Prospect as the surviving
entity in the merger and Patriot will cease to exist as a
separate corporation following the merger. In the merger, each
outstanding share of Patriot common stock will be converted into
the right to receive approximately 0.3992 shares of common stock
of Prospect, subject the payment of cash in lieu of fractional
shares of Prospect common stock resulting from the application
of the foregoing exchange ratio. As more fully described in this
document, the merger agreement requires that Patriot declare, to
the extent necessary, a final dividend prior to the
closing of the merger in amount equal to its undistributed
investment company taxable income and net capital gain (if any),
and the exchange ratio will be adjusted for any such dividend
that Patriot may declare prior to closing. However, the exchange
ratio will not be adjusted for dividends declared by Prospect,
except in certain extraordinary circumstances.
If the merger is consummated, all the assets and liabilities of
Patriot and Prospect immediately before the merger will become
assets and liabilities of Prospect, as the surviving entity,
immediately after the merger, and Patriots wholly-owned
subsidiary, Patriot Capital Funding LLC I, will become a
direct wholly-owned subsidiary of Prospect after the merger. As
a condition to closing, Prospect is obligated to repay the
principal, interest and penalties under the Amended
Securitization Facility and other amounts related to the Amended
Securitization Facility not to exceed $1.35 million.
Following completion of the merger and based on the number of
shares of Prospect common stock issued and outstanding on the
date hereof, former Patriot shareholders will hold approximately
13.6% of the outstanding common shares of Prospect.
Background
of the Merger
In late 2008, Patriot disclosed in its SEC filings that as a
result of the unprecedented instability in the financial markets
and the severe slowdown in the overall economy, it did not have
adequate liquidity to operate its business. In early 2009,
Patriot also disclosed in its SEC filings that it was shifting
its short-term business focus from making debt and equity
investments to preserving its liquidity position. Subsequent to
such public disclosures, Patriot began to receive a number of
unsolicited inquiries from potential acquirers and investors
seeking to assess whether Patriot would be interested in
engaging in a strategic transaction. Prior to April 2009, such
informal inquiries were brought to the attention of
Patriots board of directors. However, given the facts that
the market price of Patriots common stock was
substantially below the net asset value per share of its common
stock and Patriot was not in violation of any of the covenants
under the Amended Securitization Facility, it was determined
that such inquiries were not in the best interests of Patriot
and its shareholders and did not merit further consideration at
such time.
In January 2009, Patriot began to negotiate the terms of the
renewal of the liquidity facility that supported the Amended
Securitization Facility with BMO Capital Markets Inc.
(BMO), the agent of the lenders under the liquidity
facility and the Amended Securitization Facility. The liquidity
facility was provided by the lenders that participated in the
Amended Securitization Facility for a period of 364 days and was
renewable annually thereafter at the option of the lenders. If
the liquidity facility was not renewed by the lenders on or
before April 11, 2009, a termination event (i.e., default)
would occur under the Amended Securitization Facility, which
would require, among other things, that all principal and
interest collected from the debt investments secured by the
facility be used to repay amounts outstanding under the facility
by April 2011. In connection with these negotiations, BMO
provided Patriot with a term sheet that outlined the
lenders offer to extend the liquidity facility for an
additional
364-day
period. Over the course of the next few months, Patriot
delivered various informational requests to BMO in order to
secure approval of the terms and conditions as outlined in the
term sheet provided. However, shortly before April 11,
2009, the offer to extend the liquidity
70
facility was withdrawn without explanation by BMO leaving
Patriot with few, if any, options to obtain alternative debt
financing.
Because of the risk that the liquidity facility supporting the
Amended Securitization Facility would not be renewed in the
months leading up to its expiration on April 11, 2009,
Patriots board of directors and management began exploring
various strategic alternatives. At its regularly scheduled
March 3, 2009 board meeting, Patriot management presented
the Patriot board of directors with two alternatives for
obtaining additional liquidity for Patriot:
|
|
|
|
|
converting to a bank holding company structure in order to
access the U.S. Department of the Treasurys Troubled
Asset Relief Program and other federal government programs that
sought to provide liquidity to banks and other financial
institutions, or
|
|
|
|
forming a Small Business Investment Company, or SBIC, subsidiary
in order to access the capital markets through the issuance of
debentures guaranteed by the U.S. Small Business
Administration.
|
At the same time, Patriot management was continuing to negotiate
the renewal of the liquidity facility with the Amended
Securitization Facility lenders as well as seeking alternative
debt financing in the event the liquidity facility would not be
renewed. After considerable discussion, the Patriot board of
directors instructed management not to pursue a conversion to a
bank holding company structure until there was more information
as to whether the liquidity facility would be renewed. With
respect to the SBIC subsidiary option, management was instructed
to take the initial steps necessary to form an SBIC subsidiary;
however, management noted that the entire process typically
takes up to 12 months and cannot be accelerated, so forming
an SBIC subsidiary would only be a viable alternative if the
liquidity facility was renewed.
As a result of the potential non-renewal of the liquidity
facility under the Amended Securitization Facility, Patriot
disclosed in its annual report on
Form 10-K
for the year ended December 31, 2008 (which was filed with
the SEC on March 16, 2009) that there was substantial doubt
with respect to its ability to continue as a going concern
unless it was able to renew the liquidity facility or otherwise
negotiate with the lenders under the Amended Securitization
Facility for repayment terms that would not require it to use
all principal and interest collected from the debt investments
secured by the facility to repay amounts outstanding under the
facility.
On April 3, 2009, a termination event occurred under the
Amended Securitization Facility due to the amount of
Patriots advances outstanding under the Amended
Securitization Facility exceeding the maximum availability under
the Amended Securitization Facility for more than three
consecutive business days. The maximum availability under the
Amended Securitization Facility is determined by, among other
things, the fair market value of all eligible loans serving as
collateral under the Amended Securitization Facility. Because
the fair market value of certain eligible loans decreased at
December 31, 2008, Patriots advances outstanding
under the Amended Securitization Facility exceeded the maximum
availability under the Amended Securitization Facility. This
determination was made in connection with the delivery of a
borrowing base report to the facility lenders on March 31,
2009. As of such date, Patriot had $157.6 million
outstanding under the Amended Securitization Facility. As a
result of the occurrence of the termination event, Patriot was
prohibited from making additional advances under the Amended
Securitization Facility and all principal, interest and fees
collected from the debt investments secured by the Amended
Securitization Facility were required to be used to pay down
amounts outstanding under the Amended Securitization Facility
within 24 months following the date of the termination
event. In addition, the termination event permits the lenders
under the facility, upon a
10-day
notice to Patriot, to accelerate amounts outstanding under the
Amended Securitization Facility and exercise other rights and
remedies provided by the Amended Securitization Facility,
including the right to sell the collateral under the Amended
Securitization Facility.
As a result of the foregoing, Patriot filed a
Form 8-K
with the SEC on April 7, 2009 disclosing the fact that a
termination event had occurred under the Amended Securitization
Facility. Patriot also disclosed in the
Form 8-K
that it was currently evaluating other financing
and/or
strategic alternatives, including possible debt or equity
financing, acquisition or disposition of assets, and other
strategic transactions. In subsequent periodic reports
filed with the SEC, Patriot indicated that, because
substantially all of its debt investments were secured under the
Amended Securitization Facility, Patriot could not provide any
assurance that it would have sufficient cash and liquid assets
to fund its operations and dividend distributions to its
shareholders,
71
which failure could, among other things, result in adverse tax
consequences, including possible failure to qualify as a RIC
under Subchapter M of the Code.
On April 24, 2009, the Patriot board of directors formally
engaged FBR to act as its financial advisor in connection with
the exploration of strategic alternatives. In that regard, at
Patriots request, FBR compiled a list of potential
strategic partners among business development companies,
commercial finance companies, banks, private equity funds and
hedge funds and, at Patriots request, contacted each of
them to inquire as to whether they might be interested in
pursuing a strategic transaction with Patriot, including, among
other things, a stock or cash merger, a significant equity
investment, a refinancing of Patriots debt, or a purchase
of assets.
Concurrent with the engagement of FBR, the Patriot board of
directors also instructed management to continue forbearance
discussions with the lenders in an effort to ensure that the
lenders would not accelerate payments due under the Amended
Securitization Facility.
On May 7, 2009, the Patriot board of directors held a
regularly scheduled board meeting and asked for an update as to
the forbearance discussions between management and BMO.
Mr. Buckanavage indicated that BMO was requesting a number
of actions be taken in order to avoid acceleration of the
facility, including pledging all currently unpledged loans and
equity positions as collateral under the facility, establishing
a bank account with BMO and reducing compensation paid to board
members. At the same meeting, Mr. Buckanavage provided an
update with respect to the status of discussions with potential
strategic partners. Mr. Buckanavage indicated that, at
Patriots instruction, FBR had contacted 133 potential
strategic partners. Of the 133 potential strategic partners
contacted, 51 had executed non-disclosure agreements with
Patriot, which included, among other standard provisions,
restrictions on their use of Patriots confidential
information, a prohibition on such party soliciting the
employees of Patriot, an undertaking by such parties to abide by
the rules of the evaluation process established by Patriot, and
an agreement by such party to not acquire, or attempt to
acquire, securities of Patriot except through the evaluation
process. Following execution of the non-disclosure agreements,
the relevant parties received or were given access to
confidential information regarding, among other things,
Patriots business, management, assets, liabilities,
financial condition and results of operations.
A special board meeting was held on May 18, 2009 attended
by the entire Patriot board of directors as well as
representatives of Alston & Bird, LLP
(Alston), Patriots counsel with respect to the
Amended Securitization Facility. Mr. Buckanavage provided
the Patriot board of directors with an update on his
negotiations with BMO on the forbearance agreement. He noted
that BMO had requested a number of additional terms in exchange
for granting forbearance, including a $3 million payment to
Patriot Capital Funding, LLC I (Patriot LLC) to
assist it in paying down it obligations under the facility, a
pledge of all Patriots unencumbered assets, including all
unrestricted cash, to support the facility, a 75 basis
point fee (which would approximate $1 million), and a
requirement that Patriot get BMOs consent before modifying
the terms of the loans it has with any of its portfolio
companies. Mr. Buckanavage noted that these additional
terms would greatly weaken Patriots cash position and
hinder its ability to service its existing portfolio companies.
The Patriot board of directors considered the possibility of
Patriot filing for bankruptcy protection and issues regarding
the possibility of Patriot LLC filing concurrently with Patriot.
Among other things, the Patriot board of directors noted that
the independent directors of Patriot LLC would have to
unanimously consent to a bankruptcy filing. After considering
various issues relating to Patriot LLCs ability and
willingness to file for bankruptcy protection, the Patriot board
of directors expressed its strong preference to continue
negotiations with BMO in an attempt to make the forbearance
agreement more palatable rather than to seriously consider
filing for bankruptcy protection.
A special board meeting was held on May 22, 2009 attended
by the entire Patriot board of directors as well as
representatives of FBR. Mr. Buckanavage updated the board
of directors regarding discussions with BMO and stated that the
conditions that BMO was asking for in exchange for forbearance
were terms that Patriot may not be able to satisfy while
protecting shareholder value. Specifically, BMO wanted access to
the letters of interest, or LOIs, obtained from the potential
strategic partners who had requested and received confidential
information concerning Patriot. Representatives of FBR then
updated the Patriot board of directors with respect to the
status of discussions with potential strategic partners. FBR
noted that Patriot had received
72
18 LOIs from 16 different parties. The Patriot board of
directors discussed the various LOIs with the assistance of
Patriots financial advisors.
As a result of the increasing friction between BMO and Patriot,
management became increasingly concerned that BMO might exercise
its right to seize Patriot LLCs assets which would result
in the lenders having control over Patriot LLCs assets and
allow them to separately engage in discussions regarding sales
of such assets for the purpose of paying down Patriots
debt. In such event, the Patriot board of directors was
concerned that BMO would likely seek to sell such assets over a
short period of time in order to generate sufficient cash to
payoff the Amended Securitization Facility without regard to
maximizing the amount available to Patriots shareholders.
Such a sale would likely result in selling assets at fire sale
prices, thereby diminishing or potentially eliminating the
amount of cash available to distribute to shareholders. Based on
that concern, the Patriot board of directors considered whether
filing for bankruptcy protection would be advisable under the
circumstances since such a filing would prevent the lenders from
removing Patriot as servicer over its investment portfolio and
would prevent the lenders from seizing any of the assets pledged
as collateral under the facility. Patriot felt that retaining
servicing rights over its investment portfolio provided the best
opportunity to complete one or more strategic transactions that
were in the best interests of its shareholders.
On May 26, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as
representatives of FBR. FBR noted that Patriot had received four
additional LOIs, which raised the total number of LOIs received
to 22. Mr. Melsheimer, chairman of the Patriot board of
directors, recommended that the board establish key criteria for
determining which of the 22 LOIs had characteristics that the
board felt were most important. These factors were deemed to be
(a) value to Patriots common shareholders;
(b) form of the consideration (i.e., cash or common stock);
(c) whether the transaction would result in meaningful
repayment of the Amended Securitization Facility;
(d) whether the transaction could be completed quickly;
(e) whether the transaction would require the approval of
shareholders of either the strategic partner or Patriot; and
(f) how existing employees of Patriot would be treated.
After a detailed review and discussion of the merits and
drawbacks of each of the 22 LOIs with the assistance of
Patriots financial advisors, the board authorized FBR to
invite 12 of the 22 bidders to the second round and authorized
management, with the assistance of Patriots legal and
financial advisors, to begin preliminary negotiations with each
in an effort to determine which of the 12 potential strategic
partners best satisfied the goals set forth by the board.
Following this discussion, Mr. Buckanavage reported that
the negotiations relating to the forbearance agreement were not
progressing as hoped and that he felt an acceptable forbearance
agreement would be unlikely at this time. In light of this, the
board decided that it was imperative that negotiations with the
twelve potential strategic partners begin as soon as possible.
On May 29, 2009, the Patriot board of directors held a
special meeting attended by the entire board. The board called
the meeting to receive an update from Mr. Buckanavage as to
his discussions with potential bankruptcy counsel.
Mr. Buckanavage reported that he had spoken with three
bankruptcy firms and, as a result of his discussions,
recommended that the board consider engaging Young Conaway
Stargatt & Taylor, LLP (Young Conaway).
The board authorized Mr. Buckanavage to engage Young
Conaway to provide advice in the event that Patriot was forced
to seek bankruptcy protection. Separately, Mr. Buckanavage
reported he had apprised the independent directors of Patriot
LLC as to how negotiations were progressing with BMO and
notified them that Patriot was considering a broad range of
strategic options, including transactions proposed in the LOIs,
further negotiations with BMO and a potential bankruptcy filing.
The independent directors of Patriot LLC requested several items
from Mr. Buckanavage, including Patriots most recent
SEC filings, its most recent valuation report from
Duff & Phelps and the notice of termination under the
Amended Securitization Facility.
On June 1, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as
representatives from Sutherland Asbill & Brennan LLP
(Sutherland), Patriots outside corporate
counsel, and representatives of Young Conaway.
Mr. Buckanavage reported that BMO had requested additional
concessions from Patriot with respect to the forbearance
agreement, including the addition of one more independent
director to Patriot LLC approved by BMO and the identification
of the specific parties who had submitted LOIs to Patriot.
Previously Patriot had provided the details of the LOIs on a
no-names basis. The
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Patriot board of directors was concerned that these actions were
designed to allow BMO to negotiate directly with the potential
strategic partners that had submitted LOIs and potentially to
prevent Patriot from considering all alternatives available to
Patriot, including the possibility of seeking bankruptcy
protection. The board instructed Mr. Buckanavage to make
clear to BMO that Patriot would seek a confidentiality agreement
with BMO in the event Patriot agreed to release the names of the
potential strategic partners to BMO.
On June 5, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as
representatives from Sutherland and representatives of Young
Conaway. Mr. Buckanavage updated the board on forbearance
negotiations with BMO. In connection with possible forbearance
of Patriots obligations under the facility,
Mr. Buckanavage reported that BMO had requested loan
documentation for all portfolio companies and placed onerous
conditions on allowing Patriot to use any of its funds to assist
two of its portfolio companies which included, among other
things, a 20 basis point fee, an increase in the interest
rate under the Amended Securitization Facility to prime rate
plus 300 basis points, termination of Patriots
existing swap agreements, which would result in a realized loss
of $3.3 million, and adding a third independent director to
Patriots wholly-owned subsidiary. The board of directors
was concerned that providing loan documentation to BMO might be
a precursor to BMO exercising its rights and remedies.
A representative of Young Conaway then reported his discussion
with the outside legal counsel to the two independent managers
of Patriot LLC relating to a possible joint bankruptcy filing,
which the Patriot board of directors discussed and considered.
The Patriot board of directors then determined that a bankruptcy
filing, by Patriot without a simultaneous bankruptcy filing by
Patriot LLC would not realize many benefits since a large
portion of Patriots assets are held by Patriot LLC.
On June 7, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as a
representative from Sutherland and representatives of Young
Conaway. At the meeting. Mr. Buckanavage shared with the
board of directors a request from BMO to be granted access to
the LOIs received by Patriot and the terms of a draft
confidentiality agreement BMO submitted to Mr. Buckanavage
in this regard. The board of directors instructed
Mr. Buckanavage to negotiate the terms of the draft
confidentiality agreement that BMO provided.
A representative of Young Conaway next updated the Patriot board
of directors regarding his discussions with the outside legal
counsel to the independent managers of Patriot LLC. The
independent managers of Patriot LLC indicated that they did not
support filing for bankruptcy protection at this time, but also
indicated that they agreed to have a joint board meeting with
Patriot the following day to consider the proposal fully.
On June 8, 2009, the Patriot board of directors held a
special joint meeting attended by the entire board of Patriot,
the board of managers of Patriot LLC, a representative from
Sutherland and representatives of Young Conaway. The meeting was
held to discuss whether Patriot and Patriot LLC should jointly
file for bankruptcy protection. After considerable discussion,
the independent directors of Patriot LLC indicated that they did
not support a bankruptcy filing at this time but were open to
reconsideration if BMO exercised its rights and remedies under
the facility.
At the meeting, Mr. Buckanavage announced that two
potential bidders, Company A and Company B, included in their
LOIs a provision that would result in the entire repayment of
Patriots obligations due under the facility. The Patriot
board of directors determined that it was necessary to speed up
the process of evaluating bids with the assistance of
Patriots legal and financial advisors in light of the
increasing friction with BMO in connection with negotiating a
forbearance agreement.
On June 9, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as a
representative from Sutherland and representatives from Young
Conaway. Based on the prior days joint board meeting, the
board of directors decided to focus on speeding up negotiations
with potential strategic partners. In connection with this, the
Patriot board of directors instructed Mr. Buckanavage to
request FBR to contact each of the 22 bidders, which included
each of the entities that previously submitted LOIs, and
re-commence discussions. In addition, the board approved a
resolution allowing BMO to review the 22 LOIs, subject to a
confidentiality and non-disclosure agreement.
On June 17, 2009, the Patriot board of directors held a
special meeting attended by the entire board.
Mr. Buckanavage provided the board with an update regarding
the 22 bidders that the board previously
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requested FBR to contact. The proposals were classified into
three groups: the first consisting of four proposals that
warranted further consideration, the second consisting of eight
proposals that would require adjustments in order to be
seriously considered, and the third consisting of ten proposals
that were not worth pursuing as currently contemplated because
they failed to meet the standards previously set forth by the
board. Mr. Buckanavage noted that Patriot, with the
assistance of its legal and financial advisors, would contact
each potential strategic partner and compile a list of the
strategic proposals deemed most likely to satisfy the
boards criteria for consideration. Those potential
strategic partners would be invited to commence diligence review
of Patriot beginning June 29, 2009.
The board also considered whether any other alternatives to a
merger, acquisition or significant investor may be a possibility
since the conditions in the debt markets had shown signs of
improvement. The board noted that a private or public debt
offering would require the consent of BMO which, in the opinion
of the board, would be difficult to obtain given BMOs
refusal to consent to the release of debt documents of two of
Patriots portfolio companies which would have allowed
Patriot to sell such investments and use the proceeds to pay
down the facility.
On July 1, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as
representatives of FBR and a representative of Sutherland. The
meeting was called to discuss a revised non-binding LOI from
Prospect, a public business development company, that included a
full pay-down of Patriots obligations under the Amended
Securitization Facility and a conversion of the Companys
outstanding stock into 0.40 shares of Prospects
common stock. Based on the market price of Prospects
common stock at that time, the conversion ratio valued Patriot
common stock at approximately $4.00 per share. It was noted that
Prospect had requested that Patriot enter into exclusive
negotiations regarding this proposal, begin negotiating the
terms of the merger agreement and agree to reimburse certain
expenses of Prospect in connection with the negotiation of the
merger agreement and performing due diligence.
The board, after consulting with its legal and financial
advisors, chose not to engage in exclusive negotiations with
Prospect, but agreed to reimburse Prospect for certain expenses
incurred as a result of negotiation of the merger agreement and
due diligence in an amount not to exceed $250,000.
Between June 30, 2009 and July 24, 2009,
Patriots management met with 11 of the 12 second round
participants in face-to-face due diligence meetings, responded
to diligence requests and made available additional information
about Patriot.
The Patriot board of directors then discussed the other
proposals submitted by potential strategic partners with the
assistance of Patriots legal and financial advisors. At
Patriots instruction, FBR had previously informed each
potential bidder that a full pay-down of Patriots
obligations under the Amended Securitization Facility would be
an important factor in Patriots consideration of their
bids, as this had become an important prerequisite of BMO
approving any transaction, and binding proposals were due
on July 29, 2009.
Consideration
of Specific Proposals
On July 29, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as
representatives of FBR and representatives of Sutherland. At
that meeting, the board reviewed and discussed with the
assistance of its legal and financial advisors the seven final
proposals submitted by potential bidders.
Pursuant to the terms of the proposal submitted by Prospect,
Prospect offered to issue Prospect common stock to Patriot
shareholders in an amount that valued Patriot shares at $4.00
per share, with the exchange ratio to be fixed at the time of
the signing of the merger agreement. The indicated exchange
ratio would be approximately 0.40 shares of Prospect common
stock for each share of Patriot common stock outstanding. In
addition, pursuant to the terms of the proposal submitted by
Prospect, Prospect agreed to fully repay all amounts outstanding
under the Amended Securitization Facility with no financing
conditions. Further, the board noted that Prospect had already
completed its diligence, had submitted a mark-up of the proposed
merger agreement, had engaged in discussions regarding the same,
and had indicated a strong desire to negotiate and sign a merger
agreement. Finally, Prospects proposal would not require
Prospect shareholder approval.
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The board noted that this proposal satisfied most of the factors
it deemed to be important. However, the board discussed its
preference to have a minimum price per share exchange ratio
rather than a fixed exchange ratio since the merger
consideration to shareholders would decrease if the market price
of Prospect common stock decreased.
Company B, a registered closed-end investment company, proposed
to issue shares of Company B common stock with a stated net
asset value of $6.00 per share, which, based on the discount to
net asset value at which Company Bs common stock was
then trading, had an implied current market value of $4.99 per
share of Patriot common stock as of July 31, 2009. However,
although the proposal by Company B represented the highest
implied per share offer, and included an agreement to repay
amounts outstanding under the Amended Securitization Facility,
such proposal was contingent upon: (i) Company B obtaining
the consent of its lender to repay the amounts outstanding under
the Amended Securitization Facility; (ii) Company B
obtaining approval from its shareholders; (iii) Company B
obtaining approval from its board of trustees; and
(iv) Patriot agreeing to a
45-day
exclusivity period to allow Company B to complete confirmatory
legal and accounting due diligence of Patriot (including
business due diligence on nine of Patriots largest
portfolio companies) and negotiate the terms of a definitive
merger agreement. In addition, the
mark-up of
the merger agreement submitted by Company B indicated that
certain price adjustments might apply and that Company B would
require all directors and executive officers of Patriot to
execute voting agreements pursuant to which they would agree to
vote all shares of Patriot common stock held by them in favor of
the merger with Company B. Finally, it was noted at the meeting
that Company B did not plan to provide legal due diligence
materials requested by Patriot unless and until it had an
indication that Patriot was ready to move forward with Company B
on an exclusive basis.
While the board noted that the implied per share merger
consideration offered by Company B was higher than that offered
by Prospect, Company Bs proposal (like Prospects
proposal) did not have a minimum per share offer price which
meant that the actual consideration could be lower based on the
market price of Company Bs common stock. In addition, the
financing contingency related to repayment of Patriots
obligations under the Amended Securitization Facility, the
45-day
exclusivity period, the need to obtain approval of Company
Bs shareholders, and the fact that Patriot had not yet
been provided due diligence information from Company B were
negative factors that called into question the viability of and
time period in which the transaction could be completed, both of
which weighed against Company Bs proposal. In light of the
foregoing, the board of directors of Patriot did not view
Company Bs proposal as a firm proposal.
Company C, a private hedge fund, offered cash in the amount of
$3.00 per share to the Companys shareholders. Company
Cs proposal indicated it would negotiate with BMO
regarding the terms of the Amended Securitization Facility but
did not indicate the amount of Patriots obligations to be
repaid under the facility. Company C would also need to obtain
shareholder approval to complete the transaction, although it
had very few shareholders, so this was not deemed to be a
negative point. Company C did not submit a mark-up of the
proposed transaction agreement, as had been requested by Patriot
as part of the evaluation process.
The board considered the fact that Company C was offering cash
instead of common stock but felt that the offer price per share
undervalued Patriots assets and was not in the best
interests of its shareholders. In addition, the lack of
commitment to pay down Patriots obligations under the
Amended Securitization Facility was a negative factor that
greatly disadvantaged this proposal as compared to the proposal
from Prospect, since the board viewed it as unlikely that BMO
would consent to such transaction.
Company D, a private commercial finance company, offered cash in
the amount of $2.20 per share to Patriots shareholders or,
alternatively, an aggregate of approximately $46 million to
purchase Patriots assets. Company Ds proposal
indicated it would pay down Patriots obligations under the
Amended Securitization Facility with no financing necessary.
Company D would not need to obtain shareholder approval to
complete the transaction, but would need to obtain approval from
its investment committee. Company D did not submit a
mark-up of the proposed transaction agreement, as had been
requested by Patriot as part of the evaluation process.
The board considered the fact that Company D was offering cash
instead of common stock but felt that the offer price per share,
which was lower than that offered by Company C, Company B
and Prospect,
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undervalued Patriots assets and was not in the best
interests of its shareholders. The offer to pay down
Patriots obligations under the Amended Securitization
Facility and the fact that Company D would not require
shareholder approval were considered to be positive factors but
did not outweigh the low offer price. As a result, the board
deemed this offer to be less attractive than the proposal from
Prospect.
Company E, a private hedge fund, offered to purchase
Patriots assets for $155 million of cash, with the
proceeds of the purchase price to be used to pay down
obligations under the Amended Securitization Facility. The
balance of the purchase price after repayment of Patriots
obligations represented approximately $2.02 per share on a pro
forma basis based on estimates as of August 3, 2009.
Company E also agreed to fund the purchase of Patriots
assets with existing capital. Company E would not need to obtain
shareholder approval to complete the transaction, but would need
approval from its investment committee. Company E did not
submit a mark-up of the proposed transaction agreement, as had
been requested by Patriot as part of the evaluation process.
The board considered the fact that Company E was offering cash
instead of common stock but felt that the offer price per share,
which was lower than that offered by Company C, Company D,
Company B and Prospect, undervalued Patriots assets
and was not in the best interests of its shareholders. The
ability to use the proceeds from the sale of Patriots
assets to pay down Patriots obligations under the Amended
Securitization Facility and the fact that Company E would not
require shareholder approval were considered to be positive
factors but did not outweigh the low offer price. As a result,
the board deemed this offer to be less attractive than the
proposal from Prospect.
Company F, a private equity firm, offered to purchase five of
Patriots portfolio companies at 80% of the fair value of
the portfolio companies measured as of the last quarterly
valuation date. The board determined that this proposal did not
address any of the primary factors previously set forth by the
board and therefore deemed the offer to be significantly less
attractive than the proposal from Prospect. Importantly, other
than with the proceeds from the sale of the five portfolio
companies, the proposal did not provide for repayment of
Patriots obligations under the Amended Securitization
Facility. Company F did not submit a mark-up of the
proposed transaction agreement, as had been requested by Patriot
as part of the evaluation process.
Company G, a private commercial finance company, offered to
provide Patriot with a new credit facility of up to
$35 million which would allow Patriot to make new loan
originations. In return Company G would receive 1 million
warrants and $3 million worth of Patriot common stock based
on the recent market price of $1.81 per share. Company G would
not require any consents or approvals to complete its proposal.
Company G did not submit a mark-up of the proposed
transaction agreement, as had been requested by Patriot as part
of the evaluation process.
The board considered Company Gs proposal but determined
that the proposal did not address any of the primary factors
previously set forth by the board and therefore deemed the offer
to be significantly less attractive than the proposal from
Prospect. Importantly, the proposal did not provide for
repayment of Patriots obligations under the Amended
Securitization Facility.
After considering the various proposals from the bidders noted
above, the board discussed the merger agreement counterproposals
made by Prospect including, among other things, two items that
were being negotiated, the non-solicitation provision and the
amount of
break-up
fees. The non-solicitation provision set forth limitations on
the boards ability to seek offers from competing bidders.
The board proposed alternative terms and asked to receive an
update at its next meeting.
On July 31, 2009, the Patriot board of directors held a
special meeting attended by the entire board as well as members
of management of Patriot, representatives of FBR and
representatives of Sutherland. The purpose of the meeting was to
review the progress of negotiations with Prospect and discuss
other bids, if any, that had been received. FBR informed the
board that Patriot had received one additional bid from Company
H. Company H offered to make an equity investment in Patriot
which would allow Patriot to make a $50 million repayment
of its obligations under the Amended Securitization Facility.
Company Hs ownership in Patriot would be approximately
51%. The board considered the merits of the proposal but decided
that the proposal was less attractive than the proposal from
Prospect.
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The board then considered updates regarding negotiations with
Prospect and ongoing discussions regarding the non-solicitation
and related provisions. In light of the extensive evaluation
process that had been conducted, Prospect took the position that
a lock-up
provision, coupled with a high termination fee if Prospect
terminated in certain circumstances, were warranted to protect
the substantial investment of, and value offered by, Prospect.
The then current draft of the merger agreement, as proposed by
Patriot, contained a provision permitting the board to consider
and accept a proposal superior to Prospects proposal,
subject to meeting the conditions set forth therein. After
considering the advice of counsel, the board further discussed
this provision and its fiduciary duties under Delaware law in
the context of the proposed transaction.
The board asked and was informed that no counter-proposals had
been received from any of the other bidders, including Company B.
On August 2, 2009, the Patriot board of directors held two
special meetings attended by the entire board as well as members
of management of Patriot, representatives of FBR and
representatives of Sutherland, to discuss the status of
negotiations with Prospect. The board was informed that Prospect
would agree to a termination fee of $3.2 million or
approximately 4% of the equity consideration in the merger if
Patriot were to terminate the proposed transaction in certain
circumstances. In addition, Prospect would agree to a provision
allowing the board to negotiate with, and accept an alternative
proposal from, a third party so long as certain conditions were
satisfied. In light of Prospects insistence on the breakup
fee as a condition to the merger, and the potential benefits of
the transaction, and after consultation with its legal and
financial advisors, the board determined to agree to the
proposed termination fee. The board then had extensive
discussions relating to the no solicitation
provision in the merger agreement that restricted the
boards ability to solicit alternative offers attractive to
Patriots shareholders. Specifically, the board considered
the requirement that only fully funded superior
proposals containing no material conditions to closing
more burdensome than those included in the merger agreement
allowed the board to exercise its fiduciary duties under
Delaware law in the context of the proposed transaction. In
light of the attractiveness of the terms of the offer from
Prospect, the limited alternatives that Patriot had,
Patriots financial condition and lack of liquidity and the
unwillingness of Prospect to compromise further on these issues,
the board authorized Patriots officers and counsel to
accept this provision in order to be able to complete the
proposed transaction. The board was advised that Prospect wanted
to sign the merger agreement as soon as possible.
At approximately 7:30 a.m. on August 3, 2009, the
Patriot board of directors held a special meeting attended by
the entire board as well as members of management of Patriot,
representatives of FBR and representatives of Sutherland, to
consider the form of merger agreement pursuant to which Patriot
would merge with Prospect. Representatives of Sutherland then
reviewed the proposed form of merger agreement. Following a
discussion of the proposed form of merger agreement during which
representatives of Sutherland responded to numerous questions
from members of the board, the board requested that FBR review
and discuss its financial analyses of Prospect and the proposed
merger. Following further discussion during which
representatives of FBR responded to questions from members of
the board regarding FBRs financial analyses, FBR, at the
request of the board, rendered its oral opinion as of
August 3, 2009 to the board of directors of Patriot (which
was subsequently confirmed in writing by delivery of FBRs
written opinion dated the same date) with respect to the
fairness, from a financial point of view, to the holders of
Patriot common stock of the exchange ratio set forth in the
merger agreement.
On the morning of August 3, 2009, the board, given the
thorough and exhaustive evaluation process conducted, the lack
of counterproposals from other parties, the risks posed by the
termination event that occurred under the Amended Securitization
Facility, the substantial premium to Patriots shareholders
offered by Prospects proposal, and the certainty and
expediency that a transaction with Prospect provided, declared
the merger agreement advisable and in the best interests of
Patriot and its shareholders, approved and adopted the merger
agreement, and authorized Mr. Buckanavage to sign the
merger agreement with Prospect. Subsequent to the execution of
the merger agreement by Patriot and Prospect, Prospect issued a
press release publicly announcing the signing of the merger
agreement with Patriot.
Subsequent to entering into the merger agreement, Patriot
received an unsolicited letter from Company B that
referenced the final proposal it had previously submitted to
Patriot and then expressed a willingness to
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further discuss its proposal. The Patriot board of directors
held a meeting to consider the letter and determined that there
was no further action required with respect to the letter as a
result of the vagueness of the letter, the continuing
deficiencies in Company Bs final proposal and
consistent with the terms of the merger agreement.
Reasons
for the Merger
In light of the unprecedented instability in the financial
markets and the severe slowdown in the overall economy, Patriot
does not have adequate liquidity, including access to the debt
and equity capital markets, to operate its business. In this
regard, on April 3, 2009, a termination event occurred
under the Amended Securitization Facility due to the amount of
Patriots advances outstanding under the facility exceeding
the maximum availability under the facility for more than three
consecutive business days. Among other things, the terms of the
facility require that all principal, interest and fees collected
from the debt investments securing the facility must be used to
pay down amounts outstanding thereunder until all such amounts
have been repaid, which may be no later than the date that is
24 months following the date of the termination event.
Substantially all of Patriots debt investments are
securing the Amended Securitization Facility. The facility also
permits the lenders, upon notice to Patriot, to accelerate
amounts outstanding under the facility and exercise other rights
and remedies provided by the facility, including the right to
sell the collateral under the facility.
Moreover, Patriots management estimated that Patriot could
exhaust all of its available cash and other liquid assets not
restricted by the terms of the Amended Securitization Facility
in the near future depending on the working capital needs of its
portfolio companies. Although Patriot had engaged in active
discussions with the Amended Securitization Facility lenders to
seek relief from certain terms of the facility, including the
requirement under the facility that Patriot use all principal,
interest and fees collected from the debt investments secured by
the facility to pay down amounts outstanding under the facility
by April 3, 2011, it had been unable to obtain relief from
any terms of the facility. In light of the foregoing, Patriot
began to evaluate other financing
and/or
strategic alternatives, including possible debt or equity
financing, acquisition or disposition of assets, and other
strategic transactions.
In evaluating the merger proposal from Prospect, Patriots
board of directors considered numerous factors, including the
ones described below, and, as a result, determined that the
proposed merger was in Patriots best interests and the
best interests of Patriots shareholders. The following
discussion of the information and factors considered by
Patriots board of directors, including its independent
directors, is not intended to be exhaustive, but includes all
material factors considered by Patriots board of directors
in evaluating the Prospect merger proposal.
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Lack of Liquidity; Potential Impact on Tax
Status. Since Patriot can no longer borrow
amounts under the Amended Securitization Facility, and because
all principal, interest and fees collected from the debt
investments secured by the facility must be used to repay
amounts outstanding under the facility, Patriot has limited
liquidity and no potential sources of free cash flow. Thus,
there is no assurance that Patriot will have sufficient cash and
liquid assets to fund its operations and dividend distributions
to its shareholders, which failure could, among other things,
result in adverse tax consequences, including possible failure
to qualify as a regulated investment company, or
RIC, under Subchapter M of the Code. In
addition, without a strategic transaction, Patriot would likely
be required to seek bankruptcy protection in the relatively near
future.
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Potential Actions by Patriots
Lenders. Substantially all of Patriots debt
investments are secured under the Amended Securitization
Facility. As a result of the occurrence of a termination event
under the Amended Securitization Facility, the lenders may, upon
notice to Patriot, accelerate amounts outstanding under the
facility and exercise other rights and remedies provided by the
facility, including the right to sell the collateral under the
facility. In such event, the Patriot board of directors is
concerned that such forced sales of assets, particularly in the
current economic environment, may be done at fire sale prices,
thereby diminishing or potentially eliminating the amount of
cash available to distribute to shareholders.
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Thorough Review of Strategic
Alternatives. Patriot engaged in a thorough
review of the strategic alternatives available to Patriot,
including, among other things, negotiations with its lenders
under the Amended Securitization Facility, conversion to a bank
holding company, the formation of a Small Business Investment
Company subsidiary, a stock or cash merger, a significant equity
investment, a refinancing of Patriots debt, a purchase and
sale of Patriots assets, and a bankruptcy filing. In
furtherance of the evaluation and proposal solicitation process,
Patriot publicly announced that it was actively evaluating
strategic alternatives (thereby putting potential strategic
partners on notice that Patriot was open to discussing such
alternatives with interested parties), and, at Patriots
request, Patriots financial advisor, FBR, had contacted
133 potential strategic partners, including business development
companies, commercial finance companies, banks, private equity
funds, hedge funds and other potential strategic partners, to
assess whether they might be interested in pursuing a strategic
transaction with Patriot. Of the 133 potential strategic
partners contacted, 51 executed non-disclosure agreements with
Patriot and received confidential information concerning
Patriots business, management, assets, liabilities,
financial condition and results of operations. Of those 51
potential strategic partners, 22 submitted preliminary
indications of interest, and 12 were invited to perform in-depth
due diligence and submit final bids, eight of which submitted
final bids. Based on this lengthy and thorough process,
Patriots board of directors believes it has explored all
alternatives reasonably available to Patriot.
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Best Alternative Reasonably Available to
Patriot. Because Patriot had publicly announced
that it was actively evaluating strategic alternatives, and had
contacted such a large number of potential strategic partners to
determine their level of interest in a strategic transaction
involving Patriot, the Patriot board of directors strongly
believes that, of all possible alternatives, and based on the
proposed transactions submitted by potential strategic partners,
the transaction with Prospect represents the best alternative
that is reasonably available to Patriot. In making this
determination, the Patriot board of directors considered:
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the existing termination event under the Amended Securitization
Facility;
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the current financial condition of Patriot, particularly the
liquidity needed to fund its operations and, potentially, to
make required distributions to shareholders;
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the distinct possibility that Patriot will run out of available
cash in the near future;
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the current trading price of Patriots common stock;
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the lack of progress in negotiations with the lenders under the
Amended Securitization Facility;
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the other alternatives reasonably available to Patriot;
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the terms of the other proposals submitted, including the
proposed economic terms, the conditions to closing, the expected
timing of such transactions, and the likelihood of consummation;
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the financial terms of the Prospect proposal, including the
proposed exchange ratio and Prospects ability and
agreement to repay the full amount of principal and interest
outstanding under the Amended Securitization Facility;
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the tax-free
nature of the merger;
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the fact that although the implied value of the merger
consideration of $4.00 proposed for each share of Patriot common
stock represented a discount to Patriots net asset value
for the quarter ended March 31, 2009 and the anticipated
net asset value for the quarter ended June 30, 2009, which
was based on information available to the board at the time
(which value was later confirmed), such discount was generally
comparable to the discount to net asset value at which many
other business development companies traded;
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the fact that Patriot shareholders are not being cashed out and
will continue as shareholders in the combined operations of
Patriot and Prospect;
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the business and legal due diligence review of Prospects
operations, its portfolio companies and other corporate and
financial matters conducted over an extended period of time by
Patriot and its legal and financial advisors;
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the financial strength of Prospect;
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the lack of a financing contingency to closing in the Prospect
proposal; and
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the fact that no shareholder approval of Prospects
shareholders would be required.
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Business Prospects of Patriot. As noted above,
the unprecedented economic conditions that faced companies in
the financial services industry, coupled with the termination
event under the Amended Securitization Facility, has made it
impossible for Patriot to operate its business consistent with
past practice. The proposed strategic combination with Prospect
will eliminate the uncertainty created by the termination event
under the Amended Securitization Facility, and will allow
Patriot shareholders to participate in the combined operations
of Patriot and Prospect following the merger.
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Strategic and Business Considerations. Because
the Patriot shareholders will be shareholders in Prospect
following the merger, Patriot shareholders stand to participate
in the future growth and prospects of the combined businesses of
Patriot and Prospect, without the limitations currently
restricting the operations of Patriot. Prospect is an
established company with a strong capital position and
performance history. The larger equity market capitalization of
the combined companies should help create earnings stability and
assist Prospect in its efforts to raise capital in the public
equity and debt markets.
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Terms of the Merger Agreement. The exchange
ratio of 0.3992 shares of Prospect common stock to be
received in exchange for each share of Patriot common stock,
which is subject to certain adjustments, represents a 105%
premium to the closing price of Patriot common stock on
July 31, 2009, based on the closing price of Prospect
common stock on that date (which was the last trading day before
public announcement of the merger). In addition, this
represented a 127% premium to the volume weighted average price
of Patriots common stock during the six months ended
June 30, 2009, based on the closing price of Prospect
common stock on July 31, 2009.
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Opinion of Financial Advisor. The financial
analysis reviewed and discussed with the board of directors of
Patriot by representatives of FBR as well as the oral opinion of
FBR rendered to the board of directors of Patriot on
August 3, 2009 (which was subsequently confirmed in writing
by delivery of FBRs written opinion dated the same date)
with respect to the fairness, from a financial point of view, to
the holders of Patriot common stock of the exchange ratio set
forth in the merger agreement. See The Merger
Proposal Opinion of Patriots Financial
Advisor.
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Tax Free Treatment of Proposed Merger. The
proposed merger is expected to be treated as a tax-free
reorganization under Section 368(a) of the Code. If the
transaction so qualifies, Patriots shareholders generally
will not recognize gain or loss to the extent that they receive
shares of Prospect common stock in exchange for their shares of
Patriot common stock. See U.S. Federal Income Tax
Consequences of the Merger.
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Repayment of Amended Securitization
Facility. As part of the merger agreement,
Prospect will repay (i) all principal and interest due
under the Amended Securitization Facility, which amounted to
$112.7 million as of September 30, 2009, and
(ii) up to $1.35 million in other costs, fees and
expenses payable to the lenders under the terms of the Amended
Securitization Facility.
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Patriots board of directors considered the following
negative factors relating to the merger:
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Market Price. There is uncertainty regarding
how the transaction will affect the trading in Prospects
common shares before the completion of the merger which may
affect the value of the merger consideration to be paid to
Patriot shareholders. As a result, the implied market value of
the per share merger consideration could decrease prior to the
closing of the proposed merger if the market price of
Prospects common stock decreases.
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Net Asset Value. The net asset value per share
of Patriots common stock, as of June 30, 2009, was
$7.66, an amount higher than the implied market value of the
merger consideration.
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81
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Restrictions on Ability to Solicit Alternative
Offers. The restrictive non-solicitation
provisions contained in the merger agreement prohibit Patriot
from soliciting alternative offers from third parties, and
permit Patriot to consider bona fide alternative proposals from
third parties only in certain limited circumstances. While these
limitations ensure that only someone who is committed to making
a superior proposal will attempt to re-open the evaluation
process, these limitations may discourage third parties from
making superior offers to acquire Patriot because of the
increased price that such third party would have to pay.
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Lack of Dissenters Rights. There are no
dissenters rights applicable to the proposed merger.
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Combined Company May Not Succeed. Certain of
Patriots shareholders may view the combined company as a
different and less desirable investment vehicle for their
capital, and sales of shares by such shareholders could depress
the share price of Patriots common stock. In addition,
there can be no assurance that the combined company will succeed.
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Patriots board of directors also considered the following
material factors relating to the proposed merger:
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the review and analysis of each of Patriots and
Prospects business, financial condition, earnings, risks
and prospects;
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the historical market prices and trading information with
respect to the common stock of Patriot and Prospect;
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the values and prospects of the portfolio company investments
held by Patriot and Prospect;
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the comparisons of historical financial measures for Patriot and
Prospect, including earnings, return on capital and cash flow,
and comparisons of historical operational measures; and
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the current industry, economic and market conditions and how
such conditions are expected to impact Patriots and
Prospects ability to conduct their operations.
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This discussion of the information and factors that
Patriots board of directors considered in making its
decision is not intended to be exhaustive but includes all
material factors considered by Patriots board of
directors. In view of the wide variety of factors considered in
connection with its evaluation of the transaction and the
complexity of those matters, Patriots board of directors
did not find it useful to, and did not attempt to, quantify,
rank or otherwise assign relative weights to these factors. In
addition, the individual members of Patriots board of
directors may have given different weights to different factors.
Following the merger, Patriot will cease to exist as a separate
entity. In connection with this, it will deregister all unsold
shares under its option and restricted stock plans as well as
unsold common shares under its shelf registration statement. Its
shares of common stock will no longer trade on the Nasdaq Global
Select Market, and it will withdraw its election to be treated
as a business development company under Section 54(c) of
the 1940 Act.
Patriots board of directors believes that, overall, the
positive factors of the transaction to Patriot and its
shareholders substantially outweigh the risks related to the
proposed merger, and, therefore, unanimously approved the merger
agreement.
Recommendation
of the Board of Directors
After careful consideration of the information and factors noted
above, Patriots board of directors, including its
independent directors, concluded that the proposed merger is
advisable and in the best interest of its shareholders and
unanimously recommends that shareholders vote FOR
approval of the merger agreement.
Opinion
of Patriots Financial Advisor
On August 3, 2009, FBR rendered its oral opinion to
Patriots board of directors (which was subsequently
confirmed in writing by delivery of FBRs written opinion
dated the same date) to the effect that, as of
82
August 3, 2009, the exchange ratio set forth in the merger
agreement was fair, from a financial point of view, to the
holders of Patriot common stock.
FBRs opinion was directed to Patriots board of
directors, and only addressed the fairness, from a financial
point of view, to the holders of Patriot common stock of the
exchange ratio set forth in the merger agreement, and did not
address any other aspect or implication of the merger. The
summary of FBRs opinion in this proxy statement/prospectus
is qualified in its entirety by reference to the full text of
its written opinion, which is included as Annex B to this
proxy statement/prospectus and sets forth the procedures
followed, assumptions made, qualifications and limitations on
the review undertaken and other matters considered by FBR in
preparing its opinion. However, neither FBRs written
opinion nor the summary of its opinion and the related analyses
set forth in this proxy statement/prospectus are intended to be,
and they do not constitute, advice or a recommendation to any
holder of Patriot common stock as to how such holder should vote
or act with respect to any matter relating to the merger.
In arriving at its opinion, FBR:
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reviewed a draft, dated August 3, 2009, of the Agreement
and Plan of Merger by and between Patriot Capital Funding, Inc.
and Prospect Capital Corporation;
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reviewed certain financial statements of Patriot and Prospect
and certain other business, financial and operating information
relating to Patriot and Prospect provided to FBR by the
managements of Patriot and Prospect;
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reviewed certain publicly available business and financial
information relating to the industries in which Patriot and
Prospect operate;
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met with certain members of the managements of Patriot and
Prospect to discuss the business and prospects of Patriot and
Prospect;
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reviewed certain business, financial and other information
relating to Patriot and Prospect, including financial forecasts
for Patriot through December 31, 2009 provided to or
discussed with FBR by the management of Patriot;
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reviewed certain financial and stock trading data and
information for Patriot and Prospect and compared that data and
information with corresponding data and information for
companies with publicly traded securities that FBR deemed
relevant;
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reviewed certain financial terms of the proposed merger and
compared those terms with the financial terms of certain other
business combinations and other transactions which have recently
been effected or announced; and
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considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria
that FBR deemed relevant.
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In connection with its review, FBR did not independently verify
any of the foregoing information and FBR assumed and relied upon
such information being complete and accurate in all material
respects. With respect to the financial forecasts provided or
discussed with FBR by Patriot that FBR used in its analyses,
management of Patriot advised FBR, and FBR assumed, that such
forecasts were reasonably prepared in good faith on bases
reflecting the best currently available estimates and judgments
of the management of Patriot as to the future financial
performance of Patriot through December 31, 2009 and FBR
expressed no view and assumed no responsibility for the
assumptions, estimates and judgments on which such forecasts
were based. As the board of directors of Patriot was aware,
Prospect did not provide FBR with its managements
forecasts as to the future financial performance of Prospect.
FBR also assumed, with Patriots consent, that, in the
course of obtaining any regulatory or third party consents,
approvals or agreements in connection with the merger, no delay,
limitation, restriction or condition would be imposed that would
have an adverse effect on Patriot, Prospect, or the contemplated
benefits of the merger and that the merger would be consummated
in accordance with the terms of the merger agreement without
waiver, modification or amendment of any material term,
condition or agreement thereof. FBR also assumed, with
Patriots consent, that the merger would be treated as a
tax-free reorganization for federal income tax purposes and that
the merger agreement, when executed by the parties thereto,
would conform to the draft reviewed by FBR in all respects
material to
83
its analyses. In addition, Patriot advised FBR and for purposes
of its analyses and its opinion, FBR assumed that (i) on
April 3, 2009, a termination event occurred under
Patriots Amended Securitization Facility with an entity
affiliated with BMO Capital Markets Corp. and Branch Banking and
Trust Company, (ii) as a result of the occurrence of
the termination event under the Amended Securitization Facility,
Patriot could no longer make additional advances under the
Amended Securitization Facility and all principal, interest and
fees collected from the debt investments secured by the facility
would have to be used to pay down amounts outstanding under the
facility within 24 months following the date of the
termination event, (iii) the lenders under the Amended
Securitization Facility, upon notice to Patriot could accelerate
amounts outstanding under the facility and exercise other rights
and remedies provided by the facility, including the right to
sell the collateral under the facility, (iv) Patriot was
unable to obtain alternative sources of financing to replace the
Amended Securitization Facility or otherwise provide access to
ongoing liquidity and funding or eliminate the need for such
liquidity and funding, and (v) given the nature of
Patriots various businesses, assets and financing
arrangements and the expected actions of its counterparties,
creditors and employees, if the merger was not consummated
Patriot was unlikely to be able to continue to function as a
going concern which could reasonably result in a voluntary or
involuntary bankruptcy or liquidation of Patriot in which the
holders of Patriot common stock would receive little or no
value. FBR did not evaluate the solvency or fair value of any
party to the merger agreement under any state or federal laws
relating to bankruptcy, insolvency or similar matters and do not
express any opinion as to the value of any asset of Patriot,
whether at current market prices or in the future. FBR noted,
however, that, under the ownership of a company with adequate
liquidity and capital, such as Prospect, the value of Patriot
and its subsidiaries could substantially improve, resulting in
significant returns to Prospect if the merger is consummated.
Patriot further advised FBR that, as a result of concerns
regarding the viability of Patriot as a going concern, Patriot
had not prepared, and consequently could not provide FBR with,
forecasts as to its future financial performance beyond
December 31, 2009.
FBRs opinion addressed only the fairness, from a financial
point of view, to the holders of Patriot common stock of the
exchange ratio set forth in the merger agreement and did not
address any other aspect or implication of the merger or any
agreement, arrangement or understanding entered into in
connection with the merger or otherwise or the fairness of the
amount or nature of, or any other aspect relating to, any
compensation to any officers, directors or employees of any
party to the merger, or class of such persons, relative to the
exchange ratio or otherwise. In addition, FBR did not
investigate or otherwise evaluate the potential affects of the
merger on the federal, state or other taxes or tax rates payable
by Patriot, Prospect or the holders of Patriot common stock or
Prospect common stock and, with Patriots consent, FBR
assumed, that such taxes and tax rates would not be affected by
or after giving effect to the merger. The issuance of FBRs
opinion was approved by an authorized internal committee of FBR.
FBRs opinion was necessarily based upon information made
available to it as of the date its opinion and financial,
economic, market and other conditions as they existed and could
be evaluated on such date. FBR did not express any opinion as to
what the value of shares of Prospect common stock actually would
be when issued to the holders of Patriot common stock pursuant
to the merger or the prices at which shares of Prospect common
stock would trade at any time. FBRs opinion did not
address the relative merits of the merger as compared to
alternative transactions or strategies that might be available
to Patriot or any other party to the merger, nor did it address
the underlying business decision of the board of directors of
Patriot or any other party to the merger to proceed with the
merger.
Furthermore, in connection with its opinion, FBR was not
requested to make, and did not make, any physical inspection or
independent appraisal or evaluation of any of the assets,
properties or liabilities (contingent or otherwise) of Patriot,
Prospect or any other party, nor was FBR provided with any such
appraisal or evaluation. FBR did not estimate, and expressed no
opinion regarding, the liquidation value of any entity.
FBRs opinion was provided for the information of
Patriots board of directors in connection with its
consideration of the merger and FBRs opinion should not be
construed as creating any fiduciary duty on the part of FBR to
Patriot, Patriots board of directors, any security holder
of Patriot or any other party. FBRs opinion does not
constitute advice or a recommendation to any investor or
security holder of Patriot or any other person as to how such
investor, security holder or other person should vote or act on
any matter relating to the proposed merger or otherwise.
84
In preparing its opinion to Patriots board of directors,
FBR performed a variety of analyses, including those described
below. The summary of FBRs valuation analyses is not a
complete description of the analyses underlying FBRs
opinion. The preparation of a fairness opinion is a complex
process involving various quantitative and qualitative judgments
and determinations with respect to the financial, comparative
and other analytic methods employed and the adaptation and
application of those methods to the unique facts and
circumstances presented. As a consequence, neither FBRs
opinion nor the analyses underlying its opinion are readily
susceptible to partial analysis or summary description. FBR
arrived at its opinion based on the results of all analyses
undertaken by it and assessed as a whole and did not draw, in
isolation, conclusions from or with regard to any individual
analysis, analytic method or factor. Accordingly, FBR believes
that its analyses must be considered as a whole and that
selecting portions of its analyses, analytic methods and
factors, without considering all analyses and factors or the
narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying its analyses and
opinion.
In performing its analyses, FBR considered business, economic,
industry and market conditions, financial and otherwise, and
other matters as they existed on, and could be evaluated as of,
the date of its opinion. No company or business used in
FBRs analyses for comparative purposes is identical to
Patriot, Prospect or the proposed transaction. While the results
of each analysis were taken into account in reaching its overall
conclusion with respect to fairness, FBR did not make separate
or quantifiable judgments regarding individual analyses. The
implied valuation metrics indicated by FBRs analyses are
illustrative and not necessarily indicative of actual values nor
predictive of future results or values, which may be
significantly more or less favorable than those suggested by the
analyses. In addition, any analyses relating to the value of
assets, businesses or securities do not purport to be appraisals
or to reflect the prices at which businesses or securities
actually may be sold, which may depend on a variety of factors,
many of which are beyond Patriots control and the control
of FBR. Much of the information used in, and accordingly the
results of, FBRs analyses are inherently subject to
substantial uncertainty.
FBRs opinion and analyses were provided to Patriots
board of directors in connection with its consideration of the
proposed merger and were among many factors considered by
Patriots board of directors in evaluating the proposed
merger. Neither FBRs opinion nor its analyses were
determinative of the exchange ratio or of the views of
Patriots board of directors with respect to the proposed
merger.
The following is a summary of the material valuation analyses
performed in connection with the preparation of FBRs
opinion rendered to Patriots board of directors on
August 3, 2009. The analyses summarized below include
information presented in tabular format. The tables alone do not
constitute a complete description of the analyses. Considering
the data in the tables below without considering the full
narrative description of the analyses, as well as the
methodologies underlying and the assumptions, qualifications and
limitations affecting each analysis, could create a misleading
or incomplete view of FBRs analyses.
For purposes of its analyses, FBR reviewed a number of financial
metrics including:
Enterprise Value generally the value as
of a specified date of the relevant companys outstanding
equity securities (taking into account its restricted units,
outstanding options, warrants and other convertible securities)
plus the value of its minority interests plus the amount of its
net debt (the amount of its outstanding indebtedness, preferred
stock and capital lease obligations less the amount of cash on
its balance sheet) as of a specified date.
Unless the context indicates otherwise, common stock prices for
the selected companies used in the Selected Companies Analysis
described below were as of July 31, 2009, the final trading
day prior to FBR rendering its opinion to the Board of Directors
of Patriot.
Selected Companies Analysis. FBR considered
certain financial data for Patriot and Prospect and selected
internally-managed and externally-managed business development
companies with publicly traded equity securities. The financial
data included:
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Stock Price as a multiple of Net Asset Value per Share; and
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Enterprise Value as a multiple of Total Assets.
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85
The selected companies were selected because they had publicly
traded equity securities and were deemed to be similar to
Patriot and Prospect in one or more respects including the
nature of their business, size, diversification, financial
performance and geographic concentration. No specific numeric or
other similar criteria were used to select the selected
companies and all criteria were evaluated in their entirety
without application of definitive qualifications or limitations
to individual criteria. As a result, a significantly larger or
smaller company with substantially similar lines of businesses
and business focus may have been included while a similarly
sized company with less similar lines of business and greater
diversification may have been excluded. FBR identified a
sufficient number of companies for purposes of its analysis but
may not have included all companies that might be deemed
comparable to Patriot and Prospect, respectively. The selected
internally-managed business development companies were:
American Capital, Ltd.
Allied Capital Corporation
MCG Capital Corporation
Main Street Capital Corporation
Kohlberg Capital Corporation
Triangle Capital Corporation of Maryland
FBR noted the following multiples for the selected
internally-managed business development companies as of
July 31, 2009 and compared those multiples to the implied
multiples for the merger based on the closing price of Prospect
common stock on July 31, 2009:
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Selected
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Internally
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Managed
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Business
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Development
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Implied
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Companies
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Transaction
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Multiple Description
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Mean
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Median
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Multiple
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Stock Price as a multiple of Net Asset Value per Share
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0.63
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x
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0.52
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x
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0.54
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x
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Enterprise Value as a multiple of Assets
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0.82
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x
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0.76
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x
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0.67
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x
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The selected externally-managed business development companies
were:
Apollo Investment Corporation
Ares Capital Corporation
BlackRock Kelso Capital Corporation
Fifth Street Finance Corp.
MVC Capital, Inc.
Gladstone Capital Corporation
PennantPark Investment Corporation
GSC Investment Corp.
FBR noted the following multiples for the selected
externally-managed business development companies as of
July 31, 2009 and compared those multiples to the implied
multiples for the merger based on the closing price of Prospect
common stock on July 31, 2009:
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Selected
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Externally
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Managed
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Business
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Development
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Implied
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Companies
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Transaction
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Multiple Description
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Mean
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Median
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Multiple
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Stock Price as a multiple of Net Asset Value per Share
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0.72
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x
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0.77
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x
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0.54
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x
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Enterprise Value as a multiple of Assets
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0.75
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x
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0.82
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x
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0.67
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x
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86
Contribution
Analysis
FBR also noted the relative contributions of Patriot and
Prospect to the pro forma combined entity resulting from the
merger of certain financial and operating metrics and compared
those contributions to the 15.2% of the pro forma combined
entity that would be owned by the former holders of Patriot
common stock after giving effect to the merger and the 84.8% of
the pro forma combined entity that would be owned by the pre
merger holders of Prospect common stock after giving effect to
the merger:
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Patriot
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Prospect
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Equity Market Capitalization (as of July 31, 2009)
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7.2
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%
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92.8
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%
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LTM Revenues
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26.8
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%
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73.2
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%
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LTM Net Investment Income
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24.9
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%
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75.1
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%
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LTM Net Income/Loss
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NM
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NM
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LTM Total Assets
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33.4
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%
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66.6
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%
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LTM Enterprise Value
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33.0
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%
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67.0
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%
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LTM Net Asset Value
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21.6
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%
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78.4
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%
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Investments at Cost (as reflected on Patriots financial
statements):
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3/31/09
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38.0
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%
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62.0
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%
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12/31/08
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39.0
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%
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61.0
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%
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9/30/08
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38.8
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%
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61.2
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%
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6/30/08
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40.6
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%
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59.4
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%
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Investments at Fair Value (as reflected on Patriots
financial statements):
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3/31/09
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35.0
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%
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65.0
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%
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12/31/08
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36.7
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%
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63.3
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%
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9/30/08
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37.6
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%
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62.4
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%
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6/30/08
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39.3
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%
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60.7
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%
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* |
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NM denotes not meaningful |
Other
Considerations
Historical
Exchange Ratios
FBR also noted the following historical exchange ratios based on
the closing market prices of Prospect common stock and Patriot
common stock and compared those historical exchange ratios to
the exchange ratio provided for in the merger of 0.3992 of a
share of Prospect common stock per share of Patriot common stock:
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Historical Exchange Ratios
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Current (as of July 31, 2009)
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0.1945
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Last
3-Months
Average
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0.1930
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2009 High
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0.3151
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2009 Low
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0.1534
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2009 Average
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0.2191
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High Since Patriot IPO
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1.2577
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Low Since Patriot IPO
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0.1534
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Average Since Patriot IPO
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0.6735
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87
Historical
Stock Trading Range
FBR also noted the following historical stock trading range
information for Patriot common stock as of July 31, 2009:
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Past Three Months
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Past Six Months
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Last Twelve Months
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Volume Weighted Average Price
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$
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1.71
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$
|
1.76
|
|
|
$
|
3.16
|
|
Total Volume Traded
|
|
|
11,537,477
|
|
|
|
16,731,613
|
|
|
|
30,779,318
|
|
Average Daily Volume
|
|
|
174,810
|
|
|
|
130,716
|
|
|
|
120,703
|
|
Shares Traded as a % of Shares Outstanding
|
|
|
55.1
|
%
|
|
|
79.9
|
%
|
|
|
146.9
|
%
|
Premiums
Paid Analysis
FBR also noted the implied premium reflected by the exchange
ratio in the merger based on the closing price of Prospect
common stock on July 31, 2009 relative to the following
historical trading prices of Patriot common stock as of
July 31, 2009:
|
|
|
|
|
|
|
Premium
|
|
|
Current Price (as of July 31, 2009)
|
|
|
105.1
|
%
|
30-Day
Volume Weighted Average Price
|
|
|
146.4
|
%
|
60-Day
Volume Weighted Average Price
|
|
|
117.9
|
%
|
52-Week High
|
|
|
(49.0
|
)%
|
52-Week Low
|
|
|
354.5
|
%
|
Other
Matters
Pursuant to an engagement letter dated April 24, 2009,
Patriot retained FBR as its financial advisor in connection
with, among other things, the proposed merger. Patriot engaged
FBR based on FBRs qualifications, experience and
reputation as an internationally recognized investment banking
and financial advisory firm. FBR will receive a fee of
$1,000,000 for its services, $900,000 of which is contingent
upon the consummation of the merger. FBR also became entitled to
receive a fee of $500,000 upon the rendering of its opinion
which is creditable against the fee payable upon the
consummation of the merger. In addition, Patriot has agreed to
indemnify FBR and certain related parties for certain
liabilities and other items arising out of or related to its
engagement. In addition, FBR and its affiliates may in the
future provide financial advice and services to Patriot,
Prospect and certain of their respective affiliates for which
FBR and its affiliates would also expect to receive
compensation. FBR is a full service securities firm engaged in
securities trading and brokerage activities as well as providing
investment banking and other financial services. In the ordinary
course of business, FBR and its affiliates may acquire, hold or
sell, for FBR and its affiliates own accounts and the accounts
of customers, equity, debt and other securities and financial
instruments (including bank loans and other obligations) of
Patriot, Prospect and any other company that may be involved in
the merger, as well as provide investment banking and other
financial services to such companies.
Dividends
and Distributions
In order to maintain Patriots qualification as a RIC for
U.S. federal income tax purposes, Patriot generally must
distribute to its shareholders annually at least 90% of its
investment company taxable income, which is
generally its net ordinary income plus the excess, if any, of
realized net short-term capital gains over realized net
long-term capital losses. Prior to the closing date of the
merger, Patriot will declare to the extent necessary a dividend
to its shareholders, which together with all Patriots
previous dividends, will have the effect of distributing to
Patriots stockholders all of its investment company
taxable income (computed without regard to the deduction for
dividends paid) and net capital gains, if any, through the
closing date of the merger and thus satisfy the annual RIC
distribution requirements for the taxable year ending on the
closing date of the merger. The final dividend may be made part
in cash and part in common stock in accordance with a recent IRS
revenue procedure. Shareholders will be required to include the
full
88
amount of any final dividend, whether paid entirely in cash or
in a mixture of cash and common stock, as ordinary income (or
long-term capital gain to the extent such final dividend is
properly designated as a capital gain dividend) and the amount
of U.S. federal income tax that each shareholder is
required to pay with respect to such dividends that may exceed
the cash received. If Patriot does not pay the final dividend
prior to the closing date of the merger, then Prospect will pay
the final dividend after the closing date of the merger.
Shareholders are strongly urged to consult their own tax
advisors in this regard.
See Risk Factors Risks Related to
Prospect Prospect may in the future choose to
pay dividends in its own stock, in which case you may be
required to pay tax in excess of the cash you receive and
Risk Factors Risks Related to
Patriot Patriot may in the future choose to pay
dividends in its own stock, in which case you may be required to
pay tax in excess of the cash you receive.
Litigation
Relating to the Merger
On or about August 6, 2009, Bruce Belodoff filed a putative
class action complaint against Patriot, Patriots directors
and certain of Patriots officers in the Stamford Superior
Court of the State of Connecticut. The lawsuit alleges that the
proposed merger between Patriot and Prospect is the product of a
flawed sales process and that Patriots directors and
officers breached their fiduciary duty by agreeing to a
structure that was not designed to maximize the value of
Patriots shares. In addition, the lawsuit asserts that
Patriot aided and abetted its officers and directors
breach of fiduciary duty. Finally, the lawsuit alleges that the
proposed merger was designed to benefit certain of
Patriots officers.
On or about August 11, 2009, Thomas Webster filed a
putative class action lawsuit against Patriot, its directors and
certain of its officers in the Superior Court of the State of
Connecticut. This lawsuit is essentially identical to the class
action lawsuit filed by Bruce Belodoff against Patriot on
August 4, 2009, which is described above, and was filed by
two of the same law firms that filed such lawsuit.
On or about August 13, 2009, Brian Killion filed a putative
class action complaint against Patriot, its directors and
certain of its officers and Prospect in the Bridgeport Superior
Court of the State of Connecticut. The lawsuit alleges that the
consideration to be paid in the proposed merger between Patriot
and Prospect is unfair and is the result of an unfair process.
The lawsuit further alleges that Patriots directors and
officers breached their fiduciary duty by agreeing to a
structure that is designed to deter higher offers from other
bidders and for failing to obtain the highest and best price for
Patriots stockholders. In addition, the lawsuit asserts
that Patriot and Prospect aided and abetted the alleged breaches
of fiduciary duty.
All three complaints seek to enjoin consummation of the merger
or, in the event that the merger has been consummated prior to
the entry of a judgment, to rescind the transaction
and/or award
rescissory damages.
On October 9, 2009, Patriot filed motions to strike the
complaints in all three lawsuits on the basis that the
plaintiffs allegations failed to state any claims upon
which relief may be granted as a matter of law. On the same day,
Prospect filed a motion to strike the lawsuit filed by Brian
Killion.
At this time, Patriot is unable to determine whether an
unfavorable outcome from these claims is probable or remote or
to estimate the amount or range of potential loss, if any.
However, Patriot believes that these claims are without merit
and intends to vigorously defend against them.
Interests
of Patriots Directors and Executive Officers in the
Merger
In considering the recommendation of the board of directors,
Patriots shareholders should be aware that certain of
Patriots directors and executive officers have interests
in the transaction that are different from,
and/or in
addition to, the interests of Patriots shareholders
generally. The Patriot board of directors was aware of these
potential conflicts of interest and considered them, among other
matters, in evaluating and negotiating the merger agreement and
the merger, and in reaching its decisions to approve the merger
agreement and to recommend that the shareholders vote in favor
of adopting the merger agreement.
Treatment
of Stock Options
As of August 3, 2009, there were approximately
2,861,177 shares of Patriot common stock issuable pursuant
to stock options granted under the Patriot Stock Option Plan to
current executive officers, including
89
both vested and unvested options. Pursuant to the terms of
the Patriot Stock Option Plan, all outstanding stock options
become fully vested upon a change in control. The completion of
the proposed merger would be a change in control for this
purpose. Thus, in accordance with the terms of the Stock Option
Plan and the proposed merger agreement, each outstanding option
held by an executive officer as of the completion of the merger
will become fully vested (to the extent not already vested) and
will be cancelled and exchanged for a cash payment equal to the
number of shares of Patriot common stock underlying the option
multiplied by $0.01, less any applicable taxes required to be
withheld.
The following table identifies, for each person who was an
executive officer of Patriot as of August 3, 2009, the
aggregate number of shares of Patriot common stock subject to
outstanding vested and unvested options as of such date, and the
cash to be paid in exchange for such options in connection with
the merger (without reduction for taxes required to be
withheld). The information assumes that all such options remain
outstanding on the closing date of the merger.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Number of Shares
|
|
|
Cash Payable
|
|
|
|
Subject to
|
|
|
in Exchange
|
|
|
|
Vested and
|
|
|
for
|
|
|
|
Unvested
|
|
|
Vested and
|
|
Name
|
|
Options
|
|
|
Unvested Options
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
Richard B. Buckanavage
|
|
|
998,187
|
|
|
$
|
9,982
|
|
William E. Alvarez, Jr.
|
|
|
181,761
|
|
|
$
|
1,818
|
|
Timothy W. Hassler
|
|
|
983,256
|
|
|
$
|
9,833
|
|
Matthew R. Colucci
|
|
|
530,512
|
|
|
$
|
5,305
|
|
Clifford L. Wells
|
|
|
167,461
|
|
|
$
|
1,675
|
|
Treatment
of Restricted Stock
As of August 3, 2009, there were approximately
606,250 shares of restricted stock granted under
Patriots Restricted Stock Plan to Patriots current
executive officers. Pursuant to the terms of the restricted
stock agreements under which the restricted stock was granted,
and for certain executive officers, the terms of their
employment agreements, the restricted stock becomes fully vested
upon a change in control. The completion of the proposed merger
would be a change in control for this purpose. Thus, in
accordance with the restricted stock agreements, the employment
agreements and the proposed merger agreement, each outstanding
share of restricted stock held by an executive officer as of the
completion of the merger will become fully vested. For each such
executive officer, a portion of the shares that become vested
will be cancelled and exchanged for a cash payment in an amount
sufficient to cover all federal, state and local taxes required
to be withheld on behalf of the executive officer upon the
vesting of the shares. The remaining shares held by each
executive officer will participate in the merger on the same
basis as other shares of Patriot common stock.
The following table identifies, for each person who was an
executive officer of Patriot as of August 3, 2009, the
aggregate number of shares of restricted stock held as of
August 3, 2009 and the value of such restricted stock that
will become fully vested in connection with the merger, assuming
a per share value of $4.00. The information assumes that all
such shares of restricted stock remain outstanding on the
closing date of the merger.
|
|
|
|
|
|
|
|
|
|
|
Aggregate Shares of
|
|
|
Value of Shares of
|
|
Name
|
|
Restricted Stock
|
|
|
Restricted Stock
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
Richard B. Buckanavage
|
|
|
226,500
|
|
|
$
|
906,000
|
|
William E. Alvarez, Jr.
|
|
|
42,500
|
|
|
$
|
170,000
|
|
Timothy W. Hassler
|
|
|
163,500
|
|
|
$
|
654,000
|
|
Matthew R. Colucci
|
|
|
136,250
|
|
|
$
|
545,000
|
|
Clifford L. Wells
|
|
|
37,500
|
|
|
$
|
150,000
|
|
90
Employment
Agreements and Severance Agreement
Each of the current executive officers of Patriot (other than
Mr. Wells) is party to an employment agreement with Patriot
that provides for certain severance payments and benefits in the
event of termination of the executive officers employment
under certain circumstances, including termination of the
executive officer by Patriot or its successor without cause and
termination by the executive officer for good reason.
Mr. Wells and Patriot have entered into a severance
agreement providing for certain severance payments and benefits
in the event of his termination of employment by Patriot or its
successor without cause or by him for good reason, as further
described below. Each executive officer would be required to
enter into an agreement with Patriot that provides for a general
release of all legal claims that are or may be held by each such
executive officer against Patriot in order for such executive
officer to receive any severance payments and benefits pursuant
to the employment or severance agreements. (Any reference in
this description of the employment and severance agreements to
Patriot should be read as a reference to Patriot or its
successor where applicable to actions or payments after the
proposed merger.)
The terms good reason and cause are
generally defined in the employment and severance agreements as
follows:
|
|
|
|
|
Good reason means that, without the executive
officers written consent, any of the following events
occurs: (1) any material change in the duties and
responsibilities of the executive that is inconsistent in any
material and adverse respect with his position, duties,
responsibilities or status with Patriot; (2) a material and
adverse change in the executives titles or offices with
Patriot; (3) an adverse change in his bonus opportunity or
a reduction in the executives salary unless Patriot is
implementing an overall general salary reduction affecting all
employees; (4) any requirement that the executive be
relocated more than 35 miles from Patriots office; or
(5) the failure of a purchaser of Patriot or the successor
to the obligations of the employment agreement to honor the
terms of the employment agreement or, in the case of Mr. Wells,
assume the obligations of the severance agreement.
|
|
|
|
Cause refers to: (1) the executives
willful and continued failure to perform substantially his
duties with Patriot after a written demand for substantial
performance is delivered by Patriot; (2) the
executives willfully engaging in illegal conduct or gross
misconduct which is demonstrably and materially injurious to the
Patriot; (3) the executives ineligibility to serve as
an executive officer pursuant to Section 9 of the 1940 Act;
or (4) the executives conviction of a felony or crime
of moral turpitude.
|
To comply with Section 409A of the Internal Revenue Code,
to the extent severance payments are to be made in installments
under the employment agreements, are deemed to provide a
deferral of compensation under Section 409A, and the
executive officer is a specified employee (as such
term is defined in Section 409A) at the time of his
termination, no payments would be provided until six months
after the date of separation from service, at which point
Patriot would make a lump sum payment of the delayed amounts.
Employment
Agreements with Messrs. Buckanavage and
Hassler
Pursuant to the employment agreements with
Messrs. Buckanavage and Hassler, if either of these
executive officers terminates his employment for good reason, or
if Patriot terminates his employment without cause, he will be
entitled to receive: (1) an amount equal to between one and
one and one-half times the sum of his annual base salary in the
then current year and the average of (a) his annual bonus plus
(b) the value of annual restricted stock awards (Average
Annual Bonus) during 2008 and the term of the agreement,
paid in monthly installments; (2) an amount equal to a pro
rata portion (based on length of service during the year in
which the executive officer terminated employment) of his
Average Annual Bonus during 2008 and the term of the agreement;
(3) his accrued but unpaid base salary, bonuses,
reimbursable expenses and benefits; and (4) continued
medical and dental insurance for up to one and one-half years
after termination. In addition, his options and restricted stock
awards shall become fully vested upon termination.
If either executive officer terminates his employment for any
reason in the seventh month after a change in
control, he will be entitled to receive the amounts and
benefits set forth in the immediately preceding
91
paragraph. For this purpose, the proposed merger will be a
change in control. If within one year following a change in
control, the executive officer terminates his employment for
good reason (for this purpose only, the term good reason
includes only the last three reasons in the definition above),
or if Patriot terminates his employment without cause, he will
be entitled to receive: (1) an amount equal to three times
the sum of his annual base salary in the then current year and
his Average Annual Bonus during 2008 and the term of the
agreement, paid over three years in monthly installments;
(2) an amount equal to a pro rata portion (based on length
of service during the year in which the executive officer
terminated employment) of his Average Annual Bonus during 2008
and the term of the agreement; (3) his accrued but unpaid
base salary, bonuses, reimbursable expenses and benefits; and
(4) continued medical and dental insurance for up to three
years after termination.
Employment
Agreements with Messrs. Alvarez and Colucci
Pursuant to the employment agreements with Messrs. Alvarez
and Colucci, if either of these executive officers terminates
his employment for good reason, or if Patriot terminates his
employment without cause, he will be entitled to receive:
(1) an amount equal to the sum of, in the case of
Mr. Alvarez, his annual base salary in the then current
year and his Average Annual Bonus during the term of his
agreement, paid in equal monthly installments, or in the case of
Mr. Colucci, one and one-half times the sum of his annual
base salary in the then current year and his Average Annual
Bonus during the 2008 and term of the agreement, paid in equal
monthly installments; (2) an amount equal to a pro rata
portion (based on length of service during the year in which the
executive officer terminated employment) of his Average Annual
Bonus during the term of the agreement (and in 2008 for Mr.
Colucci); (3) his accrued but unpaid base salary, bonuses,
reimbursable expenses and benefits; and (4) continued
medical and dental insurance for up to 12 months after
termination for Mr. Alvarez and for up to 18 months
after termination for Mr. Colucci. In addition,
Mr. Alvarezs options shall become fully vested upon
termination and, in the case of Mr. Colucci, his options
and restricted stock awards shall become fully vested upon
termination. Any restricted shares issued to Mr. Colucci
will vest upon the occurrence of a change in control, and the
proposed merger would be a change in control for this purpose.
There are two differences in the above definition of good
reason under the employment agreements with
Messrs. Alvarez and Colucci. For Mr. Alvarez, a
relocation provides good reason if it is more than 50 miles
from Patriots offices. For Messrs. Alvarez
and Colucci, the failure of the chief executive officer to
determine performance objectives for the annual bonus within the
first 60 days of the performance period would provide an
additional good reason.
Severance
Agreement with Mr. Wells
Patriot and Mr. Wells have entered into a severance
agreement, pursuant to which if Mr. Wellss employment
is terminated by Patriot or its successor without cause or by
Mr. Wells for good reason within 30 days before or
within six months after a change in control that occurs between
July 31, 2009 and January 31, 2010, then
Mr. Wells will be entitled to receive his monthly base
salary in monthly installments for six months following his
termination of employment. For purposes of this severance
agreement, the completion of the proposed merger would be a
change in control if it occurs during the period specified.
The table below summarizes the maximum termination and change in
control amounts that would be payable to Patriots named
executive officers under each of their current employment
agreements or severance agreements as if the change in control
occurs on September 30, 2009 and employment of each
terminates on that date or as otherwise specified in the table.
The payments set forth in the table do not include payments in
cancellation and exchange for unvested and vested options, which
are made pursuant to the merger agreement.
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination in
|
|
|
|
|
|
|
Termination for
|
|
Connection with
|
|
|
|
Termination by Us
|
|
|
Good Reason by
|
|
Change in Control
|
|
Termination by
|
|
Within 1 Year of
|
|
|
Executive Officer
|
|
Within 30 Days
|
|
Executive Officer
|
|
Change in Control
|
|
|
or We Terminate
|
|
Before or Within
|
|
in the Seventh
|
|
Without Cause or by
|
|
|
Employment Other
|
|
Six Months After a
|
|
Month After a
|
|
Executive Officer
|
Name
|
|
Than for Cause
|
|
Change in Control
|
|
Change in Control
|
|
for Good Reason
|
|
Richard P. Buckanavage
|
|
$
|
2,849,389
|
|
|
|
|
|
|
$
|
2,549,673
|
|
|
$
|
4,804,417
|
|
William E. Alvarez,
Jr.(1)
|
|
$
|
983,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy W. Hassler
|
|
$
|
2,274,718
|
|
|
|
|
|
|
$
|
2,021,353
|
|
|
$
|
3,927,312
|
|
Matthew R. Colucci
|
|
$
|
1,872,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clifford L.
Wells(1)
|
|
$
|
117,075
|
|
|
$
|
117,075
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The payments to Messrs. Alvarez and Wells set forth in this
table do not include payments in satisfaction of restricted
stock in the amounts of $170,000 and $150,000, respectively.
These payments are made pursuant to the merger agreement. |
The foregoing estimates are based on a number of assumptions.
Facts and circumstances at the time of any change in control
transaction and termination thereafter as well as changes in the
applicable executive officers compensation history
preceding such a transaction
and/or a
qualifying termination thereafter could materially impact the
amounts to be paid.
Indemnification
and Insurance
Prospect and the surviving corporation have agreed to jointly
and severally indemnify, to the greatest extent permitted by
law, each of Patriots present and former officers,
directors and employees against all expenses, losses and
liabilities (and comply with all of Patriots and its
subsidiaries existing obligations to advance funds for
expenses) incurred in connection with any claim, action, suit,
proceeding or investigation arising out of, relating to, or in
connection with, any acts or omission in their capacity as an
officer, director or employee occurring on or before the
effective time of the merger and against all expenses, losses
and liabilities in connection with such persons serving as an
officer, director or other fiduciary in any entity if such
service was at the request of or for the benefit of the Patriot
and its subsidiaries.
The merger agreement requires that Prospect purchase or cause
there to be purchased, and that following the effective time of
the merger the surviving corporation maintain, a tail policy to
the current policy of directors and officers
liability insurance maintained on the date hereof by Patriot
(the current policy) containing the same coverage
and in the same amount as the current policy and with a claims
period of at least six years after the closing date with respect
to claims arising from facts or events that existed or occurred
prior to or at the effective time; provided,
however, that in no event shall the surviving corporation
be required to expend annually in excess of 300% of the annual
premium currently paid by Patriot (the insurance
amount) under the current policy; provided,
however, that if the premium of such insurance coverage
exceeds the insurance amount, Prospect shall be obligated to
obtain, and the surviving corporation shall be obligated to
maintain, a policy with the greatest coverage available for a
cost not exceeding the insurance amount. The tail policy shall
be purchased at Patriots expense unless Patriot is unable
to fund the cost for the entire six-year period, in which case
Prospect shall fund the balance of the expense.
Continued
Benefits
To the extent that any of Patriots executive officers
remain employed by the surviving corporation, they will be
entitled to receive compensation and benefits following the
merger. See Description of the Merger
Agreement Additional Covenants Pending Completion of
the Merger. To date, Prospect has not made any commitments
or entered into any agreements to retain any of Patriots
employees, including its executive officers.
93
DESCRIPTION
OF THE MERGER AGREEMENT
The following summary, which includes all of the material
terms of the merger agreement, is qualified by reference to the
complete text of the merger agreement, which is attached as
Annex A to this document and is incorporated by
reference in this document.
Structure
of the Merger
Subject to the terms and conditions of the merger agreement,
Patriot will merge with and into Prospect and the separate
corporate existence of Patriot will cease. Prospect will be the
surviving entity and will succeed to and assume all of the
rights and obligations of Patriot.
Closing;
Completion of the Proposed Merger
Subject to the satisfaction of various conditions to closing
(including approval by Patriots shareholders), the
completion of the proposed merger, if approved by Patriots
shareholders, will occur no later than the fifth business day
after the satisfaction or waiver of the conditions set forth in
the merger agreement or at another date or time as may be agreed
to by Patriot and Prospect. If the merger agreement is approved
at the special meeting, and the other conditions to the closing
of the merger are satisfied, the parties expect to complete the
merger during the fourth quarter of 2009, but in no event later
than December 15, 2009.
Merger
Consideration
If the proposed merger is consummated, each share of Patriot
common stock will be converted into the right to receive
approximately 0.3992 of a share of Prospect common stock. If the
number of shares of Prospect common stock increase, decrease,
change into or are exchanged for a different number or kind of
shares or securities before the merger is completed as a result
of a reclassification, stock dividend, stock split, reverse
stock split, or other similar change (but excluding as a result
of sales of Prospect common stock, sales of Prospect
equity-linked securities, and the issuance of Prospect common
stock pursuant to the Prospect dividend reinvestment plan or
otherwise in lieu of a portion of any cash dividend declared by
Prospect), then an appropriate and proportionate adjustment will
be made to the number of shares of Prospect common stock into
which each share of Patriot common stock will be converted.
Holders of shares of Patriot common stock will not receive any
fractional shares of Prospect common stock in the merger.
Instead, each Patriot shareholder otherwise entitled to a
fractional share interest in Prospect will be paid an amount in
cash, rounded to the nearest cent based on a formula set forth
in the merger agreement.
In addition, the exchange ratio will be adjusted for any
dividend that Patriot may declare prior to closing. In this
regard, as a RIC, Patriot generally does not have to pay
corporate-level federal income taxes on any net ordinary income
or capital gains that it distributes to its stockholders as
dividends if it meets certain
source-of-income,
income distribution and asset diversification requirements. As a
result, Patriot will be required to declare, to the extent
necessary, a dividend prior to the consummation of the merger in
an amount equal to its undistributed investment company taxable
income and its net capital gain (if any) in order to preserve
this favorable tax treatment. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations of Patriot Recent Developments and
Note 11. Income Taxes and Note 14.
Subsequent Events to Patriots unaudited
financial statements for a detailed discussion regarding
Patriots undistributed net ordinary income and capital
gains.
The terms of the merger agreement anticipate that any such
dividends may be paid out in accordance with a recent revenue
procedure issued by the IRS, pursuant to which up to 90% of the
total dividend may be paid in shares of common stock and the
remainder will be paid in cash. Any such dividend, whether
received in cash or common stock (including common stock of
Prospect) will be taxable to shareholders as a ordinary income
(or capital gains, if such dividends are properly designated as
capital gain dividends). See Risk Factors
Risks Related to Prospect Prospect may in the
future choose to pay dividends in its own stock, in which case
you may be required to pay tax in excess of the cash you
receive and Risk Factors Risks
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Related to Patriot Patriot may in the future choose
to pay dividends in its own stock, in which case you may be
required to pay tax in excess of the cash you receive.
If any such dividends are declared by Patriot prior to closing,
the exchange ratio will be adjusted as follows:
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with respect to the cash portion of any such dividends, the
numerator of the exchange ratio will bereduced in an
amount equal to the cash dividend per share paid or payable with
respect to each share of Patriots common stock and, as a
result, the aggregate number of shares of Prospect common stock
to be received by Patriot shareholders in the merger will
decrease accordingly; and
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with respect to the stock portion of any such dividends, the
exchange ratio, after adjustment for any cash dividends as
discussed above, will be proportionally adjusted
to reflect any such dividends paid or payable in stock and, as a
result, the number of shares of Patriot common stock to be
issued for each outstanding share of Patriot common stock will
be reduced, but the aggregate number of shares of Prospect
common stock to be received by Patriot shareholders in the
merger will remain unchanged.
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After the effective time of the merger, there will be no further
registration of transfers on the stock transfer books of Patriot
or its transfer agent of Patriots common stock that was
outstanding immediately prior to the effective time of the
merger. Upon completion of the proposed merger, the outstanding
shares of Patriots common stock will evidence only the
right to receive the merger consideration, and shares of
Patriots common stock will be cancelled and will cease to
exist.
Treatment
of Patriot Stock Options and Restricted Stock
Each outstanding option to acquire Patriot common stock granted
under Patriots stock option plan will be cancelled in
exchange for a cash payment of $0.01 for each share of Patriot
common stock for which such option is exercisable.
Restricted shares of Patriot common stock outstanding
immediately prior to the effective time of the merger will vest
at the effective time and a portion of those shares held by each
of Patriots executive officers and employees will be
cancelled in exchange for a cash payment in an amount sufficient
to cover the federal, state and local taxes required to be
withheld from the executive officer or employee upon the vesting
of the shares, with the remaining shares participating in the
merger on the same basis as other shares of Patriot common stock.
Prior to the effective time of the merger, Patriot will
terminate its stock option and restricted stock plans.
Conversion
of Shares; Exchange of Certificates; Book-Entry Shares
The conversion of Patriot common stock into the right to receive
the merger consideration will occur automatically at the
effective time of the merger. Prior to the completion of the
merger, Prospect will select a bank or trust company reasonably
acceptable to Patriot to be the exchange agent, who will
exchange certificates representing shares of Patriot common
stock for the merger consideration upon receipt of an
appropriately completed letter of transmittal (discussed below)
and perform other duties as explained in the merger agreement.
Shares of Patriot common stock held in the Direct Registration
System (DRS) will automatically be converted into whole shares
of Patriot common stock in DRS form. An account statement will
be mailed to you confirming this automatic conversion.
Shares of Patriot common stock held in the book-entry form will
be automatically converted into whole shares of Prospect common
stock in book-entry form. An account statement will be mailed to
you confirming this automatic conversion.
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Letter of
Transmittal
As soon as reasonably practicable after completion of the
merger, the exchange agent will mail a letter of transmittal to
each holder of a Patriot common stock certificate at the
effective time of the merger. This mailing will contain
instructions on how to surrender Patriot common stock
certificates in exchange for statements indicating book-entry
ownership of Prospect common stock and a check in the amount of
cash to be paid in lieu of fractional shares of Prospect common
stock. If a holder of a Patriot common stock certificate makes a
special request, however, Prospect will issue to the requesting
holder a Prospect stock certificate in lieu of book-entry
shares. When you deliver your Patriot stock certificates to the
exchange agent along with a properly executed letter of
transmittal and any other required documents, your Patriot stock
certificates will be cancelled and you will receive statements
indicating book-entry ownership of Prospect common stock, or, if
requested, stock certificates representing the number of full
shares of Prospect common stock to which you are entitled under
the merger agreement. You also will receive a cash payment for
any fractional shares of Patriot common stock that would have
been otherwise issuable to you as a result of the merger.
Holders of Patriot common stock should not submit their Patriot
stock certificates for exchange until they receive the
transmittal instructions and a form of letter of transmittal
from the exchange agent.
If a certificate for Patriot common stock has been lost, stolen
or destroyed, the exchange agent will issue the consideration
properly payable under the merger agreement upon receipt of
appropriate evidence as to that loss, theft or destruction and
appropriate and customary indemnification.
After completion of the merger, there will be no further
transfers on the stock transfer books of Patriot, except as
required to settle trades executed prior to completion of the
merger.
Withholding
The exchange agent will be entitled to deduct and withhold from
the cash in lieu of fractional shares payable to any Patriot
shareholder the amounts it is required to deduct and withhold
under any federal, state, local or foreign tax law. If the
exchange agent withholds any amounts, these amounts will be
treated for all purposes of the merger as having been paid to
the shareholders from whom they were withheld.
Dividends
and Distributions
Until Patriot common stock certificates are surrendered for
exchange, any dividends or other distributions declared after
the completion of the merger with respect to Prospect common
stock into which shares of Patriot common stock may have been
converted will accrue, without interest, but will not be paid.
Prospect will pay to former Patriot shareholders any unpaid
dividends or other distributions, without interest, only after
they have duly surrendered their Patriot stock certificates. In
addition, the merger agreement provides that any such unpaid
dividends or other distributions will be payable in the form of
shares Prospects common stock in accordance with
Prospects dividend reinvestment plan.
In order to maintain Patriots qualification as a RIC for
U.S. federal income tax purposes, Patriot generally must
distribute to its shareholders annually at least 90% of its
investment company taxable income, which is
generally its net ordinary income plus the excess, if any, of
realized net short-term capital gains over realized net
long-term capital losses. As a result, Patriot will be required
to declare, to the extent necessary, a dividend prior to the
consummation of the merger in an amount equal to its
undistributed investment company taxable income and net capital
gain (if any) in order to preserve this favorable tax treatment
and to eliminate its liability for U.S. federal income tax.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations of Patriot
Recent Developments and Note 11. Income
Taxes and Note 14. Subsequent Events to
Patriots unaudited financial statements for a detailed
discussion regarding Patriots undistributed net ordinary
income and capital gains.
The terms of the merger agreement anticipate that any such
dividends may be paid out in accordance with a recent revenue
procedure issued by the IRS, pursuant to which up to 90% of the
total dividend may be paid in shares of common stock and the
remainder will be paid in cash. Any such dividend, whether
received
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in cash or common stock (including common stock of Prospect)
will be taxable to shareholders as a ordinary income (or capital
gains, if such dividends are properly designated as capital gain
dividends). See Risk Factors Risks Related to
Prospect Prospect may in the future choose to
pay dividends in its own stock, in which case you may be
required to pay tax in excess of the cash you receive and
Risk Factors Risks Related to
Patriot Patriot may in the future choose to pay
dividends in its own stock, in which case you may be required to
pay tax in excess of the cash you receive.
Representations
and Warranties
The merger agreement contains customary representations and
warranties of Patriot and Prospect relating to their respective
businesses. With the exception of certain representations that
must be true and correct in all or virtually all respects, or in
all material respects, no representation or warranty will be
deemed untrue, inaccurate or incorrect as a consequence of the
existence or absence of any fact, circumstance or event unless
that fact, circumstance or event, individually or when taken
together with all other facts, circumstances or events, has had
or would reasonably be expected to have a material adverse
effect on the financial condition, results of operations or
business of the company making the representation. The
representations and warranties in the merger agreement do not
survive the completion of the merger.
In determining whether a material adverse effect has occurred or
would reasonably be expected to occur since December 31,
2008, the parties will disregard any effects resulting from
(1) changes in generally accepted accounting principles or
regulatory accounting requirements applicable generally to
companies in the industries in which the relevant party and its
subsidiaries operate (except to the extent that the effects of
such a change are disproportionately adverse to such party as
compared to other companies in such industries),
(2) changes after the date of the merger agreement in laws,
rules or regulations of general applicability to companies in
the industries in which the relevant party and its subsidiaries
operate (except to the extent that the effects of such a change
are disproportionately adverse to such party as compared to
other companies in such industries), (3) actions or
omissions taken with the prior written consent of the other
party, (4) changes in global or national political
conditions or in general, economic or market conditions
generally affecting the industries in which the relevant party
or its subsidiaries operate (except to the extent that the
effects of such a change are disproportionately adverse to such
party as compared to other companies in such industries),
(5) conditions arising out of acts of terrorism, war,
weather conditions or other force majeure events, (6) the
public disclosure of the merger agreement or the transactions
contemplated by the merger agreement, and, in the case of
Patriot only, (7) any legal proceedings made or brought by
any current or former shareholders of such party arising out of
the merger agreement, (8) any changes in the liquidity
position of Patriot that do not create new material liabilities
for Patriot (excluding liabilities assumed or funded by
Prospect), or (9) any events of default under the Amended
Securitization Agreement in addition to already existing events
of default.
The merger agreement contains customary representations and
warranties by each of Patriot and Prospect relating to, among
other things:
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due organization, valid existence and good standing;
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authorization to enter into the merger agreement and required
shareholder approval by Patriot shareholders to complete the
merger;
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compliance with SEC reporting requirements;
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required governmental consents;
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financial statements, internal controls and disclosure controls
and procedures;
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no breach of organizational documents or material agreements as
a result of the merger agreement or the completion of the merger;
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brokers fees payable in connection with the merger;
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accuracy of information contained in the documents to be filed
with the SEC;
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capitalization;
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absence of defaults under certain contracts;
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taxes and tax returns;
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tax treatment of the merger;
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compliance with laws;
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no changes since December 31, 2008 that would have a
material adverse effect;
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no material legal proceedings;
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environmental matters;
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insurance; and
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no material undisclosed liabilities.
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The merger agreement also contains additional customary
representations and warranties made by Patriot relating to,
among other things:
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employee matters, including employee benefit plans;
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investment securities;
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owned and leased properties;
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ownership of intellectual property rights reasonably necessary
to conduct its business;
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inapplicability of state takeover laws; and
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interested party transactions.
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In addition, the merger agreement contains a representation and
warranty made by Prospect that it has and will have immediately
available funds in cash or cash equivalents or available under
lines of credit to pay off (i) all principal and interest
due under the Amended Securitization Facility, which amounted to
$112.7 million as of September 30, 2009, and
(ii) up to $1.35 million in other costs, fees and
expenses payable to the lenders under the terms of the Amended
Securitization Facility, and includes certain representations
and warranties concerning Prospects investment adviser and
administrator.
The representations and warranties described above and included
in the merger agreement were made by each of Patriot and
Prospect to the other. These representations and warranties were
made as of specific dates, may be subject to important
qualifications and limitations agreed to by Patriot and Prospect
in connection with negotiating the terms of the merger
agreement, and may have been included in the merger agreement
for the purpose of allocating risk between Patriot and Prospect
rather than to establish matters as facts. The merger agreement
is described in, and included as an appendix to, this document
only to provide you with information regarding its terms and
conditions, and not to provide any other factual information
regarding Patriot and Prospect or their respective businesses.
Accordingly, the representations and warranties and other
provisions of the merger agreement should not be read alone, but
instead should be read only in conjunction with the information
provided elsewhere in this document and in the documents
incorporated by reference into this document. See Where
You Can Find More Information.
98
Conduct
of Business Pending Completion of the Merger
Under the merger agreement, Patriot has agreed that, during the
period before the completion of the merger, except as expressly
contemplated by the merger agreement, it will, and will cause
its subsidiaries to:
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conduct its operations only in the ordinary course of business
consistent with past practice; and
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seek to preserve intact its current business organizations and
ongoing businesses.
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Each of Patriot and Prospect have agreed to take no action that
would reasonably be expected to adversely affect or materially
delay its ability to obtain any necessary regulatory and
governmental approvals, perform its covenants or complete the
merger.
In addition, pending the merger, Patriot has agreed that,
without Prospects written consent or except as otherwise
expressly contemplated by the merger agreement, it will not, and
will cause its subsidiaries not to, among other things:
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amend its organizational documents;
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except as required under any contract or employee benefit plan
(other than employment agreements with its executive officers),
increase in any manner the compensation or benefits of any
current or former officers, directors or employees; pay any
amounts to any current or former officers, directors or
employees not required by any current plan or agreement (other
than base salary in the ordinary course of business); adopt any
stock option plan or other stock-based compensation plan,
compensation, severances, pension, retirement, profit-sharing,
welfare benefit, or other employee benefit plan or agreement
with or for the benefit of any employee; accelerate the vesting
of any stock-based compensation or other long-term compensation;
or hire any employee or terminate the employment of any employee;
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adjust, split, combine or reclassify any of its shares; make,
declare or pay any dividend other than the distribution of the
investment company taxable income and net capital gains for the
taxable year ending on the date of the merger (which
distribution is described elsewhere in this document), or make
any other distribution on, or directly or indirectly redeem,
purchase, or otherwise acquire, any shares of its capital stock
or any securities convertible into any shares of its capital
stock; grant any stock options or any restricted shares, or
grant any right to acquire any shares of capital stock; or issue
any additional shares of capital stock or other securities,
except as pursuant to options granted under its stock option
plan outstanding as of the merger agreement;
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transfer ownership or grant any intellectual property rights to
any person;
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take any action, or omit to take any action, which action or
omission would result in the merger not qualifying as a
reorganization under Section 368(a) of the Code;
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sell or otherwise dispose of any asset or property, or cancel,
release or assign any material amount of indebtedness, other
than pursuant to existing contracts;
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amend any material contract, instrument or other agreement;
create, renew or amend any agreement or contract or, except as
required by law, other binding obligation containing any
material restriction on the ability to conduct business as
currently being conducted or on the ability to engage in any
type of activity or business;
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make any material investment or loan (other than funding
existing unfunded commitments to its portfolio companies);
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incur any additional indebtedness, make or change any tax
election, or settle or compromise any tax liability;
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commence or settle any material claim, action or proceeding;
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file or amend any tax return other than in the ordinary course
of business;
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take any action or willfully fail to take any action that is
intended or may reasonably be expected to result in a failure to
meet the conditions required to consummate the merger; or
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implement or adopt any change in tax accounting or financial
accounting principles, other than as may be required by
applicable law or regulatory guidelines.
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Additional
Covenants Pending Completion of the Merger
Each of Patriot and Prospect has agreed that it will, among
other things:
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cooperate and use reasonable efforts to promptly prepare and
file all necessary documentation, to effect all applications,
notices and filing, to obtain as promptly as practical all
consents of all third parties that are necessary or advisable to
consummate the merger, and to comply with the terms and
conditions of all consents of all third parties;
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take all necessary actions in case at any time after the
completion of the merger any further action is necessary to
carry out the purposes of the merger agreement;
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upon request, furnish or cause to be furnished all information
as may be reasonably necessary or advisable in connection with
the any SEC filing or any other statement, filing, notice or
application made to any governmental entity in connection with
the merger;
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promptly advise the other party upon receiving any communication
from any governmental entity the consent or approval of which is
required for consummation of the merger that causes the
recipient party to believe that there is a reasonably likelihood
that any requisite regulatory approvals will not be obtained or
will be materially delayed;
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afford to the other party reasonably access, during normal
business hours prior to the merger, to all of its properties,
books, commitments and records, and, during such party, make
available to the other parties copies of all documents filed or
received during such period pursuant to federal securities laws
and all other information concerning its business, properties
and personnel as the other party may reasonably request;
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consult with each other and give each other reasonable advance
notice and opportunity to review and comment upon any press
release or other public statements with respect to the
transactions contemplated by the merger agreement;
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cooperate in the prompt preparation and the filing with the SEC
of the registration statement on
Form N-14
of which this document forms a part;
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promptly advise the other party of any change or event
reasonably likely to result in a breach of any representations,
warranties or covenants contained in the merger agreement or
that would result in the conditions to closing not being
satisfied;
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take all such steps as may be necessary or appropriate to cause
any disposition of shares of Patriot common stock or conversion
of any derivative securities in respect of such shares of
Patriot common stock in order to be exempt from the
short-swing profits prohibition; and
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coordinate regarding the declaration of any dividends in respect
of Prospect common stock and Patriot common stock and the record
dates and payment dates of each, including the dividend relating
to the distribution of Patriots undistributed investment
company taxable income and net capital gain for the year ending
on the closing date of the merger (which distribution is
described elsewhere in this document).
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Patriot has agreed further that it will, among other things:
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include in this document the recommendation of its board of
directors that Patriot shareholders approve the merger agreement
and the transactions contemplated by the merger agreement,
provided that the recommendation of Patriots board of
directors may be withdrawn if the board of directors has
accepted a proposal for a superior competing transaction (as
discussed below);
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terminate promptly any feature of its dividend reinvestment plan
providing for the issuance of shares by Patriot;
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give Prospect the opportunity to participate in the defense or
settlement of any shareholder litigation against Patriot
and/or its
directors relating to the merger; and
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not settle or offer to settle any litigation commenced on or
after the date of the merger agreement against Patriot or any of
its directors or executive officers by any of its shareholders
relating to the merger or the merger agreement, without the
prior written consent of Prospect.
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Prospect has agreed further that it will, among other things:
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take all actions necessary and appropriate to complete the
merger, including, causing the Prospect shares to be issued in
the merger to be approved for listing on the NASDAQ Global
Select Market;
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for a period of 12 months following the closing date of the
merger, provide employee benefit and other plans and
compensation arrangements to Patriot employees employed by
Patriot on the closing date that are comparable to the employee
benefit and compensation opportunities that are generally made
available to similarly situated employees of Patriot Capital
Management or Prospect Administration;
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to the extent that a Patriot employee becomes eligible to
participate in an employee benefit maintained by Prospect or any
of its subsidiaries, Prospect Capital Management or Prospect
Administration, cause such employee benefit plan to
(i) recognize the service of that employee with Patriot for
purposes of eligibility, participation, vesting and, except
under defined benefit pension plans, benefit accrual under such
employee benefit plan, to the same extent such service was
recognized immediately prior to the merger under a comparable
Patriot benefit plan in which the employee was eligible to
participate immediately prior to the merger, except to the
extent it would result in duplication of benefits or for hours
worked in 2009 for purposes of participation during 2009 in any
profit sharing plan of Prospect Capital Management or Prospect
Administration and (ii) with respect to any health, dental,
vision plan or other welfare plan of Prospect or any of its
subsidiaries, Prospect Capital Management, or Prospect
Administration in which any employee is eligible to participate
for the plan year in which such employee is first eligible to
participate, use its reasonable best efforts to cause its
third-party insurance providers to (x) waive any
pre-existing condition limitations or eligibility waiting
periods under such plan to the extent such limitation would have
been waived or satisfied under the Patriot benefit plan, and
(y) recognize any health, dental or vision expenses
incurred by such employee in the year that includes the closing
date (or, if later, the year in which such covered employee is
first eligible to participate) for purposes of any applicable
deductible and annual
out-of-pocket
expense requirements under any such health, dental or vision
plan; and
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honor each employment agreement with an executive officer of
Patriot specified in the merger agreement.
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Conditions
to the Merger
Conditions
to Each Partys Obligations to Effect the
Merger
The obligations of Patriot and Prospect to complete the proposed
merger are subject to the satisfaction or, where permissible,
waiver of the following conditions:
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the merger agreement is approved by the required vote of
Patriots shareholders;
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no legal prohibition on completion of the merger is in effect;
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the registration statement, including this document, is declared
effective by the SEC;
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in the event a filing is required under the
Hart-Scott-Rodino
Act in connection with the merger, any waiting period applicable
to the merger under the
Hart-Scott-Rodino
Act shall have expired or been terminated (Patriot and Prospect
have concluded that no filing under the
Hart-Scott-Rodino
Act is required); and
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there shall be no pending suit, action or proceeding by any
governmental entity that has a reasonable likelihood of success
challenging the merger, seeking to prohibit or limit ownership
by Patriot, Prospect or their subsidiaries of a material portion
of their respective business or assets, or imposing other
similar restrictions.
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Conditions
to the Obligations of Prospect to Effect the
Merger
The obligations of Prospect to complete the merger are subject
to the satisfaction or, where permissible, waiver of the
following conditions:
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the representations and warranties of Patriot contained in the
merger agreement shall have been accurate as of the date of the
merger agreement and be accurate as of the effective date, and
Prospect shall have received a certificate of Patriot signed on
behalf of Patriot by the chief executive officer or chief
financial officer of Patriot to such effect. Subject to certain
exceptions, this condition will be deemed satisfied unless any
or all breaches of Patriots representations and warranties
in the merger agreement (without giving effect to any
materiality qualification or limitation) are reasonably expected
to have a material adverse effect on Patriot;
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Patriot shall have performed in all material respects all
obligations required to be performed by it under the merger
agreement at or prior to the effective time of the merger, and
Prospect shall have received a certificate of Patriot signed on
behalf of Patriot by the chief executive officer or chief
financial officer of Patriot to such effect;
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Patriot shall have received the written opinion, dated the
closing date of the merger, of Sutherland Asbill &
Brennan LLP substantially to the effect that, on the basis of
the law in effect at the closing date of the merger, and facts,
representations and assumptions set forth in such opinion that
are consistent with the state of facts existing at the closing
date of the merger, that the merger will constitute a
reorganization within the meaning of Section 368(a) of the
Code;
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All regulatory approvals necessary to consummate the merger
shall have been obtained and remain in full force and effect;
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Patriot shall have delivered to Prospect all payoff letters from
its lenders under the Amended Securitization Facility; and
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Patriot shall have compiled with the provisions of the merger
agreement relating to the final dividend of Patriot.
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Conditions
to the Obligations of Patriot to Effect the Merger
The obligations of Patriot to complete the merger are subject to
the satisfaction or, where permissible, waiver of the following
conditions:
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the representations and warranties of Prospect contained in the
merger agreement shall have been accurate as of the date of the
merger agreement and shall be accurate as of the effective time,
and Patriot shall have received a certificate of Prospect signed
on behalf of Prospect by the chief executive officer or chief
financial officer of Prospect to such effect. Subject to certain
exceptions, this condition shall be deemed satisfied unless any
or all breaches of Prospects representations and
warranties in the merger agreement (without giving effect to any
materiality qualification or limitation) are reasonably expected
to have a material adverse effect on Prospect;
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Prospect shall have performed in all material respects all
obligations required to be performed by it under the merger
agreement at or prior to the effective time of the merger, and
Patriot shall have received a certificate of Prospect signed on
behalf of Prospect by the chief executive officer or chief
financial officer of Prospect to such effect;
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Prospect shall have received the written opinion, dated the
closing date of the merger, of Sutherland Asbill &
Brennan LLP substantially to the effect that, on the basis of
the law in effect at the closing
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date of the merger, and facts, representations and assumptions
set forth in such opinion that are consistent with the state of
facts existing at the closing date of the merger, that the
merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
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All regulatory approvals necessary to consummate the merger
shall have been obtained and remain in full force and
effect; and
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Prospect shall have taken such steps as reasonably requested by
the lenders under the Amended Securitization Facility in order
to repay all amounts due under the Amended Securitization
Facility.
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No
Solicitation by Patriot
Patriot has agreed that, except as described below, none of
Patriot, its subsidiaries, or any officer, director, employee,
agent or representative (including any investment banker,
financial advisor, attorney, accountant or other representative)
will initiate, solicit, encourage or facilitate (including by
way of furnishing information) or take any other action designed
to facilitate any inquiries or proposals regarding any
alternative proposal or alternative transaction; participate in
any discussions or negotiations regarding an alternative
proposal or alternative transaction; or enter into any agreement
regarding any alternative proposal or alternative transaction.
Patriot has further agreed to not terminate, waive, modify, or
amend any provision of, or grant permission or request under,
any standstill or confidentiality agreement to which it or its
subsidiaries is a party, and shall use, or cause to be used,
reasonable efforts to enforce such agreements. Patriot has
agreed to immediately cease and cause to be terminated any
existing discussions or negotiations with any parties previously
conducted with respect to any alternative proposal or
alternative transaction. Patriot has agreed to notify Prospect
in writing promptly (in no event later than 48 hours) after
receipt of any alternative proposals or modifications or
amendments to any alternative proposals, or any request for
nonpublic information relating to Patriot or its subsidiaries or
access to properties, books and records of Patriot and its
subsidiaries, and to keep Prospect informed of any material
changes in the status or terms of any alternative proposal or
request.
For purposes of the merger agreement, an alternative
proposal means any written proposal for a merger, share
exchange, consolidation, sale of assets, sale of shares of
capital stock (including by way of tender offer), or similar
transactions involving Patriot or any of its subsidiaries or the
shareholders of Patriot or any of its subsidiaries received from
a third party (or group of persons) not affiliated with Patriot
or Prospect that, if consummated, would constitute an
alternative transaction. An alternative transaction
means:
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a transaction pursuant to which a third party, directly or
indirectly, acquires or would acquire more than 75% of the
outstanding shares of Patriot or outstanding voting power or of
any preferred stock that would be entitled to a class or series
vote with respect to a merger or other reorganization involving
Patriot, whether from Patriot or pursuant to a tender offer or
exchange offer or otherwise;
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a merger, share exchange, consolidation or other business
combination involving Patriot;
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any transaction pursuant to which a third party acquires or
would acquire control of assets (including for this purpose the
outstanding equity securities of subsidiaries of Patriot and
securities of the entity surviving any merger or business
combination including any of Patriots subsidiaries) of
Patriot or any of its subsidiaries representing more than 75% of
the fair market value of all the assets, net revenues or net
income of Patriot and its subsidiaries, taken as a whole,
immediately prior to such transaction; or
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any other consolidation, business combination, recapitalization
or similar transaction of similar scope involving Patriot or any
of its subsidiaries other than the transactions contemplated by
the merger agreement.
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The Patriot board of directors shall be permitted, prior to the
special meeting of the Patriot shareholders relating to the
merger with Prospect, to consider and participate in discussions
and negotiations with respect to a bona fide alternative
proposal received from a third party, if and so long as:
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the alternative proposal is a superior proposal (other than the
requirement that the alternative proposal is binding on the
third party);
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the alternative proposal was not solicited by Patriot, its
subsidiaries or any officer, director, employee, agent or
representative (including any investment banker, financial
advisor, attorney, accountant or representative) of Patriot or
its subsidiaries in violation of the merger agreement;
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the alternative proposal is from a third party that is qualified
to make such proposal;
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the Patriot board of directors reasonably determines in good
faith (after consultation with outside legal counsel) that
failure to do so would cause it to violate its fiduciary duties
under applicable law;
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prior to Patriots board of directors engaging in any such
discussions or negotiations, the third party first enters into a
confidentiality agreement with Patriot on terms substantially
similar to, and no less favorable to Patriot than those
contained in the confidentiality agreement with
Prospect; and
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the third party deposits with Patriot a non-refundable cash
deposit in an amount equal to the termination fee.
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In addition Patriot must provide Prospect with 72 hours
advance notice of entering into discussions or negotiations
concerning an alternative proposal, and must negotiate with
Prospect in good faith to make adjustments to the merger
agreement such that the alternative proposal would no longer
constitute a superior proposal.
For purposes of the merger agreement, a superior
proposal means any alternative proposal made by a third
party that:
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is legally binding on the third party but not on Patriot;
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is fully financed and contains no financing contingency or
obligation to obtain consent from a lender or equity source;
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contains no condition to closing materially more burdensome on
Patriot, or in Patriot boards reasonable and good faith
judgment (after consultation with its financial advisor and
outside legal counsel) making it materially less likely that the
conditions to the closing of such transaction would be satisfied
than, the conditions to closing set forth in the merger
agreement (with a condition for a vote of the third partys
shareholders on any matter being materially more burdensome and
making it materially less likely that all conditions to such
alternative proposal will be satisfied); and
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which is otherwise on terms which the Company Board determines
in its reasonable good faith judgment (after consultation with
its financial advisor and outside legal counsel), taking into
account, among other things, all legal, financial, regulatory
and other aspects of the proposal and the person making the
proposal, that the proposal (i) if consummated would result
in a transaction that is more favorable, from a financial point
of view, to Patriots shareholders (after taking into
account any termination fee, expense reimbursement, or make
whole payment) than the merger and (ii) is reasonably
certain of being completed.
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Except as described below, Patriots board of directors
will not withdraw, modify or qualify, or propose publicly to
withdraw, modify or qualify, its recommendation of the merger
agreement
and/or the
merger to Patriots shareholders or take any public action
or make any public statement in connection with the special
meeting inconsistent with such recommendation, unless:
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it receives, prior to the date on which the Patriot shareholders
have approved the merger, an alternative proposal not solicited
in any manner in violation of the merger agreement;
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Patriot has not breached in any material respect any of the
provisions in the merger agreement relating to shareholder
approval or non-solicitation;
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it reasonably determines in good faith (after consultation with
outside legal counsel and prior to the date on which the
shareholders have approved the merger), that in light of a
superior proposal the failure to effect such change of
recommendation would cause it to violate its fiduciary duties to
the shareholders under applicable law;
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Prospect has received written notice from Patriot at least ten
business days prior to such change of notification identifying
the identify of the person making the alternative proposal,
stating that Patriot has received a alternative proposal which
the board has determined is a superior proposal and that Patriot
intends to effect a change of recommendation, and including a
summary of material terms of the alternative proposal; and
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during the notice period, Patriot and its advisors have
negotiated in good faith with Prospect to make adjustments in
the terms and conditions of the merger agreement such that the
alternative proposal would no longer constitute a superior
proposal.
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Termination
of the Merger Agreement
Right
to Terminate
The merger agreement may be terminated at any time before
completion of the merger, whether before or after approval of
the merger agreement and the merger by Patriot shareholders, as
follows:
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by mutual written consent of Patriot and Prospect;
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by either Patriot or Prospect if:
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any governmental entity that must grant approval of the merger
has denied such approval and such denial has become final and
non-appealable, or a governmental entity of competent
jurisdiction issues a final and nonappealable order, injunction
or decree permanently enjoining or otherwise prohibiting or
making illegal the consummation of the transactions contemplated
by the merger agreement;
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the merger is not completed prior to December 15, 2009,
except that neither Patriot nor Prospect may terminate the
merger agreement if its willful and material breach is the
reason that the merger has not been completed;
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the required approval of the merger agreement by Patriot
shareholders is not obtained at the special meeting; or
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upon a violation or breach by either party of any agreement,
covenant, representation or warranty, so that the conditions to
the completion of the merger would be incapable of being
satisfied by the closing date, which is not cured within 30 days
of notice being provided to the breaching party.
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by Prospect, prior to receipt of Patriot shareholder approval,
within 10 days after the Patriot board of directors effects a
change of recommendation; or, in the case of any alternative
proposal structured as a tender or exchange offer for Patriot
common stock commenced by a person unaffiliated with the buyer,
if the Patriot board of directors fails to issue within
10 days after the public announcement of the alternative
proposal a public statement reaffirming the board recommendation
and recommending that Patriots shareholders reject the
alternative proposal; or if Patriot breaches any of the no
solicitation provisions of the merger agreement.
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by Patriot, if Patriot receives a superior proposal, the board
authorizes Patriot to enter into an agreement to consummate the
transaction contemplated by such superior proposal, and
concurrently with such termination, Patriot pays the termination
fee and enters into a definitive agreement to consummate the
transaction contemplated by the superior proposal; or if the
board effects a recommendation change in compliance with the no
solicitation provisions of the merger agreement.
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Because the parties expect that all conditions to the merger
other than shareholder approval are likely to be satisfied prior
to the special meeting, the parties anticipate that in the event
either party is entitled to terminate the agreement pursuant to
the provisions described above, such party would decide whether
to exercise or waive that termination right as soon as possible
following the special meeting, or, if later, as soon as possible
following the satisfaction of all of the other conditions to
closing contained in the merger agreement.
105
Effect
of Termination
If the merger agreement is terminated it will become void and
have no effect, and there will be no liability on the part of
Prospect, Patriot or their respective affiliates, directors,
officers or shareholders, except that (1) Patriot and
Prospect will remain liable for any knowing breach of the merger
agreement and (2) designated provisions of the merger
agreement will survive the termination, including, but not
limited to, the confidential treatment of information and
publicity restrictions.
Expenses;
Termination Fees
All fees and expenses incurred in connection with the merger,
including the preparation of this document and the solicitation
of proxies will, to the extent such funds are available to
Patriot, be paid by Patriot immediately prior to the
consummation of the merger. However, in the event the merger is
not consummated, all fees and expenses incurred in connection
with the merger will be paid by the party incurring such fees or
expenses, other than that (i) the costs and expenses of printing
and mailing this document will be paid by Patriot, (ii) all
filing and other fees paid to the SEC in connection with the
merger will be paid by Prospect and (iii) certain fees and
expenses of up to $250,00 of Prospect will be paid by Patriot in
the circumstances described below.
Assuming Prospect is not in material breach of any covenants,
representation or warranties or any agreements under the merger
agreement at the time of termination:
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Patriot will pay to Prospect a termination fee in the amount of
$3,200,000, if the merger agreement is terminated:
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by Patriot, in conjunction with the authorization of
Patriots board of directors to enter into an agreement to
consummate a transaction contemplated by a superior proposal or
in conjunction with a recommendation change by the board; or
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by Prospect, in conjunction with a change of recommendation by
the Patriot board of directors at any time prior to the approval
by Patriots shareholders of the merger; or, in conjunction
with any alternative proposal structured as a tender or exchange
offer for Patriot common stock commenced by a person
unaffiliated with Prospect, if the Patriot board of directors
fails to issue within 10 days after the public announcement
of the alternative proposal a public statement reaffirming the
board recommendation and recommending that the Patriot
shareholders reject the alternative proposal; or in conjunction
with any breach by Patriot of any of the no solicitation
provisions of the merger agreement.
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Patriot will reimburse Prospect up to $250,000 of expenses
incurred in connection with the negotiation of the merger
agreement if the merger agreement is terminated by Prospect:
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in the event the required approval of the merger agreement by
Patriot shareholders is not obtained at the special
meeting; or
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upon a violation or breach by Patriot of any agreement,
covenant, representation or warranty, so that the conditions to
the completion of the merger would be incapable of being
satisfied by the closing date.
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In addition, if the merger agreement is terminated in the manner
described immediately above, and an expense reimbursement, but
not a termination fee, is paid to Prospect, and within one year
of the date of such termination Patriot enters into an agreement
to consummate an alternative proposal, Patriot will pay Prospect
the difference between the termination fee and any expense
reimbursement made in connection with the termination.
Waiver
and Amendment of the Merger Agreement
The merger agreement may be amended in writing by action of the
board of directors of Prospect and the board of directors of
Patriot any time before or after approval of the merger by
Patriot shareholders. However,
106
after shareholder approval is obtained, no amendment may be made
which by law requires the further approval of shareholders
without obtaining such further approval. If the merger agreement
is amended after the mailing of this document and your vote is
required to such amendment, Patriot will resolicit your vote.
At any time before the completion of the merger, the parties
may, in writing:
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extend the time for the performance of any of the obligations or
other acts of the other parties;
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waive any inaccuracies in the representations and warranties of
the other parties contained in the merger agreement or in any
document delivered under the merger agreement; or
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waive compliance with any of the agreements or conditions of the
other parties contained in the merger agreement.
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Indemnification;
Directors and Officers Insurance
From and after the effective time of the merger, Prospect will
indemnify, defend and hold harmless the officers and directors
of Patriot against all losses, claims, damages, costs, expenses
(including attorneys fees and expenses), liabilities or
judgments or amounts that are paid in settlement of, or
otherwise in connection with any threatened or actual claim,
action, suit, proceeding or investigation based on or arising
out of the fact that such person is or was a director or officer
of Patriot or any subsidiary of Patriot at or prior to the
effective time of the merger, whether asserted or claimed prior
to, or at or after, the effective time of the merger, including
all such indemnified liabilities based on, or arising out of, or
pertaining to the merger agreement or the transactions
contemplated by the merger agreement, in each case to the full
extent permitted under applicable law.
The merger agreement requires Prospect to maintain for a period
of six years after completion of the merger Patriots
current directors and officers liability insurance
policy, or policies of at least the same coverage and amount and
containing terms and conditions that are not less advantageous
than the current policy, with respect to acts or omissions
occurring prior to completion of the merger, except that
Prospect is not required to incur an annual premium expense
greater than 300% of Patriots current annual
directors and officers liability insurance premium.
If Prospect is unable to maintain such a policy because the
annual premium expense is greater than 300% of Patriots
current annual directors and officers liability
insurance premium, Prospect is obligated to obtain as much
comparable insurance as is available for the amount that is 300%
of Patriots current premium.
107
ACCOUNTING
TREATMENT
The merger will be accounted for as an acquisition of Patriot by
Prospect in accordance with SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)). In accordance with the
acquisition method of accounting, the fair value of the
consideration paid is allocated to the assets acquired and
liabilities assumed based on their fair values at the date of
acquisition. As described in more detail in SFAS 141(R),
goodwill, if any, is recognized as of the acquisition date,
measured as a residual, which results in measuring goodwill as
the excess of the consideration transferred over the fair value
of the identifiable net assets acquired. If the total
acquisition date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration
transferred, the excess is recognized in earnings as a gain.
In connection with the merger of Patriot and Prospect, the
estimated fair value of the net assets acquired is anticipated
to equal the purchase price and, based on Prospects
preliminary purchase price allocation of $198.1 million, no
gain will be recorded by Prospect in the period the merger is
completed.
108
U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following general discussion is a summary of certain United
States federal income tax consequences of the merger to
U.S. holders (as defined below) of Patriot common stock
that exchange their shares of Patriot common stock for shares of
Prospect common stock in the merger. This discussion does not
address any tax consequences arising under the laws of any
state, local or foreign jurisdiction, or under any United States
federal laws other than those pertaining to the income tax. This
discussion is based upon the Internal Revenue Code of 1986, as
amended, or the Code, the regulations promulgated
under the Code and court and administrative rulings and
decisions, all as in effect on the date of this document. These
laws may change, possibly retroactively, and any change could
affect the accuracy of the statements and conclusions set forth
in this discussion. No ruling has been or will be obtained from
the IRS regarding any matter relating to the merger. No
assurance can be given that the IRS would not assert, or that a
court would not sustain, a position contrary to any of the tax
aspects described below.
This discussion addresses only those Patriot shareholders that
hold their shares of Patriot common stock as a capital asset
(generally assets held for investment) within the meaning of
Section 1221 of the Code. This summary discussion of United
States federal income tax consequences is for general
information only. Further, this discussion does not address all
aspects of United States federal income taxation that may be
relevant to you in light of your particular circumstances or
that may be applicable to you if you are subject to special
treatment under the United States federal income tax laws,
including if you are:
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a financial institution;
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a tax-exempt organization;
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an S corporation or other pass-through entity (or an
investor in an S corporation or other pass-through entity);
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an insurance company;
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a mutual fund;
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a dealer or broker in stocks and securities, or currencies;
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a trader in securities that elects
mark-to-market
treatment;
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a holder of Patriot common stock subject to the alternative
minimum tax provisions of the Code;
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a holder of Patriot common stock that received Patriot common
stock through the exercise of an employee stock option, through
a tax qualified retirement plan or otherwise as compensation;
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a person that is not a U.S. holder (as defined below);
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a person that has a functional currency other than the
U.S. dollar;
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a holder of Patriot common stock that holds Patriot common stock
as part of a hedge, straddle, constructive sale, conversion or
other integrated transaction; or
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a United States expatriate.
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Determining the actual tax consequences of the merger to you may
be complex. They will depend on your specific situation and on
factors that are not within our control. You should consult with
your own tax advisor as to the tax consequences of the merger in
your particular circumstances, including the applicability and
effect of the alternative minimum tax and any state, local,
foreign or other tax laws and of changes in tax laws.
For purposes of this discussion, the term
U.S. holder means a beneficial owner of Patriot
common stock that is for United States federal income tax
purposes (i) an individual citizen or resident of the
United States, (ii) a corporation organized in or under the
laws of the United States or any state thereof or the District
of Columbia or (iii) otherwise subject to United States
federal income taxation on a net income basis in respect of the
Patriot common stock.
The United States federal income tax consequences to a partner
in an entity or arrangement treated as a partnership, for United
States federal income tax purposes, that holds Patriot common
stock generally will
109
depend on the status of the partner and the activities of the
partnership. Partners in a partnership holding Patriot common
stock should consult their own tax advisors.
Tax
Consequences if the Merger Qualifies as a
Reorganization
Tax
Consequences of the Merger Generally
The parties currently intend for the merger to qualify as a
reorganization for United States federal income tax purposes.
Unless waived, it is a condition to Prospects obligation
to complete the merger that Prospect receive an opinion from
Sutherland Asbill & Brennan LLP, dated the closing date of
the merger, substantially to the effect that the merger will
qualify as a reorganization within the meaning of
Section 368(a) of the Code. Similarly, unless waived, it is
a condition to Patriots obligation to complete the merger
that Patriot receive an opinion from Sutherland
Asbill & Brennan LLP, dated the closing date of the
merger, substantially to the effect that the merger will qualify
as a reorganization within the meaning of
Section 368(a) of the Code. We refer to these conditions
together as the tax opinion closing conditions. The
opinion of Sutherland Asbill & Brennan LLP will be
based on U.S. federal income tax law in effect on the
closing date of the merger, and on representation letters
provided by Prospect and Patriot and on customary factual
assumptions. None of the opinions described above will be
binding on the IRS or any court.
If the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Code, the U.S. federal income
tax consequences of the merger can be summarized as follows: No
gain or loss will be recognized by either Prospect or by Patriot
by reason of the merger. Upon exchanging shares of Patriot
common stock for shares of Prospect common stock, you generally
will not recognize gain or loss, except with respect to cash
received instead of fractional shares of Prospect common stock
(as discussed below). The aggregate tax basis in the shares of
Prospect common stock that you receive in the merger, including
any fractional share interests deemed received and redeemed as
described below, will equal your aggregate adjusted tax basis in
the Patriot common stock you surrender. Your holding period for
the shares of Prospect common stock that you receive in the
merger (including a fractional share interest deemed received
and sold as described below) will include your holding period
for the shares of Patriot common stock that you surrender in the
exchange.
Cash
Instead of a Fractional Share
If you receive cash instead of a fractional share of Prospect
common stock, you will be treated as having received the
fractional share of Prospect common stock pursuant to the merger
and then as having sold that fractional share of Prospect common
stock for cash. As a result, you generally will recognize gain
or loss equal to the difference between the amount of cash
received and the basis in your fractional share of Prospect
common stock as set forth above. This gain or loss generally
will be capital gain or loss, and will be long-term capital gain
or loss if, as of the effective date of the merger, the holding
period for the shares (including the holding period of Patriot
common stock surrendered therefor) is greater than one year. The
deductibility of capital losses is subject to limitations.
Backup
Withholding
If you are a non-corporate holder of Patriot common stock you
may be subject to information reporting and backup withholding
(currently at a rate of 28%) on any cash payments you receive.
You generally will not be subject to backup withholding,
however, if you:
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furnish a correct taxpayer identification number, certify that
you are not subject to backup withholding on the substitute
Form W-9
or successor form included in the election form/letter of
transmittal you will receive and otherwise comply with all the
applicable requirements of the backup withholding rules; or
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provide proof that you are otherwise exempt from backup
withholding.
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Any amounts withheld under the backup withholding rules will
generally be allowed as a refund or credit against your United
States federal income tax liability, provided you timely furnish
the required information to the Internal Revenue Service.
110
MARKET
PRICE AND DIVIDEND INFORMATION
Price
Range of Common Stock and Distributions
Prospects common stock trades on the NASDAQ Global Select
Market under the symbol PSEC and Patriots
common stock trades on the NASDAQ Global Select Market under the
symbol PCAP. The following table sets forth, for
each fiscal quarter during the last two fiscal years, the range
of high and low closing prices of both Prospects and
Patriots common stock, each as reported on the NASDAQ
Global Select Market. The stock quotations are interdealer
quotations and do not include markups, markdowns or commissions.
Also set forth below are the dividend policies of Patriot and
Prospect as well as the distributions declared and paid by each
company during the last two fiscal years. After the merger is
complete, the distribution policy of Prospect will remain the
same and will govern former Patriot shareholders.
Patriot
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High
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Low
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Fiscal year 2009
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First quarter
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$
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4.08
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$
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0.88
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Second quarter
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$
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2.35
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$
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1.52
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Third quarter (through October 19, 2009)
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$
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4.27
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$
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1.55
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Fiscal year 2008
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First quarter
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$
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11.61
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$
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9.57
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Second quarter
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$
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10.99
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$
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6.25
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Third quarter
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$
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7.83
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$
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5.55
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Fourth quarter
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$
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6.03
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$
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2.12
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Fiscal year 2007
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First quarter
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$
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14.57
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$
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13.15
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Second quarter
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$
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15.65
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$
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14.04
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Third quarter
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$
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15.24
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$
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12.13
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Fourth quarter
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$
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13.35
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$
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10.09
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Patriots dividends, if any, will be determined by its
board of directors. The amount to be paid out as a dividend has
traditionally been determined by Patriots board of
directors each quarter based on the annual estimate of
Patriots taxable income by Patriots management. At
its year-end Patriot may pay a bonus distribution, in addition
to the other distributions, to ensure that it has paid out at
least 90% of its net ordinary taxable income and net realized
short-term capital gains in excess of net realized long-term
capital losses for the year. Prior to the closing date of the
merger, Patriot will declare to the extent necessary, a dividend
to its shareholders, which together with all Patriots
previous dividends, will have the effect of distributing to
Patriots stockholders all of its investment company
taxable income (computed without regard to the deduction for
dividends paid) and net capital gains, if any, through the
closing date of the merger and thus satisfy the annual RIC
distribution requirements for the taxable year ending on the
closing date of the merger. The final dividend may be made part
in cash and part in common stock in accordance with a recent IRS
revenue procedure. Through December 31, 2008, the Company has
made all required distributions on its 2008 distributable income
to satisfy its RIC requirements.
111
The following table summarizes Patriots dividends declared
during the last two fiscal years:
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
|
|
|
2008
|
|
|
|
|
|
|
|
|
October 30, 2008
|
|
December 22, 2008
|
|
January 15, 2009
|
|
$
|
0.25
|
|
July 30, 2008
|
|
September 12, 2008
|
|
October 15, 2008
|
|
$
|
0.33
|
|
May 2, 2008
|
|
June 5, 2008
|
|
July 16, 2008
|
|
$
|
0.33
|
|
February 22, 2008
|
|
March 14, 2008
|
|
April 16, 2008
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
Total 2008
|
|
|
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
November 1, 2007
|
|
December 14, 2007
|
|
January 16, 2008
|
|
$
|
0.33
|
|
August 2, 2007
|
|
September 14, 2007
|
|
October 17, 2007
|
|
$
|
0.32
|
|
April 30, 2007
|
|
June 15, 2007
|
|
July 17, 2007
|
|
$
|
0.32
|
|
February 23, 2007
|
|
March 15, 2007
|
|
April 18, 2007
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Total 2007
|
|
|
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
Patriot has adopted a dividend reinvestment plan that provides
for reinvestment of its distributions on behalf of its
shareholders, unless a shareholder elects to receive cash. As a
result, if Patriots board of directors authorizes, and it
declares, a cash dividend, then its shareholders who have not
opted out of its dividend reinvestment plan will
have their cash dividends automatically reinvested in additional
shares of its common stock, rather than receiving the cash
dividends. Shareholders who receive dividends in the form of
stock will be subject to the same federal, state and local tax
consequences as shareholders who elect to receive their
dividends in cash. Patriot has the option to satisfy the share
requirements of the dividend reinvestment plan through the
issuance of new shares of its common stock or through open
market purchases of its common stock by the administrator of the
dividend reinvestment plan. The number of newly issued shares to
be issued to a shareholder is determined by dividing the total
dollar amount of the dividend payable to such shareholder by the
market price per share of Patriots common stock at the
close of regular trading on The NASDAQ Global Select Market on
the dividend payment date. Shares purchased in open market
transactions by the administrator of the dividend reinvestment
plan will be allocated to a shareholder based upon the average
purchase price, excluding any brokerage charges or other
chargers, of all shares of common stock purchased with respect
to the dividend. Pursuant to the merger agreement, Patriot has
agreed to terminate any feature of its dividend reinvestment
plan that provides for the issuance of its shares of common
stock under the plan.
Prospect
Prospect has paid and intend to continue to distribute quarterly
distributions to its shareholders out of assets legally
available for distribution. Prospects distributions, if
any, will be determined by its board of directors. Certain
amounts of the quarterly distributions may from time to time be
paid out of its capital rather than from earnings for the
quarter as a result of its deliberate planning or by accounting
reclassifications although it intends that its cumulative
distributions over the course of the year will not exceed its
taxable income by more than an insignificant amount.
Prospects most recently declared quarterly distribution of
$0.4075 per share for the quarter ended September 30, 2009,
is likely to exceed net investment income for the quarter. No
assurance can be given that it will maintain the amount of its
current distributions or that such distributions will be made
solely out of its investment income.
In December 2008, Prospects Board of Directors elected to
retain a portion of its profits generated in the quarter ended
September 30, 2008 and pay a 4% excise tax on such retained
earnings. The tax of $532,479 was paid during the quarter ended
March 31, 2009.
In addition, although Prospect currently intends to distribute
realized net capital gains (which it defines as net long-term
capital gains in excess of short-term capital losses), if any,
at least annually, out of the assets legally available for such
distributions, it may decide in the future to retain such
capital gains for investment.
112
Prospect can offer no assurance that it will achieve results
that will permit the payment of any cash distributions and, if
it issues senior securities, it will be prohibited from making
distributions if doing so causes it to fail to maintain the
asset coverage ratios stipulated by the 1940 Act or if
distributions are limited by the terms of any of its borrowings.
Prospect maintains an opt out dividend reinvestment
plan for its common shareholders. As a result, if it declares a
distribution then each shareholders distribution will be
automatically reinvested in additional shares of its common
stock, unless the shareholder has specifically opted
out of the dividend reinvestment plan so as to receive
cash dividends. Shareholders who receive distributions in the
form of stock are subject to the same U.S. Federal, state
and local tax consequences as are shareholders who elect to
receive their distributions in cash.
With respect to the distributions paid to shareholders, income
from origination, structuring, closing, commitment and other
upfront fees associated with investments in portfolio companies
were treated as taxable income and distributed to shareholders.
For the fiscal year ended June 30, 2008, Prospect paid
total distributions of approximately $39.5 million. For the
fiscal year ending June 30, 2009, Prospect paid total
distributions of approximately $43.3 million.
Tax characteristics of all distributions will be reported to
shareholders, as appropriate, on
Form 1099-DIV
after the end of the calendar year. Prospects ability to
pay distributions could be affected by future business
performance, liquidity, capital needs, alternative investment
opportunities and loan covenants.
113
The following table sets forth, for the periods indicated, its
NAV per share of common stock and the high and low closing
prices per share of its common stock as reported on the NASDAQ
Global Select Market. Prospects common stock historically
trades at prices both above and below its NAV. There can be no
assurance, however, that such premium or discount, as
applicable, to NAV will be maintained. Common stock of business
development companies, like that of closed-end investment
companies, frequently trades at a discount to current NAV.
Recently, Prospects common stock has traded at a discount
to its NAV, adversely affecting its ability to raise capital.
The risk that its common stock may continue to trade at a
discount to its NAV is separate and distinct from the risk that
its NAV per share may decline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
|
|
|
|
Stock Price
|
|
|
(Discount) of
|
|
|
(Discount) of
|
|
|
Distribution
|
|
|
|
NAV(1)
|
|
|
High(2)
|
|
|
Low(2)
|
|
|
High to NAV
|
|
|
Low to NAV
|
|
|
Declared
|
|
|
Twelve Months Ending June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
13.67
|
|
|
$
|
15.45
|
|
|
$
|
14.42
|
|
|
|
13.0
|
%
|
|
|
5.5
|
%
|
|
|
|
|
Second quarter
|
|
|
13.74
|
|
|
|
15.15
|
|
|
|
11.63
|
|
|
|
10.3
|
%
|
|
|
(15.4
|
)%
|
|
$
|
0.100
|
|
Third quarter
|
|
|
13.74
|
|
|
|
13.72
|
|
|
|
10.61
|
|
|
|
(0.1
|
)%
|
|
|
(22.8
|
)%
|
|
|
0.125
|
|
Fourth quarter
|
|
|
14.59
|
|
|
|
13.47
|
|
|
|
12.27
|
|
|
|
(7.7
|
)%
|
|
|
(15.9
|
)%
|
|
|
0.150
|
|
Twelve Months Ending June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.60
|
|
|
$
|
13.60
|
|
|
$
|
11.06
|
|
|
|
(6.8
|
)%
|
|
|
(24.2
|
)%
|
|
$
|
0.200
|
|
Second quarter
|
|
|
14.69
|
|
|
|
15.46
|
|
|
|
12.84
|
|
|
|
5.2
|
%
|
|
|
(12.6
|
)%
|
|
|
0.280
|
|
Third quarter
|
|
|
14.81
|
|
|
|
16.64
|
|
|
|
15.00
|
|
|
|
12.4
|
%
|
|
|
1.3
|
%
|
|
|
0.300
|
|
Fourth quarter
|
|
|
15.31
|
|
|
|
17.07
|
|
|
|
15.83
|
|
|
|
11.5
|
%
|
|
|
3.4
|
%
|
|
|
0.340
|
|
Twelve Months Ending June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.86
|
|
|
$
|
16.77
|
|
|
$
|
15.30
|
|
|
|
12.9
|
%
|
|
|
3.0
|
%
|
|
$
|
0.380
|
|
Second quarter
|
|
|
15.24
|
|
|
|
18.97
|
|
|
|
15.10
|
|
|
|
23.3
|
%
|
|
|
2.4
|
%
|
|
|
0.385
|
|
Third quarter
|
|
|
15.18
|
|
|
|
17.68
|
|
|
|
16.40
|
|
|
|
17.1
|
%
|
|
|
8.0
|
%
|
|
|
0.3875
|
|
Fourth quarter
|
|
|
15.04
|
|
|
|
18.68
|
|
|
|
16.91
|
|
|
|
24.2
|
%
|
|
|
12.4
|
%
|
|
|
0.390
|
|
Twelve Months Ending June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
15.08
|
|
|
$
|
18.68
|
|
|
$
|
14.16
|
|
|
|
23.9
|
%
|
|
|
(6.1
|
)%
|
|
$
|
0.3925
|
|
Second quarter
|
|
|
14.58
|
|
|
|
17.17
|
|
|
|
11.22
|
|
|
|
17.8
|
%
|
|
|
(23.0
|
)%
|
|
|
0.395
|
|
Third quarter
|
|
|
14.15
|
|
|
|
16.00
|
|
|
|
13.55
|
|
|
|
13.1
|
%
|
|
|
(4.2
|
)%
|
|
|
0.400
|
|
Fourth quarter
|
|
|
14.55
|
|
|
|
16.12
|
|
|
|
13.18
|
|
|
|
10.8
|
%
|
|
|
(9.4
|
)%
|
|
|
0.40125
|
|
Twelve Months Ending June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.63
|
|
|
$
|
14.24
|
|
|
$
|
11.12
|
|
|
|
(2.7
|
)%
|
|
|
(24.0
|
)%
|
|
$
|
0.4025
|
|
Second quarter
|
|
|
14.43
|
|
|
|
13.08
|
|
|
|
6.29
|
|
|
|
(9.4
|
)%
|
|
|
(56.4
|
)%
|
|
|
0.40375
|
|
Third quarter
|
|
|
14.19
|
|
|
|
12.89
|
|
|
|
6.38
|
|
|
|
(9.2
|
)%
|
|
|
(55.0
|
)%
|
|
|
0.405
|
|
Fourth quarter
|
|
|
12.40
|
|
|
|
10.48
|
|
|
|
7.95
|
|
|
|
(15.5
|
)%
|
|
|
(35.9
|
)%
|
|
|
0.40625
|
|
Twelve Months Ending June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
(3)(4)
|
|
|
|
$10.99
|
|
|
|
$8.82
|
|
|
|
(4)
|
|
|
|
(4)
|
|
|
|
$0.4075
|
|
Second quarter (to October 19, 2009)
|
|
|
(3)(4)
|
|
|
|
11.30
|
|
|
|
10.37
|
|
|
|
(4)
|
|
|
|
(4)
|
|
|
|
(5)
|
|
|
|
|
(1)
|
|
NAV per share is determined as of
the last day in the relevant quarter and therefore may not
reflect the NAV per share on the date of the high or low sales
price. The NAVs shown are based on outstanding shares at the end
of each period.
|
|
(2)
|
|
The High/Low Stock Price is
calculated as of the last reported sales price on a given day in
the applicable quarter.
|
|
|
|
(3)
|
|
Prospects most recently
determined NAV per share was $12.40 as of June 30, 2009 ($11.22
on an as adjusted basis solely to give effect to dividends paid
on July 20, 2009 and Prospects issuances of common shares
on July 20, 2009 in connection with its dividend reinvestment
plan, on July 7, 2009 in an underwritten common stock offering
and on August 20, 2009 and September 24, 2009 in private stock
offerings). NAV as of September 30, 2009 may be higher or lower
than $11.22 based on potential changes in valuations as of
September 30, 2009.
|
|
|
|
(4)
|
|
Prospects NAV has not yet
been finally determined for any day after June 30, 2009.
|
|
|
|
(5)
|
|
Prospects distribution for
the second quarter of 2010 will be declared in December 2009.
|
114
BUSINESS
OF PATRIOT
In light of the unprecedented instability in the financial
markets, the severe slowdown in the overall economy and the
termination event that occurred under the Amended Securitization
Facility, Patriot does not have adequate liquidity, including
access to the debt and equity capital markets, to operate its
business in the manner in which it has historically operated and
which is described below.
General
Patriot is a specialty finance company that provides customized
financing solutions to small- to mid-sized companies.
Patriots ability to invest across a companys capital
structure, from senior secured loans to equity securities,
allows it to offer a comprehensive suite of financing solutions,
including one-stop financings. Its
one-stop financing typically includes a revolving
line of credit, one or more senior secured term loans and a
subordinated debt investment. Patriot also makes equity
co-investments of generally up to $3.0 million and
investments in broadly syndicated loans. Patriot primarily
finances privately-held companies in transactions initiated by
private equity sponsors.
Patriots investment objective is to generate both current
cash income and capital appreciation. To accomplish this
objective, it seeks to provide its shareholders with current
income primarily from the interest on its debt investments and
related origination fees, and to enable its shareholders to
participate in the capital appreciation and potential long-term
growth of its portfolio companies through warrants and other
equity interests it acquires.
Patriot typically make investments of $3 million to
$20 million in companies with $10 million to
$100 million in annual revenues that operate in diverse
industry sectors. As of June 30, 2009, Patriot had debt
investments in 30 portfolio companies with an aggregate
fair value of $274.2 million, and warrants to purchase
shares of common stock in two portfolio companies and equity
investments (other than warrants) in 21 portfolio companies
with an aggregate fair value of $9.7 million.
As of June 30, 2009, senior secured revolving lines of
credit, senior secured term loans, junior secured term loans,
subordinated debt and equity investments comprised approximately
5.0%, 43.5%, 17.9%, 30.2%, and 3.4%, respectively, of
Patriots investment portfolio at fair value. For the six
months ended June 30, 2009, the weighted average yield on
all of its outstanding debt investments was approximately 10.7%.
Patriot is a closed-end, non-diversified investment company that
has elected to be treated as a business development company
under the 1940 Act. Patriot is internally managed by its
executive officers under the supervision of its board of
directors. As a result, Patriot do not pay investment advisory
fees, but instead it incurs the operating costs associated with
employing investment and portfolio management professionals.
As a business development company, Patriot is required to comply
with numerous regulatory requirements. Patriot finances its
investments using debt and equity. However, its ability to use
debt is limited in certain significant respects. See
Business of Patriot Regulations
Regulation as a Business Development Company. Patriot has
elected to be treated for federal income tax purposes as a RIC
under Subchapter M of the Code. See Business of
Patriot Regulations Taxation as a
Regulated Investment Company. As a RIC, Patriot generally
will not have to pay corporate-level federal income taxes on any
net ordinary income or capital gains that it distributes to its
shareholders as dividends if it meets certain
source-of-income,
income distribution and asset diversification requirements.
Corporate
History and Information
Patriot was founded in November 2002 by Richard P. Buckanavage,
its president and chief executive officer, Timothy W. Hassler,
its chief investment officer, and Compass Group Investments,
Inc., a private investment firm providing capital to middle
market companies. Prior to its founding, Mr. Buckanavage
was a managing director and the head of debt sales at GE Capital
Markets, Inc. and Mr. Hassler was a director in the capital
markets division of U.S. Bank National Association.
Messrs. Buckanavage and Hassler have more than
35 years of combined experience lending to, and investing
in, small- to mid-sized companies.
115
Since Patriot commenced investment operations in 2003, and prior
to its initial public offering in 2005, it conducted its
business through two separate entities, Patriot Capital Funding,
Inc. and Wilton Funding, LLC. Patriot Capital Funding, Inc.
originated, arranged and serviced the investments made by Wilton
Funding, LLC, which invested in debt instruments and warrants of
U.S.-based
companies. In connection with the consummation of Patriots
initial public offering, Wilton Funding, LLC merged with and
into Patriot Capital Funding, Inc.
Patriots principal executive offices are located at 274
Riverside Avenue, Westport, Connecticut 06880 and its telephone
number is
(203) 429-2700.
Patriot maintains a website on the Internet at
www.patcapfunding.com. Patriot makes available free of
charge through its website its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after it electronically files such material with, or
furnishes it to, the SEC. Information contained on its website
is not incorporated by reference into this document and you
should not consider information contained on its website to be
part of this document.
Patriots
Business Strategy
Patriots investment objective is to generate both current
cash income and capital appreciation through debt and equity
investments in small- to mid-sized companies. Patriot has
adopted the following business strategy to achieve its
investment objective:
|
|
|
|
|
Deliver a comprehensive suite of customized financing
solutions in a responsive and efficient
manner. Patriots goal is to provide a
comprehensive suite of customized financing solutions in a
responsive and efficient manner to private equity sponsors in
connection with their proposed investments in small- to
mid-sized companies. Private equity sponsors with whom Patriot
works require a high level of creativity and knowledge in
structuring investment transactions. Its ability to provide
financing across all levels of a companys capital
structure appeals to private equity sponsors that typically seek
to rely on a limited number of third party financing sources for
their investment transactions in order to facilitate and ensure
the timely closing of such transactions. Patriot believes its
ability to provide a comprehensive suite of customized financing
solutions sets it apart from other lenders that focus on
providing a limited number of financing solutions.
|
|
|
|
Capitalize on its strong private equity sponsor
relationships. Patriot is committed to
establishing, building and maintaining its private equity
sponsor relationships. Patriots marketing efforts are
focused on building and maintaining relationships with private
equity sponsors that routinely make investments in the small- to
mid-sized companies that it targets. Patriot believes that its
relationships with private equity sponsors provide it with, in
addition to potential investment opportunities, other
significant benefits, including an additional layer of due
diligence and additional monitoring capabilities. Private equity
sponsors also provide its portfolio companies with significant
benefits, including strategic guidance, and an additional
potential source of capital and operational expertise. Patriot
has assembled a management team that has developed an extensive
network of private equity sponsor relationships in its target
market over the last 15 years. Patriot believes that its
management teams relationships with these private equity
sponsors will provide it with significant investment
opportunities.
|
|
|
|
Employ disciplined underwriting policies and maintain
rigorous portfolio monitoring. Patriot has an
extensive investment underwriting and monitoring process.
Patriot conducts a thorough analysis of each potential portfolio
company and its prospects, competitive position, financial
performance and industry dynamics. Patriot stresses the
importance of credit and risk analysis in its underwriting
process. Patriot believes that its continued adherence to this
disciplined process will permit it to mitigate loan losses, to
continue to generate a stable and diversified revenue stream of
current income from its debt investments and provide it with the
ability to make distributions to its shareholders.
|
|
|
|
Leverage the skills of its experienced management
team. Patriots management team is led by
its president and chief executive officer, Mr. Buckanavage,
and its chief investment officer, Mr. Hassler, who combined
have more than 35 years of experience in lending to, and
investing in, small- to mid-sized companies. The members of its
management team have broad investment backgrounds, with prior
|
116
|
|
|
|
|
experience at specialty finance companies, middle market
commercial banks and other financial services companies. Patriot
believes that the experience and contacts of its management team
will continue to allow it to effectively implement the key
aspects of its business strategy.
|
Investment
Criteria
Patriots management team has identified the following
investment criteria and guidelines that it believes are
important in evaluating prospective portfolio companies. Its
management team uses these criteria and guidelines in evaluating
investment opportunities for it. However, not all of these
criteria and guidelines were, or will be, met in connection with
each of its investments.
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Established companies with positive cash
flow. Patriot seeks to invest in established
companies with sound historical financial performance. Patriot
typically focuses on companies with a history of profitability
on an operating cash flow basis and that generate minimum annual
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) of $2 million. Patriot does not intend to
invest in
start-up
companies or companies with speculative business plans.
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Strong competitive position in
industry. Patriot analyzes the strengths and
weaknesses of target companies relative to their competitors.
The factors it considers include relative product pricing,
product quality, customer loyalty, substitution risk, switching
costs, patent protection, brand positioning and capitalization.
Patriot seeks to invest in companies that have developed leading
positions within their respective markets, are well positioned
to capitalize on growth opportunities and operate businesses or
in industries with significant barriers to entry. Patriot seeks
companies that demonstrate advantages when compared to their
competitors, which may help to protect their market position and
profitability.
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Experienced management team. Patriot seeks to
invest in companies that have experienced management teams.
Patriot also seeks to invest in companies that have proper
incentives in place, including having significant equity
interests, to motivate management to act in concert with its
interests as investors.
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Diversified customer and supplier
base. Patriot generally seeks to invest in
companies that have a diversified customer and supplier base.
Companies with a diversified customer and supplier base are
generally better able to endure economic downturns, industry
consolidation, changing business preferences and other factors
that may negatively impact their customers, suppliers and
competitors.
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Private equity sponsorship. Patriot generally
seeks to invest in companies in conjunction with private equity
sponsors who have proven capabilities in building value. Patriot
believes that a private equity sponsor can serve as a committed
partner and advisor that will actively work with the company and
its management team to meet company goals and create value.
Patriot assesses a private equity sponsors commitment to a
portfolio company by, among other things, the capital
contribution it has made or will make in the portfolio company.
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Exit strategy. Patriot seeks to invest in
companies that it believes will provide a steady stream of cash
flow to repay its debt investments and reinvest in their
respective businesses. Patriot expects that the primary means by
which it exits its debt investments will be through the
repayment of its investment by internally generated cash flow.
In addition, Patriot will seek to invest in companies whose
business models and expected future cash flows may provide
alternate methods of repaying its investment, such as through a
strategic acquisition by other industry participants, an initial
public offering, a recapitalization or another capital market
transaction.
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Underwriting
Process and Investment Approval
An initial evaluation of each potential investment is performed
by one of Patriots investment professionals. To the extent
a potential investment appears to meet Patriots investment
criteria, a pre-screening
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memorandum is prepared and presented to its investment committee
detailing some or all of the following information:
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Transaction description;
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Company description, including product or service analysis,
market position, market dynamics, customer and supplier analysis
and evaluation of management;
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Quantitative and qualitative analysis of historical financial
performance and financial projections;
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Competitive landscape;
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Business strengths and weaknesses;
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On-site
visits with management and relevant employees;
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Quantitative and qualitative private equity sponsor
analysis; and
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Potential investment structures, senior and total leverage
multiples and investment pricing terms.
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If Patriots investment committee votes to proceed, it
submits a non-binding proposal to the prospective private equity
sponsor
and/or
potential portfolio company. Once the private equity sponsor
and/or
potential portfolio company agree to the terms and conditions
outlined in its financing proposal, Patriot commences its full
due diligence assessment, including:
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Initial or additional
on-site
visits with management and relevant employees;
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Review of historical and projected financial statements,
including reports from third-party accountants;
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Interviews with customers and suppliers;
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Research on products and services, market dynamics and
competitive landscape;
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Management background checks;
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Review of material contracts;
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Review by legal, environmental or other industry consultants, if
applicable; and
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Financial sponsor diligence, including portfolio company and
lender reference checks.
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Upon completion of a satisfactory due diligence review, a full
investment memorandum is prepared and distributed to the
investment committee for final approval of the proposed
investment. The investment committee is able to request
additional due diligence or modify the financing structure or
terms of the proposed investment. The approval of the investment
committee is required before Patriot proceeds with any
investment. Upon receipt of such approval, Patriot proceeds to
document and, upon satisfaction of applicable closing
conditions, fund the investment.
Patriots investment committee consists of its president
and chief executive officer, Mr. Buckanavage, its chief
investment officer, Mr. Hassler, its executive vice
president and chief compliance officer, Clifford L. Wells, and
its executive vice president and managing director, Matthew R.
Colucci.
All actions described above that require the approval of
Patriots investment committee must be approved by each
member of its investment committee at a meeting at which at
least a majority of the members of its investment committee is
present.
Investments
Patriot generally targets investments of approximately
$3 million to $20 million in companies with annual
revenues between $10 million and $100 million.
Patriots ability to invest across a companys capital
structure, from senior secured loans to equity securities allows
it to offer companies a comprehensive suite of financing
solutions, including one-stop financing.
Patriots one-stop financing typically includes
a revolving line of credit, one or more senior secured term
loans and a subordinated debt investment. Patriots loans
may include
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both debt and equity components. The debt instruments provide
for returns in the form of interest payments, including
payment-in-kind
or PIK interest, while the equity instruments, such as warrants
and non-control, equity co-investments, provide it with an
opportunity to participate in the capital appreciation of the
portfolio company and, to a lesser extent, returns in the form
of dividend payments, as well as
payment-in-kind
or PIK dividends.
Debt
Investments
Patriot tailors the terms of its debt investments to the facts
and circumstances of the transaction and prospective portfolio
company, negotiating a structure that seeks to protect its
rights and manage its risk while creating incentives for the
portfolio company to achieve its business plan. For example,
Patriots seek to limit the downside risks of its
investments by:
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negotiating covenants that are designed to protect its
investments while affording its portfolio companies as much
flexibility in managing their businesses as possible. Such
restrictions may include affirmative and negative covenants,
default penalties, lien protection, change of control provisions
and board rights; and
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requiring a total return on its investments (including both
interest and potential equity appreciation) that compensates it
for credit risk.
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Senior
Secured Loans
Patriots senior secured loans generally have terms of 4 to
7 years, provide for a variable or fixed interest rate and
are secured by a first priority security interest in all
existing and future assets of the borrower. Patriot generally
only invests in senior secured loans of a portfolio company in
conjunction with an investment in a junior secured loan,
subordinated debt investment or a one-stop
financing. Patriots senior secured loans may take many
forms, including revolving lines of credit, term loans and
acquisition lines of credit.
Junior
Secured Loans
Patriots junior secured loans generally have terms of 5 to
7.5 years, provide for a variable or fixed interest rate
and are secured by a second priority security interest in all
existing and future assets of the borrower. Patriot may invest
in junior secured loans, such as last out senior
notes or second lien notes, on a stand-alone basis, or in
conjunction with a senior secured loan, a subordinated debt
investment or a one-stop financing.
Subordinated
Debt
Patriots subordinated debt investments generally have
terms of 5 to 7.5 years and provide for a fixed interest
rate. A portion of its subordinated debt investments may be
secured by a second priority security interest in the assets of
the borrower. Patriot may make subordinated debt investments on
a stand-alone basis, or in conjunction with a senior secured
loan, a junior secured loan or a one-stop financing.
Patriots subordinated debt investments can include an
equity component, such as warrants to purchase common stock in
the portfolio company, and
payment-in-kind,
or PIK, interest, which represents contractual interest accrued
and added to the principal balance that generally becomes due at
maturity.
One-Stop
Financing
Patriots one-stop financing typically includes
a revolving line of credit, one or more senior secured term
loans and a subordinated debt investment. Patriot believes its
ability to provide one-stop financing sets it apart
from other lenders who focus on only one or two layers of the
capital structure. Subsequent to its closing of a
one-stop financing, Patriot may seek to exit lower
yielding tranches of the financing by arranging for replacement
financing by another lender.
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Broadly
Syndicated Loans
In addition to the investments described above, Patriot also
makes investments in broadly syndicated loans. A syndicated loan
is a loan that is provided by a group of lenders and is
structured, arranged and administered by one or several
commercial or investment banks known as arrangers.
Patriots syndicated loans generally have terms of 4 to
7.5 years, provide for a variable or fixed interest rate
and are secured by a first or second priority security interest
in all existing and future assets of the borrower.
Equity
Investments
When Patriot provides a one-stop financing or when
it makes a subordinated debt investment, it may acquire warrants
to purchase common stock or other equity interests in the
portfolio company. The warrants Patriot receives in connection
with these investments generally are detachable and require only
a nominal cost to exercise. In addition, Patriot may from time
to time make non-control, equity co-investments of generally up
to $3.0 million in companies in conjunction with private
equity sponsors. Patriot generally seek to structure its equity
investments, such as warrants and direct equity co-investments,
to provide it with minority rights provisions and event-driven
puts. Patriot also seek to obtain registration rights in
connection with these investments, which may include demand and
piggyback registration rights. Certain equity
investments include
payment-in-kind
or PIK dividends, which represent contractually deferred
dividends added to the balance of Patriots equity
investment.
Portfolio
Management
Patriot generally employs several methods of evaluating and
monitoring the performance of its portfolio companies, which,
depending on the particular investment, may include the
following specific processes, procedures and reports:
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Monthly review of actual financial performance versus the
corresponding period of the prior year and financial projections;
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Monthly review of borrowing base, if applicable;
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Quarterly review of operating results, covenant compliance, and
general business performance, including the preparation of a
portfolio monitoring report which is distributed to members of
its investment committee;
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Periodic
face-to-face
meetings with management teams and private equity sponsors of
portfolio companies; and
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Attendance at portfolio company board meetings through board
seats or observation rights.
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In connection with the monitoring of its portfolio companies,
each debt investment Patriot holds is rated based upon the
following five-level numeric investment rating system:
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Investment Rating 1 Investment that exceeds
expectations
and/or
capital gain expected;
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Investment Rating 2 Investment generally
performing in accordance with expectations;
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Investment Rating 3 Investment that requires
closer monitoring;
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Investment Rating 4
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Investment performing below expectations where a higher risk of
loss exists; and
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Investment Rating 5
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Investment performing significantly below expectations where
Patriot expects a loss.
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In the event that Patriot determines that an investment is
underperforming, or circumstances suggest that the risk
associated with a particular investment has significantly
increased, it undertakes more aggressive monitoring of the
affected portfolio company. While Patriots investment
rating system identifies the relative risk for each investment,
the rating alone does not dictate the scope
and/or
frequency of any monitoring that it
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performs. The frequency of Patriots monitoring of an
investment is determined by a number of factors, including, but
not limited to, the trends in the financial performance of the
portfolio company, the investment structure and the type of
collateral securing its investment, if any.
Regulations
Regulation
as a Business Development Company
Patriot has elected to be regulated as a business development
company under the 1940 Act. The 1940 Act requires that a
majority of its directors be persons other than interested
persons, as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that Patriot may not change the
nature of its business so as to cease to be, or to withdraw its
election as, a business development company, unless approved by
a majority of its outstanding voting securities.
Qualifying
Assets
Under the 1940 Act, a business development company may not
acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the companys
total assets. The principal categories of qualifying assets
relevant to Patriots business are any of the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible portfolio
company is defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly owned by the business
development company) or a company that would be an investment
company but for certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
(i) does not have any class of securities listed on a
national securities exchange;
(ii) has a class of securities listed on a national
securities exchange, but has an aggregate market value of
outstanding voting and non-voting common equity of less than
$250 million;
(iii) is controlled by a business development company or a
group of companies including a business development company and
the business development company has an affiliated person who is
a director of the eligible portfolio company; or
(iv) is a small and solvent company having total assets of
not more than $4 million and capital and surplus of not
less than $2 million.
(2) Securities of any eligible portfolio company which the
business development company controls.
(3) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and the business development company
already owns 60% of the outstanding equity of the eligible
portfolio company.
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(5) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less
from the time of investment.
In addition, a business development company must have been
organized and have its principal place of business in the United
States and must be operated for the purpose of making
investments in the types of securities described in (1),
(2) or (3) above.
Managerial
Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for
the purpose of the 70% test, Patriot must either control the
issuer of the securities or must offer to make available to the
issuer of the securities (other than small and solvent companies
described above) significant managerial assistance; except that,
where Patriot purchases such securities in conjunction with one
or more other persons acting together, one of the other persons
in the group may make available such managerial assistance.
Making available managerial assistance means, among other
things, any arrangement whereby the business development
company, through its directors, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance
and counsel concerning the management, operations or business
objectives and policies of a portfolio company.
Common
Stock
Patriot is not generally able to issue and sell its common stock
at a price below net asset value per share. Patriot may,
however, sell its common stock, warrants, options or rights to
acquire its common stock, at a price below the current net asset
value of the common stock if its board of directors determines
that such sale is in its best interests and that of its
shareholders, and its shareholders approve such sale. In any
such case, the price at which Patriots securities are to
be issued and sold may not be less than a price which, in the
determination of its board of directors, closely approximates
the market value of such securities (less any distributing
commission or discount). Patriot may also make rights offerings
to its shareholders at prices per share less than the net asset
value per share, subject to applicable requirements of the 1940
Act.
Senior
Securities
Patriot is permitted, under specified conditions, to issue
multiple classes of debt and one class of stock senior to its
common stock if its asset coverage, as defined in the 1940 Act,
is at least equal to 200% immediately after each such issuance.
In addition, while any senior securities remain outstanding
(other than senior securities representing indebtedness issued
in consideration of a privately arranged loan which is not
intended to be publicly distributed), Patriot must make
provisions to prohibit any distribution to its shareholders or
the repurchase of such securities or shares unless it meet the
applicable asset coverage ratios at the time of the distribution
or repurchase. Patriot may also borrow amounts up to 5% of the
value of its total assets for temporary or emergency purposes
without regard to asset coverage.
Code of
Ethics
Patriot has adopted a code of ethics pursuant to
Rule 17j-1
under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities
transactions. Personnel subject to the code may invest in
securities for their personal investment accounts, including
securities that may be purchased or held by it, so long as such
investments are made in accordance with the codes
requirements. The code of ethics is available on Patriots
website on the Internet at www.patcapfunding.com.
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Proxy
Voting Policies and Procedures
Patriots vote proxies relating to its portfolio securities
in the best interest of its shareholders. Patriot reviews on a
case-by-case
basis each proposal submitted to a shareholder vote to determine
its impact on the portfolio securities held by it. Although
Patriot generally votes against proposals that may have a
negative impact on its portfolio securities, it may vote for
such a proposal if there exists compelling long-term reasons
to do so.
Patriots proxy voting decisions are made by the investment
professionals who are responsible for monitoring each of its
investments. To ensure that Patriots vote is not the
product of a conflict of interest, it requires that:
(i) anyone involved in the decision making process disclose
to its chief compliance officer any potential conflict that he
or she is aware of and any contact that he or she has had with
any interested party regarding a proxy vote; and
(ii) employees involved in the decision making process or
vote administration are prohibited from revealing how Patriot
intends to vote on a proposal in order to reduce any attempted
influence from interested parties.
Shareholders may obtain information regarding how Patriot voted
proxies with respect to its portfolio securities by making a
written request for proxy voting information to: Chief
Compliance Officer, Patriot Capital Funding, Inc., 274 Riverside
Avenue, Westport, CT 06880.
Other
Patriot is prohibited under the 1940 Act from knowingly
participating in certain transactions with its affiliates
without the prior approval of its board of directors who are not
interested persons and, in some cases, prior approval by the SEC.
Patriot is periodically examined by the SEC for compliance with
the 1940 Act.
Patriot is required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect it against
larceny and embezzlement. Furthermore, as a business development
company, Patriot is prohibited from protecting any director or
officer against any liability to it or its shareholders arising
from willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such
persons office.
Patriot is required to adopt and implement written policies and
procedures reasonably designed to prevent violation of the
federal securities laws, review these policies and procedures
annually for their adequacy and the effectiveness of their
implementation, and to designate a chief compliance officer to
be responsible for administering the policies and procedures.
Taxation
as a Regulated Investment Company
Patriot has elected to be taxed as a RIC under Subchapter M of
the Code. As long as Patriot qualifies as a RIC, it will not be
taxed on its investment company taxable income or realized net
capital gains, to the extent that such taxable income or gains
are distributed, or deemed to be distributed, to shareholders on
a timely basis.
Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses, and generally excludes
net unrealized appreciation or depreciation until realized.
Dividends declared and paid by Patriot in a year generally
differ from taxable income for that year as such dividends may
include the distribution of current year taxable income or the
distribution of prior year taxable income carried forward into
and distributed in the current year. Distributions also may
include returns of capital.
To maintain RIC tax treatment, Patriot must, among other things,
distribute, with respect to each taxable year, at least 90% of
its investment company taxable income (i.e., its net ordinary
income and its realized net short-term capital gains in excess
of realized net long-term capital losses, if any). In order to
avoid certain excise taxes imposed on RICs, Patriot must
distribute, with respect to each calendar year, an amount at
least
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equal to the sum of (1) 98% of its ordinary income for the
calendar year, (2) 98% of its capital gains in excess of
capital losses for the one-year period ending on October 31 of
the calendar year and (3) any ordinary income and net
capital gains for the preceding years that were not distributed
during such years. To the extent Patriots taxable earnings
for a fiscal tax year fall below the total amount of its
distributions for that fiscal year, a portion of those
distributions may be deemed a return of capital to its
shareholders.
Patriot may not be able to achieve operating results that will
allow it to make distributions at a specific level or to
increase the amount of these distributions from time to time. In
light of the termination event that occurred under the Amended
Securitization Facility on April 3, 2009, it may not be
possible for Patriot to continue to comply with the annual
distribution requirement. In addition, Patriot may be limited in
its ability to make distributions due to the asset coverage test
for borrowings applicable to it as business development company
under the 1940 Act and due to provisions in its Amended
Securitization Facility. If Patriot does not distribute a
certain percentage of its taxable income annually, it will
suffer adverse tax consequences, including possible loss of its
status as a RIC. Patriot cannot assure shareholders that they
will receive any distributions at a particular level.
Pursuant to a recent revenue procedure issued by the IRS, the
IRS has indicated that it will treat distributions from certain
publicly traded RICs (including business development companies)
that are paid part in cash and part in stock as dividends that
would satisfy the RICs annual distribution requirements.
In order to qualify for such treatment, the revenue procedure
requires that at least 10% of the total distribution be paid in
cash and that each shareholder have a right to elect to receive
its entire distribution in cash. If too many shareholders elect
to receive cash, each shareholder electing to receive cash must
receive a proportionate share of the cash to be distributed
(although no shareholder electing to receive cash may receive
less than 10% of such shareholders distribution in cash).
This revenue procedure applies to distributions made during
2009. In light of the uncertainty in the financial markets and
the economy and the termination event that occurred under the
Amended Securitization Facility on April 11, 2009, Patriot
may make dividend distributions partly in cash and shares as an
additional measure to preserve liquidity. In addition, see
Description of the Merger Agreement Dividends
and Distributions for a description of circumstances in
which dividend distributions will be required to be made partly
in cash and shares.
Determination
of Net Asset Value
Patriot determine the net asset value per share of its common
stock on a quarterly basis. Patriot discloses these net asset
values in the periodic reports it files with the SEC. The net
asset value per share is equal to the value of its total assets
minus liabilities and any preferred stock outstanding divided by
the total number of shares of common stock outstanding.
Value, as defined in Section 2(a)(41) of the 1940 Act, is
(i) the market price for those securities for which a
market quotation is readily available and (ii) for all
other securities and assets, fair value as is determined in good
faith by the board of directors. Since there is typically no
readily available market value for the investments in
Patriots portfolio, it value substantially all of its
portfolio investments at fair value as determined in good faith
by its board of directors pursuant to a valuation policy and a
consistently applied valuation process. Because of the inherent
uncertainty in determining the fair value of investments that do
not have a readily available market value, the fair value of its
investments determined in good faith by its board of directors
may differ significantly from the values that would have been
used had a ready market existed for the investments, and the
differences could be material.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Standards
No. 157 Fair Value Measurements, or
SFAS 157, which became effective for fiscal years beginning
after November 15, 2007. SFAS 157 defines fair value
as the price at which an asset could be exchanged in a current
transaction between knowledgeable, willing parties. A
liabilitys fair value is defined as the amount that would
be paid to transfer the liability to a new obligor, not the
amount that would be paid to settle the liability with the
creditor. Where available, fair value is based on observable
market prices or parameters or derived from such prices or
parameters. Where observable prices or inputs are not available,
valuation techniques are applied. These valuation techniques
involve some level of management estimation and
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judgment, the degree of which is dependent on the price
transparency for the investments or market and the
investments complexity.
Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level
of judgment associated with the inputs used to measure their
fair value. Hierarchical levels, defined by SFAS 157 and
directly related to the amount of subjectivity associated with
the inputs to fair valuation of these assets and liabilities,
are as follows:
Level 1 Unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date.
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data at the measurement date for substantially
the full term of the assets or liabilities.
Level 3 Unobservable inputs that reflect
managements best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
Concurrent with Patriots adoption of SFAS 157,
effective January 1, 2008, Patriot augmented the valuation
techniques it uses to estimate the fair value of its debt
investments where there is not a readily available market value
(Level 3). Prior to January 1, 2008, Patriot estimated
the fair value of its Level 3 debt investments by first
estimating the enterprise value of the portfolio company which
issued the debt investment. To estimate the enterprise value of
a portfolio company, Patriot analyzed various factors, including
the portfolio companies historical and projected financial
results. Typically, private companies are valued based on
multiples of EBITDA (Earning Before Interest, Taxes,
Depreciation and Amortization), cash flow, net income, revenues
or, in limited instances, book value.
In estimating a multiple to use for valuation purposes, Patriot
looked to private merger and acquisition statistics, discounted
public trading multiples or industry practices. In some cases,
Patriot considered the best valuation methodology may have been
a discounted cash flow analysis based on future projections. If
a portfolio company was distressed, a liquidation analysis may
have provided the best indication of enterprise value. If there
was adequate enterprise value to support the repayment of
Patriots debt, the fair value of the Level 3 loan or
debt security normally corresponded to cost plus the amortized
original issue discount unless the borrowers condition or
other factors lead to a determination of fair value at a
different amount.
Beginning on January 1, 2008, Patriot also introduced a
bond-yield model to value these investments based on the present
value of expected cash flows. The primary inputs into the model
are market interest rates for debt with similar characteristics
and an adjustment for the portfolio companys credit risk.
The credit risk component of the valuation considers several
factors including financial performance, business outlook, debt
priority and collateral position.
Patriots board of directors undertakes a multi-step
valuation process each quarter in connection with determining
the fair value of its investments:
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Its quarterly valuation process begins with each portfolio
company or investment being initially valued by the investment
professionals responsible for the portfolio investment;
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Valuation conclusions are documented and discussed with its
investment committee;
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|
|
|
The valuation committee of its board of directors reviews the
valuation conclusions prepared by its investment professionals;
|
|
|
|
Duff & Phelps, an independent valuation firm, performs
certain mutually agreed limited procedures that it has
identified and asked them to perform on a selection of its
portfolio company valuation conclusions; and
|
125
|
|
|
|
|
Using the results of the above procedures, its board of
directors determines the fair value of each investment in its
portfolio in good faith.
|
Determination of the fair value involves subjective judgments
and estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to Patriots financial statements refer to the
uncertainty with respect to the possible effect of such
valuations, and any change in such valuations, on its financial
statements.
Competition
Patriot competes for investments with a number of business
development companies and other investment funds (including
private equity funds and mezzanine funds), as well as
traditional financial services companies such as commercial
banks and other sources of financing. Many of these entities
have greater financial and managerial resources than Patriot
does. Patriot believes it competes with these entities primarily
on the basis of its willingness to make smaller investments, the
experience and contacts of its management team, its responsive
and efficient investment analysis and decision-making processes,
its comprehensive suite of customized financing solutions and
the investment terms it offers. Patriot does not seek to compete
primarily on the interest rates it offers to potential portfolio
companies, and it believes that some of its competitors make
senior secured loans, junior secured loans and subordinated debt
investments with interest rates that are comparable to or lower
than the rates it offers.
Employees
As of June 30, 2009, Patriot had 11 employees,
including investment and portfolio management professionals, and
operations professionals.
Legal
Proceedings
Although Patriot may, from time to time, be involved in
litigation arising out of its operations in the normal course of
business or otherwise, it is currently not a party to any
pending material legal proceedings, except as otherwise
disclosed in The Merger Proposal Litigation
Related to the Merger.
126
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PATRIOT
Overview
Patriot is a specialty finance company that provides customized
financing solutions to small- to mid-sized companies.
Patriots ability to invest across a companys capital
structure, from senior secured loans to equity securities,
allows it to offer a comprehensive suite of financing solutions,
including one-stop financing. In August 2005,
Patriot completed an initial public offering of shares of its
common stock and it elected to be treated as a business
development company under the 1940 Act in connection with its
initial public offering. Patriot has also elected to be treated
as a RIC under Subchapter M of the Code. Pursuant to this
election, Patriot generally will not have to pay corporate-level
taxes on any income or gains it distributes (actually or as a
deemed dividend) to its stockholders as dividends, provided that
it satisfies certain requirements.
In light of the unprecedented instability in the financial
markets and the severe slowdown in the overall economy, Patriot
does not have adequate liquidity, including access to the debt
and equity capital markets, to operate its business. As a
result, Patriots short-term business focus has shifted
from making debt and equity investments to preserving its
liquidity position. In this regard, on April 3, 2009, a
termination event (i.e., default) occurred under the Amended
Securitization Facility due to the amount of its advances
outstanding under the facility exceeding the maximum
availability under the facility for more than three consecutive
business days. The maximum availability under the facility is
determined by, among other things, the fair market value of all
eligible loans serving as collateral under the facility. Because
the fair market value of certain eligible loans decreased at
December 31, 2008, Patriots advances outstanding
under the facility exceeded the maximum availability under the
facility. This determination was made in connection with the
delivery of a borrowing base report to the facility lenders on
March 31, 2009. As a result of the occurrence of the
termination event under the facility, Patriot can no longer make
additional advances under the facility. Also, the interest rate
payable under the Amended Securitization Facility increased from
the commercial paper rate plus 1.75% to the prime rate plus
3.75%. In addition, the terms of the facility require that from
April 3, 2009 all principal, interest and fees collected
from the debt investments secured by the facility must be used
to pay down amounts outstanding under the facility within
24 months following the date of the termination event.
Substantially all of Patriots debt investments are secured
under its Amended Securitization Facility. The facility also
permits the lenders, upon notice to Patriot, to accelerate
amounts outstanding under the facility and exercise other rights
and remedies provided by the facility, including the right to
sell the collateral under the facility. To date, Patriot has not
received any such notice from the lenders. At June 30,
2009, the interest rate under the Amended Securitization
Facility was 7.0%.
Moreover, Patriots independent registered public
accounting firm issued an opinion on Patriots
December 31, 2008 consolidated financial statements that
states that the consolidated financial statements were prepared
assuming Patriot will continue as a going concern and further
states that the uncertainty regarding the renewal of the
liquidity facility supporting the Amended Securitization
Facility raises substantial doubt about Patriots ability
to continue as a going concern. At the time Patriots
independent registered public accounting firm issued this
opinion, Patriot was negotiating the renewal of the liquidity
facility, which matured on April 11, 2009, that supported
its Amended Securitization Facility with certain liquidity
banks. In the event that the liquidity banks did not renew the
liquidity facility, the terms of the Amended Securitization
Facility would require, among other things, that all principal
and interest collected from the debt investments secured by the
Amended Securitization Facility be used to pay down amounts
outstanding under the facility by April 2011. Subsequent to the
issuance of this opinion by Patriots independent
registered public accounting firm, the liquidity banks
determined not to renew the liquidity facility supporting the
Amended Securitization Facility.
Portfolio
Composition
Patriots primary business is lending to and investing in
small- to mid-sized businesses through investments in senior
secured loans, junior secured loans, subordinated debt
investments and equity-based
127
investments, including warrants. The fair value of its portfolio
was $283.9 million and $322.4 million at June 30,
2009 and December 31, 2008, respectively.
Total portfolio investment activity as of and for the six months
ended June 30, 2009 and the year ended December 31,
2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Beginning portfolio at fair value
|
|
$
|
322,370,748
|
|
|
$
|
384,725,753
|
|
Investments in debt securities
|
|
|
10,273,276
|
|
|
|
79,096,786
|
|
Investments in equity securities
|
|
|
188
|
|
|
|
3,245,937
|
|
Investment repayments
|
|
|
(21,116,671
|
)
|
|
|
(95,018,988
|
)
|
Increase in
payment-in-kind
interest/dividends
|
|
|
2,218,782
|
|
|
|
5,452,124
|
|
Sale of investments
|
|
|
(1,377,011
|
)
|
|
|
(15,267,401
|
)
|
Change in unearned revenue
|
|
|
443,572
|
|
|
|
(129,458
|
)
|
Realized loss on investments
|
|
|
(12,013,473
|
)
|
|
|
|
|
Change in fair value of investments
|
|
|
(16,870,174
|
)
|
|
|
(39,992,921
|
)
|
|
|
|
|
|
|
|
|
|
Ending portfolio at fair value
|
|
$
|
283,929,237
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 and December 31, 2008, the
composition of Patriots portfolio at fair value was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Senior secured revolving lines of credit
|
|
$
|
14,252,865
|
|
|
|
5.0
|
%
|
|
$
|
10,266,191
|
|
|
|
3.2
|
%
|
Senior secured term loans
|
|
|
123,459,342
|
|
|
|
43.5
|
|
|
|
146,372,476
|
|
|
|
45.4
|
|
Junior secured term loans
|
|
|
50,861,771
|
|
|
|
17.9
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
Senior subordinated debt
|
|
|
85,658,932
|
|
|
|
30.2
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
Investments in equity securities
|
|
|
9,696,327
|
|
|
|
3.4
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009 and year ended
December 31, 2008, the weighted average yield on all of
Patriots outstanding debt investments was approximately
10.7% and 12.1%, respectively. The weighted average balance of
its debt investment portfolio during the six months ended
June 30, 2009 was $300.3 million, down from
$333.2 million during the fourth quarter of 2008. Yields
are computed using actual interest income earned for the year
(annualized for the six months ended June 30, 2009),
including amortization of loan fees and original issue discount,
divided by the weighted average fair value of debt investments.
As of June 30, 2009 and December 31, 2008,
$109.8 million and $123.5 million, respectively, of
Patriots portfolio investments at fair value were at fixed
interest rates, which represented approximately 39% and 38%,
respectively, of its total portfolio of investments at fair
value. Patriot generally structures its subordinated debt
investments at fixed rates while many of its senior secured and
junior secured loans are, and will be, at variable rates.
At June 30, 2009 and December 31, 2008, Patriots
equity investments consisted of common and preferred stock, LLC
membership interests and warrants to acquire equity interests in
certain of its portfolio companies. Warrants to acquire equity
interests allow Patriot to participate in the potential
appreciation in the value of the portfolio company, while
minimizing the amount of upfront cost to it.
128
The composition of Patriots investment portfolio by
industry sector, using Moodys Industry Classifications,
excluding unearned income, as of June 30, 2009 and
December 31, 2008 at cost and fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Machinery
|
|
$
|
51,631,722
|
|
|
|
15.0
|
%
|
|
$
|
36,171,707
|
|
|
|
12.7
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
Health Care, Education & Childcare
|
|
|
39,025,805
|
|
|
|
11.3
|
|
|
|
37,864,405
|
|
|
|
13.3
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
Personal & Nondurable Consumer Products
|
|
|
38,546,025
|
|
|
|
11.2
|
|
|
|
36,274,356
|
|
|
|
12.8
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
Automobile
|
|
|
30,715,635
|
|
|
|
8.9
|
|
|
|
23,050,225
|
|
|
|
8.1
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
Textiles & Leather
|
|
|
28,954,845
|
|
|
|
8.4
|
|
|
|
27,780,125
|
|
|
|
9.8
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
Electronics
|
|
|
27,233,211
|
|
|
|
7.9
|
|
|
|
27,389,835
|
|
|
|
9.6
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
Printing & Publishing
|
|
|
26,352,526
|
|
|
|
7.6
|
|
|
|
11,324,964
|
|
|
|
4.0
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
Metals & Minerals
|
|
|
23,089,697
|
|
|
|
6.7
|
|
|
|
22,746,197
|
|
|
|
8.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
17,921,135
|
|
|
|
5.2
|
|
|
|
11,323,286
|
|
|
|
4.0
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
Retail Stores
|
|
|
11,579,947
|
|
|
|
3.4
|
|
|
|
11,484,713
|
|
|
|
4.1
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
Housewares & Durable Consumer Products
|
|
|
11,106,570
|
|
|
|
3.2
|
|
|
|
7,292,672
|
|
|
|
2.6
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
Ecological
|
|
|
9,929,859
|
|
|
|
2.9
|
|
|
|
9,588,359
|
|
|
|
3.4
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
Grocery
|
|
|
8,393,329
|
|
|
|
2.4
|
|
|
|
8,541,001
|
|
|
|
3.0
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
Chemicals, Plastic & Rubber
|
|
|
5,360,932
|
|
|
|
1.6
|
|
|
|
3,781,610
|
|
|
|
1.3
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
Insurance
|
|
|
5,012,842
|
|
|
|
1.5
|
|
|
|
4,699,639
|
|
|
|
1.6
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
Buildings & Real Estate
|
|
|
4,492,943
|
|
|
|
1.3
|
|
|
|
4,492,943
|
|
|
|
1.6
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
Personal, Food & Miscellaneous Services
|
|
|
3,000,000
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
123,200
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of total portfolio. |
At June 30, 2009 and December 31, 2008, Patriot did
not have any investment in excess of 10% of its total investment
portfolio at fair value. Investment income, consisting of
interest, dividends and fees can fluctuate dramatically upon
repayment of an investment or sale of an equity interest.
Revenue recognition in any given period can be highly
concentrated among several portfolio companies. During the three
and six months ended June 30, 2009 and 2008, Patriot did
not record investment income from any portfolio company in
excess of 10% of total investment income.
Portfolio
Asset Quality
Patriot utilizes a standard investment rating system for its
entire portfolio of debt investments. Investment Rating 1 is
used for investments that exceed expectations
and/or a
capital gain is expected. Investment Rating 2 is used for
investments that are generally performing in accordance with
expectations. Investment Rating 3 is used for performing
investments that require closer monitoring. Investment Rating 4
is used for investments performing below expectations where a
higher risk of loss exists. Investment Rating 5 is used for
investments performing significantly below expectations where we
expect a loss.
129
The following table shows the distribution of Patriots
debt investments on the 1 to 5 investment rating scale at fair
value as of June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
|
|
|
1
|
|
$
|
95,779,317
|
|
|
|
34.9
|
%
|
|
$
|
82,179,735
|
|
|
|
26.7
|
%
|
|
|
|
|
2
|
|
|
134,852,717
|
|
|
|
49.2
|
|
|
|
184,507,897
|
|
|
|
59.9
|
|
|
|
|
|
3
|
|
|
30,469,979
|
|
|
|
11.1
|
|
|
|
21,275,475
|
|
|
|
6.9
|
|
|
|
|
|
4
|
|
|
4,890,139
|
|
|
|
1.8
|
|
|
|
8,477,320
|
|
|
|
2.7
|
|
|
|
|
|
5
|
|
|
8,240,758
|
|
|
|
3.0
|
|
|
|
11,639,548
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
274,232,910
|
|
|
|
100.0
|
%
|
|
$
|
308,079,975
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009 and December 31, 2008, Patriot had
loans and equity investments from six and three, respectively,
of its portfolio companies on non-accrual status.
In the event that the United States economy continues in a
prolonged recession, it is possible that the financial results
of small- to mid-sized companies, similar to those in which
Patriot invests, could experience further deterioration, which
could ultimately lead to difficulty in meeting debt service
requirements and an increase in defaults. Patriot can provide no
assurance that the performance of certain of its portfolio
companies will not be negatively impacted by these economic or
other conditions which could have a negative impact on its
future results.
Results
of Operations
The principal measure of Patriots financial performance is
net income (loss), which includes net investment income (loss),
net realized gain (loss) and net unrealized appreciation
(depreciation). Net investment income (loss) is the difference
between Patriots income from interest, dividends, fees,
and other investment income and its operating expenses. Net
realized gain (loss) on investments is the difference between
the proceeds received from dispositions of portfolio investments
and their stated cost. Net unrealized appreciation
(depreciation) on investments is the net change in the fair
value of Patriots investment portfolio. Net unrealized
appreciation (depreciation) on interest rate swaps is the net
change in the fair value of its outstanding swap agreements.
Comparison
for the three months ended June 30, 2009 and 2008
Total
Investment Income
Total investment income includes interest and dividend income on
Patriots investments, fee income and other investment
income. Fee income consists principally of loan and arrangement
fees, annual administrative fees, unused fees, prepayment fees,
amendment fees, equity structuring fees and waiver fees. Other
investment income consists primarily of the accelerated
recognition of deferred financing fees received from
Patriots portfolio companies on the repayment of the
outstanding investment, the sale of the investment or reduction
of available credit.
Total investment income for the three months ended June 30,
2009 and 2008, was $8.1 million and $10.7 million,
respectively. For the three months ended June 30, 2009,
this amount consisted of interest income of $12,000 from cash
and cash equivalents, $7.8 million of interest and dividend
income from portfolio investments (which included
$1.1 million in
payment-in-kind
or PIK interest and dividends) and $288,000 of fee income. For
the three months ended June 30, 2008, this amount consisted
of interest income of $30,000 from cash and cash equivalents,
$10.1 million of interest and dividend income from
portfolio investments (which included $1.4 million in
payment-in-kind
or PIK interest and dividends), $142,000 in fee income and
$380,000 in other investment income.
The decrease in Patriots total investment income for the
three months ended June 30, 2009 as compared to the three
months ended June 30, 2008 was primarily attributable to a
decrease in the weighted average fair
130
value balance outstanding of its interest-bearing investment
portfolio during the quarter ended June 30, 2009. The
primary reason behind the decrease in total investment income
was a decrease in interest income due to the decrease in the
weighted average fair value balance of its investment portfolio,
and a decrease in the weighted average yield of its investments.
During the three months ended June 30, 2009, the weighted
average fair value balance outstanding of Patriots
interest-bearing investment portfolio was approximately
$292.4 million as compared to approximately
$337.3 million during the three months ended June 30,
2008. The weighted average yield on Patriots investments
during the three months ended June 30, 2009 decreased as a
result of an increase in the number of loans on non-accrual
status and an overall decrease in market interest rates.
Expenses
Expenses include compensation expense, interest on
Patriots outstanding indebtedness, professional fees, and
general and administrative expenses.
Expenses for the three months ended June 30, 2009 and 2008,
were $5.6 million and $4.2 million, respectively.
Expenses increased for the three months ended June 30, 2009
as compared to the three months ended June 30, 2008 by
approximately $1.4 million, primarily as a result of higher
interest expense of $852,000, higher professional fees of
$610,000 and higher general and administrative expenses of
$126,000, partially offset by lower compensation expense which
decreased by $268,000. The lower compensation expense was
principally attributable to the elimination of bonus accruals
given the impact of the current market and economic environment
on Patriots financial performance, reduction of employee
headcount during the fourth quarter of 2008 and the first
quarter of 2009, partially offset by an increase in base salary
for three of Patriots executive officers during the first
quarter of 2009. The increase in interest expense was
attributable to an increase in interest rates during the second
quarter of 2009 as a result of the April 3, 2009
termination event which occurred under the Amended
Securitization Facility. Patriots weighted average
borrowings outstanding were approximately $141.5 million
during the three months ended June 30, 2009, as compared to
$139.6 million during the three months ended June 30,
2008. Such borrowings were used primarily to fund investments.
The increase in professional fees expense is primarily due to
additional legal fees we incurred in 2009 relating to the
termination event under the Amended Securitization Facility and
Patriots evaluation of strategic alternatives. The
increase in general and administrative expenses is primarily the
result of additional costs incurred in connection with the
evaluation of strategic alternatives, including additional fees
paid to Patriots directors in connection with board
meetings relating to the termination event under the Amended
Securitization Facility and the evaluation of strategic
alternatives.
Realized
Gain (Loss) on Disposition of Investments
Net realized gain (loss) on investments is the difference
between the proceeds received from dispositions of portfolio
investments and their stated cost. During the three months ended
June 30, 2009, Patriot realized a loss of $413,000 on
investments principally from the sale of one syndicated loan
investment. During the three months ended June 30, 2008,
Patriot realized a loss of $344,000 on investments principally
from the cancellation of warrants in which it had previously
recorded unrealized depreciation on the entire warrant balance.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of Patriots investment
portfolio during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains or losses are realized. During the three months ended
June 30, 2009 and 2008, Patriot recorded net unrealized
depreciation of $12.7 million and $3.4 million,
respectively, on its investments. For the three months ended
June 30, 2009, Patriots net unrealized depreciation
consisted of the following: approximately $12.9 million of
unrealized depreciation resulted from a decline in cash flows of
its portfolio companies; approximately $1.5 million of
unrealized depreciation which resulted from changes in market
multiples and interest rates; offset by approximately
$1.7 million of unrealized appreciation resulted from
quoted market prices on its syndicated loan portfolio. For the
three months ended June 30, 2008, Patriots net
unrealized depreciation consisted of the following:
approximately $217,000 of unrealized
131
depreciation resulted from the decrease in quoted market prices
on its syndicated loan portfolio as a result of the disruption
in the credit markets for broadly syndicated loans;
approximately $3.6 million resulted from a decline in the
financial performance of its portfolio companies; offset by
approximately $452,000 of unrealized appreciation which resulted
from changes in market multiples and interest rates.
Net
Unrealized Appreciation or Depreciation on Interest Rate
Swaps
Net unrealized appreciation (depreciation) on interest rate
swaps represents the change in the value of the swap agreements.
For the three months ended June 30, 2009 and 2008, Patriot
recorded unrealized appreciation of approximately $679,000 and
$970,000, respectively, on its interest rate swap agreements.
The unrealized appreciation in the value of its interest rate
swap agreements in 2009 and 2008 resulted from the volatility
and corresponding fluctuation in variable interest rates during
the periods. On July 9, 2009, Patriot terminated all eight
interest rate swap agreements in connection with entering into
an agreement, limited consent and amendment to its Amended
Securitization Facility with the lenders and incurred a
liability of approximately $3.3 million.
Net
Income (Loss)
Net loss was $9.9 million for the quarter ended
June 30, 2009 as compared to net income of
$3.7 million for the quarter ended June 30, 2008. The
net loss for the three months ended June 30, 2009
principally related to net unrealized depreciation of
$12.7 million on Patriots investments.
Comparison
for the six months ended June 30, 2009 and 2008
Total
Investment Income
Total investment income includes interest and dividend income on
Patriots investments, fee income and other investment
income. Fee income consists principally of loan and arrangement
fees, annual administrative fees, unused fees, prepayment fees,
amendment fees, equity structuring fees and waiver fees. Other
investment income consists primarily of the accelerated
recognition of deferred financing fees received from its
portfolio companies on the repayment of the outstanding
investment, the sale of the investment, or reduction of
available credit.
Total investment income for the six months ended June 30,
2009 and 2008, was $16.6 million and $21.9 million,
respectively. For the six months ended June 30, 2009, this
amount consisted of interest income of $31,000 from cash and
cash equivalents, $16.1 million of interest income from
portfolio investments (which included $2.3 million in
payment-in-kind
or PIK interest and dividends), $455,000 in fee income and
$9,000 in other investment income. For the six months ended
June 30, 2008, this amount consisted of interest income of
$84,000 from cash and cash equivalents, $21.0 million of
interest income from portfolio investments (which included
$3.0 million in
payment-in-kind
or PIK interest and dividends), $356,000 in fee income and
$420,000 in other investment income.
The decrease in Patriots total investment income for the
six months ended June 30, 2009 as compared to the six
months ended June 30, 2008 was primarily attributable to a
decrease in the weighted average fair value balance outstanding
of its interest-bearing investment portfolio during the six
months ended June 30, 2009. The primary reason behind the
decrease in total investment income was a decrease in interest
income due to the decrease in the weighted average fair value
balance of its investment portfolio, and a decrease in the
weighted average yield of its investments. During the six months
ended June 30, 2009, the weighted average fair value
balance outstanding of Patriots interest-bearing
investment portfolio was approximately $300.3 million as
compared to approximately $350.3 million during the six
months ended June 30, 2008. The weighted average yield on
its investments during the six months ended June 30, 2009
decreased as a result of an increase in the number of loans on
non-accrual status and an overall decrease in market interest
rates.
132
Expenses
Expenses include compensation expense, interest on outstanding
indebtedness, professional fees, and general and administrative
expenses.
Expenses for the six months ended June 30, 2009 and 2008,
were $9.0 million and $8.7 million, respectively.
Expenses increased for the six months ended June 30, 2009
as compared to the six months ended June 30, 2008 by
approximately $300,000, primarily as a result of higher interest
expense which increased by $379,000, higher professional fees of
$676,000 and higher general and administrative expenses which
increased by $68,000, offset by lower compensation expense which
decreased by $846,000. The lower compensation expense was
principally attributable to the elimination of bonus accruals
given the impact of the current market and economic environment
on Patriots financial performance, reduction of employee
headcount during the fourth quarter of 2008 and the first
quarter of 2009, partially offset by an increase in base salary
for three of Patriots executive officers during the first
quarter of 2009. The increase in interest expense was
attributable to a increase in interest rates during the second
quarter of 2009 as a result of the April 3, 2009
termination event which occurred under the Amended
Securitization Facility. Patriots weighted average
borrowings outstanding were approximately $146.4 million
during the six months ended June 30, 2009, as compared to
$146.2 million during the six months ended June 30,
2008. Such borrowings were used primarily to fund investments.
The increase in professional fees expense is primarily due to
additional legal fees Patriot incurred in 2009 relating to the
termination event under the Amended Securitization Facility and
Patriots evaluation of strategic alternatives. The
increase in general and administrative expenses is primarily the
result of additional costs incurred in connection with the
evaluation of strategic alternatives, including additional fees
paid to Patriots directors in connection with board
meetings relating to the termination event under the Amended
Securitization Facility, offset by reduced travel, advertising
and investor relations expenses.
Realized
Gain (Loss) on the Disposition of Investments
Net realized gain (loss) on investments is the difference
between the proceeds received from dispositions of portfolio
investments and their stated cost. During the six months ended
June 30, 2009, Patriot realized a loss of
$12.0 million due to the permanent impairment of loans to
one of its portfolio companies and the sale of one syndicated
loan investment. During the six months ended June 30, 2008,
Patriot realized a loss of $434,000 on investments from the sale
of one portfolio debt investment and from the cancellation of
warrants in which it had previously recorded unrealized
depreciation on the entire warrant balance.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of Patriots investment
portfolio during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains or losses are realized. During the six months ended
June 30, 2009 and 2008, we recorded net unrealized
depreciation of $16.9 million and $13.2 million,
respectively, on Patriots investments. For the six months
ended June 30, 2009, Patriots net unrealized
depreciation consisted of the following: approximately
$17.5 million of unrealized depreciation resulted from a
decline in cash flows of Patriots portfolio companies;
approximately $0.7 million of unrealized depreciation which
resulted from changes in market multiples and interest rates;
offset by approximately $1.3 million of unrealized
appreciation resulted from quoted market prices on its
syndicated loan portfolio. For the six months ended
June 30, 2008, Patriots net unrealized depreciation
consists of the following: approximately $1.4 million of
unrealized depreciation resulted from the decrease in quoted
market prices on its syndicated loan portfolio as a result of
disruption in the financial credit markets for broadly
syndicated loans; approximately $7.8 million resulted
133
from a decline in the financial performance of its portfolio
companies; and approximately $4.0 million resulted from
changes in market multiples and interest rates.
Unrealized
Appreciation or Depreciation on Interest Rate
Swaps
Net unrealized appreciation on interest rate swaps represents
the change in the fair value of Patriots swap agreements.
For the six months ended June 30, 2009 and 2008, Patriot
recorded unrealized appreciation of approximately $862,000 and
$217,000, respectively, on its interest rate swap agreements.
The unrealized appreciation in the value of its interest rate
swap agreements in 2009 and 2008 resulted from the volatility
and corresponding fluctuation in variable interest rates during
the periods. On July 9, 2009, Patriot terminated all eight
interest rate swap agreements in connection with entering into
an agreement, limited consent and amendment to its Amended
Securitization Facility with the lenders and incurred a
liability of approximately $3.3 million.
Net
Income (Loss)
Net loss was $20.4 million for the six months ended
June 30, 2009 as compared to net loss of $232,000 for the
six months ended June 30, 2008. The $20.2 million
increase in net loss was primarily a result of an increase in
net unrealized depreciation of $3.7 million, an increase in
realized losses of $11.6 million, and a decrease in net
investment income of $5.5 million.
Comparison of the year ended December 31, 2008 and
December 31, 2007
Total
Investment Income
Total investment income included interest and dividend income on
Patriots investments, fee income and other investment
income. Fee income consists principally of loan and arrangement
fees, annual administrative fees, unused fees, prepayment fees,
amendment fees, equity structuring fees and waiver fees. Other
investment income consists primarily of the accelerated
recognition of deferred financing fees received from
Patriots portfolio companies on the repayment of the
entire outstanding investment, the sale of the investment or
reduction of available credit.
Total investment income for the years ended December 31,
2008 and December 31, 2007 was $42.3 million and
$39.0 million, respectively. For the year ended
December 31, 2008, this amount consisted of interest income
of $142,000 from cash and cash equivalents, $40.0 million
of interest and dividend income from portfolio investments
(which included $5.5 million in
payment-in-kind
or PIK interest and dividends), $1.4 million in fee income
and $750,000 in other investment income. For the year ended
December 31, 2007, this amount primarily consisted of
interest income of $255,000 from cash and cash equivalents,
$36.9 million of interest and dividend income from
portfolio investments (which included $3.9 million in
payment-in-kind
or PIK interest and dividends), $1.3 million in fee income
and $535,000 in other investment income.
The increase in Patriots total investment income for the
year ended December 31, 2008 as compared to the year ended
December 31, 2007 is primarily attributable to an increase
in the weighted average fair value balance outstanding of its
interest-bearing investment portfolio during the year ended
December 31, 2008, partially offset by a decrease in the
weighted average yield of its investments. The weighted average
yield decreased primarily as a result of an overall decrease in
market interest rates. During the year ended December 31,
2008, the weighted average fair value balance outstanding of
Patriots interest-bearing investment portfolio was
approximately $336.8 million as compared to approximately
$298.5 million during the year ended December 31,
2007. Total investments decreased from $384.7 million at
December 31, 2007 to $322.4 million at
December 31, 2008, primarily due to an increase in payoffs
recorded in 2008 in the amount of $27.7 million and an
increase of $36.4 million in unrealized depreciation for
the year ended December 31, 2008. However, the weighted
average balance outstanding increased in 2008 as a result of the
following: the majority of the net originations in 2007,
$127.5 million, occurred in the third and fourth quarters
of 2007; the majority of the unrealized depreciation recorded in
2008, $40.0 million, was recorded in the third and fourth
134
quarters of 2008. These factors contributed to influencing the
increase in the weighted average balance for 2008.
Expenses
Expenses included compensation expense, interest on
Patriots outstanding indebtedness, professional fees, and
general and administrative expenses.
Expenses for the years ended December 31, 2008 and 2007
were $16.6 million and $16.2 million, respectively.
Expenses increased for the year ended December 31, 2008 as
compared to the year ended December 31, 2007 primarily as a
result of increased interest expense in the amount of $737,000,
increased professional fees in the amount of $748,000 and
increased general and administrative expense in the amount of
$308,000. Those increases were partially offset by lower
compensation expense in the amount of $1.4 million. The
lower compensation expense was principally attributable to the
elimination of bonus accruals during the third and fourth
quarters of 2008 given the impact of the current market
environment on Patriots financial performance in 2008 and
the recognition that bonus awards for 2008 would be smaller than
previously anticipated. The higher interest expense is
attributable to an increase in the weighted average borrowings
outstanding under its $225.0 million amended and restated
securitization revolving credit facility, which were
approximately $141.5 million in 2008 as compared to
$106.0 million in 2007, and an increase in interest rates
on its outstanding indebtedness during the third and fourth
quarters of 2008. Such borrowings were primarily used to fund
investments. The increase in general and administrative expenses
is primarily a result of higher costs for benefits, proxy
solicitation fees and printing costs. The increase in
professional fees expense is primarily due to increases in the
fees Patriot incurred in 2008 related to accounting and
compliance costs in connection with the adoption of Statement
of Financial Standards No. 157 Fair Value
Measurements, on January 1, 2008 and the write-off of
legal and accounting costs related to the 2008 filing of a shelf
registration statement pursuant to which Patriot did not sell
any securities. In prior periods, Patriot capitalized such
expenses and expensed them in connection with securities
offerings pursuant to such shelf registration statements.
Realized
Gain (Loss) on Sale of Investments
Net realized gain (loss) on sale of investments is the
difference between the proceeds received from dispositions of
portfolio investments and their stated cost. During the year
ended December 31, 2008, Patriot realized losses of
$883,000, principally from the sale of two syndicated debt
investments and the cancellation of warrants which it had
previously written down to zero, which were partially offset by
the sale of an equity investment. During the year ended
December 31, 2007, Patriot realized gains of $92,000
principally due to the sale of equity warrants from one of its
portfolio investments.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
Patriot determines the value of each investment in its portfolio
on a quarterly basis, and changes in value result in unrealized
appreciation or depreciation being recognized in its statement
of operations. Value, as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for
which a market quotation is readily available and (ii) for
all other securities and assets, fair value as determined in
good faith by Patriots board of directors. Since there is
typically no readily available market value for the investments
in Patriots portfolio, it values substantially all of its
portfolio investments at fair value as determined in good faith
by its board of directors pursuant to written guidelines
established by its board of directors and a consistently applied
valuation process. See Business of Patriot
Determination of Net Asset Value for a discussion of its
valuation policy and process. At December 31, 2008 and
2007, portfolio investments recorded at fair value were
approximately 91.0% and 96.6% of Patriots total assets,
respectively. Because of the inherent uncertainty of determining
the fair value of investments that do not have a readily
available market, the fair value of Patriots investments
determined in good faith by the board of directors may differ
significantly from the values that would have been used had a
ready market existed for the investments, and the differences
could be material.
135
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of Patriots investment
portfolio during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains and losses are realized. During the year ended
December 31, 2008, Patriot recorded net unrealized
depreciation of $40.0 million on its investments and during
the year ended December 31, 2007, it recorded net
unrealized depreciation of $3.6 million on its investments.
For the year ended December 31, 2008, a portion of
Patriots net unrealized depreciation, approximately
$5.6 million, resulted from the decrease in quoted market
prices on its syndicated loan portfolio as a result of the
disruption in the credit markets for broadly syndicated loans;
approximately $27.5 million resulted from a decline in the
financial performance of its portfolio companies; and
approximately $6.9 million resulted from the
January 1, 2008 adoption of SFAS 157. During the year
ended December 31, 2007, Patriot recorded net unrealized
depreciation of $3.6 million on its investments. A
substantial portion of the unrealized depreciation recorded
during 2007 resulted from an increase in the number of its
portfolio companies requiring closer monitoring or performing
below expectations and, to a lesser extent, from quoted market
prices below par on its syndicated loan portfolio as a result of
the disruption in the financial and credit markets for large
syndicated loans.
Unrealized
Appreciation (Depreciation) on Interest Rate Swaps
Net unrealized appreciation (depreciation) on interest rate
swaps represents the change in value of Patriots swap
agreements. For the year ended December 31, 2008, Patriot
recorded an unrealized depreciation of approximately
$2.3 million on its interest rate swap agreements as
compared to $775,000 of unrealized depreciation in the
comparable period in 2007. The 2008 and 2007 unrealized
depreciation in the value of Patriots interest rate swap
agreements resulted from the volatility in interest rates during
both years.
Net
Income (Loss) from Operations
Net loss was $17.5 million for the year ended
December 31, 2008 as compared to net income of
$18.4 million for the year ended December 31, 2007.
The $35.9 million decrease in net income was primarily a
result of an increase in net realized and unrealized loss in the
amount of $38.9 million, partially offset by a
$3.0 million increase in net investment income.
Comparison
of the year ended December 31, 2007 and December 31,
2006
Total
Investment Income
Total investment income included interest and dividend income on
Patriots investments, fee income and other investment
income. Fee income consists principally of loan and arrangement
fees, annual administrative fees, unused fees, prepayment fees,
amendment fees, equity structuring fees and waiver fees. Other
investment income consists primarily of the accelerated
recognition of deferred financing fees received from
Patriots portfolio companies on the repayment of the
entire outstanding investment, the sale of the investment or
reduction of available credit.
Total investment income for the years ended December 31,
2007 and December 31, 2006 was $39.0 million and
$26.5 million, respectively. For the year ended
December 31, 2007, this amount consisted of interest income
of $255,000 from cash and cash equivalents, $36.9 million
of interest and dividend income from portfolio investments
(which included $3.9 million in
payment-in-kind
or PIK interest and dividends), $1.3 million in fee income
and $535,000 in other investment income. For the year ended
December 31, 2006, this amount primarily consisted of
interest income of $423,000 from cash and cash equivalents,
$25.0 million of interest and dividend income from
portfolio investments (which included $2.4 million in
payment-in-kind
or PIK interest and dividends), $270,000 in fee income and
$848,000 in other investment income.
The increase in Patriots total investment income for the
year ended December 31, 2007 as compared to the year ended
December 31, 2006 was primarily attributable to an increase
in the weighted average fair value balance outstanding of its
interest-bearing investment portfolio during the year ended
December 31, 2007. During the year ended December 31,
2007, the weighted average fair value balance outstanding of
Patriots interest-bearing investment portfolio was
approximately $298.5 million as compared to approximately
$192.5 million during the year ended December 31,
2006. The primary reason behind the increase in total
136
investment income was an increase in interest income due to the
increase in the size of Patriots investment portfolio,
partially offset by a decrease in the weighted average yield of
its investments, and an increase in fee income due to an
increase in prepayment penalties and structuring fees as well as
higher fees for amendments. The weighted average yield decreased
as a result of a shift in Patriots portfolio mix towards
more senior secured investments and an overall decrease in
market interest rates.
Expenses
Expenses included compensation expense, interest on
Patriots outstanding indebtedness, professional fees, and
general and administrative expenses.
Expenses for the years ended December 31, 2007 and 2006
were $16.2 million and $11.5 million, respectively.
Expenses increased for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 primarily as a
result of increased compensation expense in the amount of
$1.5 million, increased interest expense in the amount of
$3.1 million and increased general and administrative
expense in the amount of $269,000. Those increases were offset
by lower professional fees expense in the amount of $159,000.
The higher compensation expense was due to an increase in
salaries of existing employees, higher bonus accruals and the
addition of new employees during the year. The higher interest
expense was attributable to an increase in the weighted average
borrowings outstanding under Patriots $175.0 million
amended and restated securitization revolving credit facility,
which were approximately $106.0 million in 2007 as compared
to $55.3 million in 2006, and an increase in interest rates
on its outstanding indebtedness during the third and fourth
quarters of 2007. Such borrowings were primarily used to fund
investments. The increase in general and administrative expenses
was primarily a result of higher costs for benefits and travel
attributable to the increase in employees and computer software
expense. The decrease in professional fees expense was primarily
due to decreases in the fees Patriot incurred in 2006 related to
its initial compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
Realized
Gain (Loss) on Sale of Investments
Net realized gain (loss) on sale of investments is the
difference between the proceeds received from dispositions of
portfolio investments and their stated cost. During the year
ended December 31, 2007, Patriot realized gains of $92,000,
principally due to the sale of equity warrants from one of its
portfolio investments. During the year ended December 31,
2006, it sold its investment in Interstate Highway Sign
Corporation and realized a net loss of $3.3 million.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
Patriot determine the value of each investment in its portfolio
on a quarterly basis, and changes in value result in unrealized
appreciation or depreciation being recognized in its statement
of operations. Value, as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for
which a market quotation is readily available and (ii) for
all other securities and assets, fair value as determined in
good faith by Patriots board of directors. Since there is
typically no readily available market value for the investments
in its portfolio, Patriots value substantially all of its
portfolio investments at fair value as determined in good faith
by its board of directors pursuant to its valuation policy and a
consistently applied valuation process. See Business of
Patriot Determination of Net Asset Value for a
discussion of its valuation policy and process. At
December 31, 2007 and 2006, portfolio investments recorded
at fair value were approximately 96.6% and 95.1% of its total
assets, respectively. Because of the inherent uncertainty of
determining the fair value of investments that do not have a
readily available market, the fair value of Patriots
investments determined in good faith by the board of directors
may differ significantly from the values that would have been
used had a ready market existed for the investments, and the
differences could be material.
Net unrealized appreciation (depreciation) on investments is the
net change in the fair value of Patriots investment
portfolio during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains and losses are realized. During the year ended
December 31, 2007, Patriot recorded net unrealized
depreciation of $3.6 million on its investments and during
the year ended
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December 31, 2006, Patriot recorded net unrealized
appreciation of $3.8 million on its investments, which
primarily related to one investment which was sold during the
year at a realized loss of $3.3 million and the reversal of
the previously recorded unrealized loss related thereto. A
substantial portion of the unrealized depreciation recorded
during 2007 resulted from an increase in the number of
Patriots portfolio companies requiring closer monitoring
or performing below expectations and, to a lesser extent, from
quoted market prices below par on its syndicated loan portfolio
as a result of disruption in the financial and credit markets
for large syndicated loans. Sustained market disruptions in the
large corporate leverage loan market could continue to have a
downward impact on the amount of unrealized depreciation Patriot
record on its syndicated loans.
Unrealized
Appreciation (Depreciation) on Interest Rate Swaps
Net unrealized depreciation on interest rate swaps represents
the change in value of Patriots swap agreements. For the
year ended December 31, 2007, Patriot recorded an
unrealized depreciation of approximately $775,000 on its
interest rate swap agreements as compared to $13,000 in
unrealized appreciation in the comparable period in 2006. The
2007 unrealized depreciation in the value of Patriots
interest rate swap agreements resulted from the volatility in
interest rates during the year.
Net
Income from Operations
Net income was $18.4 million for the year ended
December 31, 2007 as compared to $15.6 million for the
year ended December 31, 2006. The $2.8 million
increase in net income was primarily a result of an increase in
investment income of $12.5 million in 2007, partially
offset by an increase in operating expenses in the amount of
$4.7 million and an increase in net realized and unrealized
loss in the amount of $4.9 million.
Financial
Condition, Liquidity and Capital Resources
Cash,
Cash Equivalents and Restricted Cash
At June 30, 2009 and December 31, 2008, Patriot had
$8.1 million and $6.4 million, respectively, in cash
and cash equivalents. In addition, at June 30, 2009 and
December 31, 2008, Patriot had $7.8 million and
$22.2 million, respectively, in restricted cash which it
maintained in accordance with the terms of its Amended
Securitization Facility. A portion of the December 31, 2008
funds were released or available to Patriot on January 12,
2009. Due to the termination event under the Amended
Securitization Facility on April 3, 2009, a portion of the
March 31, 2009 funds, which would have been released to
Patriot on April 13, 2009, were instead used to reduce the
outstanding borrowings under its Amended Securitization
Facility. As a result, any future funds that get released under
the Amended Securitization Facility will be used to reduce
outstanding borrowings until fully repaid. On June 30, 2009
and August 7, 2009, $137.4 million and
$115.7 million, respectively, was outstanding under the
Amended Securitization Facility. On August 7, 2009, Patriot
had $6.7 million in cash and cash equivalents.
For the six months ended June 30, 2009, net cash provided
by operating activities totaled $5.3 million, compared to
net cash provided by operating activities of $8.6 million
for the comparable 2008 period. This change was due primarily to
an increase in net loss, an increase in net realized losses on
investments, an increase in interest payable, a decrease in
unrealized depreciation on investments, an increase in
unrealized appreciation on swaps, and an increase in accounts
payable, accrued expenses and other. Those amounts were offset
by a decrease in PIK interest and dividends. Cash provided by
investing activities totaled $12.2 million and
$52.2 million for the six months ended June 30, 2009
and 2008, respectively. This change was principally due to lower
loan repayments and amortization of $30.4 million, and a
decrease in investment sales of $9.0 million during the
first half of 2009. Cash used for financing activities totaled
$15.8 million and $60.5 million in the six months
ended June 30, 2009 and 2008, respectively. This change was
principally due to a net decrease of $23.6 million in net
borrowings and a decrease of $8.2 million in dividends
paid, both of which were offset by an increase in restricted
cash in the amount of $11.8 million.
138
Liquidity
and Capital Resources
Patriot has historically relied on cash generated from its
operations and debt and equity financings to fund its business.
Patriot primarily used these funds to make investments in
portfolio companies in accordance with its investment objective,
to pay its operating expenses and to make cash distributions to
the holders of its common stock. However, since mid-2007, global
credit and other financial markets have suffered substantial
stress, volatility, illiquidity and disruption. These forces
reached unprecedented levels in late 2008, resulting in the
bankruptcy or acquisition of, or government assistance to,
several major domestic and international financial institutions.
In particular, the financial services sector has been negatively
impacted by significant write-offs related to sub-prime
mortgages and the re-pricing of credit risk. These events have
significantly diminished overall confidence in the debt and
equity markets and caused increasing economic uncertainty. This
reduced confidence and uncertainty has severely hampered
Patriots ability to obtain equity and debt financing.
As a result of this turmoil in the financial markets and
Patriots greatly diminished access to equity and debt
financing, it had previously taken a number of steps to help
improve the availability of liquidity, including:
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curtailing its investment originations;
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reducing its operating expenses;
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obtaining stockholder approval at its 2008 annual meeting of
stockholders to sell shares of its common stock below the then
current net asset value per share in one or more offerings for a
period of one year which ended on June 17, 2009; and
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postponing any decisions relating to 2009 dividend requirements,
if any, until Patriot has a better insight on its requirement
and its ability to pay.
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However, in light of the termination event which occurred under
the Amended Securitization Facility on April 3, 2009,
Patriot can no longer make additional advances under the
facility and must use all principal, interest and fees collected
from the debt investments secured by the facility to pay down
amounts outstanding under the facility by April 3, 2011.
Because substantially all of its debt investments are secured by
the Amended Securitization Facility, Patriot cannot provide any
assurance that it will have sufficient cash and liquid assets to
fund its operations and dividend distributions to its
stockholders. Moreover, Patriots ability to operate its
business in the manner in which it has historically operated
will be constrained until its ability to access the debt and
equity capital markets improves. In this regard, because
Patriots common stock has traded at a price significantly
below its current net asset value per share over the last
several months and it is limited in its ability to sell its
common stock at a price below net asset value per share without
first obtaining stockholder approval (which approval Patriot did
not seek at its 2009 annual meeting of stockholders), Patriot
may continue to be limited in its ability to raise equity
capital. In addition, as a business development company, Patriot
generally is required to meet a coverage ratio of total assets
less liabilities and indebtedness not represented by senior
securities, to total senior securities, which includes all of
its borrowings and any preferred stock it may issue in the
future, of at least 200%. This requirement limits the amount
that Patriot may borrow. As of June 30, 2009, this ratio
was 217%.
Borrowings
Securitization Revolving Credit Facility. On
September 18, 2006, Patriot, through a consolidated
wholly-owned bankruptcy remote, special purpose subsidiary,
entered into an amended and restated securitization revolving
credit facility (the Securitization Facility) with
an entity affiliated with BMO Capital Markets Corp. (formerly
known as Harris Nesbitt Corp.). The Securitization Facility
allowed the special purpose subsidiary to borrow up to
$140 million through the issuance of notes to a
multi-seller commercial paper conduit administered by the
affiliated entity. The Securitization Facility also required
bank liquidity commitments (the Liquidity Facility)
to provide liquidity support to the conduit. The Liquidity
Facility was provided by the lender that participated in the
Securitization Facility for a period of
364-days and
was renewable annually thereafter at the option of the lender.
On May 2, 2007, Patriot amended the Securitization
139
Facility to lower the interest rate payable on any outstanding
borrowings under the Securitization Facility from the commercial
paper rate plus 1.35% to the commercial paper rate plus 1.00%
during the period of time Patriot was permitted to make draws
under the Securitization Facility. The amendment also reduced or
eliminated certain restrictions pertaining to certain loan
covenants. On August 31, 2007, Patriot amended the
Securitization Facility to increase its borrowing capacity
thereunder by $35 million. The amendment also extended the
commitment termination date from July 23, 2009 to
July 22, 2010 and reduced or eliminated certain
restrictions pertaining to certain loan covenants. The
Securitization Facility provided for the payment by Patriot to
the lender of a monthly fee equal to 0.25% per annum on the
unused amount of the Securitization Facility.
On April 11, 2008, Patriot entered into the Amended
Securitization Facility with an entity affiliated with BMO
Capital Markets Corp. and Branch Banking and Trust Company
(the Lenders). The Amended Securitization Facility
amended and restated the Securitization Facility to, among other
things: (i) increase the borrowing capacity from
$175 million to $225 million; (ii) extend the
maturity date from July 22, 2010 to April 11, 2011
(unless extended prior to such date for an additional
364-day
period with the consent of the Lenders); (iii) increase the
interest rate payable under the facility from the commercial
paper rate plus 1.00% to the commercial paper rate plus 1.75% on
up to $175 million of outstanding borrowings and the LIBOR
rate plus 1.75% on up to $50 million of outstanding
borrowings; and (iv) increase the unused commitment fee
from 0.25% per annum to 0.30% per annum.
Similar to the Securitization Facility, the Amended
Securitization 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 Amended Securitization 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 have
resulted in the early termination of the Amended Securitization
Facility. The Amended Securitization Facility also requires the
maintenance of the Liquidity Facility. The Liquidity Facility
was provided by the Lenders that participate in the
Securitization Facility for a period of
364-days and
was renewable annually thereafter at the option of the lenders.
The Liquidity Facility was scheduled to be renewed in April
2009. The Amended Securitization Facility is secured by all of
the loans held by the Companys special purpose subsidiary.
On April 3, 2009, a termination event occurred under the
Amended Securitization Facility due to the amount of
Patriots advances outstanding under the facility exceeding
the maximum availability under the facility for more than three
consecutive business days. The maximum availability under the
facility is determined by, among other things, the fair market
value of all eligible loans serving as collateral under the
facility. Because the fair market value of certain eligible
loans decreased at December 31, 2008, Patriots
advances outstanding under the facility exceeded the maximum
availability under the facility. This determination was made in
connection with the delivery of a borrowing base report to the
facility lenders on March 31, 2009. As of such date,
Patriot had $157.6 million outstanding under the facility.
As a result of the occurrence of the termination event under the
facility, Patriot can no longer make additional advances under
the facility. Also, the interest rate payable under the Amended
Securitization Facility increased from the commercial paper rate
plus 1.75% to the prime rate plus 3.75%. In addition, the terms
of the facility require that all principal, interest and fees
collected from the debt investments secured by the facility must
be used to pay down amounts outstanding under the facility
within 24 months following the date of the termination
event. The facility also permits the Lenders, upon notice to
Patriot, to accelerate amounts outstanding under the facility
and exercise other rights and remedies provided by the facility,
including the right to sell the collateral under the facility.
To date, Patriot has not received any such notice from the
Lenders.
At June 30, 2009, $137.4 million was outstanding under
the Amended Securitization Facility. At June 30, 2009, the
interest rate payable on amounts outstanding under the Amended
Securitization Facility was 7.0%.
Since 2006, Patriot, through its special purpose subsidiary,
entered into eight interest rate swap agreements. The swap
agreements have a fixed rate range of 3.3% to 5.2% on an initial
notional amount of $53.6 million. The swap agreements
generally expire up to five years from issuance. The swaps were
put into
140
place to hedge against changes in variable interest payments on
a portion of Patriots outstanding borrowings. For the six
months ended June 30, 2009 and 2008, net unrealized
appreciation attributed to the swaps were approximately $862,000
and $217,000, respectively. While hedging activities may
insulate Patriot against adverse changes in interest rates, they
may also limit its ability to participate in the benefits of
lower rates with respect to the outstanding borrowings. On
July 9, 2009, Patriot terminated all eight interest rate
swap agreements and realized a loss of $3.3 million.
Regulated
Investment Company Status and Dividends
Effective as of August 1, 2005, Patriot elected to be
treated as a RIC under Subchapter M of the Code. As long as
Patriot qualifies as a RIC, it will not be taxed on its
investment company taxable income or realized net capital gains,
to the extent that such taxable income or gains are distributed,
or deemed to be distributed, to shareholders on a timely basis.
Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses, and generally excludes
net unrealized appreciation or depreciation, until realized.
Dividends declared and paid by Patriot in a year may differ from
taxable income for that year as such dividends may include the
distribution of current year taxable income, the distribution of
prior year taxable income carried forward into and distributed
in the current year. Distributions also may include returns of
capital.
To maintain RIC tax treatment, Patriot must, among other things,
distribute, with respect to each taxable year, at least 90% of
its investment company taxable income (i.e., its net ordinary
income and its realized net short-term capital gains in excess
of realized net long-term capital losses, if any). In order to
avoid certain excise taxes imposed on RICs, Patriot must
distribute, with respect to each calendar year, an amount at
least equal to the sum of (1) 98% of its ordinary income
for the calendar year, (2) 98% of its capital gains in
excess of capital losses for the one-year period ending on
October 31 of the calendar year and (3) any ordinary income
and net capital gains for preceding years that were not
distributed during such years. To the extent Patriots
taxable earnings for a fiscal tax year falls below the total
amount of its distributions for that fiscal year, a portion of
those distributions may be deemed a return of capital to its
shareholders.
Patriot may not be able to achieve operating results that will
allow it to make distributions at a specific level or to
increase the amount of these distributions from time to time. As
a result of the termination event that occurred under the
Amended Securitization Facility on April 3, 2009, Patriot
is required to dedicate a significant portion of its operating
cash flow to repay the principal amount outstanding under the
Amended Securitization Facility by April 2011. As a result,
Patriot may be required to severely limit or otherwise cease
making cash distributions to its stockholders. If Patriot does
not distribute at least a certain percentage of its taxable
income annually, it will suffer adverse tax consequences,
including possible loss of its status as a RIC. Patriot cannot
assure shareholders that they will receive any distributions or
distributions at a particular level. In addition, Patriot may be
limited in its ability to make distributions due to the asset
coverage test for borrowings applicable to it as a business
development company under the 1940 Act. As a result of
Patriots tax loss for the six months ended June 30,
2009, Patriot did not have any required dividend distributions.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations of Patriot
Recent Developments for a discussion on how the
consummation of the merger with Prospect will impact
Patriots required dividend distributions.
Critical
Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of
the financial statements, and revenues and expenses during the
period reported. On an ongoing basis, Patriots management
evaluates its estimates and assumptions, which are based on
historical experience and on various other assumptions that it
believes to be reasonable under the circumstances. Actual
results could differ from those
141
estimates. Changes in its estimates and assumptions could
materially impact Patriots results of operations and
financial condition.
Going
Concern
A fundamental principle of the preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America is the assumption that
an entity will continue in existence as a going concern, which
contemplates continuity of operations and the realization of
assets and settlement of liabilities occurring in the ordinary
course of business. This principle is applicable to all entities
except for entities in liquidation or entities for which
liquidation appears imminent. In accordance with this
requirement, Patriots policy is to prepare its
consolidated financial statements on a going concern basis
unless it intends to liquidate or have no other alternative but
to liquidate. As a result of the termination event that occurred
under the Amended Securitization Facility, Patriot can no longer
make additional advances under the facility. In addition, the
terms of the facility require that all principal, interest and
fees collected from the debt investments secured by the facility
must be used to pay down amounts outstanding under the facility
within 24 months following the date of the termination
event. The facility also permits the lenders, upon notice to
Patriot, to accelerate amounts outstanding under the facility
and exercise other rights and remedies provided by the facility,
including the right to sell the collateral under the facility.
Patriot has not received any such notice from the lenders. While
Patriot has prepared its consolidated financial statements on a
going concern basis, if it is unable to obtain relief from
certain terms of the facility, its ability to continue as a
going concern may be severely impacted. Therefore, Patriot may
not be able to realize its assets and settle its liabilities in
the ordinary course of business. Patriots consolidated
financial statements included in this document do not reflect
any adjustments that might specifically result from the outcome
of this uncertainty.
Valuation
of Portfolio Investments
The most significant estimate inherent in the preparation of
Patriots financial statements is the valuation of
investments and the related amounts of unrealized appreciation
and depreciation of investments recorded. Under
SFAS No. 157, Patriot principally utilizes the market
approach to estimate the fair value of its investments where
there is not a readily available market and it also utilizes the
income approach to estimate the fair value of its debt
investments. Under the market approach, Patriot estimates the
enterprise value of the portfolio companies in which it invests.
There is no one methodology to estimate enterprise value and, in
fact, for any one portfolio company, enterprise value is best
expressed as a range of fair values, from which Patriot derives
a single estimate of enterprise value. To estimate the
enterprise value of a portfolio company, it analyzes various
factors, including the portfolio companys historical and
projected financial results. Patriot generally requires
portfolio companies to provide annual audited and quarterly and
monthly unaudited financial statements, as well as annual
projections for the upcoming fiscal year. Typically, private
companies are valued based on multiples of EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization), cash
flows, net income, revenues, or in limited cases, book value.
Under the income approach, Patriot generally prepares and
analyzes discounted cash flow models based on its projections of
the future free cash flows of the business. Patriot also uses
bond yield models to determine the present value of the future
cash flow streams of its debt investments. Patriot reviews
various sources of transactional data, including private mergers
and acquisitions involving debt investments with similar
characteristics, and assess the information in the valuation
process.
The fair value of Patriots investments at June 30,
2009, and December 31, 2008 was determined in good faith by
its board of directors. Duff & Phelps, LLC, an
independent valuation firm (Duff &
Phelps), provided third party valuation consulting
services to Patriot which consisted of certain mutually agreed
upon limited procedures that Patriot engaged them to perform. At
June 30, 2009 and at December 31, 2008, Patriot asked
Duff & Phelps to perform the limited procedures on
investments in 8 and 12 portfolio companies, respectively,
comprising approximately 25% and 38% of the total investments at
fair value, respectively. Upon completion of their limited
procedures, Duff & Phelps concluded that the fair
value of those investments subjected to the limited procedures
did not appear to be unreasonable. Patriots board of
directors is solely
142
responsible for the valuation of Patriots portfolio
investments at fair value as determined in good faith pursuant
to its valuation policy and consistently applied valuation
process.
Fee
Income Recognition
Patriot receives a variety of fees in the ordinary course of its
business, including arrangement fees and loan fees. Patriot
accounts for its fee income by evaluating arrangements
containing multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable and there exists
sufficient evidence of their fair values to separately account
for some or all of the deliverables (i.e., there are separate
units of accounting). In those arrangements states that the
total consideration received for the arrangement is allocated to
each unit based upon each units relative fair value. In
other arrangements, some or all of the deliverables are not
independently functional, or there is not sufficient evidence of
their fair values to account for them separately. In determining
fair value of various fee income Patriot receives, it will first
rely on data compiled through its investment and syndication
activities and secondly on independent third party data.
The timing of revenue recognition for a given unit of accounting
depends on the nature of the deliverable(s) in that accounting
unit (and the corresponding revenue recognition model) and
whether the general conditions for revenue recognition have been
met. Fee income for which fair value cannot be reasonably
ascertained is recognized using the interest method. In
addition, Patriot capitalizes and offsets direct loan
origination costs against the origination fees received and only
defers the net fee.
Payment-in-Kind
or PIK Interest and Dividends
Patriot includes in income certain amounts that it has not yet
received in cash, such as contractual
payment-in-kind
or PIK interest or dividends, which represents either
contractually deferred interest added to the loan balance that
is generally due at the end of the loan term or contractually
deferred dividends added to its equity investment in the
portfolio company. Patriot will cease accruing PIK interest if
it does not expect the portfolio company to be able to pay all
principal and interest due, and it will cease accruing PIK
dividends if it does not expect the portfolio company to be able
to make PIK dividend payments in the future. In certain cases, a
portfolio company makes principal payments on its loan prior to
making payments to reduce the PIK loan balances and, therefore,
the PIK portion of a portfolio companys loan can increase
while the total outstanding amount of the loan to that portfolio
company may stay the same or decrease. Accrued PIK interest and
dividends represented $7.3 million or 2.6% of
Patriots portfolio of investments at fair value as of
June 30, 2009 and $6.6 million or 2.0% of its
portfolio of investments at fair value as of December 31,
2008. The net increase in loan and equity balances as a result
of contracted PIK arrangements are separately identified on
Patriots statements of cash flows.
PIK related activity for the six months ended June 30, 2009
and the year ended December 31, 2008 was as follows:
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Six Months Ended
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Fiscal Year Ended
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June 30, 2009
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December 31, 2008
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Beginning PIK balance
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$
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6,605,194
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$
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4,714,356
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PIK interest and dividends earned during the period
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2,218,782
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5,452,124
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PIK conversion to equity
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(1,519,567
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PIK write-off(1)
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(1,110,041
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PIK receipts during the period
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(447,982
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(2,041,719
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Ending PIK balance
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$
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7,265,953
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$
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6,605,194
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(1) |
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Write-off is the result of the permanent impairment of loans to
one of Patriots portfolio companies. |
143
Interest
and Dividend Income Recognition
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. When a loan or
debt security becomes 90 days or more past due, or if
Patriot otherwise does not expect the debtor to be able to
service its debt or other obligations, it will generally place
the loan or debt security on non-accrual status and cease
recognizing interest income on that loan or debt security until
the borrower has demonstrated the ability and intent to pay
contractual amounts due. At June 30, 2009 and
December 31, 2008, Patriot had loans and equity investments
from six and three, respectively, of its portfolio companies on
non-accrual status. Dividend income on preferred equity
securities is recorded on an accrual basis to the extent that
such amounts are expected to be collected. Dividend income on
equity securities is recorded on the record date for private
companies and the ex-dividend date for publicly traded companies.
Off-Balance
Sheet Arrangements
Patriot is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial
needs of its portfolio companies. These instruments include
commitments to extend credit and involve, to varying degrees,
elements of credit risk in excess of the amount recognized in
the balance sheet. Patriot attempts to limit its credit risk by
conducting extensive due diligence, negotiating appropriate
financial covenants and obtaining collateral where necessary. As
of June 30, 2009, Patriot had unused commitments to extend
credit to its portfolio companies of $17.3 million, which
are not reflected on Patriots balance sheet. Since
April 3, 2009, the date of the termination event under the
Amended Securitization Facility, Patriot has funded revolver
draws under its outstanding commitments. Patriot is currently in
negotiation with the Lenders to have eligible revolver draws,
which are requests on loans that secure the Amended
Securitization Facility, funded by the Lenders going forward.
Ineligible revolver draw requests, those requests on loans
outside of the Amended Securitization Facility, will not be
funded by the Lenders. Patriot may not have the ability to fund
the ineligible revolver draw requests in the future or eligible
revolver draw requests if the Lenders refuse to accommodate this
request. In connection with the Amended Securitization Facility,
Patriots consolidated special purpose subsidiary may be
required under certain circumstances to enter into interest rate
swap agreements or other interest rate hedging transactions.
Patriot has agreed to guarantee the payment of certain swap
breakage costs that may be payable by its special purpose
subsidiary in connection with any such interest rate swap
agreements or other interest rate hedging transactions. At
June 30, 2009, Patriot had eight such agreements. On
July 9, 2009, Patriot terminated all eight interest rate
swap agreements and realized a loss of $3.3 million.
Contractual
Obligations
As of June 30, 2009, Patriot had $137.4 million
outstanding under the Amended Securitization Facility. On
April 3, 2009, a termination event occurred under the
Amended Securitization Facility due to the amount of its
advances outstanding under the facility exceeding the maximum
availability under the facility for more than three consecutive
business days. The maximum availability under the facility is
determined by, among other things, the fair market value of all
eligible loans serving as collateral under the facility. Because
the fair market value of certain eligible loans decreased at
December 31, 2008, Patriots advances outstanding
under the facility exceeded the maximum availability under the
facility. This determination was made in connection with the
delivery of a borrowing base report to the facility lenders on
March 31, 2009. As a result of the occurrence of the
termination event under the facility, Patriot can no longer make
additional advances under the facility. Also, the interest rate
payable under the Amended Securitization Facility increased from
the commercial paper rate plus 1.75% to the prime rate plus
3.75%. In addition, the terms of the facility require that all
principal, interest and fees collected from the debt investments
secured by the facility must be used to pay down amounts
outstanding under the facility within 24 months following
the date of the termination event. The facility also permits the
lenders, upon notice to Patriot, to accelerate amounts
outstanding under the facility and exercise other rights and
remedies provided by the facility, including the right to sell
the collateral under the facility. To date, Patriot has not
received any such notice from the lenders.
Furthermore, Patriot is in discussions with the facility lenders
to seek relief from certain of the terms of the facility,
including the requirement under the facility that it use all
principal, interest and fees collected
144
from the debt investments secured by the facility to pay down
amounts outstanding under the facility within 24 months
following the date of the termination event. However, based on
discussion to date, Patriot is not optimistic that the lenders
will agree to provide it any relief from any terms of the
facility. As a result, Patriot is also currently evaluating
other financing
and/or
strategic alternatives, including possible sale of the company,
debt or equity financing, disposition of assets, and other
strategic transactions. At June 30, 2009, the interest rate
under the Amended Securitization Facility was 7.0%.
On August 11, 2005, Patriot entered into a lease agreement
for office space expiring on January 15, 2011. Future
minimum lease payments due under the office lease and for
certain office equipment are as follows: remainder of
2009 $121,000; 2010 $247,000;
2011 $21,000.
Recent
Developments
On July 9, 2009, Patriot entered into an agreement, limited
consent and amendment (the Agreement, Consent and
Amendment) related to, among other things, the Amended
Securitization Facility with the Lenders and other related
parties. In connection with the Agreement, Consent and
Amendment, the Lenders consented to the sale of the Encore Legal
Solutions, Inc. and L.A. Spas, Inc. term loans and equity
interests and Patriot agreed to terminate all eight outstanding
swap agreements and pay the counterparty to such swaps
approximately $3.3 million. In addition, Patriot agreed
with the Lenders that it will not accept equity securities or
other non-cash consideration in forbearance of the exercise of
any rights under any of the loans or debt instruments held in
its investment portfolio or the cash interest payments on these
investments.
On July 9, 2009, Patriot received proceeds of
$3.2 million in conjunction with the sale of its junior
secured term loans in Encore Legal Solutions, Inc. In connection
with the sale, Patriot realized a loss of approximately
$13.4 million. Such proceeds were used to reduce the
principal on its outstanding borrowings under the Amended
Securitization Facility.
On July 9, 2009, Patriot sold its senior and subordinated
term loans in L.A. Spas, Inc. for a release of future
liabilities against it relating to its investments in this
portfolio company. In connection with the sale, Patriot recorded
a loss of approximately $1.6 million.
On July 23, 2009, Patriot received gross proceeds of
$3.8 million in connection with the full repayment of its
senior subordinated term loan to Copperhead Chemical Company,
Inc. Such proceeds were used to reduce the principal on its
outstanding borrowings under the Amended Securitization Facility.
On July 23, 2009, William E. Alvarez, Jr., Executive
Vice President, Chief Financial Officer and Secretary of
Patriot, entered into an amendment to the employment agreement
with Patriot, dated August 7, 2007. The amendment modifies
the definition of Average Annual Bonus set forth in
Section 8 of the employment agreement for purposes of
calculating the lump sum payment Mr. Alvarez would receive
if his employment is terminated for any reason except for
cause (as defined in the employment agreement). The
amendment defines Average Annual Bonus to include
his average bonus for the term of the employment agreement plus
the aggregate grant date fair value of restricted stock awarded
during the term of the employment agreement.
On July 24, 2009, Patriot received gross proceeds of
$11.2 million in connection with the full repayment of its
senior and subordinated term loans to Fairchild Industrial
Products, Co. Such proceeds were used to reduce the principal on
Patriots outstanding borrowings under the Amended
Securitization Facility.
On July 31, 2009, Patriot entered into a severance
agreement with Clifford L. Wells, its Executive Vice-President
and Chief Compliance Officer. Pursuant to the terms of the
severance agreement, if Mr. Wellss employment is
terminated by Patriot without cause or by Mr. Wells for
good reason within 30 days before or within six months
after a change of control transaction that occurs between
July 31, 2009 and January 31, 2010, then Patriot will
pay to Mr. Wells his monthly base salary in monthly
installments for six months following his termination of
employment.
On August 3, 2009, Patriot and Prospect Capital Corporation
entered into an Agreement and Plan of Merger, dated as of
August 3, 2009 (the Merger Agreement), pursuant
to which Patriot will merge with and
145
into Prospect Capital, with Prospect continuing as the surviving
company in the merger (the Merger). Subject to the
terms and conditions of the Merger Agreement, if the Merger is
completed, each issued and outstanding share of Patriot common
stock will be converted into 0.3992 shares of Prospect
Capitals common stock and any fractional shares resulting
from the application of the exchange ratio will be paid in cash.
The exchange ratio will be adjusted for any dividend Patriot may
declare prior to the closing of the Merger. If not exercised
prior to completion of the Merger, outstanding stock options
will vest and be cancelled in exchange for the payment in cash
to the holder of these stock options of $0.01 per share of
Patriot common stock for which these options are exercisable.
Further, in connection with the Merger, each share of
Patriots restricted stock then outstanding will vest and
all restrictions with respect to such shares of restricted sock
will lapse (a) a number of shares of each holder of
restricted stock will be cancelled in exchange for the cash
value per share of Prospects common stock at the time of
the consummation of the Merger in an amount estimated to be
sufficient to pay applicable taxes in connection with the
vesting of such shares or (b) the remaining number of
shares of restricted stock will be converted in the Merger into
shares of Prospects common stock on the same terms as all
other shares of Patriots common stock. In connection with
the completion of the Merger, Prospect will pay off the
outstanding principal and accrued interest and up to
$1.35 million of related fees and expenses due under the
Amended Securitization Facility. As of the date of the Merger
Agreement, there was approximately $115.7 million
outstanding under the facility. Further, as a condition to
Prospect agreeing to execute the Merger Agreement, Patriot
agreed to reverse, immediately prior to the Merger, the
$11.8 million federal income tax ordinary loss deduction
that it previously disclosed it would incur with respect to its
investments in L.A. Spas, Inc. As a result, Patriot estimates
that distributable income for RIC purposes at June 30, 2009
would have been $8.3 million. Immediately prior to the
merger, Patriot expects to declare a dividend in the amount of
its cumulative distributable income for RIC purposes, which will
be payable 10% in cash and 90% in common stock.
Consummation of the Merger, which is currently anticipated to
occur in the earlier part of the fourth quarter of 2009, is
subject to certain conditions, including, among others, the
approval of Patriot stockholders, accuracy of the
representations and warranties of the other party and compliance
by the other party with its obligations under the Merger
Agreement.
The Merger Agreement also contains certain termination rights
for Patriot and Prospect, as the case may be, including: if the
Merger has not been completed by December 15, 2009; if
there is a breach by the other party that is not or cannot be
cured within 30 days notice of such breach and such
breach would result in a failure of the conditions to closing
set forth in the Merger Agreement; if Patriots Board of
Directors fails to recommend the Merger to its stockholders; if
Patriot breaches its obligations in any material respect
regarding any alternative business combination proposals; or if
Patriots shareholders have voted to not approve the
Merger. In addition, the Merger Agreement provides that, in
connection with the termination of the Merger Agreement under
specified circumstances, Patriot may be required to pay Prospect
a termination fee equal to $3.2 million or to reimburse
certain expenses and make certain other payments.
On August 4, 2009, Bruce Belodoff filed a putative class
action complaint against Patriot, its directors and certain of
its officers in the Stamford Superior Court of the State of
Connecticut. The lawsuit alleges that the proposed merger
between Patriot and Prospect is the product of a flawed sales
process and that Patriots directors and officers breached
their fiduciary duty by agreeing to a structure that was not
designed to maximize the value of its shares. In addition, the
lawsuit asserts that Patriot aided and abetted its
officers and directors breach of fiduciary duty.
On August 5, 2009, Brian Killion filed a putative class
action complaint against Patriot, its directors and certain of
its officers and Prospect in the Bridgeport Superior Court of
the State of Connecticut. The lawsuit alleges that the
consideration to be paid in the proposed merger between Patriot
and Prospect is unfair and is the result of an unfair process.
The lawsuit further alleges that Patriots directors and
officers breached their fiduciary duty by agreeing to a
structure that is designed to deter higher offers from other
bidders and for failing to obtain the highest and best price for
Patriots shareholders. In addition, the lawsuit asserts
that Patriot and Prospect aided and abetted Patriots
officers and directors breach of fiduciary duty.
146
On August 11, 2009, Thomas Webster filed a putative class
action lawsuit against Patriot, its directors and certain of its
officers in the Superior Court of the State of Connecticut. This
lawsuit is essentially identical to the class action lawsuit
filed by Bruce Belodoff against Patriot on August 4, 2009,
which is described above, and was filed by the same law firm
that filed such lawsuit.
All three complaints seek to enjoin consummation of the merger
or, in the event that the merger has been consummated prior to
the entry of a judgment, to rescind the transaction
and/or award
rescissory damages.
At this time, Patriot is unable to determine whether an
unfavorable outcome from these claims is probable or remote or
to estimate the amount or range of potential loss, if any.
However, Patriot believes that these claims are without merit
and intends to vigorously defend against them.
147
SENIOR
SECURITIES OF PATRIOT
Information about Patriots senior securities is shown in
the following tables as of the applicable fiscal year ended
December 31, unless otherwise noted. The report of
Patriots independent registered public accounting firm on
the senior securities table as of December 31, 2008, is
attached as an exhibit to the registration statement of which
this prospectus is a part. The indicates
information which the SEC expressly does not require to be
disclosed for certain types of senior securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
Exclusive of
|
|
|
Asset
|
|
|
Liquidating
|
|
|
Average
|
|
|
|
Treasury
|
|
|
Coverage
|
|
|
Preference
|
|
|
Market Value
|
|
Class and Year
|
|
Securities(1)
|
|
|
per Unit(2)
|
|
|
per Unit(3)
|
|
|
per Unit(4)
|
|
|
Securitization Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (as of June 30, 2009)
|
|
$
|
137,365,363
|
|
|
$
|
2,168
|
|
|
|
|
|
|
|
N/A
|
|
2008
|
|
|
162,600,000
|
|
|
|
2,108
|
|
|
|
|
|
|
|
N/A
|
|
2007
|
|
|
164,900,000
|
|
|
|
2,344
|
|
|
|
|
|
|
|
N/A
|
|
2006
|
|
|
98,380,000
|
|
|
|
2,668
|
|
|
|
|
|
|
|
N/A
|
|
2005
|
|
|
21,650,000
|
|
|
|
6,873
|
|
|
|
|
|
|
|
N/A
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (as of June 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
41,645,458
|
|
|
|
1,640
|
|
|
|
|
|
|
|
N/A
|
|
Revolving Credit Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (as of June 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
600,000
|
|
|
|
1,640
|
|
|
|
|
|
|
|
N/A
|
|
Demand Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (as of June 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
400,000
|
|
|
|
1,640
|
|
|
|
|
|
|
|
N/A
|
|
|
|
(1)
|
Total amount of each class of senior securities outstanding at
the end of the period presented.
|
|
(2)
|
The asset coverage ratio for a class of senior securities
representing indebtedness is calculated as Patriots total
assets, less all liabilities and indebtedness not represented by
senior securities, divided by senior securities representing
indebtedness. Asset coverage per unit is expressed in terms of
dollar amounts per $1,000 of indebtedness.
|
|
(3)
|
The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it.
|
|
(4)
|
Not applicable, as senior securities are not registered for
public trading.
|
148
PORTFOLIO
COMPANIES OF PATRIOT
The following table sets forth certain information as of
June 30, 2009 for each portfolio company in which Patriot
had a debt or equity investment. Other than these investments,
Patriots only relationships with its portfolio companies
are the managerial assistance it may separately provide to its
portfolio companies, which services would be ancillary to its
investments, and the board observer or participation rights
Patriot may receive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
ADAPCO, Inc.
550 Aero Lane
Sanford, FL 32771
|
|
Distributor of specialty chemical and contract application
services
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
|
|
|
|
|
|
$
|
1,787,120
7,642,739
|
|
|
$
|
1,787,120
7,642,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
500,000
|
|
|
|
158,500
|
|
|
|
Aircraft Fasteners International, LLC
P.O. Box 66249
Los Angeles, CA
90066-0249
|
|
Distributor of fasteners and related hardware for use in
aerospace, electronics and defense industries
|
|
Senior Secured Term Loan(4)
Junior Secured Term Loan(4)(5)
Convertible Preferred Stock(5)
|
|
|
<5
|
%
|
|
|
5,287,888
5,303,580
234,924
|
|
|
|
5,208,888
5,303,580
435,600
|
|
|
|
Allied Defense Group, Inc.
8000 Towers Crescent Drive
Suite 260
Vienna, VA 22182
|
|
Diversified defense company
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
463,168
|
|
|
|
123,200
|
|
|
|
Arrowhead General Insurance Agency, Inc.(6)
701 B Street, Suite 2100
San Diego, CA 92101
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan(4)(5)
|
|
|
|
|
|
|
5,012,842
|
|
|
|
4,699,639
|
|
|
|
Aylward Enterprises, LLC(3)
401 Industrial Drive
New Bern, NC 28562
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
3,955,707
8,019,598
|
|
|
|
3,955,707
411,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt(5)
|
|
|
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note(5)
|
|
|
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
|
|
|
>5% and
<25%
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
Borga, Inc.
300 West Peach Street
Fowler, CA 93625
|
|
Manufacturer of pre-fabricated metal building systems
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
796,199
1,611,597
|
|
|
|
796,199
1,611,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)(5)
|
|
|
|
|
|
|
8,255,274
|
|
|
|
2,141,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to Purchase Common Stock
|
|
|
<5
|
%
|
|
|
16,828
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
Boxercraft Incorporated
P.O. Box 20016
Atlanta, GA 30325
|
|
Supplier of spirit-wear
and campus apparel
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
|
|
|
|
|
|
$
|
777,090
4,445,473
|
|
|
$
|
777,090
4,445,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
4,885,834
|
|
|
|
4,885,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)(5)
|
|
|
|
|
|
|
6,714,635
|
|
|
|
6,714,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
1,080,000
|
|
|
|
699,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC(3)
600 W. Bayaud
|
|
Provider of proprietary branded professional
|
|
Junior Secured Term Loan B(4)
|
|
|
|
|
|
|
9,884,257
|
|
|
|
9,884,257
|
|
Denver, CO 80223
|
|
skincare and cosmetic products to physicians and spa communities
|
|
Senior Subordinated Debt(4)
|
|
|
|
|
|
|
6,197,779
|
|
|
|
6,260,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
750,000
|
|
|
|
536,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options in Mineral Fusion
Natural Brands, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copernicus Group
One Triangle Drive, Suite 100
P.O. Box 110605
Research Triangle Park, NC 27709
|
|
Provider of clinical
trial review services
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
Senior Subordinated Debt(4)
Preferred Stock Series A
|
|
|
|
|
|
|
132,771
7,523,944
12,188,822
1,000,000
|
|
|
|
132,771
7,523,944
11,307,622
799,900
|
|
|
|
Copperhead Chemical Company, Inc.
2 River Road
Tamaqua, PA 18252
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt(4)(5)
|
|
|
|
|
|
|
3,781,610
|
|
|
|
3,781,610
|
|
|
|
CS Operating, LLC(3)
1260 Brittmoore Road
Houston, TX 77043
|
|
Provider of maintenance, repair and replacement of HVAC,
electrical, plumbing and foundation repair
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
Senior Subordinated Debt(4)(5)
|
|
|
|
|
|
|
195,448
1,624,813
2,672,682
|
|
|
|
195,448
1,624,813
2,672,682
|
|
|
|
Custom Direct, Inc.(6)
1802 Fashion Court
Joppa, MD 21085
|
|
Direct marketer of checks and other financial products and
services
|
|
Senior Secured Term Loan(4)
Junior Secured Term Loan(4)
|
|
|
|
|
|
|
1,614,297
2,000,000
|
|
|
|
1,424,459
1,150,000
|
|
|
|
Dover Saddlery, Inc.
525 Great Road
PO Box 1100
Littleton, MA 01460
|
|
Equestrian products catalog retailer
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
148,200
|
|
|
|
52,966
|
|
|
|
Employbridge Holding Company(3)(6)
1040 Crown Pointe Parkway
Atlanta, GA 30338
|
|
A provider of specialized staffing services
|
|
Junior Secured Term Loan(4)
|
|
|
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
Encore Legal Solutions, Inc.
10200 Grogans
|
|
Legal document management services
|
|
Junior Secured Term Loan A(4)(5)
|
|
|
|
|
|
$
|
4,020,456
|
|
|
$
|
3,081,250
|
|
Mill Road, Suite 350
The Woodlands, TX 77380
|
|
|
|
Junior Secured Term Loan B(4)(5)
|
|
|
|
|
|
|
7,390,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
5,159,567
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
490 Wanda Park Boulevard
Mt. Pleasant, SC 29464
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A(4)
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
2,455,202
4,172,027
|
|
|
|
2,357,602
4,005,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)
|
|
|
|
|
|
|
2,565,670
|
|
|
|
2,462,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D(4)
|
|
|
|
|
|
|
6,122,761
|
|
|
|
6,122,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class A
|
|
|
<5
|
%
|
|
|
2,475
|
|
|
|
346,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class B(5)
|
|
|
<5
|
%
|
|
|
291,667
|
|
|
|
297,022
|
|
|
|
Fairchild Industrial Products, Co.
|
|
Manufacturer of industrial controls and
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
1,379,347
|
|
|
|
1,379,347
|
|
3920 West Point Blvd.
Winston-Salem, NC 27103
|
|
power transmission products
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
4,329,951
|
|
|
|
4,329,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt(4)
|
|
|
|
|
|
|
5,426,216
|
|
|
|
5,426,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class A(5)
|
|
|
<5
|
%
|
|
|
366,297
|
|
|
|
372,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class B
|
|
|
<5
|
%
|
|
|
121,598
|
|
|
|
289,300
|
|
|
|
Fischbein, LLC
151 Walker Road
Statesville, NC 28625
|
|
Designer and manufacturer of packaging equipment
|
|
Senior Subordinated Debt(4)(5)
Membership Interest Class A
|
|
|
>25
|
%
|
|
|
3,553,859
2,800,000
|
|
|
|
3,541,760
2,984,400
|
|
|
|
Hudson Products Holdings, Inc.(6)
1307 Soldiers Field Drive
Sugar Land, Texas 77479
|
|
Manufactures and designs air-cooled heat exchanger equipment
|
|
Senior Secured Term Loan(4)
|
|
|
|
|
|
|
7,241,237
|
|
|
|
6,773,813
|
|
|
|
Impact Products, LLC
2840 Centennial Road
Toledo, OH 43617
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan(4)
|
|
|
|
|
|
|
8,808,494
|
|
|
|
8,808,494
|
|
|
|
|
|
Senior Subordinated Debt(4)
|
|
|
|
|
|
|
5,521,880
|
|
|
|
5,521,880
|
|
|
|
KTPS Holdings, LLC
P.O. Box 75157
Colorado Springs, CO 80970
|
|
Manufacturer and distributor of specialty pet products
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
1,488,972
3,828,779
|
|
|
|
1,488,972
3,828,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
450,967
|
|
|
|
450,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)(5)
|
|
|
|
|
|
|
4,552,975
|
|
|
|
4,320,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest Class A
|
|
|
>5% and
<25%
|
|
|
|
730,020
|
|
|
|
167,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest Common
|
|
|
>5% and
<25%
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
L.A. Spas, Inc.
1311 N. Blue Gum Street
Anaheim, CA 92806
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan(4) Charge-off cost of impaired loan(7)
|
|
|
|
|
|
$
|
1,175,000
4,092,364
(3,693,230
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt(4)(5)
|
|
|
|
|
|
|
7,907,534
|
|
|
|
|
|
|
|
|
|
Charge-off of cost of impaired loan(7)
|
|
|
|
|
|
|
(7,907,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to Purchase Common Stock
|
|
|
<5
|
%
|
|
|
5,000
|
|
|
|
|
|
|
|
Label Corp Holdings, Inc.(6)
13321 California Street
Suite 400
Omaha, NE 68154
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan(4)
|
|
|
|
|
|
|
6,167,519
|
|
|
|
5,669,255
|
|
|
|
LHC Holdings Corp.
601 North Congress
Avenue, Suite 424
Delray Beach, FL 33445
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
3,674,985
|
|
|
|
3,569,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt(4)
|
|
|
|
|
|
|
4,523,264
|
|
|
|
4,523,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
|
|
|
<5
|
%
|
|
|
125,000
|
|
|
|
184,800
|
|
|
|
Mac & Massey Holdings, LLC
101 Great Southwest Parkway
Atlanta, GA 30336
|
|
Broker and distributor of ingredients to manufacturers of food
products
|
|
Senior Subordinated Debt(4)(5)
Common Stock
|
|
|
<5
|
%
|
|
|
8,158,201
235,128
|
|
|
|
8,158,201
382,800
|
|
|
|
Northwestern Management
|
|
Provider of dental
|
|
Revolving Line of Credit(4)
|
|
|
|
|
|
|
117,625
|
|
|
|
117,625
|
|
Services, LLC
|
|
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
951 Broken Sound Parkway
Suite 185
|
|
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
5,156,736
|
|
|
|
5,156,736
|
|
Boca Raton, FL 33487
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
1,221,357
|
|
|
|
1,221,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan(4)(5)
|
|
|
|
|
|
|
2,861,301
|
|
|
|
2,861,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
500,000
|
|
|
|
465,500
|
|
|
|
Nupla Corporation
11912 Sheldon Street
Sun Valley, CA 91352
|
|
Manufacturer and marketer of professional high-grade
fiberglass-handled striking and digging tools
|
|
Revolving Line of Credit(4)
Senior Secured Term Loan A(4)
Senior Subordinated Debt(4)(5)
|
|
|
|
|
|
|
1,081,546
5,105,570
3,142,795
|
|
|
|
1,081,546
5,105,570
1,105,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class A(5)
|
|
|
>5% and
<25%
|
|
|
|
564,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class B(5)
|
|
|
|
|
|
|
1,131,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
>5% and
<25%
|
|
|
|
80,100
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
Prince Mineral Company, Inc.
One Prince Plaza
PO Box 1009
Quincy, IL 62306
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan(4)
Senior Subordinated Debt(4)(5)
|
|
|
|
|
|
$
|
11,095,875
11,993,822
|
|
|
$
|
10,752,375
11,993,822
|
|
|
|
Quartermaster, Inc.
17600 Fabrica Way
|
|
Retailer of uniforms and tactical equipment to law
|
|
Revolving Line of Credit(4)
|
|
|
|
|
|
|
2,985,955
|
|
|
|
2,985,955
|
|
Cerritos, CA 90703
|
|
enforcement and security professionals
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
2,495,985
|
|
|
|
2,495,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
2,518,505
|
|
|
|
2,518,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)(5)
|
|
|
|
|
|
|
3,431,302
|
|
|
|
3,431,302
|
|
|
|
R-O-M Corporation
6800 East 163rd Street
Belton, MO 64012
|
|
Manufacturer of doors, ramps and bulk heads for fire trucks and
food
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
5,993,933
|
|
|
|
5,696,433
|
|
|
|
transportation
|
|
Senior Secured Term Loan B(4)
|
|
|
8,255,898
|
|
|
|
7,845,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt(4)
|
|
|
7,073,185
|
|
|
|
7,073,185
|
|
|
|
Sidumpr Trailer Company
53577 Highway 20
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit(4)
|
|
|
|
|
|
|
934,432
|
|
|
|
934,432
|
|
Plainview, Nebraska 68769
|
|
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
|
2,036,677
|
|
|
|
1,500,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C(4)(5)
|
|
|
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
|
|
|
|
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock(5)
|
|
|
<5
|
%
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
<5
|
%
|
|
|
25
|
|
|
|
|
|
|
|
Smart, LLC(3)
Raritan Plaza I, 9th Floor
Edison, NJ 08837
|
|
Provider of tuition management services
|
|
Membership Interest Class B
Membership Interest Class D
|
|
|
>5% and
<25%
|
|
|
|
1,280,403
290,333
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Name and Address of
|
|
Nature of Its
|
|
Title of Securities
|
|
of Class
|
|
|
Cost of
|
|
|
Fair Value of
|
|
Portfolio Company
|
|
Principal Business
|
|
Held by Us
|
|
Held(1)
|
|
|
Investment
|
|
|
Investment(2)
|
|
|
Sport Helmets Holdings, LLC(3)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A(4)
|
|
|
|
|
|
$
|
4,040,710
|
|
|
$
|
3,759,310
|
|
4635 Crossroad Park Drive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liverpool, NY 13088
|
|
|
|
Senior Secured Term Loan B(4)
|
|
|
|
|
|
|
7,370,660
|
|
|
|
6,856,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt Series A(4)(5)
|
|
|
|
|
|
|
7,012,295
|
|
|
|
6,399,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt Series B(5)
|
|
|
|
|
|
|
1,290,324
|
|
|
|
1,179,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
>5% and
<25%
|
|
|
|
2,000,000
|
|
|
|
1,399,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
$
|
344,380,927
|
|
|
$
|
283,929,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In the case of warrants to purchase equity securities or
convertible securities, represents percentage of class of
underlying equity securities issuable upon exercise of warrants
or upon conversion of convertible securities.
|
|
|
(2) |
The fair value of all investments outstanding on June 30,
2009 was determined by Patriots board of directors.
|
|
|
(3) |
An affiliate of the listed portfolio company is also a borrower
under this investment.
|
|
|
(4) |
Pledged as collateral under Patriots Amended
Securitization Facility. See Note 4 to Consolidated Financial
Statements.
|
|
|
(5)
|
Amount includes payment-in-kind (PIK) interest or dividends.
|
|
(6)
|
Syndicated investment which has been originated by another
financial institution and broadly distributed.
|
Description
of Portfolio Companies
Set forth below is a brief description of each of Patriots
portfolio companies as of June 30, 2009.
ADAPCO, Inc. Sanford, Florida-based ADAPCO,
Inc. is a distributor of specialty chemical and contract
application services in the vector disease control field.
Aircraft Fasteners International, LLC Marina
Del Ray, California-based Aircraft Fasteners International, LLC
is a master stocking distributor specializing in self-locking
nuts, threaded inserts, and related high performance hardware
for the aerospace, electronics and defense industries.
Allied Defense Group, Inc. Vienna,
Virginia-based Allied Defense Group, Inc. owns and manages a
portfolio of defense and security businesses in the following
niches: ordnance and manufacturing, environmental security and
safety, electronic security, and software training and
simulation.
Arrowhead General Insurance Agency, Inc.
San Diego, California-based Arrowhead General Insurance,
Inc. is a privately held general insurance agency and program
specialist.
Aylward Enterprises, LLC New Bern, North
Carolina-based Aylward Enterprises, LLC is a packaging equipment
manufacturer for the pharmaceutical, over the counter products,
and nutraceuticals industries. Aylward is widely recognized as
the worldwide innovation leader in solid-dosage filling
machinery for the bottle and blister formats.
Borga, Inc. Fowler, California-based Borga,
Inc. is a manufacturer of pre-fabricated metal building systems
and components for the agricultural, commercial and industrial
markets.
Boxercraft Incorporated Atlanta,
Georgia-based Boxercraft International is a leading supplier of
specialty apparel, including spiritwear and campus apparel.
Caleel & Hayden, LLC Denver,
Colorado-based Caleel & Hayden serves more than 5,400
dermatologists, cosmetic surgeons, licensed aestheticians, spas
and salons domestically and internationally and select specialty
retailers in the U.S. The companys brands include
glominerals, mineral fusion, glotherapeutics and glospa,
154
which were developed by C&H and Cellex-C and Lycon Wax,
which are sold under exclusive distribution agreements in the
United States and select international markets.
Copernicus Group Research Triangle Park,
North Carolina-based Copernicus Group provides protection of the
rights and welfare of research subjects through the initial and
ongoing review of clinical trials.
Copperhead Chemical Company, Inc. Tamaqua,
Pennsylvania-based Copperhead Chemical Company, Inc. is a
manufacturer of nitroglycerin for pharmaceutical products (used
in the treatment of angina and congestive heart failure) and a
manufacturer of explosive materials for use in propellants, fuel
additives and munitions applications.
CS Operating, LLC Houston, Texas-based CS
Operating, LLC is a provider of residential services including
foundation repair, HVAC maintenance, repair and replacement and
plumbing repair services.
Custom Direct, Inc. Joppa, Maryland-based
Custom Direct, Inc. is a direct marketer of checks and other
financial products and services.
Dover Saddlery, Inc. Littleton,
Massachusetts-based Dover Saddlery, Inc. is a supplier of
English equestrian saddles, tack and riding apparel, and has the
largest English equestrian catalog in the United States. Dover
Saddlery, Inc. also serves the equestrian market through retail
stores and its website, and has recently expanded into the
western riding market through the acquisition of the catalog
assets of a western riding catalog company.
Employbridge Holding Company Atlanta,
Georgia-based Employbridge Holding Company is a provider of
specialized staffing services.
Encore Legal Solutions, Inc. Houston,
Texas-based Encore Legal Solutions, Inc. offers a variety of
outsourcing services to law firms and corporate counsel,
including reprographics, document preparation, scanning, coding
and indexing, electronic data discovery, on-line document
storage, as well as trial consulting and trial exhibit
production.
EXL Acquisition Corp. the holding company of
Mount Pleasant, South Carolina-based Environmental Express,
Inc., a manufacturer and marketer of consumable environmental
lab testing equipment and supplies.
Fairchild Industrial Products, Co.
Winston-Salem, North Carolina-based Fairchild Industrial
Products, Co. is a designer and manufacturer of pneumatic and
electro-pneumatic industrial control products.
Fischbein, LLC Statesville, North
Carolina-based Fischbein, LLC designs, manufactures and provides
bag packaging equipment and complete systems to a worldwide
customer base, specific to their applications.
Hudson Products Holdings, Inc. Sugar
Land, Texas-based Judson Products Holdings, Inc. is a
manufacturer and designer of air-cooled heat exchanger equipment.
Impact Products, LLC Toledo, Ohio-based
Impact Products, LLC is a manufacturer and distributor of
non-chemical cleaning, maintenance and safety products.
KTPS Holdings, LLC Colorado Springs,
Colorado-based KTPS Holdings LLC consists of two operating
companies, both of which are leading manufacturers and
distributors of specialty pet products. Its operating companies
include Ray Allen Manufacturing LLC, a leading manufacturer and
direct marketer of canine training equipment and accessories to
the working-dog industry; and K&H Manufacturing LLC, a
leading manufacturer and distributor of specialty pet products.
L.A. Spas, Inc. Anaheim, California-based
L.A. Spas, Inc. is a designer, manufacturer and marketer of high
quality above ground spas, spa supplies and related products.
Label Corp Holdings, Inc. Omaha,
Nebraska-based Label Corp Holdings, Inc. is a manufacturer of
prime labels.
LHC Holdings Corp. Delray Beach,
Florida-based LHC Holdings Corp. is a provider of home
healthcare services.
155
Mac & Massey Holdings, LLC Atlanta,
Georgia-based Mac & Massey LLC consists of two
operating companies, both of which are leaders in the market for
food ingredients. Its operating companies include Macsource LLC,
a leading distributor of ingredients to the food manufacturing
industry; and Massey-Fair Industrial Inc., a broker of food
ingredients.
Northwestern Management Services, LLC Boca
Raton, Florida-based Northwestern Management Services, Inc.
(d/b/a Gentle Dental Group) is a network of eleven
modern, retail-driven, full service general and multi-specialty
dental practices. The company provides convenient, high quality
general preventative and restorative care, specialty dental
services (including endodontic, periodontic, oral and
maxillofacial surgery, prosthodontic, pediatric and orthodontic
treatment), and cosmetic treatment all within the groups
own facilities.
Nupla Corporation Sun Valley,
California-based Nupla Corporation has been a leading US
manufacturer of specialized, industrial-grade striking, digging
and cutting tools for over 50 years. Its products include
over 1,500 hand tool products, including shovels, rakes, hoes,
axes, metal-head hammers and soft-faced hammers, as well as
replacement handles for all of these tools.
Prince Mineral Company, Inc. Quincy,
Illinois-based Prince Mineral Company, Inc. is a producer of
specialty mineral products with a particular focus on naturally
occurring minerals and pigment applications. Prince Mineral
Company, Inc. services a variety of industries and its products
are used in bricks, cement, glass, steel and numerous other
materials.
Quartermaster, Inc. Cerritos,
California-based Quartermaster, Inc. is a direct supplier of
uniforms and tactical equipment to law enforcement and security
professionals. Quartermaster, Inc. sells its products through
its catalog, website, national accounts with security guard
companies, two retail stores in Southern California and one
retail store in Las Vegas, Nevada.
R-O-M Corporation Kansas City, Missouri-based
R-O-M Corporation is a designer, supplier and manufacturer of
innovative niche products for the fire safety and food
transportation industries. R-O-M Corporations products
includes R-O-M Robinson
Shutterstm
roll-up doors for emergency apparatus and service vehicles;
LoadMakertm,
Generation
IItm
and Center
ZoneMakertm
insulated bulkhead systems for the food service industry;
RoadwarrioRtm
and
SidekicKtm
safety walkramp systems for the food distribution industry; and
LinksGuardtm
security chain closures for building security.
Sidumpr Trailer Company Plainview,
Nebraska-based Sidumpr Trailer Company is a manufacturer
of proprietary, patented, bi-directional side dump trailers.
Smart, LLC Edison, New Jersey-based Smart,
LLC is a provider of tuition management services to private
schools through out the U.S.
Sport Helmets Holdings, LLC Liverpool, New
York-based Sport Helmets Holdings, LLC is a manufacturer of
protective headgear.
156
MANAGEMENT
OF PATRIOT
Patriots business and affairs are managed under the
direction of its board of directors. Patriots board of
directors elects its officers, who serve at the discretion of
the board of directors.
Day-to-day
management of Patriots portfolio is the responsibility of
its investment committee. As a result, its investment committee
must approve the acquisition and disposition of all of its
investments. All such actions must be approved by each member of
its investment committee at a meeting at which at least a
majority of the members of its investment committee is present.
Board of
Directors and Executive Officers
Under Patriots restated certificate of incorporation, its
directors are divided into three classes. Each class of
directors holds office for a three-year term. At each annual
meeting of its shareholders, the successors to the class of
directors whose terms expire at such meeting will be elected to
hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their
election. This classification of Patriots board of
directors may have the effect of delaying or preventing a change
in control of its management. Each director holds office for the
term to which he or she is elected and until his or her
successor is duly elected and qualifies. Patriot restated
certificate of incorporation permits the board of directors to
elect directors to fill vacancies that are created either
through an increase in the number of directors or due to the
resignation, removal or death of any director.
Information regarding Patriots board of directors is set
forth below. Patriot has divided the directors into two
groups independent directors and interested
directors. Interested directors are interested
persons of Patriot Capital Funding as defined in
Section 2(a)(19) of the 1940 Act.
Independent
Directors
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Director Since
|
|
Expiration of Term
|
|
Mel P. Melsheimer
|
|
|
70
|
|
|
Chairman
|
|
|
2005
|
|
|
|
2012
|
|
Steven Drogin
|
|
|
65
|
|
|
Director
|
|
|
2005
|
|
|
|
2012
|
|
Richard A. Sebastiao
|
|
|
61
|
|
|
Director
|
|
|
2005
|
|
|
|
2012
|
|
Dennis C. ODowd
|
|
|
59
|
|
|
Director
|
|
|
2005
|
|
|
|
2010
|
|
Interested
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Director Since
|
|
Expiration of Term
|
|
Richard P. Buckanavage
|
|
|
46
|
|
|
Director, President and Chief Executive Officer
|
|
|
2003
|
|
|
|
2011
|
|
Timothy W. Hassler
|
|
|
40
|
|
|
Director, Chief Investment Officer
|
|
|
2002
|
|
|
|
2011
|
|
The address for each director is
c/o Patriot
Capital Funding, Inc., 274 Riverside Avenue, Westport,
CT 06880.
Executive
Directors
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Richard P. Buckanavage
|
|
|
46
|
|
|
Director, President and Chief Executive Officer
|
Timothy W. Hassler
|
|
|
40
|
|
|
Director, Chief Investment Officer
|
William E. Alvarez, Jr.
|
|
|
56
|
|
|
Executive Vice President, Chief Financial Officer and Secretary
|
Clifford L. Wells
|
|
|
53
|
|
|
Executive Vice President and Chief Compliance Officer
|
Matthew R. Colucci
|
|
|
37
|
|
|
Executive Vice President and Managing Director
|
157
The address for each executive officer is
c/o Patriot
Capital Funding, Inc., 274 Riverside Avenue, Westport, CT 06880.
Biographical
Information
Independent
Directors
Steven Drogin has been a member of Patriots board
of directors since June 2005. He retired from KPMG LLP in 2003
where he worked for 38 years and served as an audit partner
since 1976. From 1992 until he retired, Mr. Drogin was a
member of KPMGs Financial Services Practice.
Mr. Drogin is a Certified Public Accountant
(CPA) and a member of the American Institute of
Certified Public Accountants and the New York State Society
of CPAs (NYSSCPA). He has served on several of
NYSSCPAs committees. From 1990 to 1992, he was the
Chairman of the NYSSCPAs Leasing and Financial Services
Companies Committee.
Mel P. Melsheimer has been a member of Patriots
board of directors since June 2005. Since August 2006, he has
served as the chairman of Patriots board of directors.
Since January 7, 2005, Mr. Melsheimer has been the
president and a director of Linkhorn Capital Advisors, Inc., an
entity which is a managing member of Masters Capital
Nanotechnology, LLC, a venture capital general partner. From
February 1997 to December 2004, Mr. Melsheimer served as
the president, chief operating officer and chief financial
officer of Harris & Harris Group, Inc., a publicly
traded business development company. During his tenure at
Harris & Harris Group, Mr. Melsheimer also served
as the chief compliance officer, the treasurer and a managing
director. From March 1994 to February 1997, he served as a
consultant to Harris & Harris Group or as an officer
and a director to one of its portfolio companies. From November
1992 to February 1994, he served as executive vice president,
chief operating officer and secretary of Dairy Holdings, Inc., a
privately-held dairy company.
Richard A. Sebastiao has been a member of Patriots
board of directors since June 2005. In December 1989, he founded
RAS Management Advisors, Inc. and its predecessors (RAS
Management), a crisis management and turnaround firm, and
served as its president from such time until January 2008. While
president of RAS Management, Mr. Sebastiao also served, on
an interim basis, as the chief restructuring officer
and/or chief
executive officer and a director of several entities which
retained RAS Management in connection with their restructurings.
In January 2008, he sold substantially all of the assets of RAS
Management to RAS Management Advisors, LLC, an entity newly
formed by certain former associates of RAS Management to carry
on the business formerly conducted by RAS Management, and has
served as a consultant to such newly formed entity since such
time. Since February 2003, Mr. Sebastiao has also served on
the board of directors of ATC Associates, Inc., an environmental
consulting firm. From December 2005 until April 2006, he served
on the board of directors of CDI Holding Corp., a holding
company for a regional chain of drug stores and convenience
stores. Mr. Sebastiao is a member of the Turnaround
Management Association and the American Bankruptcy Institute.
Dennis C. ODowd has been a member of Patriots
board of directors since June 2005. He has been a financial and
business consultant since 1980 and maintains an active portfolio
in timber and real estate. From 1983 to 2000,
Mr. ODowd also served in various capacities,
including chief executive officer, of the U.S. branch and
related financial and investment companies of Creditanstalt
Bankverein, an Austrian-based financial institution, which later
merged with Bank Austria. Prior to joining Creditanstalt
Bankverein, Mr. ODowd worked at Nederlandsche
Middenstandsbank from 1979 to 1983, Fidelity Bank from 1977 to
1979 and began his banking career at Chemical Bank in 1970.
Interested
Directors
Messrs. Buckanavage and Hassler are interested persons
of Patriot under the 1940 Act because they are also officers of
Patriot.
Richard P. Buckanavage has been a member of
Patriots board of directors and Patriots president
and chief executive officer since 2003. Prior to joining Patriot
Capital Funding, Mr. Buckanavage was a managing
158
director and the head of debt sales at GE Capital Markets, Inc.
from 1999 to 2003 where he was responsible for all domestic debt
syndication and private placement activities. From 1995 to 1999,
Mr. Buckanavage was a senior vice president and midwest
region manager for Creditanstalt Corporate Finance, Inc.
(CCFI). During that time, he was also a senior
investment officer at Creditanstalt Small Business Investment
Corporation (CSBIC), CCFIs private equity unit
that originated and managed a portfolio of non-controlling
equity investments. CCFI and CSBIC were a one-stop
capital source that focused on making investments in middle
market companies in conjunction with private equity sponsors. In
his capacities at CCFI and CSBIC, Mr. Buckanavage managed a
portfolio of senior secured loans, subordinated debt and equity
investments in excess of $1.2 billion. While at CSBIC,
Mr. Buckanavage was also a member of the board of directors
of several of CSBICs portfolio companies. His professional
experience also includes various business development and
portfolio management roles in the leveraged finance groups at
Bank of America, and Fleet Bank and its predecessors.
Timothy W. Hassler has been a member of Patriots
board of directors since November 2002. He has served as
Patriots chief investment officer since March 2008. Prior
to such time, he had served as Patriots chief operating
officer and chief compliance officer since 2003. Prior to
joining Patriot Capital Funding, Mr. Hassler was a director
in the capital markets division of U.S. Bank National
Association and its predecessors from 1999 to 2002. During that
time, he focused on originating, structuring and negotiating
senior debt and junior capital investments for middle market
leveraged transactions in the manufacturing, distribution, and
food and agribusiness industries. From 1991 to 1999,
Mr. Hassler worked in a middle market lending group of
U.S. Bank National Association and its predecessors, where
he was a relationship manager for a more than $200 million
portfolio of middle market loans outstanding, with over
$500 million of commitments. In this capacity, he was
responsible for new business development, portfolio management
and underwriting. Mr. Hassler began his career in the
training program of U.S. Bank National Association and its
predecessors in 1990.
Executive
Officers
The biographical information for Richard P. Buckanavage,
Patriots president and chief executive officer, and
Timothy W. Hassler, Patriots chief investment officer, are
set forth above under Interested
Directors.
William E. Alvarez, Jr. serves as Patriots
executive vice president, chief financial officer and secretary.
Prior to joining Patriot Capital Funding in December 2004,
Mr. Alvarez was an executive financial consultant at
Trans-Lux Corporation, a public media and communication company,
from February 2003 to December 2004. During that period, he was
responsible for operations restructuring, SEC reporting and
compliance with the Sarbanes-Oxley Act of 2002. From 2001 to
2003, Mr. Alvarez was employed by Bond Technologies, Inc.,
a privately-held professional technology consulting services
firm, as chief financial officer. From 1998 to 2001,
Mr. Alvarez was employed by Dynax Solutions, Inc., a
privately-held professional technology consulting services firm,
as chief financial officer. Prior to 1998, Mr. Alvarez held
financial officer positions with other companies.
Mr. Alvarez began his career at Deloitte & Touche
LLP where he was primarily responsible for servicing financial
services companies. Mr. Alvarez is a Certified Public
Accountant.
Clifford L. Wells has served as Patriots executive
vice president since December 2004 and Patriots chief
compliance officer since March 2008. He had previously served as
Patriots chief investment officer from December 2004 until
March 2008. Prior to joining Patriot Capital Funding in 2004,
Mr. Wells was senior vice president credit
risk/portfolio management at the US branch of Abbey National
Treasury Services from 2002 to 2004. In that role, he provided
credit analysis for middle market leveraged transactions,
managed risks associated with a loan portfolio of distressed
assets and provided
day-to-day
risk management of an oil and natural gas loan portfolio of
nearly $1 billion. From 1996 to 2002, Mr. Wells served
as senior vice president and northeast/mid-atlantic region
manager for Creditanstalt Corporate Finance, Inc., a
one-stop capital source that focused on making
investments in middle market companies in conjunction with
private equity sponsors, where he was responsible for all facets
of the deal process including sourcing, structuring, closing and
managing of senior and junior capital opportunities for middle
market cash-flow transactions. He was also involved in
implementing appropriate strategies for a portfolio of
underperforming investments. His professional background also
includes lending positions with Heller Financial, Inc., US West
Financial Services, Inc.
159
and GATX Capital Corporation. He started his career as an
auditor with Arthur Andersen & Company. Mr. Wells
is a Certified Public Accountant.
Matthew R. Colucci has served as Patriots executive
vice president since December 2003 and a managing director since
April 2006. Prior to joining Patriot Capital Funding in December
2003, Mr. Colucci was a vice president in GEs
Merchant Banking Group (and with its predecessor, Heller
Financial, Inc.) from 1998 to 2003. During that period, he was
responsible for originating, structuring, underwriting and
monitoring both senior and junior capital investments in middle
market leveraged transactions. From 1996 to 1998,
Mr. Colucci was a senior associate in the Corporate Finance
Group of Bayerische Landesbank, a German commercial bank. He
began his career in 1994 as a bond analyst for The Aetna
Casualty & Surety Company.
Committees
of the Board of Directors
The board of directors of Patriot has established an executive
committee, an audit committee, a compensation committee, a
valuation committee, and a nominating and corporate governance
committee. The audit committee, the compensation committee and
the nominating and corporate governance committee each operate
pursuant to a committee charter. The charter of each committee
is available on Patriots web site at
www.patcapfunding.com in the Corporate Governance section.
The Executive Committee. The executive
committee exercises those rights, powers, and authority that the
board of directors from time to time grants to it, except where
action by the board is required by statute, an order of the SEC,
or Patriots restated certificate of incorporation or
restated bylaws. The members of the executive committee are
Messrs. Buckanavage, Hassler and ODowd. The executive
committee did not meet during 2008.
The Valuation Committee. The valuation
committee is responsible for reviewing and approving for
submission to Patriots board of directors, in good faith,
the fair value of all of Patriots debt and equity
securities for which current market values are not readily
available. The valuation committee met four times during 2008.
The members of the valuation committee are
Messrs. ODowd, Melsheimer and Sebastiao, each of whom
is independent for purposes of the 1940 Act and the NASDAQ
Global Select Market corporate governance listing standards.
Mr. Sebastiao serves as the chairman of the valuation
committee.
The Audit Committee. The audit committee is
responsible for selecting Patriots independent
accountants, reviewing the plans, scope and results of the audit
engagement with Patriots independent accountants,
reviewing the independence of Patriots independent
accountants and reviewing the adequacy of its internal
accounting controls. The audit committee met five times during
2008. The members of the audit committee are
Messrs. Melsheimer, Sebastiao and Drogin, each of whom is
independent for purposes of the 1940 Act and the NASDAQ Global
Select Market corporate governance listing standards.
Mr. Melsheimer serves as the chairman of the audit
committee. Patriots board of directors has determined that
Mr. Melsheimer is an audit committee financial
expert as defined under SEC rules.
The Compensation Committee. The compensation
committee determines the total compensation of Patriots
executive officers including the amount of salary and bonus for
each of its executive officers. The compensation committee met
four times during 2008. The members of the compensation
committee are Messrs. Sebastiao, ODowd and Drogin,
each of whom is independent for purposes of the 1940 Act and the
NASDAQ Global Select Market corporate governance listing
standards. Mr. ODowd serves as the chairman of the
compensation committee.
Compensation Committee Interlocks and Insider
Participation. None of the members of the
compensation committee are current or former officers or
employees of Patriot. None of the members of the compensation
committee has any relationship required to be disclosed under
this caption under the rules of the SEC.
160
The Nominating and Corporate Governance
Committee. The nominating and corporate
governance committee is responsible for identifying, researching
and nominating directors for election by Patriots
shareholders, selecting nominees to fill vacancies on
Patriots board of directors or a committee of the board
and overseeing the evaluation of the board of directors and
Patriots management. The nominating and corporate
governance committee met once during 2008. In February 2009, the
nominating and corporate governance committee met to discuss,
among other things, nominating the directors for election by
Patriots shareholders at this Meeting. The members of the
nominating and corporate governance committee are
Messrs. Melsheimer, ODowd and Drogin, each of whom is
independent for purposes of the 1940 Act and the NASDAQ Global
Select Market corporate governance listing standards.
Mr. Drogin serves as the chairman of the nominating and
corporate governance committee.
The nominating and corporate governance committee will consider
qualified director nominees recommended by shareholders when
such recommendations are submitted in accordance with
Patriots restated bylaws and any other applicable law,
rule or regulation regarding director nominations. Shareholders
may submit candidates for nomination for Patriots board of
directors by writing to: Board of Directors, Patriot Capital
Funding, Inc., 274 Riverside Avenue, Westport, CT 06880. When
submitting a nomination to Patriot for consideration, a
shareholder must provide certain information about each person
whom the shareholder proposes to nominate for election as a
director, including: (i) the name, age, business address
and residence address of the person; (ii) the principal
occupation or employment or the person; (iii) the class or
series and number of shares of Patriots capital stock
owned beneficially or of record by the persons; and
(iv) any other information relating to the person that
would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitations of
proxies for election of directors pursuant to Section 14 of
the Exchange Act, and the rules and regulations promulgated
thereunder. Such notice must be accompanied by the proposed
nominees written consent to be named as a nominee and to
serve as a director if elected.
In evaluating director nominees, the nominating and corporate
governance committee considers the following facts:
|
|
|
|
|
the appropriate size and composition of Patriots board of
directors;
|
|
|
|
Patriots needs with respect to the particular talents and
experience of its directors;
|
|
|
|
the knowledge, skills and experience of nominees in light of
prevailing business conditions and the knowledge, skills and
experience already possessed by other members of Patriots
board of directors;
|
|
|
|
the capacity and desire to serve as a member of Patriots
board of directors and to represent the balance, best interests
of its shareholders as a whole;
|
|
|
|
experience with accounting rules and practices; and
|
|
|
|
the desire to balance the considerable benefit of continuity
with the periodic addition of the fresh perspective provided by
new members.
|
The nominating and corporate governance committees goal is
to assemble a board of directors that brings us a variety of
perspectives and skills derived from high quality business and
professional experience.
Other than the foregoing there are no stated minimum criteria
for director nominees, although the nominating and corporate
governance committee may also consider such other factors as it
may deem are in Patriots best interests and those of its
shareholders. The nominating and corporate governance committee
also believes it appropriate for certain key members of
Patriots management to participate as members of the board
of directors.
The nominating and corporate governance committee identifies
nominees by first evaluating the current members of the board of
directors willing to continue in service. Current members of the
board of directors with skills and experience that are relevant
to Patriots business and who are willing to continue in
service are
161
considered for re-nomination, balancing the value of continuity
of service by existing members of the board of directors with
that of obtaining a new perspective. If any member of the board
of directors does not wish to continue in service or if the
nominating and corporate governance committee or the board of
directors decides not to re-nominate a member for re-election,
the nominating and corporate governance committee identifies the
desired skills and experience of a new nominee in light of the
criteria above. Current members of the nominating and corporate
governance committee and board of directors are polled for
suggestions as to individuals meeting the criteria of the
nominating and corporate governance committee. Research may also
be performed to identify qualified individuals. Patriot have not
engaged third parties to identify or evaluate or assist in
identifying potential nominees to the board of directors.
162
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF PATRIOT
Transactions
with Related Persons
During 2008, Patriot did not enter into any transactions with
related persons that would be required to be disclosed under
this caption pursuant to Item 404(a) of
Regulation S-K.
Review,
Approval or Ratification of Transactions with Related
Parties
As required by the NASDAQ Global Select Market corporate
governance listing standards, the audit committee of
Patriots board of directors is required to review and
approve any transactions with related parties (as such term is
defined in Item 404 of
Regulation S-K).
Such requirement is set forth in the audit committees
charter.
163
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
PATRIOT
The following table sets forth, as of September 30, 2009,
each shareholder known by Patriot to be the beneficial owner of
more than 5% of Patriots outstanding shares of common
stock, each current director, each nominee for director,
Patriots named executive officers, and the directors and
executive officers as a group. Unless otherwise indicated,
Patriot believes that each beneficial owner set forth in the
table has sole voting and investment power.
Patriots directors are divided into two groups
interested directors and independent directors. Interested
directors are interested persons as defined in the
Investment Company Act of 1940, or the 1940 Act.
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Dollar Range of
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Number of
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Equity Securities
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Shares Owned
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Percentage
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Beneficially
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Beneficially(1)
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of Class(2)
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Owned
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Interested Directors:
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Richard P. Buckanavage
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1,234,904
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(3)
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5.72
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%
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over $
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100,000
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Timothy W. Hassler
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1,139,074
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(3)
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5.28
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%
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over $
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100,000
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Independent Directors:
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Steven Drogin
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10,693
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*
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50,001 - 100,000
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Mel P. Melsheimer
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16,000
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*
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$
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50,001 - $100,000
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Dennis C. ODowd
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4,000
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*
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$
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1 - $10,000
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Richard A. Sebastiao
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17,490
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*
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$
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50,001 - $100,000
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Executive Officers:
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William E. Alvarez, Jr.
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202,839
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(3)
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*
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over $
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100,000
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Matthew R. Colucci
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619,177
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(3)
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2.87
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%
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over $
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100,000
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Clifford L. Wells
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173,461
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(3)
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*
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over $
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100,000
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All Directors and Executive Officers as a Group (9 in number)(5)
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3,417,638
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(4)
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15.83
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%
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* |
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Less than 1% |
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(1) |
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Beneficial ownership has been determined in accordance with
Rule 13d-3
of the Securities Exchange Act of 1934. For purposes of this
table, shares of restricted stock, all of which are unvested,
have been included since they will all vest in connection with
the consummation of the merger. |
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(2) |
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Based on a total of 21,584,251 shares of Patriots
common stock issued and outstanding as of September 30,
2009, which includes 633,750 shares of restricted stock
that will vest in connection with the consummation of the merger. |
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(3) |
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Includes shares of Patriot common stock issuable upon the
exercise of options exercisable within 60 days of
September 30, 2009 as follows: Richard P. Buckanavage
(1,008,404 shares), Timothy W. Hassler
(975,574 shares), William E. Alvarez, Jr.
(160,339 shares), Matthew R. Colucci (482,927 shares)
and Clifford L. Wells (135,961 shares). |
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(4) |
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Includes 2,593,704 shares of Patriot common stock issuable
upon the exercise of options exercisable within 60 days of
September 30, 2009. |
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(5) |
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The address for all officers and directors is
c/o Patriot
Capital Funding, Inc., 274 Riverside Avenue, Westport, CT 06880. |
164
BUSINESS
OF PROSPECT
General
Prospect is a financial services company that primarily lends
and invests in middle market privately-held companies. Prospect
is a closed-end investment company that has filed an election to
be treated as a business development company under the 1940 Act.
Prospect, a Maryland corporation, was organized on
April 13, 2004 under the name Prospect Street Energy
Corporation and it changed its name to Prospect
Energy Corporation on June 23, 2004. Prospect changed
its name again to Prospect Capital Corporation in
May 2007 and at the same time terminated its policy of investing
at least 80% of its net assets in energy companies. While it
expects to be less focused on the energy industry in the future,
it will continue to have significant holdings in the energy and
energy related industries.
Prospects headquarters are located at 10 East
40th Street, 44th Floor, New York, NY 10016, and its
telephone number is
(212) 448-0702.
Prospects investment adviser is Prospect Capital
Management LLC.
Prospects
Investment Objective and Policies
Prospects investment objective is to generate both current
income and long-term capital appreciation through debt and
equity investments. Prospect focuses on making investments in
private companies, and many of its investments are in energy
companies. Prospect is a non-diversified company within the
meaning of the 1940 Act.
Prospect concentrates on making investments in companies having
annual revenues of less than $500 million and enterprise
values of less than $250 million, which it refers to as
target or middle market companies. In
most cases, these middle market companies are privately held or
have thinly traded public securities at the time it invests in
them.
Prospect seeks to maximize returns and protect risk for its
investors by applying rigorous analysis to make and monitor its
investments. While the structure of its investments vary, it can
invest in senior secured debt, senior unsecured debt,
subordinated secured debt, subordinated unsecured debt,
mezzanine debt, convertible debt, convertible preferred equity,
preferred equity, common equity, warrants, and other
instruments, many of which generate current yield.
Prospects investments primarily range between
approximately $5 million and $50 million each,
although this investment size may vary as the size of its
capital base changes.
Prospect is currently pursuing multiple investment
opportunities, including purchases of portfolios from private
and public companies, as well as originations and secondary
purchases of particular securities. There can be no assurance
that Prospect will successfully consummate any investment
opportunity it is currently pursuing. Motivated sellers,
including commercial finance companies, hedge funds, other
business development companies, total return swap
counterparties, banks, collateralized loan obligation funds, and
other entities, are suffering from excess leverage, and Prospect
believe it is well positioned to capitalize as potential buyers
of such assets at attractive prices. If any of these
opportunities are consummated, there can be no assurance that
investors will share Prospects view of valuation or that
any assets acquired will not be subject to future write downs,
each of which could have an adverse effect on Prospects
stock price.
While Prospects primary focus is on seeking current income
through investment in the debt
and/or
dividend-paying equity securities of privately held companies
and long-term capital appreciation by acquiring accompanying
warrants, options or other equity securities of such companies,
it may invest up to 30% of the portfolio in opportunistic
investments in order to seek enhanced returns for shareholders.
Such investments may include investments in the debt and equity
instruments of public companies. Prospect expects that these
public companies generally will have debt securities that are
non-investment grade. Within this 30% basket, Prospect may also
invest in debt and equity securities of middle-market companies
located outside of the United States.
Prospects investments may include other equity
investments, such as warrants, options to buy a minority
interest in a portfolio company, or contractual payment rights
or rights to receive a proportional interest in the
165
operating cash flow or net income of such company. When
determined by Prospect Capital Management to be in its best
interest, Prospect may acquire a controlling interest in a
portfolio company. Any warrants Prospect receives with its debt
securities may require only a nominal cost to exercise, and
thus, as a portfolio company appreciates in value, it may
achieve additional investment return from this equity interest.
Prospect has structured, and will continue to structure, some
warrants to include provisions protecting its rights as a
minority-interest or, if applicable, controlling-interest
holder, as well as puts, or rights to sell such securities back
to the company, upon the occurrence of specified events. In many
cases, Prospect obtains registration rights in connection with
these equity interests, which may include demand and
piggyback registration rights.
Prospect plans to hold many of its investments to maturity or
repayment, but will sell its investments earlier if a liquidity
event takes place, such as the sale or recapitalization of a
portfolio company, or if it determines a sale of one or more of
its investments to be in its best interest.
Prospect has qualified and elected to be treated for federal
income tax purposes as a RIC under Subchapter M of the Code. As
a RIC, it generally does not have to pay corporate-level federal
income taxes on any ordinary income or capital gains that it
distributes to its shareholders as dividends. To continue to
qualify as a RIC, it must, among other things, meet certain
source-of-income
and asset diversification requirements (as described below). In
addition, to qualify for RIC tax treatment it must distribute to
its shareholders, for each taxable year, at least 90% of its
investment company taxable income, which is
generally its ordinary income plus the excess of its realized
net short-term capital gains over its realized net long-term
capital losses.
Industry
Sectors
To date, Prospect has invested significantly in industrial and
energy related companies. However, Prospect continues to widen
its strategy focus in other sectors of the economy to diversify
its portfolio holdings. The energy industry consists of
companies in the direct energy value chain as well as companies
that sell products and services to, or acquire products and
services from, the direct energy value chain. In this document,
all of these companies are referred to as energy
companies and assets in these companies as energy
assets. The categories of energy companies in this chain
are described below. The direct energy value chain broadly
includes upstream businesses, midstream businesses and
downstream businesses:
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Upstream businesses find, develop and extract energy resources,
including natural gas, crude oil and coal, which are typically
from geological reservoirs found underground or offshore, and
agricultural products.
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Midstream businesses gather, process, refine, store and transmit
energy resources and their byproducts in a form that is usable
by wholesale power generation, utility, petrochemical,
industrial and gasoline customers.
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Downstream businesses include the power and electricity segment
as well as businesses that process, refine, market or distribute
hydrocarbons or other energy resources, such as customer-ready
natural gas, propane and gasoline, to end-user customers.
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Ongoing
Relationships with Portfolio Companies
Monitoring
Prospect Capital Management monitors Prospects portfolio
companies on an ongoing basis. Prospect Capital Management will
continue to monitor the financial trends of each portfolio
company to determine if it is meeting its business plan and to
assess the appropriate course of action for each company.
Prospect Capital Management employs several methods of
evaluating and monitoring the performance and value of
Prospects investments, which may include, but are not
limited to, the following:
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Assessment of success in adhering to the portfolio
companys business plan and compliance with covenants;
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166
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Regular contact with portfolio company management and, if
appropriate, another financial or strategic sponsor, to discuss
financial position, requirements and accomplishments;
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Attendance at and participation in board meetings of the
portfolio company; and
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Review of monthly and quarterly financial statements and
financial projections for portfolio companies.
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Valuation
Process
Prospects board of directors has established procedures
for the valuation of its investment portfolio. These procedures
are detailed below.
For most of Prospects 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,
Prospects board of directors has approved a multi-step
valuation process each quarter, as described below:
1) Each portfolio company or investment is reviewed by
Prospects investment professionals with the independent
valuation firm;
2) the independent valuation firm engaged by
Prospects board of directors conducts independent
appraisals and makes their own independent assessment;
3) the audit committee of Prospects board of
directors reviews and discusses the preliminary valuation of
Prospects investment adviser and that of the independent
valuation firms; and
4) Prospects board of directors discusses the
valuations and determines the fair value of each investment in
its portfolio in good faith based on the input of its investment
adviser, the independent valuation firm and the audit committee.
Investments are valued utilizing a market approach, an income
approach, or both approaches, as appropriate. The market
approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses
valuation techniques to convert future amounts (for example,
cash flows or earnings) to a single present value amount
(discounted) calculated based on an appropriate discounts rate.
The measurement is based on the net present value indicated by
current market expectations about those future amounts. In
following these approaches, the types of factors that Prospect
may take into account in fair value pricing its 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
companys ability to make payments, its earnings and
discounted cash flows, the markets in which the portfolio
company does business, comparisons of financial ratios of peer
companies that are public, M&A comparables, the principal
market and enterprise values, among other factors.
In September, 2006, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, or
FAS 157. FAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those years. Prospect has adopted this statement on a
prospective basis beginning in the quarter ended
September 30, 2008. Adoption of this statement did not have
a material effect on Prospects financial statements for
that quarter or for the current quarter ended December 31,
2008.
FAS 157 classifies the inputs used to measure these fair
values into the following hierarchy:
Level 1: Quoted prices in active markets
for identical assets or liabilities, accessible by Prospect at
the measurement date.
167
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. Prospects
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and
considers factors specific to each investment. The changes to
generally accepted accounting principles from the application of
FAS 157 relate to the definition of fair value, framework
for measuring fair value, and the expanded disclosures about
fair value measurements. FAS 157 applies to fair value
measurements already required or permitted by other standards.
In accordance with FAS 157, the fair value of
Prospects investments is defined as the price that it
would receive upon selling an investment in an orderly
transaction to an independent buyer in the principal or most
advantageous market in which that investment is transacted.
Valuation
of Other Financial Assets and Financial
Liabilities
In February 2007, FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115. SFAS 159 permits an entity to elect
fair value as the initial and subsequent measurement attribute
for many of assets and liabilities for which the fair value
option has been elected and similar assets and liabilities
measured using another measurement attribute. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those years. Prospect has adopted this statement on
July 1, 2008 and has elected not to value some assets and
liabilities at fair value as would be permitted by SFAS 159.
Business Factors
That May Affect Future Results
Factors that may affect future results include, but are not
limited to, general economic conditions, interest rates,
commodity prices, supply of and demand for particular services
or products, the market position of individual companies, the
level of competition in regional and global markets, and other
factors.
Prospects
Investment Adviser
Prospect Capital Management manages Prospects investments
as its investment adviser. Prospect Capital Management is a
Delaware limited liability corporation that has been registered
as an investment adviser under the Advisers Act since
March 31, 2004. Prospect Capital Management is led by John
F. Barry III and M. Grier Eliasek, two senior executives
with significant investment advisory and business experience.
Both Messrs. Barry and Eliasek spend a significant amount
of their time in their roles at Prospect Capital Management
working on Prospects behalf. The principal executive
offices of Prospect Capital Management are 10 East
40th Street, 44th Floor, New York, NY 10016. Prospect
depends on the diligence, skill and network of business contacts
of the senior management of its investment adviser. Prospect
also depends, to a significant extent, on its investment
advisers investment professionals and the information and
deal flow generated by those investment professionals in the
course of their investment and portfolio management activities.
Prospects investment advisers senior management team
evaluates, negotiates, structures, closes, monitors and services
its investments. Prospects future success depends to a
significant extent on the continued service of the senior
management team, particularly John F. Barry III and M.
Grier Eliasek. The departure of any of the senior managers of
Prospects investment adviser could have a materially
adverse effect on its ability to achieve its investment
objective. In addition, Prospect can offer no assurance that
Prospect Capital Management will remain its investment adviser
or that Prospect will continue to have access to its investment
professionals or its information and deal flow. Under
Prospects Investment Advisory Agreement, Prospect pays
Prospect Capital Management investment advisory fees, which
consist of an annual base management fee based on
Prospects gross assets as well as a two-part incentive fee
based on Prospects performance. Mr. Barry currently
controls Prospect Capital Management.
168
Managerial
Assistance
As a business development company, Prospect offers, and must
provide upon request, managerial assistance to certain of its
portfolio companies. This assistance could involve, among other
things, monitoring the operations of its portfolio companies,
participating in board and management meetings, consulting with
and advising officers of portfolio companies and providing other
organizational and financial guidance. Prospect may receive fees
for these services. Such fees, if received by it, and not other
entities, may not always qualify as good income for
purposes of the 90% income test that it must meet each year to
qualify as a RIC. Prospect Administration provides such
managerial assistance on its behalf to portfolio companies and
is compensated therefore when Prospect is required to provide
this assistance.
Investment
Advisory Agreement
Terms
Prospect has entered into an investment advisory and management
agreement with Prospect Capital Management, or the Investment
Advisory Agreement; under which Prospect Capital Management,
subject to the overall supervision of Prospects board of
directors, manages the
day-to-day
operations of, and provides investment advisory services to,
Prospect. Under the terms of the Investment Advisory Agreement,
Prospect Capital Management: (i) determines the composition
of Prospects portfolio, the nature and timing of the
changes to its portfolio and the manner of implementing such
changes, (ii) identifies, evaluates and negotiates the
structure of the investments Prospect makes (including
performing due diligence on its prospective portfolio
companies); and (iii) closes and monitors investments
Prospect makes.
Prospect Capital Managements 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
Prospect are not impaired. For providing these services Prospect
Capital Management receives a fee from Prospect, 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
Prospects 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 Prospects gross assets at the end of the
two most recently completed calendar quarters and appropriately
adjusted for any share issuances or repurchases during the
current calendar quarter. Base management fees for any partial
month or quarter are appropriately prorated.
The incentive fee has two parts. The first part, the income
incentive fee, is calculated and payable quarterly in arrears
based on Prospects 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 Prospect
receives from portfolio companies) accrued during the calendar
quarter, minus Prospects 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 Prospect has
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 Prospects 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. Prospect pays
the investment adviser an
169
income incentive fee with respect to its pre-incentive fee net
investment income in each calendar quarter as follows:
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no incentive fee in any calendar quarter in which its
pre-incentive fee net investment income does not exceed the
hurdle rate;
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100.00% of its 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 with a 7.00% annualized hurdle rate); and
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20.00% of the amount of its pre-incentive fee net investment
income, if any, that exceeds 125.00% of the quarterly hurdle
rate in any calendar quarter (8.75% annualized with 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 Prospects 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, Prospect calculates 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 may be
asserted against a portfolio company arising its 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 Prospects 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.
Examples
of Quarterly Incentive Fee Calculation
Example 1: Income Incentive Fee (*):
Alternative 1
Assumptions
Investment income (including interest, dividends, fees, etc.) =
1.25%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment income
− (base management fee + other expenses)) = 0.55%
170
Pre-incentive net investment income does not exceed hurdle rate,
therefore there is no income incentive fee.
Alternative 2
Assumptions
Investment income (including interest, dividends, fees, etc.) =
2.70%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment
income − (base management fee + other expenses)) =
2.00%
Pre-incentive net investment income exceeds hurdle rate,
therefore there is an income incentive fee payable by Prospect
to its Investment Adviser.
Income incentive Fee = 100% × Catch Up + the
greater of 0% AND (20% × (pre-incentive fee net investment
income − 2.1875%)
= (100% × (2.00% − 1.75%)) + 0%
= 100% × 0.25% + 0%
= 0.25%
Alternative 3
Assumptions
Investment income (including interest, dividends, fees, etc.) =
3.00%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment
income − (base management fee + other expenses)) =
2.30%
Pre-incentive net investment income exceeds hurdle rate,
therefore there is an income incentive fee payable by Prospect
to its Investment Adviser.
Income incentive Fee = 100% × Catch Up + the
greater of 0% AND (20% × (pre-incentive fee net investment
income − 2.1875%)
= (100% × (2.1875% − 1.75%)) + the greater of 0%
AND (20% × (2.30% − 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
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(1) |
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Represents 7% annualized hurdle rate. |
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(2) |
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Represents 2% annualized base management fee. |
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(3) |
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Excludes organizational and offering expenses. |
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(*) |
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The hypothetical amount of pre-incentive fee net investment
income shown is based on a percentage of total net assets. |
171
Example 2: Capital Gains Incentive Fee:
Alternative 1
Assumptions
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Year 1: $20 million investment made
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Year 2: Fair market value (FMV) of
investment determined to be $22 million
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Year 3: FMV of investment determined to be
$17 million
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Year 4: Investment sold for $21 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: No impact
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Year 3: Decrease base amount on which the
second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation)
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Year 4: Increase base amount on which the
second part of the incentive fee is calculated by
$4 million ($1 million of realized capital gain and
$3 million reversal in unrealized capital
depreciation)
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Alternative 2
Assumptions
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Year 1: $20 million investment made
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Year 2: FMV of investment determined to be
$17 million
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Year 3: FMV of investment determined to be
$17 million
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Year 4: FMV of investment determined to be
$21 million
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Year 5: FMV of investment determined to be
$18 million
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Year 6: Investment sold for $15 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Decrease base amount on which the
second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation)
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Year 3: No impact
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Year 4: Increase base amount on which the
second part of the incentive fee is calculated by
$3 million (reversal in unrealized capital
depreciation)
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Year 5: Decrease base amount on which the
second part of the incentive fee is calculated by
$2 million (unrealized capital depreciation)
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Year 6: Decrease base amount on which the
second part of the incentive fee is calculated by
$3 million ($5 million of realized capital loss offset
by a $2 million reversal in unrealized capital
depreciation)
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Alternative 3
172
Assumptions
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Year 1: $20 million investment made in
company A (Investment A), and $20 million
investment made in company B (Investment B)
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Year 2: FMV of Investment A is determined to
be $21 million, and Investment B is sold for
$18 million
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Year 3: Investment A is sold for
$23 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Decrease base amount on which the
second part of the incentive fee is calculated by
$2 million (realized capital loss on Investment B)
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Year 3: Increase base amount on which the
second part of the incentive fee is calculated by
$3 million (realized capital gain on Investment A)
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Alternative 4
Assumptions
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Year 1: $20 million investment made in
company A (Investment A), and $20 million
investment made in company B (Investment B)
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Year 2: FMV of Investment A is determined to
be $21 million, and FMV of Investment B is determined to be
$17 million
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Year 3: FMV of Investment A is determined to
be $18 million, and FMV of Investment B is determined to be
$18 million
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Year 4: FMV of Investment A is determined to
be $19 million, and FMV of Investment B is determined to be
$21 million
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Year 5: Investment A is sold for
$17 million, and Investment B is sold for $23 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Decrease base amount on which the
second part of the incentive fee is calculated by
$3 million (unrealized capital depreciation on Investment B)
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Year 3: Decrease base amount on which the
second part of the incentive fee is calculated by
$1 million ($2 million in unrealized capital
depreciation on Investment A and $1 million recovery in
unrealized capital depreciation on Investment B)
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Year 4: Increase base amount on which the
second part of the incentive fee is calculated by
$3 million ($1 million recovery in unrealized capital
depreciation on Investment A and $2 million recovery in
unrealized capital depreciation on Investment B)
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Year 5: Increase base amount on which the
second part of the incentive fee is calculated by
$1 million ($3 million realized capital gain on
Investment B offset by $3 million realized capital loss on
Investment A plus a $1 million reversal in
unrealized capital depreciation on Investment A from
Year 4).
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Duration
and Termination
The Investment Advisory Agreement was originally approved by
Prospects board of directors on June 23, 2004 and was
recently re-approved by the Board of Directors on June 17,
2009 for an additional one-year. Unless terminated earlier as
described below, it will remain in effect from year to year
thereafter if approved
173
annually by Prospects Board of Directors or by the
affirmative vote of the holders of a majority of its outstanding
voting securities, including, in either case, approval by a
majority of its directors who are not interested persons. The
Investment Advisory Agreement will automatically terminate in
the event of its assignment. The Investment Advisory Agreement
may be terminated by either party without penalty upon not more
than 60 days written notice to the other.
Indemnification
The Investment Advisory Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, Prospect Capital Management and its officers,
managers, agents, employees, controlling persons, members and
any other person or entity affiliated with it are entitled to
indemnification from Prospect for any damages, liabilities,
costs and expenses (including reasonable attorneys fees
and amounts reasonably paid in settlement) arising from the
rendering of Prospect Capital Managements services under
the Investment Advisory Agreement or otherwise as
Prospects investment adviser.
Administration
Agreement
Prospect has also entered into an Administration Agreement with
Prospect Administration under which Prospect Administration,
among other things, provides (or arranges for the provision of)
administrative services and facilities for Prospect. For
providing these services, Prospect reimburses Prospect
Administration for its allocable portion of overhead incurred by
Prospect Administration in performing its obligations under the
Administration Agreement, including rent and its allocable
portion of the costs of Prospects chief compliance officer
and chief financial officer and their respective staffs. Under
this agreement, Prospect Administration furnishes Prospect with
office facilities, equipment and clerical, bookkeeping and
record keeping services at such facilities. Prospect
Administration also performs, or oversees the performance of,
Prospects required administrative services, which include,
among other things, being responsible for the financial records
that Prospect is required to maintain and preparing reports to
its shareholders and reports filed with the Securities and
Exchange Commission, or the SEC. In addition, Prospect
Administration assists Prospect in determining and publishing
its net asset value, overseeing the preparation and filing of
its tax returns and the printing and dissemination of reports to
its shareholders, and generally oversees the payment of its
expenses and the performance of administrative and professional
services rendered to Prospect by others. Under the
Administration Agreement, Prospect Administration also provides
on Prospects behalf managerial assistance to those
portfolio companies to which Prospect is 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 Prospects 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 Prospect for any damages, liabilities,
costs and expenses (including reasonable attorneys fees
and amounts reasonably paid in settlement) arising from the
rendering of Prospect Administrations services under the
Administration Agreement or otherwise as Prospects
administrator.
Payment
of Prospects Expenses
All investment professionals of Prospect Capital Management and
its respective staff, when and to the extent engaged in
providing investment advisory and management services, and the
compensation and routine overhead expenses of such personnel
allocable to such services, will be provided and paid for by
Prospect Capital Management. Prospect bears all other costs and
expenses of its operations and transactions, including those
relating to: organization and offering; calculation of its net
asset value (including the cost and expenses of any independent
valuation firm); expenses incurred by Prospect Capital
Management payable to third parties, including agents,
consultants or other advisers (such as independent valuation
firms, accountants and legal counsel), in monitoring its
financial and legal affairs and in monitoring its investments
and performing
174
due diligence on its prospective portfolio companies; interest
payable on debt, if any, and dividends payable on preferred
stock, if any, incurred to finance its investments; offerings of
its debt, its preferred shares, its common stock and other
securities; investment advisory fees; fees payable to third
parties, including agents, consultants or other advisors,
relating to, or associated with, evaluating and making
investments; transfer agent and custodial fees; registration
fees; listing fees; taxes; independent directors fees and
expenses; costs of preparing and filing reports or other
documents with the SEC; the costs of any reports, proxy
statements or other notices to shareholders, including printing
costs; its allocable portion of the fidelity bond, directors and
officers/errors and omissions liability insurance, and any other
insurance premiums; direct costs and expenses of administration,
including auditor and legal costs; and all other expenses
incurred by Prospect, by Prospect Capital Management or by
Prospect Administration in connection with administering
Prospects business, such as its allocable portion of
overhead under the administration agreement, including rent and
its allocable portion of the costs of its chief compliance
officer and chief financial officer and their respective staffs
under the
sub-administration
agreement, as further described below.
License
Agreement
Prospect entered into a license agreement with Prospect Capital
Management, pursuant to which Prospect Capital Management agreed
to grant it a nonexclusive, royalty free license to use the name
Prospect Capital. Under this agreement, Prospect has
a right to use the Prospect Capital name, for so long as
Prospect Capital Management or one of its affiliates remains
Prospects Investment Adviser. Other than with respect to
this limited license, Prospect has no legal right to the
Prospect Capital name. This license agreement will remain in
effect for so long as the Investment Advisory Agreement with
Prospect Capital Management is in effect.
Determination
of Net Asset Value
The net asset value per share of Prospects outstanding
shares of common stock will be determined quarterly by dividing
the value of total assets minus liabilities by the total number
of shares outstanding.
In calculating the value of its total assets, Prospect will
value investments for which market quotations are readily
available at such market quotations. Short-term investments
which mature in 60 days or less, such as U.S. Treasury
bills, are valued at amortized cost, which approximates market
value. The amortized cost method involves recording a security
at its cost (i.e., principal amount plus any premium and less
any discount) on the date of purchase and thereafter
amortizing/accreting that difference between the principal
amount due at maturity and cost assuming a constant yield to
maturity as determined at the time of purchase. Short-term
securities which mature in more than 60 days are valued at
current market quotations by an independent pricing service or
at the mean between the bid and ask prices obtained from at
least two brokers or dealers (if available, or otherwise by a
principal market maker or a primary market dealer). Investments
in money market mutual funds are valued at their net asset value
as of the close of business on the day of valuation.
Most of the investments in Prospects portfolio do not have
market quotations which are readily available, meaning the
investments do not have actively traded markets. Debt and equity
securities for which market quotations are not readily available
are valued with the assistance of an independent valuation
service using a documented valuation policy and a valuation
process that is consistently applied under the direction of
Prospects board of directors.
The factors that may be taken into account in valuing such
investments include, as relevant, the portfolio companys
ability to make payments, its estimated earnings and projected
discounted cash flows, the nature and realizable value of any
collateral, the financial environment in which the portfolio
company operates, comparisons to securities of similar publicly
traded companies, changes in interest rates for similar debt
instruments and other relevant factors. Due to the inherent
uncertainty of determining the fair value of investments that do
not have readily available market quotations, the fair value of
these investments may differ significantly from the values that
would have been used had such market quotations existed for such
investments, and any such differences could be material.
175
As part of the fair valuation process, the independent valuation
firm engaged by the board of directors performs a review of each
debt and equity investment and provides a range of values for
each investment, which, along with managements valuation
recommendations, is reviewed by the audit committee. Management
and the independent valuation firm may adjust their preliminary
evaluations to reflect comments provided by the audit committee.
The audit committee reviews the final valuation report and
managements valuation recommendations and makes a
recommendation to the board of directors based on its analysis
of the methodologies employed and the various weights that
should be accorded to each portion of the valuation as well as
factors that the independent valuation firm and management may
not have included in their evaluation processes. The board of
directors then evaluates the audit committee recommendations and
undertakes a similar analysis to determine the fair value of
each investment in the portfolio in good faith.
Determination of fair values involves subjective judgments and
estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current accounting standards, the
notes to Prospects financial statements will refer to the
uncertainty with respect to the possible effect of such
valuations, and any change in such valuations, on its financial
statements.
Furthermore, in September 2006, the Financial Accounting
Standards Board (FASB) issued a new pronouncement
addressing fair value measurements, Statement of Financial
Accounting Standards Number 157, Fair Value
Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
SFAS 157 becomes effective for fiscal years beginning after
November 15, 2007; therefore, its first applicability to
Prospect will be for its upcoming fiscal year beginning
July 1, 2008. Prospect does not believe that the adoption
of SFAS 157 will materially impact the amounts reported in
its financial statements, however, additional disclosures will
be required about the inputs used to develop the measurements
and the effect of certain of the measurements reported to
changes in net assets for a fiscal period.
Dividend
Reinvestment Plan
Prospect has adopted a dividend reinvestment plan that provides
for reinvestment of its distributions on behalf of its
shareholders, unless a shareholder elects to receive cash as
provided below. As a result, when its board of directors
authorizes, and Prospect declares, a cash dividend, then its
shareholders who have not opted out of its dividend
reinvestment plan will have their cash dividends automatically
reinvested in additional shares of its common stock, rather than
receiving the cash dividends.
No action is required on the part of a registered shareholder to
have their cash dividend reinvested in shares of its common
stock. A registered shareholder may elect to receive an entire
dividend in cash by notifying the plan administrator and
Prospects transfer agent and registrar, in writing so that
such notice is received by the plan administrator no later than
the record date for dividends to shareholders. The plan
administrator sets up an account for shares acquired through the
plan for each shareholder who has not elected to receive
dividends in cash and hold such shares in non-certificated form.
Upon request by a shareholder participating in the plan, the
plan administrator will, instead of crediting shares to the
participants account, issue a certificate registered in
the participants name for the number of whole shares of
Prospects common stock and a check for any fractional
share. Such request by a shareholder must be received three days
prior to the dividend payable date in order for that dividend to
be paid in cash. If such request is received less than three
days prior to the dividend payable date, then the dividends are
reinvested and shares are repurchased for the shareholders
account; however, future dividends are paid out in cash on all
balances. Those shareholders whose shares are held by a broker
or other financial intermediary may receive dividends in cash by
notifying their broker or other financial intermediary of their
election.
Prospect primarily uses newly issued shares to implement the
plan, whether its shares are trading at a premium or at a
discount to net asset value. However, Prospect reserves the
right to purchase shares in the open market in connection with
its implementation of the plan. The number of shares to be
issued to a shareholder is determined by dividing the total
dollar amount of the dividend payable to such shareholder by the
market price per share of its common stock at the close of
regular trading on The NASDAQ Global Market on the valuation
date for such dividend. If Prospect uses newly-issued shares to
implement the plan,
176
the valuation date will not be earlier than the last day that
shareholders have the right to elect to receive cash in lieu of
shares. Market price per share on that date will be the closing
price for such shares on The NASDAQ Global Market or, if no sale
is reported for such day, at the average of their reported bid
and asked prices. The number of shares of Prospects common
stock to be outstanding after giving effect to payment of the
dividend cannot be established until the value per share at
which additional shares will be issued has been determined and
elections of its shareholders have been tabulated.
There are no brokerage charges or other charges to shareholders
who participate in the plan. The plan administrators fees
under the plan are paid by Prospect. If a participant elects by
written notice to the plan administrator to have the plan
administrator sell part or all of the shares held by the plan
administrator in the participants account and remit the
proceeds to the participant, the plan administrator is
authorized to deduct a $15 transaction fee plus a $0.10 per
share brokerage commissions from the proceeds.
Shareholders who receive dividends in the form of stock are
subject to the same federal, state and local tax consequences as
are shareholders who elect to receive their dividends in cash. A
shareholders basis for determining gain or loss upon the
sale of stock received in a dividend from Prospect will be equal
to the total dollar amount of the dividend payable to the
shareholder. Any stock received in a dividend will have a new
holding period for tax purposes commencing on the day following
the day on which the shares are credited to the
U.S. shareholders account.
Participants may terminate their accounts under the plan by
notifying the plan administrator via its website at
www.amstock.com or by filling out the transaction request form
located at the bottom of their statement and sending it to the
plan administrator at American Stock Transfer &
Trust Company, P.O. Box 922, Wall Street Station,
New York, NY
10269-0560
or by calling the plan administrators Interactive Voice
Response System at
(888) 888-0313.
The plan may be terminated by Prospect upon notice in writing
mailed to each participant at least 30 days prior to any
payable date for the payment of any dividend by Prospect. All
correspondence concerning the plan should be directed to the
plan administrator by mail at American Stock
Transfer & Trust Company, 59 Maiden Lane,
New York, NY 10007 or by telephone at
(718) 921-8200.
Shareholders who purchased their shares through or hold their
shares in the name of a broker or financial institution should
consult with a representative of their broker or financial
institution with respect to their participation in
Prospects dividend reinvestment plan. Such holders of
Prospects stock may not be identified as its registered
shareholders with the plan administrator and may not
automatically have their cash dividend reinvested in shares of
its common stock by the administrator.
Tax
Considerations
Election
to be Taxed as a RIC
As a business development company, Prospect has qualified and
elected to be treated as a RIC under Subchapter M of the Code.
As a RIC, Prospect generally is not subject to corporate-level
federal income taxes on any ordinary income or capital gains
that it distributes to its shareholders as dividends. To qualify
as a RIC, Prospect must, among other things, meet certain
source-of-income
and asset diversification requirements (as described below). In
addition, to obtain RIC tax treatment, Prospect must distribute
to its shareholders, for each taxable year, at least 90% of its
investment company taxable income, which is
generally its ordinary income plus the excess of realized net
short-term capital gains over realized net long-term capital
losses, or the Annual Distribution Requirement.
Qualification
and Taxation as a RIC
In order to qualify as a RIC for federal income tax purposes,
Prospect must, among other things:
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qualify to be treated as a business development company under
the 1940 Act at all times during each taxable year;
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177
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derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to certain
securities loans, gains from the sale of stock or other
securities, or other income derived with respect to its business
of investing in such stock or securities and net income derived
from an interest in a qualified publicly traded
partnership (as defined in the Code), or the 90% Income
Test;
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diversify its holdings so that at the end of each quarter of the
taxable year: at least 50% of the value of its assets consists
of cash, cash equivalents, U.S. Government securities,
securities of other RICs, and other securities if such other
securities of any one issuer do not represent more than 5% of
the value of its assets or more than 10% of the outstanding
voting securities of the issuer (which for these purposes
includes the equity securities of a qualified publicly
traded partnership); and
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diversify its holdings so that no more than 25% of the value of
its assets are invested in the securities, other than
U.S. Government securities or securities of other RICs,
(i) of one issuer (ii) of two or more issuers that are
controlled, as determined under applicable tax rules, by
Prospect and that are engaged in the same or similar or related
trades or businesses or (iii) of one or more
qualified publicly traded partnerships, or the
Diversification Tests.
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To the extent that Prospect invests in entities treated as
partnerships for federal income tax purposes (other than a
qualified publicly traded partnership), it generally
must include the items of gross income derived by the
partnerships for purposes of the 90% Income Test, and the income
that is derived from a partnership (other than a qualified
publicly traded partnership) will be treated as qualifying
income for purposes of the 90% Income Test only to the extent
that such income is attributable to items of income of the
partnership which would be qualifying income if realized by
Prospect directly. In addition, Prospect generally must take
into account its proportionate share of the assets held by
partnerships (other than a qualified publicly traded
partnership) in which it is a partner for purposes of the
Diversification Tests.
In order to meet the 90% Income Test, Prospect may establish one
or more special purpose corporations to hold assets from which
it does not anticipate earning dividend, interest or other
qualifying income under the 90% Income Test. Any such special
purpose corporation would generally be subject to
U.S. federal income tax, and could result in a reduced
after-tax yield on the portion of its assets held there.
Provided that Prospect qualifies as a RIC and satisfies the
Annual Distribution Requirement, it will not be subject to
federal income tax on the portion of its investment company
taxable income and net capital gain (i.e., net long-term capital
gains in excess of net short-term capital losses) that it timely
distributes to shareholders. Prospect will be subject to
U.S. federal income tax at the regular corporate rates on
any income or capital gain not distributed (or deemed
distributed) to its shareholders.
Prospect will be subject to a 4% non-deductible federal excise
tax on certain undistributed income of RICs unless it
distributes in a timely manner an amount at least equal to the
sum of (1) 98% of its ordinary income for each calendar
year, (2) 98% of its capital gain net income for the
one-year period ending October 31 in that calendar year and
(3) any income realized, but not distributed, in preceding
years. Prospect currently intends to make sufficient
distributions each taxable year such that it will not be subject
to federal income or excise taxes on its net income.
Prospect may be required to recognize taxable income in
circumstances in which it does not receive cash. For example, if
it holds debt obligations that are treated under applicable tax
rules as having original issue discount (such as debt
instruments with
payment-in-kind
interest or, in certain cases, increasing interest rates or
issued with warrants), it must include in income each year a
portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing
such income is received by Prospect in the same taxable year.
Because any original issue discount accrued will be included in
its investment company taxable income for the year of accrual,
Prospect may be required to make a distribution to its
shareholders in order to satisfy the Annual Distribution
Requirement, even though it will not have received any
corresponding cash amount.
178
Gain or loss realized by Prospect from warrants acquired by it
as well as any loss attributable to the lapse of such warrants
generally will be treated as capital gain or loss. Such gain or
loss generally will be long-term or short-term, depending on how
long it held a particular warrant.
Although Prospect does not presently expect to do so, it is
authorized to borrow funds and to sell assets in order to
satisfy distribution requirements. However, under the 1940 Act,
it is not permitted to make distributions to its shareholders
while its debt obligations and other senior securities are
outstanding unless certain asset coverage tests are
met. Moreover, its ability to dispose of assets to meet its
distribution requirements may be limited by (1) the
illiquid nature of its portfolio
and/or
(2) other requirements relating to its status as a RIC,
including the Diversification Tests. If Prospect disposes of
assets in order to meet the Annual Distribution Requirement or
the Excise Tax Avoidance Requirement, it may make such
dispositions at times that, from an investment standpoint, are
not advantageous.
If Prospect fails to satisfy the Annual Distribution Requirement
or otherwise fail to qualify as a RIC in any taxable year, it
will be subject to tax in that year on all of its taxable
income, regardless of whether it makes any distributions to its
shareholders. In that case, all of such income will be subject
to corporate-level federal income tax, reducing the amount
available to be distributed to its shareholders. See
Failure to Obtain RIC Tax Treatment below. In
contrast, assuming Prospect qualifies as a RIC, its
corporate-level federal income tax should be substantially
reduced or eliminated.
Certain of Prospects investment practices may be subject
to special and complex federal income tax provisions that may,
among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions,
(ii) convert lower taxed long-term capital gain into higher
taxed short-term capital gain or ordinary income,
(iii) convert an ordinary loss or a deduction into a
capital loss (the deductibility of which is more limited),
(iv) cause it to recognize income or gain without a
corresponding receipt of cash, (v) adversely affect the
time as to when a purchase or sale of stock or securities is
deemed to occur, (vi) adversely alter the characterization
of certain complex financial transactions, and
(vii) produce income that will not be qualifying income for
purposes of the 90% Income Test. Prospect will monitor its
transactions and may make certain tax elections in order to
mitigate the effect of these provisions.
To the extent that Prospect invests in equity securities of
entities that are treated as partnerships for federal income tax
purposes, the effect of such investments for purposes of the 90%
Income Test and the Diversification Tests will depend on whether
the partnership is a qualified publicly traded
partnership or not. If the partnership is a
qualified publicly traded partnership, the net
income derived from such investments will be qualifying income
for purposes of the 90% Income Test and will be
securities for purposes of the Diversification
Tests, as described above. If the partnership, however, is not
treated as a qualified publicly traded partnership,
then the consequences of an investment in the partnership will
depend upon the amount and type of income and assets of the
partnership allocable to Prospect. The income derived from such
investments may not be qualifying income for purposes of the 90%
Income Test and, therefore, could adversely affect
Prospects qualification as a RIC. Prospect intends to
monitor its investments in equity securities of entities that
are treated as partnerships for federal income tax purposes to
prevent its disqualification as a RIC.
Prospect may invest in preferred securities or other securities
the federal income tax treatment of which may not be clear or
may be subject to re-characterization by the IRS. To the extent
the tax treatment of such securities or the income from such
securities differs from the expected tax treatment, it could
affect the timing or character of income recognized, requiring
Prospect to purchase or sell securities, or otherwise change its
portfolio, in order to comply with the tax rules applicable to
RICs under the Code.
Failure
to Obtain RIC Tax Treatment
If Prospect were unable to obtain tax treatment as a RIC, it
would be subject to tax on all of its taxable income at regular
corporate rates. Prospect would not be able to deduct
distributions to shareholders, nor would they be required to be
made. Distributions would generally be taxable to its
shareholders as ordinary dividend income eligible for the 15%
maximum rate to the extent of its current and accumulated
earnings and profits. Subject to certain limitations under the
Code, corporate distributees would be eligible for the
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dividends-received deduction. Distributions in excess of its
current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the
shareholders tax basis, and any remaining distributions
would be treated as a capital gain.
Regulation
as a Business Development Company
General
Prospect is a closed-end, non-diversified investment company
that has filed an election to be treated as a business
development company under the 1940 Act and has elected to be
treated as a RIC under Subchapter M of the Code. The 1940 Act
contains prohibitions and restrictions relating to transactions
between business development companies and their affiliates
(including any investment advisers or
sub-advisers),
principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the directors be
persons other than interested persons, as that term
is defined in the 1940 Act. In addition, the 1940 Act provides
that it may not change the nature of its business so as to cease
to be, or to withdraw its election as, a business development
company unless approved by a majority of its outstanding voting
securities.
Prospect may invest up to 100% of its assets in securities
acquired directly from issuers in privately negotiated
transactions. With respect to such securities, it may, for the
purpose of public resale, be deemed an underwriter
as that term is defined in the Securities Act. Prospects
intention is to not write (sell) or buy put or call options to
manage risks associated with the publicly traded securities of
its portfolio companies, except that it may enter into hedging
transactions to manage the risks associated with interest rate
and other market fluctuations. However, in connection with an
investment or acquisition financing of a portfolio company, it
may purchase or otherwise receive warrants to purchase the
common stock of the portfolio companies. Similarly, in
connection with an acquisition, Prospect may acquire rights to
require the issuers of acquired securities or their affiliates
to repurchase them under certain circumstances. Prospect also
does not intend to acquire securities issued by any investment
company that exceed the limits imposed by the 1940 Act. Under
these limits, it generally cannot acquire more than 3% of the
voting stock of any registered investment company, invest more
than 5% of the value of its total assets in the securities of
one investment company or invest more than 10% of the value of
its total assets in the securities of more than one investment
company. With regard to that portion of its portfolio invested
in securities issued by investment companies, it should be noted
that such investments might subject Prospects shareholders
to additional expenses. None of these policies are fundamental
and may be changed without shareholder approval.
Qualifying
Assets
Under the 1940 Act, a business development company may not
acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the companys
total assets. The principal categories of qualifying assets
relevant to Prospects business are the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer
which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly owned by the business
development company) or a company that would be an investment
company but for certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
1. does not have any class of securities with respect to
which a broker or dealer may extend margin credit;
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2. is controlled by a business development company or a
group of companies including a business development company and
the business development company has an affiliated person who is
a director of the eligible portfolio company; or
3. is a small and solvent company having total assets of
not more than $4 million and capital and surplus of not
less than $2 million.
(2) Securities of any eligible portfolio company which
Prospect controls.
(3) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing agreements.
(4) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and Prospect already owns 60% of the
outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less
from the time of investment.
In addition, a business development company must have been
organized and have its principal place of business in the United
States and must be operated for the purpose of making
investments in the types of securities described in (1),
(2) or (3) above.
Managerial
Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for
the purpose of the 70% test, the business development company
must either control the issuer of the securities or must offer
to make available to the issuer of the securities (other than
small and solvent companies described above) significant
managerial assistance; except that, where the business
development company purchases such securities in conjunction
with one or more other persons acting together, one of the other
persons in the group may make available such managerial
assistance. Making available significant managerial assistance
means, among other things, any arrangement whereby the business
development company, through its directors, officers or
employees, offers to provide, and, if accepted, does so provide,
significant guidance and counsel concerning the management,
operations or business objectives and policies of a portfolio
company.
Temporary
Investments
Pending investment in other types of qualifying
assets, as described above, Prospects investments
may consist of cash, cash equivalents, including money market
funds, U.S. government securities or high quality debt
securities maturing in one year or less from the time of
investment, which Prospect refers to, collectively, as temporary
investments, so that 70% of its assets are qualifying assets.
Typically, it will invest in U.S. treasury bills or in
repurchase agreements, provided that such agreements are fully
collateralized by cash or securities issued by the
U.S. government or its agencies. A repurchase agreement
involves the purchase by an investor, such as us, of a specified
security and the simultaneous agreement by the seller to
repurchase it at an agreed upon future date and at a price which
is greater than the purchase price by an amount that reflects an
agreed-upon
interest rate. There is no percentage restriction on the
proportion of Prospects assets that may be invested in
such repurchase agreements. However, if more than 25% of its
total assets constitute repurchase agreements from a single
counterparty, it would not meet the Diversification Tests in
order to qualify as a RIC for federal income tax purposes. Thus,
Prospect does not intend to enter into repurchase agreements
with a single counterparty in excess of this limit.
Prospects investment adviser will monitor the
creditworthiness of the counterparties with which it enters into
repurchase agreement transactions.
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Senior
Securities
Prospect is permitted, under specified conditions, to issue
multiple classes of indebtedness and one class of stock senior
to its common stock if its asset coverage, as defined in the
1940 Act, is at least equal to 200% immediately after each such
issuance. In addition, while any senior securities remain
outstanding, it must make provisions to prohibit any
distribution to its shareholders or the repurchase of such
securities or shares unless it meets the applicable asset
coverage ratios at the time of the distribution or repurchase.
Prospect may also borrow amounts up to 5% of the value of its
total assets for temporary or emergency purposes without regard
to asset coverage. For a discussion of the risks associated with
leverage, see Risk Factors.
Investment
Concentration
Prospects investment objective is to generate both current
income and long-term capital appreciation through debt and
equity investments. While it is diversifying the portfolio, many
of its existing investments are in the energy and energy related
industries.
Compliance
Policies and Procedures
Prospect and its investment adviser have adopted and implemented
written policies and procedures reasonably designed to prevent
violation of the federal securities laws, and are required to
review these compliance policies and procedures annually for
their adequacy and the effectiveness of their implementation,
and to designate a Chief Compliance Officer to be responsible
for administering the policies and procedures. Brian H.
Oswald serves as its Chief Compliance Officer.
Proxy
Voting Policies and Procedures
Prospect has delegated its proxy voting responsibility to
Prospect Capital Management. The guidelines are reviewed
periodically by Prospect Capital Management and if required, its
independent directors, and, accordingly, are subject to change.
As an investment adviser registered under the Advisers Act,
Prospect Capital Management has a fiduciary duty to act in the
best interests of its clients. As part of this duty, Prospect
Capital Management recognizes that it must vote client
securities in a timely manner free of conflicts of interest and
in the best interests of its clients.
Shareholders may obtain information about how Prospect
Capital Management voted proxies on Prospects behalf by
making a written request for proxy voting information to: Chief
Compliance Officer, Prospect Capital Management LLC, 10 East
40th Street, 44th Floor, New York, NY 10016.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a variety of regulatory
requirements on publicly-held companies. In addition to
Prospects Chief Executive and Chief Financial
Officers required certifications as to the accuracy of its
financial reporting, it is also required to disclose the
effectiveness of its disclosure controls and procedures as well
as report on its assessment of its internal controls over
financial reporting, the latter of which must be audited by its
independent registered public accounting firm.
The Sarbanes-Oxley Act also requires Prospect to continually
review its policies and procedures to ensure that it remains in
compliance with all rules promulgated under the Act.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PROSPECT
(All figures in this item are in thousands except share, per
share and other data)
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this document. Historical results set forth are not
necessarily indicative of Prospects future financial
position and results of operations.
Note on
Forward Looking Statements
Some of the statements in this report constitute forward-looking
statements, which relate to future events or Prospects
future performance or financial condition. The forward-looking
statements contained herein involve risks and uncertainties,
including statements as to:
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Prospects future operating results;
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Prospects business prospects and the prospects of its
portfolio companies;
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the impact of investments that Prospect expects to make;
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Prospects contractual arrangements and relationships with
third parties;
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the dependence of Prospects future success on the general
economy and its impact on the industries in which it invests;
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the ability of Prospects portfolio companies to achieve
their objectives;
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Prospects expected financings and investments;
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the adequacy of Prospects cash resources and working
capital; and
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the timing of cash flows, if any, from the operations of
Prospects portfolio companies.
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Prospect generally uses words such as anticipates,
believes, expects, intends
and similar expressions to identify forward-looking statements.
Prospects actual results could differ materially from
those projected in the forward-looking statements for any
reason, including the factors set forth in Risk
Factors and elsewhere in this report.
Prospect has based the forward-looking statements included in
this report on information available to it on the date of this
report, and it assumes no obligation to update any such
forward-looking statements. Although it undertakes no obligation
to revise or update any forward-looking statements, whether as a
result of new information, future events or otherwise, you are
advised to consult any additional disclosures that Prospect may
make directly to you or through reports that it in the future
may file with the Securities and Exchange Commission
(SEC), including any annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
Overview
Prospect is a financial services company that primarily lends
and invests in middle market, privately-held companies. Prospect
is a closed-end investment company that has filed an election to
be treated as a business development company under the 1940 Act.
Prospect invests primarily in senior and subordinated debt and
equity of companies in need of capital for acquisitions,
divestitures, growth, development, project financing and
recapitalization. Prospect works with the management teams or
financial sponsors to seek investments with historical cash
flows, asset collateral or contracted pro-forma cash flows.
The aggregate value of Prospects portfolio investments was
$547,168 and $497,530 as of June 30, 2009 and June 30,
2008, respectively. During the fiscal year ended June 30,
2009, Prospects net cost of investments increased by
$34,619, or 7.0%, as Prospect invested in three new and several
follow-on investments while Prospect sold three investments and
Prospect received repayment on four other investments.
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Compared to the end of last fiscal year (ended June 30,
2008), net assets increased by $102,973 or 24.0% during the year
ended June 30, 2009, from $429,623 to $532,596. This
increase resulted from the issuance of new shares of
Prospects common stock (less offering costs) in the amount
of $99,281, dividend reinvestments of $5,107, and another
$35,104 from operations. These increases, in turn, were offset
by $36,519 in dividend distributions to Prospects
stockholders. The $35,104 increase in net assets resulting from
operations is net of the following: net investment income of
$59,163, realized loss on investments of $39,078, and a net
increase in net assets due to changes in net unrealized
appreciation of investments of $15,019. On June 30, 2009,
Prospect determined that the impairment of the Change Clean
Energy Holdings, Inc. (CCEHI) investment (formerly
known as Worchester Energy Partners, Inc. (WEPI))
was other than temporarily impaired and recognized a realized
loss for the amount by which the amortized cost exceeded the
current fair value. This loss was partially offset by realized
gains from sales of the Arctic Acquisition Corp.
(Arctic) warrants and Deep Down, Inc. (Deep
Down) common stock. The net unrealized appreciation was
driven by significant
write-ups of
Prospects investments in American Gilsonite Company
(AGC), Gas Solutions Holdings, Inc.
(GSHI or Gas Solutions), NRG
Manufacturing, Inc. (NRG), R-V Industries, Inc.
(R-V), Shearers Foods, Inc.
(Shearers) and Stryker Energy, LLC
(Stryker) due to improvements in operations, and by
the disposition of previously written-down investment in CCEHI
mentioned above, which, in turn, were offset by significant
write-downs Prospects investments in Ajax Rolled
Ring & Machine (Ajax), Appalachian Energy
Holdings LLC (AEH), Conquest Cherokee, LLC
(Conquest), Deb Shops, Inc. (Deb Shops),
Iron Horse Coiled Tubing, Inc. (Iron Horse) and
Yatesville Coal Holdings, Inc. (Yatesville) due to
deterioration in operations combined with general increases in
lending rates.
Prospect seeks to be a long-term investor with their investment
companies. To date, Prospect has invested primarily in
industries related to the industrial/energy economy. However,
Prospect continues to widen Prospects strategy focus in
other sectors of the economy to diversify Prospects
portfolio holdings.
Market
Conditions
In 2008 and early 2009, the financial services industry has been
negatively affected by turmoil in the global capital markets.
What began in 2007 as a deterioration of credit quality in
subprime residential mortgages has spread rapidly to other
credit markets. Market liquidity and credit quality conditions
are significantly weaker today than two years ago.
Prospect believes that it is well positioned to navigate through
these adverse market conditions. As a business development
company, it is limited to a maximum 1 to 1 debt to equity ratio,
and as of June 30, 2009, Prospects debt to equity
ratio was 0.23 to 1. As of June 30, 2009, Prospect has
borrowed $124,800 against its credit facility with Rabobank
Nederland, which outstanding balance was reduced to zero
subsequent to June 30, 2009. As Prospect makes additional
investments that are eligible to be pledged under the credit
facility, it will generate additional availability. The
revolving period for the extended credit facility continues
until June 25, 2010, with an expected maturity on
June 25, 2011.
Prospect also continue to generate liquidity through stock
offerings and the realization of portfolio investments. On
March 19, 2009, April 27, 2009, May 26, 2009, and
July 7, 2009, Prospect completed public stock offerings for
1,500,000 shares, 3,680,000 shares,
7,762,500 shares, and 5,175,000 shares, of its common
stock at $8.20 per share, $7.75 per share, $8.25 per share,
$9.00 per share, raising $12,300, $28,520, $64,040, and $46,580
of gross proceeds, respectively. On August 20, 2009 and
September 24, 2009, Prospect issued 3,449,686 shares
and 2,807,111 shares at $8.50 and $9.00 per share in
private stock offerings generating $29,322 and $25,264 of gross
proceeds, respectively, from the offerings. Concurrent with the
sale of these shares, Prospect entered into registration rights
agreements in which it granted the purchasers certain
registration rights with respect to the shares. Under the terms
and conditions of the registration rights agreements, Prospect
will use Prospects reasonable best efforts to file with
the SEC within sixty (60) days a post-effective amendment
to the registration statement on
Form N-2
and will also use Prospects reasonable best efforts to
cause such post-effective amendment to be declared effective by
the SEC within one hundred twenty (120) days. Under the
registration rights agreements, Prospect may be obligated to
make liquidated damages payments to holders upon certain events.
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The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
income and expenses during the reported period. Changes in the
economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results
to differ.
Fourth
Quarter Highlights
On April 27, 2009, Prospect closed a public offering of
3,680,000 shares of Prospects common stock (including
the exercise of over-allotment options of Prospects
underwriters). The net proceeds to us were approximately $26,956
after deducting estimated offering expenses.
On May 26, 2009, Prospect closed a public offering of
7,762,500 shares of Prospects common stock (including
the exercise of over-allotment options of Prospects
underwriters). The net proceeds to us were approximately $60,538
after deducting estimated offering expenses.
On June 23, 2009, Prospect declared its fourth fiscal
quarter (for the fiscal year ending June 30,
2009) dividend of $0.40625 per share. The ex-dividend and
record dates were July 6, 2009 and July 8, 2009,
respectively. This dividend marked the Companys
19th
consecutive quarterly increase.
Recent
Developments
On July 6, 2009, and July 8, 2009, Prospect paid down
$50,500 and $74,300 of its revolving credit facility,
respectively, reducing the outstanding borrowing to zero.
On July 7, 2009, Prospect closed a public offering of
5,175,000 shares of its common stock (including the
exercise of over-allotment options of Prospects
underwriters). The net proceeds to Prospect were approximately
$44,046 after deducting estimated offering expenses.
On July 20, 2009, Prospect issued 297,274 shares of
its common stock in connection with the dividend reinvestment
plan.
On August 3, 2009, Prospect announced that it had entered
into a definitive agreement to acquire Patriot Capital Funding,
Inc. (NASDAQ: PCAP) (Patriot) for approximately
$197,000 comprised of its common stock and cash to repay all
Patriot debt, anticipated to be $110,500 when the acquisition
closes. Prospects common shares will be exchanged at a
ratio of approximately 0.3992 for each Patriot share, or
8,616,433 shares of Prospects common stock for
21,584,251 Patriot shares, with such exchange ratio decreased
for any tax distributions Patriot may declare before closing. In
return, Prospect will acquire assets with an amortized cost of
approximately $311,000 for approximately $196,000, based on an
estimate of its common stock price of $10 per share and the
anticipated debt outstanding at the closing, for which the value
of either may change prior to the closing. Prospect, in
conjunction with an independent valuation agent, have determined
that the fair value of the assets is approximate to the
anticipated purchase price and does not anticipate recording any
material gain on the consummation of the transaction.
On August 20, 2009, Prospect issued 3,449,686 shares
at $8.50 per share in a private stock offering. The net proceeds
to Prospect were approximately $29,205 after deducting legal and
advisory fees. Concurrent with the sale of these shares,
Prospect entered into a registration rights agreement in which
it granted the purchasers certain registration rights with
respect to the Shares. Under the terms and conditions of the
registration rights agreement, Prospect will use its reasonable
best efforts to file with the SEC within sixty (60) days a
post-effective amendment to the registration statement on
Form N-2
and will also use Prospects reasonable best efforts to
cause such post-effective amendment to be declared effective by
the SEC within one hundred twenty (120) days. Under the
registration rights agreement, Prospect may be obligated to make
liquidated damages payments to holders upon certain events.
On August 31, 2009, C&J Cladding, LLC
(C&J) repaid the $3,150 loan receivable to
Prospect and Prospect received an additional 5.00% prepayment
penalty totaling $158. Prospect continues to hold warrants for
common units in this investment.
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On September 4, 2009, Peerless Manufacturing Co. repaid the
$20,000 loan receivable to Prospect.
On September 24, 2009, Prospect issued
2,807,111 shares at $9.00 per share in a private stock
offering. The net proceeds to Prospect were approximately
$24,423 after deducting estimated legal and advisory fees.
Concurrent with the sale of these shares, Prospect entered into
a registration rights agreement in which it granted the
purchasers certain registration rights with respect to the
Shares. Under the terms and conditions of the registration
rights agreement, Prospect will use its reasonable best efforts
to file with the SEC within sixty (60) days a
post-effective amendment to the registration statement on
Form N-2
and will also use Prospects reasonable best efforts to
cause such post-effective amendment to be declared effective by
the SEC within one hundred twenty (120) days. Under the
registration rights agreement, Prospect may be obligated to make
liquidated damages payments to holders upon certain events.
On September 28, 2009, Prospect announced the declaration
of a cash distribution of $0.4075 per share to holders of record
on October 8, 2009 to be paid on October 19, 2009.
On September 29, 2009, Prospect announced a $20,000
increase in total commitments on its revolving credit facility,
increasing the facility size from $175,000 to $195,000.
Critical
Accounting Policies and Estimates
The discussion and analysis of Prospects financial
condition and results of operations are based upon
Prospects financial statements, which have been prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP). The preparation
of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Changes in the
economic environment, financial markets and any other parameters
used in determining such estimates could cause actual results to
differ materially. In addition to the discussion below,
Prospects critical accounting policies are further
described in the notes to the financial statements.
Basis
of Consolidation
Under the 1940 Act rules, the regulations pursuant to
Article 6 of
Regulation S-X,
and the American Institute of Certified Public Accountants
Audit and Accounting Guide for Investment Companies, Prospect
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 Prospect.
Prospects June 30, 2009 and June 30, 2008,
financial statements include Prospects accounts and the
accounts of Prospect Capital Funding, LLC, Prospects only
wholly-owned, closely-managed subsidiary that is also an
investment company. All intercompany balances and transactions
have been eliminated in consolidation.
Investment
Classification
Prospect is a non-diversified company within the meaning of the
1940 Act. Prospect classifies its 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 Prospect assumes an obligation
to acquire a financial instrument and assume the risks for gains
or losses related to that instrument. Investments are
derecognized when Prospect assumes an obligation to sell a
financial instrument and forego the risks for gains or losses
related to that instrument. Specifically, Prospect records 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
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for investments sold and payables for investments purchased,
respectively, in the Consolidated Statements of Assets and
Liabilities.
Investment
Valuation
Prospects Board of Directors has established procedures
for the valuation of its investment portfolio. These procedures
are detailed below.
Investments for which market quotations are readily available
are valued at such market quotations.
For most of Prospects 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,
Prospects Board of Directors has approved a multi-step
valuation process each quarter, as described below:
1) Each portfolio company or investment is reviewed by
Prospects investment professionals with the independent
valuation firm engaged by Prospects Board of Directors;
2) the independent valuation firm conducts independent
appraisals and makes their own independent assessment;
3) the audit committee of Prospects Board of
Directors reviews and discusses the preliminary valuation of
Prospects Investment Adviser and that of the independent
valuation firm; and
4) the Board of Directors discusses the valuations and
determines the fair value of each investment in the portfolio in
good faith based on the input of Prospects Investment
Adviser, the independent valuation firm and the audit committee.
In September, 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157).
FAS 157 defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years.
Prospect adopted this statement on a prospective basis beginning
in the quarter ended September 30, 2008. Adoption of this
statement did not have a material effect on Prospects
financial position or results.
FAS 157 classifies the inputs used to measure these fair
values into the following hierarchy:
Level 1: Quoted prices in active markets
for identical assets or liabilities, accessible by Prospect 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. Prospects
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and
considers factors specific to each investment.
The changes to generally accepted accounting principles from the
application of FAS 157 relate to the definition of fair
value, framework for measuring fair value, and the expanded
disclosures about fair value measurements. FAS 157 applies
to fair value measurements already required or permitted by
other standards. In accordance with FAS 157, the fair value
of Prospects investments is defined as the price that it
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.
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In April 2009, FASB issued Staff Position
No. 157-4,
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
(FSP
FAS 157-4).
FSP
FAS 157-4
provides further clarification for the application of
FAS 157 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. FSP
FAS 157-4
is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of FSP
FAS 157-4
for the year ended June 30, 2009, did not have any effect
on Prospects net asset value, financial position or
results of operations as there was no change to the fair value
measurement principles set forth in FAS 157.
Revenue
Recognition
Realized gains or losses on the sale of investments are
calculated using the specific identification method.
Interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis.
Origination, closing
and/or
commitment fees associated with investments in portfolio
companies are accreted into interest income over the respective
terms of the applicable loans. Upon the prepayment of a loan or
debt security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as
interest income.
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 managements judgment. Non-accrual
loans are restored to accrual status when past due principal and
interest is paid and in managements judgment, are likely
to remain current. As of June 30, 2009, the fair value of
these loans are approximately 7.3% of Prospects net assets.
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.
Federal
and State Income Taxes
Prospect has 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. Prospect is
required to distribute at least 90% of its investment company
taxable income and intends to distribute (or retain through a
deemed distribution) all of its investment company taxable
income and net capital gain to stockholders; therefore, Prospect
has made no provision for income taxes. The character of income
and gains that Prospect 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 Prospect does not distribute (or are not deemed to have
distributed) at least 98% of its annual taxable income in the
year earned, Prospect will generally be required to pay an
excise tax equal to 4% of the amount by which 98% of its annual
taxable income exceeds the distributions from such taxable
income for the year. To the extent that Prospect determine that
its estimated current year annual taxable income will be in
excess of estimated current year dividend distributions from
such taxable income, Prospect accrues 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.
Prospect adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured,
presented, and disclosed in the financial statements.
FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the
Companys tax returns to determine whether the tax
positions are more-
188
likely-than-not of being sustained by the applicable tax
authority. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or
expense in the current year. Adoption of FIN 48 was applied
to all open tax years as of July 1, 2007. The adoption of
FIN 48 did not have an effect on Prospects net asset
value, financial condition or results of operations as there was
no liability for unrecognized tax benefits and no change to
Prospects beginning net asset value. As of June 30,
2009 and for the year then ended, Prospect did not have a
liability for any unrecognized tax benefits. Managements
determinations regarding FIN 48 may be subject to review
and adjustment at a later date based upon factors including, but
not limited to, an on-going analysis of tax laws, regulations
and interpretations thereof.
Dividends
and Distributions
Dividends and distributions to Prospects common
stockholders are recorded on the ex-dividend date. Each quarter,
the amount to be paid as a dividend, if any, is approved by
Prospects Board of Directors and is generally based upon
managements estimate of earnings for the quarter. Net
realized capital gains, if any, are distributed at least
annually.
Financing
Costs
Prospect records origination expenses related to its credit
facility as deferred financing costs. These expenses are
deferred and amortized as part of interest expense using the
straight-line method, which approximates the effective interest
method, over the stated life of the facility.
Prospect records registration expenses related to shelf filings
as prepaid assets. These expenses consist principally of SEC
registration, legal and accounting fees incurred through
June 30, 2009 that are related to the shelf filings that
will be charged to capital upon the receipt of the capital or
charged to expense if not completed.
Guarantees
and Indemnification Agreements
Prospect follows FASB Interpretation No. 45,
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45).
FIN 45 elaborates on the disclosure requirements of a
guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a
guarantee, for those guarantees that are covered by FIN 45,
the fair value of the obligation undertaken in issuing certain
guarantees. FIN 45 did not have a material effect on the
financial statements.
Valuation
of Other Financial Assets and Financial
Liabilities
In February 2007, FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115
(FAS 159). FAS 159 permits an entity to
elect fair value as the initial and subsequent measurement
attribute for many of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities
measured using another measurement attribute. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those years. Prospect has adopted this statement on
July 1, 2008 and has elected not to value some assets and
liabilities at fair value as would be permitted by FAS 159.
Recent
Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business
Combinations (FAS 141(R)).
FAS 141(R) establishes accounting principles and disclosure
requirements for all transactions in which a company obtains
control over another business. The standard is effective for
fiscal years beginning after December 15, 2008.
Prospects management does not believe that the adoption of
FAS 141(R) will have a material impact on Prospects
financial statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133
189
(FAS 161). FAS 161 is intended to improve
financial reporting for derivative instruments by requiring
enhanced disclosure that enables investors to understand how and
why the entity uses derivatives, how derivatives are accounted
for, and how derivatives affect an entitys results of
operations, financial position, and cash flows. FAS 161
becomes effective for fiscal years beginning after
November 15, 2008; therefore, is applicable for
Prospects fiscal year beginning July 1, 2009.
Prospects management does not believe that the adoption of
FAS 161 will have a material impact on its financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles (FAS 162).
FAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities
that are presented in conformity with GAAP. This statement is
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. Prospects
management does not believe that the adoption of FAS 162
will have a material impact on its financial statements.
In May 2009, the FASB issued Statement of Financial Accounting
Standards No. 165, Subsequent Events
(FAS 165). FAS 165 establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The standard, which
includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim
or annual periods ending after June 15, 2009.
Prospects Management has also evaluated all events or
transactions from September 12, 2009 through
October 20, 2009, and has updated Note 12 to
Prospects consolidated financial statements for any
additional transactions which have occurred, which are
unaudited. During these periods, Prospect did not have any
material recognizable subsequent events other than those
disclosed in its financial statements.
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 (FAS 168). FAS 168
provides for the FASB Accounting Standards Codification (the
Codification) to become the single official source
of authoritative, nongovernmental GAAP. The Codification did not
change GAAP but reorganizes the literature. FAS 168 is
effective for interim and annual periods ending after
September 15, 2009. Prospects management does not
believe that the adoption of FAS 168 will have a material
impact on its financial statements.
Per
Share Information
Net increase in net assets resulting from operations per common
share, or Basic Earnings Per Share, are calculated using the
weighted average number of common shares outstanding for the
period presented. Diluted earnings per share are not presented
as there are no potentially dilutive securities outstanding.
Investment
Holdings
As of June 30, 2009, Prospect continues to pursue its
investment strategy. Despite its name change to Prospect
Capital Corporation and the termination of its policy to
invest at least 80% of its net assets in energy companies in May
2007, Prospect currently has a concentration of investments in
companies in the energy and energy related industries. Some of
the companies in which Prospect invests have relatively short or
no operating histories. These companies are and will be subject
to all of the business risk and uncertainties associated with
any new business enterprise, including the risk that these
companies may not reach their investment objective or the value
of Prospects investment in them may decline substantially
or fall to zero.
Prospects portfolio had an annualized current yield of
13.7% and 15.5% across all its long-term debt and certain equity
investments as of June 30, 2009 and June 30, 2008,
respectively. This yield includes interest from all of
Prospects long-term investments as well as dividends from
GSHI and NRG for the year ended June 30, 2009 and Ajax,
GSHI and NRG for the year ended June 30, 2008. The 1.8%
decrease is primarily due to loans which have been classified as
non-accrual status during the fiscal year ended June 30,
2009. For the year ended June 30, 2009, total foregone
interest related to loans on non-accrual status was $18,746.
Monetization of other equity positions that Prospect holds is
not included in this yield calculation. In each of
190
Prospects portfolio companies, it holds equity positions,
ranging from minority interests to majority stakes, which
Prospect expect over time to contribute to its investment
returns. Some of these equity positions include features such as
contractual minimum internal rates of returns, preferred
distributions, flip structures and other features expected to
generate additional investment returns, as well as contractual
protections and preferences over junior equity, in addition to
the yield and security offered by its cash flow and collateral
debt protections.
As of June 30, 2009, Prospect owns controlling interests in
Ajax, C&J, CCEHI, GSHI, Integrated Contract Services, Inc.
(ICS), Iron Horse, NRG, R-V, and Yatesville.
Prospect also owns an affiliated interest in AEH and BNN
Holdings Corp. d/b/a Biotronic NeuroNetwork
(Biotronic).
The following is a summary of Prospects investment
portfolio by level of control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Fair
|
|
|
Percent of
|
|
|
Fair
|
|
|
Percent of
|
|
Level of Control
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
Control
|
|
$
|
206,332
|
|
|
|
31.9
|
%
|
|
$
|
205,827
|
|
|
|
38.8
|
%
|
Affiliate
|
|
|
32,254
|
|
|
|
5.0
|
%
|
|
|
6,043
|
|
|
|
1.2
|
%
|
Non-control/Non-affiliate
|
|
|
308,582
|
|
|
|
47.8
|
%
|
|
|
285,660
|
|
|
|
53.8
|
%
|
Money Market Funds
|
|
|
98,735
|
|
|
|
15.3
|
%
|
|
|
33,000
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
$
|
645,903
|
|
|
|
100.0
|
%
|
|
$
|
530,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is Prospects investment portfolio presented
by type of investment at June 30, 2009 and June 30,
2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Fair
|
|
|
Percent of
|
|
|
Fair
|
|
|
Percent of
|
|
Type of Investment
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
Money Market Funds
|
|
$
|
98,735
|
|
|
|
15.3
|
%
|
|
$
|
33,000
|
|
|
|
6.2
|
%
|
Senior Secured Debt
|
|
|
220,993
|
|
|
|
34.2
|
%
|
|
|
199,946
|
|
|
|
37.7
|
%
|
Subordinated Secured Debt
|
|
|
194,547
|
|
|
|
30.1
|
%
|
|
|
219,623
|
|
|
|
41.4
|
%
|
Subordinated Unsecured Debt
|
|
|
16,331
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Preferred Stock
|
|
|
4,139
|
|
|
|
0.7
|
%
|
|
|
7,707
|
|
|
|
1.4
|
%
|
Common Stock
|
|
|
89,278
|
|
|
|
13.8
|
%
|
|
|
58,312
|
|
|
|
11.0
|
%
|
Membership Interests
|
|
|
7,270
|
|
|
|
1.1
|
%
|
|
|
3,000
|
|
|
|
0.6
|
%
|
Overriding Royalty Interests
|
|
|
3,483
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Net Profits Interests
|
|
|
2,561
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Warrants
|
|
|
8,566
|
|
|
|
1.4
|
%
|
|
|
8,942
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
$
|
645,903
|
|
|
|
100.0
|
%
|
|
$
|
530,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
The following is Prospects investment portfolio presented
by geographic location of the investment at June 30, 2009
and June 30, 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Fair
|
|
|
Percent of
|
|
|
Fair
|
|
|
Percent of
|
|
Geographic Exposure
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
Western US
|
|
$
|
48,091
|
|
|
|
7.4
|
%
|
|
$
|
30,322
|
|
|
|
5.7
|
%
|
Southeast US
|
|
|
101,710
|
|
|
|
15.7
|
%
|
|
|
128,512
|
|
|
|
24.2
|
%
|
Southwest US
|
|
|
253,615
|
|
|
|
39.3
|
%
|
|
|
211,177
|
|
|
|
39.9
|
%
|
Midwest US
|
|
|
84,097
|
|
|
|
13.0
|
%
|
|
|
47,869
|
|
|
|
9.0
|
%
|
Northeast US
|
|
|
47,049
|
|
|
|
7.3
|
%
|
|
|
68,468
|
|
|
|
12.9
|
%
|
Canada
|
|
|
12,606
|
|
|
|
2.0
|
%
|
|
|
11,182
|
|
|
|
2.1
|
%
|
Money Market Funds
|
|
|
98,735
|
|
|
|
15.3
|
%
|
|
|
33,000
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
$
|
645,903
|
|
|
|
100.0
|
%
|
|
$
|
530,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is Prospects investment portfolio presented
by industry sector of the investment at June 30, 2009 and
June 30, 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Fair
|
|
|
Percent of
|
|
|
Fair
|
|
|
Percent of
|
|
Industry Sector
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
Biomass Power
|
|
$
|
2,530
|
|
|
|
0.4
|
%
|
|
$
|
15,580
|
|
|
|
2.9
|
%
|
Construction Services
|
|
|
2,408
|
|
|
|
0.4
|
%
|
|
|
6,043
|
|
|
|
1.1
|
%
|
Contracting
|
|
|
5,000
|
|
|
|
0.8
|
%
|
|
|
5,000
|
|
|
|
0.9
|
%
|
Financial Services
|
|
|
23,073
|
|
|
|
3.6
|
%
|
|
|
23,699
|
|
|
|
4.5
|
%
|
Food Products
|
|
|
29,416
|
|
|
|
4.6
|
%
|
|
|
19,351
|
|
|
|
3.7
|
%
|
Gas Gathering and Processing
|
|
|
85,187
|
|
|
|
13.2
|
%
|
|
|
61,542
|
|
|
|
11.6
|
%
|
Healthcare
|
|
|
60,293
|
|
|
|
9.3
|
%
|
|
|
13,752
|
|
|
|
2.6
|
%
|
Manufacturing
|
|
|
110,929
|
|
|
|
17.2
|
%
|
|
|
109,542
|
|
|
|
20.7
|
%
|
Metal Services
|
|
|
7,133
|
|
|
|
1.1
|
%
|
|
|
6,829
|
|
|
|
1.3
|
%
|
Mining and Coal Production
|
|
|
13,097
|
|
|
|
2.0
|
%
|
|
|
25,726
|
|
|
|
4.9
|
%
|
Oil and Gas Production
|
|
|
104,806
|
|
|
|
16.2
|
%
|
|
|
112,850
|
|
|
|
21.3
|
%
|
Oilfield Fabrication
|
|
|
34,931
|
|
|
|
5.4
|
%
|
|
|
24,854
|
|
|
|
4.7
|
%
|
Pharmaceuticals
|
|
|
11,452
|
|
|
|
1.8
|
%
|
|
|
11,523
|
|
|
|
2.2
|
%
|
Production Services
|
|
|
12,606
|
|
|
|
1.9
|
%
|
|
|
14,038
|
|
|
|
2.6
|
%
|
Retail
|
|
|
6,272
|
|
|
|
1.0
|
%
|
|
|
13,428
|
|
|
|
2.5
|
%
|
Shipping Vessels
|
|
|
7,381
|
|
|
|
1.1
|
%
|
|
|
6,804
|
|
|
|
1.3
|
%
|
Specialty Minerals
|
|
|
18,924
|
|
|
|
2.9
|
%
|
|
|
15,632
|
|
|
|
2.9
|
%
|
Technical Services
|
|
|
11,730
|
|
|
|
1.8
|
%
|
|
|
11,337
|
|
|
|
2.1
|
%
|
Money Market Funds
|
|
|
98,735
|
|
|
|
15.3
|
%
|
|
|
33,000
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
$
|
645,903
|
|
|
|
100.0
|
%
|
|
$
|
530,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Activity
At June 30, 2009, approximately 102.7% of Prospects
net assets or about $547,168 was invested in 30 long-term
portfolio investments and 18.5% of its net assets invested in
money market funds. Liabilities in excess of other assets offset
the excess of these amounts over 100%.
192
Long-Term
Portfolio Investment Activity
During the year ended June 30, 2009, Prospect completed
three new investments and several follow-on investments in
existing portfolio companies, totaling approximately $96,263.
The more significant of these investments are described briefly
in the following:
On August 1, 2008, Prospect provided $7,400 in debt
financing to Houston, Texas-based Castro Cheese Company Inc.
(Castro), a leading manufacturer of Hispanic cheeses
and creams. The investment was in the form of a junior secured
note with a net profits interest.
On August 4, 2008, Prospect provided $15,000 in debt
financing to support the take-private acquisition of the
TriZetto Group (TriZetto), a leading health care
information technology company. The investment was in the form
of a subordinated unsecured note with a net profits interest.
On August 21, 2008, Prospect provided a $26,000 senior
secured debt financing and co-invested $2,300 in equity
alongside Great Point Partners, LLC in its growth
recapitalization of Biotronic, the largest independent national
provider of intra-operative neurophysiological monitoring
services. The investment was in the form of a senior secured
note with preferred shares.
During the fiscal year ended June 30, 2009, Prospect made
four follow-on secured debt investments totaling $7,500 in Iron
Horse in support of the build out of additional equipment. All
fundings of Iron Horse were in the form of a bridge loan.
On December 10, 2008, Prospect made a follow-on investment
of $5,000 in GSHI for the repayment of third-party bank senior
credit facility. The investment was in the form of a senior
secured note. On June 30, 2009, Prospect made a follow-on
investment of $5,000 in GSHI in the form of a junior secured
note.
During the fiscal year ended June 30, 2009, Prospect
provided additional fundings of $5,250 and $9,284 to CCEI and
Yatesville, respectively, to fund ongoing operations.
For the year ended June 30, 2009, Prospect closed-out four
positions which are briefly described below.
On July 3, 2008, Prospect exercised Prospects warrant
for 4,960,585 shares of common stock in Deep Down. As
permitted by the terms of the warrant, Prospect elected to make
this exercise on a cashless basis entitling us to 2,618,129
common shares. On August 1, 2008, Prospect sold all the
shares acquired, receiving $1,649 of net proceeds.
On August 27, 2008, R-V repaid the $7,526 debt outstanding.
Prospect continues to hold common stock and warrants in this
investment.
On January 21, 2009, Diamondback Operating, L.P. repaid the
$9,200 debt outstanding. Prospect continues to hold a net
profits interest in this investment.
On May 7, 2009, Prospect received $75 as settlement of its
net profits interest in Charlevoix.
On September 30, 2008, Prospect settled its net profits
interests (NPIs) in IEC Systems LP (IEC)
and Advanced Rig Services LLC (ARS) with the
companies for a combined $12,576. IEC and ARS originally issued
the NPIs to us when Prospect loaned a combined $25,600 to IEC
and ARS on November 20, 2007. In conjunction with the NPI
realization, Prospect simultaneously reinvested the $12,576 as
incremental senior secured debt in IEC and ARS. The incremental
debt will amortize over the period ending November 20, 2010.
193
The following is a
quarter-by-quarter
summary of Prospects investment activity:
|
|
|
|
|
|
|
|
|
Quarter-End
|
|
Acquisitions(1)
|
|
|
Dispositions(2)
|
|
|
June 30, 2009
|
|
$
|
7,929
|
|
|
$
|
3,148
|
|
March 31, 2009
|
|
|
6,356
|
|
|
|
10,782
|
|
December 31, 2008
|
|
|
13,564
|
|
|
|
2,128
|
|
September 30, 2008
|
|
|
70,456
|
|
|
|
10,949
|
|
June 30, 2008
|
|
|
118,913
|
|
|
|
61,148
|
|
March 31, 2008
|
|
|
31,794
|
|
|
|
28,891
|
|
December 31, 2007
|
|
|
120,846
|
|
|
|
19,223
|
|
September 30, 2007
|
|
|
40,394
|
|
|
|
17,949
|
|
June 30, 2007
|
|
|
130,345
|
|
|
|
9,857
|
|
March 31, 2007
|
|
|
19,701
|
|
|
|
7,731
|
|
December 31, 2006
|
|
|
62,679
|
|
|
|
17,796
|
|
September 30, 2006
|
|
|
24,677
|
|
|
|
2,781
|
|
June 30, 2006
|
|
|
42,783
|
|
|
|
5,752
|
|
March 31, 2006
|
|
|
15,732
|
|
|
|
901
|
|
December 31, 2005
|
|
|
|
|
|
|
3,523
|
|
September 30, 2005
|
|
|
25,342
|
|
|
|
|
|
June 30, 2005
|
|
|
17,544
|
|
|
|
|
|
March 31, 2005
|
|
|
7,332
|
|
|
|
|
|
December 31, 2004
|
|
|
23,771
|
|
|
|
32,083
|
|
September 30, 2004
|
|
|
30,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since inception
|
|
$
|
810,529
|
|
|
$
|
234,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes new deals, additional fundings, refinancings and PIK
interest |
|
|
|
(2) |
|
Includes scheduled principal payments, prepayments and repayments |
Prospect classifies its 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.
The following is a summary of Prospects investment
portfolio by level of control:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Fair
|
|
|
Percent of
|
|
|
Fair
|
|
|
Percent of
|
|
Level of Control
|
|
Value
|
|
|
Portfolio
|
|
|
Value
|
|
|
Portfolio
|
|
|
Control
|
|
$
|
206,332
|
|
|
|
31.9
|
%
|
|
$
|
205,827
|
|
|
|
38.8
|
%
|
Affiliate
|
|
|
32,254
|
|
|
|
5.0
|
%
|
|
|
6,043
|
|
|
|
1.2
|
%
|
Non-control/Non-affiliate
|
|
|
308,582
|
|
|
|
47.8
|
%
|
|
|
285,660
|
|
|
|
53.8
|
%
|
Money Market Funds
|
|
|
98,735
|
|
|
|
15.3
|
%
|
|
|
33,000
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
$
|
645,903
|
|
|
|
100.0
|
%
|
|
$
|
530,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
Investment
Valuation
In determining the fair value of Prospects portfolio
investments at June 30, 2009, the Audit Committee
considered valuations from the independent valuation firm and
from management having an aggregate range of $527,122 to
$572,503, excluding money market investments.
In determining the range of value for debt instruments,
management and the independent valuation firm generally shadow
rated the investment and then based upon the range of ratings,
determined appropriate yields to maturity for a loan rated as
such. A discounted cash flow analysis was then prepared using
the appropriate yield to maturity as the discount rate, yielding
the ranges. For equity investments, the enterprise value was
determined by applying EBITDA multiples for similar recent
investment sales. For stressed equity investments, a liquidation
analysis was prepared.
The Board of Directors looked at several factors in determining
where within the range to value the asset including: recent
operating and financial trends for the asset, independent
ratings obtained from third parties and comparable multiples for
recent sales of companies within the industry. The composite of
all these analysis, applied to each investment, was a total
valuation of $547,168, excluding money market investments.
Prospects investments are generally lower middle market
companies, outside of the financial sector, with less than
$30,000 of annual EBITDA. Prospect believe its market has
experienced less volatility than others because it believes
there are more buy and hold investors who own these less liquid
investments. In addition, the middle market relies on less
leverage than the large capitalization marketplace, which it
believes will result in less financial distress.
During the fiscal year ended June 30, 2009, several general
economic factors have occurred which have affected the valuation
of its investment portfolio.
Generally, interest rates offered on loans similar to those that
Prospect has originated have changed since its investments were
consummated. While it does not believe that there has been any
diminution of credit quality, general changes in current
interest rates would affect the price for which it could sell
these assets and Prospect has adjusted its fair value of these
assets to reflect such changes. Prospect have adjusted the value
of fourteen debt investments based upon such general changes in
market interest rates including: AGC, Biotronic, C&J,
Castro, Freedom Marine Services LLC, H&M Oil &
Gas, LLC, IEC/ARS, Maverick Healthcare, LLC, Peerless, Resco
Products, Inc. (Resco), Shearers, Stryker,
TriZetto and Unitek.
Seven debt investments were made to companies that are not
performing in line with budget expectations as of June 30,
2009. These investments (Ajax, AEH, Conquest, Deb Shops, ICS,
Iron Horse, and Wind River Resources Corp. and Wind
River II Corp. (Wind River)) are well
collateralized and Prospect expects full recovery. For these
assets, Prospect has increased the market interest rates to take
into account the increased credit risk and general changes in
current interest rates for similar assets to determine their
fair value.
Control investments offer increased risk and reward over
straight debt investments. Operating results and changes in
market multiples can result in dramatic changes in values from
quarter to quarter. Significant downturns in operations can
further result in Prospects looking to recoveries on sales
of assets rather than the enterprise value of the investment.
Several control assets in Prospects portfolio are under
enhanced scrutiny by its senior management and its Board of
Directors and are discussed below.
Gas
Solutions Holdings, Inc.
GSHI is an investment that Prospect made in September 2004 in
which it owns 100% of the equity. GSHI is a midstream gathering
and processing business located in East Texas. GSHI has improved
its operations and has experienced an increase in revenue, gross
margin, and EBITDA (the later two metrics on both an absolute
and a percentage of revenues basis) over the past five years.
During the past year, Prospect has been in discussions with
multiple interested purchasers for Gas Solutions. While Prospect
wishes to unlock the value in Gas Solutions, it does not wish to
enter into any agreement at any time that does not recognize the
long term value it sees in Gas Solutions. As a well hedged
midstream asset, which will generate predictable and consistent
cash flows to Prospect, Gas Solutions is a
195
valuable asset that it wishes to sell at a value-maximizing
price, or not at all. Prospect continues discussions with
interested parties, but has a patient approach toward the
process. In addition, a sale of the assets, rather than the
stock of GSHI, might result in a significant tax liability at
the GSHI level which will need to be paid prior to any
distribution to Prospect.
In late March 2008, Royal Bank of Canada provided a $38,000 term
loan to Gas Solutions II Ltd, a wholly owned subsidiary of
GSHI, the proceeds of which were used to refinance all of
Citibanks approximately $8,000 of outstanding senior
secured debt and provide liquidity to GSHI. In December 2008,
Prospect lent an additional $5,000 to GSHI, which enabled the
company to repay the loan to the Royal Bank of Canada. Upon
repayment, Prospects existing loan position moved to a
first lien position in GSHI, improving its borrowing base
requirements with its lender. In June 2009, Prospect lent an
additional $5,000 to GSHI in the form of junior secured debt to
enable GSHI to dividend additional retained earnings and profits.
In early May 2008, Gas Solutions II Ltd purchased a series
of propane puts at $0.10 out of the money and at prices of $1.53
per gallon and $1.394 per gallon covering the periods
May 1, 2008, through April 30, 2009, and May 1,
2009, through April 30, 2010, respectively. These hedges
were executed at close to the highest market propane prices ever
achieved on an historical basis; such hedges preserve the upside
of Gas Solutions II Ltd to benefit from potential future
increases in commodity prices. GSHI generated approximately
$26,172 of EBITDA for the fiscal year ending December 31,
2008, an increase of 67% from 2007 results. Despite the decline
in oil and natural gas over the last year, GSHI generated
approximately $15,900 of EBITDA for the twelve months ending
April 30, 2009.
In determining the value of GSHI, Prospect has utilized several
valuation techniques to determine the value of the investment.
These techniques offer a wide range of values. Prospects
Board of Directors has determined the value to be $85,187 for
Prospects debt and equity positions at June 30, 2009
based upon a combination of a discounted cash flow analysis, a
public comparables analysis and review of recent indications of
interest. At June, 2009, GSHI is valued $50,184 above its
amortized cost at June 30, 2009, compared to the $36,321
unrealized gain recorded at June 30, 2008.
Integrated
Contract Services, Inc.
Prospects investment in ICS is under enhanced review by
its senior management team due to existing payment and covenant
defaults under the contracts governing these investments. Prior
to January 2009, ICS owned the assets of ESA Environmental
Specialists, Inc. (ESA) and 100% of the stock of The
Healing Staff (THS). ESA originally defaulted under
Prospects contract governing its investment in ESA,
prompting Prospect to commence foreclosure actions with respect
to certain ESA assets in respect of which it has a priority
lien. In response to Prospects actions, ESA filed
voluntarily for reorganization under the bankruptcy code on
August 1, 2007. On September 20, 2007 the
U.S. Bankruptcy Court approved a Section 363 Asset
Sale from ESA to us. To complete this transaction, Prospect
contributed its ESA debt to a newly-formed entity, ICS, and
provided funds for working capital on October 9, 2007. In
return for the ESA debt, Prospect received senior secured debt
in ICS of equal amount to its ESA debt, preferred stock of ICS,
and 49% of the ICS common stock. ICS subsequently ceased
operations and assigned the collateral back to Prospect. ICS is
in default of both payment and financial covenants. During
September and October 2007, Prospect provided $1,170 to THS for
working capital.
In January 2009, Prospect foreclosed on the real and personal
property of ICS. Through this foreclosure process, it gained
100% ownership of THS and certain ESA assets. Based upon an
analysis of the liquidation value of the ESA assets and the
enterprise value of THS, Prospects Board of Directors
reaffirmed the fair value of its investment in ICS at $5,000 at
June 30, 2009, a reduction of $11,652 from its amortized
cost, compared to the $11,464 unrealized loss recorded at
June 30, 2008.
Yatesville
Coal Holdings, Inc.
All of Prospects coal holdings have been consolidated
under common management in Yatesville. Yatesville began to show
improvement after the consolidation of the coal holdings, but
the company exhausted its permitted reserves in December 2008
and has not had any meaningful revenue stream since.
Yatesvilles
196
management continues to pursue additional mine permits and
received its first new permit in May 2009 for approximately
650,000 tons. Yatesville has elected not to begin production
from its new permit and is investigating alternative revenue
streams. These actions have been complicated and impacted by an
environment where coal prices are depressed from historical
norms. Prospect continues to evaluate strategies for Yatesville
such as selling unneeded equipment and reserves. During the year
ended June 30, 2009, Prospect provided additional funding
of $9,284 to Yatesville to fund ongoing operations and received
back $815 on its loan. Prospects Board of Directors, upon
recommendation from senior management, has set the value of the
Yatesville investment at $13,097 at June 30, 2009, a
reduction of $35,793 from its amortized cost, compared to the
$14,694 unrealized loss recorded at June 30, 2008.
Change
Clean Energy Holdings Inc. and Change Clean Energy, Inc., f/k/a
Worcester Energy Partners, Inc.
Change Clean Energy, Inc. (CCEI) is under enhanced
review by Prospects senior management team due to poor
operating results. In March 2009 CCEI ceased operations
temporarily as it was not economically feasible to make a profit
based on the cost of materials and the price being paid for
electricity. During that quarter, Prospect determined that it
was appropriate to institute foreclosure proceedings against the
co-borrowers of Prospects debt to take full control of the
assets. In anticipation of such proceedings CCEHI was
established and on March 11, 2009, the foreclosure was
completed and the assets were assigned to a wholly owned
subsidiary of CCEHI. During the year ended June 30, 2009,
Prospect provided additional funding of $5,250 to CCEI and $694
to CCEHI to fund ongoing operations. CCEI currently has no
material operations. Prospect have determined that the current
impairment at both CCEI and CCEHI is other than temporary and
have recognized a realized loss of $41,134 for the year ended
June 30, 2009, which is the amount by which the amortized
cost exceeded the fair value at June 30, 2009 of $2,530, as
set by Prospects Board of Directors. Prospect had recorded
an unrealized loss of $22,141 at June 30, 2008.
Capitalization
Prospects investment activities are capital intensive and
the availability and cost of capital is a critical component of
its business. Prospect capitalizes its business with a
combination of debt and equity. Its debt is currently consists
of a revolving credit facility availing us of the ability to
borrow debt subject to borrowing base determinations and its
equity capital is currently comprised entirely of common equity.
On June 25, 2009, Prospect completed a first closing on an
expanded $250,000 syndicated revolving credit facility (the
Facility). The new Facility, for which lenders have
closed on $195,000 to date, includes an accordion feature which
allows the Facility to accept up to an aggregate total of
$250,000 of commitments for which Prospect continue to solicit
additional commitments from other lenders for the additional
$55,000. The revolving period of the Facility extends through
June 2010, with an additional one year amortization period after
the completion of the revolving period.
As of June 30, 2009 and 2008, Prospect had $124,800 and
$91,167 of borrowings outstanding under Prospects credit
facility, respectively. Interest on borrowings under the credit
facility was one-month Libor plus 250 basis points prior to
June 25, 2009, increasing to one-month Libor plus
400 basis points, subject to a minimum Libor floor of
200 basis points after that date. The maintenance of this
facility requires us to pay a fee for the amount not drawn upon.
Prior to June 25, 2009, this fee was assessed at the rate
of 37.5 basis points per annum of the amount of that unused
portion, after that date this rate increased to 100 basis
points per annum. The following table shows the facility amounts
and outstanding borrowings at June 30, 2009 and
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Facility
|
|
|
Amount
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Revolving Credit Facility
|
|
$
|
175,000
|
|
|
$
|
124,800
|
|
|
$
|
200,000
|
|
|
$
|
91,167
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
Less Than
|
|
|
|
|
|
More Than
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3 Years
|
|
|
Revolving Credit Facility
|
|
$
|
|
|
|
$
|
124,800
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2009, Prospect completed
three stock offerings and raised $100,304 of additional equity
by issuing 12,942,500 shares of Prospects common
stock below net asset value diluting net asset value by $2.06
per share. The following table shows the calculation of net
asset value per share as of June 30, 2009 and June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net Assets
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
Shares of common stock outstanding
|
|
|
42,943,084
|
|
|
|
29,520,379
|
|
Net asset value per share
|
|
$
|
12.40
|
(1)
|
|
$
|
14.55
|
|
|
|
|
(1) |
|
Prospects most recently estimated NAV per share is $11.22
on an as adjusted basis solely to give effect to its payment of
the July dividend recorded on ex-dividend date of July 6,
2009 and issuance of common shares on July 20, 2009 in
connection with Prospects dividend reinvestment plan, and
issuances on July 7, 2009, August 20, 2009 and
September 24, 2009 in an underwritten common and two
unregistered direct common stock offerings, versus $12.40
determined by us as of June 30, 2009. NAV as of
September 30, 2009 may be higher or lower than $11.22
based on potential changes in valuations. Prospects Board
of Directors has not yet determined the fair value of portfolio
investments subsequent to June 30, 2009. Prospects
Board of Directors determines the fair value of its portfolio
investments on a quarterly basis in connection with the
preparation of quarterly financial statements and based on input
from an independent valuation firm, its Investment Advisor and
the audit committee of its Board of Directors. |
At June 30, 2009, Prospect had 42,943,084 shares of
its common stock outstanding.
Results
of Operations
Net increase in net assets resulting from operations for the
years ended June 30, 2009, 2008 and 2007 was $35,104,
$27,591 and $16,728, respectively, representing $1.11, $1.17 and
$1.06 per weighted average share, respectively. During the year
ended June 30, 2009, Prospect experienced net unrealized
and realized losses of $24,059 or approximately $0.76 per
weighted average share primarily from the write-downs of its
investments in CCEI and Yatesville. During the year ended
June 30, 2008, Prospect experienced net unrealized and
realized losses of $17,522 or approximately $0.74 per weighted
average share primarily from the sales of its investments in
Advantage Oilfield Group and Central Illinois Energy at a loss.
During the year ended June 30, 2007, Prospect experienced
net unrealized and realized losses of $6,403 or approximately
$0.41 per weighted average share primarily from the write-downs
of its investments in Advantage Oilfield Group.
While Prospect seeks to maximize gains and minimize losses, its
investments in portfolio companies can expose its capital to
risks greater than anticipated as these companies are typically
not issuing securities rated investment grade, have limited
resources, have limited operating history, are generally private
companies with limited operating information available and are
likely to depend on a small core of management talents. Changes
in any of these factors can have a significant impact on the
value of the portfolio company.
Investment
Income
Prospect generates revenue in the form of interest income on the
debt securities that it owns, dividend income on any common or
preferred stock that it owns, and amortized loan origination
fees on the structuring of new deals. Prospects
investments, if in the form of debt securities, will typically
have a term of one to ten years and bear interest at a fixed or
floating rate. To the extent achievable, Prospect will seek to
collateralize its investments by obtaining security interests in
its portfolio companies assets. It also may acquire
minority or majority equity interests in its portfolio
companies, which may pay cash or in-kind dividends on a
recurring
198
or otherwise negotiated basis. In addition, Prospect may
generate revenue in other forms including prepayment penalties
and possibly consulting fees. Any such fees generated in
connection with its investments are recognized as earned.
Investment income, which consists of interest income, including
accretion of loan origination fees and prepayment penalty fees,
dividend income and other income, including settlement of net
profits interests, overriding royalty interests and structuring
fees, was $100,481, $79,402, and $40,681 for the years ended
June 30, 2009, June 30, 2008 and June 30, 2007,
respectively. Drivers of these increases include increased
assets generating increased interest and dividend income along
with increased income from royalty and settlement of net profits
interests. The following table describes the various components
of investment income and the related levels of debt investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
Interest income
|
|
$
|
62,926
|
|
|
$
|
59,033
|
|
|
$
|
30,084
|
|
Dividend income
|
|
|
22,793
|
|
|
|
12,033
|
|
|
|
6,153
|
|
Other income
|
|
|
14,762
|
|
|
|
8,336
|
|
|
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
100,481
|
|
|
$
|
79,402
|
|
|
$
|
40,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average debt principal of investments
|
|
$
|
525,144
|
|
|
$
|
397,913
|
|
|
$
|
172,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate earned
|
|
|
12.0
|
%
|
|
|
14.8
|
%
|
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income has increased from $40,681 for the year
ended June 30, 2007 to $79,402 for the year ended
June 30, 2008 to $100,481 for the year ended June 30,
2009. Investment income has been increasing as Prospect continue
to deploy the additional capital, raised in both debt and equity
offerings, in revenue-producing assets.
Average interest income producing assets have increased from
$172,605 for the year ended June 30, 2007 to $397,913 for
the year ended June 30, 2008 to $525,144 for the year ended
June 30, 2009. While Prospect has been able to increase the
gross amount of interest income, average yields on interest
bearing assets have decreased from 17.4% for the year ended
June 30, 2007 to 14.8% for the year ended June 30,
2008 to 12.0% for the year ended June 30, 2009. These
decreases are the result of Prospects increasing its asset
mix in financings with private equity sponsors. Prospect believe
that such financings offer less risk, and consequently lower
yields, due, in part, to lesser risk to its capital resulting
from larger equity at risk underneath its capital. Holding these
types of investments has allowed Prospect to more effectively
utilize its credit facility to finance such assets at an average
rate of 3.8% for the year ended June 30, 2009.
Additionally, during the year ended June 30, 2009, interest
of $18,746 was foregone on non-accrual debt investments compared
to $3,449 and $1,270 of foregone interest for the year ended
June 30, 2008 and June 30, 2007, respectively. Without
these adjustments, the weighted average interest rates earned on
debt investments would have been 15.6%, 15.7% and 18.2% for the
years ended June 30, 2009, 2008 and 2007, respectively.
Investment income is also generated from dividends and other
income. Dividend income has grown significantly from $6,153 for
the year ended June 30, 2007 to $12,033 for the year ended
June 30, 2008 to $22,793 for the year ended June 30,
2009. Prospect has received dividends from its investments in
GSHI, R-V, Ajax, C&J and NRG. The increase in dividend
income is mostly attributable to dividends received from its
investment in GSHI, which were $9,450 and $20,500 during the
years ended June 30, 2008 and June 30, 2009,
respectively.
Other income has come primarily from structuring fees,
overriding royalty interests, and settlement of net profits
interests. Income from other sources has grown significantly
from $4,444 for the year ended June 30, 2007 to $8,336 for
the year ended June 30, 2008 to $14,762 for the year ended
June 30, 2009. During the year ended June 30, 2008
Prospect received royalty income and settlement of net profits
interest of $2,984 in the aggregate related to Ken-Tex Energy
Corp, and $4,751 of structuring fees related to Ajax, H&M
and various other portfolio investments. During the year ended
June 30, 2009, structuring fees of $1,274 were received
primarily related to Biotronic and GSHI, a decrease of $3,477
from the year ended June 30, 2008.
199
The increase in other income for the year ended June 30,
2009 is largely due to the settlement of Prospects net
profit interests in IEC/ARS for $12,576.
Operating
Expenses
Prospects primary operating expenses consist of investment
advisory fees (base and incentive fees), credit facility costs,
legal and professional fees and other operating and
overhead-related expenses. These expenses include its allocable
portion of overhead under the Administration Agreement with
Prospect Administration under which Prospect Administration
provides administrative services and facilities for us.
Prospects investment advisory fees compensate
Prospects Investment Adviser for its work in identifying,
evaluating, negotiating, closing and monitoring Prospects
investments. Prospect bear all other costs and expenses of
Prospects operations and transactions in accordance with
Prospects Administration Agreement with Prospect
Administration. Operating expenses were $41,318, $34,289 and
$17,550 for the years ended June 30, 2009, June 30,
2008 and June 30, 2007, respectively.
The base investment advisory expenses were $11,915, $8,921 and
$5,445 for the years ended June 30, 2009, June 30,
2008 and June 30, 2007, respectively. These increases are
directly related to Prospects growth in total assets.
$14,790, $11,278 and $5,781 in income incentive fees were earned
for the years ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively. The increases in the income
incentive fees are driven by Prospects stronger
performance with respect to net investment income as evidenced
by net operating income ratios of 13.14%, 12.66% and 9.71% for
the years ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively. No capital gains incentive fee
has yet been incurred pursuant to the Investment Advisory
Agreement.
During the years ended June 30, 2009, June 30, 2008
and June 30, 2007, Prospect incurred $6,161, $6,318 and
$1,903, respectively, of expenses related to its credit
facilities. These expenses are related directly to the
leveraging capacity put into place for each of those years and
the levels of indebtedness actually undertaken in those years.
The table below describes the various credit facility expenses
and the related indicators of leveraging capacity and
indebtedness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
|
Interest expense
|
|
$
|
5,075
|
|
|
$
|
5,104
|
|
|
$
|
357
|
|
Amortization of deferred financing costs
|
|
|
759
|
|
|
|
726
|
|
|
|
1,264
|
|
Commitment and other fees
|
|
|
327
|
|
|
|
488
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,161
|
|
|
$
|
6,318
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average debt outstanding
|
|
$
|
132,013
|
|
|
$
|
90,032
|
|
|
$
|
4,282
|
|
Weighted average interest rate
|
|
|
3.84
|
%
|
|
|
5.67
|
%
|
|
|
8.37
|
%
|
Facility amount at beginning of year
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
|
30,000
|
|
The decrease in Prospects interest rate incurred is
primarily due to a decrease in average LIBOR of approximately
1.44% for the year ended June 30, 2009 in comparison to
4.08% and 5.33% for the years ended June 30, 2008 and 2007,
respectively. This decrease is partially offset by an increase
of 125 basis points in its current borrowing rate effective
November 14, 2008.
As Prospects asset base has grown and it has added
complexity to its capital raising activities, due, in part, to
its securitization credit facility initiated in June 2007, it
has commensurately increased the size of its administrative and
financial staff, accounting for a significant increase in the
overhead allocation from Prospect Administration. Over the last
year, Prospect Administration has added several additional staff
members, including a senior finance professional, a treasurer, a
corporate counsel and other finance professionals. As
Prospects portfolio continues to grow, it expects to
continue to increase the size of Prospects administrative
and financial staff on a basis that provides increasing returns
to scale. However, initial investments in administrative and
financial staff may not provide returns to scale immediately,
perhaps
200
not until the portfolio increases to a greater size. Other
allocated expenses from Prospect Administration have, as
expected, increased alongside with the increase in staffing and
asset base.
Legal costs decreased significantly from $2,503 for the year
ended June 30, 2008 to $947 for the year ended
June 30, 2009 as there were reduced costs for litigation.
Net
Investment Income, Net Realized Gains (Loss), Increase
(Decrease) in Net Assets from Net Changes in Unrealized
Appreciation/Depreciation and Net Increase in Net Assets
Resulting from Operations
Prospects net investment income was $59,163, $45,113 and
$23,131 for the years ended June 30, 2009, June 30,
2008 and June 30, 2007, respectively. Net investment income
represents the difference between investment income and
operating expenses and is directly impacted by the items
described above.
Net realized (losses) gains were ($39,078), ($16,222) and $1,949
for the years ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively. On June 30, 2009,
Prospect determined that the impairment of the CCEHI investment
was other than temporary and recognized a realized loss for the
amount by which the amortized cost exceeded the current fair
value. This loss was partially offset by realized gains from
sales of the Arctic warrants and Deep Down common stock. The net
realized loss of $16,222 sustained in the year ended
June 30, 2008 was due mainly to the sale of Charlevoix and
Advantage Oilfield Group Ltd. (AOG) while the $1,949
realized gain registered for the year ended June 30, 2007
is attributable to the sale of Evolution Petroleum Corporation.
Increase (decrease) in net assets from changes in unrealized
appreciation/depreciation was $15,019, ($1,300) and ($8,352) for
the years ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively. For the year ended
June 30, 2009, the net unrealized appreciation was driven
by significant
write-ups of
Prospects investments in AGC, GSHI, NRG, R-V,
Shearers and Stryker, and by the disposition of previously
written-down investment in CCEI mentioned above, which, in turn,
were offset by significant write-downs its investments in Ajax,
AEH, Conquest, Deb Shops, Iron Horse and Yatesville as well as
the elimination of the unrealized appreciation resulting from
the sale of Deep Down mentioned above. For the year ended
June 30, 2008, $1,300 of the decrease in net assets from
the net change in unrealized appreciation/depreciation was
driven by significant write-downs in its investments in ICS,
WECO, and Yatesville partially offset by the
write-up for
its investment in GSHI and by the disposition of previously
written-down investments in AOG and ESA. For the year ended
June 30, 2007, $8,352 of the decrease in net assets from
such changes is attributable to significant write-downs of its
investments in AOG, ESA, Unity Virginia Holdings LLC and Whymore
Coal Company Inc. which, in turn, were slightly offset by a
significant
write-up in
the value for GSHI.
Financial
Condition, Liquidity and Capital Resources
Prospects cash flows used in operating activities totaled
($74,000), ($204,025) and ($143,890) for the years ended
June 30, 2009, June 30, 2008 and June 30, 2007,
respectively. Financing activities provided cash flows of
$83,387, $204,580 and $143,890 for the years ended June 30,
2009, June 30, 2008 and June 30, 2007, respectively.
Dividends paid and declared were $43,257, $24,915 and $21,634
for the years ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively.
Prospects primary uses of funds have been to add to its
investments in its portfolio companies, to add new companies to
its investment portfolio, and to make cash distributions to
holders of its common stock.
Prospect has funded and may continue to fund a portion of its
cash needs through borrowings from banks, issuances of senior
securities or secondary offerings. Prospect may also securitize
a portion of its investments in mezzanine or senior secured
loans or other assets. Prospects objective is to put in
place such borrowings in order to enable us to expand its
portfolio. At June 30, 2009, Prospect had a $175,000
revolving credit facility on which $124,800 was outstanding.
On September 6, 2007, Prospects Registration
Statement on
Form N-2
was declared effective by the SEC. At June 30, 2009, under
the Registration Statement, Prospect had remaining availability
to issue up to approximately $248,700 of Prospects equity
securities over the next 14 months. In July 2009, August
2009
201
and September 2009, Prospect issued an additional $46,580,
$29,322 and $24,423, respectively, in common stock, reducing the
remaining availability to approximately $148,400.
We also continue to generate liquidity through stock offerings
and the realization of portfolio investments. On March 19,
2009, April 27, 2009, May 26, 2009, and July 7,
2009, Prospect completed public stock offerings for
1,500,000 shares, 3,680,000 shares,
7,762,500 shares, and 5,175,000 shares, of
Prospects common stock at $8.20 per share, $7.75 per
share, $8.25 per share, $9.00 per share, raising $12,300,
$28,520, $64,040, and $46,580 of gross proceeds, respectively.
On August 20, 2009 and September 24, 2009, Prospect
issued 3,449,686 and 2,807,111 shares at $8.50 and $9.00
per share in private stock offerings generating $29,322 and
$25,264 of gross proceeds from the offerings. Concurrent with
the sale of these shares, Prospect entered into registration
rights agreements in which Prospect granted the purchasers
certain registration rights with respect to the shares. Under
the terms and conditions of the registration rights agreements,
Prospect will use Prospects reasonable best efforts to
file with the SEC within sixty (60) days a post-effective
amendment to the registration statement on
Form N-2
and will also use Prospects reasonable best efforts to
cause such post-effective amendment to be declared effective by
the SEC within one hundred twenty (120) days. Under the
registration rights agreements, Prospect may be obligated to
make liquidated damages payments to holders upon certain events.
Off-Balance
Sheet Arrangements
At June 30, 2009, Prospect did not have any off-balance
sheet liabilities or other contractual obligations that are
reasonably likely to have a current or future material effect on
its financial condition, other than those which originate from
1) the investment advisory and management agreement and the
administration agreement and 2) the portfolio companies.
202
PORTFOLIO
COMPANIES OF PROSPECT
The following is a listing of our portfolio companies at
June 30, 2009. Values are as of June 30, 2009.
The portfolio companies are presented in three categories:
companies more than 25% owned are portfolio
companies in which Prospect directly or indirectly own more than
25% of the outstanding voting securities of such portfolio
company and, therefore, are presumed to be controlled by us
under the 1940 Act; companies owned 5% to 25% are
portfolio companies where Prospect directly or indirectly owns
5% to 25% of the outstanding voting securities of such portfolio
company
and/or hold
one or more seats on the portfolio companys Board of
Directors and, therefore, are deemed to be an affiliated person
under the 1940 Act; companies less than 5% owned are
portfolio companies where Prospect directly or indirectly owns
less than 5% of the outstanding voting securities of such
portfolio company and where it has no other affiliations with
such portfolio company. As of June 30, 2009, Prospect owned
100% of the fully diluted common equity of GSHI, 100% of the
common equity of CCEHI, 49% of the fully diluted common equity
of Integrated, 79.83% of the fully diluted common equity of Iron
Horse, 80% of the fully diluted common equity of NRG, 74.51% of
the fully diluted equity of R-V, 78.11% of the fully diluted
common equity of Ajax and 100% of the fully diluted common
equity of Yatesville. Prospect makes available significant
managerial assistance to its portfolio companies. Prospect
generally requests and may receive rights to observe the
meetings of its portfolio companies Boards of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Nature of its
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Principal Business
|
|
Title and Class of
|
|
|
|
|
|
Held, at
|
|
|
Loans, at
|
|
Name of Portfolio Company
|
|
(Location)
|
|
Securities Held
|
|
Collateral Held
|
|
Investment Structure
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Companies more than 25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring and Machine
|
|
Manufacturing
(South Carolina)
|
|
Senior secured debt, subordinated secured debt, preferred stock
and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Preferred shares; Senior secured note Tranche A,
10.50% due 4/01/2013; Subordinated secured note Tranche B,
11.50% plus 6.00% PIK due 4/01/2013
|
|
|
0.0
|
|
|
|
31.6
|
|
C&J Cladding LLC
|
|
Metal services (Texas)
|
|
Senior secured debt and warrants
|
|
First priority lien on substantially all assets
|
|
Warrants, common shares, expiring 3/30/2014; Senior secured
note, 14.00% due 3/30/2012
|
|
|
3.8
|
|
|
|
3.3
|
|
Change Clean Energy Holdings, Inc
|
|
Biomass power (Maine)
|
|
Common equity
|
|
First priority lien on substantially all assets
|
|
Common shares
|
|
|
2.5
|
|
|
|
0.0
|
|
Gas Solutions Holdings, Inc.
|
|
Gas gathering and processing (Texas)
|
|
Senior and junior secured debt and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Senior secured note, 18.00% due 12/22/2018;
Junior secured note, 18.00% due 12/23/2018
|
|
|
55.2
|
|
|
|
30.0
|
|
Integrated Contract Services, Inc.
|
|
Contracting (North Carolina)
|
|
Senior and junior secured debt, preferred stock and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Preferred shares; Senior and junior secured
notes, 7.00% plus 7.00% PIK plus 6.00% default interest, in
non-accrual status effective 10/09/2007 past due; Senior demand
note, 15.00% due 6/30/2009
|
|
|
0.0
|
|
|
|
5.0
|
|
Iron Horse Coiled Tubing, Inc.
|
|
Production services (Alberta, Canada)
|
|
Senior secured debt, bridge loan and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Senior secured note, 15.00% due 12/31/2009;
Bridge loan, 15.00% plus 3.00% PIK due 12/31/2009
|
|
|
0.0
|
|
|
|
12.6
|
|
NRG Manufacturing, Inc.
|
|
Manufacturing (Texas)
|
|
Senior secured debt and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Senior secured note, 16.50% due 8/31/2011
|
|
|
19.3
|
|
|
|
13.1
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Nature of its
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Principal Business
|
|
Title and Class of
|
|
|
|
|
|
Held, at
|
|
|
Loans, at
|
|
Name of Portfolio Company
|
|
(Location)
|
|
Securities Held
|
|
Collateral Held
|
|
Investment Structure
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
R-V Industries, Inc.
|
|
Manufacturing (Pennsylvania)
|
|
Warrants and common equity
|
|
N/A loan repaid.
|
|
Common shares; Warrants, common shares, expiring 6/30/2017
|
|
|
16.8
|
|
|
|
0.0
|
|
Yatesville Coal Holdings, Inc.
|
|
Mining and coal production (Kentucky)
|
|
Senior and junior secured debt and common equity
|
|
First priority lien on substantially all assets
|
|
Common shares; Senior secured note, 15.72% due 12/31/2010, in
non-accrual status effective 1/01/2009; Junior secured note,
15.72% due 12/31/2010, in non-accrual status effective 1/01/2009
|
|
|
0.0
|
|
|
|
13.1
|
|
Companies 5% to
25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy Holdings LLC
|
|
Construction services (West Virginia)
|
|
Senior secured debt, warrants and preferred units
|
|
First priority lien on substantially all assets
|
|
Preferred units; Warrants, common shares, expiring 2/13/2016,
6/17/2018, 11/30/2018; Senior secured note Tranche A, 14.00%
plus 3.00% PIK plus 3.00% default interest non-accrual status
effective 11/01/2008 due 1/31/2011; Senior secured note Tranche
B, 14.00% plus 3.00% PIK 3.00% default interest non-accrual
status effective 11/01/2008, past due
|
|
|
0.0
|
|
|
|
2.4
|
|
Biotronic NeuroNetwork
|
|
Healthcare (Michigan)
|
|
Senior secured debt and preferred stock
|
|
First priority lien on substantially all assets
|
|
Preferred shares; Senior secured note, 11.50%, 1.00% PIK due
2/21/2013
|
|
|
2.8
|
|
|
|
27.0
|
|
Companies less than 5% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Gilsonite Company
|
|
Specialty minerals (Utah)
|
|
Senior subordinated secured debt and membership interests
|
|
Second priority lien on substantially all assets
|
|
Membership interests; Senior subordinated secured note, 12.00%
plus 3.00% PIK due 3/14/2013
|
|
|
3.9
|
|
|
|
15.1
|
|
Castro Cheese Company, Inc.
|
|
Food products (Texas)
|
|
Junior secured debt
|
|
Second priority lien on substantially all assets
|
|
Junior secured note, 11.00% plus 2.00% PIK due 2/28/2013
|
|
|
0.0
|
|
|
|
7.6
|
|
Conquest Cherokee LLC
|
|
Oil and gas production (Tennessee)
|
|
Senior secured debt, net profit interest and overriding royalty
interest
|
|
First priority lien on substantially all assets
|
|
Overriding royalty interest, 5.00%; net profits interest,
10.00% Senior secured note, 13.00% , in non-accrual status
effective 4/01/2009 plus 4.00% default interest, past due
|
|
|
0.6
|
|
|
|
6.8
|
|
Deb Shops, Inc.
|
|
Retail (Pennsylvania)
|
|
Second lien debt
|
|
Second priority lien on substantially all assets
|
|
Second lien note, 8.67% due 10/23/2014;
|
|
|
0.0
|
|
|
|
6.3
|
|
Diamondback Operating LP
|
|
Oil and gas production (Oklahoma)
|
|
Net profit interest
|
|
N/A-Loan repaid.
|
|
Net profit interest, 15.00%
|
|
|
0.5
|
|
|
|
0.0
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Nature of its
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Principal Business
|
|
Title and Class of
|
|
|
|
|
|
Held, at
|
|
|
Loans, at
|
|
Name of Portfolio Company
|
|
(Location)
|
|
Securities Held
|
|
Collateral Held
|
|
Investment Structure
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Freedom Marine Services LLC
|
|
Shipping vessels (Louisiana)
|
|
Subordinated secured debt and net profit interest
|
|
Second priority lien on substantially all assets
|
|
Net profit interest, 22.50%; Subordinated secured note, 12.00%
plus 4.00% PIK due 12/31/2011
|
|
|
0.2
|
|
|
|
7.2
|
|
H&M Oil & Gas LLC
|
|
Oil and gas production (Texas)
|
|
Senior secured debt and net profit interest
|
|
First priority lien on substantially all assets
|
|
Net profit interest, 8.00%; Senior secured note, 13.00% due
6/30/2010
|
|
|
1.7
|
|
|
|
49.7
|
|
IEC Systems LP/Advanced Rig Services LLC (ARS)
|
|
Oilfield fabrication (Texas)
|
|
Senior secured debt
|
|
First priority lien on substantially all assets
|
|
Senior secured notes 12.00% plus 3.00% PIK due 11/20/2012
|
|
|
0.0
|
|
|
|
34.9
|
|
Maverick Healthcare LLC
|
|
Healthcare (Arizona)
|
|
Second lien debt, preferred units and common units
|
|
Second priority lien on substantially all assets
|
|
Common units; Preferred units; Second lien debt, 12.00% plus
1.50% PIK due 4/30/2014
|
|
|
1.3
|
|
|
|
12.8
|
|
Miller Petroleum, Inc.
|
|
Oil and gas production (Tennessee)
|
|
Warrants
|
|
N/A loan repaid
|
|
Warrants, expiring 5/04/2010 through 6/30/2014
|
|
|
0.2
|
|
|
|
0.0
|
|
Peerless Manufacturing Co.
|
|
Manufacturing (Texas)
|
|
Subordinated secured debt
|
|
Second priority lien on substantially all assets
|
|
Subordinated secured debt, 11.50% plus 3.50% PIK due 4/29/2013
|
|
|
0.0
|
|
|
|
20.4
|
|
Qualitest Pharmaceuticals, Inc.
|
|
Pharmaceuticals (Alabama)
|
|
Second lien debt
|
|
Second priority lien on substantially
|
|
Second lien debt, 8.10% due 4/30/2015
|
|
|
0.0
|
|
|
|
11.5
|
|
Regional Management Corp.
|
|
Financial services
(South Carolina)
|
|
Second lien debt
|
|
Second priority lien on substantially all assets
|
|
Second lien debt, 12.00% plus 2.00% PIK due 6/29/2012
|
|
|
0.0
|
|
|
|
23.1
|
|
Resco Products, Inc.
|
|
Manufacturing (Pennsylvania)
|
|
Second lien debt
|
|
Second priority lien on substantially all assets
|
|
Second lien debt, 8.67% due 6/22/2014
|
|
|
0.0
|
|
|
|
9.8
|
|
Shearers Foods, Inc.
|
|
Food products (Ohio)
|
|
Second lien debt and membership interests
|
|
Common equity; Second priority lien on substantially all assets
|
|
Membership interests; Second lien debt, 14.00% due 10/31/2013
|
|
|
3.4
|
|
|
|
18.4
|
|
Stryker Energy LLC
|
|
Oil and gas production (Ohio)
|
|
Subordinated secured revolving credit facility and overriding
royalty interest
|
|
Second priority lien on substantially all assets
|
|
Overriding royalty interest, 3.50%; Subordinated secured
revolving credit facility, 12.00% due 12/01/2011
|
|
|
2.9
|
|
|
|
29.6
|
|
TriZetto Group
|
|
Healthcare (California)
|
|
Subordinated unsecured debt
|
|
Unsecured
|
|
Subordinated unsecured note, 12.00% plus 1.50% PIK due 10/01/2016
|
|
|
0.0
|
|
|
|
16.3
|
|
Unitek
|
|
Technical services (Pennsylvania)
|
|
Second lien debt
|
|
Second priority lien on substantially all assets
|
|
Second lien debt, 13.08% due 12/31/2013
|
|
|
0.0
|
|
|
|
11.7
|
|
Wind River Resources Corp. and Wind River II Corp.
|
|
Oil and gas production (Utah)
|
|
Senior secured debt and net profit interest
|
|
First priority lien on substantially all assets
|
|
Net profit interest, 5.00%; Senior secured note, 13.00% plus
3.00% default interest, in non-accrual status effective
12/01/2008 due 7/31/2010
|
|
|
0.2
|
|
|
|
12.6
|
|
205
MANAGEMENT
OF PROSPECT
Prospects business and affairs are managed under the
direction of its board of directors. Prospects board of
directors currently consists of five directors, three of whom
are not interested persons of Prospect as defined in
Section 2(a)(19) of the 1940 Act. Prospect refer to these
individuals as its independent directors. Prospects board
of directors elects its officers to serve for a one-year term
and until their successors are duly elected and qualify, or
until their earlier removal or resignation.
Board Of
Directors And Executive Officers
Under Prospects charter, its directors are divided into
three classes. Directors are elected for a staggered term of
three years each, with a term of office of one of the three
classes of directors expiring each year. At each annual meeting
of its shareholders, the successors to the class of directors
whose terms expire at such meeting are elected to hold office
for a term expiring at the annual meeting of shareholders held
in the third year following the year of their election. Each
director holds office for the term to which he or she is elected
and until his or her successor is duly elected and qualifies.
Directors
and Executive Officers
Prospects directors and executive officers and their
positions are set forth below. The address for each director and
executive officer is
c/o Prospect
Capital Corporation, 10 East 40th Street, 44th Floor,
New York, NY 10016.
Independent
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
|
|
|
|
|
Term of
|
|
Principal
|
|
Fund
|
|
Other
|
|
|
Position(s)
|
|
Office(1) and
|
|
Occupation(s)
|
|
Complex
|
|
Directorships
|
|
|
Held with
|
|
Length of
|
|
During
|
|
Overseen by
|
|
Held by
|
Name and Age
|
|
the Company
|
|
Time Served
|
|
Past 5 Years
|
|
Director
|
|
Director(2)
|
|
Graham D.S. Anderson, 44
|
|
Director
|
|
Class I Director since September 2008; Term expires 2011
|
|
General Partner of Euclid SR Partners from 2000 to present. From
1996 to 2000, Mr. Anderson was a General Partner of Euclid
Partners, the predecessor to Euclid SR Partners.
|
|
One
|
|
None
|
Eugene S. Stark, 51
|
|
Director
|
|
Class III Director since September 2008; Term expires 2010
|
|
Principal Financial Officer, Chief Compliance Officer and Vice
President Administration of General American
Investors Company, Inc. from May 2005 to present. Prior to his
role with General American Investors Company, Inc., Mr. Stark
served as the Chief Financial Officer of Prospect Capital
Corporation from January 2005 to April 2005. From May 1987 to
December 2004 Mr. Stark served as Senior Vice President and Vice
President with Prudential Financial, Inc.
|
|
One
|
|
None
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
|
|
|
|
|
Term of
|
|
Principal
|
|
Fund
|
|
Other
|
|
|
Position(s)
|
|
Office(1) and
|
|
Occupation(s)
|
|
Complex
|
|
Directorships
|
|
|
Held with
|
|
Length of
|
|
During
|
|
Overseen by
|
|
Held by
|
Name and Age
|
|
the Company
|
|
Time Served
|
|
Past 5 Years
|
|
Director
|
|
Director(2)
|
|
Andrew C. Cooper, 48
|
|
Director
|
|
Class II Director since February 2009; Term expires 2009
|
|
Mr. Cooper is an entrepreneur, who over the last 11 years
has founded, built, run and sold three companies. He is Co-Chief
Executive Officer of Unison Site Management, Inc., a specialty
finance company focusing on cell site easements, and Executive
Director of Brand Asset Digital, a digital media marketing and
distribution company. Prior to that, Mr. Cooper focused on
venture capital and investment banking for Morgan Stanley for
14 years.
|
|
One
|
|
Unison Site Management, LLC, Brand Asset Digital, LLC and
Aquatic Energy, LLC
|
|
|
|
(1) |
|
Prospects Board of Directors is divided into three classes
of directors serving staggered three-year terms.
Mr. Anderson is a Class I director with a term that
will expire in 2011, Mr. Eliasek is a Class II
director with a term that will expire in 2009 and Mr. Barry
and Mr. Stark are Class III directors with terms that
will expire in 2010. |
|
(2) |
|
No director otherwise serves as a director of an investment
company subject to the 1940 Act. |
Interested
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Term of
|
|
Principal
|
|
Portfolios in
|
|
Other
|
|
|
Position(s)
|
|
Office(1) and
|
|
Occupation(s)
|
|
Fund Complex
|
|
Directorships
|
|
|
Held with
|
|
Length of
|
|
During
|
|
Overseen
|
|
Held by
|
Name and Age
|
|
Prospect
|
|
Time Served
|
|
Past 5 Years
|
|
by Director
|
|
Director(2)
|
|
John F. Barry
III,(3) 57
|
|
Director, Chairman of the Board of Directors, and Chief
Executive Officer
|
|
Class III Director since June 2004; Term expires 2010
|
|
Chairman and Chief Executive Officer of Prospect; Managing
Director and Chairman of the Investment Committee of Prospect
Capital Management and Prospect Administration since June 2004;
Managing Director of Prospect Capital Management.
|
|
One
|
|
None
|
M. Grier
Eliasek,(3) 36
|
|
Director, President and Chief Operating Officer
|
|
Class II Director since June 2004; Term expires 2009
|
|
President and Chief Operating Officer of Prospect, Managing
Director of Prospect Capital Management and Prospect
Administration
|
|
One
|
|
None
|
207
|
|
|
(1) |
|
Prospects Board of Directors is divided into three classes
of directors serving staggered three-year terms.
Mr. Anderson is a Class I director with a term that
will expire in 2011, Mr. Eliasek is a Class II
director with a term that will expire in 2009 and Mr. Barry
and Mr. Stark are Class III directors with terms that
will expire in 2010. |
|
(2) |
|
No director otherwise serves as a director of an investment
company subject to the 1940 Act. |
|
(3) |
|
Messrs. Barry and Eliasek are each considered an
interested person under the 1940 Act by virtue of
serving as one of our officers and having a relationship with
Prospect Capital Management. |
Information
about Executive Officers who are not Directors
|
|
|
|
|
|
|
|
|
Position(s) Held with
|
|
Term of Office and
|
|
Principal Occupation(s)
|
Name and Age
|
|
Prospect
|
|
Length of Time Served
|
|
During Past Five Years
|
|
Brian H.
Oswald, 48
|
|
Chief Financial Officer, Chief Compliance Officer, Treasurer and
Secretary(1)
|
|
November 2008 to present as Chief Financial Officer and October
2008 to present as Chief Compliance Officer
|
|
Joined Prospect Administration as Managing Director in June
2008. Previously Managing Director in Structured Finance Group
at GSC Group (2006 to 2008) and Chief Financial Officer at
Capital Trust, Inc. (2003 to 2005)
|
|
|
|
(1) |
|
Mr. William E. Vastardis was the Chief Compliance Officer
until September 30, 2008. On October 1, 2008, Brian H.
Oswald assumed this role and effective November 11, 2008,
Mr. Oswald also assumed the roles of Chief Financial
Officer and Treasurer, replacing Mr. Vastardis. |
Independent
Directors
Graham D.S. Anderson. Mr. Anderson has
served as General Partner of Euclid SR Partners from 1996 to
present. Mr. Anderson currently serves as a member of the
Board of Directors of Acurian, Inc. (a clinical trial
recruitment company), FatWire Software Corp. (a web content
management company), iJet Risk Management (an operational risk
management information company), Plateau Systems Limited (a
human capital management software company) and SkinMedica Inc.
(a dermatology and cosmeceuticals company).
Andrew C. Cooper. Mr. Cooper has
24 years of experience in growth company management,
venture investing and investment banking. He has a wide range of
operational, marketing, technology, and debt and equity capital
raising expertise. Mr. Cooper is an entrepreneur, who over
the last 11 years has founded, built, run and sold three
companies. Prior to that, Mr. Cooper focused on venture
capital and investment banking for Morgan Stanley for
14 years. He is Co-Chief Executive Officer of Unison Site
Management, Inc., a specialty finance company focusing on cell
site easements, and Executive Director of Brand Asset Digital, a
digital media marketing and distribution company. His current
Board appointments include Unison Site Management, LLC, Brand
Asset Digital, LLC and Aquatic Energy, LLC.
Eugene S. Stark. Mr. Stark has served as
Principal Financial Officer, Chief Compliance Officer and Vice
President Administration of General American
Investors Company, Inc. from May 2005 to present. Prior to his
role with General American Investors Company, Inc.,
Mr. Stark served as the Chief Financial Officer of Prospect
Capital Corporation from January 2005 to April 2005. From May
1987 to December 2004 Mr. Stark served as Senior Vice
President (division level) and Vice President (corporate level)
with Prudential Financial, Inc. in various financial management
positions. Mr. Stark serves as a member of the Board of
Directors of Prospect Capital Funding LLC, a wholly-owned
subsidiary of Prospect, and sits on the Board of Trustees and is
a Member of the Finance Committee of Mount Saint Mary Academy.
208
Interested
Directors
John F. Barry III. Mr. Barry is chairman
and chief executive officer of Prospect and is a control person
of Prospect Capital Management and a managing director of
Prospect Administration. Mr. Barry is chairman of
Prospects investment committee and has been an officer of
Prospect since 1990. In addition to overseeing Prospect,
Mr. Barry has served on the boards of directors of twelve
private and public Prospect portfolio companies. Mr. Barry
has served on the board of advisors of USEC Inc., a
publicly-traded energy company. Mr. Barry has served as
chairman and chief executive officer of Bondnet Trading Systems.
From 1988 to 1989, Mr. Barry managed the investment bank of
L.F. Rothschild & Company, focusing on private equity
and debt financings for energy and other companies. From 1983 to
1988, Mr. Barry was a senior investment and merchant banker
at Merrill Lynch & Co., where he was a founding member
of the project finance group, executing more than
$4 billion in energy and other financings. From 1979 to
1983, Mr. Barry was a corporate securities attorney at
Davis Polk & Wardwell, where he advised energy
companies and their commercial and investment bankers. From 1978
to 1979, Mr. Barry served as law clerk to Circuit Judge,
formerly Chief Judge, J. Edward Lumbard of the U.S. Court
of Appeals for the Second Circuit in New York City.
Mr. Barry is chairman of the board of directors of the
Mathematics Foundation of America, a non-profit foundation which
enhances opportunities in mathematics education for students
from diverse backgrounds. Mr. Barry received his JD cum
laude from Harvard Law School, where he was an editor of the
Harvard Law Review, and his Bachelor of Arts magna cum laude
from Princeton University, where he was a University Scholar.
M. Grier Eliasek. Mr. Eliasek is
president and chief operating officer of Prospect and a managing
director of Prospect Capital Management and Prospect
Administration. At Prospect, Mr. Eliasek is responsible for
various administrative and investment management functions and
leads and supervises other Prospect professionals in origination
and assessment of investments. Mr. Eliasek has served as a
senior investment professional at Prospect since 1999. Prior to
joining Prospect, Mr. Eliasek assisted the chief financial
officer of Amazon.com in 1999 in corporate strategy, customer
acquisition, and new product launches. From 1995 to 1998,
Mr. Eliasek served as a consultant with Bain &
Company, a global strategy consulting firm, where he managed
engagements for companies in several different industries. At
Bain, Mr. Eliasek analyzed new lines of businesses,
developed market strategies, revamped sales organizations and
improved operational performance. Mr. Eliasek received his
MBA from Harvard Business School. Mr. Eliasek received his
Bachelor of Science in Chemical Engineering with Highest
Distinction from the University of Virginia, where he was a
Jefferson Scholar and a Rodman Scholar.
Executive
Officer
Brian H. Oswald. Mr. Oswald is chief
financial officer, chief compliance officer, secretary and
treasurer of Prospect. He began his career at KPMG Peat Marwick,
where he held various positions over his ten-year tenure,
finishing as a Senior Manager in the financial institutions
group. During his time at KPMG, he served as the reviewing
senior manager for several initial public offerings of financial
institutions. After KPMG, Mr. Oswald served as the
Executive Vice President and President of Gloversville Federal
Savings and Loan Association, served as the Director of
Financial Reporting and Subsidiary Accounting for River Bank
America and served as the Corporate Controller for Magic
Solutions, Inc. In each of these positions, Mr. Oswald
instituted significant operational changes and was instrumental
in raising additional equity for River Bank America. From 2003
to 2005, Mr. Oswald led Capital Trust, Inc., a self-managed
finance and investment management REIT which specializes in
credit-sensitive structured financial products, as Chief
Financial Officer. From 1997 to 2003, he served as Chief
Accounting Officer for Capital Trust. Prior to joining Prospect,
Mr. Oswald spent two years with the Structured Finance
Division of GSC Group, serving as Managing Director of Finance
for this asset management company. At GSC, Mr. Oswald
managed the finances for a REIT, two hedge funds and thirteen
CDOs. Mr. Oswald joined the Administrator on June 16,
2008. Mr. Oswald holds a B.A. degree in Accounting from
Moravian College. He is a licensed Certified Public Accountant
in the States of New York and Pennsylvania, and is a Certified
Management Accountant. Mr. Oswald also serves as a board
member of RMJ Laboratories, Inc.
209
Committees
of the Board of Directors
Prospects Board of Directors has established an Audit
Committee and a Nominating and Corporate Governance Committee.
For the fiscal year ended June 30, 2009, its Board of
Directors held twenty-two Board of Director meetings, eleven
Audit Committee meetings, and five Nominating and Corporate
Governance Committee meetings. All directors attended at least
75% of the aggregate number of meetings of the Board of
Directors and of the respective committees on which they served.
Prospect requires each director to make a diligent effort to
attend all board and committee meetings, as well as each annual
meeting of shareholders.
The Audit Committee. The Audit Committee
operates pursuant to a charter approved by the Board of
Directors. The charter sets forth the responsibilities of the
Audit Committee, which include selecting or retaining each year
an independent registered public accounting firm, or the
independent accountants, to audit the accounts and records of
Prospect; reviewing and discussing with management and the
independent accountants the annual audited financial statements
of Prospect, including disclosures made in managements
discussion and analysis, and recommending to the Board of
Directors whether the audited financial statements should be
included in Prospects annual report on
Form 10-K;
reviewing and discussing with management and the independent
accountants Prospects quarterly financial statements prior
to the filings of its quarterly reports on
Form 10-Q;
pre-approving the independent accountants engagement to
render audit
and/or
permissible non-audit services; and evaluating the
qualifications, performance and independence of the independent
accountants. The Audit Committee is presently composed of three
persons: Messrs. Anderson, Cooper and Stark, each of whom
is not an interested person as defined in the 1940
Act and is considered independent under the Marketplace Rules of
the NASDAQ Stock Market LLC. Prospects Board of Directors
has determined that Mr. Stark is an audit committee
financial expert as that term is defined under
Item 407 of
Regulation S-K
and Mr. Stark serves as the Chairman of the Audit
Committee. The Audit Committee may delegate its pre-approval
responsibilities to one or more of its members. The member(s) to
whom such responsibility is delegated must report, for
informational purposes only, any pre-approval decisions to the
Audit Committee at its next scheduled meeting.
Messrs. Stark, Anderson and Cooper were added to the Audit
Committee concurrent with their election to the Board of
Directors on September 4, 2008, September 15, 2008 and
February 12, 2009, respectively.
The function of the Audit Committee is oversight.
Prospects management is primarily responsible for
maintaining appropriate systems for accounting and financial
reporting principles and policies and internal controls and
procedures that provide for compliance with accounting standards
and applicable laws and regulations. The independent accountants
are primarily responsible for planning and carrying out a proper
audit of Prospects annual financial statements in
accordance with generally accepted accounting standards. The
independent accountants are accountable to the Board of
Directors and the Audit Committee, as representatives of
Prospects shareholders. The Board of Directors and the
Audit Committee have the ultimate authority and responsibility
to select, evaluate and, where appropriate, replace
Prospects independent accountants (subject, if applicable,
to shareholder ratification).
In fulfilling their responsibilities, it is recognized that
members of the Audit Committee are not Prospects full-time
employees or management and are not, and do not represent
themselves to be, accountants or auditors by profession. As
such, it is not the duty or the responsibility of the Audit
Committee or its members to conduct field work or
other types of auditing or accounting reviews or procedures, to
determine that the financial statements are complete and
accurate and are in accordance with generally accepted
accounting principles, or to set auditor independence standards.
Each member of the Audit Committee is entitled to rely on
(a) the integrity of those persons within and outside us
and management from which it receives information; (b) the
accuracy of the financial and other information provided to the
Audit Committee absent actual knowledge to the contrary (which
is required to be promptly reported to the Board of Directors);
and (c) statements made by Prospects officers and
employees, its Investment Adviser or other third parties as to
any information technology, internal audit and other non-audit
services provided by the independent accountants to Prospect.
The Nominating and Corporate Governance
Committee. The Nominating and Corporate
Governance Committee, or the Nominating and Governance
Committee, is responsible for selecting qualified nominees to be
elected to the Board of Directors by shareholders; selecting
qualified nominees to fill any vacancies on the
210
Board of Directors or a committee thereof; developing and
recommending to the Board of Directors a set of corporate
governance principles applicable to Prospect; overseeing the
evaluation of the Board of Directors and management; and
undertaking such other duties and responsibilities as may from
time to time be delegated by the Board of Directors to the
Nominating and Governance Committee. The Nominating and
Governance Committee is presently composed of three persons:
Messrs. Anderson, Cooper and Stark, each of whom is not an
interested person as defined in
Section 2(a)(19) of the 1940 Act and Mr. Anderson
serves as the Chairman of the Nominating and Governance
Committee. Messrs. Stark, Anderson and Cooper were added to
the Nominating and Governance Committee concurrent with their
election to the Board of Directors on September 4, 2008,
September 15, 2008 and February 12, 2009, respectively.
The Nominating and Governance Committee will consider
shareholder recommendations for possible nominees for election
as directors when such recommendations are submitted in
accordance with the Prospects bylaws and any applicable
law, rule or regulation regarding director nominations.
Nominations should be sent to the Corporate Secretary,
c/o Prospect
Capital Corporation, 10 East 40th Street, 44th Floor,
New York, New York 10016. When submitting a nomination to
Prospect for consideration, a shareholder must provide all
information that would be required under applicable SEC rules to
be disclosed in connection with election of a director,
including the following minimum information for each director
nominee: full name, age and address; principal occupation during
the past five years; current directorships on publicly held
companies and investment companies; number of shares of our
common stock owned, if any; and, a written consent of the
individual to stand for election if nominated by the Board of
Directors and to serve if elected by the shareholders. Criteria
considered by the Nominating and Governance Committee in
evaluating the qualifications of individuals for election as
members of the Board of Directors include compliance with the
independence and other applicable requirements of the
Marketplace Rules of NASDAQ and the 1940 Act and all other
applicable laws, rules, regulations and listing standards, the
criteria, policies and principles set forth in the Nominating
and Corporate Governance Committee Charter, and the ability to
contribute to the effective management of Prospect, taking into
account Prospects needs and such factors as the
individuals experience, perspective, skills, expertise and
knowledge of the industries in which Prospect operates, personal
and professional integrity, character, business judgment, time
availability in light of other commitments, dedication and
conflicts of interest. The Nominating and Governance Committee
also may consider such other factors as it may deem to be in
Prospects best interests and those of its shareholders.
The Board of Directors also believes it is appropriate for
certain key members of Prospects management to participate
as members of the Board of Directors.
Corporate
Governance
Corporate Governance Guidelines. Upon the
recommendation of the Nominating and Governance Committee, the
Board of Directors has adopted Corporate Governance Guidelines
on behalf of Prospect. These Corporate Governance Guidelines
address, among other things, the following key corporate
governance topics: director responsibilities; the size,
composition, and membership criteria of the Board of Directors;
composition and responsibilities of directors serving on
committees of the Board of Directors; director access to
officers, employees, and independent advisors; director
orientation and continuing education; director compensation; and
an annual performance evaluation of the Board of Directors.
Code of Conduct. Prospect has adopted a code
of conduct which applies to, among others, our senior officers,
including its Chief Executive Officer and Chief Financial
Officer, as well as all of its employees. Prospects code
of conduct is an exhibit to its Annual Report on
Form 10-K
filed with the SEC, and can be accessed via the Internet site of
the SEC at
http://www.sec.gov.
Prospect intends to disclose amendments to or waivers from a
required provision of the code of conduct on
Form 8-K.
Code of Ethics. Prospect Capital Management
and Prospect Administration have each adopted a code of ethics
pursuant to
Rule 17j-1
under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities
transactions. Personnel subject to each code may invest in
securities for their personal investment accounts, including
securities that may be purchased or held by Prospect, so long as
such investments are made in accordance with the codes
requirements.
211
Internal Reporting and Whistle Blower Protection
Policy. Prospects Audit Committee has
established guidelines and procedures regarding the receipt,
retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters, collectively,
Accounting Matters, and the confidential, anonymous submission
by its employees of concerns regarding questionable accounting
or auditing matters. Persons with complaints or concerns
regarding Accounting Matters may submit their complaints to
Prospects Chief Compliance Officer, or CCO. Persons who
are uncomfortable submitting complaints to the CCO, including
complaints involving the CCO, may submit complaints directly to
Prospects Audit Committee Chairman. Complaints may be
submitted on an anonymous basis.
The CCO may be contacted at: Prospect Capital Corporation, Chief
Compliance Officer, 10 East 40th Street, 44th Floor,
New York, New York 10016.
The Audit Committee Chairman may be contacted at: Prospect
Capital Corporation, Audit Committee Chairman, 10 East
40th Street, 44th Floor, New York, New York 10016.
Independent
Directors
The Board of Directors, in connection with the 1940 Act and
Marketplace Rules 4200(a)(15) and 4350(c) of NASDAQ, has
considered the independence of members of the Board of Directors
who are not employed by Prospect Capital Management and has
concluded that Messrs. Anderson, Liebolt and Stark are not
interested persons as defined by the 1940 Act and
therefore qualify as independent directors under the standards
promulgated by the Marketplace Rules of NASDAQ. In reaching this
conclusion, the Board of Directors concluded that
Messrs. Anderson, Liebolt and Stark had no relationships
with Prospect Capital Management or any of its affiliates, other
than their positions as directors of Prospect and, if
applicable, investments in us that are on the same terms as
those of other shareholders.
Portfolio
Managers
The following individuals function as portfolio managers
primarily responsible for the day-to-day management of
Prospects portfolio. Prospects portfolio managers
are not responsible for day-to-day management of any other
accounts. For a description of their principal occupations for
the past five years, see above.
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Length of Service
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Name
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Position
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with Company (Years)
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John F. Barry
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Chairman and Chief Executive Officer
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5
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M. Grier Eliasek
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President and Chief Operating Officer
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5
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Mr. Eliasek receives a salary and bonus from Prospect
Capital Management that takes into account his role as a senior
officer of Prospect and of Prospect Capital Management, his
performance and the performance of each of Prospect Capital
Management and Prospect. Mr. Barry receives no compensation
from Prospect. Mr. Barry, as the sole member of Prospect
Capital Management, receives a salary
and/or bonus
from Prospect Capital Management and is entitled to equity
distributions after all other obligations of Prospect Capital
Management are met.
The following table sets forth the dollar range of our common
stock beneficially owned by each of the portfolio managers
described above as of January 29, 2009.
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Aggregate Dollar Range of
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Common Stock Beneficially Owned
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Name
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by Prospect Capital Management
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John F. Barry
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Over $100,000
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M. Grier Eliasek
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Over $100,000
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Proxy
Voting Policies And Procedures
Prospect has delegated its proxy voting responsibility to
Prospect Capital Management. The guidelines are reviewed
periodically by Prospect Capital Management and Prospects
non-interested directors, and, accordingly, are subject to
change.
212
EXECUTIVE
COMPENSATION OF PROSPECT
Compensation
of Directors and Officers
The following table sets forth information regarding the
compensation received by the directors and executive officers
from Prospect for the fiscal year ended June 30, 2009. No
compensation is paid to the interested directors by Prospect.
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Pension or
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Retirement
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Benefits Accrued
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Total
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Aggregate
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as Part of
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Compensation
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Compensation
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Prospects
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Paid to
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Name and Position
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from Prospect
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Expenses(1)
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Director/Officer
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Interested Directors
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John F. Barry(2)
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None
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None
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None
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M. Grier Eliasek(2)
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None
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None
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None
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Independent Directors
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Graham D.S. Anderson(3)
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$67,750
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None
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$67,750
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Andrew C. Cooper(4)
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$32,381
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None
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$32,381
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William J. Gremp(5)
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$41,035
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None
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$41,035
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F. Lee Liebolt, Jr.(6)
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$32,500
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None
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$32,500
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Walter V.E. Parker(7)
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$24,375
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None
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$24,375
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Eugene S. Stark(8)
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$70,500
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None
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$70,500
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Executive Officers
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William E. Vastardis(9,10)
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None
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Brian H. Oswald(2)
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None
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None
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None
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(1) |
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Prospect does not have a bonus, profit sharing or retirement
plan, and directors do not receive any pension or retirement
benefits. |
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(2) |
|
Prospect has not paid, and it does not intend to pay, any annual
cash compensation to its executive officers for their services
as executive officers. Messrs. Barry and Eliasek are
compensated by Prospect Capital Management from the income
Prospect Capital Management receives under the management
agreement between Prospect Capital Management and Prospect.
Mr. Oswald is compensated by Prospect Administration from
the income Prospect Administration receives under the
Administration Agreement. |
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(3) |
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Mr. Anderson joined Prospects Board of Directors on
September 15, 2008. |
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(4) |
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Mr. Cooper joined Prospects Board of Directors on
February 12, 2009. |
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(5) |
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Mr. Gremp ceased being a member of the Board of Directors
concurrent with his resignation on December 10, 2008. |
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(6) |
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Mr. Liebolt ceased being a member of the Board of Directors
concurrent with the election of directors at Prospects
most recent annual meeting held on February 12, 2009. |
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(7) |
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Mr. Parker ceased being a member of the Board of Directors
concurrent with his resignation on December 12, 2008. |
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(8) |
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Mr. Stark joined Prospects Board of Directors on
September 4, 2008. |
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(9) |
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Mr. Vastardis served as Chief Compliance Officer from
January 4, 2005 through September 30, 2008, and served
as Chief Financial Officer and Treasurer from April 30,
2005 through November 11, 2008. Mr. Vastardis served
as Secretary from April 30, 2005 through June 6, 2008. |
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(10) |
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The compensation of William E. Vastardis for his service as
Chief Financial Officer and Treasurer of Prospect was paid by
Vastardis Fund Services LLC, Prospects
sub-administrator. Vastardis Fund Services was in turn paid
by Prospect at a monthly minimum rate of $33,333.33 or annual
fees on gross assets of 0.20% on the first $250 million,
0.15% on the next $250 million, 0.10% on the next
$250 million, 0.075% on the next |
213
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$250 million and 0.05% over one billion. The compensation
of William E. Vastardis for his service as Chief Compliance
Officer of Prospect was paid by Vastardis Compliance Services
LLC. Vastardis Compliance Services LLC is in turn paid by
Prospect at a monthly rate of $6,250. In addition, Prospect pays
Vastardis Compliance Services LLC for certain other services at
the rate of $270 per hour. Both Vastardis Fund Services LLC
and Vastardis Compliance Services LLC determine the compensation
to be paid to Mr. Vastardis with respect to Prospect based
on a
case-by-case
evaluation of the time and resources that is required to fulfill
his duties to Prospect. For the fiscal year ending June 30,
2009, Prospect paid Vastardis Compliance Services LLC $25,000
for services rendered by Mr. Vastardis as Chief Compliance
Officer. For the fiscal year ending June 30, 2009, Prospect
paid Vastardis Fund Services LLC approximately $827,083 for
services required to be provided by Prospect Administration,
including, but not limited to, (a) clerical, bookkeeping
and record keeping services, (b) conducting relations with
custodians, depositories, transfer agents and other third-party
service providers and (c) furnishing reports to Prospect
Administration and the Board of Directors of Prospect of its
performance of obligations. In addition, the fees paid to
Vastardis Fund Service LLC cover the services rendered by
Mr. Vastardis as our Chief Financial Officer and Treasurer. |
For the first nine months of the fiscal year ended June 30,
2008, the independent directors received an annual fee of
$70,000, paid monthly in advance, plus reimbursement of any
reasonable out-of-pocket expenses incurred. The chairman of each
committee also received an additional annual fee of $5,000. For
the last three months of the fiscal year ended June 30,
2008, the independent directors received an annual fee of
$75,000, paid monthly in advance, plus $1,250 in connection with
each board or committee meeting attended, and the chairman of
each committee also received an additional annual fee of $5,000.
The independent directors were also reimbursed for any
reasonable out-of-pocket expenses incurred. No compensation was
paid to directors who are interested persons of Prospect as
defined in 1940 Act. In addition, Prospect purchases
directors and officers liability insurance on behalf
of the directors and officers.
Effective July 1, 2008, the independent directors received
an annual fee of $90,000 plus reimbursement of any reasonable
out-of-pocket expenses incurred. The chairman of the Audit
Committee received an additional annual cash retainer of $7,500
and the chairman of the Nominating and Corporate Governance
Committee received an additional annual cash retainer of $5,000.
Effective September 15, 2008, the independent directors who
do not serve on any committees of the board receive an annual
fee of 11,250.
Effective October 1, 2008, the independent directors who
serve on a committee of the Board receive an annual fee of
$85,000 plus reimbursement of any reasonable out-of-pocket
expenses incurred and committee chairmen no longer receive any
additional compensation.
Effective January 12, 2009, the independent directors who
serve on both committees of the Board receive an annual fee of
$85,000 plus reimbursement of any reasonable out-of-pocket
expenses incurred, the independent directors who serve on one
committee of the Board receive an annual fee of $60,000 plus
reimbursement of any reasonable out-of-pocket expenses incurred
and the independent directors who do not serve on any committees
of the board receive an annual fee of $11,250.
214
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF PROSPECT
Prospect has entered into the Investment Advisory Agreement with
Prospect Capital Management. Prospects Chairman of the
board of directors is the sole member of and controls Prospect
Capital Management. Prospects senior management may in the
future also serve as principals of other investment managers
affiliated with Prospect Capital Management that may in the
future manage investment funds with investment objectives
similar to Prospects. In addition, Prospects
executive officers and directors and the principals of Prospect
Capital Management may serve as officers, directors or
principals of entities that operate in the same or related lines
of business as Prospect does or of investment funds managed by
affiliates. Accordingly, Prospect may not be given the
opportunity to participate in certain investments made by
investment funds managed by advisers affiliated with Prospect
Capital Management. However, Prospects investment adviser
and other members of the affiliated present and predecessor
companies of Prospect Capital Management intend to allocate
investment opportunities in a fair and equitable manner
consistent with Prospects investment objectives and
strategies so that it is not disadvantaged in relation to any
other client.
In addition, pursuant to the terms of the Administration
Agreement, Prospect Administration provides, or arranges to
provide, Prospect with the office facilities and administrative
services necessary to conduct Prospects day-to-day
operations. Prospect Capital Management is the sole member of
and controls Prospect Administration. Prospect Administration,
pursuant to the approval of Prospects board of directors,
has engaged Vastardis to serve as the sub-administrator of
Prospect.
Prospect has no intention of investing in any portfolio company
in which Prospect Capital Management or any affiliate currently
has an investment.
215
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
PROSPECT
As of September 30, 2009, there were no persons that owned
25% or more of Prospects outstanding voting securities,
and it believes no person should be deemed to control it, as
such term is defined in the 1940 Act.
The following table sets forth, as of September 30, 2009,
certain ownership information with respect to Prospects
common stock for those persons who directly or indirectly own,
control or hold with the power to vote, 5% or more of
Prospects outstanding common stock and all officers and
directors, as a group. Unless otherwise indicated, Prospect
believes that the beneficial owners set forth in the tables
below have sole voting and investment power.
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Percentage of
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Common Stock
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Name and Address
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Type of Ownership
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Shares Owned
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Outstanding(1)
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Prospect Capital Management LLC(2)
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Record and beneficial
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901,815
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1.74
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%
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All officers and directors as a group (7 persons)(3)
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Record and beneficial
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1,626,934
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3.14
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%
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(1) |
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Does not reflect shares of common stock reserved for issuance
upon any exercise of any underwriters overallotment option. |
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(2) |
|
John F. Barry is a control person of Prospect Capital Management. |
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(3) |
|
Represents shares of common stock held by Prospect Capital
Management. Because John F. Barry controls Prospect Capital
Management, he may be deemed to be the beneficial owner of
shares of our common stock held by Prospect Capital Management.
The address for all officers and directors is
c/o Prospect
Capital Corporation, 10 East 40th Street, 44th Floor, New York,
NY 10016. |
The following table sets forth the dollar range of our equity
securities beneficially owned by each of Prospects
directors and officers as of September 30, 2009. Prospect
is not part of a family of investment companies as
that term is defined in the 1940 Act.
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Dollar Range of Equity
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Name of Director or Officer
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Securities in Prospect(1)
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Independent Directors
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Graham D.S. Anderson
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$10,001 $50,000
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Andrew C. Cooper
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none
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Eugene S. Stark
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|
$10,001 $50,000
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Interested Directors
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|
|
John F. Barry III(2)
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|
Over $100,000
|
M. Grier Eliasek
|
|
Over $100,000
|
Officer
|
|
|
Brian H. Oswald(3)
|
|
$50,001 $100,000
|
|
|
|
(1) |
|
Dollar ranges are as follows: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000 or over $100,000. |
|
(2) |
|
Represents an indirect beneficial ownership in shares of
Prospects common stock, that are beneficially owned
directly by Prospect Capital Management, by reason of
Mr. Barrys position as a control person of Prospect
Capital Management. |
|
(3) |
|
Mr. William E. Vastardis was also the Chief Compliance
Officer until September 30, 2008. On October 1, 2008,
Brian H. Oswald assumed this role and effective
November 11, 2008, Mr. Oswald also assumed the roles
of Chief Financial Officer and Treasurer, replacing
Mr. Vastardis. Mr. Oswald is also the Secretary of
Prospect. |
216
DESCRIPTION
OF PATRIOTS CAPITAL STOCK
The following description is based on relevant portions of the
Delaware General Corporation Law, Patriots restated
certificate of incorporation and Patriots restated bylaws.
This summary is not necessarily complete, and Patriot refers you
to the Delaware General Corporation Law, Patriots restated
certificate of incorporation and Patriots restated bylaws
for a more detailed description of the provisions summarized
below.
Capital
Stock
Patriots authorized capital stock consists of
49,000,000 shares of common stock, par value $0.01 per
share, and 1,000,000 shares of preferred stock, par value
of $0.01 per share. Patriots common stock trades on The
NASDAQ Global Select Market under the ticker symbol
PCAP. As of September 30, 2009,
3,644,677 and 2,065,045 shares of Patriots
common stock have been authorized for issuance under
Patriots stock option plan and employee restricted stock
plan, respectively. Under Delaware law, Patriots
stockholders generally will not be personally liable for
Patriots debts or obligations.
Set forth below is a chart describing the outstanding classes of
Patriots securities as of September 30, 2009:
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(3)
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(4)
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Amount Held
|
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Amount Outstanding
|
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(1)
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(2)
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by the Company
|
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Exclusive of Amount
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Title of Class
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Amount Authorized
|
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or for its Account
|
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Shown Under(3)
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Common Stock
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|
49,000,000
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20,950,501
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Preferred Stock
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1,000,000
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Common
Stock
Under the terms of Patriots restated certificate of
incorporation, all shares of Patriots common stock have
equal rights as to earnings, assets, dividends and voting and,
when they are issued, will be duly authorized, validly issued,
fully paid and nonassessable. Distributions may be paid to the
holders of Patriots common stock if, as and when
authorized by Patriots board of directors and declared by
Patriot out of funds legally available therefor. Shares of
Patriots common stock have no preemptive, exchange,
conversion or redemption rights and are freely transferable,
except where their transfer is restricted by federal and state
securities laws or by contract. In the event of Patriots
liquidation, dissolution or winding up, each share of
Patriots common stock would be entitled to share ratably
in all of Patriots assets that are legally available for
distribution after Patriot pays all debts and other liabilities
and subject to any preferential rights of holders of
Patriots preferred stock, if any preferred stock is
outstanding at such time. Each share of Patriots common
stock is entitled to one vote on all matters submitted to a vote
of stockholders, including the election of directors. Except as
provided with respect to any other class or series of stock, the
holders of Patriots common stock possess exclusive voting
power. There is no cumulative voting in the election of
directors, which means that holders of a majority of the
outstanding shares of common stock will be able to elect all of
Patriots directors, and holders of less than a majority of
such shares will be unable to elect any director.
Preferred
Stock
Under the terms of Patriots restated certificate of
incorporation, Patriots board of directors is authorized
to issue shares of preferred stock in one or more series without
shareholder approval. Except as otherwise provided in the 1940
Act, the board has discretion to determine the rights,
preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of
preferred stock.
Every issuance of preferred stock will be required to comply
with the requirements of the 1940 Act. The 1940 Act requires,
among other things, that (1) immediately after issuance and
before any dividend or other distribution is made with respect
to Patriots common stock and before any purchase of common
stock is made, such preferred stock together with all other
senior securities must not exceed an amount equal to 50% of
Patriots total assets after deducting the amount of such
dividend, distribution or purchase price, as the case
217
may be, and (2) the holders of shares of preferred stock,
if any are issued, must be entitled as a class to elect two
directors at all times and to elect a majority of the directors
if dividends on such preferred stock are in arrears by two years
or more. Certain matters under the 1940 Act require the separate
vote of the holders of any issued and outstanding preferred
stock. Patriot believes that the availability for issuance of
preferred stock will provide Patriot with increased flexibility
in structuring future financings and acquisitions.
Limitation
on Liability of Directors and Officers; Indemnification and
Advance of Expenses
Under Patriots restated certificate of incorporation,
Patriot fully indemnifies any person who was or is involved in
any actual or threatened action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of
the fact that such person is or was one of Patriots
directors or officers or is or was serving at Patriots
request as a director or officer of another corporation,
partnership, limited liability company, joint venture, trust or
other enterprise, including service with respect to an employee
benefit plan, against expenses (including attorneys fees),
judgments, fines and amounts paid or to be paid in settlement
actually and reasonably incurred by such person in connection
with such action, suit or proceeding. Patriots restated
certificate of incorporation also provides that Patriots
directors are not personally liable for monetary damages to
Patriot for breaches of their fiduciary duty as directors,
except for a breach of their duty of loyalty to Patriot or
Patriots stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law, for authorization of illegal dividends or
redemptions or for any transaction from which the director
derived an improper personal benefit. So long as Patriot is
regulated under the 1940 Act, the above indemnification and
limitation of liability will be limited by the 1940 Act or by
any valid rule, regulation or order of the SEC thereunder. The
1940 Act provides, among other things, that a company may not
indemnify any director or officer against liability to it or its
stockholders to which he or she might otherwise be subject by
reason of his or her willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his or her office unless a determination is made by
final decision of a court, by vote of a majority of a quorum of
directors who are disinterested, non-party directors or by
independent legal counsel that the liability for which
indemnification is sought did not arise out of the foregoing
conduct.
Delaware law also provides that indemnification permitted under
the law shall not be deemed exclusive of any other rights to
which the directors and officers may be entitled under the
corporations bylaws, any agreement, a vote of stockholders
or otherwise.
Patriots restated certificate of incorporation permits
Patriot to secure insurance on behalf of any person who is or
was or has agreed to become a director or officer of Patriot or
is or was serving at Patriots request as a director or
officer of another enterprise for any liability arising out of
his or her actions, regardless of whether the Delaware General
Corporation Law would permit indemnification. Patriot has
obtained liability insurance for Patriots officers and
directors.
Delaware
Law and Certain Certificate of Incorporation And Bylaw
Provisions; Anti-Takeover Measures
Patriot is subject to the provisions of Section 203 of the
General Corporation Law of Delaware. In general, the statute
prohibits a publicly held Delaware corporation from engaging in
a business combination with interested
stockholders for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes
certain mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to
exceptions, an interested stockholder is a person
who, together with his, her or its affiliates and associates,
owns, or within three years did own, 15% or more of the
corporations voting stock.
Patriots restated certificate of incorporation and
restated bylaws provide that:
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Patriots board of directors is divided into three classes,
as nearly equal in size as possible, with staggered three-year
terms;
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218
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directors may be removed only for cause by the affirmative vote
of the holders of two-thirds of the shares of Patriots
capital stock entitled to vote; and
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any vacancy on the board of directors, however the vacancy
occurs, including a vacancy due to an enlargement of the board,
may only be filled by vote of the directors then in office.
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The classification of Patriots board of directors and the
limitations on removal of directors and filling of vacancies
could have the effect of making it more difficult for a third
party to acquire Patriot, or of discouraging a third party from
acquiring Patriot.
Patriots restated certificate of incorporation and
restated bylaws also provide that:
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any action required or permitted to be taken by the stockholders
at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before such meeting and may
not be taken by written action in lieu of a meeting; and
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special meetings of the stockholders may only be called by
Patriots board of directors, chairman, or president and
chief executive officer.
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Patriots restated bylaws provide that, in order for any
matter to be considered properly brought before a
meeting, a stockholder must comply with requirements regarding
advance notice to Patriot. These provisions could delay until
the next stockholders meeting stockholder actions which
are favored by the holders of a majority of Patriots
outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer
for Patriots common stock, because such person or entity,
even if it acquired a majority of Patriots outstanding
voting securities, would be able to take action as a stockholder
(such as electing new directors or approving a merger) only at a
duly called stockholders meeting, and not by written consent.
Patriots restated certificate of incorporation also
authorizes the issuance of 1,000,000 shares of preferred
stock, which Patriots board of directors may generally
issue without stockholder approval. See
Capital Stock Preferred
Stock.
Delawares corporation law provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporations certificate
of incorporation or bylaws, unless a corporations
certificate of incorporation or bylaws requires a greater
percentage. Under Patriots restated bylaws, the
affirmative vote of the holders of at least
66 2/3%
of the shares of Patriots capital stock entitled to vote
is required to amend or repeal any of the provisions of
Patriots restated bylaws. Moreover, Patriots
restated bylaws provide that generally, a majority of the shares
of Patriots capital stock issued and outstanding and
entitled to vote will be able to amend Patriots restated
certificate of incorporation. However, the vote of at least
66 2/3%
of the shares of Patriots capital stock then outstanding
and entitled to vote in the election of directors, voting
together as a single class, will be required to amend or repeal
any provision of the restated certificate of incorporation
pertaining to the board of directors, limitation of liability,
indemnification, stockholder action or amendments to the
restated certificate of incorporation. The stockholder vote with
respect to Patriots restated certificate of incorporation
or restated bylaws would be in addition to any separate class
vote that might in the future be required under the terms of any
series preferred stock that might be outstanding at the time any
such changes are submitted to stockholders. In addition,
Patriots restated certificate of incorporation permits
Patriots board of directors to amend or repeal
Patriots restated bylaws by a majority vote.
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DESCRIPTION
OF PROSPECTS CAPITAL STOCK
The following description is based on relevant portions of the
Maryland General Corporation Law and on Prospects charter
and bylaws. This summary is not necessarily complete, and you
should refer to the Maryland General Corporation Law and
Prospects charter and bylaws for a more detailed
description of the provisions summarized below.
Capital
Stock
Prospects authorized capital stock consists of
100,000,000 shares of stock, par value $.001 per share, all
of which is initially classified as common stock.
Prospects common stock is traded on The NASDAQ Global
Select Market under the symbol PSEC. There are no
outstanding options or warrants to purchase Prospects
stock. No stock has been authorized for issuance under any
equity compensation plans. Under Maryland law, Prospect
stockholders generally are not personally liable for
Prospects debts or obligations.
Under Prospects charter, Prospects board of
directors is authorized to classify and reclassify any unissued
shares of stock into other classes or series of stock, and to
authorize the issuance of such shares, without obtaining
stockholder approval. As permitted by the Maryland General
Corporation Law, Prospects charter provides that the board
of directors, without any action by its stockholders, may amend
the charter from time to time to increase or decrease the
aggregate number of shares of stock or the number of shares of
stock of any class or series that it has authority to issue.
The below table sets forth each class of Prospects
outstanding securities as of September 30, 2009:
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(3)
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(4)
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Amount Held
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Amount Outstanding
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(1)
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(2)
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by the Company
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Exclusive of Amount
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Title of Class
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Amount Authorized
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or for its Account
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Shown Under(3)
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Common Stock
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100,000,000
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0
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54,672,155
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Common
stock
All shares of Prospect common stock have equal rights as to
earnings, assets, dividends and voting and, when they are
issued, will be duly authorized, validly issued, fully paid and
nonassessable. Distributions may be paid to the holders of
Prospect common stock if, as and when authorized by
Prospects board of directors and declared by Prospect out
of funds legally available therefor. Shares of Prospect common
stock have no preemptive, conversion or redemption rights and
are freely transferable, except where their transfer is
restricted by U.S. Federal and state securities laws or by
contract. In the event of a liquidation, dissolution or winding
up of Prospect, each share of Prospect common stock would be
entitled to share ratably in all of Prospects assets that
are legally available for distribution after Prospect pays all
debts and other liabilities and subject to any preferential
rights of holders of Prospect preferred stock, if any preferred
stock is outstanding at such time. Each share of Prospect common
stock is entitled to one vote on all matters submitted to a vote
of stockholders, including the election of directors. Except as
provided with respect to any other class or series of stock, the
holders of Prospect common stock will possess exclusive voting
power. There is no cumulative voting in the election of
directors, which means that prior to the issuance of preferred
stock holders of a majority of the outstanding shares of common
stock will elect all of Prospects directors, and holders
of less than a majority of such shares will be unable to elect
any director.
Preferred
stock
Prospects charter authorizes its board of directors to
classify and reclassify any unissued shares of stock into other
classes or series of stock, including preferred stock. Prior to
issuance of shares of each class or series, the board of
directors is required by Maryland law and by Prospects
charter to set the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions
of redemption for each class or series. Thus, the board of
directors could authorize the issuance of shares of preferred
stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a
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premium price for holders of Prospect common stock or otherwise
be in their best interest. You should note, however, that any
issuance of preferred stock must comply with the requirements of
the 1940 Act. The 1940 Act requires, among other things, that
(1) immediately after issuance and before any dividend or
other distribution (other than in shares of stock) is made with
respect to Prospect common stock and before any purchase of
common stock is made, such preferred stock together with all
other senior securities must not exceed an amount equal to 50%
of Prospects total assets after deducting the amount of
such dividend, distribution or purchase price, as the case may
be, and (2) the holders of shares of preferred stock, if
any are issued, must be entitled as a class to elect two
directors at all times and to elect a majority of the directors
if dividends on such preferred stock become in arrears by two
years or more until all arrears are cured. Certain matters under
the 1940 Act require the separate vote of the holders of any
issued and outstanding preferred stock. For example, holders of
preferred stock would vote separately from the holders of common
stock on a proposal to operate other than as an investment
company. Prospect believes that the availability for issuance of
preferred stock will provide it with increased flexibility in
structuring future financings and acquisitions.
Limitation
On Liability Of Directors And Officers; Indemnification And
Advance Of Expenses
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause
of action. Prospects charter contains such a provision
which eliminates directors and officers liability to
the maximum extent permitted by Maryland law, subject to the
requirements of the 1940 Act.
Prospects charter authorizes it, to the maximum extent
permitted by Maryland law and subject to the requirements of the
1940 Act, to obligate Prospect to indemnify any present or
former director or officer or any individual who, while serving
as a director or officer and at Prospects request, serves
or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner or trustee,
from and against any claim or liability to which that person may
become subject or which that person may incur by reason of his
or her service in any such capacity and to pay or reimburse
their reasonable expenses in advance of final disposition of a
proceeding. Prospects bylaws obligate it, to the maximum
extent permitted by Maryland law and subject to the requirements
of the 1940 Act, to indemnify any present or former director or
officer or any individual who, while serving as a director or
officer and at Prospects request, serves or has served
another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise
as a director, officer, partner or trustee and who is made, or
threatened to be made, a party to the proceeding by reason of
his or her service in any such capacity from and against any
claim or liability to which that person may become subject or
which that person may incur by reason of his or her service in
any such capacity and to pay or reimburse their reasonable
expenses in advance of final disposition of a proceeding. The
charter and bylaws also permit Prospect to indemnify and advance
expenses to any person who served a predecessor of Prospect in
any of the capacities described above and any of Prospects
employees or agents or any employees or agents of
Prospects predecessor. In accordance with the 1940 Act,
Prospect will not indemnify any person for any liability to
which such person would be subject by reason of such
persons willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
his or her office.
Maryland law requires a corporation (unless its charter provides
otherwise, which Prospect charter does not) to indemnify a
director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he or she
is made, or threatened to be made, a party by reason of his or
her service in that capacity. Maryland law permits a corporation
to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made, or threatened to
be made, a party by reason of their service in those or other
capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter
giving rise to the proceeding and (1) was committed in bad
faith or (2) was the result of active and deliberate
dishonesty, (b) the director or officer actually received
an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the
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director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under Maryland law, a
Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right of the corporation or for a
judgment of liability on the basis that a personal benefit was
improperly received, unless in either case a court orders
indemnification, and then only for expenses. In addition,
Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporations
receipt of (a) a written affirmation by the director or
officer of his or her good faith belief that he or she has met
the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by him or her or
on his or her behalf to repay the amount paid or reimbursed by
the corporation if it is ultimately determined that the standard
of conduct was not met.
Prospects insurance policy does not currently provide
coverage for claims, liabilities and expenses that may arise out
of activities that a present or former director or officer of
Prospect has performed for another entity at Prospects
request. There is no assurance that such entities will in fact
carry such insurance. However, Prospect notes that it does not
expect to request its present or former directors or officers to
serve another entity as a director, officer, partner or trustee
unless Prospect can obtain insurance providing coverage for such
persons for any claims, liabilities or expenses that may arise
out of their activities while serving in such capacities.
Provisions
Of The Maryland General Corporation Law And Prospects
Charter And Bylaws
Anti-takeover
Effect
The Maryland General Corporation Law and Prospects charter
and bylaws contain provisions that could make it more difficult
for a potential acquiror to acquire Prospect by means of a
tender offer, proxy contest or otherwise. These provisions are
expected to discourage certain coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to
acquire control of Prospect to negotiate first with
Prospects board of directors. These provisions could have
the effect of depriving stockholders of an opportunity to sell
their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of
Prospect. Prospect believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging
any such acquisition proposals because, among other things, the
negotiation of such proposals may improve their terms.
Control
share acquisitions
The Maryland General Corporation Law under the Control Share Act
provides that control shares of a Maryland corporation acquired
in a control share acquisition have no voting rights except to
the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter. Shares owned by the acquiror,
by officers or by directors who are employees of the corporation
are excluded from shares entitled to vote on the matter. Control
shares are voting shares of stock which, if aggregated with all
other shares of stock owned by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power:
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one-tenth or more but less than one-third,
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one-third or more but less than a majority, or
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a majority or more of all voting power.
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The requisite stockholder approval must be obtained each time an
acquiror crosses one of the thresholds of voting power set forth
above. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously
obtained stockholder approval. A control share acquisition means
the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition may compel the board of directors of the corporation
to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the
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satisfaction of certain conditions, including an undertaking to
pay the expenses of the meeting. If no request for a meeting is
made, the corporation may itself present the question at any
stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then the corporation may repurchase
for fair value any or all of the control shares, except those
for which voting rights have previously been approved. The right
of the corporation to repurchase control shares is subject to
certain conditions and limitations, including, as provided in
Prospects bylaws, compliance with the 1940 Act. Fair value
is determined, without regard to the absence of voting rights
for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of the shares are considered and not
approved. If voting rights for control shares are approved at a
stockholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders
may exercise appraisal rights. The fair value of the shares as
determined for purposes of appraisal rights may not be less than
the highest price per share paid by the acquiror in the control
share acquisition.
The Control Share Act does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation
is a party to the transaction or (b) to acquisitions
approved or exempted by the charter or bylaws of the corporation.
Prospects bylaws contain a provision exempting from the
Control Share Act any and all acquisitions by any person of
Prospects shares of stock. There can be no assurance that
such provision will not be amended or eliminated at any time in
the future. However, Prospect will amend its bylaws to be
subject to the Control Share Act only if the board of directors
determines that it would be in Prospects best interests
and if the SEC does not object to Prospects determination
that its being subject to the Control Share Act does not
conflict with the 1940 Act.
Business
combinations
Under Maryland law, business combinations between a
Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange or,
in circumstances specified in the statute, an asset transfer or
issuance or reclassification of equity securities. An interested
stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power
of the corporations shares; or
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation.
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A person is not an interested stockholder under this statute if
the board of directors approved in advance the transaction by
which he otherwise would have become an interested stockholder.
However, in approving a transaction, the board of directors may
provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined
by the board of directors.
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder.
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These super-majority vote requirements do not apply if the
corporations common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid
by the interested stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by the board
of directors before the time that the interested stockholder
becomes an interested stockholder. Prospects board of
directors has adopted a resolution that any business combination
between Prospect and any other person is exempted from the
provisions of the Business Combination Act, provided that
the business combination is first approved by the board of
directors, including a majority of the directors who are not
interested persons as defined in the 1940 Act. This resolution,
however, may be altered or repealed in whole or in part at any
time. If this resolution is repealed, or the board of directors
does not otherwise approve a business combination, the statute
may discourage others from trying to acquire control of Prospect
and increase the difficulty of consummating any offer.
Conflict
with 1940 Act
Prospects bylaws provide that, if and to the extent that
any provision of the Maryland General Corporation Law, including
the Control Share Act (if Prospect amends its bylaws to be
subject to such Act) and the Business Combination Act, or any
provision of Prospects charter or bylaws conflicts with
any provision of the 1940 Act, the applicable provision of the
1940 Act will control.
Classified
board of directors
Prospects board of directors is divided into three classes
of directors serving staggered three-year terms. The current
terms of the first, second and third classes will expire in
2009, 2010 and 2011 respectively, and in each case, until their
successors are duly elected and qualify. Each year one class of
directors will be elected to the board of directors by the
stockholders. A classified board may render a change in control
of Prospect or removal of Prospects incumbent management
more difficult. Prospect believes, however, that the longer time
required to elect a majority of a classified board of directors
will help to ensure the continuity and stability of
Prospects management and policies.
Election
of directors
Prospects charter and bylaws provide that the affirmative
vote of the holders of a majority of the outstanding shares of
stock entitled to vote in the election of directors will be
required to elect a director. Under the charter, Prospects
board of directors may amend the bylaws to alter the vote
required to elect directors.
Number
of directors; vacancies; removal
Prospects charter provides that the number of directors
will be set only by the board of directors in accordance with
Prospects bylaws. Prospects bylaws provide that a
majority of its entire board of directors may at any time
increase or decrease the number of directors. However, unless
Prospects bylaws are amended, the number of directors may
never be less than three nor more than eight. Prospects
charter provides that, at such time as it has three independent
directors and its common stock is registered under the Exchange
Act of 1934, as amended, or the Exchange Act, Prospect elects to
be subject to the provision of Subtitle 8 of Title 3 of the
Maryland General Corporation Law regarding the filling of
vacancies on the board of directors. Accordingly, at such time,
except as may be provided by the board of directors in setting
the terms of any class or series of preferred stock, any and all
vacancies on the board of directors may be filled only by the
affirmative vote of a majority of the remaining directors in
office, even if the remaining directors do not constitute a
quorum, and any director elected to fill a vacancy will serve
for the remainder of the full term of the directorship in which
the vacancy occurred and until a successor is elected and
qualifies, subject to any applicable requirements of the 1940
Act.
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Prospects charter provides that a director may be removed
only for cause, as defined in its charter, and then only by the
affirmative vote of at least two-thirds of the votes entitled to
be cast in the election of directors.
Action
by stockholders
The Maryland General Corporation Law provides that stockholder
action can be taken only at an annual or special meeting of
stockholders or (unless the charter provides for stockholder
action by less than unanimous written consent, which
Prospects charter does not) by unanimous written consent
in lieu of a meeting. These provisions, combined with the
requirements of Prospects bylaws regarding the calling of
a stockholder-requested special meeting of stockholders
discussed below, may have the effect of delaying consideration
of a stockholder proposal until the next annual meeting.
Advance
notice provisions for stockholder nominations and stockholder
proposals
Prospects bylaws provide that with respect to an annual
meeting of stockholders, nominations of persons for election to
the board of directors and the proposal of business to be
considered by stockholders may be made only (1) pursuant to
Prospects notice of the meeting, (2) by the board of
directors or (3) by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice
procedures of the bylaws. With respect to special meetings of
stockholders, only the business specified in Prospects
notice of the meeting may be brought before the meeting.
Nominations of persons for election to the board of directors at
a special meeting may be made only (1) pursuant to
Prospects notice of the meeting, (2) by the board of
directors or (3) provided that the board of
directors has determined that directors will be elected at the
meeting, by a stockholder who is entitled to vote at the meeting
and who has complied with the advance notice provisions of the
bylaws.
The purpose of requiring stockholders to give Prospect advance
notice of nominations and other business is to afford
Prospects board of directors a meaningful opportunity to
consider the qualifications of the proposed nominees and the
advisability of any other proposed business and, to the extent
deemed necessary or desirable by Prospects board of
directors, to inform stockholders and make recommendations about
such qualifications or business, as well as to provide a more
orderly procedure for conducting meetings of stockholders.
Although Prospects bylaws do not give its board of
directors any power to disapprove stockholder nominations for
the election of directors or proposals recommending certain
action, they may have the effect of precluding a contest for the
election of directors or the consideration of stockholder
proposals if proper procedures are not followed and of
discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or
to approve its own proposal without regard to whether
consideration of such nominees or proposals might be harmful or
beneficial to Prospect and its stockholders.
Calling
of special meetings of stockholders
Prospects bylaws provide that special meetings of
stockholders may be called by its board of directors and certain
of its officers. Additionally, Prospects bylaws provide
that, subject to the satisfaction of certain procedural and
informational requirements by the stockholders requesting the
meeting, a special meeting of stockholders will be called by the
secretary of the corporation upon the written request of
stockholders entitled to cast not less than a majority of all
the votes entitled to be cast at such meeting.
Approval
of extraordinary corporate action; amendment of charter and
bylaws
Under Maryland law, a Maryland corporation generally cannot
dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business,
unless approved by the affirmative vote of stockholders entitled
to cast at least two-thirds of the votes entitled to be cast on
the matter. However, a Maryland corporation may provide in its
charter for approval of these matters by a lesser percentage,
but not less than a majority of all of the votes entitled to be
cast on the matter. Prospects charter generally provides
for approval of charter amendments and
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extraordinary transactions by the stockholders entitled to cast
at least a majority of the votes entitled to be cast on the
matter.
Prospects charter also provides that certain charter
amendments and any proposal for Prospects conversion,
whether by merger or otherwise, from a closed-end company to an
open-end company or any proposal for Prospects liquidation
or dissolution requires the approval of the stockholders
entitled to cast at least 80 percent of the votes entitled
to be cast on such matter. However, if such amendment or
proposal is approved by at least two-thirds of Prospects
continuing directors (in addition to approval by its board of
directors), such amendment or proposal may be approved by a
majority of the votes entitled to be cast on such a matter. The
continuing directors are defined in Prospects
charter as its current directors as well as those directors
whose nomination for election by the stockholders or whose
election by the directors to fill vacancies is approved by a
majority of the continuing directors then on the board of
directors.
Prospects charter and bylaws provide that the board of
directors will have the exclusive power to make, alter, amend or
repeal any provision of its bylaws.
No
appraisal rights
Except with respect to appraisal rights arising in connection
with the Control Share Act discussed above, as permitted by the
Maryland General Corporation Law, Prospects charter
provides that stockholders will not be entitled to exercise
appraisal rights.
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COMPARISON
OF SHAREHOLDER RIGHTS
The following is a summary of the material differences between
the rights of Patriot shareholders and the rights of Prospect
shareholders. This summary does not address each difference
between Delaware law and Maryland law, but focuses on those
differences which the companies believe are most relevant to
Patriot shareholders. This summary is not intended to be
complete and is qualified by reference to the
certificate/articles of incorporation and bylaws of Prospect and
Patriot, as well as the laws of Delaware and Maryland. The
certificate/charter and bylaws of Patriot and Prospect have been
filed as exhibits to the registration statement of which this
proxy/prospectus forms a part. Shareholders of Patriot may
request copies of these documents as provided in Where You
Can Find More Information.
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Patriot
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Prospect
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Authorized Capital Stock
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Patriots certificate of incorporation authorizes it to
issue up to 49,000,000 shares of common stock, par value
$0.01 per share, and 1,000,000 shares of preferred stock,
par value $0.01 per share.
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Prospects charter authorizes it to issue up to
100,000,000 shares of stock, initially consisting of
100,000,000 shares of common stock, par value $0.001 per
share.
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Preemptive Rights
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The General Corporation Law of the State of Delaware, or DGCL
provides that no shareholder will have any preemptive right to
subscribe to an additional issue of stock or to any security
convertible into stock unless such right is expressly granted in
the certificate of incorporation. Patriots certificate of
incorporation does not grant preemptive rights.
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The Maryland General Corporation Law, or MGCL, does not confer
preemptive rights on shareholders but does permit corporations
to include a grant of preemptive rights in the charter.
Prospects charter does not grant preemptive rights.
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Amendment to Certificate of Incorporation
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The DGCL and Patriot certification of incorporation provide that
an amendment to the certificate of incorporation requires that
the board of directors adopt a resolution setting forth the
proposed amendment and that the shareholders must approve the
amendment by a majority of outstanding shares entitled to vote
(and a majority of the outstanding shares of each class entitled
to vote, if any).. The Patriot certification of incorporation
provides further that the affirmative vote of the holders of at
least
662/3%
of the shares of Patriots capital stock then outstanding
and entitled to vote in the election of directors, voting
together as a single class shall be required to amend or repeal
any provisions of Articles V (board of directors), VI
(limitation of liability), VII (indemnification), VIII
(shareholder action) or IX (amendment) of Patriots
certificate of incorporation.
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Under the MGCL, a Maryland corporation generally cannot amend
its charter, unless approved by the affirmative vote of
shareholders entitled to cast at least two thirds of the votes
entitled to be cast on the matter. However, a Maryland
corporation may provide in its charter for shareholder approval
of these matters by a lesser percentage, but not less than a
majority of all of the votes entitled to be cast on the matter.
Prospects charter generally provides for approval of
charter amendments by the shareholders entitled to cast at least
a majority of the votes entitled to be cast on the matter.
Certain amendments to Prospects charter (relating to
number, class, election and removal of directors and provisions
governing extraordinary actions and charter amendments) require
the approval of the shareholders entitled to cast at least
80 percent of the votes entitled to be cast on such matter.
However, if such amendment is approved by at least two-thirds of
Prospects continuing directors (in addition to approval by
the Board of Directors), such amendment or proposal may be
approved by a majority of the votes entitled to be cast on such
a matter. The continuing directors are defined in
Prospects charter as the current directors as well as
those directors whose nomination for election by the
shareholders or whose election by the directors to fill
vacancies is approved by a majority of the continuing directors
then on the Board of Directors.
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Additionally, as permitted by the MGCL, Prospects charter
provides that the Board of Directors, without any action by the
shareholders, may amend the charter from time to time to
increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that
Prospect has authority to issue.
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Amendment to Bylaws
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The Patriot certificate of incorporation provides that the Board
of Directors is expressly authorized to adopt, amend or repeal
the bylaws, and that any bylaws made by the directors may be
amended or repealed by the directors or by the shareholders.
Notwithstanding anything in the certificate of incorporation to
the contrary, the bylaws may not be amended or repealed by the
shareholders, and no provision inconsistent with the bylaws
shall be adopted by the shareholders, without the vote of the
holders of
662/3%
of the shares of Patriots capital stock then outstanding
and entitled to vote in the election of directors, voting
together as a single class.
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As permitted by the MGCL, Prospect has granted its board of
directors the exclusive power to alter, amend or repeal any
provision of its bylaws and to make new bylaws.
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Voting Rights and Required Vote Generally
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The DGCL and Patriots bylaws provide that unless otherwise
provided in the certificate of incorporation, each shareholder
is entitled to one vote for each share of capital stock held by
such shareholder. Patriots bylaws provide further that all
matters brought before a shareholders meeting require the
affirmative vote of the majority of the shares present in person
or represented by proxy and entitled to vote at a shareholders
meeting at which a quorum is present, unless the questions is
one upon which by express provision of statute or of the
certificate of incorporation or the bylaws, a different vote is
required, in which case such express provision governs.
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The MGCL provides that, unless the charter provides otherwise,
each share is entitled to one vote. Prospects bylaws
provide that a majority of the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall
be sufficient to approve any matter which may properly come
before the meeting, unless a greater or lesser vote is required
by statute or by the charter of the Corporation, in which case
such other requirement shall apply.
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Notice of Shareholders Meeting
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As permitted under the DGCL, the Patriot bylaws provide that
written notice of an annual or special meeting must be served
upon or mailed to each shareholder entitled to vote at such
meeting at least 10 but not more than 60 days prior to the
meeting. Such notice must state the location, date and hour of
the meeting. A notice of a special meeting must describe the
order of business to be addressed at the meeting.
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As permitted under the MGCL, the Prospect bylaws provide that
written or printed notice of an annual or special meeting must
be given to each shareholder entitled to vote at such meeting
and to each shareholder not entitled to vote who is entitled to
notice of the meeting, at least 10 but not more than
90 days prior to the meeting. The notice must state the
time and place of the meeting and, in the case of a special
meeting, the purpose for which the meeting is called.
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Quorum for Meeting of Shareholders
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The DGCL and Patriot bylaws provide that a quorum for a
shareholders meeting consists of a majority of shares entitled
to vote present in person or represented by proxy at such
meeting, unless the certificate of incorporation or bylaws of
the corporation provide otherwise.
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As permitted by the MGCL, the Prospect bylaws provide that a
quorum for a shareholders meeting consists of the presence in
person or by proxy of the holders of shares entitled to cast a
majority of votes entitled to be cast, except with respect to
any matter that, under applicable statutes or regulatory
requirements, requires approval by a separate vote of one or
more classes of stock, in which case the presence in person or
by proxy of the holders of shares entitled to cast a majority of
the votes entitled to be cast by each class on such a matter
will constitute a quorum.
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Shareholder Action by Written Consent
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The DGCL provides that any action that may be taken at any
annual or special meeting of shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action taken, is
signed by the holders of outstanding stock having not less than
the minimum number of votes that would be needed to take the
action at a meeting where all shares entitled to vote were
present and voted. Every written consent must show the date of
signature of each shareholder who signs the consent, and no
written consent will be effective to take the action referred to
in the consent unless, within 60 days of the earliest dated
consent delivered to the corporation, written consents signed by
a sufficient number of shareholders to take action are delivered
to the corporation.
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The consent to action in lieu of a meeting must be given in writing or by electronic transmission by the holders of all outstanding shares entitled to vote on the matter and filed in paper or electronic form with the records of the shareholders meetings. In addition, unless the charter requires otherwise, the holders of any class of stock, other than common stock entitled to vote generally in the election of directors, may take action or consent to any action by delivering, in writing or by electronic transmission, consent of the shareholders entitled to cast not less than the minimum number of votes that would be necessary to authorize or take the action at a shareholders meeting if the corporation gives notice of the action to each holder of the class of stock not later than 10 days after the effective time of the action.
A written consent may not take effect unless written consents signed by a sufficient number of shareholders to take action are delivered to the corporation within 60 days after the date of the earliest consent.
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Special Meetings of Shareholders
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The DGCL provides that special meetings of the shareholders may
be called by the board of directors or by such persons as may be
authorized by the certificate of incorporation or by the bylaws.
The DGCL does not require that shareholders be given the right
to call special meetings. The Patriot bylaws state that special
meetings of the shareholders may be called by the Board of
Directors, the Chairman of the Board of Directors or the Chief
Executive Officers.
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As permitted by the MGCL, Prospects bylaws provide that
special meetings of shareholders may be called by the Chairman
of the Board of Directors its president, and the Board of
Directors. Additionally, Prospects bylaws provide that,
subject to the satisfaction of certain procedural and
informational requirements by the shareholders requesting the
meeting, a special meeting of shareholders will be called by the
secretary of the corporation upon the written request of
shareholders entitled to cast not less than a majority of all
the votes entitled to be cast at such meeting.
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Voting Rights in Extraordinary Transactions
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The DGCL generally requires that any merger, consolidation or
sale of substantially all the assets of a corporation be
approved by a vote of a majority of all outstanding shares
entitled to vote thereon. Although a Delaware corporations
certificate of incorporation may provide for a greater vote,
Patriots certificate of incorporation does not do so.
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Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of shareholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Prospects charter generally provides for approval of charter amendments and extraordinary transactions by the shareholders entitled to cast at least a majority of the votes entitled to be cast on the matter.
Prospects charter also provides that certain charter amendments and any proposal for Prospects conversion, whether by merger or otherwise, from a closed-end company to an open-end company or any proposal for its liquidation or dissolution requires the approval of the shareholders entitled to cast at least 80 percent of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by at least two-thirds of Prospects continuing directors (in addition to approval by the Board of Directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The continuing directors are defined in Prospects charter as the current directors as well as those directors whose nomination for election by the shareholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the Board of Directors.
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Dissenters or Appraisal Rights
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Under the DGCL, a shareholder of a Delaware corporation who has
not voted in favor of, nor consented in writing to, a merger or
consolidation in which the corporation is participating
generally has the right to an appraisal of the fair value of the
shareholders shares of stock, subject to specified
procedural requirements. The DGCL does not confer appraisal
rights, however, if the corporations stock is either
(1) listed on a national securities exchange or
(2) held of record by more than 2,000 holders. Even if a
corporations stock meets the foregoing requirements,
however, the DGCL provides that appraisal rights generally will
be permitted if shareholders of the corporation are required to
accept for their stock in any merger, consolidation or similar
transaction anything other than (1) shares of the
corporation surviving or resulting from the transaction, or
depository receipts representing shares of the surviving or
resulting corporation, or those shares or depository receipts
plus cash in lieu of fractional interests, (2) shares of
any other corporation, or depository receipts representing
shares of the other corporation, or those shares or depository
receipts plus cash in lieu of fractional interests, which shares
or depository receipts are listed on a national securities
exchange or held of record by more than 2,000 holders, or
(3) any combination of the foregoing.
Under the DGCL, appraisal rights are not available in the merger
for Patriot shareholders.
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Shareholders of any Maryland corporation have the right to
demand and to receive payment of the fair value of their stock
in the event of (1) a merger or consolidation, (2) a share
exchange, (3) a transfer of all or substantially all of a
corporations assets, (4) a charter amendment altering
contract rights of outstanding stock and substantially adversely
affects the shareholders rights (unless the right to do so
is reserved in the charter) or (5) certain business
combinations. The right to fair value does not apply if (1) the
stock is listed on a national securities exchange; (2) the stock
is that of the successor in a merger; (3) the stock is not
entitled to be voted on the transaction or the shareholder did
not own the stock on the record date for determining
shareholders entitled to vote on the transaction; (4) the
charter provides that the holders of the stock are not entitled
to exercise the rights of an objective shareholder; or (5) the
stock is that of an open-end investment company registered with
the SEC under the Investment Company Act of 1940 and the stock
is valued in the transaction at its net asset value.
Except with respect to appraisal rights arising in connection
with the Control Share Act, as permitted by the MGCL,
Prospects charter provides that shareholders will not be
entitled to exercise appraisal rights.
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Shareholder Inspection of Corporate Records
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The DGCL provides any shareholder with the right to inspect the
corporations stock ledger, shareholder lists and other
books and records for a purpose reasonably related to the
persons interest as a shareholder. A complete list of the
shareholders entitled to vote at a shareholders meeting must be
available for shareholder inspection at least 10 days
before the meeting. In addition to the inspection rights granted
under the DGCL, the Patriot bylaws provide that at least ten
days before every meeting of the shareholders, the officer in
charge of the stock ledger will prepare a complete list of the
shareholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of and the number of
shares registered in the name of each shareholder. Such list
will be open for examination for any purpose germane to the
meeting, during ordinary business hours, for a period of at
least 10 days prior to the meeting on a reasonably
accessible electronic network, provide that the information
required to gain access is provided with notice of the meeting,
or at Patriots principal place of business. If the meeting
is to be held at a place, then the list shall be produced and
kept at the time and place of the meeting during the whole time
of the meeting, and may be inspected by any shareholder who is
present.
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Any shareholder of a Maryland corporation may make a written
request to inspect and copy the bylaws, minutes, annual reports
or voting trust agreements at the corporations principal
office. The individual may also make a written request for a
statement by the corporation showing all stock and securities
issued and consideration received by the corporation within the
preceding 12 months. One or more persons who together are,
and for at least six months have been, shareholders of record of
at least five percent of the outstanding stock of any class of a
Maryland corporation may (1) inspect and copy the
corporations books of account and its stock ledger during
usual business hours, upon written request, (2) present to any
officer or resident agent of the corporation a written request
for a statement of its affairs, setting forth the
corporations assets and liabilities as of a reasonably
current date and (3) in the case of any corporation which does
not maintain a stock ledger at its principal office, present to
any officer or resident agent of the corporation a written
request of a list of its shareholders, setting forth the name
and address of each shareholder and the number of shares of each
class which the shareholder holds. Within 20 days after
the request is made, the corporation will prepare this
information and have it available on file at its principal
office.
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Shareholder Proposals
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The Patriot bylaws provide that shareholders may propose
business for any annual meeting if the shareholder gives proper
notice and if the shareholders is a shareholder of record on the
date of the giving of the notice and on the record date for the
determination of shareholders entitled to vote at the annual
meeting. For the notice to be timely, it must be delivered to
Patriots principal executive offices at least 90 days
prior to the date of the anniversary of the previous years
annual meeting, unless the annual meeting is scheduled either
30 days before or 60 days after the anniversary date,
in which case notice must be received no later than 90 business
days prior to the annual meeting or the 10th day after
notice of the meeting was mailed or disclosed. The notice must
include (i) a brief description of each matter the
shareholder proposed to bring at the annual meeting,
(ii) the name and record address of the shareholder,
(iii) the class or series and number shares of capital
stock of the shareholder, (iv) a description of all
arrangements or understandings between the shareholder and any
other person in connection with the proposal of the business and
any material interest of the shareholder in the business, and
(v) a representation that the shareholder intends to appear
in person or by proxy at the annual meeting.
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Prospects bylaws provide that with respect to an annual
meeting of shareholders, nominations of persons for election to
the Board of Directors and the proposal of business to be
considered by shareholders may be made by a shareholder who is
entitled to vote at the meeting and who has complied with the
advance notice procedures of the bylaws. With respect to special
meetings of shareholders, only the business specified in the
notice of the meeting may be brought before the meeting.
To be timely, notices must be delivered to the secretary at
Prospects principal executive office not earlier than the
150th day
prior to the first anniversary of the date of mailing of the
notice for the preceding years annual meeting nor later
than the 120th day prior to the first anniversary of the
date of mailing of the notice for the preceding years
annual meeting; provided that if the date of the annual meeting
is advanced or delayed by more than 30 days from the first
anniversary of the date of the preceding years annual
meeting, notice by the shareholder must be delivered not earlier
than the
150th day
prior to the date of the annual meeting and not later than the
120th day
prior to the date of the annual meeting. The notice must include
a description of the business that the shareholder proposes to
bring, the reason for proposing such business, and any material
interest in the business of any shareholder. The notice must
also include the class, series and number of all shares of stock
of the shareholder providing notice; the name and address, if
different, of certain associated persons; and to the extent
known by the shareholder giving the notice, the name and address
of any other shareholder supporting the proposal.
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Number of Directors on Board
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The DGCL provides that a corporations board of directors
must consist of one or more individuals, with the number fixed
by, or in the manner provided in, the bylaws, unless the
certificate of incorporation fixes the number, in which case a
change in the number of directors shall be made only by
amendment of the certificate. The DGCL further provides that
directors need not be shareholders of the corporation unless the
corporations certificate of incorporation or bylaws so
provide. Patriots bylaws provide that the number of
directors will not be fewer than 5 or greater than 11.
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As permitted by the MGCL, Prospects charter provides that
the number of directors will be set only by the Board of
Directors in accordance with its bylaws. Prospects bylaws
provide that a majority of the entire Board of Directors may at
any time increase or decrease the number of directors. However,
unless Prospects bylaws are amended, the number of
directors may never be less than three nor more than eight.
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Classification of Directors
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The DGCL permits, but does not require, a classified board of
directors, pursuant to which the directors can be divided into
two or three classes with staggered terms of office, with only
one class of directors standing for election each year.
Patriots certificate of incorporation provides that, from
the first date that Patriot has more than give shareholders, the
board of directors will be divided into three classes,
designated Class I, Class II and Class III, as
nearly equal in number as possible (and no class will have less
than one director). The term of office of directors of one class
expires at each annual meeting of the shareholders.
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The MGCL provides that a corporation may divide the directors
into classes and may provide for a term of office which may not
be more than five years. The term of at least one class of
directors, however, must expire each year. The board of
directors of an eligible Maryland corporation may,
notwithstanding contrary charter or bylaw provisions, divide its
members into three classes, which must to the extent possible
have the same number of directors. If the board of directors
classifies its members in this way, it must, prior to the first
annual meeting of shareholders after doing so, designate members
to serve as Class I, Class II and Class III
directors, who then serve until the ends of these terms.
Prospects Board of Directors is divided into three classes
of directors serving staggered three-year terms. Each year one
class of directors is elected to the Board of Directors by the
shareholders.
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Nomination and Election of Directors
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As permitted by the DGCL, Patriots bylaws provide that
nominations of persons for election to the board of directors
may be made at any annual meeting of shareholders, or at any
special meeting of shareholders called for the purpose of
electing directors, by the board of directors or by any
shareholder who is a shareholder of record on the date of the
giving of notice of nomination. In order for a shareholder
nomination to be effective, the shareholder must provide notice
to Patriots executive offices (a) in the case of an
annual meeting, at least 90 days prior to the date of the
anniversary of the previous years annual meeting, unless
the annual meeting is scheduled either 30 days before or
60 days after the anniversary date, in which case notice
must be received no later than 90 business days prior to the
annual meeting or the 10th day after notice of the meeting
was mailed or disclosed, or (b) in the case of a special
meeting, within 10 days following notice of the date of the
special meeting. The shareholder nomination must be in proper
form, including (a) as to each nominee, (i) the name,
age, business address and residence address of the person,
(ii) the principal occupation of the person, (iii) the
class or series and number of shares of stock owned by the
person, and (iv) and other information relating to the
person that would be required to be disclosed in a proxy
statement; and as to each shareholder giving notice,
(i) the name and record address of the shareholder,
(ii) the class or series and number of shares owned by that
shareholder, (iii) a description of all arrangements or
understandings between such shareholder and each proposed
nominee and other person or persons pursuant tow which the
nominations are to be made by the shareholder, (iv) a
representation that the shareholder intends to appear in person
or by proxy to nominate the persons named in the notice, and
(v) any other information relating to the shareholder that
would be required to be disclosed in a proxy statement.
The DGCL further provides that unless a corporations
certificate of incorporation or bylaws otherwise provides,
directors of a corporation are elected by a plurality of the
votes of the shares present in person or represented by proxy
and entitled to vote in the election at a shareholders meeting
at which a quorum is present (i.e., the nominees for director
receiving the highest number of affirmative votes, up to the
number of directors to be elected, are elected).
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An annual meeting of shareholders shall be held for the election of directors.
Nominations of persons for election to the Board of Directors at an annual meeting may be made by a shareholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws, provided that the Board of Directors has determined that directors will be elected at the meeting. To be timely, notices must be delivered to the secretary at Prospects principal executive office not earlier than the 150th day prior to the first anniversary of the date of mailing of the notice for the preceding years annual meeting nor later than the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding years annual meeting; provided that if the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding years annual meeting, notice by the shareholder must be delivered not earlier than the 150th day prior to the date of the annual meeting and not later than the 120th day prior to the date of the annual meeting. The notice must include, as to each individual being nominated, the name, age, business address and residence address of such individual; the class, series and number of any shares of stock of the individual; the date such shares were acquired and the investment intent of the acquisition; whether the shareholder believes the individual is an interested person of Prospect; and all other information relating to the individual that is required to be disclosed in solicitation of proxies. The notice must also include, as to the shareholder, all other information normally required for a shareholder proposal.
Prospects bylaws provide that each director shall be elected by the affirmative vote of the holders of a majority of the shares of stock outstanding and entitled to vote thereon.
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Removal of Directors
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As permitted by the DGCL, Patriots certificate of
incorporation provides that any director may be removed from
office at any time, but only for cause, at a meeting called for
that purpose, and only by the vote of the holders of at least
662/3%
of the shares of Patriots capital stock then outstanding
and entitled to vote in the election of directors, voting
together as a single class. Further, whenever the holders of one
or more series of Preferred Stock have the right, voting
separately or together by series, to elect directors at an
annual or special meeting of shareholders, the election, term of
office, filling of vacancies and other features of such
directorship will be governed by the rights of the preferred
stock as set forth in the certificate of designations governing
that series.
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As permitted by the MGCL, Prospects charter provides that
a director may be removed only for cause, as defined in the
charter, and then only by the affirmative vote of at least
two-thirds of the votes entitled to be cast in the election of
directors.
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Vacancies on Board
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As permitted by the DGCL, Patriots certificate of
incorporation provides that the board of directors is expressly
authorized to change the number of directors in any or all of
the classes without consent of the shareholders. Subject to the
rights of the shares of any series of preferred stock then
outstanding, newly created directorships resulting from any
increase in the number of directors or any vacancies on the
board of directors resulting from death, resignation,
retirement, disqualification, removal from office or any other
cause may only be filled by the board of directors, provided
that a quorum is then in office and present, or by a majority of
the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. Directors elected to
fill a newly created directorship or other vacancies will hold
office for the remainder of the full term of the class of
directors in which the new directorship was created or the
vacancy occurred and until such directors successor has
been elected and qualified.
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As permitted by the MGCL, Prospects charter provides that,
at such time as it has three independent directors and its
common stock is registered under the Exchange Act of 1934, as
amended, or the Exchange Act, it elects to be subject to the
provision of Subtitle 8 of Title 3 of the MGCL regarding the
filling of vacancies on the Board of Directors. Accordingly, at
such time, except as may be provided by the Board of Directors
in setting the terms of any class or series of preferred stock,
any and all vacancies on the Board of Directors may be filled
only by the affirmative vote of a majority of the remaining
directors in office, even if the remaining directors do not
constitute a quorum, and any director elected to fill a vacancy
will serve for the remainder of the full term of the
directorship in which the vacancy occurred and until a successor
is elected and qualifies.
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Limitation on Personal Liability of Directors
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As permitted by the DGCL, Patriots certificate of
incorporation eliminates the liability of a director to the
corporation or its shareholders for monetary damages for a
breach of the directors fiduciary duties, except liability
for any breach of the directors duty of loyalty to the
corporations shareholders, for acts or omissions not in
good faith or that involve intentional misconduct or knowing
violation of law, under Section 174 of the DGCL (which
deals generally with unlawful payments of dividends, stock
repurchases and redemptions), and for any transaction from which
the director derived an improper personal benefit.
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Pursuant to the MGCL, a corporation may, in its charter,
eliminate or limit a directors (and an officers)
personal liability to the corporation and its shareholders for
monetary damages with certain exceptions. A director who
performs his or her duties in accordance with the standard of
conduct described in the MGCL has no liability by reason of
being or having been a director of a corporation. Furthermore, a
corporations charter may either expand or limit
directors and officers liability to the corporation
or shareholders. The only exceptions to the liability limitation
permitted in the charter are (a) actual receipt of an improper
benefit of profit in money, property or services and (b) active
and deliberate dishonesty established by a final judgment as
material to the cause of action. The corporation may only limit
liability for monetary damages in suits by the corporation or
the shareholders (and not by third parties) and may not limit
the availability of equitable remedies.
Prospect has, to the fullest extent possible under Maryland law,
limited the liability of its directors and officers.
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Indemnification of Officers and Directors
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Patriots certificate of incorporation provides that any
person who is made party to any proceeding because he or she was
or is a director or officer of Patriot will be indemnified and
held harmless by Patriot to the fullest extent permitted by the
DGCL. The DGCL provides that a corporation may indemnify its
officers, directors, employees and agents against liabilities
and expenses incurred in proceedings if the person acted in good
faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with
respect to any criminal action, had no reasonable cause to
believe that the persons conduct was unlawful. The DGCL
further provides that no indemnification is available in respect
of a claim as to which the person has been adjudged to be liable
to the corporation, unless and only to the extent that a court
determines that in view of all the circumstances, such person is
fairly and reasonably entitled to indemnity for such expenses
that the court deems proper. Under the DGCL, a Delaware
corporation must indemnify its present or former directors and
officers against expenses (including attorneys fees)
actually and reasonably incurred to the extent that the officer
or director has been successful on the merits or otherwise in
defense of any action, suit or proceeding brought against him or
her by reason of the fact that he or she is or was a director or
officer of the corporation.
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|
The MGCL requires a corporation (unless its charter provides
otherwise, which Prospects charter does not) to indemnify
a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he or she
is made, or threatened to be made, a party by reason of his or
her service in that capacity. Maryland law permits a corporation
to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made, or threatened to
be made, a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith or (2)
was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any
criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that a
personal benefit was improperly received, unless in either case
a court orders indemnification, and then only for expenses. In
addition, Maryland law permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of (a) a written affirmation by the
director or officer of his or her good faith belief that he or
she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking
by him or her or on his or her behalf to repay the amount paid
or reimbursed by the corporation if it is ultimately determined
that the standard of conduct was not met.
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238
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Patriot
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Prospect
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Prospects charter authorizes, and Prospects bylaws
obligates, to the maximum extent permitted by Maryland law and
subject to the requirements of the 1940 Act, Prospect to
indemnify any present or former director or officer or any
individual who, while serving as a director or officer and at
its request, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director,
officer, partner or trustee, from and against any claim or
liability to which that person may become subject or which that
person may incur by reason of his or her service in any such
capacity and to pay or reimburse their reasonable expenses in
advance of final disposition of a proceeding. Prospect will not
indemnify any person for any liability to which such person
would be subject by reason of such persons willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
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Interested Director Transactions
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The DGCL generally permits transactions involving a corporation
and an interested director of that corporation if: (i) the
material facts as to the directors relationship or
interest and as to the transaction are disclosed or are known to
the board of directors or a committee thereof, and the board of
directors or committee in good faith authorizes the transaction
by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors represent
less than a quorum; (ii) the material facts as to the
directors relationship or interest and as to the
transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the transaction is specifically
approved in good faith by vote of the shareholders; or
(iii) the transaction is fair to the corporation. The DGCL
allows loans to officers and employees whenever, in the judgment
of the directors, such loan may reasonably be expected to
benefit the corporation.
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Pursuant to the MGCL, no contract or transaction is void solely
because of the common directorship or interest, or because a
director, having a financial interest in a matter, is present at
the meeting at which the matter is ratified or votes for such
matter at said meeting, if: (1) the material facts are made
known to the other directors and the contract or transaction is
approved by a majority of disinterested directors although less
than a quorum; (2) the material facts are made known to
shareholders and the contract or transaction is approved by a
majority of votes cast by disinterested shareholders; or (3) the
contract or transaction is reasonable to the corporation.
Maryland also provides that directors of investment companies
(as defined by the Investment Company Act of 1940 (the
1940 Act)) making any decision or taking any action
as directors are deemed independent and disinterested unless
they fit the definition of interested person set
forth in the 1940 Act. The 1940 Act specifically provides that
a person is not interested solely by reason of being a director,
owner of securities or family member of a director or owner of
securities.
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Appointment and Removal of Officers
|
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As permitted by the DGCL, the Patriot bylaws provide that
Patriots officers will be appointed by the board of
directors, which may determine the order of the officers
rank. The officers will be elected annually at the first meeting
of the board of directors held after each annual meeting of the
shareholders. Any Patriot officer can be removed, either with or
without case, at any time, by the board of directors.
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As permitted by the MGCL, Prospects bylaws provides that
Prospect shall include a president, secretary and treasurer and
may include a chief executive officer, one or more vice
presidents, a chief operating officer, a chief financial
officer, one or more assistant secretaries and one or more
assistant treasurers. The officers shall be elected annually by
the board of directors. Any officer can be removed, either with
or without cause, at any time, by the board of directors.
|
239
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Patriot
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Prospect
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Control Share Acquisition Statutes
|
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Section 203 of the DGCL is Delawares business
combination statute. Section 203 is designed to protect
publicly traded Delaware corporations, such as Patriot, from
hostile takeovers, by prohibiting a Delaware corporation from
engaging in a business combination with a person
beneficially owning 15% or more of the corporations voting
stock for three years following the time that person becomes a
15% beneficial owner, with certain exceptions. A corporation may
elect not to be governed by Section 203 of the DGCL.
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The MGCL under the Control Share Act provides that control
shares of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the
matter. Shares owned by the acquiror, by officers or by
directors who are employees of the corporation are excluded from
shares entitled to vote on the matter. Control shares are voting
shares of stock which, if aggregated with all other shares of
stock owned by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle
the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power:
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one-tenth or more but less than
one-third,
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one-third or more but less than a
majority, or
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|
a majority or more of all voting power.
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The requisite shareholder approval must be obtained each time an
acquiror crosses one of the thresholds of voting power set forth
above. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously
obtained shareholder approval. A control share acquisition means
the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition may compel the Board of Directors of the corporation
to call a special meeting of shareholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. If no request
for a meeting is made, the corporation may itself present the
question at any shareholders meeting.
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240
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Patriot
|
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Prospect
|
|
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|
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then the corporation may repurchase
for fair value any or all of the control shares, except those
for which voting rights have previously been approved. The right
of the corporation to repurchase control shares is subject to
certain conditions and limitations, including, as provided in
our bylaws, compliance with the 1940 Act. Fair value is
determined, without regard to the absence of voting rights for
the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of the shares are considered and not
approved. If voting rights for control shares are approved at a
shareholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other shareholders
may exercise appraisal rights. The fair value of the shares as
determined for purposes of appraisal rights may not be less than
the highest price per share paid by the acquiror in the control
share acquisition.
The Control Share Act does not apply (a) to shares acquired in a
merger, consolidation or share exchange if the corporation is a
party to the transaction or (b) to acquisitions approved or
exempted by the charter or bylaws of the corporation.
Prospects bylaws contain a provision exempting from the
Control Share Act any and all acquisitions by any person of its
shares of stock.
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Dividends and Stock Repurchases
|
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|
The DGCL provides that, subject to any restrictions in a
corporations certificate of incorporation, dividends may
be declared from the corporations surplus, or, if there is
no surplus, from its net profits for the fiscal year in which
the dividend is declared and for the preceding fiscal year.
Dividends may not be declared out of net profits, however, if
the corporations capital has been diminished to an amount
less than the aggregate amount of all capital represented by the
issued and outstanding stock of all classes having a preference
upon the distribution of assets until the deficiency in the
amount of capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution
of assets is repaired. Furthermore, the DGCL generally provides
that a corporation may redeem or repurchase its shares only if
the redemption or repurchase would not impair the capital of the
corporation. The Patriot certificate of incorporation states
only that the right of the holders of shares of common stock to
receive dividends is subject to the rights of the shares of then
outstanding preferred stock.
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|
Maryland permits a corporation, subject to any restriction in
its charter, to make any distribution (including a purchase or
redemption of shares) authorized by the board of directors if,
after the distribution, the corporation would not be insolvent
in either the equity sense (inability to pay debts
as they become due in the usual course) or the balance
sheet sense (assets being less than the sum of liabilities
plus, unless the charter provides otherwise, senior liquidation
preferences) unless a distribution is made from (i) the net
earnings of the corporation for the fiscal year in which the
distribution is made, (ii) the net earnings of the corporation
for the preceding fiscal year, or (iii) the sum of net earnings
of the corporation for the preceding eight fiscal quarters. In
addition, for purposes of determining compliance with the
insolvency tests, Maryland permits assets to be valued on the
basis of a fair valuation of the assets or upon any
other reasonable method rather than limiting
application of the tests to the financial statements. The
corporation may make a distribution in money or in any other
property of the corporation.
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241
PROPOSAL 2:
TO APPROVE THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY
OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES, IN THE EVENT
THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE SPECIAL
MEETING TO ADOPT THE MERGER AGREEMENT
Patriots shareholders may be asked to consider and act
upon one or more adjournments of the special meeting, if
necessary or appropriate, to solicit additional proxies in the
event there are not sufficient votes at the time of the special
meeting to adopt the merger agreement by and between Patriot and
Prospect.
If a quorum is not present at the special meeting,
Patriots shareholders may be asked to vote on the proposal
to adjourn the special meeting to solicit additional proxies. If
a quorum is present at the special meeting, but there are not
sufficient votes at the time of the special meeting to approve
the merger proposal, Patriots shareholders may also be
asked to vote on the proposal to approve the adjournment of the
special meeting to permit further solicitation of proxies in
favor of the merger proposal. Patriots board of directors
will take into account the best interests of shareholders in
determining whether to propose the adjournment of the meeting.
If the adjournment proposal is submitted for a vote at the
special meeting, and if Patriots shareholders vote to
approve the adjournment proposal, the meeting will be adjourned
to enable the solicitation of additional proxies in favor of the
merger proposal. If the adjournment proposal is approved, and
the special meeting is adjourned, Patriot will use the
additional time to solicit additional proxies in favor of the
merger proposal, including the solicitation of proxies from
shareholders that have previously voted against the merger
proposal. Among other things, approval of the adjournment
proposal could mean that, even though Patriot may have received
proxies representing a sufficient number of votes against the
merger proposal to defeat it, Patriot could present the
adjournment proposal for a vote of Patriots shareholders
and thereby cause the special meeting to be adjourned without a
vote on the merger proposal and seek during that period to
convince the holders of those shares to change their votes to
vote in favor of the merger proposal. Therefore, if a
shareholder voted against the merger proposal, then such
shareholder may not want to vote for the adjournment proposal.
Patriots board of directors believes that, if the number
of shares of Patriot common stock voting in favor of the merger
proposal is insufficient to approve it, it is in the best
interests of its shareholders to enable Patriot, for a limited
period of time, to continue to seek to obtain a sufficient
number of additional votes in favor of the merger proposal.
Any proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies if there are not
sufficient votes to adopt the merger proposal requires the
affirmative vote of a majority of the shares represented at the
special meeting in person or by proxy. The persons named as
proxies will vote those proxies for such adjournment, unless
marked to be voted against any proposal for which an adjournment
is sought, to permit further solicitation of proxies.
Patriots board of directors recommends that
shareholders vote for the proposal to approve
any adjournment of the special meeting, if necessary or
appropriate, to solicit additional proxies, in the event there
are not sufficient votes at the time of the special meeting to
adopt the agreement and plan of merger.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Since Prospect generally acquires and disposes of its
investments in privately negotiated transactions, it
infrequently uses brokers in the normal course of its business.
The aggregate amount of brokerage commissions paid by Prospect
during the three most recent fiscal years is $105,613. Subject
to policies established by Prospects board of directors,
Prospect Capital Management is primarily responsible for the
execution of the publicly-traded securities portion of
Prospects portfolio transactions and the allocation of
brokerage commissions.
242
Prospect Capital Management does not expect to execute
transactions through any particular broker or dealer, but seeks
to obtain the best net results for Prospect, taking into account
such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of
execution, and operational facilities of the firm and the
firms risk and skill in positioning blocks of securities.
While Prospect Capital Management generally seeks reasonably
competitive trade execution costs, Prospect will not necessarily
pay the lowest spread or commission available. Subject to
applicable legal requirements, Prospect Capital Management may
select a broker based partly upon brokerage or research services
provided to it and Prospect and any other clients. In return for
such services, Prospect may pay a higher commission than other
brokers would charge if Prospect Capital Management determines
in good faith that such commission is reasonable in relation to
the services provided.
LEGAL
MATTERS
The validity of Prospects common stock to be issued in
connection with the merger will be passed upon for Prospect by
Venable LLP. Sutherland Asbill & Brennan LLP will pass
upon certain legal matters to the effect that, subject to the
assumptions set forth in such opinion, the merger will
constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code.
EXPERTS
The consolidated financial statements of Prospect as of
June 30, 2009 and 2008 and for each of the three years in
the period ended June 30, 2009 included in this document
and registration statement have been so included in reliance on
the report of BDO Seidman, LLP, Prospects independent
registered public accounting firm appearing elsewhere herein
given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements, schedule and
managements assessment of the effectiveness of internal
control over financial reporting of Patriot Capital Funding,
Inc. included in this registration statement have been so
included in reliance upon the reports of Grant Thornton LLP,
independent registered public accountants (which report
expressed an unqualified opinion and contained explanatory
paragraphs relating to substantial doubt about the
Companys ability to continue as a going concern and the
adoption of Statement of Financial Accounting Standards No.
157 Fair Value Measurements), upon the
authority of said firm as experts in accounting and auditing in
giving said reports.
OTHER
MATTERS
According to Patriots bylaws, business to be conducted at
a special meeting of shareholders may only be brought before the
meeting pursuant to a notice of meeting or otherwise properly
brought before the meeting by or at the direction of
Patriots board of directors. Under Delaware Law and
Patriots Bylaws, only the matters stated in the notice of
special meeting will be presented for action at the special
meeting or at any adjournment or postponement of the special
meeting.
Patriot will hold a 2010 annual meeting of shareholders only if
the merger is not completed. If it is determined that the merger
will not be completed as contemplated by the merger agreement,
Patriot will provide notice of the date fixed for the annual
meeting, as well as the deadline for submitting shareholder
proposals for such meeting and for having such shareholder
proposals included in its proxy statement.
WHERE YOU
CAN FIND MORE INFORMATION
Prospect has filed with the SEC a registration statement on
Form N-14
together with all amendments and related exhibits under the
Securities Act of 1933. The registration statement contains
additional information about Prospect and the securities being
offered by this prospectus.
243
Prospect and Patriot file annual, quarterly and current reports,
proxy statements and other information with the SEC under the
Securities Exchange Act of 1934. You can inspect any materials
filed by Prospect and Patriot with the SEC, without charge, at
the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room.
The information Prospect files with the SEC is available free of
charge by contacting it at 10 East
40th Street,
44th Floor, New York, NY 10016, or by telephone at
(212) 448-0702
or on its website at www.prospectstreet.com. The SEC also
maintains a website that contains reports, proxy statements and
other information regarding registrants, including Prospect,
that file such information electronically with the SEC. The
address of the SECs website is www.sec.gov.
Information contained on Prospects website or on the
SECs website about Prospect is not incorporated into this
prospectus and you should not consider information contained on
Prospects website or on the SECs website to be part
of this prospectus.
The information Patriot files with the SEC is available free of
charge by contacting it at 274 Riverside Avenue, Westport, CT
06880, or by telephone at
(203) 429-2700
or on its website at www.patcapfunding.com. The SEC also
maintains a website that contains reports, proxy statements and
other information regarding registrants, including Patriot, that
file such information electronically with the SEC. The address
of the SECs website is www.sec.gov. Information
contained on Patriots website or on the SECs website
about Patriot is not incorporated into this prospectus and you
should not consider information contained on Patriots
website or on the SECs website to be part of this
prospectus.
244
INDEX TO
FINANCIAL STATEMENTS
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|
|
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|
Prospect Capital Corporation
|
|
|
|
|
AUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-19
|
|
|
|
|
|
|
Patriot Capital Funding, Inc.
|
|
|
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-39
|
|
|
|
|
F-45
|
|
|
|
|
F-50
|
|
AUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-68
|
|
|
|
|
F-70
|
|
|
|
|
F-71
|
|
|
|
|
F-72
|
|
|
|
|
F-73
|
|
|
|
|
F-74
|
|
|
|
|
F-77
|
|
|
|
|
F-80
|
|
F-1
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Prospect Capital Corporation
New York, New York
We have audited the accompanying consolidated statements of
assets and liabilities of Prospect Capital Corporation,
including the schedule of investments, as of June 30, 2009
and 2008, and the related consolidated statements of operations,
changes in net assets, and cash flows for each of the three
years in the period ended June 30, 2009, and the financial
highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and
financial highlights referred to above present fairly, in all
material respects, the financial position of Prospect Capital
Corporation at June 30, 2009 and 2008, and the results of
its operations and its cash flows for each of the three years in
the period ended June 30, 2009, and the financial
highlights for each of the periods presented in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Prospect Capital Corporations internal control over
financial reporting as of June 30, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated
September 11, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
September 11, 2009
F-2
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
(in
thousands, except share and per share data)
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|
|
|
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|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS (Note 10)
|
Investments at fair value (net cost of $531,424 and $496,805,
respectively, Note 3)
|
|
|
|
|
|
|
|
|
Control investments (net cost of $187,105 and $203,661,
respectively)
|
|
$
|
206,332
|
|
|
$
|
205,827
|
|
Affiliate investments (net cost of $33,544 and $5,609,
respectively)
|
|
|
32,254
|
|
|
|
6,043
|
|
Non-control/Non-affiliate investments (net cost of $310,775 and
$287,535,respectively)
|
|
|
308,582
|
|
|
|
285,660
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
|
547,168
|
|
|
|
497,530
|
|
|
|
|
|
|
|
|
|
|
Investments in money market funds
|
|
|
98,735
|
|
|
|
33,000
|
|
Cash
|
|
|
9,942
|
|
|
|
555
|
|
Receivables for:
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
3,562
|
|
|
|
4,094
|
|
Dividends
|
|
|
28
|
|
|
|
4,248
|
|
Loan principal
|
|
|
|
|
|
|
71
|
|
Other
|
|
|
571
|
|
|
|
567
|
|
Prepaid expenses
|
|
|
68
|
|
|
|
273
|
|
Deferred financing costs
|
|
|
6,951
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
667,025
|
|
|
|
541,778
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Credit facility payable (Note 10)
|
|
|
124,800
|
|
|
|
91,167
|
|
Dividends payable
|
|
|
|
|
|
|
11,845
|
|
Due to Prospect Administration (Note 7)
|
|
|
842
|
|
|
|
695
|
|
Due to Prospect Capital Management (Note 7)
|
|
|
5,871
|
|
|
|
5,946
|
|
Accrued expenses
|
|
|
2,381
|
|
|
|
1,104
|
|
Other liabilities
|
|
|
535
|
|
|
|
1,398
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
134,429
|
|
|
|
112,155
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
|
|
|
|
|
|
|
|
|
Components of Net Assets
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 and
100,000,000 common shares authorized, respectively; 42,943,084
and 29,520,379 issued and outstanding, respectively)
(Note 5)
|
|
$
|
43
|
|
|
$
|
30
|
|
Paid-in capital in excess of par
|
|
|
545,707
|
|
|
|
441,332
|
|
Undistributed net investment income
|
|
|
24,152
|
|
|
|
1,508
|
|
Accumulated realized losses on investments
|
|
|
(53,050
|
)
|
|
|
(13,972
|
)
|
Unrealized appreciation on investments
|
|
|
15,744
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share
|
|
$
|
12.40
|
|
|
$
|
14.55
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments (Net of foreign withholding tax of $166,
$230, and $178, respectively)
|
|
$
|
19,281
|
|
|
$
|
21,709
|
|
|
$
|
13,500
|
|
Affiliate investments (Net of foreign withholding tax of
$ , $70, and $237, respectively)
|
|
|
3,039
|
|
|
|
1,858
|
|
|
|
3,489
|
|
Non-control/Non-affiliate investments
|
|
|
40,606
|
|
|
|
35,466
|
|
|
|
13,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
62,926
|
|
|
|
59,033
|
|
|
|
30,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
22,468
|
|
|
|
11,327
|
|
|
|
3,400
|
|
Money market funds
|
|
|
325
|
|
|
|
706
|
|
|
|
2,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend income
|
|
|
22,793
|
|
|
|
12,033
|
|
|
|
6,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Control/affiliate investments
|
|
|
1,249
|
|
|
|
1,123
|
|
|
|
230
|
|
Non-control/Non-affiliate investments
|
|
|
13,513
|
|
|
|
7,213
|
|
|
|
4,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
14,762
|
|
|
|
8,336
|
|
|
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
100,481
|
|
|
|
79,402
|
|
|
|
40,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee (Note 7)
|
|
|
11,915
|
|
|
|
8,921
|
|
|
|
5,445
|
|
Income incentive fee (Note 7)
|
|
|
14,790
|
|
|
|
11,278
|
|
|
|
5,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment advisory fees
|
|
|
26,705
|
|
|
|
20,199
|
|
|
|
11,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and credit facility expenses
|
|
|
6,161
|
|
|
|
6,318
|
|
|
|
1,903
|
|
Sub-administration fees (including former Chief
Financial Officer and Chief Compliance Officer)
|
|
|
846
|
|
|
|
859
|
|
|
|
567
|
|
Legal fees
|
|
|
947
|
|
|
|
2,503
|
|
|
|
1,365
|
|
Valuation services
|
|
|
705
|
|
|
|
577
|
|
|
|
395
|
|
Audit, compliance and tax related fees
|
|
|
1,015
|
|
|
|
470
|
|
|
|
599
|
|
Allocation of overhead from Prospect Administration (Note 7)
|
|
|
2,856
|
|
|
|
2,139
|
|
|
|
532
|
|
Insurance expense
|
|
|
246
|
|
|
|
256
|
|
|
|
291
|
|
Directors fees
|
|
|
269
|
|
|
|
253
|
|
|
|
230
|
|
Other general and administrative expenses
|
|
|
1,035
|
|
|
|
715
|
|
|
|
442
|
|
Excise taxes
|
|
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
41,318
|
|
|
|
34,289
|
|
|
|
17,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
59,163
|
|
|
|
45,113
|
|
|
|
23,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (loss) gain on investments
|
|
|
(39,078
|
)
|
|
|
(16,222
|
)
|
|
|
1,949
|
|
Net change in unrealized appreciation (depreciation) on
investments
|
|
|
15,019
|
|
|
|
(1,300
|
)
|
|
|
(8,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
$
|
35,104
|
|
|
$
|
27,591
|
|
|
$
|
16,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations per share:
(Note 6 and Note 8)
|
|
$
|
1.11
|
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
31,559,905
|
|
|
|
23,626,642
|
|
|
|
15,724,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Increase in Net Assets from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
59,163
|
|
|
$
|
45,113
|
|
|
$
|
23,131
|
|
Net realized (loss) gain on investments
|
|
|
(39,078
|
)
|
|
|
(16,222
|
)
|
|
|
1,949
|
|
Net change in unrealized appreciation (depreciation) on
investments
|
|
|
15,019
|
|
|
|
(1,300
|
)
|
|
|
(8,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
|
35,104
|
|
|
|
27,591
|
|
|
|
16,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to Shareholders
|
|
|
(36,519
|
)
|
|
|
(39,513
|
)
|
|
|
(27,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from capital shares sold
|
|
|
100,304
|
|
|
|
140,249
|
|
|
|
197,558
|
|
Less: Offering costs of public share offerings
|
|
|
(1,023
|
)
|
|
|
(1,505
|
)
|
|
|
(874
|
)
|
Reinvestment of dividends
|
|
|
5,107
|
|
|
|
2,753
|
|
|
|
5,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets Resulting from Capital
Share Transactions
|
|
|
104,388
|
|
|
|
141,497
|
|
|
|
202,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Net Assets:
|
|
|
102,973
|
|
|
|
129,575
|
|
|
|
191,778
|
|
Net assets at beginning of year
|
|
|
429,623
|
|
|
|
300,048
|
|
|
|
108,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets at End of Year
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
|
$
|
300,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
12,942,500
|
|
|
|
9,400,000
|
|
|
|
12,526,650
|
|
Shares issued through reinvestment of dividends
|
|
|
480,205
|
|
|
|
171,314
|
|
|
|
352,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in capital share activity
|
|
|
13,422,705
|
|
|
|
9,571,314
|
|
|
|
12,879,192
|
|
Shares outstanding at beginning of year
|
|
|
29,520,379
|
|
|
|
19,949,065
|
|
|
|
7,069,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding at End of Year
|
|
|
42,943,084
|
|
|
|
29,520,379
|
|
|
|
19,949,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
35,104
|
|
|
$
|
27,591
|
|
|
$
|
16,728
|
|
Net realized loss (gain) on investments
|
|
|
39,078
|
|
|
|
16,239
|
|
|
|
(1,947
|
)
|
Net change in unrealized (appreciation) depreciation on
investments
|
|
|
(15,019
|
)
|
|
|
1,300
|
|
|
|
8,352
|
|
Accretion of original issue discount on investments
|
|
|
(2,399
|
)
|
|
|
(2,095
|
)
|
|
|
(1,808
|
)
|
Amortization of deferred financing costs
|
|
|
759
|
|
|
|
727
|
|
|
|
1,264
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for purchases of investments
|
|
|
(98,305
|
)
|
|
|
(311,947
|
)
|
|
|
(167,255
|
)
|
Proceeds from sale of investments and collection of investment
principal
|
|
|
27,007
|
|
|
|
127,212
|
|
|
|
38,407
|
|
Purchases of cash equivalents
|
|
|
(39,999
|
)
|
|
|
(274,949
|
)
|
|
|
(259,887
|
)
|
Sales of cash equivalents
|
|
|
39,999
|
|
|
|
274,932
|
|
|
|
259,885
|
|
Net (increase) decrease investments in money market funds
|
|
|
(65,735
|
)
|
|
|
8,760
|
|
|
|
(40,152
|
)
|
Decrease (increase) in interest receivable, net
|
|
|
532
|
|
|
|
(1,955
|
)
|
|
|
(500
|
)
|
Decrease (increase) in dividends receivable
|
|
|
4,220
|
|
|
|
(3,985
|
)
|
|
|
(250
|
)
|
Decrease (increase) in loan principal receivable
|
|
|
71
|
|
|
|
(71
|
)
|
|
|
385
|
|
Decrease in receivable for securities sold
|
|
|
|
|
|
|
|
|
|
|
369
|
|
Decrease in receivable for structuring fees
|
|
|
|
|
|
|
1,625
|
|
|
|
|
|
Decrease in due from Prospect Administration
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Decrease in due from Prospect Capital Management
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Increase in other receivables
|
|
|
(4
|
)
|
|
|
(296
|
)
|
|
|
(1,896
|
)
|
Decrease (increase) in prepaid expenses
|
|
|
205
|
|
|
|
198
|
|
|
|
(394
|
)
|
(Decrease) increase in payables for securities purchased
|
|
|
|
|
|
|
(70,000
|
)
|
|
|
32
|
|
Increase in due to Prospect Administration
|
|
|
147
|
|
|
|
365
|
|
|
|
330
|
|
(Decrease) increase in due to Prospect Capital Management
|
|
|
(75
|
)
|
|
|
1,438
|
|
|
|
3,763
|
|
Increase (decrease) in accrued expenses
|
|
|
1,277
|
|
|
|
(208
|
)
|
|
|
469
|
|
(Decrease) increase in other liabilities
|
|
|
(863
|
)
|
|
|
1,094
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Operating Activities:
|
|
|
(74,000
|
)
|
|
|
(204,025
|
)
|
|
|
(143,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
100,157
|
|
|
|
238,492
|
|
|
|
|
|
Payments under credit facility
|
|
|
(66,524
|
)
|
|
|
(147,325
|
)
|
|
|
(28,500
|
)
|
Financing costs paid and deferred
|
|
|
(6,270
|
)
|
|
|
(416
|
)
|
|
|
(2,660
|
)
|
Net proceeds from issuance of common stock
|
|
|
100,304
|
|
|
|
140,249
|
|
|
|
197,558
|
|
Offering costs from issuance of common stock
|
|
|
(1,023
|
)
|
|
|
(1,505
|
)
|
|
|
(874
|
)
|
Dividends paid
|
|
|
(43,257
|
)
|
|
|
(24,915
|
)
|
|
|
(21,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities:
|
|
|
83,387
|
|
|
|
204,580
|
|
|
|
143,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Cash
|
|
|
9,387
|
|
|
|
555
|
|
|
|
|
|
Cash balance at beginning of year
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Balance at End of Year
|
|
$
|
9,942
|
|
|
$
|
555
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid For Interest
|
|
$
|
5,014
|
|
|
$
|
4,942
|
|
|
$
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of shares issued in connection with dividend
reinvestment plan
|
|
$
|
5,107
|
|
|
$
|
2,753
|
|
|
$
|
5,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
June 30,
2009 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Control Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring & Machine
|
|
South Carolina/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted common shares (7 total unrestricted common shares
issued and outstanding and 681.85 restricted common shares
issued and outstanding)
|
|
|
|
|
6
|
|
|
$
|
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Series A convertible preferred shares (7,192.6 total
preferred shares issued and outstanding)
|
|
|
|
|
6,142.6
|
|
|
|
6,057
|
|
|
|
|
|
|
|
0.0
|
%
|
Subordinated secured note Tranche B,11.50% plus
6.00% PIK, 4/01/2013(3),(4)
|
|
|
|
$
|
11,675
|
|
|
|
11,675
|
|
|
|
10,151
|
|
|
|
1.9
|
%
|
Senior secured note Tranche A,
10.50%,4/01/2013(3),(5)
|
|
|
|
$
|
21,487
|
|
|
|
21,487
|
|
|
|
21,487
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
39,219
|
|
|
|
31,638
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J Cladding LLC
|
|
Texas/Metal
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant, common units, expiring 3/30/2014 (1,000 total company
units outstanding)
|
|
|
|
|
400
|
|
|
|
580
|
|
|
|
3,825
|
|
|
|
0.7
|
%
|
Senior secured note, 14.00%, 3/30/2012(3),(6)
|
|
|
|
$
|
3,150
|
|
|
|
2,722
|
|
|
|
3,308
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
3,302
|
|
|
|
7,133
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change Clean Energy Holdings, Inc. (CCEHI)(7)
|
|
Maine/Biomass
Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCEHI common shares (1,000 total common shares issued and
outstanding)
|
|
|
|
|
1,000
|
|
|
|
2,530
|
|
|
|
2,530
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Solutions Holdings, Inc.(3),(8)
|
|
Texas/Gas
Gathering and
Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (100 total common shares outstanding)
|
|
|
|
|
100
|
|
|
|
5,003
|
|
|
|
55,187
|
|
|
|
10.4
|
%
|
Junior secured note, 18.00%, 12/23/2018
|
|
|
|
$
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
0.9
|
%
|
Senior secured note, 18.00%, 12/22/2018
|
|
|
|
$
|
25,000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
35,003
|
|
|
|
85,187
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Contract Services, Inc.(9)
|
|
North Carolina/
Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (100 total common shares outstanding)
|
|
|
|
|
49
|
|
|
$
|
679
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Series A preferred shares (10 total Series A preferred
shares outstanding)
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
Junior secured note, stated rate 7.00% plus 7.00% PIK plus 6.00%
default interest, in non-accrual status effective 10/09/2007,
past due
|
|
|
|
$
|
14,003
|
|
|
|
14,003
|
|
|
|
3,030
|
|
|
|
0.6
|
%
|
Senior secured note, stated rate 7.00% plus 7.00% PIK plus 6.00%
default interest, in non-accrual status effective 10/09/2007,
past due
|
|
|
|
$
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
0.1
|
%
|
Senior demand note, 15.00%, 6/30/2009(10)
|
|
|
|
$
|
1,170
|
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
16,652
|
|
|
|
5,000
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Iron Horse Coiled Tubing, Inc.
|
|
Alberta, Canada/
Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (2,231 total class A common shares
outstanding)
|
|
|
|
|
1,781
|
|
|
$
|
268
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Senior secured note, 15.00%, 12/31/2009
|
|
|
|
$
|
9,250
|
|
|
|
9,250
|
|
|
|
3,004
|
|
|
|
0.6
|
%
|
Bridge loan, 15.00% plus 3.00% PIK, 12/31/2009
|
|
|
|
$
|
9,826
|
|
|
|
9,826
|
|
|
|
9,602
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
19,344
|
|
|
|
12,606
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRG Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
(1,000 total common shares issued and outstanding)
|
|
|
|
|
800
|
|
|
|
2,317
|
|
|
|
19,294
|
|
|
|
3.6
|
%
|
Senior secured note, 16.50%, 8/31/2011(3),(11)
|
|
|
|
$
|
13,080
|
|
|
|
13,080
|
|
|
|
13,080
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
15,397
|
|
|
|
32,374
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V Industries, Inc.
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
(750,000 total common shares issued and outstanding)
|
|
|
|
|
545,107
|
|
|
|
5,086
|
|
|
|
12,267
|
|
|
|
2.3
|
%
|
Warrants, common shares, expiring 6/30/2017 (200,000 total
common shares outstanding)
|
|
|
|
|
200,000
|
|
|
|
1,682
|
|
|
|
4,500
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
6,768
|
|
|
|
16,767
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky/
Mining and Coal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yatesville Coal Holdings, Inc.(12)
|
|
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (1,000 total common shares outstanding)
|
|
|
|
|
1,000
|
|
|
|
427
|
|
|
|
|
|
|
|
0.0
|
%
|
Junior secured note, 15.72%, in non-accrual status effective
1/01/2009, matures 12/31/2010
|
|
|
|
$
|
38,463
|
|
|
|
38,463
|
|
|
|
3,097
|
|
|
|
0.6
|
%
|
Senior secured note, 15.72%, in non-accrual status effective
1/01/2009, matures 12/31/2010
|
|
|
|
$
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
48,890
|
|
|
|
13,097
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
|
187,105
|
|
|
|
206,332
|
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy Holdings LLC(13)
|
|
West Virginia/
Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Class A common units, expiring
2/13/2016
(86,843 total fully-diluted class A common units
outstanding)
|
|
|
|
|
6,065
|
|
|
$
|
176
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Warrants Class A common units, expiring
6/17/2018
(86,843 total fully-diluted class A common units
outstanding)
|
|
|
|
|
6,025
|
|
|
|
172
|
|
|
|
|
|
|
|
0.0
|
%
|
Warrants Class A common units, expiring
11/30/2018
(86,843 total fully-diluted class A common units
outstanding)
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
Series A preferred equity
(1,075 total series A preferred equity units outstanding)
|
|
|
|
|
200
|
|
|
|
82
|
|
|
|
|
|
|
|
0.0
|
%
|
Series B preferred equity
(794 total series B preferred equity units outstanding)
|
|
|
|
|
241
|
|
|
|
241
|
|
|
|
|
|
|
|
0.0
|
%
|
F-8
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Series C preferred equity
(500 total series C preferred equity units outstanding)
|
|
|
|
|
500
|
|
|
$
|
500
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Senior Secured Debt Tranche B, 14.00% plus 3.00% PIK plus
3.00% default interest, non-accrual status effective 11/01/2008,
past due
|
|
|
|
$
|
2,050
|
|
|
|
1,955
|
|
|
|
356
|
|
|
|
0.1
|
%
|
Senior Secured Debt Tranche A, 14.00% plus 3.00% PIK plus
3.00% default interest, non-accrual status effective 11/01/2008,
matures 1/31/2011
|
|
|
|
$
|
1,997
|
|
|
|
1,891
|
|
|
|
2,052
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
5,017
|
|
|
|
2,408
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotronic Neuro Network
|
|
Michigan/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (85,000 total preferred shares outstanding)(14)
|
|
|
|
|
9,925.455
|
|
|
|
2,300
|
|
|
|
2,839
|
|
|
|
0.5
|
%
|
Senior secured note, 11.50% plus 1.00% PIK, 2/21/2013(3),(15)
|
|
|
|
$
|
26,227
|
|
|
|
26,227
|
|
|
|
27,007
|
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
28,527
|
|
|
|
29,846
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
33,544
|
|
|
|
32,254
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliate Investments (less than 5.00% of
voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Gilsonite Company
|
|
Utah/Specialty
Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership interest units in AGC/PEP, LLC(16)
|
|
|
|
|
99.9999
|
%
|
|
|
1,031
|
|
|
|
3,851
|
|
|
|
0.7
|
%
|
Senior subordinated note, 12.00% plus 3.00% PIK, 3/14/2013(3)
|
|
|
|
$
|
14,783
|
|
|
|
14,783
|
|
|
|
15,073
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
15,814
|
|
|
|
18,924
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castro Cheese Company, Inc.(3)
|
|
Texas/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior secured note, 11.00% plus 2.00% PIK, 2/28/2013
|
|
|
|
$
|
7,538
|
|
|
$
|
7,413
|
|
|
$
|
7,637
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest Cherokee, LLC(17)
|
|
Tennessee/Oil
and Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalty Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
0.1
|
%
|
Senior secured note, 13.00%, in non-accrual status effective
4/01/2009 plus 4.00% default interest, past due(18)
|
|
|
|
$
|
10,200
|
|
|
|
10,191
|
|
|
|
6,855
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
10,191
|
|
|
|
7,420
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb Shops, Inc.(19)
|
|
Pennsylvania/
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 8.67%, 10/23/2014
|
|
|
|
$
|
15,000
|
|
|
|
14,623
|
|
|
|
6,272
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback Operating, LP
|
|
Oklahoma/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits interest, 15.00% payable on equity distributions(20)
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom Marine Services LLC(3),(21)
|
|
Louisiana/
Shipping
Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits interest, 22.50% payable on equity distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
0.0
|
%
|
F-9
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Subordinated secured note, 12.00% plus 4.00% PIK, 12/31/2011(22)
|
|
|
|
$
|
7,234
|
|
|
$
|
7,160
|
|
|
$
|
7,152
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
7,160
|
|
|
|
7,381
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M Oil & Gas, LLC(3),(21)
|
|
Texas/Oil and
Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits interest, 8.00% payable on equity distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
1,682
|
|
|
|
0.3
|
%
|
Senior secured note, 13.00%, 6/30/2010(23)
|
|
|
|
$
|
49,688
|
|
|
|
49,688
|
|
|
|
49,697
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
49,688
|
|
|
|
51,379
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC Systems LP (IEC)/
Advanced Rig Services LLC (ARS)(3),(24)
|
|
Texas/
Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$
|
21,411
|
|
|
|
21,411
|
|
|
|
21,839
|
|
|
|
4.1
|
%
|
ARS senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$
|
12,836
|
|
|
|
12,836
|
|
|
|
13,092
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
34,247
|
|
|
|
34,931
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick Healthcare, LLC
|
|
Arizona/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (79,000,000 total class A common units
outstanding)
|
|
|
|
|
1,250,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Preferred units (79,000,000 total preferred units outstanding)
|
|
|
|
|
1,250,000
|
|
|
|
1,252
|
|
|
|
1,300
|
|
|
|
0.2
|
%
|
Second lien debt, 12.00% plus 1.50% PIK, 4/30/2014(3)
|
|
|
|
$
|
12,691
|
|
|
|
12,691
|
|
|
|
12,816
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
13,943
|
|
|
|
14,116
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miller Petroleum, Inc.(25)
|
|
Tennessee/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants, common shares, expiring 5/04/2010 to 6/30/2014
(15,811,856 total common shares outstanding)
|
|
|
|
|
1,935,523
|
|
|
|
150
|
|
|
|
241
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless Manufacturing Co.(3)
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured note, 11.50% plus 3.50% PIK, 4/29/2013
|
|
|
|
$
|
20,000
|
|
|
|
20,000
|
|
|
|
20,400
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest Pharmaceuticals, Inc.(3),(26)
|
|
Alabama/
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 8.10%, 4/30/2015
|
|
|
|
$
|
12,000
|
|
|
|
11,949
|
|
|
|
11,452
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Management Corp.(3)
|
|
South Carolina/
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$
|
25,424
|
|
|
|
25,424
|
|
|
|
23,073
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco Products, Inc.(3),(27)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 8.67%, 6/22/2014
|
|
|
|
$
|
9,750
|
|
|
|
9,594
|
|
|
|
9,750
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shearers Foods, Inc.
|
|
Ohio/
Food Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership interest units in Mistral Chip Holdings, LLC
(45,300 total membership units outstanding)(28)
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
3,419
|
|
|
|
0.6
|
%
|
F-10
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Second lien debt, 14.00%, 10/31/2013(3)
|
|
|
|
$
|
18,000
|
|
|
$
|
18,000
|
|
|
$
|
18,360
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
21,779
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker Energy, LLC(29)
|
|
Ohio/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalty Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
2,918
|
|
|
|
0.6
|
%
|
Subordinated secured revolving credit facility,
12.00%, 12/01/2011(3),(30)
|
|
|
|
$
|
29,500
|
|
|
|
29,154
|
|
|
|
29,554
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
29,154
|
|
|
|
32,472
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TriZetto Group(3)
|
|
California/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated unsecured note, 12.00% plus 1.50% PIK, 10/01/2016
|
|
|
|
$
|
15,205
|
|
|
$
|
15,065
|
|
|
$
|
16,331
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek(3),(31)
|
|
Pennsylvania/
Technical
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 13.08%, 12/31/2013
|
|
|
|
$
|
11,500
|
|
|
|
11,360
|
|
|
|
11,730
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Resources Corp. and Wind River II Corp.(21)
|
|
Utah/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits interest, 5.00% payable on equity distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
0.0
|
%
|
Senior secured note, stated rate 13.00% plus 3.00% default
interest, in non-accrual status effective 12/01/2008, matures
7/31/2010(32)
|
|
|
|
$
|
15,000
|
|
|
|
15,000
|
|
|
|
12,644
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
12,836
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/Non-affiliate Investments
|
|
|
|
|
|
|
|
|
310,775
|
|
|
|
308,582
|
|
|
|
57.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
|
531,424
|
|
|
|
547,168
|
|
|
|
102.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money Market Funds Government
Portfolio (Class I)
|
|
|
|
|
94,752,972
|
|
|
|
94,753
|
|
|
|
94,753
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money Market Funds Government
Portfolio (Class I)(3)
|
|
|
|
|
3,982,278
|
|
|
|
3,982
|
|
|
|
3,982
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Money Market Funds
|
|
|
|
|
|
|
|
|
98,735
|
|
|
|
98,735
|
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
$
|
630,159
|
|
|
$
|
645,903
|
|
|
|
121.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Control Investments (25.00% or greater of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ajax Rolled Ring & Machine
|
|
South Carolina/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted common shares (7 total unrestricted common shares
issued and outstanding and 803.18 restricted common shares
issued and outstanding)
|
|
|
|
|
6
|
|
|
$
|
|
|
|
$
|
|
|
|
|
0.0
|
%
|
Series A convertible preferred shares (7,222.6 total
preferred shares issued and outstanding)
|
|
|
|
|
6,142.6
|
|
|
|
6,293
|
|
|
|
6,293
|
|
|
|
1.5
|
%
|
Subordinated secured note Tranche B,11.50% plus
6.00% PIK, 4/01/2013(3),(4)
|
|
|
|
$
|
11,500
|
|
|
|
11,500
|
|
|
|
11,500
|
|
|
|
2.6
|
%
|
Senior secured note Tranche A,
10.50%,4/01/2013(3),(5)
|
|
|
|
$
|
21,890
|
|
|
|
21,890
|
|
|
|
21,890
|
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
39,683
|
|
|
|
39,683
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&J Cladding LLC(3)
|
|
Texas/
Metal Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant, common units, expiring 3/30/2014
(600 total company units outstanding)
|
|
|
|
|
400
|
|
|
|
580
|
|
|
|
2,222
|
|
|
|
0.5
|
%
|
Senior secured note, 14.00%, 3/30/2012(6)
|
|
|
|
$
|
4,800
|
|
|
|
4,085
|
|
|
|
4,607
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
4,665
|
|
|
|
6,829
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Solutions Holdings, Inc.(8)
|
|
Texas/Gas
Gathering and
Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (100 total common shares outstanding)
|
|
|
|
|
100
|
|
|
|
5,221
|
|
|
|
41,542
|
|
|
|
9.7
|
%
|
Subordinated secured note, 18.00%, 12/22/2009(3)
|
|
|
|
$
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
25,221
|
|
|
|
61,542
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrated Contract Services, Inc.(9)
|
|
North Carolina/
Contracting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (100 total common shares outstanding)
|
|
|
|
|
49
|
|
|
|
491
|
|
|
|
|
|
|
|
0.0
|
%
|
Series A preferred shares (10 total Series A preferred
shares outstanding)
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
Junior secured note, 14.00%, 9/30/2010
|
|
|
|
$
|
14,003
|
|
|
|
14,003
|
|
|
|
3,030
|
|
|
|
0.7
|
%
|
Senior secured note, 14.00%, 9/30/2010
|
|
|
|
$
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
0.2
|
%
|
Senior demand note, 15.00%, 6/30/2009(10)
|
|
|
|
$
|
1,170
|
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
16,464
|
|
|
|
5,000
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron Horse Coiled Tubing, Inc.
|
|
Alberta, Canada/
Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (1,093 total common shares outstanding)
|
|
|
|
|
643
|
|
|
$
|
268
|
|
|
$
|
49
|
|
|
|
0.0
|
%
|
Warrants for common shares(33)
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
Senior secured note, 15.00%, 4/19/2009
|
|
|
|
$
|
9,250
|
|
|
|
9,094
|
|
|
|
9,073
|
|
|
|
2.1
|
%
|
Bridge loan, 15.00% plus 3.00% PIK, 12/11/2008
|
|
|
|
|
|
|
|
|
2,103
|
|
|
|
2,060
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
11,465
|
|
|
|
11,182
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
NRG Manufacturing, Inc.
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (1,000 total common shares issued and outstanding)
|
|
|
|
|
800
|
|
|
$
|
2,317
|
|
|
$
|
8,656
|
|
|
|
2.0
|
%
|
Senior secured note, 16.50%, 8/31/2011(3),(11)
|
|
|
|
$
|
13,080
|
|
|
|
13,080
|
|
|
|
13,080
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
15,397
|
|
|
|
21,736
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-V Industries, Inc.
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
(800,000 total common shares outstanding)
|
|
|
|
|
545,107
|
|
|
|
5,031
|
|
|
|
8,064
|
|
|
|
1.9
|
%
|
Warrants, common shares, expiring 6/30/2017
|
|
|
|
|
200,000
|
|
|
|
1,682
|
|
|
|
2,959
|
|
|
|
0.7
|
%
|
Senior secured note, 15.00%, 6/30/2017(3)
|
|
|
|
$
|
7,526
|
|
|
|
5,912
|
|
|
|
7,526
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
12,625
|
|
|
|
18,549
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worcester Energy Partners, Inc.(7)
|
|
Maine/
Biomass Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity ownership
|
|
|
|
|
|
|
|
|
457
|
|
|
|
1
|
|
|
|
0.0
|
%
|
Senior secured note, 12.50%, 12/31/2012
|
|
|
|
$
|
37,388
|
|
|
|
37,264
|
|
|
|
15,579
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
37,721
|
|
|
|
15,580
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yatesville Coal Holdings, Inc.(12)
|
|
Kentucky/
Mining and Coal
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (1,000 total common shares outstanding)
|
|
|
|
|
1,000
|
|
|
|
284
|
|
|
|
|
|
|
|
0.0
|
%
|
Junior secured note, 12.50%, 12/31/2010
|
|
|
|
$
|
30,136
|
|
|
|
30,136
|
|
|
|
15,726
|
|
|
|
3.7
|
%
|
Senior secured note, 12.50%, 12/31/2010
|
|
|
|
$
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
40,420
|
|
|
|
25,726
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
|
203,661
|
|
|
|
205,827
|
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments (5.00% to 24.99% of voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appalachian Energy Holdings LLC(3),(13)
|
|
West Virginia/
Construction
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Class A common units, expiring
2/13/2016
(49,753 total class A common units outstanding)
|
|
|
|
|
12,090
|
|
|
$
|
348
|
|
|
$
|
794
|
|
|
|
0.2
|
%
|
Series A preferred equity
(16,125 total series A preferred equity units outstanding)
|
|
|
|
|
3,000
|
|
|
|
72
|
|
|
|
162
|
|
|
|
0.0
|
%
|
Series B preferred equity
(794 total series B preferred equity units outstanding)
|
|
|
|
|
241
|
|
|
|
241
|
|
|
|
|
|
|
|
0.0
|
%
|
Senior Secured Debt Tranche A, 14.00% plus 3.00% PIK,
1/31/2011
|
|
|
|
$
|
3,003
|
|
|
|
3,003
|
|
|
|
3,003
|
|
|
|
0.7
|
%
|
Senior Secured Debt Tranche B, 14.00% plus 3.00% PIK,
05/01/2009
|
|
|
|
$
|
1,945
|
|
|
|
1,945
|
|
|
|
2,084
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
5,609
|
|
|
|
6,043
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
|
5,609
|
|
|
|
6,043
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliate Investments (less than 5.00% of
voting control)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Gilsonite Company
|
|
Utah/
Specialty Minerals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership interest units in AGC/PEP, LLC(16)
|
|
|
|
|
99.9999
|
%
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
|
0.2
|
%
|
Senior subordinated note, 12.00% plus 3.00%,3/14/2013(3)
|
|
|
|
$
|
14,632
|
|
|
|
14,632
|
|
|
|
14,632
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
15,632
|
|
|
|
15,632
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conquest Cherokee, LLC(3),(17),(18)
|
|
Tennessee/Oil and
Gas Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured note, 13.00%, 5/05/2009
|
|
|
|
$
|
10,200
|
|
|
|
10,125
|
|
|
|
9,923
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deb Shops, Inc.(3),(19)
|
|
Pennsylvania/
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 10.69%, 10/23/2014
|
|
|
|
$
|
15,000
|
|
|
|
14,577
|
|
|
|
13,428
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deep Down, Inc.(3)
|
|
Texas/
Production
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant, common shares, expiring 8/06/2012
(174,732,501 total common shares outstanding)
|
|
|
|
|
4,960,585
|
|
|
|
|
|
|
|
2,856
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamondback Operating, LP(3),(21)
|
|
Oklahoma/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured note, 12.00% plus 2.00% PIK, 8/28/2011
|
|
|
|
$
|
9,200
|
|
|
$
|
9,200
|
|
|
$
|
9,108
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freedom Marine Services LLC(3),(21),(22)
|
|
Louisiana/
Shipping Vessels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured note, 12.00% plus 4.00% PIK, 12/31/2011
|
|
|
|
$
|
6,948
|
|
|
|
6,850
|
|
|
|
6,805
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&M Oil & Gas, LLC(3),(21),(23)
|
|
Texas/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured note, 13.00%, 6/30/2010
|
|
|
|
$
|
50,500
|
|
|
|
50,500
|
|
|
|
50,500
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC Systems LP (IEC)/
Advanced Rig Services LLC (ARS)(3),(24)
|
|
Texas/
Oilfield
Fabrication
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IEC senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$
|
19,028
|
|
|
|
19,028
|
|
|
|
19,028
|
|
|
|
4.4
|
%
|
ARS senior secured note, 12.00% plus 3.00% PIK, 11/20/2012
|
|
|
|
$
|
5,825
|
|
|
|
5,825
|
|
|
|
5,825
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
24,853
|
|
|
|
24,853
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maverick Healthcare, LLC(3)
|
|
Arizona/
Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (78,100,000 total common units outstanding)
|
|
|
|
|
1,250,000
|
|
|
|
1,252
|
|
|
|
1,252
|
|
|
|
0.3
|
%
|
Preferred units (78,100,000 total preferred units outstanding)
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
Senior secured note, 12.00% plus 1.50% PIK, 10/13/2014
|
|
|
|
$
|
12,500
|
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
13,752
|
|
|
|
13,752
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
Par Value/
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Locale/
|
|
Shares/
|
|
|
|
|
|
Fair
|
|
|
Net
|
|
Portfolio Investments(1)
|
|
Industry
|
|
Ownership %
|
|
|
Cost
|
|
|
Value(2)
|
|
|
Assets
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Miller Petroleum, Inc.
|
|
Tennessee/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants, common shares, expiring 5/04/2010 to 3/31/2013
(14,566,856 total common shares outstanding)
|
|
|
|
|
1,571,191
|
|
|
$
|
150
|
|
|
$
|
111
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peerless Manufacturing Co.(3)
|
|
Texas/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured note, 11.50% plus 3.50% PIK, 4/30/2013
|
|
|
|
$
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualitest Pharmaceuticals, Inc.(3),(26)
|
|
Alabama/
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 12.45%, 4/30/2015
|
|
|
|
$
|
12,000
|
|
|
$
|
11,944
|
|
|
$
|
11,523
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Management Corp.(3)
|
|
South Carolina/
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated secured note, 12.00% plus 2.00% PIK, 6/29/2012
|
|
|
|
$
|
25,000
|
|
|
|
25,000
|
|
|
|
23,699
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resco Products, Inc.(3),(27)
|
|
Pennsylvania/
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 11.06%, 6/24/2014
|
|
|
|
$
|
9,750
|
|
|
|
9,574
|
|
|
|
9,574
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shearers Foods, Inc.
|
|
Ohio/Food
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mistral Chip Holdings, LLC membership unit
(45,300 total membership units outstanding)(28)
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
0.5
|
%
|
Second lien debt, 14.00%, 10/31/2013(3)
|
|
|
|
$
|
18,000
|
|
|
|
18,000
|
|
|
|
17,351
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
19,351
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stryker Energy, LLC(3),(29),(30)
|
|
Ohio/
Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated revolving credit facility, 12.00%, 11/30/2011
|
|
|
|
$
|
29,500
|
|
|
|
29,041
|
|
|
|
28,518
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitek(3),(31)
|
|
Pennsylvania/
Technical Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt, 12.75%, 12/27/2012
|
|
|
|
$
|
11,500
|
|
|
|
11,337
|
|
|
|
11,337
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind River Resources Corp. and Wind River II
Corp.(3),(21),(32)
|
|
Utah/Oil and Gas
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured note, 13.00%, 7/31/2009
|
|
|
|
$
|
15,000
|
|
|
|
15,000
|
|
|
|
14,690
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/Non-affiliate Investments
|
|
|
|
|
|
|
|
|
287,535
|
|
|
|
285,660
|
|
|
|
66.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
|
496,805
|
|
|
|
497,530
|
|
|
|
115.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money Market Funds Government
Portfolio (Class I)
|
|
|
|
|
25,954,531
|
|
|
|
25,954
|
|
|
|
25,954
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First American Funds, Inc. Prime Obligations Fund
(Class A)(3)
|
|
|
|
|
7,045,610
|
|
|
|
7,046
|
|
|
|
7,046
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Money Market Funds
|
|
|
|
|
|
|
|
|
33,000
|
|
|
|
33,000
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
$
|
529,805
|
|
|
$
|
530,530
|
|
|
|
123.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
Endnote
Explanations for the Consolidated Schedules of Investments as of
June 30, 2009 and June 30, 2008
|
|
|
(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 (see Note 2). |
|
|
|
(3) |
|
Security, or portion thereof, is held as collateral for the
credit facility with Rabobank Nederland (see Note 11). The
market values of these investments at June 30, 2009 and
June 30, 2008 were $434,069 and $376,463, respectively;
they represent 67.2% and 71.0% of total investments at fair
value, respectively. |
|
|
|
(4) |
|
Interest rate is the greater of 11.5% or
3-month
LIBOR plus 8.5%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
|
|
|
(5) |
|
Interest rate is the greater of 10.5% or
3-month
LIBOR plus 7.5%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
|
|
|
(6) |
|
Interest rate is the greater of 14.0% or
12-Month
LIBOR plus 7.5%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
|
|
|
(7) |
|
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 have determined that the impairment of both CCEI and CCEHI as
of June 30, 2009 is other than temporary and have recorded
a realized loss for the amount that the amortized cost exceeds
the fair value at June 30, 2009. Our Board of Directors set
the value of the remaining CCEHI investment at $2,530 at
June 30, 2009. |
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(8) |
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Gas Solutions Holdings, Inc. is a wholly-owned investment of us. |
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(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), |
F-16
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
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representing 100% ownership. VSA is a holding company for the
real property of Integrated Contract Services, Inc.
(ICS) purchased during the foreclosure process. |
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(10) |
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Loan is with THS an affiliate of ICS. |
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(11) |
|
Interest rate is the greater of 16.5% or
12-Month
LIBOR plus 11.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(12) |
|
On June 30, 2008, we consolidated our holdings in four coal
companies into Yatesville Coal Holdings, Inc.
(Yatesville), and consolidated the operations under
one management team. In the transaction, the debt that we held
of C&A Construction, Inc. (C&A), Genesis
Coal Corp. (Genesis), North Fork Collieries LLC
(North Fork) and Unity Virginia Holdings LLC
(Unity) were exchanged for newly issued debt from
Yatesville, and our ownership interests in C&A, E&L
Construction, Inc. (E&L), Whymore Coal Company
Inc. (Whymore), Genesis and North Fork were
exchanged for 100% of the equity of Yatesville. This
reorganization allows for a better utilization of the assets in
the consolidated group. |
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At June 30, 2009 and at June 30, 2008, Yatesville
owned 100% of the membership interest of North Fork. In
addition, Yatesville held a $8,062 and $5,721, respectively,
note receivable from North Fork as of those two respective dates. |
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At June 30, 2009 and at June 30, 2008, Yatesville
owned 87% and 75%, respectively, of the common stock of Genesis
and held a note receivable of $20,802 and $17,692, respectively,
as of those two respective dates. |
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Yatesville held a note receivable of $4,261 and $3,902,
respectively, from Unity at June 30, 2009 and at
June 30, 2008. |
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There are several entities involved in Yatesvilles
investment in Whymore at June 30, 2009 and at June 30,
2008. As of those two respective dates, Yatesville owned
10,000 shares of common stock or 100% of the equity and
held a $14,973 and $12,822, respectively, senior secured debt
receivable from C&A, which owns the equipment. Yatesville
owned 10,000 shares of common stock or 100% of the equity
of E&L, which leases the equipment from C&A, employs
the workers, is listed as the operator with the Commonwealth of
Kentucky, mines the coal, receives revenues and pays all
operating expenses. Yatesville owns 4,900 shares of common
stock or 49% of the equity of Whymore, which applies for and
holds permits on behalf of E&L. Yatesville also owned 4,285
Series A convertible preferred shares in each of C&A,
E&L and Whymore. Additionally, Yatesville retains an option
to purchase the remaining 51% of Whymore. Whymore and E&L
are guarantors under the C&A credit agreement with
Yatesville. |
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(13) |
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There are several entities involved in the Appalachian Energy
Holdings LLC (AEH) investment. We own warrants, the
exercise of which will permit us to purchase 15,215 units
of Class A common units of AEH at a nominal cost and in
near-immediate fashion. We own 200 units of Series A
preferred equity, 241 units of Series B preferred
equity, and 62.5 units of Series C preferred equity of
AEH. The senior secured notes are with C&S Operating LLC
and East Cumberland L.L.C., both operating companies owned by
AEH. |
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(14) |
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On a fully diluted basis represents, 11.677% of voting common
shares. |
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(15) |
|
Interest rate is the greater of 11.5% or
6-month
LIBOR plus 7.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(16) |
|
We own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,038 out of
a total of 65,232 shares of American Gilsonite Holding
Company which owns 100% of American Gilsonite Company. |
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(17) |
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In addition to the stated returns, we also hold overriding
royalty interests on which we receive payment based upon
operations of the borrower and net profits interest of 10.00% on
equity distributions which will be realized upon sale of the
borrower or a sale of the interests. |
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(18) |
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Interest rate is the greater of 13.0% or
12-Month
LIBOR plus 7.5% not to exceed 14.50%; rate reflected is as of
the reporting date June 30, 2009 or
June 30, 2008, as applicable. |
F-17
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED
SCHEDULES OF INVESTMENTS (Continued)
|
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(19) |
|
Interest rate is
3-Month
LIBOR plus 8.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(20) |
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In January 2009, our loan was repaid in full and we retained a
15.0% net profits interest payable on equity distributions. |
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(21) |
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In addition to the stated returns, we also hold net profits
interest which will be realized upon sale of the borrower or a
sale of the interests. |
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(22) |
|
Interest rate is the greater of 12.0% or
3-Month
LIBOR plus 6.11%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(23) |
|
Interest rate is the greater of 13.0% or
12-Month
LIBOR plus 7.5%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(24) |
|
Interest rate is the greater of 12.0% or
12-month
LIBOR plus 6.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(25) |
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Total common shares outstanding of 15,811,856 as of
March 11, 2009 from Miller Petroleum, Inc.s Quarterly
Report on
Form 10-Q
filed on March 16, 2009. |
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(26) |
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Interest rate is
3-Month
LIBOR plus 7.5%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(27) |
|
Interest rate is
3-Month
LIBOR plus 8.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(28) |
|
Mistral Chip Holdings, LLC owns 45,300 shares out of 50,500
total shares outstanding of Chip Holdings, Inc., the parent
company of Shearers Foods, Inc. |
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(29) |
|
In addition to the stated returns, we also hold overriding
royalty interests on which we receive payment based upon
operations of the borrower. |
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(30) |
|
Interest rate is the greater of 12.0% or
12-Month
LIBOR plus 7.0%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(31) |
|
As of June 30, 2009 and June 30, 2008, interest rate
is the greater of 13.08% and 12.75%, respectively, or
3-Month
LIBOR plus 7.25%; rate reflected is as of the reporting
date June 30, 2009 or June 30, 2008, as
applicable. |
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(32) |
|
Interest rate is the greater of 13.0% or
12-month
LIBOR plus 7.5% not to exceed 14.0%; rate reflected is as of the
reporting date June 30, 2009 or June 30,
2008, as applicable. |
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(33) |
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The number of these warrants which are exercisable is contingent
upon the length of time that passes before the bridge loan is
repaid, 224 shares on August 11, 2008, 340 additional
shares on October 11, 2008 and 574 additional shares on
December 11, 2008. |
See notes to consolidated financial statements.
F-18
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009
(In
thousands, except share and per share data)
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.
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Note 2.
|
Significant
Accounting Policies
|
The following are significant accounting policies consistently
applied by us:
Basis
of Presentation
The accompanying 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-K
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
F-19
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to exist when a company or individual possesses or has the right
to acquire within 60 days or less, a beneficial ownership
of 25% or more of the voting securities of an investee company.
Affiliated investments and affiliated companies are defined by a
lesser degree of influence and are deemed to exist through the
possession outright or via the right to acquire within
60 days or less, beneficial ownership of 5% or more of the
outstanding voting securities of another person.
Investments are recognized when we assume an obligation to
acquire a financial instrument and assume the risks for gains or
losses related to that instrument. Investments are derecognized
when we assume an obligation to sell a financial instrument and
forego the risks for gains or losses related to that instrument.
Specifically, we record all security transactions on a trade
date basis. Investments in other, non-security financial
instruments are recorded on the basis of subscription date or
redemption date, as applicable. Amounts for investments
recognized or derecognized but not yet settled are reported as
receivables for investments sold and payables for investments
purchased, respectively, in the Consolidated Statements of
Assets and Liabilities.
Investment
Valuation
Our Board of Directors has established procedures for the
valuation of our investment portfolio. These procedures are
detailed below.
Investments for which market quotations are readily available
are valued at such market quotations.
For most of our investments, market quotations are not
available. With respect to investments for which market
quotations are not readily available or when such market
quotations are deemed not to represent fair value, our Board of
Directors has approved a multi-step valuation process each
quarter, as described below:
(1) Each portfolio company or investment is reviewed by our
investment professionals with the independent valuation firm
engaged by our Board of Directors;
(2) the independent valuation firm conducts independent
appraisals and makes their own independent assessment;
(3) the audit committee of our Board of Directors reviews
and discusses the preliminary valuation 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.
Investments are valued utilizing a market approach, an income
approach, or both approaches, as appropriate. The market
approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses
valuation techniques to convert future amounts (for example,
cash flows or earnings) to a single present value amount
(discounted) calculated based on an appropriate discount rate.
The measurement is based on the net present value indicated by
current market expectations about those future amounts. In
following these approaches, the types of factors that we may
take into account in fair value pricing our investments include,
as relevant: available current market data, including relevant
and applicable market trading and transaction comparables,
applicable market yields and multiples, security covenants, call
protection provisions, information rights, the nature and
realizable value of any collateral, the portfolio companys
ability to make payments, its earnings and discounted cash
flows, the markets in which the portfolio company does business,
comparisons of financial ratios of peer companies that are
public, M&A comparables, the principal market and
enterprise values, among other factors.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 defines fair value,
F-20
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. This
statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim
periods within those years. We have adopted this statement on a
prospective basis beginning in the quarter ended
September 30, 2008. Adoption of this statement did not have
a material impact on our financial statements for the year ended
June 30, 2009.
FAS 157 classifies the inputs used to measure these fair
values into the following hierarchy:
Level 1: Quoted prices in active markets
for identical assets or liabilities, accessible by us at the
measurement date.
Level 2: Quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active,
or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the
asset or liability.
In all cases, the level in the fair value hierarchy within which
the fair value measurement in its entirety falls has been
determined based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific
to each investment. The changes to GAAP from the application of
FAS 157 relate to the definition of fair value, framework
for measuring fair value, and the expanded disclosures about
fair value measurements. FAS 157 applies to fair value
measurements already required or permitted by other standards.
In accordance with FAS 157, the fair value of our
investments is defined as the price that we would receive upon
selling an investment in an orderly transaction to an
independent buyer in the principal or most advantageous market
in which that investment is transacted.
In April 2009, FASB issued Staff Position
No. 157-4,
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
(FSP
FAS 157-4).
FSP
FAS 157-4
provides further clarification for the application of
FAS 157 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. FSP
FAS 157-4
is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of FSP
FAS 157-4
for the year ended June 30, 2009, 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 FAS 157.
Valuation
of Other Financial Assets and Financial
Liabilities
In February 2007, FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an
amendment of FASB Statement No. 115
(FAS 159). FAS 159 permits an entity to
elect fair value as the initial and subsequent measurement
attribute for many of assets and liabilities for which the fair
value option has been elected and similar assets and liabilities
measured using another measurement attribute. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those years. We have adopted this statement on
July 1, 2008 and have elected not to value some assets and
liabilities at fair value as would be permitted by FAS 159.
Revenue
Recognition
Realized gains or losses on the sale of investments are
calculated using the specific identification method.
Interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis.
Origination, closing
and/or
commitment fees associated with investments in portfolio
companies
F-21
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are accreted into interest income over the respective terms of
the applicable loans. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as
interest income.
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. Unpaid 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 managements judgment. Non-accrual
loans are restored to accrual status when past due principal and
interest is paid and in managements judgment, are likely
to remain current.
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.
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
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. During the quarter ended December 31, 2008,
we elected to retain a portion of our annual taxable income and
paid $533 for the excise tax with the filing of the return in
March 2009.
We adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented, and disclosed in the
financial statements. FIN 48 requires the evaluation of tax
positions taken or expected to be taken in the course of
preparing our tax returns to determine whether the tax positions
are more-likely-than-not of being sustained by the
applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or
expense in the current year. Adoption of FIN 48 was applied
to all open tax years as of July 1, 2007. The adoption of
FIN 48 did not have an effect on our net asset value,
financial condition or results of operations as there was no
liability for unrecognized tax benefits and no change to our
beginning net asset value. As of June 30, 2009 and for the
twelve months then ended, we did not have a liability for any
unrecognized tax benefits. Managements determinations
regarding FIN 48 may be subject to review and adjustment at
a later date based upon factors including, but not limited to,
an on-going analysis of tax laws, regulations and
interpretations thereof.
F-22
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dividends
and Distributions
Dividends and distributions to common stockholders are recorded
on the ex-dividend date. The amount, if any, to be paid as a
dividend is approved by our Board of Directors each quarter and
is generally based upon our managements 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 a method that
appropriates the effective interest method.
We record registration expenses related to shelf filings as
prepaid assets. These expenses consist principally of Securities
and Exchange Commission (SEC) registration, legal
and accounting fees incurred through June 30, 2009 that are
related to the shelf filings that will be charged to capital
upon the receipt of the capital or charged to expense if not
completed.
Guarantees
and Indemnification Agreements
We follow FASB Interpretation Number 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 elaborates on the
disclosure requirements of a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also requires a guarantor to
recognize, at the inception of a guarantee, for those guarantees
that are covered by FIN 45, the fair value of the
obligation undertaken in issuing certain guarantees. FIN 45
did not have a material effect on the financial statements.
Refer to Note 3, Note 7 and Note 10 for further
discussion of guarantees and indemnification agreements.
Per
Share Information
Net increase in net assets resulting from operations per common
share are calculated using the weighted average number of common
shares outstanding for the period presented. Diluted net
increase in net assets resulting from operations per share are
not presented as there are no potentially dilutive securities
outstanding.
Reclassifications
Certain reclassifications have been made in the presentation of
prior consolidated financial statements to conform to the
presentation as of and for the twelve months ended June 30,
2009.
Recent
Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141(R), Business
Combinations (FAS 141(R)).
FAS 141(R) establishes accounting principles and disclosure
requirements for all transactions in which a company obtains
control over another business. The standard is effective for
fiscal years beginning after December 15, 2008. Our
management does not believe that the adoption of FAS 141(R)
will have a material impact on our financial statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133 (FAS 161).
FAS 161 is intended to improve financial reporting for
derivative instruments by requiring enhanced disclosure that
enables investors to understand how and why the entity uses
derivatives, how derivatives are accounted for, and how
derivatives affect an entitys results of operations,
financial position, and cash flows. FAS 161 becomes
effective for fiscal years beginning after November 15,
2008; therefore, is applicable for our fiscal year beginning
July 1, 2009. Our management does not believe that the
adoption of FAS 161 will have a material impact on our
financial statements.
F-23
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles (FAS 162).
FAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities
that are presented in conformity with GAAP. This statement is
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. Our management
does not believe that the adoption of FAS 162 will have a
material impact on our financial statements.
In May 2009, the FASB issued Statement of Financial Accounting
Standards No. 165, Subsequent Events
(FAS 165). FAS 165 establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The standard, which
includes a new required disclosure of the date through which an
entity has evaluated subsequent events, is effective for interim
or annual periods ending after June 15, 2009. We evaluated
all events or transactions that occurred after June 30,
2009 up through September 11, 2009, the date we issued
these financial statements. Management has also evaluated all
events or transactions from September 12, 2009 through
October 20, 2009, and has updated Note 12 for any
additional transactions which have occurred, which are
unaudited. During these periods, we did not have any material
recognizable subsequent events other than those disclosed in
Note 12.
In June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 (FAS 168). FAS 168
provides for the FASB Accounting Standards Codification (the
Codification) to become the single official source
of authoritative, nongovernmental GAAP. The Codification did not
change GAAP but reorganizes the literature. FAS 168 is
effective for interim and annual periods ending after
September 15, 2009. Our management does not believe that
the adoption of FAS 168 will have a material impact on our
financial statements.
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Note 3.
|
Portfolio
Investments
|
At June 30, 2009, we had invested in 30 long-term portfolio
investments, which had an amortized cost of $531,424 and a fair
value of $547,168 and at June 30, 2008, we had invested in
29 long-term portfolio investments (including a net profits
interest in Charlevoix Energy Trading LLC), which had an
amortized cost of $496,805 and a fair value of $497,530.
As of June 30, 2009, we own controlling interests in Ajax
Rolled Ring & Machine (Ajax), C&J
Cladding, LLC (C&J), Change Clean Energy
Holdings, Inc. (CCEHI), Gas Solutions Holdings, Inc.
(GSHI), Integrated Contract Services, Inc.
(ICS), Iron Horse Coiled Tubing, Inc. (Iron
Horse), NRG Manufacturing, Inc. (NRG), R-V
Industries, Inc. (R-V), and Yatesville Coal
Holdings, Inc. (Yatesville). We also own an
affiliated interest in Appalachian Energy Holdings, LLC
(AEH) and Biotronic NeuroNetwork
(Biotronic).
F-24
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of our portfolio investments as of June 30,
2009 disaggregated into the three levels of the FAS 157
valuation hierarchy are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Securities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Investments at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
206,332
|
|
|
$
|
206,332
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
32,254
|
|
|
|
32,254
|
|
Non-control/Non-affiliate investments
|
|
|
|
|
|
|
|
|
|
|
308,582
|
|
|
|
308,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547,168
|
|
|
|
547,168
|
|
Investments in money market funds
|
|
|
|
|
|
|
98,735
|
|
|
|
|
|
|
|
98,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets reported at fair value
|
|
$
|
|
|
|
$
|
98,735
|
|
|
$
|
547,168
|
|
|
$
|
645,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate values of Level 3 portfolio investments
changed during the twelve months ended June 30, 2009 as
follows:
Change in Portfolio Valuations using Significant Unobservable
Inputs (Level 3)
|
|
|
|
|
Fair value at June 30, 2008
|
|
$
|
497,530
|
|
Total gains (losses) reported in the Consolidated Statement of
Operations:
|
|
|
|
|
Included in net investment income
|
|
|
|
|
Interest income accretion of original issue discount
on investments
|
|
|
2,399
|
|
Included in realized (loss) gain on investments
|
|
|
(39,078
|
)
|
Included in net change in unrealized appreciation (depreciation)
on investments
|
|
|
15,019
|
|
Payments for purchases of investments,
payment-in-kind
interest, and net profits interests
|
|
|
98,305
|
|
Proceeds from sale of investments and collection of investment
principal
|
|
|
(27,007
|
)
|
|
|
|
|
|
Fair value at June 30, 2009
|
|
$
|
547,168
|
|
|
|
|
|
|
The amount of net unrealized gain included in the results of
operations attributable to Level 3 assets still held at
June 30, 2009 and reported within the caption Net change in
unrealized appreciation/depreciation in the Consolidated
Statement of Operations:
|
|
$
|
19,397
|
|
|
|
|
|
|
At June 30, 2009, we determined that one of our
investments, Change Clean Energy Inc. (CCEI), was
other than temporarily impaired and recorded a realized loss
representing the amount by which the amortized cost exceeded the
fair value. At June 30, 2009, five loan investments were on
non-accrual status: AEH, Conquest Cherokee, LLC
(Conquest), ICS, Wind River Resources Corp. and Wind
River II Corp. (Wind River), and Yatesville. At
June 30, 2008, the loans extended to ICS were on
non-accrual status. The loan principal of these loans amounted
to $92,513 and $14,803 as of June 30, 2009, and
June 30, 2008, respectively. The fair values of these
investments represent approximately 7.3% and 0.9% of our net
assets as of June 30, 2009 and June 30, 2008,
respectively. For the years ended June 30, 2009,
June 30, 2008 and June 30, 2007, the income foregone
as a result of not accruing interest on non-accrual debt
investments amounted to $18,746, $3,449 and $1,270, respectively.
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 June 30, 2009 for fees associated with a legal
action, and GSHI has reimbursed us for the entire amount. The
$2,093 reimbursement is reflected as dividend income: control
investments in the Consolidated Statements of Operations with
$179, $118 and $178 reflected for the year ended June 30,
2009, June 30, 2008 and June 30,
F-25
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, respectively, and the remainder reflected in prior
periods. 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 years ended
June 30, 2009, June 30, 2008 and June 30, 2007,
such reimbursements totaled as $4,422, $4,589 and $2,578,
respectively.
The original cost basis of debt placements and equity securities
acquired, including follow-on investments for existing portfolio
companies, totaled $98,305, $311,947 and $167,255 during the
year ended June 30, 2009, June 30, 2008 and
June 30, 2007, respectively. Debt repayments and sales of
equity securities with a cost basis of approximately $66,084,
$143,434 and $36,458 were received during the year ended
June 30, 2009, June 30, 2008 and June 30, 2007,
respectively
|
|
Note 4.
|
Other
Investment Income
|
Other investment income consists of structuring fees, overriding
royalty interests, prepayment penalty on net profits interests,
settlement of net profits interests, deal deposits,
administrative agent fee, and other miscellaneous and sundry
cash receipts. Income from such sources was $14,762, $8,336 and
$4,444 for the years ended June 30, 2009, June 30,
2008 and June 30, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
Income Source
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Structuring fees
|
|
$
|
1,274
|
|
|
$
|
4,751
|
|
|
$
|
2,574
|
|
Overriding royalty interests
|
|
|
550
|
|
|
|
1,819
|
|
|
|
196
|
|
Prepayment penalty on net profits interests
|
|
|
|
|
|
|
1,659
|
|
|
|
986
|
|
Settlement of net profits interests
|
|
|
12,651
|
|
|
|
|
|
|
|
|
|
Deal deposit
|
|
|
62
|
|
|
|
49
|
|
|
|
688
|
|
Administrative agent fee
|
|
|
55
|
|
|
|
48
|
|
|
|
|
|
Miscellaneous
|
|
|
170
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investment Income
|
|
$
|
14,762
|
|
|
$
|
8,336
|
|
|
$
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Equity
Offerings and Related Expenses
|
During the year ended June 30, 2009, we issued
12,942,500 shares of our common stock through public
offerings, a registered direct offering, and through the
exercise of over-allotment options on the part of the
underwriters. Offering expenses were charged against paid-in
capital in excess of par. All underwriting fees and
F-26
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
offering expenses were borne by us. The proceeds raised, the
related underwriting fees, the offering expenses, and the prices
at which common stocks were issued since inception are detailed
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Proceeds
|
|
|
Underwriting
|
|
|
Offering
|
|
|
Offering
|
|
Issuances of Common Stock
|
|
Shares Issued
|
|
|
Raised
|
|
|
Fees
|
|
|
Expenses
|
|
|
Price
|
|
|
May 26, 2009 over-allotment
|
|
|
1,012,500
|
|
|
$
|
8,353
|
|
|
$
|
418
|
|
|
$
|
|
|
|
$
|
8.250
|
|
May 26, 2009
|
|
|
6,750,000
|
|
|
|
55,687
|
|
|
|
2,784
|
|
|
|
300
|
|
|
|
8.250
|
|
April 27, 2009 over-allotment
|
|
|
480,000
|
|
|
$
|
3,720
|
|
|
$
|
177
|
|
|
$
|
|
|
|
$
|
7.750
|
|
April 27, 2009
|
|
|
3,200,000
|
|
|
|
24,800
|
|
|
|
1,177
|
|
|
|
210
|
|
|
|
7.750
|
|
March 19, 2009
|
|
|
1,500,000
|
|
|
$
|
12,300
|
|
|
|
|
|
|
$
|
513
|
|
|
$
|
8.200
|
|
June 2, 2008
|
|
|
3,250,000
|
|
|
$
|
48,425
|
|
|
$
|
2,406
|
|
|
$
|
254
|
|
|
$
|
14.900
|
|
March 31, 2008
|
|
|
1,150,000
|
|
|
$
|
17,768
|
|
|
$
|
759
|
|
|
$
|
350
|
|
|
$
|
15.450
|
|
March 28, 2008
|
|
|
1,300,000
|
|
|
|
19,786
|
|
|
|
|
|
|
|
350
|
|
|
|
15.220
|
|
November 13, 2007 over-allotment
|
|
|
200,000
|
|
|
$
|
3,268
|
|
|
$
|
163
|
|
|
$
|
|
|
|
$
|
16.340
|
|
October 17, 2007
|
|
|
3,500,000
|
|
|
|
57,190
|
|
|
|
2,860
|
|
|
|
551
|
|
|
|
16.340
|
|
January 11, 2007 over-allotment
|
|
|
810,000
|
|
|
$
|
14,026
|
|
|
$
|
688
|
|
|
$
|
|
|
|
$
|
17.315
|
(1)
|
December 13, 2006
|
|
|
6,000,000
|
|
|
|
106,200
|
|
|
|
5,100
|
|
|
|
279
|
|
|
|
17.700
|
|
August 28, 2006 over-allotment
|
|
|
745,650
|
|
|
$
|
11,408
|
|
|
$
|
566
|
|
|
$
|
|
|
|
$
|
15.300
|
|
August 10, 2006
|
|
|
4,971,000
|
|
|
|
76,056
|
|
|
|
3,778
|
|
|
|
595
|
|
|
|
15.300
|
|
August 27, 2004 over-allotment
|
|
|
55,000
|
|
|
$
|
825
|
|
|
$
|
58
|
|
|
$
|
2
|
|
|
$
|
15.000
|
|
July 27, 2004
|
|
|
7,000,000
|
|
|
|
105,000
|
|
|
|
7,350
|
|
|
|
1,385
|
|
|
|
15.000
|
|
|
|
|
(1) |
|
We declared a dividend of $0.385 per share between offering and
over allotment dates. |
Our shareholders equity accounts at June 30, 2009 and
June 30, 2008 reflect cumulative shares issued as of those
respective dates. Our common stock has been issued through
public offerings, a registered direct offering, the exercise of
over-allotment options on the part of the underwriters and our
dividend reinvestment plan. When our common stock is issued, the
related offering expenses have been charged against paid-in
capital in excess of par. All underwriting fees and offering
expenses were borne by us.
On 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
June 30, 2009 pursuant to this plan.
|
|
Note 6.
|
Net
Increase in Net Assets per Common Share
|
The following information sets forth the computation of net
increase in net assets resulting from operations per common
share for the years ended June 30, 2009, 2008 and 2007,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
35,104
|
|
|
$
|
27,591
|
|
|
$
|
16,728
|
|
Weighted average common shares outstanding
|
|
|
31,559,905
|
|
|
|
23,626,642
|
|
|
|
15,724,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations per common
share
|
|
$
|
1.11
|
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Related
Party Agreements and Transactions
|
Investment
Advisory Agreement
We have entered into an investment advisory and management
agreement with Prospect Capital Management (the Investment
Advisory Agreement) under which the Investment Adviser,
subject to the overall supervision of our Board of Directors,
manages the day-to-day operations of, and provides investment
advisory services to, us. Under the terms of the Investment
Advisory Agreement, our Investment Adviser: (i) determines
the composition of our portfolio, the nature and timing of the
changes to our portfolio and the manner of implementing such
changes, (ii) identifies, evaluates and negotiates the
structure of the investments we make (including performing due
diligence on our prospective portfolio companies); and
(iii) closes and monitors investments we make.
Prospect Capital Managements services under the Investment
Advisory Agreement are not exclusive, and it is free to furnish
similar services to other entities so long as its services to us
are not impaired. For providing these services the Investment
Adviser receives a fee from us, consisting of two components: a
base management fee and an incentive fee. The base management
fee is calculated at an annual rate of 2.00% on our gross assets
(including amounts borrowed). For services currently rendered
under the Investment Advisory Agreement, the base management fee
is payable quarterly in arrears. The base management fee is
calculated based on the average value of our gross assets at the
end of the two most recently completed calendar quarters and
appropriately adjusted for any share issuances or repurchases
during the current calendar quarter.
The Investment Adviser had previously voluntarily agreed to
waive 0.5% of the base management fee if in the future the
average amount of our gross assets for each of the two most
recently completed calendar quarters at that time, appropriately
adjusted for any share issuances, repurchases or other
transactions during such quarters, exceeds $750,000, for that
portion of the average amount of our gross assets that exceeds
$750,000. The voluntary agreement by the Investment Adviser for
such waiver for each fiscal quarter after December 31, 2007
has been terminated by the Investment Adviser.
The total base management fees earned by and paid to Prospect
Capital Management for the years ended June 30, 2009,
June 30, 2008 and June 30, 2007 were $11,915, $8,921
and $5,445, respectively.
The incentive fee has two parts. The first part, the income
incentive fee, is calculated and payable quarterly in arrears
based on our pre-incentive fee net investment income for the
immediately preceding calendar quarter. For this purpose,
pre-incentive fee net investment income means interest income,
dividend income and any other income (including any other fees
(other than fees for providing managerial assistance), such as
commitment, origination, structuring, diligence and consulting
fees and other fees that we receive from portfolio companies)
accrued during the calendar quarter, minus our operating
expenses for the quarter (including the base management fee,
expenses payable under the Administration Agreement described
below, and any interest expense and dividends paid on any issued
and outstanding preferred stock, but excluding the incentive
fee). Pre-incentive fee net investment income includes, in the
case of investments with a deferred interest feature (such as
original issue discount, debt instruments with payment in kind
interest and zero coupon securities), accrued income that we
have not yet received in cash. Pre-incentive fee net investment
income does not include any realized capital gains, realized
capital losses or unrealized capital appreciation or
depreciation. Pre-incentive fee net investment income, expressed
as a rate of return on the value of our net assets at the end of
the immediately preceding calendar quarter, is compared to a
hurdle rate of 1.75% per quarter (7.00% annualized).
Previously, our Investment Adviser had voluntarily agreed that
for each fiscal quarter from January 1, 2005 to
March 31, 2007, the quarterly hurdle rate was to be equal
to the greater of (a) 1.75% and (b) a percentage equal
to the sum of 25.0% of the daily average of the quoted
treasury rate for each month in the immediately preceding
two quarters plus 0.50%. Quoted treasury rate means
the yield to maturity (calculated on a semi-annual bond
equivalent basis) at the time of computation for Five Year
U.S. Treasury notes with a constant maturity (as compiled
and published in the most recent Federal Reserve Statistical
Release H). These
F-28
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
calculations were to be appropriately prorated for any period of
less than three months and adjusted for any share issuances or
repurchases during the current quarter. The voluntary agreement
by the Investment Adviser that the hurdle rate be fluctuating
for each fiscal quarter after January 1, 2005 (as discussed
above) was terminated by the Investment Adviser as of the
June 30, 2007 quarter. The investment adviser had also
voluntarily agreed that, in the event it is paid an incentive
fee at a time when our common stock is trading at a price below
$15 per share for the immediately preceding 30 days (as
adjusted for stock splits, recapitalizations and other
transactions), it will cause the amount of such incentive fee
payment to be held in an escrow account by an independent third
party, subject to applicable regulations. The Investment Adviser
had further agreed that this amount may not be drawn upon by the
Investment Adviser or any affiliate or any other third party
until such time as the price of our common stock achieves an
average 30 day closing price of at least $15 per share. The
Investment Adviser also had voluntarily agreed to cause 30% of
any incentive fee that it is paid and that is not otherwise held
in escrow to be invested in shares of our common stock through
an independent trustee. Any sales of such stock were to comply
with any applicable six month holding period under
Section 16(b) of the Securities Act and all other
restrictions contained in any law or regulation, to the fullest
extent applicable to any such sale. These two voluntary
agreements by the Investment Adviser have been terminated by the
Investment Adviser for all incentive fees after
December 31, 2007.
The net investment income used to calculate this part of the
incentive fee is also included in the amount of the gross assets
used to calculate the 2.00% base management fee. We pay the
Investment Adviser an income incentive fee with respect to our
pre-incentive fee net investment income in each calendar quarter
as follows:
|
|
|
|
|
no incentive fee in any calendar quarter in which our
pre-incentive fee net investment income does not exceed the
hurdle rate;
|
|
|
|
|
|
100.00% of our pre-incentive fee net investment income with
respect to that portion of such pre-incentive fee net investment
income, if any, that exceeds the hurdle rate but is less than
125.00% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized assuming a 7.00% annualized hurdle
rate); and
|
|
|
|
|
|
20.00% of the amount of our pre-incentive fee net investment
income, if any, that exceeds 125.00% of the quarterly hurdle
rate in any calendar quarter (8.75% annualized assuming a 7.00%
annualized hurdle rate).
|
These calculations are appropriately prorated for any period of
less than three months and adjusted for any share issuances or
repurchases during the current quarter.
The second part of the incentive fee, the capital gains
incentive fee, is determined and payable in arrears as of the
end of each calendar year (or upon termination of the Investment
Advisory Agreement, as of the termination date), and equals
20.00% of our realized capital gains for the calendar year, if
any, computed net of all realized capital losses and unrealized
capital depreciation at the end of such year. In determining the
capital gains incentive fee payable to the Investment Adviser,
we calculate the aggregate realized capital gains, aggregate
realized capital losses and aggregate unrealized capital
depreciation, as applicable, with respect to each investment
that has been in its portfolio. For the purpose of this
calculation, an investment is defined as the total
of all rights and claims which maybe asserted against a
portfolio company arising from our participation in the debt,
equity, 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
F-29
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Income incentive fees totaling $14,790, $11,278 and $5,781 were
earned for the years ended June 30, 2009, June 30,
2008 and June 30, 2007, respectively. No capital gains
incentive fees were earned for years ended June 30, 2009,
June 30, 2008 and June 30, 2007.
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 years
ended June 30, 2009, 2008 and 2007, the reimbursement was
approximately $2,856, $2,139 and $532, 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 Administrations services under the Administration
Agreement or otherwise as administrator for us.
Prospect Administration previously engaged Vastardis
Fund Services LLC (Vastardis) to serve as our
sub-administrator to perform certain services required of
Prospect Administration. 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 administration services were
assumed by Prospect Administration effective September 14,
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 $846, $1,027,
and $505 of managerial assistance fees for the years ended
June 30, 2009, June 30, 2008, and June 30, 2007,
respectively, of which $60 and $380 remains on the consolidated
statement of assets and liabilities as of June 30, 2009,
and
F-30
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2008, respectively. These fees are paid to the
Administrator so we simultaneously accrue a payable to the
Administrator for the same amounts, which remain on the
consolidated statements of assets and liabilities.
|
|
Note 8.
|
Financial
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Per Share Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
14.55
|
|
|
$
|
15.04
|
|
|
$
|
15.31
|
|
|
$
|
14.59
|
|
|
$
|
(0.01
|
)
|
Costs related to the initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
(0.21
|
)
|
Costs related to the secondary public offering
|
|
|
|
|
|
|
(0.07
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.87
|
|
|
|
1.91
|
|
|
|
1.47
|
|
|
|
1.21
|
|
|
|
0.34
|
|
Realized (loss) gain
|
|
|
(1.24
|
)
|
|
|
(0.69
|
)
|
|
|
0.12
|
|
|
|
0.04
|
|
|
|
|
|
Net unrealized appreciation (depreciation)
|
|
|
0.48
|
|
|
|
(0.05
|
)
|
|
|
(0.52
|
)
|
|
|
0.58
|
|
|
|
0.90
|
|
Net (decrease) increase in net assets as a result of public
offering
|
|
|
(2.11
|
)
|
|
|
|
|
|
|
0.26
|
|
|
|
|
|
|
|
13.95
|
|
Dividends declared and paid
|
|
|
(1.15
|
)
|
|
|
(1.59
|
)
|
|
|
(1.54
|
)
|
|
|
(1.12
|
)
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
12.40
|
|
|
$
|
14.55
|
|
|
$
|
15.04
|
|
|
$
|
15.31
|
|
|
$
|
14.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value at end of period
|
|
$
|
9.20
|
|
|
$
|
13.18
|
|
|
$
|
17.47
|
|
|
$
|
16.99
|
|
|
$
|
12.60
|
|
Total return based on market value(2)
|
|
|
(22.04
|
)%
|
|
|
(15.90
|
)%
|
|
|
12.65
|
%
|
|
|
44.90
|
%
|
|
|
(13.46
|
)%
|
Total return based on net asset value(2)
|
|
|
(4.81
|
)%
|
|
|
7.84
|
%
|
|
|
7.62
|
%
|
|
|
12.76
|
%
|
|
|
7.40
|
%
|
Shares outstanding at end of period
|
|
|
42,943,084
|
|
|
|
29,520,379
|
|
|
|
19,949,065
|
|
|
|
7,069,873
|
|
|
|
7,055,100
|
|
Average weighted shares outstanding for period
|
|
|
31,559,905
|
|
|
|
23,626,642
|
|
|
|
15,724,095
|
|
|
|
7,056,846
|
|
|
|
7,055,100
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period (in thousands)
|
|
$
|
532,596
|
|
|
$
|
429,623
|
|
|
$
|
300,048
|
|
|
$
|
108,270
|
|
|
$
|
102,967
|
|
Annualized ratio of operating expenses to average net assets
|
|
|
9.03
|
%
|
|
|
9.62
|
%
|
|
|
7.36
|
%
|
|
|
8.19
|
%
|
|
|
5.52
|
%
|
Annualized ratio of net investment income to average net assets
|
|
|
13.14
|
%
|
|
|
12.66
|
%
|
|
|
9.71
|
%
|
|
|
7.90
|
%
|
|
|
8.50
|
%
|
|
|
|
(1) |
|
Financial highlights are based on weighted average shares. |
|
|
|
(2) |
|
Total return based on market value is based on the change in
market price per share between the opening and ending market
prices per share in each period and assumes that dividends are
reinvested in accordance with our dividend reinvestment plan.
Total return based on net asset value is based upon the change
in net asset value per share between the opening and ending net
asset values per share in each period and assumes that dividends
are reinvested in accordance with our dividend reinvestment plan. |
From time to time, we may become involved in various
investigations, claims and legal proceedings that arise in the
ordinary course of our business. These matters may relate to
intellectual property, employment, tax, regulation, contract or
other matters. The resolution of these matters as they arise
will be subject to various uncertainties and, even if such
claims are without merit, could result in the expenditure of
significant financial and managerial resources.
On December 6, 2004, Dallas Gas Partners, L.P.
(DGP) served us with a complaint filed
November 30, 2004 in the U.S. District for the
Southern District of Texas, Galveston Division. DGP alleges that
DGP was defrauded and that we breached our fiduciary duty to DGP
and tortiously interfered with DGPs contract to purchase
Gas Solutions, Ltd. (a subsidiary of our portfolio company,
GSHI) in connection with our alleged agreement in September 2004
to loan DGP funds with which DGP intended to buy Gas Solutions,
Ltd. for approximately $26,000. The complaint sought relief not
limited to $100,000. On November 30, 2005,
U.S. Magistrate Judge John R. Froeschner of the
U.S. District Court for the Southern District of Texas,
F-31
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Galveston Division, issued a recommendation that the court grant
our Motion for Summary Judgment dismissing all claims by DGP. On
February 21, 2006, U.S. District Judge Samuel Kent of
the U.S. District Court for the Southern District of Texas,
Galveston Division issued an order granting our Motion for
Summary Judgment dismissing all claims by DGP, against us. On
May 16, 2007, the Court also granted us summary judgment on
DGPs liability to us on our counterclaim for DGPs
breach of a release and covenant not to sue. On January 4,
2008, the Court, Judge Melinda Harmon presiding, granted our
motion to dismiss all DGPs claims asserted against certain
of our officers and affiliates. On August 20, 2008, Judge
Harmon entered a Final Judgment dismissing all of DGPs
claims. DGP appealed to the U.S. Court of Appeals for the
Fifth Circuit, which affirmed the Final Judgment on
June 24, 2009. DGP has moved for rehearing. Our damage
claims against DGP remain pending.
In May 2006, based in part on unfavorable due diligence and the
absence of investment committee approval, we declined to extend
a loan for $10,000 to a potential borrower
(plaintiff). Plaintiff was subsequently sued by its
own attorney in a local Texas court for plaintiffs failure
to pay fees owed to its attorney. In December 2006, plaintiff
filed a cross-action against us and certain affiliates (the
defendants) in the same local Texas court, alleging,
among other things, tortuous interference with contract and
fraud. We petitioned the United States District Court for the
Southern District of New York (the District Court)
to compel arbitration and to enjoin the Texas action. In
February 2007, our motions were granted. Plaintiff appealed that
decision. On July 24, 2008, the Second Circuit Court of
Appeals affirmed the judgment of the District Court. The
arbitration commenced in July 2007 and concluded in late
November 2007. Post-hearing briefings were completed in February
2008. On April 14, 2008, the arbitrator rendered an award
in our favor, rejecting all of plaintiffs claims. On
April 18, 2008, we filed a petition before the District
Court to confirm the award. On October 8, 2008, the
District Court granted the Companys petition to confirm
the award, confirmed the awards and subsequently entered
judgment thereon in favor of the Company in the amount of
$2,288. After filing a defective notice of appeal to the United
States Court of Appeals for the Second Circuit on
November 5, 2008, plaintiffs counsel resubmitted a
new notice of appeal on January 9, 2009. The plaintiff
subsequently requested that the Company agree to stipulate to
the withdrawal of plaintiffs appeal to the Second Circuit.
Such a stipulation was filed with the Second Circuit on or about
April 14, 2009. Based on this stipulation, the Second
Circuit issued a mandate terminating the appeal, which was
transmitted to the District Court on April 23, 2009.
Post-judgment discovery against plaintiff is continuing and we
have filed a motion for sanctions against plaintiffs
counsel which is scheduled for argument on October 5, 2009.
|
|
Note 10.
|
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). Until November 14, 2008, interest on the
Rabobank Facility was charged at LIBOR plus 175 basis
points; thereafter, under the terms of a commitment letter with
Rabobank to arrange and structure a new rated credit facility,
we agreed to an immediate increase in the current borrowing rate
on the Rabobank Facility to LIBOR plus 250 basis points.
Additionally, Rabobank charged a fee on the unused portion of
the facility. This fee is assessed at the rate of
37.5 basis points per annum of the amount of that unused
portion.
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,
includes an accordion feature which allows the Syndicated
Facility to accept up to an aggregate total of $250,000 of
commitments for which we continue to solicit additional
commitments from other lenders for the additional $75,000. The
revolving period extends through June 24, 2010, with an
additional one year amortization period thereafter whereby all
principal, interest and fee payments received in conjunction
with collateral pledged to the Syndicated Facility, less a
monthly servicing fee payable to us, are required to be
F-32
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
used to repay outstanding borrowings under the Syndicated
Facility. Any remaining outstanding borrowings would be due and
payable on the commitment termination date, which is currently
June 24, 2011.
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 June 30, 2009, we were in
compliance with the applicable covenants.
Interest on borrowings under the credit facility is one-month
LIBOR plus 400 basis points, subject to a minimum Libor
floor of 200 basis points. Additionally, the banks charge a
fee on the unused portion of the credit facility equal to
100 basis points. As of June 30, 2009, we had $124,800
outstanding under our credit facility. As of June 30, 2009,
$946 was available to us for borrowing under our credit
facility. 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 June 30,
2009, the investments used as collateral for the Syndicated
Facility had an aggregate market value of $434,069, which
represents 81.5% of net assets.
In connection with the origination and amendment of the
Syndicated Facility, we incurred approximately $6.3 million
of fees which are being amortized over the term of the facility.
|
|
Note 11.
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized
|
|
|
Net Increase (Decrease)
|
|
|
|
Investment Income
|
|
|
Net Investment Income
|
|
|
Gains (Losses)
|
|
|
in Net Assets from Operations
|
|
Quarter Ended
|
|
Total
|
|
|
Per Share(1)
|
|
|
Total
|
|
|
Per Share(1)
|
|
|
Total
|
|
|
Per Share(1)
|
|
|
Total
|
|
|
Per Share(1)
|
|
|
September 30, 2006
|
|
$
|
6,432
|
|
|
$
|
0.65
|
|
|
$
|
3,274
|
|
|
$
|
0.33
|
|
|
$
|
690
|
|
|
$
|
0.07
|
|
|
$
|
3,964
|
|
|
$
|
0.40
|
|
December 31, 2006
|
|
|
8,171
|
|
|
|
0.60
|
|
|
|
4,493
|
|
|
|
0.33
|
|
|
|
(1,553
|
)
|
|
|
(0.11
|
)
|
|
|
2,940
|
|
|
|
0.22
|
|
March 31, 2007
|
|
|
12,069
|
|
|
|
0.61
|
|
|
|
7,015
|
|
|
|
0.36
|
|
|
|
(2,039
|
)
|
|
|
(0.10
|
)
|
|
|
4,976
|
|
|
|
0.26
|
|
June 30, 2007
|
|
|
14,009
|
|
|
|
0.70
|
|
|
|
8,349
|
|
|
|
0.42
|
|
|
|
(3,501
|
)
|
|
|
(0.18
|
)
|
|
|
4,848
|
|
|
|
0.24
|
|
September 30, 2007
|
|
|
15,391
|
|
|
|
0.77
|
|
|
|
7,865
|
|
|
|
0.39
|
|
|
|
685
|
|
|
|
0.04
|
|
|
|
8,550
|
|
|
|
0.43
|
|
December 31, 2007
|
|
|
18,563
|
|
|
|
0.80
|
|
|
|
10,660
|
|
|
|
0.46
|
|
|
|
(14,346
|
)
|
|
|
(0.62
|
)
|
|
|
(3,686
|
)
|
|
|
(0.16
|
)
|
March 31, 2008
|
|
|
22,000
|
|
|
|
0.92
|
|
|
|
12,919
|
|
|
|
0.54
|
|
|
|
(14,178
|
)
|
|
|
(0.59
|
)
|
|
|
(1,259
|
)
|
|
|
(0.05
|
)
|
June 30, 2008
|
|
|
23,448
|
|
|
|
0.85
|
|
|
|
13,669
|
|
|
|
0.50
|
|
|
|
10,317
|
|
|
|
0.38
|
|
|
|
23,986
|
|
|
|
0.88
|
|
September 30, 2008(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
|
)
|
|
|
|
(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. See Note 4. |
|
|
Note 12.
|
Subsequent
Events
|
On July 6, 2009, and July 8, 2009, we paid down
$50,500 and $74,300 of our revolving credit facility,
respectively, reducing our outstanding borrowing to zero.
F-33
PROSPECT
CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 7, 2009, we closed a public offering of
5,175,000 shares of our common stock (including the
exercise of over-allotment options of our underwriters). The net
proceeds to us were approximately $44,046 after deducting
estimated offering expenses.
On July 20, 2009, we purchased 297,274 shares of our
common stock in connection with the dividend reinvestment plan.
On August 3, 2009, we announced that we had entered into a
definitive agreement to acquire Patriot Capital Funding, Inc.
(NASDAQ: PCAP) (Patriot) for approximately $197,000
comprised of our common stock and cash to repay all Patriot
debt, anticipated to be $110,500, when the acquisition closes.
Our common shares will be exchanged at a ratio of approximately
0.3992 for each Patriot share, or 8,616,433 shares of our
common stock for 21,584,251 Patriot shares, with such exchange
ratio decreased for any tax distributions Patriot may declare
before closing. In return, we will acquire assets with an
amortized cost of approximately $311,000 for approximately
$196,000, based on an estimate of our common stock price of $10
per share and the anticipated debt outstanding at the closing,
the value of either may change prior to the closing. We, in
conjunction with an independent valuation agent, have determined
that the fair value of the assets is approximate to the
anticipated purchase price and do not anticipate recording any
material gain on the consummation of the transaction.
On August 20, 2009, we issued 3,449,686 shares at
$8.50 per share in a private stock offering. The net proceeds to
us were approximately $29,205 after deducting legal and advisory
fees. 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. Under the terms and conditions of the registration
rights agreement, we will use our reasonable best efforts to
file with the SEC within sixty (60) days a post-effective
amendment to the registration statement on
Form N-2
and will also use our reasonable best efforts to cause such
post-effective amendment to be declared effective by the SEC
within one hundred twenty (120) days. Under the
registration rights agreement, the Corporation may be obligated
to make liquidated damages payments to holders upon certain
events.
On August 31, 2009, C&J repaid the $3,150 loan
receivable to us and we received an additional 5% prepayment
penalty totaling $158. We continue to hold warrants for common
units in this investment.
On September 4, 2009, Peerless Manufacturing Co. repaid the
$20,000 loan receivable to us.
On September 24, 2009, we issued 2,807,111 shares at
$9.00 per share in a private stock offering. The net proceeds to
us were approximately $24,423 after deducting estimated legal
and advisory fees. 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. Under the terms and conditions of the registration
rights agreement, we will use our reasonable best efforts to
file with the SEC within sixty (60) days a post-effective
amendment to the registration statement on
Form N-2
and will also use our reasonable best efforts to cause such
post-effective amendment to be declared effective by the SEC
within one hundred twenty (120) days. Under the
registration rights agreement, the Corporation may be obligated
to make liquidated damages payments to holders upon certain
events.
On September 28, 2009, we announced the declaration of a
cash distribution of $0.4075 per share to holders of record on
October 8, 2009 to be paid on October 19, 2009.
On September 29, 2009, we announced a $20,000 increase in
total commitments on our revolving credit facility, increasing
the facility size from $175,000 to $195,000.
F-34
PATRIOT
CAPITAL FUNDING, INC.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments (cost of
$227,017,180 2009, $269,577,008 2008)
|
|
$
|
212,853,296
|
|
|
$
|
240,486,620
|
|
Affiliate investments (cost of $52,239,570 2009,
$53,129,533 2008)
|
|
|
47,373,445
|
|
|
|
51,457,082
|
|
Control investments (cost of $65,124,177 2009,
$43,192,484 2008)
|
|
|
23,702,496
|
|
|
|
30,427,046
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
283,929,237
|
|
|
|
322,370,748
|
|
Cash and cash equivalents
|
|
|
8,149,781
|
|
|
|
6,449,454
|
|
Restricted cash
|
|
|
7,828,784
|
|
|
|
22,155,073
|
|
Interest receivable
|
|
|
1,151,347
|
|
|
|
1,390,285
|
|
Other assets
|
|
|
1,481,020
|
|
|
|
1,897,086
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
302,540,169
|
|
|
$
|
354,262,646
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
137,365,363
|
|
|
$
|
162,600,000
|
|
Interest payable
|
|
|
847,164
|
|
|
|
514,125
|
|
Dividends payable
|
|
|
|
|
|
|
5,253,709
|
|
Accounts payable, accrued expenses and other
|
|
|
3,831,998
|
|
|
|
5,777,642
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
142,044,525
|
|
|
|
174,145,476
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 49,000,000 shares
authorized; 20,950,501 and 20,827,334 shares issued and
outstanding at June 30, 2009, and December 31, 2008,
respectively
|
|
|
209,506
|
|
|
|
208,274
|
|
Paid-in capital
|
|
|
235,163,868
|
|
|
|
234,385,063
|
|
Accumulated net investment income (loss)
|
|
|
3,949,409
|
|
|
|
(1,912,061
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(1,758,877
|
)
|
Net realized loss on investments
|
|
|
(16,067,426
|
)
|
|
|
(4,053,953
|
)
|
Net unrealized depreciation on interest rate swaps
|
|
|
(2,235,647
|
)
|
|
|
(3,097,384
|
)
|
Net unrealized depreciation on investments
|
|
|
(60,524,066
|
)
|
|
|
(43,653,892
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
160,495,644
|
|
|
|
180,117,170
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
302,540,169
|
|
|
$
|
354,262,646
|
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER COMMON SHARE
|
|
$
|
7.66
|
|
|
$
|
8.65
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-35
PATRIOT
CAPITAL FUNDING, INC.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
$
|
6,248,628
|
|
|
$
|
7,133,671
|
|
|
$
|
12,439,390
|
|
|
$
|
15,432,004
|
|
Affiliate investments
|
|
|
1,407,606
|
|
|
|
2,498,499
|
|
|
|
2,739,165
|
|
|
|
5,012,922
|
|
Control investments
|
|
|
113,447
|
|
|
|
499,659
|
|
|
|
950,077
|
|
|
|
678,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
7,769,681
|
|
|
|
10,131,829
|
|
|
|
16,128,632
|
|
|
|
21,123,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
|
137,100
|
|
|
|
69,389
|
|
|
|
247,817
|
|
|
|
238,086
|
|
Affiliate investments
|
|
|
116,835
|
|
|
|
37,787
|
|
|
|
138,723
|
|
|
|
76,448
|
|
Control investments
|
|
|
33,613
|
|
|
|
35,000
|
|
|
|
68,158
|
|
|
|
41,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
287,548
|
|
|
|
142,176
|
|
|
|
454,698
|
|
|
|
355,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
|
|
|
|
|
242,388
|
|
|
|
8,804
|
|
|
|
282,243
|
|
Control investments
|
|
|
|
|
|
|
138,026
|
|
|
|
|
|
|
|
138,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investment income
|
|
|
|
|
|
|
380,414
|
|
|
|
8,804
|
|
|
|
420,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
8,057,229
|
|
|
|
10,654,419
|
|
|
|
16,592,134
|
|
|
|
21,899,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
838,840
|
|
|
|
1,107,324
|
|
|
|
1,759,961
|
|
|
|
2,605,499
|
|
Interest expense
|
|
|
2,777,370
|
|
|
|
1,925,230
|
|
|
|
4,363,807
|
|
|
|
3,984,753
|
|
Professional fees
|
|
|
1,017,706
|
|
|
|
408,204
|
|
|
|
1,346,626
|
|
|
|
670,731
|
|
General and administrative expense
|
|
|
920,700
|
|
|
|
794,963
|
|
|
|
1,501,394
|
|
|
|
1,433,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
5,554,616
|
|
|
|
4,235,721
|
|
|
|
8,971,788
|
|
|
|
8,694,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
2,502,613
|
|
|
|
6,418,698
|
|
|
|
7,620,346
|
|
|
|
13,204,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REALIZED GAIN (LOSS) AND NET UNREALIZED APPRECIATION
(DEPRECIATION)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on investments
non-control/non-affiliate
|
|
|
(412,709
|
)
|
|
|
5,783
|
|
|
|
(412,709
|
)
|
|
|
(83,767
|
)
|
Net realized loss on investments control
|
|
|
|
|
|
|
(350,000
|
)
|
|
|
(11,600,764
|
)
|
|
|
(350,000
|
)
|
Net unrealized depreciation on investments
non-control/non-affiliate
|
|
|
(4,966,838
|
)
|
|
|
(2,218,615
|
)
|
|
|
(4,957,308
|
)
|
|
|
(8,629,899
|
)
|
Net unrealized depreciation on investments affiliate
|
|
|
(1,682,348
|
)
|
|
|
(3,070,018
|
)
|
|
|
(3,193,649
|
)
|
|
|
(5,662,008
|
)
|
Net unrealized appreciation (depreciation) on
investments control
|
|
|
(6,064,547
|
)
|
|
|
1,920,398
|
|
|
|
(8,719,217
|
)
|
|
|
1,072,398
|
|
Net unrealized appreciation on interest rate swaps
|
|
|
678,888
|
|
|
|
969,634
|
|
|
|
861,737
|
|
|
|
216,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
|
|
|
(12,447,554
|
)
|
|
|
(2,742,818
|
)
|
|
|
(28,021,910
|
)
|
|
|
(13,436,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(9,944,941
|
)
|
|
$
|
3,675,880
|
|
|
$
|
(20,401,564
|
)
|
|
$
|
(231,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted
|
|
$
|
(0.47
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.97
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
20,950,501
|
|
|
|
20,693,337
|
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-36
PATRIOT
CAPITAL FUNDING, INC.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
7,620,346
|
|
|
$
|
13,204,598
|
|
Net realized loss on investments
|
|
|
(12,013,473
|
)
|
|
|
(433,767
|
)
|
Net unrealized depreciation on investments
|
|
|
(16,870,174
|
)
|
|
|
(13,219,509
|
)
|
Net unrealized appreciation on interest rate swaps
|
|
|
861,737
|
|
|
|
216,783
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from operations
|
|
|
(20,401,564
|
)
|
|
|
(231,895
|
)
|
|
|
|
|
|
|
|
|
|
Stockholder transactions:
|
|
|
|
|
|
|
|
|
Distributions to stockholders from net investment income
|
|
|
|
|
|
|
(13,204,598
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(441,872
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from stockholder distributions
|
|
|
|
|
|
|
(13,646,470
|
)
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
Common stock listing fees
|
|
|
|
|
|
|
(23,585
|
)
|
Issuance of common stock under dividend reinvestment plan
|
|
|
359,500
|
|
|
|
540,064
|
|
Stock option compensation
|
|
|
420,538
|
|
|
|
385,828
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
780,038
|
|
|
|
902,307
|
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets
|
|
|
(19,621,526
|
)
|
|
|
(12,976,058
|
)
|
Net assets at beginning of period
|
|
|
180,117,170
|
|
|
|
221,597,684
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
160,495,644
|
|
|
$
|
208,621,626
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$
|
7.66
|
|
|
$
|
10.08
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-37
PATRIOT
CAPITAL FUNDING, INC.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,401,564
|
)
|
|
$
|
(231,895
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
328,351
|
|
|
|
268,963
|
|
Change in interest receivable
|
|
|
238,938
|
|
|
|
401,391
|
|
Realized loss on sale of investments
|
|
|
12,013,473
|
|
|
|
433,767
|
|
Unrealized depreciation on investments
|
|
|
16,870,174
|
|
|
|
13,219,509
|
|
Unrealized appreciation on interest rate swaps
|
|
|
(861,737
|
)
|
|
|
(216,783
|
)
|
Payment-in-kind
interest and dividends
|
|
|
(2,218,782
|
)
|
|
|
(2,899,860
|
)
|
Stock-based compensation expense
|
|
|
420,538
|
|
|
|
385,828
|
|
Change in unearned income
|
|
|
(443,572
|
)
|
|
|
(633,242
|
)
|
Change in interest payable
|
|
|
333,039
|
|
|
|
(353,126
|
)
|
Change in other assets
|
|
|
87,716
|
|
|
|
(17,370
|
)
|
Change in accounts payable, accrued expenses and other
|
|
|
(1,083,907
|
)
|
|
|
(1,713,757
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,282,667
|
|
|
|
8,643,425
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Funded investments
|
|
|
(10,273,464
|
)
|
|
|
(9,691,406
|
)
|
Principal repayments on investments
|
|
|
21,116,671
|
|
|
|
51,532,552
|
|
Proceeds from sale of investments
|
|
|
1,377,011
|
|
|
|
10,353,733
|
|
Purchases of furniture and equipment
|
|
|
|
|
|
|
(6,295
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
12,220,218
|
|
|
|
52,188,584
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
7,500,000
|
|
|
|
9,052,500
|
|
Repayments on borrowings
|
|
|
(32,734,637
|
)
|
|
|
(57,852,500
|
)
|
Common stock listing fees
|
|
|
|
|
|
|
(23,585
|
)
|
Dividends paid
|
|
|
(4,894,210
|
)
|
|
|
(13,089,236
|
)
|
Deferred offering costs
|
|
|
|
|
|
|
(98,860
|
)
|
Deferred financing costs
|
|
|
|
|
|
|
(1,030,972
|
)
|
Decrease in restricted cash
|
|
|
14,326,289
|
|
|
|
2,523,926
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(15,802,558
|
)
|
|
|
(60,518,727
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,700,327
|
|
|
|
313,282
|
|
CASH AND CASH EQUIVALENTS AT:
|
|
|
|
|
|
|
|
|
Beginning of Period
|
|
|
6,449,454
|
|
|
|
789,451
|
|
|
|
|
|
|
|
|
|
|
End of Period
|
|
$
|
8,149,781
|
|
|
$
|
1,102,733
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,767,312
|
|
|
$
|
4,337,879
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
|
$
|
|
|
|
$
|
5,159,567
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends reinvested in common stock
|
|
$
|
359,500
|
|
|
$
|
540,064
|
|
Dividends declared but not paid
|
|
|
|
|
|
|
6,831,820
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC(5) (Machinery)
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit (5.3%, Due 2/12)(3)
|
|
$
|
4,000,000
|
|
|
$
|
3,955,707
|
|
|
$
|
3,955,707
|
|
|
|
|
|
Senior Secured Term
Loan A (6.0%, Due 2/12)(3)
|
|
|
8,085,938
|
|
|
|
8,019,598
|
|
|
|
411,398
|
|
|
|
|
|
Senior Subordinated Debt (22.0%, Due 8/12)(2)
|
|
|
7,731,663
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note (8.0%, Due 2/13)(2)
|
|
|
157,683
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
Membership Interest (1,250,000 units)(4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
Encore Legal Solutions, Inc. (Printing & Publishing)
|
|
Legal document management services
|
|
Junior Secured Term
Loan A (11.0%, Due 12/10)(2)(3)
|
|
|
4,082,915
|
|
|
|
4,020,456
|
|
|
|
3,081,250
|
|
|
|
|
|
Junior Secured Term
Loan B (14.0%, Due 12/10)(2)(3)
|
|
|
7,644,318
|
|
|
|
7,390,687
|
|
|
|
|
|
|
|
|
|
Common Stock (20,000 shares)(4)
|
|
|
|
|
|
|
5,159,567
|
|
|
|
|
|
|
|
Fischbein, LLC (Machinery)
|
|
Designer and manufacturer of packaging equipment
|
|
Senior Subordinated Debt (16.5%, Due 5/13)(2)(3)
|
|
|
3,572,977
|
|
|
|
3,553,859
|
|
|
|
3,541,760
|
|
|
|
|
|
Membership Interest Class A (2,800,000 units)(4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
2,984,400
|
|
|
|
L.A. Spas, Inc.
(Chemicals, Plastics &
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit (8.8%, Due 12/09)(3)
|
|
|
1,175,000
|
|
|
|
1,175,000
|
|
|
|
|
|
Rubber)
|
|
|
|
Senior Secured Term
Loan (8.8%, Due 12/09)(3)
|
|
|
4,165,430
|
|
|
|
4,092,364
|
|
|
|
|
|
|
|
|
|
Charge-off of cost of impaired loan(7)
|
|
|
|
|
|
|
(3,693,230
|
)
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt (17.5%, Due 1/10)(2)(3)
|
|
|
8,132,897
|
|
|
|
7,907,534
|
|
|
|
|
|
|
|
|
|
Charge-off of cost of impaired loan(7)
|
|
|
|
|
|
|
(7,907,534
|
)
|
|
|
|
|
|
|
|
|
Common Stock (1,125,000 shares)(4)
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants (13,828 warrants)(4)
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
Nupla Corporation (Home & Office Furnishings,
|
|
Manufacturer and marketer of professional high-grade
|
|
Revolving Line of Credit (9.3%, Due 9/12)(3)
|
|
|
1,093,276
|
|
|
|
1,081,546
|
|
|
|
1,081,546
|
|
Housewares & Durable Consumer Products)
|
|
fiberglass-handled striking and digging tools
|
|
Senior Secured Term
Loan A (10.0%, Due 9/12)(3)
|
|
|
5,139,064
|
|
|
|
5,105,570
|
|
|
|
5,105,570
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 3/13)(2)(3)
|
|
|
3,162,122
|
|
|
|
3,142,795
|
|
|
|
1,105,556
|
|
|
|
|
|
Preferred Stock Class A (475 shares)(2)
|
|
|
|
|
|
|
564,638
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class B (1,045 shares)(2)
|
|
|
|
|
|
|
1,131,921
|
|
|
|
|
|
|
|
|
|
Common Stock (1,140,584 shares)(4)
|
|
|
|
|
|
|
80,100
|
|
|
|
|
|
|
|
F-39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Sidumpr Trailer Company, Inc. (Automobile)
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit (7.3%, Due 1/11)(3)
|
|
$
|
950,000
|
|
|
$
|
934,432
|
|
|
$
|
934,432
|
|
|
|
|
|
Senior Secured Term
Loan A (7.3%, Due 1/11)(3)
|
|
|
2,047,500
|
|
|
|
2,036,677
|
|
|
|
1,500,877
|
|
|
|
|
|
Senior Secured Term
Loan B (8.8%, Due 1/11)(3)
|
|
|
2,320,625
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
Senior Secured Term
Loan C (16.5%,
Due 7/11)(2)(3)
|
|
|
2,578,751
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
Senior Secured Term
Loan D (7.3%, Due 7/11)
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock (49,635.5 shares)(2)
|
|
|
|
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
Common Stock (64,050 shares)(4)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
Total Control investments (represents 8.4% of total investments
at fair value)
|
|
|
|
|
|
|
|
$
|
65,124,177
|
|
|
$
|
23,702,496
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated (Textiles & Leather)
|
|
Supplier of spiritwear and campus apparel
|
|
Revolving Line of Credit (9.0%, Due 9/13)(3)
|
|
$
|
800,000
|
|
|
$
|
777,090
|
|
|
$
|
777,090
|
|
|
|
|
|
Senior Secured Term
Loan A (9.5%, Due 9/13)(3)
|
|
|
4,491,748
|
|
|
|
4,445,473
|
|
|
|
4,445,473
|
|
|
|
|
|
Senior Secured Term
Loan B (10.0%,
Due 9/13)(3)
|
|
|
4,937,557
|
|
|
|
4,885,834
|
|
|
|
4,885,834
|
|
|
|
|
|
Senior Secured Term
Loan C (18.5%,
Due 3/14)(2)(3)
|
|
|
6,775,232
|
|
|
|
6,714,635
|
|
|
|
6,714,635
|
|
|
|
|
|
Preferred Stock (1,000,000 shares)(4)
|
|
|
|
|
|
|
1,080,000
|
|
|
|
699,800
|
|
|
|
|
|
Common Stock (10,000 shares)(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
KTPS Holdings, LLC (Textiles & Leather)
|
|
Manufacturer and distributor of specialty pet products
|
|
Revolving Line of Credit (11.3%, Due 1/12)(3)
|
|
|
1,500,000
|
|
|
|
1,488,972
|
|
|
|
1,488,972
|
|
|
|
|
|
Senior Secured Term
Loan A (11.3%,
Due 1/12)(3)
|
|
|
3,863,606
|
|
|
|
3,828,779
|
|
|
|
3,828,779
|
|
|
|
|
|
Senior Secured Term
Loan B (12.0%,
Due 1/12)(3)
|
|
|
455,000
|
|
|
|
450,967
|
|
|
|
450,967
|
|
|
|
|
|
Senior Secured Term
Loan C (18.0%,
Due 3/12)(2)(3)
|
|
|
4,583,209
|
|
|
|
4,552,975
|
|
|
|
4,320,875
|
|
|
|
|
|
Membership Interest Class A (730.02 units)(4)
|
|
|
|
|
|
|
730,020
|
|
|
|
167,700
|
|
|
|
|
|
Membership Interest Common (199,795.08 units)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC(5)
(Diversified/Conglomerate
|
|
Provider of tuition management services
|
|
Membership Interest Class B (1,218 units)(4)
|
|
|
|
|
|
|
1,280,403
|
|
|
|
|
|
Service)
|
|
|
|
Membership Interest Class D (1 unit)(4)
|
|
|
|
|
|
|
290,333
|
|
|
|
|
|
F-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Sport Helmets Holdings, LLC(5)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term
Loan A (5.0%,
|
|
|
|
|
|
|
|
|
|
|
|
|
(Personal & Nondurable
|
|
|
|
Due 12/13)(3)
|
|
$
|
4,087,500
|
|
|
$
|
4,040,710
|
|
|
$
|
3,759,310
|
|
Consumer Products)
|
|
|
|
Senior Secured Term
Loan B (5.5%,
Due 12/13)(3)
|
|
|
7,462,500
|
|
|
|
7,370,660
|
|
|
|
6,856,790
|
|
|
|
|
|
Senior Subordinated Debt Series A (15.0%,
Due 6/14)(2)(3)
|
|
|
7,105,981
|
|
|
|
7,012,295
|
|
|
|
6,399,195
|
|
|
|
|
|
Senior Subordinated
Debt Series B
|
|
|
1,290,324
|
|
|
|
1,290,324
|
|
|
|
1,179,025
|
|
|
|
|
|
(15.0%, Due 6/14)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (20,000 shares)(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,399,000
|
|
|
|
Total Affiliate investments (represents 16.7% of total
investments at fair value)
|
|
|
|
|
|
|
|
|
|
$
|
52,239,570
|
|
|
$
|
47,373,445
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc. (Ecological)
|
|
Distributor of specialty chemicals and contract
|
|
Revolving Line of Credit (10.3%, Due 7/11)(3)
|
|
$
|
1,800,000
|
|
|
$
|
1,787,120
|
|
|
$
|
1,787,120
|
|
|
|
application services
|
|
Senior Secured Term
Loan A (10.3%,
Due 6/11)(3)
|
|
|
7,678,125
|
|
|
|
7,642,739
|
|
|
|
7,642,739
|
|
|
|
|
|
Common Stock (5,000 shares)(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
158,500
|
|
|
|
Aircraft Fasteners International, LLC
|
|
Distributor of fasteners and related hardware for use in
|
|
Senior Secured Term
Loan (4.4%, Due 11/12)(3)
|
|
|
5,358,000
|
|
|
|
5,287,888
|
|
|
|
5,208,888
|
|
(Machinery)
|
|
aerospace, electronics and defense industries
|
|
Junior Secured Term
Loan (14.0%,
Due 5/13)(2)(3)
|
|
|
5,359,740
|
|
|
|
5,303,580
|
|
|
|
5,303,580
|
|
|
|
|
|
Convertible Preferred Stock (32,000 shares)(2)
|
|
|
|
|
|
|
234,924
|
|
|
|
435,600
|
|
|
|
Allied Defense Group, Inc. (Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock (4,000 shares)(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
123,200
|
|
|
|
Arrowhead General Insurance Agency, Inc.(6)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan (12.8%, Due 2/13)(2)(3)
|
|
|
5,012,842
|
|
|
|
5,012,842
|
|
|
|
4,699,639
|
|
(Insurance)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borga, Inc. (Mining, Steel, Iron & Nonprecious
|
|
Manufacturer of pre-fabricated metal building
|
|
Revolving Line of Credit (8.0%, Due 5/10)(3)
|
|
|
800,000
|
|
|
|
796,199
|
|
|
|
796,199
|
|
Metals)
|
|
systems
|
|
Senior Secured Term
Loan B (11.5%,
Due 5/10)(3)
|
|
|
1,623,728
|
|
|
|
1,611,597
|
|
|
|
1,611,597
|
|
|
|
|
|
Senior Secured Term
Loan C (19.0%,
Due 5/10)(2)(3)
|
|
|
8,281,883
|
|
|
|
8,255,274
|
|
|
|
2,141,677
|
|
|
|
|
|
Common Stock Warrants (33,750 warrants)(4)
|
|
|
|
|
|
|
16,828
|
|
|
|
|
|
|
|
F-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Caleel + Hayden, LLC(5) (Personal & Nondurable Consumer
Products)
|
|
Provider of proprietary branded professional skincare and
cosmetic
|
|
Junior Secured Term
Loan B (9.8%,
Due 11/11)(3)
|
|
$
|
9,971,555
|
|
|
$
|
9,884,257
|
|
|
$
|
9,884,257
|
|
|
|
products to physicians and spa communities
|
|
Senior Subordinated Debt (16.5%, Due 11/12)(3)
|
|
|
6,250,000
|
|
|
|
6,197,779
|
|
|
|
6,260,279
|
|
|
|
|
|
Common Stock (7,500 shares)(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
536,500
|
|
|
|
|
|
Options in Mineral Fusion Natural Brands, LLC (11,662 options)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Operating, LLC(5) (Buildings & Real Estate)
|
|
Provider of maintenance, repair and replacement of
|
|
Revolving Line of Credit (8.0%, Due 1/13)(3)
|
|
|
200,000
|
|
|
|
195,448
|
|
|
|
195,448
|
|
|
|
HVAC, electrical, plumbing, and foundation repair
|
|
Senior Secured Term
Loan A (6.8%, Due 7/12)(3)
|
|
|
1,642,564
|
|
|
|
1,624,813
|
|
|
|
1,624,813
|
|
|
|
|
|
Senior Subordinated Debt (16.5%, Due 1/13)(2)(3)
|
|
|
2,699,741
|
|
|
|
2,672,682
|
|
|
|
2,672,682
|
|
|
|
Copernicus Group (Healthcare, Education &
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit (8.8%, Due 10/13)(3)
|
|
|
150,000
|
|
|
|
132,771
|
|
|
|
132,771
|
|
Childcare)
|
|
|
|
Senior Secured Term
Loan A (8.8%,
Due 10/13)(3)
|
|
|
7,631,250
|
|
|
|
7,523,944
|
|
|
|
7,523,944
|
|
|
|
|
|
Senior Subordinated Debt (16.0%, Due 4/14)(3)
|
|
|
12,356,810
|
|
|
|
12,188,822
|
|
|
|
11,307,622
|
|
|
|
|
|
Preferred Stock Series A (1,000,000)(4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
799,900
|
|
|
|
Copperhead Chemical Company, Inc. (Chemicals, Plastics &
Rubber)
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt (21.0%, Due 1/13)(2)(3)
|
|
|
3,806,647
|
|
|
|
3,781,610
|
|
|
|
3,781,610
|
|
|
|
Custom Direct, Inc. (6) (Printing & Publishing)
|
|
Direct marketer of checks and other financial products and
services
|
|
Senior Secured Term
Loan (3.3%, Due 12/13)(3)
|
|
|
1,838,011
|
|
|
|
1,614,297
|
|
|
|
1,424,459
|
|
|
|
|
|
Junior Secured Term
Loan (6.6%, Due 12/14)(3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1,150,000
|
|
|
|
Dover Saddlery, Inc. (Retail Stores)
|
|
Equestrian products catalog retailer
|
|
Common Stock (30,974 shares)(4)
|
|
|
|
|
|
|
148,200
|
|
|
|
52,966
|
|
|
|
Employbridge Holding Company (5)(6)
|
|
A provider of specialized staffing services
|
|
Junior Secured Term
Loan (9.3%, Due 10/13)(3)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
(Personal, Food & Miscellaneous Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp. (Electronics)
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term
Loan A (5.0%, Due 3/11)(3)
|
|
|
2,468,323
|
|
|
|
2,455,202
|
|
|
|
2,357,602
|
|
|
|
|
|
Senior Secured Term
Loan B (5.2%, Due 3/12)(3)
|
|
|
4,212,792
|
|
|
|
4,172,027
|
|
|
|
4,005,427
|
|
|
|
|
|
Senior Secured Term
Loan C (5.7%, Due 3/12)(3)
|
|
|
2,598,352
|
|
|
|
2,565,670
|
|
|
|
2,462,870
|
|
|
|
|
|
Senior Secured Term
Loan D (15.0%,
Due 3/12)(3)
|
|
|
6,170,807
|
|
|
|
6,122,761
|
|
|
|
6,122,761
|
|
|
|
|
|
Common Stock Class A (2,475 shares)(4)
|
|
|
|
|
|
|
2,475
|
|
|
|
346,739
|
|
|
|
|
|
Common Stock Class B (25 shares)(2)
|
|
|
|
|
|
|
291,667
|
|
|
|
297,022
|
|
F-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Fairchild Industrial Products, Co.
|
|
Manufacturer of industrial controls and power
|
|
Senior Secured Term
Loan A (3.6%, Due 7/10)(3)
|
|
$
|
1,386,330
|
|
|
$
|
1,379,347
|
|
|
$
|
1,379,347
|
|
(Electronics)
|
|
transmission products
|
|
Senior Secured Term
Loan B (5.4%, Due 1/11)(3)
|
|
|
4,351,250
|
|
|
|
4,329,951
|
|
|
|
4,329,951
|
|
|
|
|
|
Senior Subordinated Debt (14.8%, Due 7/11)(3)
|
|
|
5,460,000
|
|
|
|
5,426,216
|
|
|
|
5,426,216
|
|
|
|
|
|
Preferred Stock Class A (378.4 shares)(2)
|
|
|
|
|
|
|
366,297
|
|
|
|
372,600
|
|
|
|
|
|
Common Stock Class B (27.5 shares)(4)
|
|
|
|
|
|
|
121,598
|
|
|
|
289,300
|
|
|
|
Hudson Products Holdings, Inc.(6) (Mining, Steel,
|
|
Manufactures and designs air-cooled heat exchanger
|
|
Senior Secured Term
Loan (8.0%, Due 8/15)(3)
|
|
|
7,443,750
|
|
|
|
7,241,237
|
|
|
|
6,773,813
|
|
Iron & Nonprecious Metals)
|
|
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Products, LLC (Machinery)
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term
Loan (6.4%, Due 9/12)(3)
|
|
|
8,856,250
|
|
|
|
8,808,494
|
|
|
|
8,808,494
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 9/12)(3)
|
|
|
5,547,993
|
|
|
|
5,521,880
|
|
|
|
5,521,880
|
|
|
|
Label Corp Holdings,
Inc.(6) (Printing &
|
|
Manufacturer of prime labels
|
|
Senior Secured Term
Loan (8.0%, Due 8/14)(3)
|
|
|
6,451,250
|
|
|
|
6,167,519
|
|
|
|
5,669,255
|
|
Publishing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp. (Healthcare, Education &
Childcare)
|
|
Provider of home healthcare services
|
|
Senior Secured Term
Loan A (4.6%,
Due 11/12)(3)
|
|
|
3,710,276
|
|
|
|
3,674,985
|
|
|
|
3,569,585
|
|
|
|
|
|
Senior Subordinated Debt (14.5%, Due 5/13)(3)
|
|
|
4,565,000
|
|
|
|
4,523,264
|
|
|
|
4,523,264
|
|
|
|
|
|
Membership Interest (125,000 units)(4)
|
|
|
|
|
|
|
125,000
|
|
|
|
184,800
|
|
|
|
Mac & Massey Holdings, LLC (Grocery)
|
|
Broker and distributor of ingredients to manufacturers
|
|
Senior Subordinated Debt (15.8%, Due 2/13)(2)(3)
|
|
|
8,183,478
|
|
|
|
8,158,201
|
|
|
|
8,158,201
|
|
|
|
of food products
|
|
Common Stock (250 shares)(4)
|
|
|
|
|
|
|
235,128
|
|
|
|
382,800
|
|
|
|
Northwestern Management Services, LLC
|
|
Provider of dental services
|
|
Revolving Line of Credit (7.8%, Due 12/12)(3)
|
|
|
125,000
|
|
|
|
117,625
|
|
|
|
117,625
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Senior Secured Term
Loan A (6.3%,
Due 12/12)(3)
|
|
|
5,197,531
|
|
|
|
5,156,736
|
|
|
|
5,156,736
|
|
|
|
|
|
Senior Secured Term
Loan B (6.8%,
Due 12/12)(3)
|
|
|
1,231,250
|
|
|
|
1,221,357
|
|
|
|
1,221,357
|
|
|
|
|
|
Junior Secured Term
Loan (17.0%,
Due 6/13)(2)(3)
|
|
|
2,882,406
|
|
|
|
2,861,301
|
|
|
|
2,861,301
|
|
|
|
|
|
Common Stock (500 shares)(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
465,500
|
|
|
|
Prince Mineral Company, Inc. (Metals & Minerals)
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan (6.1%, Due 12/12)(3)
|
|
|
11,225,000
|
|
|
|
11,095,875
|
|
|
|
10,752,375
|
|
|
|
|
|
Senior Subordinated Debt (14.0%, Due 7/13)(2)(3)
|
|
|
12,094,987
|
|
|
|
11,993,822
|
|
|
|
11,993,822
|
|
|
|
F-43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Quartermaster, Inc. (Retail Stores)
|
|
Retailer of uniforms and tactical equipment to law
|
|
Revolving Line of Credit (6.5%, Due 12/10)(3)
|
|
$
|
3,000,000
|
|
|
$
|
2,985,955
|
|
|
$
|
2,985,955
|
|
|
|
enforcement and security professionals
|
|
Senior Secured Term
Loan A (5.7%,
Due 12/10)(3)
|
|
|
2,514,750
|
|
|
|
2,495,985
|
|
|
|
2,495,985
|
|
|
|
|
|
Senior Secured Term
Loan B (7.0%,
Due 12/10)(3)
|
|
|
2,531,250
|
|
|
|
2,518,505
|
|
|
|
2,518,505
|
|
|
|
|
|
Senior Secured Term
Loan C (15.0%,
Due 12/11)(2)(3)
|
|
|
3,451,292
|
|
|
|
3,431,302
|
|
|
|
3,431,302
|
|
|
|
R-O-M Corporation (Automobile)
|
|
Manufacturer of doors, ramps and bulk heads for
|
|
Senior Secured Term
Loan A (3.1%, Due 2/13)(3)
|
|
|
6,040,000
|
|
|
|
5,993,933
|
|
|
|
5,696,433
|
|
|
|
fire trucks and food transportation
|
|
Senior Secured Term
Loan B (4.6%, Due 5/13)(3)
|
|
|
8,336,250
|
|
|
|
8,255,898
|
|
|
|
7,845,298
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 8/13)(3)
|
|
|
7,153,842
|
|
|
|
7,073,185
|
|
|
|
7,073,185
|
|
|
|
Total Non-control/ non-affiliate investments (represents 74.9%
of total investments at fair value)
|
|
|
|
|
|
|
|
|
|
$
|
227,017,180
|
|
|
$
|
212,853,296
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
344,380,927
|
|
|
$
|
283,929,237
|
|
|
|
|
|
|
(1) |
|
Affiliate investments are generally defined under the Investment
Company Act of 1940, as amended (the 1940 Act), as
companies in which the Company owns at least 5% but not more
than 25% of the voting securities of the company. Control
investments are generally defined under the 1940 Act as
companies in which the Company owns more than 25% of the voting
securities of the company or has greater than 50% representation
on its board. |
|
(2) |
|
Amount includes
payment-in-kind
(PIK) interest or dividends. |
|
(3) |
|
Pledged as collateral under the Companys Amended
Securitization Facility. See Note 6 to Consolidated
Financial Statements. |
|
(4) |
|
Non-income producing. |
|
(5) |
|
Some of the investments listed are issued by an affiliate of the
listed portfolio company. |
|
(6) |
|
Syndicated investment which has been originated by another
financial institution and broadly distributed. |
|
(7) |
|
All or a portion of the loan is considered permanently impaired
and, accordingly, the charge-off of the principal balance has
been recorded as a realized loss for financial reporting
purposes. |
See Notes to Consolidated Financial Statements
F-44
PATRIOT
CAPITAL FUNDING, INC.
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encore Legal Solutions, Inc. (Printing & Publishing)
|
|
Legal document management services
|
|
Junior Secured Term Loan A (6.2%, Due 12/10)(2)(3)
|
|
$
|
4,020,456
|
|
|
$
|
4,007,366
|
|
|
$
|
3,537,910
|
|
|
|
|
|
Junior Secured Term Loan B (9.2%, Due 12/10)(2)(3)
|
|
|
7,390,687
|
|
|
|
7,355,975
|
|
|
|
6,492,888
|
|
|
|
|
|
Common Stock (30,000 shares)(4)
|
|
|
|
|
|
|
5,159,567
|
|
|
|
326,900
|
|
|
|
Fischbein, LLC (Machinery)
|
|
Designer and manufacturer of packaging equipment
|
|
Senior Subordinated Debt (16.5%, Due 5/13)(2)(3)
|
|
|
3,492,760
|
|
|
|
3,471,147
|
|
|
|
3,540,987
|
|
|
|
|
|
Membership Interest
Class A (2,800,000 units)(4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
3,876,000
|
|
|
|
Nupla Corporation (Home & Office Furnishings,
|
|
Manufacturer and marketer of professional high-grade
|
|
Revolving Line of Credit (7.3%, Due 9/12)(3)
|
|
|
870,000
|
|
|
|
856,425
|
|
|
|
856,425
|
|
Housewares & Durable Consumer Products)
|
|
fiberglass-handled striking and digging tools
|
|
Senior Secured Term Loan A (8.0%, Due 9/12)(3)
|
|
|
5,354,688
|
|
|
|
5,315,741
|
|
|
|
5,166,852
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 3/13)(2)(3)
|
|
|
3,123,084
|
|
|
|
3,102,059
|
|
|
|
2,192,375
|
|
|
|
|
|
Preferred Stock Class A (475 shares)(2)
|
|
|
|
|
|
|
550,584
|
|
|
|
15,900
|
|
|
|
|
|
Preferred Stock Class B (1,045 shares)(2)
|
|
|
|
|
|
|
1,101,001
|
|
|
|
1,101,500
|
|
|
|
|
|
Common Stock (1,140,584 shares)(4)
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
Sidumpr Trailer Company, Inc. (Automobile)
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit (7.3%, Due 1/11)(3)
|
|
|
950,000
|
|
|
|
934,432
|
|
|
|
934,432
|
|
|
|
|
|
Senior Secured Term Loan A (7.3%, Due 1/11)(3)
|
|
|
2,047,500
|
|
|
|
2,036,677
|
|
|
|
2,036,677
|
|
|
|
|
|
Senior Secured Term Loan B (8.8%, Due 1/11)(3)
|
|
|
2,320,625
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C (16.5%, Due 7/11)(2)(3)
|
|
|
2,406,374
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D (7.3%, Due 7/11)
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
|
|
348,200
|
|
|
|
|
|
Preferred Stock (49,635.5 shares)(2)
|
|
|
|
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
Common Stock (64,050 shares)(4)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
Total Control investments (represents 9.4% of total investments
at fair value)
|
|
|
|
|
|
$
|
43,192,484
|
|
|
$
|
30,427,046
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated (Textiles & Leather)
|
|
Supplier of spiritwear and campus apparel
|
|
Senior Secured Term Loan A (8.0%, Due 9/13)(3)
|
|
$
|
5,328,125
|
|
|
$
|
5,273,766
|
|
|
$
|
5,273,766
|
|
|
|
|
|
Senior Secured Term Loan B (8.5%, Due 9/13)(3)
|
|
|
5,486,250
|
|
|
|
5,429,567
|
|
|
|
5,429,567
|
|
|
|
|
|
Senior Subordinated Debt (16.8%, Due 3/14)(2)
|
|
|
6,591,375
|
|
|
|
6,524,347
|
|
|
|
6,524,347(3
|
)
|
|
|
|
|
Preferred Stock (1,000,000 shares)(4)
|
|
|
|
|
|
|
1,029,722
|
|
|
|
849,500
|
|
|
|
|
|
Common Stock (10,000 shares)(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
F-45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
KTPS Holdings, LLC (Textiles & Leather)
|
|
Manufacturer and distributor of specialty pet products
|
|
Revolving Line of Credit (5.0%, Due 1/12)(3)
|
|
$
|
1,000,000
|
|
|
$
|
986,840
|
|
|
$
|
986,840
|
|
|
|
|
|
Senior Secured Term Loan A (5.1%, Due 1/12)(3)
|
|
|
4,996,875
|
|
|
|
4,950,978
|
|
|
|
4,951,005
|
|
|
|
|
|
Senior Secured Term Loan B (12.0%, Due 1/12)(3)
|
|
|
465,000
|
|
|
|
460,265
|
|
|
|
460,265
|
|
|
|
|
|
Junior Secured Term Loan (15.0%, Due 3/12)(2)(3)
|
|
|
4,207,806
|
|
|
|
4,172,076
|
|
|
|
4,172,076
|
|
|
|
|
|
Membership Interest
Class A (730.02 units)(4)
|
|
|
|
|
|
|
730,020
|
|
|
|
721,200
|
|
|
|
|
|
Membership Interest Common (199,795.08 units)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC(5) (Diversified/Conglomerate Service)
|
|
Provider of tuition management services
|
|
Membership Interest
Class B (1,218 units)(4)
|
|
|
|
|
|
|
1,280,403
|
|
|
|
311,500
|
|
|
|
|
|
Membership Interest
Class D (1 unit)(4)
|
|
|
|
|
|
|
290,333
|
|
|
|
312,000
|
|
|
|
Sport Helmets Holdings,
LLC(5) (Personal & Nondurable Consumer Products)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A (5.9%, Due 12/13)(3)
|
|
|
4,500,000
|
|
|
|
4,445,614
|
|
|
|
4,282,314
|
|
|
|
|
|
Senior Secured Term Loan B (6.4%, Due 12/13)(3)
|
|
|
7,500,000
|
|
|
|
7,400,148
|
|
|
|
7,128,048
|
|
|
|
|
|
Senior Subordinated Debt Series A (15.0%, Due
6/14)(2)(3)
|
|
|
7,000,000
|
|
|
|
6,896,866
|
|
|
|
6,896,866
|
|
|
|
|
|
Senior Subordinated Debt Series B (15.0%, Due
6/14)(2)
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
|
|
Common Stock (20,000 shares)(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,899,300
|
|
|
|
Total Affiliate investments (represents 16.0% of total
investments at fair value)
|
|
|
|
|
|
$
|
53,129,533
|
|
|
$
|
51,457,082
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc. (Ecological)
|
|
Distributor of specialty chemicals and contract application
services
|
|
Senior Secured Term Loan A (11.5%, Due 6/11)(3)
|
|
$
|
8,103,125
|
|
|
$
|
8,056,102
|
|
|
$
|
8,056,102
|
|
|
|
|
|
Common Stock (5,000 shares)(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
108,800
|
|
|
|
Aircraft Fasteners International, LLC (Machinery)
|
|
Distributor of fasteners and related hardware for use in
aerospace, electronics and defense industries
|
|
Senior Secured Term Loan (4.1%, Due 11/12)(3)
|
|
|
5,528,000
|
|
|
|
5,446,932
|
|
|
|
5,208,632
|
|
|
|
|
|
Junior Secured Term Loan (14.0%, Due 5/13)(2)(3)
|
|
|
5,306,249
|
|
|
|
5,242,761
|
|
|
|
5,242,761
|
|
|
|
|
|
Convertible Preferred Stock (32,500 shares)(2)
|
|
|
|
|
|
|
273,397
|
|
|
|
503,600
|
|
|
|
Allied Defense Group, Inc. (Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock (4,000 shares)(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
173,600
|
|
|
|
Arrowhead General Insurance Agency, Inc.(6)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan (7.7%, Due 2/13)(3)
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
4,048,200
|
|
(Insurance)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Aylward Enterprises, LLC(5)
(Machinery)
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit (10.0%, Due 2/12)(3)
|
|
$
|
3,700,000
|
|
|
$
|
3,647,158
|
|
|
$
|
3,647,158
|
|
|
|
|
|
Senior Secured Term Loan A (11.6%, Due 2/12)(3)
|
|
|
8,085,938
|
|
|
|
7,999,958
|
|
|
|
3,572,320
|
|
|
|
|
|
Senior Subordinated Debt (22.0%, Due 8/12)(2)
|
|
|
7,328,591
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note (8.0%, Due 2/13)(2)
|
|
|
151,527
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
Membership Interest (1,250,000 units)(4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
Borga, Inc. (Mining, Steel, Iron & Nonprecious
|
|
Manufacturer of pre-fabricated metal building systems
|
|
Revolving Line of Credit (4.9%, Due 5/10)(3)
|
|
|
800,000
|
|
|
|
793,950
|
|
|
|
793,950
|
|
Metals)
|
|
|
|
Senior Secured Term Loan A (5.4%, Due 5/09)(3)
|
|
|
328,116
|
|
|
|
325,903
|
|
|
|
325,903
|
|
|
|
|
|
Senior Secured Term Loan B (8.4%, Due 5/10)(3)
|
|
|
1,635,341
|
|
|
|
1,617,095
|
|
|
|
1,617,095
|
|
|
|
|
|
Senior Secured Term Loan C (16.0%, Due 5/10)(2)(3)
|
|
|
8,117,266
|
|
|
|
8,074,916
|
|
|
|
8,074,916
|
|
|
|
|
|
Common Stock Warrants (33,750 warrants)(4)
|
|
|
|
|
|
|
14,805
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC(5) (Personal & Nondurable
|
|
Provider of proprietary branded professional skincare
|
|
Junior Secured Term Loan B (4.7%, Due 11/11)(3)
|
|
|
10,771,562
|
|
|
|
10,668,072
|
|
|
|
10,668,072
|
|
Consumer Products)
|
|
and cosmetic products to physicians and spa
|
|
Senior Subordinated Debt (14.5%, Due 11/12)(3)
|
|
|
6,250,000
|
|
|
|
6,190,008
|
|
|
|
6,252,608
|
|
|
|
communities
|
|
Common Stock (7,500 shares)(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
862,100
|
|
|
|
CDW Corporation(6) (Electronics)
|
|
Direct marketer of computer and peripheral equipment
|
|
Senior Secured Term Loan (6.7%, Due 10/14)
|
|
|
2,000,000
|
|
|
|
1,780,924
|
|
|
|
920,000
|
|
|
|
CS Operating, LLC(5) (Buildings & Real Estate)
|
|
Provider of maintenance, repair and replacement of
|
|
Revolving Line of Credit (6.8%, Due 1/13)(3)
|
|
|
200,000
|
|
|
|
194,564
|
|
|
|
194,564
|
|
|
|
HVAC, electrical, plumbing, and foundation repair
|
|
Senior Secured Term Loan A (6.6%, Due 7/12)(3)
|
|
|
1,855,064
|
|
|
|
1,832,122
|
|
|
|
1,832,122
|
|
|
|
|
|
Senior Subordinated Debt (16.5%, Due 1/13)(2)(3)
|
|
|
2,616,863
|
|
|
|
2,586,496
|
|
|
|
2,586,496
|
|
|
|
Copernicus Group (Healthcare, Education &
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit (8.8%, Due 10/13)(3)
|
|
|
150,000
|
|
|
|
130,753
|
|
|
|
130,753
|
|
Childcare)
|
|
|
|
Senior Secured Term Loan A (9.0%, Due 10/13)(3)
|
|
|
8,043,750
|
|
|
|
7,917,470
|
|
|
|
7,917,470
|
|
|
|
|
|
Senior Subordinated Debt (16.0%, Due 4/14)(3)
|
|
|
12,112,000
|
|
|
|
11,926,408
|
|
|
|
11,926,408
|
|
|
|
|
|
Preferred Stock Series A (1,000,000 shares)(4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,033,000
|
|
|
|
Copperhead Chemical Company, Inc. (Chemicals, Plastics &
Rubber)
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt (21.0%, Due 1/13)(2)(3)
|
|
|
3,693,195
|
|
|
|
3,664,655
|
|
|
|
3,664,655
|
|
|
|
Custom Direct, Inc.(6) (Printing & Publishing)
|
|
Direct marketer of checks and other financial products and
|
|
Senior Secured Term Loan (4.2%, Due 12/13)(3)
|
|
|
1,847,386
|
|
|
|
1,603,118
|
|
|
|
1,330,100
|
|
|
|
services
|
|
Junior Secured Term Loan (7.5%, Due 12/14)(3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
880,000
|
|
|
|
Dover Saddlery, Inc. (Retail Stores)
|
|
Equestrian products catalog retailer
|
|
Common Stock (30,974 shares)(4)
|
|
|
|
|
|
|
148,200
|
|
|
|
41,500
|
|
|
|
Employbridge Holding Company(5)(6) (Personal, Food &
Miscellaneous Services)
|
|
A provider of specialized staffing services
|
|
Junior Secured Term Loan (10.4%, Due 10/13)(3)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
1,050,000
|
|
|
|
F-47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
EXL Acquisition Corp. (Electronics)
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A (6.6%, Due 3/11)(3)
|
|
$
|
3,278,998
|
|
|
$
|
3,258,757
|
|
|
$
|
3,072,159
|
|
|
|
|
|
Senior Secured Term Loan B (6.9%, Due 3/12)(3)
|
|
|
4,499,911
|
|
|
|
4,452,650
|
|
|
|
4,196,539
|
|
|
|
|
|
Senior Secured Term Loan C (7.4%, Due 3/12)(3)
|
|
|
2,775,439
|
|
|
|
2,737,602
|
|
|
|
2,579,563
|
|
|
|
|
|
Senior Secured Term Loan D (15.0%, Due 3/12)(3)
|
|
|
6,557,997
|
|
|
|
6,501,063
|
|
|
|
6,501,063
|
|
|
|
|
|
Common Stock Class A (2,475 shares)(4)
|
|
|
|
|
|
|
2,475
|
|
|
|
269,000
|
|
|
|
|
|
Common Stock Class B (25 shares)(2)
|
|
|
|
|
|
|
279,222
|
|
|
|
281,900
|
|
|
|
Fairchild Industrial Products, Co. (Electronics)
|
|
Manufacturer of industrial controls and power
|
|
Senior Secured Term Loan A (5.8%, Due 7/10)(3)
|
|
|
1,690,402
|
|
|
|
1,678,459
|
|
|
|
1,652,157
|
|
|
|
transmission products
|
|
Senior Secured Term Loan B (7.7%, Due 1/11)(3)
|
|
|
4,477,500
|
|
|
|
4,448,975
|
|
|
|
4,379,475
|
|
|
|
|
|
Senior Subordinated Debt (14.8%, Due 7/11)(3)
|
|
|
5,460,000
|
|
|
|
5,418,066
|
|
|
|
5,418,066
|
|
|
|
|
|
Preferred Stock Class A (378.4 shares)(2)
|
|
|
|
|
|
|
353,573
|
|
|
|
353,573
|
|
|
|
|
|
Common Stock Class B (27.5 shares)(4)
|
|
|
|
|
|
|
121,598
|
|
|
|
410,000
|
|
|
|
Hudson Products Holdings, Inc.(6) (Mining, Steel, Iron &
Nonprecious Metals)
|
|
Manufactures and designs air-cooled heat exchanger equipment
|
|
Senior Secured Term Loan (8.0%, Due 8/15)(3)
|
|
|
7,481,250
|
|
|
|
7,265,876
|
|
|
|
6,433,900
|
|
|
|
Impact Products, LLC (Machinery)
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan (7.0%, Due 9/12)(3)
|
|
|
8,893,750
|
|
|
|
8,839,775
|
|
|
|
8,418,625
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 9/12)(3)
|
|
|
5,547,993
|
|
|
|
5,517,791
|
|
|
|
5,517,791
|
|
|
|
Keltner Enterprises, LLC(5) (Oil & Gas)
|
|
Distributor of automotive oils, chemicals and parts
|
|
Senior Subordinated Debt (14.0%, Due 12/11)(3)
|
|
|
3,850,000
|
|
|
|
3,840,677
|
|
|
|
3,840,677
|
|
|
|
Label Corp Holdings, Inc.(6) (Printing & Publishing)
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan (8.0%, Due 8/14)(3)
|
|
|
6,483,750
|
|
|
|
6,176,385
|
|
|
|
5,592,200
|
|
|
|
L.A. Spas, Inc. (Chemicals, Plastics & Rubber)
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit (8.8%, Due 12/09)(3)
|
|
|
1,000,000
|
|
|
|
990,794
|
|
|
|
990,794
|
|
|
|
|
|
Senior Secured Term Loan (8.8%, Due 12/09)(3)
|
|
|
4,165,430
|
|
|
|
4,092,364
|
|
|
|
4,092,364
|
|
|
|
|
|
Senior Subordinated Debt (17.5%, Due 1/10)(2)(3)
|
|
|
8,011,600
|
|
|
|
7,907,534
|
|
|
|
599,193
|
|
|
|
|
|
Common Stock (250,000 shares)(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants (13,828 warrants)(4)
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
LHC Holdings Corp. (Healthcare, Education &
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A (4.5%, Due 11/12)(3)
|
|
|
4,100,403
|
|
|
|
4,057,774
|
|
|
|
3,927,171
|
|
Childcare)
|
|
|
|
Senior Subordinated Debt (14.5%, Due 5/13)(3)
|
|
|
4,565,000
|
|
|
|
4,517,936
|
|
|
|
4,517,936
|
|
|
|
|
|
Membership Interest (1,25,000 units)(4)
|
|
|
|
|
|
|
125,000
|
|
|
|
159,500
|
|
|
|
Mac & Massey Holdings, LLC (Grocery)
|
|
Broker and distributor of ingredients to manufacturers
|
|
Senior Subordinated Debt (16.5%, Due 2/13)(2)(3)
|
|
|
7,942,142
|
|
|
|
7,913,369
|
|
|
|
7,913,369
|
|
|
|
of food products
|
|
Common Stock (250 shares)(4)
|
|
|
|
|
|
|
242,820
|
|
|
|
365,200
|
|
|
|
F-48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Northwestern Management Services, LLC
|
|
Provider of dental services
|
|
Senior Secured Term Loan A (4.5%, Due 12/12)(3)
|
|
$
|
5,580,000
|
|
|
$
|
5,531,693
|
|
|
$
|
5,531,693
|
|
(Healthcare, Education & Childcare)
|
|
|
|
Senior Secured Term Loan B (5.0%, Due 12/12)(3)
|
|
|
1,237,500
|
|
|
|
1,226,436
|
|
|
|
1,226,436
|
|
|
|
|
|
Junior Secured Term Loan (15.0%, Due 6/13)(2)(3)
|
|
|
2,839,310
|
|
|
|
2,815,535
|
|
|
|
2,815,535
|
|
|
|
|
|
Common Stock (500 shares)(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
315,200
|
|
|
|
Prince Mineral Company, Inc. (Metals & Minerals)
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan (5.5%, Due 12/12)(3)
|
|
|
11,275,000
|
|
|
|
11,131,129
|
|
|
|
10,750,129
|
|
|
|
|
|
Senior Subordinated Debt (14.0%, Due 7/13)(2)(3)
|
|
|
12,034,071
|
|
|
|
11,918,351
|
|
|
|
11,703,780
|
|
|
|
Quartermaster, Inc. (Retail Stores)
|
|
Retailer of uniforms and tactical equipment to law
|
|
Revolving Line of Credit (6.7%, Due 12/10)(3)
|
|
|
1,750,000
|
|
|
|
1,731,275
|
|
|
|
1,731,275
|
|
|
|
enforcement and security professionals
|
|
Senior Secured Term Loan A (6.8%, Due 12/10)(3)
|
|
|
3,225,250
|
|
|
|
3,197,369
|
|
|
|
3,197,369
|
|
|
|
|
|
Senior Secured Term Loan B (8.1%, Due 12/10)(3)
|
|
|
2,543,750
|
|
|
|
2,526,377
|
|
|
|
2,526,377
|
|
|
|
|
|
Senior Secured Term Loan C (15.0%, Due 12/11)(2)(3)
|
|
|
3,399,818
|
|
|
|
3,375,763
|
|
|
|
3,375,763
|
|
|
|
R-O-M Corporation (Automobile)
|
|
Manufacturer of doors, ramps and bulk heads for fire trucks
|
|
Senior Secured Term Loan A (3.4%, Due 2/13)(3)
|
|
|
6,640,000
|
|
|
|
6,582,627
|
|
|
|
6,266,127
|
|
|
|
and food transportation
|
|
Senior Secured Term Loan B (4.9%, Due 5/13)(3)
|
|
|
8,379,000
|
|
|
|
8,290,058
|
|
|
|
7,890,766
|
|
|
|
|
|
Senior Subordinated Debt (15.0%, Due 8/13)(3)
|
|
|
9,100,000
|
|
|
|
9,011,070
|
|
|
|
9,011,070
|
|
|
|
Total Non-control/non-affiliate investments (represents 74.6% of
total investments at fair value)
|
|
|
|
|
|
$
|
269,577,008
|
|
|
$
|
240,486,620
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
(1) |
|
Affiliate investments are generally defined under the Investment
Company Act of 1940, as amended (the 1940 Act), as
companies in which the Company owns at least 5% but not more
than 25% of the voting securities of the company. Control
investments are generally defined under the 1940 Act as
companies in which the Company owns more than 25% of the voting
securities of the company or has greater than 50% representation
on its board. |
|
(2) |
|
Amount includes
payment-in-kind
(PIK) interest or dividends. |
|
(3) |
|
Pledged as collateral under the Companys Amended
Securitization Facility. See Note 6 to Consolidated
Financial Statements. |
|
(4) |
|
Non-income producing. |
|
(5) |
|
Some of the investments listed are issued by an affiliate of the
listed portfolio company. |
|
(6) |
|
Syndicated investment which has been originated by another
financial institution and broadly distributed. |
See Notes to Consolidated Financial Statements
F-49
PATRIOT
CAPITAL FUNDING, INC.
(unaudited)
|
|
Note 1.
|
Description
of Business
|
Description
of Business
Patriot Capital Funding, Inc. (the Company) is a
specialty finance company that provides customized financing
solutions to small- to mid-sized companies. The Company
typically invests in companies with annual revenues between
$10 million and $100 million, and companies which
operate in diverse industry sectors. Investments usually take
the form of senior secured loans, junior secured loans and
subordinated debt investments which may contain
equity or equity-related instruments. The Company also offers
one-stop financing, which typically includes a
revolving credit line, one or more senior secured term loans and
a subordinated debt investment.
The Company has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). In addition, the Company has also
previously elected to be treated as a regulated investment
company (RIC) under the Internal Revenue Code of
1986, as amended (the Code).
The accompanying unaudited financial statements have been
prepared in conformity with generally accepted accounting
principles in the United States of America, which contemplates
continuation of the Company as a going concern. However, on
April 3, 2009, a termination event occurred under the
Companys second amended and restated securitization
revolving credit facility (the Amended Securitization
Facility) with an entity affiliated with BMO Capital
Markets Corp. and Branch Banking and Trust Company due to
the amount of the Companys advances outstanding under the
Amended Securitization Facility exceeding the maximum
availability under the Amended Securitization Facility for more
than three consecutive business days. The maximum availability
under the Amended Securitization Facility is determined by,
among other things, the fair market value of all eligible loans
serving as collateral under the Amended Securitization Facility.
Because the fair market value of certain eligible loans
decreased at December 31, 2008, the Companys advances
outstanding under the facility exceeded the maximum availability
under the Amended Securitization Facility. This determination
was made in connection with the delivery of a borrowing base
report to the facility lenders on March 31, 2009, which
disclosed that the Company was under-collateralized by
approximately $9.8 million. As of such date, the Company
had $157.6 million outstanding under the Amended
Securitization Facility. On June 30, 2009 and
August 7, 2009, $137.4 million and
$115.7 million, respectively, were outstanding under the
Amended Securitization Facility.
As a result of the occurrence of the termination event under the
Amended Securitization Facility, the Company can no longer
request additional advances under the Amended Securitization
Facility. In addition, the interest rate payable under the
Amended Securitization Facility increased from the commercial
paper rate plus 1.75% to the prime rate plus 3.75%. Also, the
terms of the Amended Securitization Facility require that all
principal, interest and fees collected from the debt investments
secured by the Amended Securitization Facility must be used to
pay down amounts outstanding under the Amended Securitization
Facility within 24 months following the date of the
termination event. The Amended Securitization Facility also
permits the lenders, upon notice to the Company, to accelerate
amounts outstanding under the Amended Securitization Facility
and exercise other rights and remedies provided by the Amended
Securitization Facility, including the right to sell the
collateral under the Amended Securitization Facility. As of the
date hereof, the Company has not received any such notice from
the lenders. At June 30, 2009, the interest rate under the
Amended Securitization Facility was 7.0%.
These matters raise substantial doubt about the Companys
ability to continue as a going concern. In view of these
matters, realization of certain of the assets in the
accompanying balance sheet is dependent upon the
F-50
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys ability to meet its financing requirements, raise
additional capital, and the success of its future operations. In
addition, because substantially all of the Companys debt
investments are secured by the Companys Amended
Securitization Facility, the Company cannot provide any
assurance that it will have sufficient cash and liquid assets to
fund its operations and dividend distributions to its
stockholders. If the Company does not distribute at least a
certain percentage of its taxable income annually, it will
suffer adverse tax consequences, including possible loss of its
status as a RIC. The Company is in discussions with the Amended
Securitization Facility lenders to seek relief from certain of
the terms of the Amended Securitization Facility, including the
requirement under the Amended Securitization Facility that the
Company use all principal, interest and fees collected from the
debt investments secured by the Amended Securitization Facility
to pay down amounts outstanding under the Amended Securitization
Facility within 24 months following the date of the
termination event. However, based on discussion to date, we are
not optimistic that the lenders will agree to provide the
Company any relief from any terms of the Amended Securitization
Facility. As a result, the Company is also currently evaluating
other financing
and/or
strategic alternatives, including possible sale of the Company,
debt or equity financing, disposition of assets, and other
strategic transactions. There can be no assurance that the
actions presently being taken by the Company with respect to the
matters described above will be successful. The financial
statements do not include any adjustments that might result from
these uncertainties.
|
|
Note 3.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying financial statements reflect the consolidated
accounts of the Company and its special purpose financing
subsidiary, Patriot Capital Funding, LLC I (see Note 6.
Borrowings), with all significant intercompany balances
eliminated. The financial results of the Companys
portfolio investments are not consolidated in the Companys
financial statements.
Interim financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim
financial information and pursuant to the requirements for
reporting on
Form 10-Q
and
Regulation S-X.
Accordingly, certain disclosures accompanying annual
consolidated financial statements prepared in accordance with
GAAP are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring accruals, considered
necessary for the fair presentation of financial statements for
the interim periods have been included. The results of
operations for the current period are not necessarily indicative
of results that ultimately may be achieved for the year. The
interim unaudited financial statements and notes thereto should
be read in conjunction with the December 31, 2008 financial
statements and notes thereto included in the Companys
Form 10-K
as filed with the SEC.
Recent
Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities,
(SFAS No. 161). SFAS No. 161
requires specific disclosures regarding the location and amounts
of derivative instruments in the Companys financial
statements; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related
hedged items affect the Companys financial position,
financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Because
SFAS No. 161 impacts the Companys disclosure and
not its accounting treatment for derivative instruments and
related hedged items, the Companys adoption of
SFAS No. 161 has not impacted the results of
operations or financial condition; however, derivative
instruments and hedging activities disclosure has been expanded,
as disclosed in Note 12. Hedging Activities.
F-51
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1).
FSP
EITF 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in
computing earnings per share (EPS). FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. All prior-period EPS data presented was
adjusted retrospectively (including interim financial statements
and selected financial data) to conform to the provisions of FSP
EITF 03-6-1.
Early application was not permitted. On August 14, 2008 and
March 3, 2009, the Companys Board of Directors
approved the issuance of 187,500 and 446,250 shares,
respectively, of restricted stock to the Companys
executive officers and employees. The Company has determined
that these shares of restricted stock are participating
securities prior to vesting however for the three and six months
ended June 30, 2009, such shares were excluded from the
computation of diluted earnings per share because to include
them would be anti-dilutive. For the three and six months ended
June 30, 2009, such shares were considered in the
Companys EPS computations.
In October 2008, the FASB issued Staff Position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active
(FSP 157-3).
FSP 157-3
provides an illustrative example of how to determine the fair
value of a financial asset in an inactive market.
FSP 157-3
does not change the fair value measurement principles set forth
in SFAS No. 157. Since adopting SFAS 157 in
January 2008, the Companys practices for determining the
fair value of the investments in its portfolio have been, and
continue to be, consistent with the guidance provided in the
example in
FSP 157-3.
Therefore, the Companys adoption of
FSP 157-3
did not affect its practices for determining the fair value of
the investments in its portfolio and did not have a material
effect on its financial position or results of operations.
In April 2009, the FASB issued Staff Position
No. 157-4,
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
(FSP 157-4).
FSP 157-4
emphasizes that even if there has been a significant decrease in
the volume and level of activity for the asset or liability and
regardless of the valuation technique and inputs used, the
objective for the fair value measurement is unchanged from what
it would be if markets were operating at normal activity levels
or transactions were orderly; that is, to determine the current
exit price.
FSP 157-4
sets forth additional factors that should be considered to
determine whether there has been a significant decrease in
volume and level of activity when compared with normal market
activity. The reporting entity shall evaluate the significance
and relevance of the factors to determine whether, based on the
weight of evidence, there has been a significant decrease in
activity and volume.
FSP 157-4
indicates that if an entity determines that either the volume or
level of activity for an asset or liability has significantly
decreased (from normal conditions for that asset or liability)
or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment
will be required to estimate fair value.
FSP 157-4
further notes that a fair value measurement should include a
risk adjustment to reflect the amount market participants would
demand because of the risk (uncertainty) in the cash flows.
FSP 157-4
also requires a reporting entity to make additional disclosures
in interim and annual periods.
FSP 157-4
is effective for interim periods ending after June 15,
2009, with early application permitted for periods ending after
March 15, 2009. Revisions resulting from a change in
valuation techniques or their application are accounted for as a
change in accounting estimate. The Company adopted
FSP 157-4
as of January 1, 2009. However, since adopting
SFAS No. 157 in January 2008, the Companys
practices for determining fair value and for disclosures about
the fair value of the investments in its portfolio have been,
and continue to be, consistent with the guidance provided in
FSP 157-4.
Therefore, the Companys adoption of
FSP 157-4
has not had any effect on its financial position or results of
operations (See Note 4. Investments).
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events,
(SFAS No. 165). SFAS No. 165 is
intended to establish general standards of accounting for, and
disclosure of, events that occur after the balance
F-52
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sheet date but before financial statements are issued. It
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date.
SFAS No. 165 is effective for interim or annual
financial periods ending after June 15, 2009 and is
required to be adopted prospectively. The Company adopted
SFAS No. 165 effective for the quarter ending
June 30, 2009.
In June 2009, the FASB issued SFAS No. 168, FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles,
(SFAS No. 168). SFAS No. 168
establishes the FASB Accounting Standards Codification as the
source of GAAP to be applied to companies. SFAS 168
explicitly recognizes rules and interpretive releases of the SEC
under authority of federal securities laws as authoritative GAAP
for SEC registrants. SFAS 168 will become effective for
interim or annual periods ending after September 15, 2009.
Interest,
Dividends, Fees, and Other Investment Income
Interest and dividend income is recognized as revenue when
earned according to the terms of the investment, and when in the
opinion of management, it is collectible. Premiums paid and
discounts obtained, including discounts in the form of fees, are
amortized into interest income over the estimated life of the
investment using the interest method. Fees consist principally
of loan and arrangement fees, annual administrative fees, unused
fees, prepayment fees, amendment fees, equity structuring fees
and waiver fees. Equity structuring fees are recognized as
earned, which is generally when the investment transaction
closes. Other investment income consists principally of the
recognition of unamortized deferred financing fees received from
portfolio companies on the repayment of their debt investment,
the sale of the debt investment or a reduction of available
credit under the debt investment.
Federal
Income Taxes
The Company has elected to be treated as a RIC under the Code.
The Companys RIC tax year was initially filed on a July 31
basis. On February 11, 2008, the Company was granted
permission by the Internal Revenue Service to change its RIC tax
year from July 31 to December 31, effective on
December 31, 2007. Accordingly, the Company has filed a
short period tax return from August 1, 2007 through
December 31, 2007, and will file on a calendar year basis
for 2008 and thereafter. The Companys policy has
historically been to comply with the requirements of the Code
that are applicable to RICs and to distribute substantially all
of its taxable income to its stockholders. In light of the
matters described in Note 2, it may not be possible for the
Company to continue to comply with these requirements. However,
the Company intends to take all steps possible to maintain its
RIC tax status. Therefore, no federal income tax provision is
included in the accompanying financial statements. However, to
the extent that the Company is not able to maintain its RIC tax
status, it may incur tax liability not currently provided for in
the Companys balance sheet.
The Company adopted Financial Accounting Standards Board
Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes at inception on
February 15, 2007. FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured,
presented, and disclosed in the consolidated financial
statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the
Companys tax returns to determine whether the tax
positions are more-likely-than-not of being
sustained by the applicable tax authority. Tax positions not
deemed to meet the more-likely-than-not threshold are recorded
as a tax benefit or expense in the current year. Adoption of
FIN 48 was applied to all open taxable years as of the
effective date. The adoption of FIN 48 did not have an
effect on the financial position or results of operations of the
Company as there was no liability for unrecognized tax benefits
and no change to the beginning capital of the Company.
Managements determinations regarding FIN 48 may be
subject to review and adjustment at a later date based upon
factors including, but not limited to, an on-going analysis of
tax laws, regulations and interpretations thereof.
F-53
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Dividends
Paid
Distributions to stockholders are recorded on the declaration
date. The Company is required to pay out to its shareholders at
least 90% of its net ordinary income and net realized short-term
capital gains in excess of net realized long-term capital losses
for each taxable year in order to be eligible for the tax
benefits allowed to a RIC under Subchapter M of the Code.
Historically it has been the policy of the Company to pay out as
a dividend all or substantially all of those amounts. The amount
to be paid out as a dividend has traditionally been determined
by the Board of Directors each quarter based on the annual
estimate of the Companys taxable income by the management
of the Company. At its year-end the Company may pay a bonus
distribution, in addition to the other distributions, to ensure
that it has paid out at least 90% of its net ordinary taxable
income and net realized short-term capital gains in excess of
net realized long-term capital losses for the year. The Board of
Directors has determined to postpone taking any action with
regard to dividends until the matter described in Note 2 is
resolved. Through December 31, 2008, the Company has made
all required distributions on its 2008 distributable income to
satisfy its RIC requirements.
Distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not
for tax purposes are reported as distributions in excess of net
investment income and net realized capital gains, respectively.
To the extent that they exceed net investment income and net
realized gains for tax purposes, they are reported as
distributions of paid-in capital (i.e., return of capital).
Consideration
of Subsequent Events.
The Company evaluated events and transactions occurring after
June 30, 2009 through August 10, 2009, the date these
consolidated interim financial statements were issued, to
identify subsequent events which may need to be recognized or
non-recognizable events which would need to be disclosed. No
recognizable events were identified. See Note 14.
Subsequent Events for non-recognizable events or transactions
identified for disclosure.
As described below (see Note 5. Fair
Value Measurements), effective January 1, 2008, the Company
adopted Statement of Financial Standards
No. 157-Fair
Value Measurement, (SFAS No. 157). At
June 30, 2009 and December 31, 2008, investments
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Investments in debt securities
|
|
$
|
323,087,617
|
|
|
$
|
274,232,910
|
|
|
$
|
344,683,219
|
|
|
$
|
308,079,975
|
|
Investments in equity securities
|
|
|
21,293,310
|
|
|
|
9,696,327
|
|
|
|
21,215,806
|
|
|
|
14,290,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
$
|
283,929,237
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009 and December 31, 2008,
$109.8 million and $123.5 million, respectively, of
the Companys portfolio investments at fair value were at
fixed rates, which represented approximately 39% and 38%,
respectively, of the Companys total portfolio of
investments at fair value. The Company generally structures its
subordinated debt at fixed rates, while most of its senior
secured and junior secured loans are at variable rates
determined on the basis of a benchmark LIBOR or prime rate. The
Companys loans generally have stated maturities ranging
from 4 to 7.5 years.
At June 30, 2009 and December 31, 2008, the Company
had equity investments and warrant positions designed to provide
the Company with an opportunity for an enhanced internal rate of
return. These instruments generally do not produce a current
return, but are held for potential investment appreciation and
capital gains.
F-54
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three months ended June 30, 2009, the Company
realized a loss of $413,000 on investments principally from the
sale of one syndicated loan. During the six months ended
June 30, 2009, the Company realized a net loss of
$12.0 million on investments primarily due to the permanent
impairment of loans to one of our portfolio companies. During
the three and six months ended June 30, 2008, the Company
realized losses of $344,000 and $434,000, respectively,
principally from the cancellation of warrants in which the
Company had previously recorded unrealized depreciation on the
entire warrant balance and the sale of portfolio investments.
During the three and six months ended June 30, 2009 the
Company recorded unrealized depreciation of $12.8 million
and $16.9 million, respectively, and during the three and
six months ended June 30, 2008, the Company recorded
unrealized depreciation of $3.4 million and
$13.2 million, respectively.
The composition of the Companys investments as of
June 30, 2009 and December 31, 2008 at cost and fair
value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
|
|
|
Senior Secured Debt
|
|
$
|
163,009,989
|
|
|
|
47.3
|
%
|
|
$
|
137,712,207
|
|
|
|
48.5
|
%
|
|
$
|
171,889,470
|
|
|
|
47.0
|
%
|
|
$
|
156,638,667
|
|
|
|
48.6
|
%
|
|
|
|
|
Junior Secured Debt
|
|
|
63,930,467
|
|
|
|
18.6
|
|
|
|
50,861,771
|
|
|
|
17.9
|
|
|
|
64,232,689
|
|
|
|
17.5
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
|
|
|
|
Subordinated Debt
|
|
|
96,147,161
|
|
|
|
27.9
|
|
|
|
85,658,932
|
|
|
|
30.2
|
|
|
|
108,561,060
|
|
|
|
29.7
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
|
|
|
|
Warrants / Equity
|
|
|
21,293,310
|
|
|
|
6.2
|
|
|
|
9,696,327
|
|
|
|
3.4
|
|
|
|
21,215,806
|
|
|
|
5.8
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of total portfolio. |
F-55
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The composition of the Companys investment portfolio by
industry sector, using Moodys Industry Classifications as
of June 30, 2009 and December 31, 2008 at cost and
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
|
|
|
Machinery
|
|
$
|
51,631,722
|
|
|
|
15.0
|
%
|
|
$
|
36,171,707
|
|
|
|
12.7
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
|
|
|
|
Health Care, Education & Childcare
|
|
|
39,025,805
|
|
|
|
11.3
|
|
|
|
37,864,405
|
|
|
|
13.3
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
|
|
|
|
Personal & Nondurable Consumer Products
|
|
|
38,546,025
|
|
|
|
11.2
|
|
|
|
36,274,356
|
|
|
|
12.8
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
|
|
|
|
Automobile
|
|
|
30,715,635
|
|
|
|
8.9
|
|
|
|
23,050,225
|
|
|
|
8.1
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
|
|
|
|
Textiles & Leather
|
|
|
28,954,845
|
|
|
|
8.4
|
|
|
|
27,780,125
|
|
|
|
9.8
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
|
|
|
|
Electronics
|
|
|
27,233,211
|
|
|
|
7.9
|
|
|
|
27,389,835
|
|
|
|
9.6
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
|
|
|
|
Printing & Publishing
|
|
|
26,352,526
|
|
|
|
7.6
|
|
|
|
11,324,964
|
|
|
|
4.0
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
|
|
|
|
Metals & Minerals
|
|
|
23,089,697
|
|
|
|
6.7
|
|
|
|
22,746,197
|
|
|
|
8.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
|
|
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
17,921,135
|
|
|
|
5.2
|
|
|
|
11,323,286
|
|
|
|
4.0
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
|
|
|
|
Retail Stores
|
|
|
11,579,947
|
|
|
|
3.4
|
|
|
|
11,484,713
|
|
|
|
4.1
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
|
|
|
|
Housewares & Durable Consumer Products
|
|
|
11,106,570
|
|
|
|
3.2
|
|
|
|
7,292,672
|
|
|
|
2.6
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
|
|
|
|
Ecological
|
|
|
9,929,859
|
|
|
|
2.9
|
|
|
|
9,588,359
|
|
|
|
3.4
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
|
|
|
|
Grocery
|
|
|
8,393,329
|
|
|
|
2.4
|
|
|
|
8,541,001
|
|
|
|
3.0
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
|
|
|
|
Chemicals, Plastic & Rubber
|
|
|
5,360,932
|
|
|
|
1.6
|
|
|
|
3,781,610
|
|
|
|
1.3
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
|
|
|
|
Insurance
|
|
|
5,012,842
|
|
|
|
1.5
|
|
|
|
4,699,639
|
|
|
|
1.6
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
|
|
|
|
Buildings & Real Estate
|
|
|
4,492,943
|
|
|
|
1.3
|
|
|
|
4,492,943
|
|
|
|
1.6
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
|
|
|
|
Personal, Food & Miscellaneous Services
|
|
|
3,000,000
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
|
|
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
|
|
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
123,200
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
|
|
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of total portfolio. |
As required by the 1940 Act, the Company classifies its
investments by level of control. Control Investments
are defined in the 1940 Act as investments in those companies
that the Company is deemed to Control. Generally,
under the 1940 Act, the Company is deemed to Control
a company in which it has invested if it owns 25% or more of the
voting securities of such company or has greater than 50%
representation on its board. Affiliate Investments
are investments in those companies that are Affiliated
Companies of the Company, as defined in the 1940 Act. The
Company is deemed to be an Affiliate of a company in
which it has invested if it owns 5% or more but less than 25% of
the voting securities of such company.
Non-Control/Non-Affiliate Investments are those
investments that are neither Control Investments nor Affiliate
Investments. At June 30, 2009 and December 31, 2008,
the Company owned greater than 5% but less than 25% of the
voting securities in four investments. At June 30, 2009 and
December 31, 2008, the Company owned 25% or more of the
voting securities in six and four investments, respectively.
F-56
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5.
|
Fair
Value Measurements
|
The Company accounts for its portfolio investments and interest
rate swaps at fair value. As a result, the Company adopted the
provisions of SFAS No. 157 in the first quarter of
2008. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value
hierarchy based on the quality of inputs used to measure fair
value and enhances disclosure requirements for fair value
measurements. SFAS No. 157 defines fair value as the
price that would be established to sell an asset or transfer a
liability in an orderly transaction between market participants
in what would be the principal or most advantageous market for
the asset or liability. Where available, fair value is based on
observable market prices or parameters or derived from such
prices or parameters. Where observable prices or inputs are not
available, valuation techniques are applied. These valuation
techniques involve some level of management estimation and
judgment, the degree of which is dependent on the price
transparency for the investments or market and the
investments complexity.
Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level
of judgment associated with the inputs used to measure their
fair value. Hierarchical levels, defined by
SFAS No. 157 and directly related to the amount of
subjectivity associated with the inputs to determining the fair
value of these assets and liabilities, are as follows:
Level 1 Unadjusted, quoted prices in active
markets for identical assets or liabilities at the measurement
date.
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data at the measurement date for substantially
the full term of the assets or liabilities.
Level 3 Unobservable inputs that reflect
managements best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
The following table presents the financial instruments carried
at fair value as of June 30, 2009, by caption on the
Consolidated Balance Sheet for each of the three levels of
hierarchy established by SFAS No. 157.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
Internal Models with
|
|
|
Internal Models with
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
Significant
|
|
|
Total Fair Value
|
|
|
|
Quoted Market Prices
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Reported in
|
|
|
|
in Active Markets
|
|
|
Market Parameters
|
|
|
Market Parameters
|
|
|
Consolidated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Balance Sheet
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliate investments
|
|
$
|
176,166
|
|
|
$
|
19,717,166
|
|
|
$
|
192,959,964
|
|
|
$
|
212,853,296
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
47,373,445
|
|
|
|
47,373,445
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
23,702,496
|
|
|
|
23,702,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
176,166
|
|
|
$
|
19,717,166
|
|
|
$
|
264,035,905
|
|
|
$
|
283,929,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps(1)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Represents interest rate swaps in connection with the
Companys Amended Securitization Facility. The fair value
of the interest rate swaps are included in the accounts payable,
accrued expenses and other line of the liabilities section of
the Consolidated Balance Sheets. On July 9, 2009, the
Company terminated all of its interest rate swap agreements and
realized a loss of $3.3 million in connection with entering
into an agreement, limited consent and amendment to the
Companys Amended Securitization Facility with the Lenders
(see Note 14. Subsequent Events). |
The following table provides a roll-forward in the changes in
fair value from December 31, 2008 to June 30, 2009,
for all investments for which the Company determines fair value
using unobservable (Level 3) factors. When a
determination is made to classify a financial instrument within
Level 3 of the valuation hierarchy, the determination is
based upon the fact that the unobservable factors are the most
significant to the overall fair value measurement. However,
Level 3 financial instruments also typically include, in
addition to the unobservable or Level 3 components,
observable components (that is, Level 1 and Level 2
components that are actively quoted and can be validated to
external sources). Accordingly, the appreciation (depreciation)
in the table below includes changes in fair value due in part to
observable Level 1 and Level 2 factors that are part
of the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using unobservable inputs (Level
3)
|
|
|
|
Non-affiliate
|
|
|
Affiliate
|
|
|
Control
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Fair Value December 31, 2008
|
|
$
|
220,017,120
|
|
|
$
|
51,457,082
|
|
|
$
|
30,427,046
|
|
|
$
|
301,901,248
|
|
Total realized losses
|
|
|
|
|
|
|
|
|
|
|
(11,600,764
|
)
|
|
|
(11,600,764
|
)
|
Change in unrealized depreciation
|
|
|
(6,171,546
|
)
|
|
|
(3,193,648
|
)
|
|
|
(8,719,219
|
)
|
|
|
(18,084,413
|
)(1)
|
Purchases, issuances, settlements and other, net
|
|
|
(7,983,780
|
)
|
|
|
(889,989
|
)
|
|
|
693,603
|
|
|
|
(8,180,166
|
)
|
Transfers within Level 3
|
|
|
(12,901,830
|
)
|
|
|
|
|
|
|
12,901,830
|
|
|
|
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2009
|
|
$
|
192,959,964
|
|
|
$
|
47,373,445
|
|
|
$
|
23,702,496
|
|
|
$
|
264,035,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to assets held at June 30, 2009 |
The Company estimates the fair value of its Level 3 debt
investments by first estimating the enterprise value of the
portfolio company which issued the debt investment and augments
the valuation techniques it uses to estimate the fair value of
its debt investments where there is not a readily available
market value (Level 3). To estimate the enterprise value of
a portfolio company, the Company analyzed various factors,
including the portfolio companies historical and projected
financial results. Typically, private companies are valued based
on multiples of EBITDA (Earning Before Interest, Taxes,
Depreciation and Amortization), cash flow, net income, revenues
or, in limited instances, book value.
In estimating a multiple to use for valuation purposes, the
Company looked to private merger and acquisition statistics,
discounted public trading multiples or industry practices. In
some cases, the valuation may be based on a combination of
valuation methodologies, including but not limited to, multiple
based, discounted cash flow and liquidation analysis. If a
portfolio company was distressed, a liquidation analysis may
have provided the best indication of enterprise value.
The Company uses a bond-yield model to value these investments
based on the present value of expected cash flows. The primary
inputs into the model are market interest rates for debt with
similar characteristics and an adjustment for the portfolio
companys credit risk. The credit risk component of the
valuation considers several factors including financial
performance, business outlook, debt priority and collateral
position. During the three months ended June 30, 2009 and
2008, the Company recorded net unrealized depreciation of
$12.7 million and $3.4 million, respectively, on its
investments. During the six months ended June 30, 2009
F-58
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2008, the Company recorded net unrealized depreciation of
$16.9 million and $13.2 million, respectively, on its
investments. For the three and six months ended June 30,
2009, the Companys net unrealized depreciation consists of
the following: approximately $12.9 million and
$17.5 million, respectively, of unrealized depreciation
resulted from a decline in cash flows of the Companys
portfolio companies; approximately $1.5 million and
$0.7 million, respectively, of unrealized depreciation
which resulted from changes in market multiples and interest
rates; offset by approximately $1.7 million and
$1.3 million, respectively, of unrealized appreciation
which resulted from quoted market prices on the Companys
syndicated loan portfolio. For the three and six months ended
June 30, 2008, the Companys net unrealized
depreciation consists of the following: approximately
$0.2 million and $1.4 million, respectively, which
resulted from quoted market prices on the Companys
syndicated loan portfolio as a result of disruption in the
financial credit markets for broadly syndicated loans;
approximately $3.6 million and $7.8 million,
respectively, resulted from a decline in cash flows of the
Companys portfolio companies; and approximately
$0.5 million of unrealized appreciation and
$4.0 million of unrealized depreciation, respectively,
which resulted from changes in market multiples and interest
rates.
On September 18, 2006, the Company, through a consolidated
wholly-owned bankruptcy remote, special purpose subsidiary,
entered into an amended and restated securitization revolving
credit facility (the Securitization Facility) with
an entity affiliated with BMO Capital Markets Corp. (formerly
known as Harris Nesbitt Corp.). The Securitization Facility
allowed the special purpose subsidiary to borrow up to
$140 million through the issuance of notes to a
multi-seller commercial paper conduit administered by the
affiliated entity. The Securitization Facility also required
bank liquidity commitments (Liquidity Facility) to
provide liquidity support to the conduit. The Liquidity Facility
was provided by the lender that participated in the
Securitization Facility for a period of
364-days and
was renewable annually thereafter at the option of the lender.
On May 2, 2007, the Company amended its Securitization
Facility to lower the interest rate payable on any outstanding
borrowings under the Securitization Facility from the commercial
paper rate plus 1.35% to the commercial paper rate plus 1.00%
during the period of time the Company was permitted to make
draws under the Securitization Facility. The amendment also
reduced or eliminated certain restrictions pertaining to certain
loan covenants. On August 31, 2007, the Company amended its
Securitization Facility to increase its borrowing capacity
thereunder by $35 million. The amendment also extended the
commitment termination date from July 23, 2009 to
July 22, 2010 and reduced or eliminated certain
restrictions pertaining to certain loan covenants. The
Securitization Facility provided for the payment by the Company
to the lender of a monthly fee equal to 0.25% per annum on the
unused amount of the Securitization Facility.
On April 11, 2008, the Company entered into the Amended
Securitization Facility with an entity affiliated with BMO
Capital Markets Corp. and Branch Banking and Trust Company
(the Lenders). The Amended Securitization Facility
amended and restated the Securitization Facility to, among other
things: (i) increase the borrowing capacity from
$175 million to $225 million; (ii) extend the
maturity date from July 22, 2010 to April 11, 2011
(unless extended prior to such date for an additional
364-day
period with the consent of the lenders thereto);
(iii) increase the interest rate payable under the facility
from the commercial paper rate plus 1.00% to the commercial
paper rate plus 1.75% on up to $175 million of outstanding
borrowings and the LIBOR rate plus 1.75% on up to
$50 million of outstanding borrowings; and
(iv) increase the unused commitment fee from 0.25% per
annum to 0.30% per annum.
Similar to the Securitization Facility, the Amended
Securitization 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. These restrictions could have affected the amount
of notes the Companys special purpose subsidiary could
issue from time to time. The Amended Securitization Facility
also contains certain requirements relating to portfolio
performance, including required minimum portfolio yield and
limitations on delinquencies and charge-offs,
F-59
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
violation of which could have resulted in the early termination
of the Amended Securitization Facility. The Amended
Securitization Facility also requires the maintenance of the
Liquidity Facility. The Liquidity Facility was provided by the
Lenders that participate in the Securitization Facility for a
period of
364-days and
was renewable annually thereafter at the option of the lenders.
The Liquidity Facility was scheduled to be renewed in April
2009. The Amended Securitization Facility is secured by all of
the loans held by the Companys special purpose subsidiary.
On April 3, 2009 a termination event occurred under the
Amended Securitization Facility due to the amount of the
Companys advances outstanding under the facility exceeding
the maximum availability under the facility for more than three
consecutive business days. The maximum availability under the
facility is determined by, among other things, the fair market
value of all eligible loans serving as collateral under the
facility. Because the fair market value of certain eligible
loans decreased at December 31, 2008, the Companys
advances outstanding under the facility exceeded the maximum
availability under the facility. This determination was made in
connection with the delivery of a borrowing base report to the
facility lenders on March 31, 2009. As of such date, the
Company had $157.6 million outstanding under the facility.
As a result of the occurrence of the termination event under the
facility, the Company can no longer make additional advances
under the facility. Also, the interest rate payable under the
Amended Securitization Facility increased from the commercial
paper rate plus 1.75% to the prime rate plus 3.75%. In addition,
the terms of the facility require that all principal, interest
and fees collected from the debt investments secured by the
facility must be used to pay down amounts outstanding under the
facility within 24 months following the date of the
termination event. The facility also permits the lenders, upon
notice to the Company, to accelerate amounts outstanding under
the facility and exercise other rights and remedies provided by
the facility, including the right to sell the collateral under
the facility. The Company has not received any such notice from
the lenders.
In connection with the origination and amendment of the
Securitization Facility and the Amended Securitization Facility,
the Company incurred $2.4 million of fees which are being
amortized over the term of the facility.
At June 30, 2009 and December 31, 2008,
$137.4 million and $162.6 million, respectively, of
borrowings were outstanding under the Amended Securitization
Facility. At June 30, 2009, the interest rate under the
Amended Securitization Facility was 7.0%. Interest expense for
the three and six months ended June 30, 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest charges
|
|
$
|
2,644,393
|
|
|
$
|
1,733,144
|
|
|
$
|
4,043,615
|
|
|
$
|
3,719,520
|
|
Amortization of debt issuance costs
|
|
|
131,729
|
|
|
|
131,728
|
|
|
|
263,456
|
|
|
|
190,632
|
|
Unused facility fees
|
|
|
1,248
|
|
|
|
60,358
|
|
|
|
56,736
|
|
|
|
74,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,777,370
|
|
|
$
|
1,925,230
|
|
|
$
|
4,363,807
|
|
|
$
|
3,984,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Stock
Option Plan and Restricted Stock Plan
|
As of June 30, 2009, 3,644,677 shares of common stock
are reserved for issuance upon exercise of options to be granted
under the Companys stock option plan and
2,065,045 shares of the Companys common stock were
reserved for issuance under the Companys employee
restricted stock plan (collectively, the Plans). On
March 3, 2009, awards of 446,250 shares of restricted
stock were granted to the Companys executive officers with
a fair value of $1.27 (the closing price of the common stock at
date of grant). The total fair value of $567,000 is being
expensed over a four year vesting period. As of June 30,
2009, 3,189,107 options were outstanding, 2,721,457 of which
were exercisable and 633,750 shares of restricted stock
were outstanding, none of which are vested. The options have a
weighted average remaining contractual life of
F-60
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
7.0 years, a weighted average exercise price of $12.43, and
an aggregate intrinsic value of $0. The restricted stock vests
over four years.
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment, (SFAS 123R).
The Company has elected the modified prospective
method of transition as permitted by SFAS 123R. Under
this transition method, the Company is required to record
compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted
awards that were outstanding at the date of adoption. The fair
value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model. For shares
granted in February 2008, this model used the following
assumptions: annual dividend rate of 11.8%, risk free interest
rate of 3.0%, expected volatility of 26%, and the expected life
of the options of 6.5 years. The Company calculated its
expected term assumption using guidance provided by SEC Staff
Accounting Bulletin 107 (SAB 107).
SAB 107 allows companies to use a simplified expected term
calculation in instances where no historical experience exists,
provided that the companies meet specific criteria. Expected
volatility was based on the Companys historical volatility.
Assumptions used with respect to future grants may change as the
Companys actual experience may be different. The fair
value of options granted in 2008 was approximately $0.47, using
the Black-Scholes option pricing model. The Company has adopted
the policy of recognizing compensation cost for awards with
graded vesting on a straight-line basis over the requisite
service period for the entire award. For the three and six
months ended June 30, 2009, the Company recorded
compensation expense related to stock awards of approximately
$220,000 and $421,000, respectively, and for the three and six
months ended June 30, 2008, the Company recorded
compensation expense related to stock awards of approximately
$204,000 and $386,000, respectively, which is included in
compensation expense in the consolidated statements of
operations. The Company has not historically recorded the tax
benefits associated with the expensing of stock options since
the Company elected to be treated as a RIC under Subchapter M of
the Internal Revenue Code and, as such, the Company is not
subject to federal income tax on the portion of taxable income
and gains distributed to stockholders, provided that at least
90% of its annual taxable income is distributed. As of
June 30, 2009, there was $247,000 of unrecognized
compensation cost related to unvested options which is expected
to be recognized over 1.7 years. As of June 30, 2009,
there was $1.6 million of unrecognized compensation cost
related to unvested restricted stock awards which is expected to
be recognized over 3.7 years.
|
|
Note 8.
|
Share
Data and Common Stock
|
The following table sets forth a reconciliation of weighted
average shares outstanding for computing basic and diluted
income (loss) per common share for the three and six months
ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
20,950,501
|
|
|
|
20,693,337
|
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
20,950,501
|
|
|
|
20,693,337
|
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of stock options and restricted stock is
computed using the treasury stock method. Options on
3.2 million shares (2009 and 2008), and restricted stock of
633,750 shares (2009), were anti-dilutive and therefore
excluded from the computation of diluted loss per share.
In 2005, the Company established a dividend reinvestment plan,
and during the three months ended March 31, 2009 and the
year ended December 31, 2008, issued 123,000 and
177,000 shares, respectively, in
F-61
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
connection with dividends paid. The following table reflects the
Companys dividends paid since March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
|
|
|
October 30, 2008
|
|
|
December 22, 2008
|
|
|
|
January 15, 2009
|
|
|
$
|
0.25
|
|
July 30, 2008
|
|
|
September 12, 2008
|
|
|
|
October 15, 2008
|
|
|
$
|
0.33
|
|
May 2, 2008
|
|
|
June 5, 2008
|
|
|
|
July 16, 2008
|
|
|
$
|
0.33
|
|
February 27, 2008
|
|
|
March 14, 2008
|
|
|
|
April 16, 2008
|
|
|
$
|
0.33
|
|
|
|
Note 9.
|
Commitments
and Contingencies
|
The balance of unused commitments to extend credit was
$17.3 million and $23.8 million at June 30, 2009
and December 31, 2008, respectively. Commitments to extend
credit consist principally of the unused portions of commitments
that obligate the Company to extend credit, such as contingent
investment draws, revolving credit arrangements or similar
transactions. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee by
the counterparty. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Since April 3, 2009,
the date of the termination event under the Amended
Securitization Facility, the Company has funded revolver draws
under our outstanding commitments. The Company is currently in
negotiation with the Lenders to have eligible revolver draws
funded by the Lenders going forward. Ineligible revolver draw
requests, those requests on loans outside of the Amended
Securitization Facility, will not be funded by the Lenders. The
Company may not have the ability to fund the ineligible revolver
draw requests in the future or eligible revolver draw requests
if the Lenders refuse to accommodate the request.
In connection with borrowings under the Amended Securitization
Facility, the Companys special purpose subsidiary was
required under certain circumstances to enter into interest rate
swap agreements or other interest rate hedging transactions. The
Company had agreed to guarantee the payment of certain swap
breakage costs that may be payable by the Companys special
purpose subsidiary in connection with any such interest rate
swap agreements or other interest rate hedging transactions (see
Note 6. Borrowings). On July 9, 2009, the Company
terminated all eight interest rate swap agreements, and realized
a loss of $3.3 million, in connection with entering into an
agreement, limited consent and amendment to the Companys
Amended Securitization Facility with the Lenders (see
Note 14. Subsequent Events).
The Company leases its corporate offices and certain equipment
under operating leases with terms expiring in 2011. Future
minimum lease payments due under operating leases at
June 30, 2009 are as follows: $121,000
remainder of 2009, $247,000 2010,
$21,000 2011. Rent expense was approximately $59,000
and $117,000 for the three and six months ended June 30,
2009, respectively, and was approximately $68,000 and $136,000
for the three and six months ended June 30, 2008,
respectively. At June 30, 2009, the Company had an
outstanding letter of credit in the amount of $38,000 as
security deposit for the lease of the Companys corporate
offices.
|
|
Note 10.
|
Concentrations
of Credit Risk
|
The Companys portfolio companies are primarily small- to
mid-sized companies that operate in a variety of industries.
At June 30, 2009 and December 31, 2008, the Company
did not have any investment in excess of 10% of the total
investment portfolio at fair value. Investment income,
consisting of interest, dividends, fees, and other investment
income, can fluctuate dramatically upon repayment of an
investment or sale of an equity interest. Revenue recognition in
any given period can be highly concentrated among several
portfolio companies. During the three and six months ended
June 30, 2009 and 2008, the Company did not record
investment income from any portfolio company in excess of 10% of
total investment income.
F-62
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective August 1, 2005, the Company elected to be treated
as a RIC. Accordingly, the Companys RIC tax year was
initially filed on a July 31 basis. On February 11, 2008,
the Company was granted permission by the Internal Revenue
Service to change its RIC tax year from July 31 to
December 31, effective on December 31, 2007.
Accordingly, the Company has prepared a short period tax return
from August 1, 2007 through December 31, 2007, and
will file on a calendar year basis for 2008 and thereafter. The
Companys policy has historically been to comply with the
requirements of Subchapter M of the Code that are applicable to
RICs and to distribute substantially all of its taxable income
to its shareholders. In light of the matters described in
Note 2, it may not be possible for the Company to continue
to comply with these requirements. However, the Company intends
to take all steps possible to maintain its RIC tax status.
Therefore, no federal, state or local income tax provision is
included in the accompanying financial statements. However, to
the extent that the Company is not able to maintain its RIC tax
status, it may incur tax liability not currently provided for in
the Companys balance sheet.
Tax loss for the six months ended June 30, 2009 is as
follows:
|
|
|
|
|
|
|
January 1, 2009
|
|
|
|
to
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
GAAP net investment income
|
|
$
|
7,620,000
|
|
Tax timing differences of:
|
|
|
|
|
Origination fees, net
|
|
|
(794,000
|
)
|
Permanent impairment on loans
|
|
|
(11,826,000
|
)
|
Stock compensation expense, original issue discount and
depreciation and amortization
|
|
|
1,464,000
|
|
|
|
|
|
|
Tax loss
|
|
$
|
(3,536,000
|
)
|
|
|
|
|
|
Distributable income (loss) differs from GAAP net investment
income primarily due to: (1) origination fees received in
connection with investments in portfolio companies are treated
as taxable income upon receipt; (2) certain stock
compensation expense is not currently deductible for tax
purposes (3) certain debt investments that generate
original issue discount; (4) depreciation and amortization;
and (5) permanent impairment on loans. As a result of the
tax loss for the six months ended June 30, 2009, the
Company did not have any required dividend distributions.
Distributions which exceed tax distributable income (tax net
investment income and realized gains, if any) are reported as
distributions of paid-in capital (i.e., return of capital). The
taxability of the distributions made during 2009 will be
determined by the Companys tax earnings and profits for
its tax year ending December 31, 2009.
The tax cost basis of the Companys investments as of
June 30, 2009 approximates the book cost. There were no
capital gain distributions in 2009 or 2008.
At June 30, 2009, the Company had a net capital loss
carryforward of $4.1 million to offset net capital gains,
to the extent provided by federal tax law. Of the total capital
loss carryforward, $3.2 million will expire in the
Companys tax year ending December 31, 2013, and
$900,000 will expire in the Companys tax year ending
December 31, 2015.
|
|
Note 12.
|
Hedging
Activities
|
Since 2006, the Company, through its special purpose subsidiary,
entered into eight interest rate swap agreements. As of
June 30, 2009, the Company included the $(2.2) million
fair value of these interest rate
F-63
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
swaps in the accounts payable, accrued expenses and other line
of the liabilities section of the Consolidated Balance Sheets.
During the three and six months ended June 30, 2009, the
Company recorded $679,000 and $862,000, respectively of
unrealized appreciation on the fair value on these interest rate
swaps in the Consolidated Statement of Operations. The Company
did not designate any of its interest rate swaps as hedges for
financial accounting purposes. Each month these interest rate
swaps are settled for cash.
No new interest rate swap agreements were executed during the
six months ended June 30, 2009. On July 9, 2009, the
Company terminated all eight interest rate swap agreements, and
realized a loss of $3.3 million, in connection with
entering into an agreement, limited consent and amendment to the
Companys Amended Securitization Facility with the Lenders
(see Note 14. Subsequent Events).
The following table summarizes the Companys terminated
interest rate swaps with Bank of Montreal as the counterparty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
Unrealized
|
|
Date
|
|
Date
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Appreciation
|
|
Entered
|
|
Expiring
|
|
|
Rate
|
|
|
Notional
|
|
|
Cost
|
|
|
Value
|
|
|
(Depreciation)
|
|
|
03/06
|
|
|
01/11
|
|
|
|
5.04
|
%
|
|
$
|
9,937,058
|
|
|
$
|
|
|
|
$
|
(366,499
|
)
|
|
$
|
100,123
|
|
12/06
|
|
|
02/12
|
|
|
|
4.84
|
%
|
|
|
3,192,219
|
|
|
|
|
|
|
|
(283,220
|
)
|
|
|
54,957
|
|
08/07
|
|
|
04/12
|
|
|
|
5.17
|
%
|
|
|
3,938,246
|
|
|
|
|
|
|
|
(381,891
|
)
|
|
|
86,294
|
|
09/07
|
|
|
04/12
|
|
|
|
4.98
|
%
|
|
|
3,784,074
|
|
|
|
|
|
|
|
(339,268
|
)
|
|
|
79,834
|
|
12/07
|
|
|
01/11
|
|
|
|
4.28
|
%
|
|
|
485,449
|
|
|
|
|
|
|
|
(47,511
|
)
|
|
|
4,581
|
|
04/08
|
|
|
12/12
|
|
|
|
3.51
|
%
|
|
|
9,385,926
|
|
|
|
|
|
|
|
(387,814
|
)
|
|
|
218,434
|
|
05/08
|
|
|
09/10
|
|
|
|
3.32
|
%
|
|
|
664,775
|
|
|
|
|
|
|
|
(12,718
|
)
|
|
|
6,349
|
|
10/08
|
|
|
10/12
|
|
|
|
3.54
|
%
|
|
|
12,458,127
|
|
|
|
|
|
|
|
(416,726
|
)
|
|
|
128,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
43,845,874
|
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
678,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Financial
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
Net investment income
|
|
|
.37
|
|
|
|
.64
|
|
Net realized loss on investments
|
|
|
(.57
|
)
|
|
|
(.02
|
)
|
Net change in unrealized depreciation on investments
|
|
|
(.81
|
)
|
|
|
(.64
|
)
|
Effect of issuance of common stock
|
|
|
(.04
|
)
|
|
|
|
|
Distributions from net investment income
|
|
|
|
|
|
|
(.64
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(.02
|
)
|
Net change in unrealized swap appreciation
|
|
|
.04
|
|
|
|
.01
|
|
Stock based compensation expense
|
|
|
.02
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
7.66
|
|
|
$
|
10.08
|
|
|
|
|
|
|
|
|
|
|
Total net asset value return(1)
|
|
|
(11.5
|
)%
|
|
|
0.1
|
%
|
Per share market value, beginning of period $3.64 $10.09 Per
share market value, end of period
|
|
$
|
1.71
|
|
|
$
|
6.25
|
|
Total market value return(2)
|
|
|
(53.0
|
)%
|
|
|
(31.9
|
)%
|
Shares outstanding at end of period
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
160,496,000
|
|
|
$
|
208,622,000
|
|
Average net assets
|
|
|
173,572,000
|
|
|
|
214,404,000
|
|
Ratio of operating expenses to average net assets (annualized)
|
|
|
10.3
|
%
|
|
|
8.1
|
%
|
Ratio of net investment income to average net assets (annualized)
|
|
|
8.8
|
%
|
|
|
12.3
|
%
|
Average borrowings outstanding
|
|
$
|
146,350,000
|
|
|
$
|
146,170,000
|
|
Average amount of borrowings per share
|
|
$
|
6.99
|
|
|
$
|
7.06
|
|
|
|
|
(1) |
|
The total net asset value return (not annualized) reflects the
change in net asset value of a share of stock, plus dividends. |
|
(2) |
|
The total market value return (not annualized) reflects the
change in the ending market value per share plus dividends,
divided by the beginning market value per share. |
|
|
Note 14.
|
Subsequent
Events
|
The Company has evaluated subsequent events through
August 10, 2009, which is the date the financial statements
were available to be issued.
On July 9, 2009, the Company entered into an agreement,
limited consent and amendment (the Agreement, Consent and
Amendment) related to, among other things, the Amended
Securitization Facility with the Lenders and other related
parties. In connection with the Agreement, Consent and
Amendment, the Lenders consented to the sale of the Encore Legal
Solutions, Inc. and L.A. Spas, Inc. term loans and equity
interests and the Company agreed to terminate all eight
outstanding swap agreements and pay the counterparty to such
swaps approximately $3.3 million. Payments on the
terminated swap liability will be made at the rate of $500,000
per month for 6 months beginning in July 2009 and $251,000
in January 2010. The Lenders agreed that the monthly payment of
the swap liability will be paid from the collection of
principal, interest
F-65
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and fees collected from the debt investments. In addition, the
Company agreed with the Lenders that it will not accept equity
securities or other non-cash consideration in forbearance of the
exercise of any rights under any of the loans or debt
instruments held in the Companys investment portfolio or
the cash interest payments on these investments.
On July 9, 2009, the Company received proceeds of
$3.2 million in conjunction with the sale of its junior
secured term loans and equity interests in Encore Legal
Solutions, Inc. In connection with the sale, the Company
realized a loss of approximately $13.4 million. Such
proceeds were used to reduce the principal on our outstanding
borrowings under the Amended Securitization Facility.
On July 9, 2009, the Company sold its senior and
subordinated term loans and equity interests in L.A. Spas, Inc.
for a release of future liabilities against the Company relating
to its investments in this portfolio company. In connection with
the sale, the Company recorded a loss of approximately
$1.6 million.
On July 23, 2009, the Company received gross proceeds of
$3.8 million in connection with the full repayment of the
senior subordinated term loan to Copperhead Chemical Company,
Inc. Such proceeds were used to reduce the principal on our
outstanding borrowings under the Amended Securitization Facility.
On July 23, 2009, William E. Alvarez, Jr., Executive
Vice President, Chief Financial Officer and Secretary of the
Company, entered into an amendment to the employment agreement
with the Company, dated August 7, 2007. The amendment
modifies the definition of Average Annual Bonus set
forth in Section 8 of the employment agreement for purposes
of calculating the lump sum payment Mr. Alvarez would
receive if his employment is terminated for any reason except
for cause (as defined in the employment agreement).
The amendment defines Average Annual Bonus to
include his average bonus for the term of the employment
agreement plus the aggregate grant date fair value of restricted
stock awarded during the term of the employment agreement.
On July 24, 2009, the Company received gross proceeds of
$11.2 million in connection with the full repayment of the
senior and subordinated term loans to Fairchild Industrial
Products, Co. Such proceeds were used to reduce the principal on
our outstanding borrowings under the Amended Securitization
Facility.
On July 31, 2009, the Company entered into a severance
agreement with Clifford L. Wells, its Executive Vice-President
and Chief Compliance Officer. Pursuant to the terms of the
severance agreement, if Mr. Wellss employment is
terminated by the Company without cause or by Mr. Wells for
good reason within 30 days before or within six months
after a change of control transaction that occurs between
July 31, 2009 and January 31, 2010, then the Company
will pay to Mr. Wells his monthly base salary in monthly
installments for six months following his termination of
employment.
On August 3, 2009, the Company and Prospect Capital
Corporation entered into an Agreement and Plan of Merger, dated
as of August 3, 2009 (the Merger Agreement),
pursuant to which the Company will merge with and into Prospect
Capital, with Prospect Capital continuing as the surviving
company in the merger (the Merger). Subject to the
terms and conditions of the Merger Agreement, if the Merger is
completed, each issued and outstanding share of the
Companys common stock will be converted into
0.3992 shares of Prospect Capitals common stock and
any fractional shares resulting from the application of the
exchange ratio will be paid in cash. The exchange ratio will be
adjusted for any dividend the Company may declare prior to the
closing of the Merger. If not exercised prior to completion of
the Merger, outstanding Company stock options will vest and be
cancelled in exchange for the payment in cash to the holder of
these stock options of $0.01 per share of the Companys
common stock for which these options are exercisable. Further,
in connection with the Merger, each share of the Companys
restricted stock then outstanding will vest all restrictions
with respect to such shares of restricted stock will lapse
(a) a number of shares of each holder of restricted stock
will be cancelled in exchange for the cash value per share of
Prospect Capitals common stock at the time of the
consummation of the Merger in an amount estimated to be
sufficient to pay applicable taxes in connection with the
vesting of such shares or (b) the remaining number of
shares of restricted stock will be converted in
F-66
PATRIOT
CAPITAL FUNDING, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Merger into shares of Prospect Capitals common stock
on the same terms as all other shares of the Companys
common stock. In connection with the completion of the Merger,
Prospect Capital will pay off the outstanding principal and
accrued interest and up to $1.35 million of related fees
and expenses due under the Companys securitization
revolving credit facility. As of the date of the Merger
Agreement, there was approximately $115.7 million
outstanding under the facility. Further, as a condition to
Prospect agreeing to execute the Merger Agreement, the Company
agreed to reverse, immediately prior to the Merger, the
$11.8 million federal income tax ordinary loss deduction
that it previously disclosed it would incur with respect to its
investments in L.A. Spas, Inc. As a result, the Company
estimates that distributable income for RIC purposes at
June 30, 2009 would have been $8.3 million.
Immediately prior to the merger, the Company expects to declare
a dividend in the amount of its cumulative distributable income
for RIC purposes, which will be payable 10% in cash and 90%
common stock.
Consummation of the Merger, which is currently anticipated to
occur in the earlier part of the fourth quarter of 2009, is
subject to certain conditions, including, among others, the
approval of the Companys stockholders, accuracy of the
representations and warranties of the other party and compliance
by the other party with its obligations under the Merger
Agreement.
The Merger Agreement also contains certain termination rights
for the Company and Prospect Capital, as the case may be,
including: if the Merger has not been completed by
December 15, 2009; if there is a breach by the other party
that is not or cannot be cured within 30 days notice
of such breach and such breach would result in a failure of the
conditions to closing set forth in the Merger Agreement; if the
Board of Directors of the Company fails to recommend the Merger
to its stockholders; if Patriot Capital Funding breaches its
obligations in any material respect regarding any alternative
business combination proposals; or if Patriot Capital Funding
stockholders have voted to not approve the Merger. In addition,
the Merger Agreement provides that, in connection with the
termination of the Merger Agreement under specified
circumstances, the Company may be required to pay Prospect
Capital a termination fee equal to $3.2 million or to
reimburse certain expenses and make certain other payments.
On August 4, 2009, Bruce Belodoff filed a class action
lawsuit against the Company, its directors and certain of its
officers in the Superior Court of the State of Connecticut. The
lawsuit alleges that the proposed merger between the Company and
Prospect Capital is the product of a flawed sales process and
that the Companys directors and officers breached their
fiduciary duty by agreeing to a structure that was not designed
to maximize the value of the Companys shares. In addition,
the lawsuit asserts that the Company aided and abetted its
officers and directors breach of fiduciary duty.
On August 5, 2009, Brian Killion filed a class action
lawsuit against the Company, its directors and certain of its
officers in the Superior Court of the State of Connecticut. The
lawsuit alleges that the consideration to be paid in the
proposed merger between the Company and Prospect Capital is
unfair and is the result of an unfair process. The lawsuit
further alleges that the Companys directors and officers
breached their fiduciary duty by agreeing to a structure that is
designed to deter higher offers from other bidders and for
failing to obtain the highest and best price for the
Companys stockholders. In addition, the lawsuit asserts
that the Company and Prospect Capital aided and abetted the
Companys officers and directors breach of
fiduciary duty.
At this time, the Company is unable to determine whether an
unfavorable outcome from this matter is probable or remote or to
estimate the amount or range of potential loss, if any. However,
the Company believes that these claims are without merit and
intends to vigorously defend against them.
F-67
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Patriot Capital Funding, Inc.
We have audited the accompanying consolidated balance sheets of
Patriot Capital Funding, Inc. (a Delaware Corporation) (the
Company) including the consolidated schedule of
investments, as of December 31, 2008 and 2007, and the
related consolidated statements of operations, cash flows,
changes in net assets and the financial highlights (included in
Note 14) for each of the three years in the period
ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Patriot Capital Funding,
Inc. as of December 31, 2008 and 2007, and the results of
its operations, cash flows, changes in net assets and its
financial highlights for each of the three years in the period
ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that Patriot Capital Funding, Inc. will
continue as a going concern. As discussed in Note 2 to the
accompanying consolidated financial statements, the Company is
currently negotiating the renewal of the liquidity facility
supporting the Companys second amended and restated
securitization revolving credit facility (the
Facility) which matures on April 11, 2009. In
the event that the liquidity facility is not renewed, the terms
of the Facility require that all principal, interest and fees
collected from the debt investments pledged under the Facility
must be used to pay down amounts outstanding under the liquidity
facility by April 11, 2011. Because substantially all of
the Companys debt investments are pledged under the
Facility, the Company may not have sufficient cash and liquid
assets to fund its normal operations. Therefore, the Company may
not be able to realize its assets and settle its liabilities in
the ordinary course of business. These conditions raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to this
matter are described in Note 2 to the accompanying
consolidated financial statements. The accompanying consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 4 to the accompanying consolidated
financial statements, in 2008 the Company adopted Statement of
Financial Accounting Standards No. 157 Fair
Value Measurements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Patriot Capital Funding, Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated
March 13, 2009 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2009
F-68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Patriot Capital Funding, Inc.
We have audited Patriot Capital Funding, Inc.s (a Delaware
Corporation) (the Company) internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Patriot Capital
Funding, Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on Patriot Capital Funding, Inc.s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Patriot Capital Funding, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Patriot Capital Funding, Inc.,
including the consolidated schedule of investments, as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, cash flows, changes in net assets and
the financial highlights (included in Note 14) for
each of the three years in the period ended December 31,
2008 and our report dated March 13, 2009 expressed an
unqualified opinion and included explanatory paragraphs
regarding the Companys ability to continue as a going
concern and the Companys adoption of Statement of
Financial Accounting Standards No. 157 Fair
Value Measurements.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2009
F-69
PATRIOT
CAPITAL FUNDING, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments (cost of
$269,577,008 2008, $294,686,727 2007)
|
|
$
|
240,486,620
|
|
|
$
|
290,225,759
|
|
Affiliate investments (cost of $53,129,533 2008,
$86,577,905 2007)
|
|
|
51,457,082
|
|
|
|
85,171,605
|
|
Control investments (cost of $43,192,484 2008,
$6,980,389 2007)
|
|
|
30,427,046
|
|
|
|
9,328,389
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
322,370,748
|
|
|
|
384,725,753
|
|
Cash and cash equivalents
|
|
|
6,449,454
|
|
|
|
789,451
|
|
Restricted cash
|
|
|
22,155,073
|
|
|
|
10,487,202
|
|
Interest receivable
|
|
|
1,390,285
|
|
|
|
1,758,954
|
|
Other assets
|
|
|
1,897,086
|
|
|
|
617,448
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
354,262,646
|
|
|
$
|
398,378,808
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
162,600,000
|
|
|
$
|
164,900,000
|
|
Interest payable
|
|
|
514,125
|
|
|
|
821,124
|
|
Dividends payable
|
|
|
5,253,709
|
|
|
|
6,814,650
|
|
Accounts payable, accrued expenses and other
|
|
|
5,777,642
|
|
|
|
4,245,350
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
174,145,476
|
|
|
|
176,781,124
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 49,000,000 shares
authorized; 20,827,334 and 20,650,455 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
|
208,274
|
|
|
|
206,504
|
|
Paid-in-capital
|
|
|
234,385,063
|
|
|
|
233,722,593
|
|
Accumulated net investment loss
|
|
|
(1,912,061
|
)
|
|
|
(1,912,061
|
)
|
Distributions in excess of net investment income
|
|
|
(1,758,877
|
)
|
|
|
(2,824,651
|
)
|
Net realized loss on investments
|
|
|
(4,053,953
|
)
|
|
|
(3,171,365
|
)
|
Net unrealized depreciation on interest rate swaps
|
|
|
(3,097,384
|
)
|
|
|
(762,365
|
)
|
Net unrealized depreciation on investments
|
|
|
(43,653,892
|
)
|
|
|
(3,660,971
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
180,117,170
|
|
|
|
221,597,684
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
354,262,646
|
|
|
$
|
398,378,808
|
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER COMMON SHARE
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-70
PATRIOT
CAPITAL FUNDING, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
$
|
29,261,759
|
|
|
$
|
31,729,397
|
|
|
$
|
25,011,993
|
|
Affiliate investments
|
|
|
8,504,451
|
|
|
|
4,947,294
|
|
|
|
375,716
|
|
Control investments
|
|
|
2,373,877
|
|
|
|
470,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
40,140,087
|
|
|
|
37,147,275
|
|
|
|
25,387,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
|
809,113
|
|
|
|
1,080,929
|
|
|
|
260,289
|
|
Affiliate investments
|
|
|
432,435
|
|
|
|
93,419
|
|
|
|
9,887
|
|
Control investments
|
|
|
168,065
|
|
|
|
106,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
1,409,613
|
|
|
|
1,280,361
|
|
|
|
270,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments
|
|
|
300,076
|
|
|
|
534,901
|
|
|
|
848,449
|
|
Affiliate investments
|
|
|
307,245
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
142,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investment income
|
|
|
749,704
|
|
|
|
534,901
|
|
|
|
848,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
42,299,404
|
|
|
|
38,962,537
|
|
|
|
26,506,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
3,973,030
|
|
|
|
5,410,075
|
|
|
|
3,877,525
|
|
Interest expense
|
|
|
8,158,473
|
|
|
|
7,421,596
|
|
|
|
4,332,582
|
|
Professional fees
|
|
|
1,635,519
|
|
|
|
887,021
|
|
|
|
1,045,613
|
|
General and administrative expense
|
|
|
2,807,113
|
|
|
|
2,498,724
|
|
|
|
2,229,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
16,574,135
|
|
|
|
16,217,416
|
|
|
|
11,485,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
25,725,269
|
|
|
|
22,745,121
|
|
|
|
15,020,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REALIZED GAIN AND (LOSS) AND NET UNREALIZED APPRECIATION
(DEPRECIATION)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on investments
non-control/non-affiliate investments
|
|
|
(990,993
|
)
|
|
|
91,601
|
|
|
|
(3,262,966
|
)
|
Net realized gain on investments affiliate
investments
|
|
|
458,405
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments control investments
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on
investments non-control/non-affiliate investments
|
|
|
(22,894,683
|
)
|
|
|
(4,620,406
|
)
|
|
|
3,858,931
|
|
Net unrealized depreciation on investments affiliate
investments
|
|
|
(9,613,047
|
)
|
|
|
(1,365,300
|
)
|
|
|
(41,000
|
)
|
Net unrealized appreciation (depreciation) on
investments control investments
|
|
|
(7,485,191
|
)
|
|
|
2,348,000
|
|
|
|
|
|
Net unrealized appreciation (depreciation) on interest rate swaps
|
|
|
(2,335,019
|
)
|
|
|
(775,326
|
)
|
|
|
12,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
|
|
|
(43,210,528
|
)
|
|
|
(4,321,431
|
)
|
|
|
567,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(17,485,259
|
)
|
|
$
|
18,423,690
|
|
|
$
|
15,588,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, basic
|
|
$
|
(0.84
|
)
|
|
$
|
0.99
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share, diluted
|
|
$
|
(0.84
|
)
|
|
$
|
0.98
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
20,713,540
|
|
|
|
18,670,904
|
|
|
|
14,145,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
|
20,713,540
|
|
|
|
18,830,213
|
|
|
|
14,237,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-71
PATRIOT
CAPITAL FUNDING, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(17,485,259
|
)
|
|
$
|
18,423,690
|
|
|
$
|
15,588,570
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
606,606
|
|
|
|
411,860
|
|
|
|
456,289
|
|
Change in interest receivable
|
|
|
368,669
|
|
|
|
462,046
|
|
|
|
(1,353,525
|
)
|
Net realized loss (gain) on sale of investments
|
|
|
882,588
|
|
|
|
(91,601
|
)
|
|
|
3,262,966
|
|
Unrealized depreciation (appreciation) on investments
|
|
|
39,992,921
|
|
|
|
3,637,706
|
|
|
|
(3,817,931
|
)
|
Unrealized depreciation (appreciation) on interest rate swaps
|
|
|
2,335,019
|
|
|
|
775,326
|
|
|
|
(12,961
|
)
|
Payment-in-kind
interest and dividends
|
|
|
(5,452,124
|
)
|
|
|
(3,928,159
|
)
|
|
|
(2,424,927
|
)
|
Stock based compensation expense
|
|
|
757,783
|
|
|
|
675,822
|
|
|
|
505,785
|
|
Change in unearned income
|
|
|
(129,458
|
)
|
|
|
986,413
|
|
|
|
152,200
|
|
Change in interest payable
|
|
|
(306,999
|
)
|
|
|
297,415
|
|
|
|
463,375
|
|
Change in other assets
|
|
|
(86,612
|
)
|
|
|
93,868
|
|
|
|
(9,663
|
)
|
Change in accounts payable, accrued expenses and other
|
|
|
(1,565,092
|
)
|
|
|
1,076,142
|
|
|
|
1,024,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,918,042
|
|
|
|
22,820,528
|
|
|
|
13,834,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded investments
|
|
|
(82,342,723
|
)
|
|
|
(200,316,250
|
)
|
|
|
(157,951,595
|
)
|
Principal repayments on investments
|
|
|
95,018,988
|
|
|
|
67,332,023
|
|
|
|
37,627,269
|
|
Proceeds from sale of investments
|
|
|
14,384,813
|
|
|
|
5,466,351
|
|
|
|
3,642,634
|
|
Purchases of furniture and equipment
|
|
|
(6,295
|
)
|
|
|
(47,832
|
)
|
|
|
(269,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
27,054,783
|
|
|
|
(127,565,708
|
)
|
|
|
(116,951,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
110,204,117
|
|
|
|
188,177,000
|
|
|
|
353,580,000
|
|
Repayments on borrowings
|
|
|
(112,504,117
|
)
|
|
|
(121,657,000
|
)
|
|
|
(276,850,000
|
)
|
Deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
(159,620
|
)
|
Net proceeds from sale of common stock
|
|
|
(23,585
|
)
|
|
|
60,517,044
|
|
|
|
36,652,098
|
|
Dividends paid
|
|
|
(26,290,394
|
)
|
|
|
(20,217,670
|
)
|
|
|
(10,885,371
|
)
|
Decrease (increase) in restricted cash
|
|
|
(11,667,871
|
)
|
|
|
(5,373,396
|
)
|
|
|
2,692,522
|
|
Deferred financing costs
|
|
|
(1,030,972
|
)
|
|
|
(122,990
|
)
|
|
|
(73,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(41,312,822
|
)
|
|
|
101,322,988
|
|
|
|
104,956,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
5,660,003
|
|
|
|
(3,422,192
|
)
|
|
|
1,839,802
|
|
CASH AND CASH EQUIVALENTS AT:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
789,451
|
|
|
|
4,211,643
|
|
|
|
2,371,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
6,449,454
|
|
|
$
|
789,451
|
|
|
$
|
4,211,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8,465,472
|
|
|
$
|
7,124,181
|
|
|
$
|
3,869,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
|
$
|
5,734,567
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends reinvested in common stock
|
|
$
|
1,065,246
|
|
|
$
|
2,212,996
|
|
|
$
|
1,054,090
|
|
Dividends declared but not paid
|
|
$
|
5,253,709
|
|
|
$
|
6,814,650
|
|
|
$
|
4,904,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-72
PATRIOT
CAPITAL FUNDING, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
25,725,269
|
|
|
$
|
22,745,121
|
|
|
$
|
15,020,644
|
|
Net realized gain (loss) on investments
|
|
|
(882,588
|
)
|
|
|
91,601
|
|
|
|
(3,262,966
|
)
|
Net unrealized appreciation (depreciation) on investments
|
|
|
(39,992,921
|
)
|
|
|
(3,637,706
|
)
|
|
|
3,817,931
|
|
Net unrealized appreciation (depreciation) on interest rate swaps
|
|
|
(2,335,019
|
)
|
|
|
(775,326
|
)
|
|
|
12,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations
|
|
|
(17,485,259
|
)
|
|
|
18,423,690
|
|
|
|
15,588,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders from net investment income
|
|
|
(25,725,269
|
)
|
|
|
(22,745,121
|
)
|
|
|
(15,020,644
|
)
|
Tax return of capital
|
|
|
(1,135,204
|
)
|
|
|
(1,592,314
|
)
|
|
|
(2,484,892
|
)
|
Distributions in excess of net investment income
|
|
|
1,065,774
|
|
|
|
(3,063
|
)
|
|
|
661,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(25,794,699
|
)
|
|
|
(24,340,498
|
)
|
|
|
(16,844,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
(23,585
|
)
|
|
|
60,517,045
|
|
|
|
36,652,098
|
|
Issuance of common stock under dividend reinvestment plan
|
|
|
1,065,246
|
|
|
|
2,212,996
|
|
|
|
1,054,090
|
|
Stock based compensation
|
|
|
757,783
|
|
|
|
675,822
|
|
|
|
505,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
1,799,444
|
|
|
|
63,405,863
|
|
|
|
38,211,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets
|
|
|
(41,480,514
|
)
|
|
|
57,489,055
|
|
|
|
36,956,264
|
|
Net assets at beginning of period
|
|
|
221,597,684
|
|
|
|
164,108,629
|
|
|
|
127,152,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
180,117,170
|
|
|
$
|
221,597,684
|
|
|
$
|
164,108,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
|
$
|
10.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
20,827,334
|
|
|
|
20,650,455
|
|
|
|
15,821,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-73
PATRIOT
CAPITAL FUNDING, INC.
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encore Legal Solutions, Inc.
|
|
Legal document management
|
|
Junior Secured Term Loan A (6.2%, Due 12/10)(2)(3)
|
|
$
|
4,020,456
|
|
|
$
|
4,007,366
|
|
|
$
|
3,537,910
|
|
(Printing & Publishing)
|
|
services
|
|
Junior Secured Term Loan B (9.2%, Due 12/10)(2)(3)
|
|
|
7,390,687
|
|
|
|
7,355,975
|
|
|
|
6,492,888
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
5,159,567
|
|
|
|
326,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC (Machinery)
|
|
Designer and manufacturer of
|
|
Senior Subordinated Debt (16.5%, Due 5/13)(2)(3)
|
|
|
3,492,760
|
|
|
|
3,471,147
|
|
|
|
3,540,987
|
|
|
|
packaging equipment
|
|
Membership Interest Class A(4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
3,876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nupla Corporation
|
|
Manufacturer and marketer of
|
|
Revolving Line of Credit (7.3%, Due 9/12)(3)
|
|
|
870,000
|
|
|
|
856,425
|
|
|
|
856,425
|
|
(Home & Office
|
|
professional high-grade
|
|
Senior Secured Term Loan A (8.0%, Due 9/12)(3)
|
|
|
5,354,688
|
|
|
|
5,315,741
|
|
|
|
5,166,852
|
|
Furnishings, Housewares &
|
|
fiberglass- handled striking and
|
|
Senior Subordinated Debt (15.0%, Due 3/13)(2)(3)
|
|
|
3,123,084
|
|
|
|
3,102,059
|
|
|
|
2,192,375
|
|
Durable Consumer Products)
|
|
digging tools
|
|
Preferred Stock Class A(2)
|
|
|
|
|
|
|
550,584
|
|
|
|
15,900
|
|
|
|
|
|
Preferred Stock Class B(2)
|
|
|
|
|
|
|
1,101,001
|
|
|
|
1,101,500
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sidumpr Trailer Company, Inc.
|
|
Manufacturer of side dump
|
|
Revolving Line of Credit (7.3%, Due 1/11)(3)
|
|
|
950,000
|
|
|
|
934,432
|
|
|
|
934,432
|
|
(Automobile)
|
|
trailers
|
|
Senior Secured Term Loan A (7.3%, Due 1/11)(3)
|
|
|
2,047,500
|
|
|
|
2,036,677
|
|
|
|
2,036,677
|
|
|
|
|
|
Senior Secured Term Loan B (8.8%, Due 1/11)(3)
|
|
|
2,320,625
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C (16.5%, Due 7/11)(2)(3)
|
|
|
2,406,374
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D (7.3%, Due 7/11)
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
|
|
348,200
|
|
|
|
|
|
Preferred Stock(2)
|
|
|
|
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control investments (represents 9.4% of total
investments at fair value)
|
|
|
|
|
|
$
|
43,192,484
|
|
|
$
|
30,427,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated
|
|
Supplier of spiritwear and
|
|
Senior Secured Term Loan A (8.0%, Due 9/13)(3)
|
|
|
5,328,125
|
|
|
|
5,273,766
|
|
|
|
5,273,766
|
|
(Textiles & Leather)
|
|
campus apparel
|
|
Senior Secured Term Loan B (8.5%, Due 9/13)(3)
|
|
|
5,486,250
|
|
|
|
5,429,567
|
|
|
|
5,429,567
|
|
|
|
|
|
Senior Subordinated Debt (16.8%, Due 3/14)(2)(3)
|
|
|
6,591,375
|
|
|
|
6,524,347
|
|
|
|
6,524,347
|
|
|
|
|
|
Preferred Stock(4)
|
|
|
|
|
|
|
1,029,722
|
|
|
|
849,500
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
|
|
Manufacturer and distributor of
|
|
Revolving Line of Credit (5.0%, Due 1/12)(3)
|
|
|
1,000,000
|
|
|
|
986,840
|
|
|
|
986,840
|
|
(Textiles & Leather)
|
|
specialty pet products
|
|
Senior Secured Term Loan A (5.1%, Due 1/12)(3)
|
|
|
4,996,875
|
|
|
|
4,950,978
|
|
|
|
4,951,005
|
|
|
|
|
|
Senior Secured Term Loan B (12.0%, Due 1/12)(3)
|
|
|
465,000
|
|
|
|
460,265
|
|
|
|
460,265
|
|
|
|
|
|
Junior Secured Term Loan (15.0%, Due 3/12)(2)(3)
|
|
|
4,207,806
|
|
|
|
4,172,076
|
|
|
|
4,172,076
|
|
|
|
|
|
Membership Interest Class A(4)
|
|
|
|
|
|
|
730,020
|
|
|
|
721,200
|
|
|
|
|
|
Membership Interest Common(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC(5) (Diversified/
|
|
Provider of tuition management
|
|
Membership Interest Class B(4)
|
|
|
|
|
|
|
1,280,403
|
|
|
|
311,500
|
|
Conglomerate Service)
|
|
services
|
|
Membership Interest Class D(4)
|
|
|
|
|
|
|
290,333
|
|
|
|
312,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sport Helmets Holdings, LLC(5)
|
|
Manufacturer of protective
|
|
Senior Secured Term Loan A (5.9%, Due 12/13)(3)
|
|
|
4,500,000
|
|
|
|
4,445,614
|
|
|
|
4,282,314
|
|
(Personal & Nondurable
|
|
headgear
|
|
Senior Secured Term Loan B (6.4%, Due 12/13)(3)
|
|
|
7,500,000
|
|
|
|
7,400,148
|
|
|
|
7,128,048
|
|
Consumer Products)
|
|
|
|
Senior Subordinated Debt - Series A (15.0%, Due 6/14)(2)(3)
|
|
|
7,000,000
|
|
|
|
6,896,866
|
|
|
|
6,896,866
|
|
|
|
|
|
Senior Subordinated Debt - Series B (15.0%, Due 6/14)(2)
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,899,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments (represents 16.0% of total
investments at fair value)
|
|
|
|
|
|
$
|
53,129,533
|
|
|
$
|
51,457,082
|
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc. (Ecological)
|
|
Distributor of specialty chemicals
|
|
Senior Secured Term Loan A (11.5%, Due 6/11)(3)
|
|
$
|
8,103,125
|
|
|
$
|
8,056,102
|
|
|
$
|
8,056,102
|
|
|
|
and contract application services
|
|
Common Stock(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
108,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fasteners International,
|
|
Distributor of fasteners and
|
|
Senior Secured Term Loan (4.1%, Due 11/12)(3)
|
|
|
5,528,000
|
|
|
|
5,446,932
|
|
|
|
5,208,632
|
|
LLC (Machinery)
|
|
related hardware for use in
|
|
Junior Secured Term Loan (14.0%, Due 5/13)(2)(3)
|
|
|
5,306,249
|
|
|
|
5,242,761
|
|
|
|
5,242,761
|
|
|
|
aerospace, electronics and
|
|
Convertible Preferred Stock(2)
|
|
|
|
|
|
|
273,397
|
|
|
|
503,600
|
|
|
|
defense industries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Defense Group, Inc.
|
|
Diversified defense
|
|
Common Stock(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
173,600
|
|
(Aerospace & Defense)
|
|
company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance
|
|
Insurance agency and
|
|
Junior Secured Term Loan (7.7%, Due 2/13)(3)
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
4,048,200
|
|
Agency, Inc.(6) (Insurance)
|
|
program specialist
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC(5)
|
|
Manufacturer of packaging
|
|
Revolving Line of Credit (10.0%, Due 2/12)(3)
|
|
$
|
3,700,000
|
|
|
$
|
3,647,158
|
|
|
$
|
3,647,158
|
|
(Machinery)
|
|
equipment
|
|
Senior Secured Term Loan A (11.6%, Due 2/12)(3)
|
|
|
8,085,938
|
|
|
|
7,999,958
|
|
|
|
3,572,320
|
|
|
|
|
|
Senior Subordinated Debt (22.0%, Due 8/12)(2)
|
|
|
7,328,591
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note (8.0%, Due 2/13)(2)
|
|
|
151,527
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
Membership Interest(4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borga, Inc. (Mining, Steel, Iron &
|
|
Manufacturer of pre-fabricated
|
|
Revolving Line of Credit (4.9%, Due 5/10)(3)
|
|
|
800,000
|
|
|
|
793,950
|
|
|
|
793,950
|
|
Nonprecious Metals)
|
|
metal building systems
|
|
Senior Secured Term Loan A (5.4%, Due 5/09)(3)
|
|
|
328,116
|
|
|
|
325,903
|
|
|
|
325,903
|
|
|
|
|
|
Senior Secured Term Loan B (8.4%, Due 5/10)(3)
|
|
|
1,635,341
|
|
|
|
1,617,095
|
|
|
|
1,617,095
|
|
|
|
|
|
Senior Secured Term Loan C (16.0%, Due 5/10)(2)(3)
|
|
|
8,117,266
|
|
|
|
8,074,916
|
|
|
|
8,074,916
|
|
|
|
|
|
Common Stock Warrants(4)
|
|
|
|
|
|
|
14,805
|
|
|
|
|
|
|
|
F-74
PATRIOT
CAPITAL FUNDING, INC.
Consolidated
Schedule of Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC(5)
|
|
Provider of proprietary branded
|
|
Junior Secured Term Loan B (4.7%, Due 11/11)(3)
|
|
|
10,771,562
|
|
|
|
10,668,072
|
|
|
|
10,668,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Personal & Nondurable
|
|
professional skincare and
|
|
Senior Subordinated Debt (14.5%, Due 11/12)(3)
|
|
|
6,250,000
|
|
|
|
6,190,008
|
|
|
|
6,252,608
|
|
Consumer Products)
|
|
cosmetic products to physicians
|
|
Common Stock(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
862,100
|
|
|
|
and spa communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDW Corporation(6)
|
|
Direct marketer of computer and
|
|
Senior Secured Term Loan (6.7%, Due 10/14)
|
|
|
2,000,000
|
|
|
|
1,780,924
|
|
|
|
920,000
|
|
(Electronics)
|
|
peripheral equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Operating, LLC(5)
|
|
Provider of maintenance, repair
|
|
Revolving Line of Credit (6.8%, Due 1/13)(3)
|
|
|
200,000
|
|
|
|
194,564
|
|
|
|
194,564
|
|
(Buildings & Real Estate)
|
|
and replacement of HVAC,
|
|
Senior Secured Term Loan A (6.6%, Due 7/12)(3)
|
|
|
1,855,064
|
|
|
|
1,832,122
|
|
|
|
1,832,122
|
|
|
|
electrical, plumbing, and foundation repair
|
|
Senior Subordinated Debt (16.5%, Due 1/13)(2)(3)
|
|
|
2,616,863
|
|
|
|
2,586,496
|
|
|
|
2,586,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copernicus Group (Healthcare,
|
|
Provider of clinical trial review
|
|
Revolving Line of Credit (8.8%, Due 10/13)(3)
|
|
|
150,000
|
|
|
|
130,753
|
|
|
|
130,753
|
|
Education & Childcare)
|
|
services
|
|
Senior Secured Term Loan A (9.0%, Due 10/13)(3)
|
|
|
8,043,750
|
|
|
|
7,917,470
|
|
|
|
7,917,470
|
|
|
|
|
|
Senior Subordinated Debt (16.0%, Due 4/14)(3)
|
|
|
12,112,000
|
|
|
|
11,926,408
|
|
|
|
11,926,408
|
|
|
|
|
|
Preferred Stock Series A
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,033,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperhead Chemical
|
|
Manufacturer of bulk
|
|
Senior Subordinated Debt (21.0%, Due 1/13)(2)(3)
|
|
|
3,693,195
|
|
|
|
3,664,655
|
|
|
|
3,664,655
|
|
Company, Inc.
(Chemicals, Plastics & Rubber)
|
|
pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc.(6)
|
|
Direct marketer of checks and
|
|
Senior Secured Term Loan (4.2%, Due 12/13)(3)
|
|
|
1,847,386
|
|
|
|
1,603,118
|
|
|
|
1,330,100
|
|
(Printing & Publishing)
|
|
other financial products and
|
|
Junior Secured Term Loan (7.5%, Due 12/14)(3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
880,000
|
|
|
|
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dover Saddlery, Inc.
|
|
Equestrian products
|
|
Common Stock(4)
|
|
|
|
|
|
|
148,200
|
|
|
|
41,500
|
|
(Retail Stores)
|
|
catalog retailer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employbridge Holding
|
|
A provider of
|
|
Junior Secured Term Loan (10.4%, Due 10/13)(3)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
1,050,000
|
|
Company(5)(6) (Personal, Food & Miscellaneous
Services)
|
|
specialized staffing services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
|
|
Manufacturer of lab testing
|
|
Senior Secured Term Loan A (6.6%, Due 3/11)(3)
|
|
|
3,278,998
|
|
|
|
3,258,757
|
|
|
|
3,072,159
|
|
(Electronics)
|
|
supplies
|
|
Senior Secured Term Loan B (6.9%, Due 3/12)(3)
|
|
|
4,499,911
|
|
|
|
4,452,650
|
|
|
|
4,196,539
|
|
|
|
|
|
Senior Secured Term Loan C (7.4%, Due 3/12)(3)
|
|
|
2,775,439
|
|
|
|
2,737,602
|
|
|
|
2,579,563
|
|
|
|
|
|
Senior Secured Term Loan D (15.0%, Due 3/12)(3)
|
|
|
6,557,997
|
|
|
|
6,501,063
|
|
|
|
6,501,063
|
|
|
|
|
|
Common Stock Class A(4)
|
|
|
|
|
|
|
2,475
|
|
|
|
269,000
|
|
|
|
|
|
Common Stock Class B(2)
|
|
|
|
|
|
|
279,222
|
|
|
|
281,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairchild Industrial Products, Co.
|
|
Manufacturer of industrial
|
|
Senior Secured Term Loan A (5.8%, Due 7/10)(3)
|
|
|
1,690,402
|
|
|
|
1,678,459
|
|
|
|
1,652,157
|
|
(Electronics)
|
|
controls and power transmission
|
|
Senior Secured Term Loan B (7.7%, Due 1/11)(3)
|
|
|
4,477,500
|
|
|
|
4,448,975
|
|
|
|
4,379,475
|
|
|
|
products
|
|
Senior Subordinated Debt (14.8%, Due 7/11)(3)
|
|
|
5,460,000
|
|
|
|
5,418,066
|
|
|
|
5,418,066
|
|
|
|
|
|
Preferred Stock Class A(2)
|
|
|
|
|
|
|
353,573
|
|
|
|
353,573
|
|
|
|
|
|
Common Stock Class B(4)
|
|
|
|
|
|
|
121,598
|
|
|
|
410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hudson Products Holdings, Inc.(6)
|
|
Manufactures and designs
|
|
Senior Secured Term Loan (8.0%, Due 8/15)(3)
|
|
|
7,481,250
|
|
|
|
7,265,876
|
|
|
|
6,433,900
|
|
(Mining, Steel, Iron & Nonprecious Metals)
|
|
air-cooled heat exchanger equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Products, LLC
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan (7.0%, Due 9/12)(3)
|
|
|
8,893,750
|
|
|
|
8,839,775
|
|
|
|
8,418,625
|
|
(Machinery)
|
|
|
|
Senior Subordinated Debt (15.0%, Due 9/12)(3)
|
|
|
5,547,993
|
|
|
|
5,517,791
|
|
|
|
5,517,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keltner Enterprises, LLC(5) (Oil & Gas)
|
|
Distributor of automotive oils, chemicals and parts
|
|
Senior Subordinated Debt (14.0%, Due 12/11)(3)
|
|
|
3,850,000
|
|
|
|
3,840,677
|
|
|
|
3,840,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Label Corp Holdings, Inc.(6)
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan (8.0%, Due 8/14)(3)
|
|
|
6,483,750
|
|
|
|
6,176,385
|
|
|
|
5,592,200
|
|
(Printing & Publishing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L.A. Spas, Inc. (Chemicals,
|
|
Manufacturer of above ground
|
|
Revolving Line of Credit (8.8%, Due 12/09)(3)
|
|
|
1,000,000
|
|
|
|
990,794
|
|
|
|
990,794
|
|
Plastics & Rubber)
|
|
spas
|
|
Senior Secured Term Loan (8.8%, Due 12/09)(3)
|
|
|
4,165,430
|
|
|
|
4,092,364
|
|
|
|
4,092,364
|
|
|
|
|
|
Senior Subordinated Debt (17.5%, Due 1/10)(2)(3)
|
|
|
8,011,600
|
|
|
|
7,907,534
|
|
|
|
599,193
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants(4)
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp. (Healthcare,
|
|
Provider of home healthcare
|
|
Senior Secured Term Loan A (4.5%, Due 11/12)(3)
|
|
|
4,100,403
|
|
|
|
4,057,774
|
|
|
|
3,927,171
|
|
Education & Childcare)
|
|
services
|
|
Senior Subordinated Debt (14.5%, Due 5/13)(3)
|
|
|
4,565,000
|
|
|
|
4,517,936
|
|
|
|
4,517,936
|
|
|
|
|
|
Membership Interest(4)
|
|
|
|
|
|
|
125,000
|
|
|
|
159,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mac & Massey Holdings, LLC
|
|
Broker and distributor of
|
|
Senior Subordinated Debt (16.5%, Due 2/13)(2)(3)
|
|
|
7,942,142
|
|
|
|
7,913,369
|
|
|
|
7,913,369
|
|
(Grocery)
|
|
ingredients to manufacturers of
|
|
Common Stock(4)
|
|
|
|
|
|
|
242,820
|
|
|
|
365,200
|
|
|
|
food products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwestern Management
|
|
Provider of dental services
|
|
Senior Secured Term Loan A (4.5%, Due 12/12)(3)
|
|
|
5,580,000
|
|
|
|
5,531,693
|
|
|
|
5,531,693
|
|
Services, LLC (Healthcare,
|
|
|
|
Senior Secured Term Loan B (5.0%, Due 12/12)(3)
|
|
|
1,237,500
|
|
|
|
1,226,436
|
|
|
|
1,226,436
|
|
Education & Childcare)
|
|
|
|
Junior Secured Term Loan (15.0%, Due 6/13)(2)(3)
|
|
|
2,839,310
|
|
|
|
2,815,535
|
|
|
|
2,815,535
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
315,200
|
|
|
|
F-75
PATRIOT
CAPITAL FUNDING, INC.
Consolidated
Schedule of Investments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prince Mineral Company, Inc.
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan (5.5%, Due 12/12)(3)
|
|
|
11,275,000
|
|
|
|
11,131,129
|
|
|
|
10,750,129
|
|
(Metals & Minerals)
|
|
|
|
Senior Subordinated Debt (14.0%, Due 7/13)(2)(3)
|
|
|
12,034,071
|
|
|
|
11,918,351
|
|
|
|
11,703,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quartermaster, Inc.
|
|
Retailer of uniforms and tactical
|
|
Revolving Line of Credit (6.7%, Due 12/10)(3)
|
|
|
1,750,000
|
|
|
|
1,731,275
|
|
|
|
1,731,275
|
|
(Retail Stores)
|
|
equipment to law enforcement
|
|
Senior Secured Term Loan A (6.8%, Due 12/10)(3)
|
|
|
3,225,250
|
|
|
|
3,197,369
|
|
|
|
3,197,369
|
|
|
|
and security professionals
|
|
Senior Secured Term Loan B (8.1%, Due 12/10)(3)
|
|
|
2,543,750
|
|
|
|
2,526,377
|
|
|
|
2,526,377
|
|
|
|
|
|
Senior Secured Term Loan C (15.0%, Due 12/11)(2)(3)
|
|
|
3,399,818
|
|
|
|
3,375,763
|
|
|
|
3,375,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-O-M Corporation (Automobile)
|
|
Manufacturer of doors, ramps and
|
|
Senior Secured Term Loan A (3.4%, Due 2/13)(3)
|
|
|
6,640,000
|
|
|
|
6,582,627
|
|
|
|
6,266,127
|
|
|
|
bulk heads for fire trucks and
|
|
Senior Secured Term Loan B (4.9%, Due 5/13)(3)
|
|
|
8,379,000
|
|
|
|
8,290,058
|
|
|
|
7,890,766
|
|
|
|
food transportation
|
|
Senior Subordinated Debt (15.0%, Due 8/13)(3)
|
|
|
9,100,000
|
|
|
|
9,011,070
|
|
|
|
9,011,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/non-affiliate investments (represents 74.6%
of total investments at fair value)
|
|
|
|
|
|
$
|
269,577,008
|
|
|
$
|
240,486,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
(1) |
|
Affiliate investments are generally defined under the Investment
Company Act of 1940, as amended (the 1940 Act), as
companies in which the Company owns at least 5% but not more
than 25% of the voting securities of the company. Control
investments are generally defined under the 1940 Act as
companies in which the Company owns more than 25% of the voting
securities of the company or has greater than 50% representation
on its board. |
|
(2) |
|
Amount includes
payment-in-kind
(PIK) interest or dividends. |
|
(3) |
|
Pledged as collateral under the Companys Securitization
Facility. See Note 6 to Consolidated Financial Statements. |
|
(4) |
|
Non-income producing. |
|
(5) |
|
Some of the investments listed are issued by an affiliate of the
listed portfolio company. |
|
(6) |
|
Syndicated investment which has been originated by another
financial institution and broadly distributed. |
See Notes to Consolidated Financial Statements
F-76
PATRIOT
CAPITAL FUNDING, INC.
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Description
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Value
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC (Machinery)
|
|
Designer and manufacturer of
|
|
Senior Subordinated Debt (16.5%, Due 5/13)(2)(3)
|
|
$
|
4,211,988
|
|
|
$
|
4,180,389
|
|
|
$
|
4,180,389
|
|
|
|
packaging equipment
|
|
Membership Interest Class A(4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
5,148,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control investments (represents 2.4% of total
investments at fair value)
|
|
|
|
|
|
$
|
6,980,389
|
|
|
$
|
9,328,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC(5)
|
|
Manufacturer of packaging
|
|
Revolving Line of Credit (8.7%, Due 2/12)(3)
|
|
$
|
3,700,000
|
|
|
$
|
3,630,012
|
|
|
$
|
3,630,012
|
|
(Machinery)
|
|
equipment
|
|
Senior Secured Term Loan A (9.5%, Due 2/12)(3)
|
|
|
8,292,188
|
|
|
|
8,162,724
|
|
|
|
8,162,724
|
|
|
|
|
|
Senior Subordinated Debt (14.5%, Due 8/12)(2)
|
|
|
6,424,702
|
|
|
|
6,335,464
|
|
|
|
6,335,464
|
|
|
|
|
|
Membership Interest(4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC (Textiles &
|
|
Manufacturer and distributor of
|
|
Revolving Line of Credit (8.2%, Due 1/12)(3)
|
|
|
300,000
|
|
|
|
282,562
|
|
|
|
282,562
|
|
Leather)
|
|
specialty pet products
|
|
Senior Secured Term Loan A (8.4%, Due 1/12)(3)
|
|
|
6,012,500
|
|
|
|
5,941,886
|
|
|
|
5,941,886
|
|
|
|
|
|
Senior Secured Term Loan B (12.0%, Due 1/12)(3)
|
|
|
1,985,000
|
|
|
|
1,960,952
|
|
|
|
1,960,952
|
|
|
|
|
|
Junior Secured Term Loan (15.0%, Due 3/12)(2)(3)
|
|
|
4,081,878
|
|
|
|
4,035,122
|
|
|
|
4,035,122
|
|
|
|
|
|
Membership Interest Class A(4)
|
|
|
|
|
|
|
730,020
|
|
|
|
769,000
|
|
|
|
|
|
Membership Interest Common(4)
|
|
|
|
|
|
|
19,980
|
|
|
|
87,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nupla Corporation (Home &
|
|
Manufacturer and marketer of
|
|
Revolving Line of Credit (9.5%, Due 9/12)(3)
|
|
|
550,000
|
|
|
|
532,725
|
|
|
|
532,725
|
|
Office Furnishings,
|
|
professional high-grade
|
|
Senior Secured Term Loan A (8.8%, Due 9/12)(3)
|
|
|
5,678,125
|
|
|
|
5,628,411
|
|
|
|
5,628,411
|
|
Housewares & Durable
|
|
fiberglass- handled striking and
|
|
Senior Subordinated Debt (14.0%, Due 3/13)(2)
|
|
|
3,019,688
|
|
|
|
2,993,614
|
|
|
|
2,993,614
|
|
Consumer Products)
|
|
digging tools
|
|
Preferred Stock(2)
|
|
|
|
|
|
|
493,427
|
|
|
|
493,427
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
25,000
|
|
|
|
38,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC(5)
|
|
Provider of tuition
|
|
Revolving Line of Credit (12.3%, Due 8/11)(3)
|
|
|
870,000
|
|
|
|
822,799
|
|
|
|
822,799
|
|
(Diversified/Conglomerate
|
|
management services
|
|
Senior Secured Term Loan A (12.3%, Due 8/11)(3)
|
|
|
3,862,500
|
|
|
|
3,817,733
|
|
|
|
3,817,733
|
|
Service)
|
|
|
|
Senior Secured Term Loan B (19.0%, Due 2/12)(2)(3)
|
|
|
3,668,965
|
|
|
|
3,626,308
|
|
|
|
3,626,308
|
|
|
|
|
|
Convertible Subordinated Note (22.0%, Due 8/12)
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
Membership Interest Class B(4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
729,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sport Helmets Holdings, LLC(5)
|
|
Manufacturer of protective
|
|
Senior Secured Term Loan A (9.0%, Due 12/13)
|
|
|
4,500,000
|
|
|
|
4,431,440
|
|
|
|
4,431,440
|
|
(Personal & Nondurable
|
|
headgear
|
|
Senior Secured Term Loan B (9.5%, Due 12/13)
|
|
|
7,500,000
|
|
|
|
7,385,336
|
|
|
|
7,385,336
|
|
Consumer Products)
|
|
|
|
Senior Subordinated Debt (15.0%, Due 6/14)(2)
|
|
|
8,011,333
|
|
|
|
7,889,250
|
|
|
|
7,889,250
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,901,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vince & Associates Clinical
|
|
Provider of clinical testing
|
|
Senior Secured Term Loan (10.0%, Due 11/12)(2)(3)
|
|
|
7,500,000
|
|
|
|
7,391,657
|
|
|
|
7,391,657
|
|
Research, Inc. (Healthcare,
|
|
services
|
|
Senior Subordinated Debt (15.0%, Due 5/13)(2)
|
|
|
5,521,561
|
|
|
|
5,441,483
|
|
|
|
5,441,483
|
|
Education & Childcare)
|
|
|
|
Convertible Preferred Stock(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
592,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments (represents 22.1% of total
investments at fair value)
|
|
|
|
|
|
$
|
86,577,905
|
|
|
$
|
85,171,605
|
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc. (Ecological)
|
|
Distributor of specialty chemicals
|
|
Revolving Line of Credit (9.0%, Due 7/11)(3)
|
|
$
|
2,200,000
|
|
|
$
|
2,177,697
|
|
|
$
|
2,177,697
|
|
|
|
and contract application services
|
|
Senior Secured Term Loan A (10.5%, Due 6/11)(3)
|
|
|
13,016,250
|
|
|
|
12,916,093
|
|
|
|
12,216,143
|
|
|
|
|
|
Common Stock(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fasteners International,
|
|
Distributor of fasteners and
|
|
Senior Secured Term Loan (8.3%, Due 11/12)(3)
|
|
|
6,800,000
|
|
|
|
6,697,869
|
|
|
|
6,697,869
|
|
LLC (Machinery)
|
|
related hardware for use in
|
|
Junior Secured Term Loan (14.0%, Due 5/13)(2)(3)
|
|
|
5,200,000
|
|
|
|
5,121,815
|
|
|
|
5,121,815
|
|
|
|
aerospace, electronics and defense industries
|
|
Convertible Preferred Stock(2)
|
|
|
|
|
|
|
253,342
|
|
|
|
341,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Defense Group, Inc. (Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
161,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance Agency, Inc.(6) (Insurance)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan (12.1%, Due 2/13)(3)
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borga, Inc. (Mining, Steel, Iron &
|
|
Manufacturer of pre-fabricated
|
|
Senior Secured Term Loan A (8.8%, Due 3/09)(3)
|
|
|
1,321,000
|
|
|
|
1,309,581
|
|
|
|
1,309,581
|
|
Nonprecious Metals)
|
|
metal building systems
|
|
Senior Secured Term Loan B (11.8%, Due 5/10)(3)
|
|
|
1,785,250
|
|
|
|
1,755,679
|
|
|
|
1,755,679
|
|
|
|
|
|
Senior Secured Term Loan C (16.0%, Due 5/10)(2)(3)
|
|
|
7,794,323
|
|
|
|
7,720,404
|
|
|
|
7,720,404
|
|
|
|
|
|
Common Stock Warrants(4)
|
|
|
|
|
|
|
10,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC(5)
|
|
Provider of proprietary branded
|
|
Junior Secured Term Loan B (9.6%, Due 11/11)(3)
|
|
|
10,879,062
|
|
|
|
10,745,564
|
|
|
|
10,745,564
|
|
(Personal & Nondurable
|
|
professional skincare and
|
|
Senior Subordinated Debt (14.5%, Due 11/12)(3)
|
|
|
6,250,000
|
|
|
|
6,174,425
|
|
|
|
6,174,425
|
|
Consumer Products)
|
|
cosmetic products to physicians
|
|
Common Stock(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
1,058,600
|
|
|
|
and spa communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cheeseworks, Inc. (Grocery)
|
|
Distributor of specialty cheese
|
|
Revolving Line of Credit (7.6%, Due 6/11)(3)
|
|
|
5,080,219
|
|
|
|
4,984,386
|
|
|
|
4,984,386
|
|
|
|
and food products
|
|
Senior Secured Term Loan (10.7%, Due 6/11)(3)
|
|
|
10,648,560
|
|
|
|
10,512,576
|
|
|
|
10,512,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Operating, LLC(5)
|
|
Provider of maintenance, repair
|
|
Senior Secured Term Loan A (9.1%, Due 7/12)(3)
|
|
|
2,325,000
|
|
|
|
2,290,500
|
|
|
|
2,290,500
|
|
(Buildings & Real Estate)
|
|
and replacement of HVAC,
|
|
Senior Subordinated Debt (14.5%, Due 1/13)(2)(3)
|
|
|
2,527,328
|
|
|
|
2,490,326
|
|
|
|
2,490,326
|
|
|
|
electrical, plumbing, and foundation repair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperhead Chemical
|
|
Manufacturer of bulk
|
|
Senior Subordinated Debt (15.3%, Due 1/13)(2)(3)
|
|
|
3,540,943
|
|
|
|
3,505,378
|
|
|
|
3,505,378
|
|
Company, Inc. (Chemicals, Plastics & Rubber)
|
|
pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc.(6)
|
|
Direct marketer of checks and
|
|
Junior Secured Term Loan (10.8%, Due 12/14)(3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1,750,000
|
|
(Printing & Publishing)
|
|
other financial products and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
|
|
|
|
|
|
|
|
|
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F-77
PATRIOT
CAPITAL FUNDING, INC.
Consolidated
Schedule of Investments (Continued)
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Company(1)
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Company
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(Industry)
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Description
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Investment
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Principal
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Cost
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Value
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Dover Saddlery, Inc.
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Equestrian products catalog
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Common Stock(4)
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148,200
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129,200
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(Retail Stores)
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retailer
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Eight OClock Coffee
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Manufacturer, distributor, and
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Junior Secured Term Loan (11.4%, Due 7/13)(3)
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9,000,000
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9,000,000
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9,000,000
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Company(6) (Beverage, Food & Tobacco)
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marketer of coffee
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Employbridge Holding
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A provider of specialized staffing
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Junior Secured Term Loan (11.8%, Due 10/13)(3)
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3,000,000
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3,000,000
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2,910,000
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Company(5)(6) (Personal,
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services
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Food & Miscellaneous Services)
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Encore Legal Solutions, Inc.
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Legal document management
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Junior Secured Term Loan A (10.7%, Due 6/10)(2)(3)
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3,949,437
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3,925,802
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3,925,802
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(Printing & Publishing)
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services
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Junior Secured Term Loan B (10.8%, Due 6/10)(2)(3)
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7,193,143
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7,138,192
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7,138,192
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Senior Subordinated Debt (15.0%, Due 6/10)(2)(3)
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5,926,861
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5,889,187
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3,489,226
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Common Stock Warrants(4)
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219,791
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EXL Acquisition Corp.
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Manufacturer of lab testing
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Senior Secured Term Loan A (8.4%, Due 3/11)(3)
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4,800,000
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4,761,933
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4,761,933
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(Electronics)
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supplies
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Senior Secured Term Loan B (8.9%, Due 3/12)(3)
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4,851,840
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4,792,326
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4,792,326
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Senior Secured Term Loan C (9.4%, Due 3/12)(3)
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2,992,500
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2,944,981
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2,944,981
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Senior Secured Term Loan D (15.0%, Due 3/12)(3)
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7,000,000
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6,925,241
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6,925,241
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Common Stock Class A(4)
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2,475
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123,900
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Common Stock Class B(2)
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254,057
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255,325
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Fairchild Industrial Products, Co.
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Manufacturer of industrial
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Senior Secured Term Loan A (8.3%, Due 7/10)(3)
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5,580,000
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5,531,331
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5,531,331
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(Electronics)
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controls and power transmission
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Senior Secured Term Loan B (10.0%, Due 7/11)(3)
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9,325,000
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9,239,973
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9,239,973
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products
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Senior Subordinated Debt (14.8%, Due 7/11)
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5,460,000
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5,401,721
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5,401,721
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Preferred Stock Class A(2)
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327,879
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327,879
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Common Stock Class B(4)
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121,598
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293,200
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Impact Products, LLC
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Distributor of janitorial supplies
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Junior Secured Term Loan (9.5%, Due 9/12)(3)
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8,968,750
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8,903,106
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8,903,106
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(Machinery)
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Senior Subordinated Debt (13.5%, Due 9/12)(2)(3)
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5,547,996
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5,509,594
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5,509,594
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Innovative Concepts in
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Manufacturer of coin operated
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Junior Secured Term Loan A (9.0%, Due 2/11)(3)
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4,312,500
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4,292,854
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4,292,854
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Entertainment, Inc.
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games
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Junior Secured Term Loan B (9.5%, Due 2/11)(3)
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3,537,000
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3,519,896
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3,519,896
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(Personal & Nondurable
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Junior Secured Term Loan C (13.0%, Due 8/11)(3)
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3,900,000
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3,881,940
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3,881,940
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Consumer Products)
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Keltner Enterprises, LLC(5)
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Distributor of automotive oils,
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Senior Subordinated Debt (14.0%, Due 12/11)(3)
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3,850,000
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3,837,555
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3,837,555
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(Oil & Gas)
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chemicals and parts
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L.A. Spas, Inc. (Chemicals,
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Manufacturer of above ground
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Senior Subordinated Debt (15.5%, Due 1/10)(2)(3)
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7,271,249
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7,225,464
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7,225,464
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Plastics & Rubber)
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spas
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Common Stock Warrants(4)
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3,009
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LHC Holdings Corp. (Healthcare,
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Provider of home healthcare
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Revolving Line of Credit (8.8%, Due 11/12)(3)
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300,000
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287,369
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287,369
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Education & Childcare)
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services
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Senior Secured Term Loan A (8.8%, Due 11/12)(3)
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5,100,000
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5,035,888
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5,035,888
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Senior Subordinated Debt (14.5%, Due 5/13)
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4,565,000
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4,507,250
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4,507,250
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Membership Interest(4)
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125,000
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120,500
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Mac & Massey Holdings, LLC
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Broker and distributor of
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Senior Subordinated Debt (16.5%, Due 2/13)(2)
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7,438,280
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7,402,496
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7,402,496
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(Grocery)
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ingredients to manufacturers of
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Common Stock(4)
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250,000
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388,200
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food products
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Metrologic Instruments, Inc.(6)
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Manufacturer of imaging and
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Senior Secured Term Loan (7.8%, Due 4/14)(3)
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992,500
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992,500
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942,900
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(Electronics)
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scanning equipment
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Junior Secured Term Loan (11.1%, Due 12/15)
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1,000,000
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1,000,000
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930,000
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Nice-Pak Products, Inc.(6)
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Manufacturer of pre-moistened
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Senior Secured Term Loan (8.5%, Due 6/14)(3)
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2,985,000
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2,985,000
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2,895,500
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(Containers, Packaging & Glass)
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wipes
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Northwestern Management
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Provider of dental services
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Senior Secured Term Loan A (8.9%, Due 12/12)(3)
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6,000,000
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5,936,612
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5,936,612
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Services, LLC (Healthcare,
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Senior Secured Term Loan B (9.4%, Due 12/12)(3)
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1,250,000
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1,236,744
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1,236,744
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Education & Childcare)
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Junior Secured Term Loan (15.0%, Due 6/13)(2)
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2,754,125
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2,724,995
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2,724,995
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Common Stock(4)
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500,000
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504,400
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Prince Mineral Company, Inc.
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Manufacturer of pigments
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Junior Secured Term Loan (9.9%, Due 12/12)(3)
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11,375,000
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11,203,941
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11,203,941
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(Metals & Minerals)
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Senior Subordinated Debt (14.0%, Due 7/13)(2)(3)
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11,913,159
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11,768,249
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11,768,249
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Quartermaster, Inc. (Retail Stores)
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Retailer of uniforms and tactical
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Revolving Line of Credit (9.5%, Due 12/10)(3)
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500,000
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471,887
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471,887
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equipment to law enforcement
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Senior Secured Term Loan A (9.4%, Due 12/10)(3)
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4,276,250
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4,228,116
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4,228,116
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and security professionals
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Senior Secured Term Loan B (10.6%, Due 12/10)(3)
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2,568,750
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2,542,846
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2,542,846
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Senior Secured Term Loan C (15.0%, Due 12/11)(2)(3)
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3,298,069
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3,265,862
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3,265,862
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R-O-M Corporation (Automobile)
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Manufacturer of doors, ramps and
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Senior Secured Term Loan A (8.0%, Due 2/13)(3)
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7,440,000
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7,359,023
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7,359,023
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bulk heads for fire trucks and
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Senior Secured Term Loan B (9.3%, Due 5/13)(3)
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8,464,500
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8,359,596
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8,359,596
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food transportation
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Senior Subordinated Debt (15.0%, Due 8/13)(2)
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9,100,000
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8,991,761
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8,991,761
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Sidumpr Trailer Company, Inc.
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Manufacturer of side dump
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Revolving Line of Credit (9.8%, Due 1/11)(3)
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1,675,000
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1,651,732
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1,651,732
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(Automobile)
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trailers
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Senior Secured Term Loan A (8.5%, Due 1/11)(3)
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2,047,500
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2,028,320
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2,028,320
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Senior Secured Term Loan B (11.5%, Due 1/11)(3)
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2,320,625
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2,294,336
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2,294,336
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Senior Secured Term Loan C (15.0%, Due 7/11)(2)(3)
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3,230,074
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3,197,254
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3,197,254
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Senior Subordinated Debt (12.0%, Due 1/12)(3)
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75,000
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75,000
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75,000
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Preferred Stock(2)
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87,271
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Common Stock(4)
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25
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Total Non-control/non-affiliate investments (represents 75.5%
of total investments at fair value)
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$
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294,686,727
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$
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290,225,759
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Total Investments
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$
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388,245,021
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$
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384,725,753
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F-78
PATRIOT
CAPITAL FUNDING, INC.
Consolidated
Schedule of Investments (Continued)
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(1) |
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Affiliate investments are generally defined under the Investment
Company Act of 1940, as amended (the 1940 Act), as
companies in which the Company owns at least 5% but not more
than 25% of the voting securities of the company. Control
investments are generally defined under the 1940 Act as
companies in which the Company owns more than 25% of the voting
securities of the company or has greater than 50% representation
on its board. |
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(2) |
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Amount includes
payment-in-kind
(PIK) interest or dividends. |
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(3) |
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Pledged as collateral under the Companys Securitization
Facility. See Note 6 to Consolidated Financial Statements. |
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(4) |
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Non-income producing. |
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(5) |
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Some of the investments listed are issued by an affiliate of the
listed portfolio company. |
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(6) |
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Syndicated investment which has been originated by another
financial institution and broadly distributed. |
See Notes to Consolidated Financial Statements
F-79
Patriot
Capital Funding, Inc.
Patriot Capital Funding, Inc. (the Company) is a
specialty finance company that provides customized financing
solutions to small- to mid-sized companies. The Company
typically invests in companies with annual revenues between
$10 million and $100 million, and companies which
operate in diverse industry sectors. Investments usually take
the form of senior secured loans, junior secured loans and
subordinated debt investments which may contain
equity or equity-related instruments. The Company also offers
one-stop financing, which typically includes a
revolving credit line, one or more senior secured term loans and
a subordinated debt investment.
The Company has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). In addition, the Company has also
previously elected to be treated as a regulated investment
company (RIC) under the Internal Revenue Code of
1986, as amended (the Code).
A fundamental principle of the preparation of financial
statements in accordance with accounting principles generally
accepted in the United States is the assumption that an entity
will continue in existence as a going concern, which
contemplates continuity of operations and the realization of
assets and settlement of liabilities occurring in the ordinary
course of business. This principle is applicable to all entities
except for entities in liquidation or entities for which
liquidation appears imminent. In accordance with this
requirement, the Companys policy is to prepare its
consolidated financial statements on a going concern basis
unless it intends to liquidate or has no other alternative but
to liquidate. On April 11, 2009, the liquidity facility
supporting the Companys second amended and restated
securitization revolving credit facility will expire if not
renewed prior to such time. The Company is currently negotiating
the renewal of the liquidity facility with certain liquidity
banks. In the event that the liquidity banks do not renew the
liquidity facility, the terms of the second amended and restated
securitization revolving credit facility require that all
principal, interest and fees collected from the debt investments
pledged under the facility must be used to pay down amounts
outstanding under the facility by April 11, 2011.
Because substantially all of the Companys debt investments
are pledged under the second amended and restated securitization
revolving credit facility, the Company cannot provide any
assurance that it would have sufficient cash and liquid assets
to fund normal operations and dividend distributions to
stockholders during the period of time when it is required to
repay amounts outstanding under the second amended and restated
securitization revolving credit facility when such amounts
became due. As a result, the Company may be required to severely
limit or otherwise cease making distributions to its
stockholders and curtail or cease new investment activities. In
addition, the Company may be required to sell a portion of its
investments to satisfy its obligation to repay such outstanding
principal amount prior to April 11, 2011 and its ability to
continue as a going concern may be impacted. The Companys
consolidated financial statements do not reflect any adjustments
that might result from the outcome of this uncertainty.
If the liquidity facility is not renewed, the Company believes
that it may be able to negotiate an arrangement with the lenders
of the second amended and restated securitization revolving
credit facility for repayment terms that do not require the
Company to use all principal, interest and fees collected from
the debt investments secured by the facility to pay down amounts
outstanding thereunder, however, the Company cannot provide any
assurance that it will be able to do so. As a result, if the
Company was unable to (i) renew the liquidity facility
supporting the Companys second amended and restated
securitization revolving credit facility or (ii) negotiate
an arrangement with the lenders of the second amended and
restated securitization revolving credit facility for repayment
terms that do not require the Company to use all principal,
interest and fees collected from the debt investments secured by
the facility to pay down amounts outstanding thereunder there
would be a significant adverse impact on the Companys
financial position and operating results.
F-80
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 3.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying financial statements reflect the consolidated
accounts of the Company and its special purpose financing
subsidiary, Patriot Capital Funding, LLC I, (see
Note 6) with all significant intercompany balances
eliminated. The financial statements of the Company 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-K
and
Regulation S-X.
The financial results of the Companys portfolio
investments are not consolidated in the Companys financial
statements.
Use of
Estimates
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. The most significant estimates related to
the valuation of the Companys investments. Actual results
may differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents consist of demand deposits and highly
liquid investments with original maturities of three months or
less. Cash equivalents are carried at cost which approximates
fair value.
Restricted
Cash
Restricted cash at December 31, 2008 and 2007, consisted of
cash held in an operating and money market account, pursuant to
the Companys agreement with its lender.
Concentration
of Credit Risk
The Company places its cash and cash equivalents with financial
institutions and, at times, cash held in checking accounts may
exceed the Federal Deposit Insurance Corporation insured limit.
Investment
Valuation
Investments are recorded at fair value with changes in value
reflected in operations in unrealized appreciation
(depreciation) of investments. Effective January 1, 2008,
the Company adopted Statement of Financial Standards
No. 157 Fair Value Measurements, or
SFAS 157. Under SFAS 157, we principally utilize the
market approach to estimate the fair value of our equity
investments where there is not a readily available market and we
also utilize the income approach to estimate the fair value of
our debt investments where there is not a readily available
market. Under the market approach, we estimate the enterprise
value of the portfolio companies in which we invest. There is no
one methodology to estimate enterprise value and, in fact, for
any one portfolio company, enterprise value is best expressed as
a range of fair values, from which we derive a single estimate
of enterprise value. To estimate the enterprise value of a
portfolio company, we analyze various factors, including the
portfolio companys historical and projected financial
results. We generally require portfolio companies to provide
annual audited and quarterly and monthly unaudited financial
statements, as well as annual projections for the upcoming
fiscal year. Typically, private companies are valued based on
multiples of EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), cash flows, net income,
revenues, or in limited cases, book value.
Under the income approach, we generally prepare and analyze
discounted cash flow models based on our projections of the
future free cash flows of the business. We also use bond yield
models to determine the present value of the future cash flow
streams of our debt investments. We review various sources of
F-81
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
transactional data, including private mergers and acquisitions
involving debt investments with similar characteristics, and
assess the information in the valuation process.
Duff & Phelps, LLC, an independent valuation firm
(Duff & Phelps), provided third party
valuation consulting services to the Company which consisted of
certain limited procedures that the Company engaged them to
perform. At December 31, 2008 and 2007, the Company asked
Duff & Phelps to perform the limited procedures on
certain investments in its portfolio. The Companys Board
of Directors is solely responsible for the valuation of the
Companys portfolio investments at fair value as determined
in good faith pursuant to the Companys valuation policy
and consistently applied valuation process.
Property,
Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are included in
other assets and are carried at cost and are depreciated using
the straight-line method over the estimated useful lives of the
related assets up to five years and over the shorter of the
economic life or the term of the lease for leasehold
improvements.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning PIK balance
|
|
$
|
4,714,356
|
|
|
$
|
2,891,565
|
|
PIK interest and dividends earned during the year
|
|
|
5,452,124
|
|
|
|
3,928,159
|
|
PIK conversion to equity
|
|
|
(1,519,567
|
)
|
|
|
|
|
Payments received during the year
|
|
|
(2,041,719
|
)
|
|
|
(2,105,368
|
)
|
|
|
|
|
|
|
|
|
|
Ending PIK balance
|
|
$
|
6,605,194
|
|
|
$
|
4,714,356
|
|
|
|
|
|
|
|
|
|
|
To qualify for the federal income tax benefits applicable to
RICs (see Accounting Policy Note on Federal Income Taxes), this
non-cash source of income is included in the income that must be
paid out to stockholders in the form of dividends, even though
the Company has not yet collected the cash relating to such
income.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of
Investments
Realized gain or loss is recorded at the disposition of an
investment and is the difference between the net proceeds from
the sale and the cost basis of the investment using the specific
identification method. Unrealized appreciation or depreciation
reflects the difference between the valuation of the investments
and the cost basis of the investments.
Stock
Compensation Plans
The Company has stock-based employee compensation plans, see
Note 7. The Company accounts for its stock-based
compensation under Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based
Payment. The Company is required to record compensation
expense for all awards granted. The fair value of each stock
option granted is estimated on the date of grant using the
Black-Scholes option pricing model.
Federal
Income Taxes
The Company has elected to be treated as a RIC under the Code.
The Companys RIC tax year was initially filed on a July 31
basis. The Companys policy is to comply with the
requirements of the Code that are applicable to RICs and to
distribute substantially all of its taxable income to its
stockholders. Therefore, no federal income tax provision is
included in the accompanying financial statements. On
February 11, 2008, the Company was granted permission by
the Internal Revenue Service to change its RIC tax year from
July 31, to December 31, effective on
December 31, 2007. Accordingly, the Company prepared a
short period tax
F-82
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
return from August 1, 2007 through December 31, 2007,
and will file on a calendar year basis for 2008 and thereafter
(see Note 13. Income Taxes).
Dividends
Paid
Distributions to stockholders are recorded on the declaration
date. The Company is required to pay out to its shareholders at
least 90% of its net ordinary income and net realized short-term
capital gains in excess of net realized long-term capital losses
for each taxable year in order to be eligible for the tax
benefits allowed to a RIC under Subchapter M of the Code. It is
the policy of the Company to pay out as a dividend all or
substantially all of those amounts. The amount to be paid out as
a dividend is determined by the Board of Directors and is based
on the annual earnings estimated by the management of the
Company. At its year-end the Company may pay a bonus dividend,
in addition to the other dividends, to ensure that it has paid
out at least 90% of its net ordinary income and net realized
short-term capital gains in excess of net realized long-term
capital losses for the year.
Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes
but not for tax purposes are reported as distributions in excess
of net investment income and net realized capital gains,
respectively. To the extent that they exceed net investment
income and net realized gains for tax purposes, they are
reported as distributions of paid-in capital (i.e., return of
capital). The Company determined that $1.1 million of
distributions represented a return of capital for tax purposes
for the tax year ended December 31, 2008. In addition, the
Company also determined that $1.3 million and $335,000,
respectively of distributions represented a return of capital
for tax purposes for the tax period August 1, 2007 to
December 31, 2007 and for the fiscal tax year ended
July 31, 2007, respectively. As more fully discussed in
Note 13, such return of capital distributions was
determined by the Companys tax earnings and profits during
such periods.
Recent
Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities,
(SFAS 161). SFAS 161 requires specific
disclosures regarding the location and amounts of derivative
instruments in the Companys financial statements; how
derivative instruments and related hedged items are accounted
for; and how derivative instruments and related hedged items
affect the Companys financial position, financial
performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early application is
permitted. Because SFAS 161 impacts the Companys
disclosure and not its accounting treatment for derivative
instruments and related hedged items, the Companys
adoption of SFAS 161 is not expected to impact the results
of operations or financial condition.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current year presentation.
Effective January 1, 2008, upon adoption of SFAS 157,
the Company changed its presentation for all periods presented
to net unearned fees against the associated debt investments.
Prior to the adoption of SFAS 157, the Company reported
unearned fees as a single line item on the Consolidated Balance
Sheets and Consolidated Schedule of Investments. This change in
presentation had no impact on the overall net cost or fair value
of the Companys investment portfolio and had no impact on
the Companys financial position or results of operations.
In October 2008, FASB Staff Position
157-3,
Determining the Fair Value of a Financial Asset in a
Market That is Not Active
(FSP 157-3)
was issued, which clarifies the application of SFAS 157
F-83
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
in an inactive market and provides an illustrative example to
demonstrate how the fair value of a financial asset is
determined when the market for that financial asset is not
active. The guidance provided by
FSP 157-3
is consistent with the Companys approach to valuing
financial assets for which there are no active markets.
At December 31, 2008 and 2007, investments consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Investments in debt securities
|
|
$
|
344,683,219
|
|
|
$
|
308,079,975
|
|
|
$
|
375,410,033
|
|
|
$
|
371,261,022
|
|
Investments in equity securities
|
|
|
21,215,806
|
|
|
|
14,290,773
|
|
|
|
12,834,988
|
|
|
|
13,464,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
$
|
388,245,021
|
|
|
$
|
384,725,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, $123.5 million and
$138.0 million, respectively, of the Companys
portfolio investments at fair value were at fixed rates, which
represented approximately 38% and 36%, respectively, of the
Companys total portfolio of investments at fair value. The
Company generally structures its subordinated debt at fixed
rates, although many of its senior secured and junior secured
loans are, and will be, at variable rates determined on the
basis of a benchmark LIBOR or prime rate. The Companys
loans generally have stated maturities ranging from 4 to
7.5 years.
At December 31, 2008 and 2007, the Company had equity
investments and warrant positions designed to provide the
Company with an opportunity for an enhanced internal rate of
return. These instruments generally do not produce a current
return, but are held for potential investment appreciation and
capital gains.
During the year ended December 31, 2008, the Company
realized a net loss of $883,000 principally from the sale of two
syndicated debt investments and the cancellation of warrants
which it had previously written down to zero, which were
partially offset by the sale of an equity investment. During the
year ended December 31, 2007, the Company realized gains of
$92,000, on the sale of portfolio investments. During the year
ended December 31, 2006, the Company realized losses of
$3.3 million, on the sale of portfolio investments. During
the years ended December 31, 2008 and 2007, the Company
recorded unrealized depreciation on investments of
$40.0 million and $3.6 million, respectively, and
during the year ended December 31, 2006, the Company
recorded unrealized appreciation on investments of
$3.8 million.
The composition of the Companys investments as of
December 31, 2008 and 2007 at cost and fair value was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Senior Secured Debt
|
|
$
|
171,889,470
|
|
|
|
47.0
|
%
|
|
$
|
156,638,667
|
|
|
|
48.6
|
%
|
|
$
|
190,048,200
|
|
|
|
49.0
|
%
|
|
$
|
189,209,150
|
|
|
|
49.2
|
%
|
Junior Secured Debt
|
|
|
64,232,689
|
|
|
|
17.5
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
|
|
85,493,227
|
|
|
|
22.0
|
|
|
|
84,583,227
|
|
|
|
22.0
|
|
Subordinated Debt
|
|
|
108,561,060
|
|
|
|
29.7
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
|
|
99,868,606
|
|
|
|
25.7
|
|
|
|
97,468,645
|
|
|
|
25.3
|
|
Warrants /Equity
|
|
|
21,215,806
|
|
|
|
5.8
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
12,834,988
|
|
|
|
3.3
|
|
|
|
13,464,731
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
$
|
388,245,021
|
|
|
|
100.0
|
%
|
|
$
|
384,725,753
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of total portfolio. |
F-84
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The composition of the Companys investment portfolio by
industry sector, using Moodys Industry Classifications as
of December 31, 2008 and 2007 at cost and fair value was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Cost
|
|
|
%(1)
|
|
|
Fair Value
|
|
|
%(1)
|
|
|
Machinery
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
|
$
|
52,844,315
|
|
|
|
13.6
|
%
|
|
$
|
54,030,773
|
|
|
|
14.1
|
%
|
Health Care, Education & Childcare
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
|
|
33,686,998
|
|
|
|
8.7
|
|
|
|
33,779,798
|
|
|
|
8.8
|
|
Personal & Nondurable Consumer Products
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
|
|
51,070,705
|
|
|
|
13.2
|
|
|
|
51,280,805
|
|
|
|
13.3
|
|
Automobile
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
|
|
34,044,318
|
|
|
|
8.8
|
|
|
|
33,957,022
|
|
|
|
8.8
|
|
Electronics
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
|
|
42,296,015
|
|
|
|
10.9
|
|
|
|
42,470,710
|
|
|
|
11.0
|
|
Textiles & Leather
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
|
|
12,970,522
|
|
|
|
3.3
|
|
|
|
13,077,422
|
|
|
|
3.4
|
|
Printing & Publishing
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
|
|
19,172,972
|
|
|
|
4.9
|
|
|
|
16,303,220
|
|
|
|
4.2
|
|
Metals & Minerals
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
|
|
22,972,190
|
|
|
|
5.9
|
|
|
|
22,972,190
|
|
|
|
6.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
|
|
10,796,410
|
|
|
|
2.8
|
|
|
|
10,785,664
|
|
|
|
2.8
|
|
Chemicals, Plastic & Rubber
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
|
|
10,733,851
|
|
|
|
2.8
|
|
|
|
10,730,842
|
|
|
|
2.8
|
|
Housewares & Durable Consumer Products
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
|
|
9,673,177
|
|
|
|
2.5
|
|
|
|
9,686,477
|
|
|
|
2.5
|
|
Retail Stores
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
|
|
10,656,911
|
|
|
|
2.7
|
|
|
|
10,637,911
|
|
|
|
2.8
|
|
Ecological
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
|
|
15,593,790
|
|
|
|
4.0
|
|
|
|
14,393,840
|
|
|
|
3.7
|
|
Grocery
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
|
|
23,149,458
|
|
|
|
6.0
|
|
|
|
23,287,658
|
|
|
|
6.1
|
|
Insurance
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
|
|
5,000,000
|
|
|
|
1.3
|
|
|
|
4,500,000
|
|
|
|
1.2
|
|
Buildings & Real Estate
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
|
|
4,780,826
|
|
|
|
1.2
|
|
|
|
4,780,826
|
|
|
|
1.2
|
|
Oil & Gas
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
|
|
3,837,555
|
|
|
|
1.0
|
|
|
|
3,837,555
|
|
|
|
1.0
|
|
Personal, Food & Miscellaneous Services
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
2,910,000
|
|
|
|
0.8
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
|
|
9,516,840
|
|
|
|
2.4
|
|
|
|
9,245,940
|
|
|
|
2.4
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
161,600
|
|
|
|
0.1
|
|
Beverage, Food & Tobacco
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
9,000,000
|
|
|
|
2.3
|
|
|
|
9,000,000
|
|
|
|
2.3
|
|
Containers, Packaging & Glass
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
0.0
|
|
|
|
2,985,000
|
|
|
|
0.8
|
|
|
|
2,895,500
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
$
|
388,245,021
|
|
|
|
100.0
|
%
|
|
$
|
384,725,753
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of total portfolio. |
As required by the 1940 Act, the Company classifies its
investments by level of control. Control Investments
are defined in the 1940 Act as investments in those companies
that the Company is deemed to Control. Generally,
under the 1940 Act, the Company is deemed to Control
a company in which it has invested if it owns 25% or more of the
voting securities of such company or has greater than 50%
representation on its board. Affiliate Investments
are investments in those companies that are Affiliated
Companies of the Company, as defined in the 1940 Act. The
Company is deemed to be an Affiliate of a company in
which it has invested if it owns 5% or more but less than 25% of
the voting securities of such company.
Non-Control/Non-Affiliate Investments are those
investments that are neither Control Investments nor Affiliate
Investments. At December 31, 2008 and 2007, the Company
owned greater than 25% of the voting securities in four and one
companies, respectively. At December 31, 2008 and 2007, the
Company owned greater than 5% but less than 25% of the voting
securities in four and six companies, respectively.
F-85
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 5.
|
Fair
Value Measurements
|
The Company accounts for its portfolio investments and interest
rate swaps at fair value. As a result, the Company adopted the
provisions of SFAS No. 157 in the first quarter of
2008. SFAS 157 defines fair value, establishes a framework
for measuring fair value, establishes a fair value hierarchy
based on the quality of inputs used to measure fair value and
enhances disclosure requirements for fair value measurements.
SFAS 157 defines fair value as the price at which an asset
could be exchanged in a current transaction between
knowledgeable, willing parties. A liabilitys fair value is
defined as the amount that would be paid to transfer the
liability to a new obligor, not the amount that would be paid to
settle the liability with the creditor. Where available, fair
value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices
or inputs are not available, valuation techniques are applied.
These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the
price transparency for the investments or market and the
investments complexity.
Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level
of judgment associated with the inputs used to measure their
fair value. Hierarchical levels, defined by SFAS 157 and
directly related to the amount of subjectivity associated with
the inputs to fair valuation of these assets and liabilities,
are as follows:
Level 1 Unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date.
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data at the measurement date for substantially
the full term of the assets or liabilities.
Level 3 Unobservable inputs that reflect
managements best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
The following table presents the financial instruments carried
at fair value as of December 31, 2008, by caption on the
Consolidated Balance Sheet for each of the three levels of
hierarchy established by SFAS 157.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Internal Models with
|
|
|
Internal Models with
|
|
|
Total Fair Value
|
|
|
|
Quoted Market Prices
|
|
|
Significant Observable
|
|
|
Significant Unobservable
|
|
|
Reported in
|
|
|
|
in Active Markets
|
|
|
Market Parameters
|
|
|
Market Parameters
|
|
|
Consolidated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Balance Sheet
|
|
|
Non-affiliate investments
|
|
$
|
215,100
|
|
|
$
|
20,254,400
|
|
|
$
|
220,017,120
|
|
|
$
|
240,486,620
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
51,457,082
|
|
|
|
51,457,082
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
30,427,046
|
|
|
|
30,427,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
215,100
|
|
|
$
|
20,254,400
|
|
|
$
|
301,901,248
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-86
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table provides a roll-forward in the changes in
fair value from December 31, 2007 to December 31,
2008, for all investments for which the Company determines fair
value using unobservable (Level 3) factors. When a
determination is made to classify a financial instrument within
Level 3 of the valuation hierarchy, the determination is
based upon the fact that the unobservable factors are the most
significant to the overall fair value measurement. However,
Level 3 financial instruments also typically include, in
addition to the unobservable or Level 3 components,
observable components (that is, Level 1 and Level 2
components that are actively quoted and can be validated to
external sources). Accordingly, the depreciation in the table
below includes changes in fair value due in part to observable
Level 1 and Level 2 factors that are part of the
valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Unobservable Inputs (Level
3)
|
|
|
|
Non-affiliate
|
|
|
Affiliate
|
|
|
Control
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Fair Value December 31, 2007
|
|
$
|
267,006,559
|
|
|
$
|
85,171,605
|
|
|
$
|
9,328,389
|
|
|
$
|
361,506,553
|
|
Total realized gains (losses)
|
|
|
|
|
|
|
458,405
|
|
|
|
(350,000
|
)
|
|
|
108,405
|
|
Change in unrealized depreciation
|
|
|
(20,557,568
|
)
|
|
|
(1,961,258
|
)
|
|
|
12,333,998
|
)
|
|
|
(34,852,824
|
)(a)
|
Purchases, issuances, settlements and other, net
|
|
|
(26,431,871
|
)
|
|
|
(32,211,670
|
)
|
|
|
33,782,655
|
|
|
|
(24,860,886
|
)
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2008
|
|
$
|
220,017,120
|
|
|
$
|
51,457,082
|
|
|
$
|
30,427,046
|
|
|
$
|
301,901,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Relates to assets held at December 31, 2008 |
Concurrent with its adoption of SFAS 157, effective
January 1, 2008, the Company augmented its valuation
techniques to estimate the fair value of its debt investments
where there is not a readily available market value
(Level 3). Prior to January 1, 2008, the Company
estimated the fair value of its Level 3 debt investments by
first estimating the enterprise value of the portfolio company
which issued the debt investment. To estimate the enterprise
value of a portfolio company, the Company analyzed various
factors, including the portfolio companys historical and
projected financial results. Typically, private companies are
valued based on multiples of EBITDA (Earning Before Interest,
Taxes, Depreciation and Amortization), cash flow, net income,
revenues or, in limited instances, book value.
In estimating a multiple to use for valuation purposes, the
Company primarily looked to private merger and acquisition
statistics, discounted public trading multiples or industry
practices. In some cases, the valuation may be based on a
combination of valuation methodologies, including, but not
limited to, multiple based, discounted cash flow and liquidation
analyses.
If there was adequate enterprise value to support the repayment
of the Companys debt, the fair value of the Level 3
loan or debt security normally corresponded to cost plus the
amortized original issue discount unless the borrowers
condition or other factors lead to a determination of fair value
at a different amount.
Beginning on January 1, 2008, the Company also introduced a
bond-yield model to value these investments based on the present
value of expected cash flows. The primary inputs into the model
are market interest rates for debt with similar characteristics
and an adjustment for the portfolio companys credit risk.
The credit risk component of the valuation considers several
factors including financial performance, business outlook, debt
priority and collateral position. During the year ended
December 31, 2008, the Company recorded net unrealized
depreciation of $40.0 million on its investments, and
during the year ended December 31, 2007, the Company
recorded unrealized depreciation of $3.6 million. For the
year ended December 31, 2008, a portion of the
Companys net unrealized depreciation, approximately
$5.6 million, resulted from net decreases in the quoted
market prices on its syndicated loan portfolio as a result of
disruption in the financial credit markets for broadly
syndicated loans; approximately $27.5 million, resulted
F-87
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
from a decline in the financial performance of our portfolio
companies; and approximately $6.9 million, resulted from
the adoption of SFAS 157.
On September 18, 2006, the Company, through a consolidated
wholly-owned bankruptcy remote, special purpose subsidiary,
entered into an amended and restated securitization revolving
credit facility (the Securitization Facility) with
an entity affiliated with BMO Capital Markets Corp. (formerly
known as Harris Nesbitt Corp.). The Securitization Facility
allowed the special purpose subsidiary to borrow up to
$140 million through the issuance of notes to a
multi-seller commercial paper conduit administered by the
affiliated entity. The Securitization Facility also required
bank liquidity commitments (Liquidity Facility) to
provide liquidity support to the conduit. The Liquidity Facility
was provided by the lender that participated in the
Securitization Facility for a period of
364-days and
was renewable annually thereafter at the option of the lender.
On May 2, 2007, the Company amended its Securitization
Facility to lower the interest rate payable on any outstanding
borrowings under the Securitization Facility from the commercial
paper rate plus 1.35% to the commercial paper rate plus 1.00%
during the period of time the Company was permitted to make
draws under the Securitization Facility. The amendment also
reduced or eliminated certain restrictions pertaining to certain
loan covenants. On August 31, 2007, the Company amended its
Securitization Facility to increase its borrowing capacity
thereunder by $35 million. The amendment also extended the
commitment termination date from July 23, 2009 to
July 22, 2010 and reduced or eliminated certain
restrictions pertaining to certain loan covenants. The
Securitization Facility provided for the payment by the Company
to the lender of a monthly fee equal to 0.25% per annum on the
unused amount of the Securitization Facility.
On April 11, 2008, the Company entered into a second
amended and restated securitization revolving credit facility
(the Amended Securitization Facility) with an entity
affiliated with BMO Capital Markets Corp. and Branch Banking and
Trust Company (the Lenders). The Amended
Securitization Facility amended and restated the Securitization
Facility to, among other things: (i) increase the borrowing
capacity from $175 million to $225 million;
(ii) extend the maturity date from July 22, 2010 to
April 11, 2011 (unless extended prior to such date for an
additional
364-day
period with the consent of the lenders thereto);
(iii) increase the interest rate payable under the facility
from the commercial paper rate plus 1.00% to the commercial
paper rate plus 1.75% on up to $175 million of outstanding
borrowings and the LIBOR rate plus 1.75% on up to
$50 million of outstanding borrowings; and
(iv) increase the unused commitment fee from 0.25% per
annum to 0.30% per annum.
The Amended Securitization Facility permits draws under the
facility until April 10, 2009, unless the Lenders extend
the Liquidity Facility underlying the Amended Securitization
Facility for an additional 364 day period. If the Liquidity
Facility is not extended, the Amended Securitization Facility
enters into a
24-month
amortization period whereby all principal, interest and fee
payments received by the Company in conjunction with collateral
pledged to the Amended Securitization Facility, less a monthly
servicing fee payable to the Company, are required to be used to
repay outstanding borrowings under the Amended Securitization
Facility. Any remaining outstanding borrowings would be due and
payable on the commitment termination date, which is currently
April 11, 2011.
Similar to the Securitization Facility, the Amended
Securitization 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. These restrictions may affect the amount of notes
the Companys special purpose subsidiary may issue from
time to time. The Amended Securitization 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 Amended Securitization Facility.
The Amended Securitization Facility also requires the
maintenance of a Liquidity Facility. The Liquidity Facility is
provided by the
F-88
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Lenders that participate in the Securitization Facility for a
period of
364-days and
is renewable annually thereafter at the option of the lenders.
The Liquidity Facility is scheduled to be renewed in April 2009.
If the Liquidity Facility is not renewed, the Companys
ability to draw under the Amended Securitization Facility would
end and the amortization period under the Amended Securitization
Facility would commence. The Amended Securitization Facility is
secured by all of the loans held by the Companys special
purpose subsidiary. At December 31, 2008, the maximum
borrowings available to the Company under the facility is
limited to the amount of stockholders equity,
$180.1 million. As of December 31, 2008, the Company
was in technical default of one of its debt covenants under its
Amended Securitization Facility, which was cured within the
timeframe allowed by the facility.
In connection with the origination and amendment of the
Securitization Facility and the Amended Securitization Facility,
the Company incurred $2.4 million of fees which are being
amortized over the term of the facility.
At December 31, 2008 and 2007, $162.6 million and
$164.9 million, respectively, of borrowings were
outstanding under the facility. At December 31, 2008, the
interest rate was 3.6%. Interest expense for the years ended
December 31, 2008, 2007 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest charges
|
|
$
|
7,495,021
|
|
|
$
|
7,044,208
|
|
|
$
|
3,753,153
|
|
Amortization of debt issuance costs
|
|
|
454,088
|
|
|
|
261,614
|
|
|
|
365,855
|
|
Unused facility fees
|
|
|
209,364
|
|
|
|
115,774
|
|
|
|
213,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,158,473
|
|
|
$
|
7,421,596
|
|
|
$
|
4,332,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006 through 2008, the Company, through our special
purpose subsidiary, entered into eight interest rate swap
agreements. The swap agreements have a fixed rate range of 3.3%
to 5.2% on an initial notional amount totaling
$53.6 million. The swap agreements expire five years from
issuance. The swaps were put into place to hedge against changes
in variable interest payments on a portion of our outstanding
borrowings. For the year ended December 31, 2008, net
unrealized depreciation attributed to the swaps was
approximately $2.3 million. For the year ended
December 31, 2007, net unrealized depreciation attributed
to the swaps was approximately $775,000. For the year ended
December 31, 2006, net unrealized appreciation attributed
to the swaps was approximately $13,000. While hedging activities
may insulate us against adverse changes in interest rates, they
may also limit our ability to participate in the benefits of
lower rates with respect to the outstanding borrowings.
|
|
Note 7.
|
Stock
Option Plan and Restricted Stock Plan
|
As of December 31, 2008, 3,644,677 shares of common
stock were reserved for issuance upon exercise of options to be
granted under the Companys stock option plan and
2,065,045 shares of the Companys common stock were
reserved for issuance under the Companys employee
restricted stock plan (the Plans). On
August 14, 2008, awards of 190,000 shares of
restricted stock were granted to the Companys executive
officers and employees with a fair value of $7.37 (the closing
price of the common stock at date of grant). On
February 27, 2008, options to purchase a total of
800,500 shares of common stock were granted to the
Companys executive officers and employees with an exercise
price of $10.91 per share (the closing price of the common stock
at date of grant). On February 23, 2007, options to
purchase a total of 227,181 shares of common stock were
granted to the Companys executive officers and employees
with an exercise price of $14.38 per share (the closing price of
the common stock at date of grant). On November 1, 2007,
options to purchase a total of 5,000 shares of common stock
were granted to the Companys employees with an exercise
price of $11.49 per share (the closing price of the common stock
at date of grant). On June 26, 2006, options to purchase a
total of 903,000 shares of common stock were granted to the
Companys executive officers and
F-89
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
employees with an exercise price of $10.97 per share (the
closing price of the common stock at date of grant). Such
options granted from 2006 to 2008 vest equally, on a monthly
basis, over three years from the date of grant and have a
ten-year exercise period. During 2008, 35,848 options were
forfeited at a weighted average exercise price of $11.45; and
also during 2008, 2,500 shares of restricted stock were
forfeited. As of December 31, 2008, 3,201,329 options were
outstanding, 2,411,454 of which were exercisable, and
187,500 shares of restricted stock were outstanding. The
options have a weighted average remaining contractual life of
7.5 years, a weighted average exercise price of $12.42, and
an aggregate intrinsic value of $0. The restricted stock vests
over 4 years.
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment, (SFAS 123R).
The Company has elected the modified prospective
method of transition as permitted by SFAS 123R. Under
this transition method, the Company is required to record
compensation expense for all awards granted after the date of
adoption and for the unvested portion of previously granted
awards that were outstanding at the date of adoption. The fair
value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model. For options
granted in 2006, this model used the following assumptions:
annual dividend rate of 9.2%, risk free interest rate of 5.25%,
expected volatility of 21%, and the expected life of the options
of 6.5 years. For options granted in February 2007, this
model used the following assumptions: annual dividend rate of
8.3%, risk free interest rate of 4.7%, expected volatility of
20%, and the expected life of the options of 6.5 years. For
options granted in November 2007, this model used the following
assumptions: annual dividend rate of 11.1%, risk free interest
rate of 4.2%, expected volatility of 24%, and the expected life
of the options of 6.5 years. For options granted in
February 2008, this model used the following assumptions: annual
dividend rate of 11.8%, risk free interest rate of 3.0%,
expected volatility of 26%, and the expected life of the options
of 6.5 years. For 2006 to 2008 grants, the Company
calculated its expected term assumption using guidance provided
by SEC Staff Accounting Bulletin 107
(SAB 107). SAB 107 allows companies to use
a simplified expected term calculation in instances where no
historical experience exists, provided that the companies meet
specific criteria. The stock options granted by the Company meet
those criteria, and the expected terms were determined using the
SAB 107 simplified method. Expected volatility was based on
historical volatility of similar entities whose share prices and
volatility were available for all grants except the November
2007 and February 2008 grants. The November 2007 and February
2008 grants were calculated using the Companys historical
volatility.
Assumptions used with respect to future grants may change as the
Companys actual experience may be different. The fair
value of options granted in 2008, 2007 and 2006 was
approximately $0.47, $0.98 and $0.74, respectively, using the
Black-Scholes option pricing model. The Company has adopted the
policy of recognizing compensation cost for awards with graded
vesting on a straight-line basis over the requisite service
period for the entire award. For the years ended
December 31, 2008, 2007 and 2006, the Company recorded
compensation expense related to stock awards of approximately
$758,000, $676,000 and $506,000, respectively, which is included
in compensation expense in the consolidated statements of
operations. The Company does not record the tax benefits
associated with the expensing of stock awards since the Company
elected to be treated as a RIC under Subchapter M of the
Internal Revenue Code and, as such, the Company is not subject
to federal income tax on the portion of taxable income and gains
distributed to stockholders, provided that at least 90% of its
annual taxable income is distributed. As of December 31,
2008, there was $453,000 of unrecognized compensation cost
related to unvested options which is expected to be recognized
over 2.2 years. As of December 31, 2008, there was
$1.3 million of total unrecognized compensation cost
related to unvested restricted stock awards which is expected to
be recognized over 3.6 years.
|
|
Note 8.
|
Employee
Benefit Plan
|
The Company adopted a 401(k) plan (Plan) effective
January 1, 2003. The Plan permits an employee to defer a
portion of their total annual compensation up to the Internal
Revenue Service annual maximum.
F-90
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Employees are eligible to participate in the Plan upon
completion of one year of service. On an annual basis, the
Company makes a contribution equal to 4% (1% of which is
discretionary) to each eligible employees account, up to
the Internal Revenue Service annual maximum. For the years ended
December 31, 2008, 2007 and 2006, the Company recorded
$97,000, $85,000 and $65,000, respectively, for employer
contributions to the Plan.
|
|
Note 9.
|
Common
Stock Transactions
|
On January 26, 2007, the Company closed a shelf offering of
2.4 million shares of common stock and received gross
proceeds of $33.7 million less underwriters
commissions and discounts, and fees of $2.0 million.
On October 2, 2007, the Company closed a shelf offering of
2.3 million shares of common stock and received gross
proceeds of $30.5 million less underwriters
commissions and discounts, and fees of $1.6 million.
The Company had previously established a dividend reinvestment
plan, and during the years ended December 31, 2008, 2007
and 2006, issued 177,000, 158,000 and 85,000 shares,
respectively, in connection with dividends paid. The Company did
not issue any shares of its common stock under the dividend
reinvestment plan during the three months ended
September 30, 2008 and the three months ended
March 31, 2008 because it elected to satisfy the share
requirements of the dividend reinvestment plan in connection
with the dividends paid on July 16, 2008 and
January 16, 2008 through open market purchases of its
common stock by the administrator of the dividend reinvestment
plan. Such purchases on July 16, 2008 and January 16,
2008 consisted of 90,000 and 55,000 common shares, respectively,
at a cost of $589,000 and $573,000, respectively, which is
included in distributions to stockholders. The following table
summarizes the Companys dividends declared during 2008,
2007 and 2006:
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
|
|
2008
|
|
|
|
|
|
|
October 30, 2008
|
|
December 22, 2008
|
|
January 15, 2009
|
|
$0.25
|
July 30, 2008
|
|
September 12, 2008
|
|
October 15, 2008
|
|
0.33
|
May 2, 2008
|
|
June 5, 2008
|
|
July 16, 2008
|
|
0.33
|
February 27, 2008
|
|
March 14, 2008
|
|
April 16, 2008
|
|
0.33
|
|
|
|
|
|
|
|
Total 2008
|
|
|
|
|
|
$1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
November 1, 2007
|
|
December 14, 2007
|
|
January 16, 2008
|
|
$0.33
|
August 2, 2007
|
|
September 14, 2007
|
|
October 17, 2007
|
|
0.32
|
April 30, 2007
|
|
June 15, 2007
|
|
July 17, 2007
|
|
0.32
|
February 23, 2007
|
|
March 15, 2007
|
|
April 18, 2007
|
|
0.32
|
|
|
|
|
|
|
|
Total 2007
|
|
|
|
|
|
$1.29
|
|
|
|
|
|
|
|
F-91
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
November 10, 2006
|
|
December 15, 2006
|
|
January 17, 2007
|
|
$0.31
|
August 7, 2006
|
|
September 15, 2006
|
|
October 17, 2006
|
|
0.31
|
May 9, 2006
|
|
June 2, 2006
|
|
July 17, 2006
|
|
0.29
|
February 28, 2006
|
|
March 21, 2006
|
|
April 11, 2006
|
|
0.29
|
|
|
|
|
|
|
|
Total 2006
|
|
|
|
|
|
$1.20
|
|
|
|
|
|
|
|
The following table sets forth a reconciliation of weighted
average shares outstanding for computing basic and diluted
income (loss) per common share for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average common shares outstanding, basic
|
|
|
20,713,540
|
|
|
|
18,670,904
|
|
|
|
14,145,200
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
159,309
|
|
|
|
92,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
20,713,540
|
|
|
|
18,830,213
|
|
|
|
14,237,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of stock options is computed using the
treasury stock method. Options and restricted shares on
3.4 million (2008), 1.5 million (2007) and
1.3 million (2006) shares, were anti-dilutive and
therefore excluded from the computation of diluted earnings per
share.
|
|
Note 11.
|
Commitments
and Contingencies
|
The balance of unused commitments to extend credit was
$23.8 million and $29.3 million at December 31,
2008 and December 31, 2007, respectively. Commitments to
extend credit consist principally of the unused portions of
commitments that obligate the Company to extend credit, such as
investment draws, revolving credit arrangements or similar
transactions. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee by
the counterparty. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
In connection with borrowings under the Amended Securitization
Facility, the Companys special purpose subsidiary may be
required under certain circumstances to enter into interest rate
swap agreements or other interest rate hedging transactions. The
Company has agreed to guarantee the payment of certain swap
breakage costs that may be payable by the Companys special
purpose subsidiary in connection with any such interest rate
swap agreements or other interest rate hedging transactions (see
Note 6. Borrowings).
The Company leases its corporate offices and certain equipment
under operating leases with terms expiring through 2011. Future
minimum lease payments due under operating leases at
December 31, 2008 are as follows: $241,000
2009, $247,000 2010, $21,000 2011. Rent
expense was approximately $274,000, $245,000 and $222,000 for
the years ended December 31, 2008, 2007 and 2006,
respectively. At December 31, 2008, the Company had an
outstanding letter of credit in the amount of $38,000 as
security deposit for the lease of the Companys corporate
office.
|
|
Note 12.
|
Concentrations
of Credit Risk
|
The Companys customers are primarily small- to mid-sized
companies in a variety of industries.
At December 31, 2008 and December 31, 2007, the
Company did not have any investment in excess of 10% of the
total investment portfolio at fair value. Investment income,
consisting of interest, dividends and
F-92
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
fees, can fluctuate dramatically upon repayment of an investment
or sale of an equity interest. Revenue recognition in any given
year can be highly concentrated among several customers. During
the years ended December 31, 2008, 2007 and 2006, the
Company did not record investment income from any customer in
excess of 10.0% of total investment income.
Effective August 1, 2005, the Company elected to be treated
as a RIC. Accordingly, the Companys RIC tax year was filed
on a July 31 basis. The Companys policy is to comply with
the requirements of Subchapter M of the Code that are applicable
to RICs and to distribute substantially all of its taxable
income to its shareholders. To date, the Company has fully met
all of the distribution requirements and other requirements of
Subchapter M of the Code, therefore, no federal, state or local
income tax provision is required. On February 11, 2008, the
Company was granted permission by the Internal Revenue Service
to change its RIC tax year from July 31, to
December 31, effective on December 31, 2007.
Accordingly, the Company prepared a short period tax return from
August 1, 2007 through December 31, 2007, and will
file on a calendar year basis for 2008 and thereafter.
Distributable taxable income for the year ended
December 31, 2008, for the period August 1, 2006
through July 31, 2007 (close of RIC tax year) and
August 1, 2007 through December 31, 2007 (RIC short
tax period) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2007
|
|
|
August 1, 2006
|
|
|
|
Year Ended
|
|
|
to
|
|
|
to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
GAAP Net Investment Income
|
|
$
|
25,725,000
|
|
|
$
|
10,224,000
|
|
|
$
|
19,407,000
|
|
Tax timing differences of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination fees, net
|
|
|
(998,000
|
)
|
|
|
1,223,000
|
|
|
|
883,000
|
|
Stock compensation expense, bonus accruals, original issue
discount and depreciation and amortization
|
|
|
(67,000
|
)
|
|
|
(37,000
|
)
|
|
|
846,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Distributable Income
|
|
$
|
24,660,000
|
|
|
$
|
11,410,000
|
|
|
$
|
21,136,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable taxable income differs from GAAP net investment
income primarily due to: (1) origination fees received in
connection with investments in portfolio companies are treated
as taxable income upon receipt but are amortized into income for
GAAP purposes; (2) certain stock compensation is not
currently deductible for tax purposes but are current expenses
for GAAP purposes and a bonus accrual carryover, as a result of
the change in the Companys tax year described above, until
actually paid; (3) certain debt investments that generate
original issue discount; and (4) depreciation and
amortization.
Distributions which exceed tax distributable income (tax net
investment income and realized gains, if any) are reported as
distributions of paid-in capital (ie., return of capital). The
taxability of the four distributions made in the period
August 1, 2006 through July 31, 2007 was determined by
the Companys tax earnings and profits for its tax fiscal
year ended July 31, 2007. The taxability of the two
distributions made in the period August 1, 2007 through
December 31, 2007 (RIC short tax period) was determined by
the Companys tax earnings and profits for the five months
ended December 31, 2007. The taxability of the four
distributions made in the year ended December 31, 2008 was
determined by the Companys tax earnings and profits for
its year ended December 31, 2008. The taxability of the
distributions made during the year ended
F-93
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
December 31, 2008, for the period August 1, 2007
through December 31, 2007, and the period August 1,
2006 through July 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2007
|
|
|
August 1, 2006
|
|
|
|
Year Ended
|
|
|
to
|
|
|
to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
24,660,000
|
|
|
$
|
11,410,000
|
|
|
$
|
21,136,000
|
|
Long-term capital gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
24,660,000
|
|
|
|
11,410,000
|
|
|
|
21,136,000
|
|
Tax return of capital
|
|
|
1,135,000
|
|
|
|
1,258,000
|
|
|
|
335,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
$
|
25,795,000
|
|
|
$
|
12,668,000
|
|
|
$
|
21,471,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2008, ordinary income of $1.19 per share and tax return of
capital of $0.05 per share was reported on
Form 1099-DIV.
For 2007, ordinary income of $1.21 per share and tax return of
capital of $0.08 per share was reported on
Form 1099-DIV. For
2006, ordinary income of $1.12 per share and tax return of
capital of $0.08 per share was reported on
Form 1099-DIV.
There were no capital gain distributions in 2008, 2007 or 2006.
The tax cost basis of the Companys investments as of
December 31, 2008 approximates the book cost.
At December 31, 2008, the Company had a net capital loss
carryforward of $4.1 million to offset net capital gains,
to the extent provided by federal tax law. Of the total capital
loss carryforward, $3.2 million will expire in the
Companys tax year ending December 31, 2013, and
$900,000 will expire in the Companys tax year ending
December 31, 2015.
As of December 31, 2008, the components of accumulated
earnings on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
Distributable ordinary income
|
|
|
|
|
|
$
|
5,022,000
|
|
Other book/tax temporary differences
|
|
|
|
|
|
|
(4,170,000
|
)
|
Unrealized depreciation
|
|
|
|
|
|
|
(46,751,000
|
)
|
Accumulated capital and other losses
|
|
|
|
|
|
|
(4,054,000
|
)
|
The tax distributable income of $5,022,000 as of
December 31, 2008 noted above was paid out as part of the
January 15, 2009 cash distribution of $5,254,000. (Note:
the dividend declared on October 30, 2008 with a record
date of December 22, 2008 and paid on January 15,
2009, is included in the 2008
Form 1099-DIV,
under the requirements of Subchapter M of the Code.
F-94
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 14.
|
Financial
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of year
|
|
$
|
10.73
|
|
|
$
|
10.37
|
|
|
$
|
10.48
|
|
Net investment income
|
|
|
1.24
|
|
|
|
1.22
|
|
|
|
1.06
|
|
Net realized gain (loss) on investments
|
|
|
(.04
|
)
|
|
|
.01
|
|
|
|
(.23
|
)
|
Net change in unrealized appreciation (depreciation) on
investments
|
|
|
(1.93
|
)
|
|
|
(.20
|
)
|
|
|
.27
|
|
Net change in unrealized depreciation on swaps
|
|
|
(.11
|
)
|
|
|
(.04
|
)
|
|
|
|
|
Tax return of capital
|
|
|
(.05
|
)
|
|
|
(.08
|
)
|
|
|
(.18
|
)
|
Distributions from net investment income
|
|
|
(1.24
|
)
|
|
|
(1.22
|
)
|
|
|
(1.06
|
)
|
Distributions in excess of net investment income
|
|
|
.05
|
|
|
|
|
|
|
|
.05
|
|
Stock based compensation expense
|
|
|
.03
|
|
|
|
.03
|
|
|
|
.03
|
|
Effect of issuance of common stock
|
|
|
(.03
|
)
|
|
|
.64
|
|
|
|
(.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of year
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
|
$
|
10.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Asset Value Return(1)
|
|
|
(7.8
|
)%
|
|
|
16.1
|
%
|
|
|
10.4
|
%
|
Per share market value, beginning of period
|
|
$
|
10.09
|
|
|
$
|
14.49
|
|
|
$
|
12.20
|
|
Per share market value, end of period
|
|
$
|
3.64
|
|
|
$
|
10.09
|
|
|
$
|
14.49
|
|
Total Market Value Return(2)
|
|
|
(51.6
|
)%
|
|
|
(21.4
|
)%
|
|
|
28.6
|
%
|
Shares outstanding at end of year
|
|
|
20,827,334
|
|
|
|
20,650,455
|
|
|
|
15,821,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of year
|
|
$
|
180,117,000
|
|
|
$
|
221,598,000
|
|
|
$
|
164,109,000
|
|
Average net assets
|
|
|
207,482,000
|
|
|
|
202,531,000
|
|
|
|
149,790,000
|
|
Ratio of operating expenses to average net assets
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
|
|
7.7
|
%
|
Ratio of net investment income to average net assets
|
|
|
12.4
|
%
|
|
|
11.2
|
%
|
|
|
10.0
|
%
|
Weighted average borrowings outstanding
|
|
$
|
141,457,000
|
|
|
$
|
106,034,000
|
|
|
$
|
55,469,000
|
|
Average amount of borrowings per share
|
|
$
|
6.79
|
|
|
$
|
5.13
|
|
|
$
|
3.51
|
|
|
|
|
(1) |
|
The total net asset value return reflects the change in net
asset value of a share of stock plus dividends from beginning of
year to end of year. |
|
(2) |
|
The total market value return reflects the change in the ending
market value per share plus dividends, |
F-95
Patriot
Capital Funding, Inc.
Notes to
Consolidated Financial
Statements (Continued)
divided by the beginning market value per share.
|
|
Note 15.
|
Selected
Quarterly Data (Unaudited)
|
The following table sets forth certain quarterly financial
information for each of the fiscal quarters during the years
ended December 31, 2008 and 2007. This information was
derived from our unaudited financial statements. Results for any
quarter are not necessarily indicative of results for the full
year or for any future quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total Investment Income
|
|
$
|
10,170,880
|
|
|
$
|
10,229,420
|
|
|
$
|
10,654,419
|
|
|
$
|
11,244,685
|
|
Net Investment Income
|
|
|
5,962,888
|
|
|
|
6,557,783
|
|
|
|
6,418,698
|
|
|
|
6,785,900
|
|
Net Realized and Unrealized Gains (Losses) on Investments and
Interest Rate Swaps
|
|
|
(22,900,157
|
)
|
|
|
(6,873,878
|
)
|
|
|
(2,742,818
|
)
|
|
|
(10,693,675
|
)
|
Net Income (Loss)
|
|
|
(16,937,269
|
)
|
|
|
(316,095
|
)
|
|
|
3,675,880
|
|
|
|
(3,907,775
|
)
|
Net Income (Loss) Per Share, Basic and Diluted
|
|
$
|
(0.81
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.19
|
)
|
Weighted Average Shares Outstanding, Basic and Diluted
|
|
|
20,806,978
|
|
|
|
20,702,485
|
|
|
|
20,693,337
|
|
|
|
20,650,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total Investment Income
|
|
$
|
11,142,679
|
|
|
$
|
9,752,882
|
|
|
$
|
9,089,653
|
|
|
$
|
8,977,323
|
|
Net Investment Income
|
|
|
6,507,150
|
|
|
|
5,500,985
|
|
|
|
5,391,708
|
|
|
|
5,345,278
|
|
Net Realized and Unrealized Gains (Losses) on Investments and
Interest Rate Swaps
|
|
|
(3,146,414
|
)
|
|
|
(1,494,112
|
)
|
|
|
291,156
|
|
|
|
27,939
|
|
Net Income
|
|
|
3,360,736
|
|
|
|
4,006,873
|
|
|
|
5,682,864
|
|
|
|
5,373,217
|
|
Net Income Per Share, Basic
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
Net Income Per Share, Diluted
|
|
$
|
0.16
|
|
|
$
|
0.22
|
|
|
$
|
0.31
|
|
|
$
|
0.30
|
|
Weighted Average Shares Outstanding, Basic
|
|
|
20,589,650
|
|
|
|
18,284,737
|
|
|
|
18,246,987
|
|
|
|
17,532,896
|
|
Weighted Average Shares Outstanding, Diluted
|
|
|
20,748,959
|
|
|
|
18,476,049
|
|
|
|
18,466,510
|
|
|
|
17,724,026
|
|
|
|
Note 16.
|
Subsequent
Events (Unaudited)
|
On March 3, 2009, the Board of Directors granted an award
of 446,250 shares of restricted stock to the Companys
executive officers with a fair value of $1.27 per share (the
closing price of the common stock at the date of grant). The
total fair value of $567,000 will be expensed over four years.
F-96
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Patriot Capital Funding, Inc.
We have audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States) the
consolidated financial statements of Patriot Capital Funding,
Inc. referred to in our report dated March 13, 2009, which is
included in the annual report on
Form 10-K.
Our audits of the basic financial statements included the
schedule of investments in and advances to affiliates, which is
the responsibility of the Companys management. In our
opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
/s/ GRANT THORNTON LLP
New York, New York
March 13, 2009
F-97
Schedule 12-14
PATRIOT
CAPITAL FUNDING, INC.
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO
AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Dividends
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Credited
|
|
|
2007
|
|
|
Gross
|
|
|
Gross
|
|
|
2008
|
|
Portfolio Company
|
|
Investment(1)
|
|
to Income
|
|
|
Fair Value
|
|
|
Additions(2)
|
|
|
Reductions(3)
|
|
|
Fair Value
|
|
|
Companies More Than 25% Owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encore Legal Solutions
|
|
Junior Debt
|
|
$
|
1,040,181
|
|
|
$
|
11,063,994
|
|
|
$
|
358,260
|
|
|
$
|
(1,391,456
|
)
|
|
$
|
10,030,798
|
|
LLC
|
|
Subordinated Debt
|
|
|
230,237
|
|
|
|
3,489,226
|
|
|
|
2,670,341
|
|
|
|
(6,159,567
|
)
|
|
|
|
|
|
|
Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
Common Stock (4)
|
|
|
|
|
|
|
|
|
|
|
5,159,567
|
|
|
|
(4,832,667
|
)
|
|
|
326,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC
|
|
Subordinated Debt
|
|
|
674,445
|
|
|
|
4,180,389
|
|
|
|
265,500
|
|
|
|
(904,902
|
)
|
|
|
3,540,987
|
|
|
|
Membership Interest (4)
|
|
|
|
|
|
|
5,148,000
|
|
|
|
|
|
|
|
(1,272,000
|
)
|
|
|
3,876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nupla Corporation
|
|
Senior Debt
|
|
|
524,506
|
|
|
|
6,161,136
|
|
|
|
964,466
|
|
|
|
(1,102,325
|
)
|
|
|
6,023,277
|
|
|
|
Subordinated Debt
|
|
|
447,666
|
|
|
|
2,993,614
|
|
|
|
108,445
|
|
|
|
(909,684
|
)
|
|
|
2,192,375
|
|
|
|
Preferred Stock
|
|
|
113,157
|
|
|
|
493,427
|
|
|
|
1,158,656
|
|
|
|
(534,683
|
)
|
|
|
1,117,400
|
|
|
|
Common Stock (4)
|
|
|
|
|
|
|
38,300
|
|
|
|
55,000
|
|
|
|
(93,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sidumpr Trailer Co.
|
|
Senior Debt
|
|
|
801,969
|
|
|
|
9,171,642
|
|
|
|
3,299,740
|
|
|
|
(9,152,073
|
)
|
|
|
3,319,309
|
|
|
|
Subordinated Debt
|
|
|
4,525
|
|
|
|
75,000
|
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
Preferred Stock
|
|
|
3,459
|
|
|
|
|
|
|
|
78,459
|
|
|
|
(78,459
|
)
|
|
|
|
|
|
|
Common Stock (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total companies more than 25% owned
|
|
$
|
3,840,145
|
|
|
$
|
42,814,728
|
|
|
$
|
14,468,434
|
|
|
$
|
(26,856,116
|
)
|
|
$
|
30,427,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies 5% to 25% Owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises,
|
|
Senior Debt
|
|
$
|
1,016,009
|
|
|
$
|
11,792,736
|
|
|
$
|
60,631
|
|
|
$
|
(4,633,889
|
)
|
|
$
|
7,219,478
|
(5)
|
LLC
|
|
Subordinated Debt
|
|
|
915,123
|
|
|
|
6,335,464
|
|
|
|
634,942
|
|
|
|
(6,970,406
|
)
|
|
|
|
|
|
|
Membership Interest (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Inc.
|
|
Senior Debt
|
|
|
279,853
|
|
|
|
|
|
|
|
11,550,000
|
|
|
|
(846,667
|
)
|
|
|
10,703,333
|
|
|
|
Subordinated Debt
|
|
|
325,284
|
|
|
|
|
|
|
|
6,591,375
|
|
|
|
(67,028
|
)
|
|
|
6,524,347
|
|
|
|
Preferred Stock
|
|
|
29,722
|
|
|
|
|
|
|
|
1,029,722
|
|
|
|
(180,222
|
)
|
|
|
849,500
|
|
|
|
Common Stock (4)
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
|
|
Senior Debt
|
|
|
597,377
|
|
|
|
8,185,400
|
|
|
|
1,811,997
|
|
|
|
(3,599,287
|
)
|
|
|
6,398,110
|
|
|
|
Junior Debt
|
|
|
629,695
|
|
|
|
4,035,122
|
|
|
|
139,728
|
|
|
|
(2,774
|
)
|
|
|
4,172,076
|
|
|
|
Membership Interest (4)
|
|
|
|
|
|
|
856,900
|
|
|
|
|
|
|
|
(135,700
|
)
|
|
|
721,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC
|
|
Senior Debt
|
|
|
1,030,989
|
|
|
|
8,266,840
|
|
|
|
550,807
|
|
|
|
(8,817,647
|
)
|
|
|
|
|
|
|
Subordinated Note
|
|
|
67,375
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
Membership Interest (4)
|
|
|
|
|
|
|
729,100
|
|
|
|
592,403
|
|
|
|
(698,003
|
)
|
|
|
623,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sport Helmets
|
|
Senior Debt
|
|
|
912,418
|
|
|
|
11,816,776
|
|
|
|
28,986
|
|
|
|
(435,400
|
)
|
|
|
11,410,362
|
|
Holdings, LLC
|
|
Subordinated Debt
|
|
|
1,235,876
|
|
|
|
7,889,250
|
|
|
|
1,266,104
|
|
|
|
(1,000,000
|
)
|
|
|
8,155,354
|
|
|
|
Common Stock (4)
|
|
|
|
|
|
|
1,901,500
|
|
|
|
|
|
|
|
(2,200
|
)
|
|
|
1,899,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vince & Associates
|
|
Senior Debt
|
|
|
359,366
|
|
|
|
7,391,657
|
|
|
|
433,343
|
|
|
|
(7,825,000
|
)
|
|
|
|
|
Clinic Research, Inc
|
|
Subordinated Debt
|
|
|
571,102
|
|
|
|
5,441,483
|
|
|
|
193,822
|
|
|
|
(5,635,305
|
)
|
|
|
|
|
|
|
Preferred Stock (4)
|
|
|
|
|
|
|
592,900
|
|
|
|
|
|
|
|
(592,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total companies 5% to 25% owned
|
|
$
|
7,970,189
|
|
|
$
|
75,485,128
|
|
|
$
|
25,133,961
|
|
|
$
|
(41,942,528
|
)
|
|
$
|
58,676,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-98
This schedule should be read in conjunction with the
Companys Consolidated Financial Statements, including the
Consolidated Statement of Investments and Notes to the
Consolidated Financial Statements.
|
|
|
(1) |
|
All investments listed are restricted securities
within the meaning of Rule 144 under the Securities Act of
1933. |
|
(2) |
|
Gross additions include increases in investments resulting from
new portfolio company investments and
paid-in-kind
interest or dividends. Gross additions also include net
increases in unrealized appreciation or net decreases in
unrealized depreciation. |
|
(3) |
|
Gross reductions include decreases in investments resulting from
principal collections related to investment repayments. Gross
reductions also include net increases in unrealized depreciation
or net decreases in unrealized appreciation. |
|
(4) |
|
Non-income producing. |
|
(5) |
|
At December 31, 2008, the Company owned less than 5% of the
voting securities of the company. |
F-99
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE I THE MERGER
|
|
|
A-1
|
|
1.1
|
|
The Merger
|
|
|
A-1
|
|
1.2
|
|
Effective Time
|
|
|
A-1
|
|
1.3
|
|
Effects of the Merger
|
|
|
A-1
|
|
1.4
|
|
Conversion of Stock
|
|
|
A-1
|
|
1.5
|
|
Stock Options and Restricted Stock
|
|
|
A-2
|
|
1.6
|
|
Articles of Incorporation and Bylaws of the Surviving Company
|
|
|
A-3
|
|
1.7
|
|
Directors and Officers
|
|
|
A-3
|
|
1.8
|
|
Tax Consequences
|
|
|
A-3
|
|
1.9
|
|
Repayment of Outstanding Indebtedness
|
|
|
A-3
|
|
|
|
|
|
|
ARTICLE II DELIVERY OF MERGER CONSIDERATION
|
|
|
A-4
|
|
2.1
|
|
Exchange Agent
|
|
|
A-4
|
|
2.2
|
|
Deposit of Merger Consideration
|
|
|
A-4
|
|
2.3
|
|
Delivery of Merger Consideration
|
|
|
A-4
|
|
|
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
|
|
|
A-6
|
|
3.1
|
|
Corporate Organization
|
|
|
A-6
|
|
3.2
|
|
Capitalization
|
|
|
A-7
|
|
3.3
|
|
Authority; No Violation
|
|
|
A-8
|
|
3.4
|
|
Consents and Approvals
|
|
|
A-8
|
|
3.5
|
|
Reports; Regulatory Matters
|
|
|
A-9
|
|
3.6
|
|
Financial Statements
|
|
|
A-10
|
|
3.7
|
|
Brokers Fees
|
|
|
A-11
|
|
3.8
|
|
Absence of Certain Changes or Events
|
|
|
A-11
|
|
3.9
|
|
Legal Proceedings
|
|
|
A-12
|
|
3.10
|
|
Taxes and Tax Returns
|
|
|
A-12
|
|
3.11
|
|
Employee Matters
|
|
|
A-14
|
|
3.12
|
|
Compliance with Applicable Law
|
|
|
A-15
|
|
3.13
|
|
Certain Contracts
|
|
|
A-15
|
|
3.14
|
|
Investment Securities
|
|
|
A-16
|
|
3.15
|
|
Property
|
|
|
A-16
|
|
3.16
|
|
Intellectual Property
|
|
|
A-17
|
|
3.17
|
|
State Takeover Laws
|
|
|
A-17
|
|
3.18
|
|
Interested Party Transactions
|
|
|
A-17
|
|
3.19
|
|
Reorganization; Approvals
|
|
|
A-17
|
|
3.20
|
|
Opinion
|
|
|
A-17
|
|
3.21
|
|
Company Information
|
|
|
A-17
|
|
3.22
|
|
Undisclosed Liabilities
|
|
|
A-17
|
|
3.23
|
|
Insurance
|
|
|
A-17
|
|
3.24
|
|
Environmental Matters
|
|
|
A-18
|
|
|
|
|
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER
|
|
|
A-18
|
|
4.1
|
|
Corporate Organization
|
|
|
A-18
|
|
4.2
|
|
Capitalization
|
|
|
A-18
|
|
A-i
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
4.3
|
|
Authority; No Violation
|
|
|
A-19
|
|
4.4
|
|
Consents and Approvals
|
|
|
A-19
|
|
4.5
|
|
Reports; Regulatory Matters
|
|
|
A-19
|
|
4.6
|
|
Financial Statements
|
|
|
A-20
|
|
4.7
|
|
Brokers Fees
|
|
|
A-22
|
|
4.8
|
|
Absence of Certain Changes or Events
|
|
|
A-22
|
|
4.9
|
|
Legal Proceedings
|
|
|
A-22
|
|
4.10
|
|
Taxes and Tax Returns
|
|
|
A-22
|
|
4.11
|
|
Compliance with Applicable Law
|
|
|
A-23
|
|
4.12
|
|
Reorganization; Approvals
|
|
|
A-23
|
|
4.13
|
|
Buyer Information
|
|
|
A-23
|
|
4.14
|
|
No Financing Condition
|
|
|
A-23
|
|
4.15
|
|
Undisclosed Liabilities
|
|
|
A-23
|
|
4.16
|
|
Insurance
|
|
|
A-23
|
|
4.17
|
|
Environmental Matters
|
|
|
A-23
|
|
4.18
|
|
Investment Adviser and Administrator
|
|
|
A-24
|
|
|
|
|
|
|
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS
|
|
|
A-25
|
|
5.1
|
|
Conduct of Businesses Prior to the Effective Time
|
|
|
A-25
|
|
5.2
|
|
Company Forbearances
|
|
|
A-25
|
|
5.3
|
|
Buyer Forbearances
|
|
|
A-26
|
|
|
|
|
|
|
ARTICLE VI ADDITIONAL AGREEMENTS
|
|
|
A-27
|
|
6.1
|
|
Regulatory Matters
|
|
|
A-27
|
|
6.2
|
|
Access to Information
|
|
|
A-28
|
|
6.3
|
|
Stockholder Approval
|
|
|
A-28
|
|
6.4
|
|
Exchange Listing
|
|
|
A-28
|
|
6.5
|
|
Employee Matters
|
|
|
A-29
|
|
6.6
|
|
Indemnification; Directors and Officers Insurance
|
|
|
A-30
|
|
6.7
|
|
Additional Agreements
|
|
|
A-31
|
|
6.8
|
|
Advice of Changes
|
|
|
A-31
|
|
6.9
|
|
Exemption from Liability Under Section 16(b)
|
|
|
A-31
|
|
6.10
|
|
No Solicitation
|
|
|
A-31
|
|
6.11
|
|
Dividends
|
|
|
A-33
|
|
6.12
|
|
Stockholder Litigation
|
|
|
A-34
|
|
6.13
|
|
Loss Information
|
|
|
A-34
|
|
|
|
|
|
|
ARTICLE VII CONDITIONS PRECEDENT
|
|
|
A-34
|
|
7.1
|
|
Conditions to Each Partys Obligation To Effect the Merger
|
|
|
A-34
|
|
7.2
|
|
Conditions to Obligations of Buyer
|
|
|
A-35
|
|
7.3
|
|
Conditions to Obligations of Company
|
|
|
A-35
|
|
|
|
|
|
|
ARTICLE VIII TERMINATION AND AMENDMENT
|
|
|
A-36
|
|
8.1
|
|
Termination
|
|
|
A-36
|
|
8.2
|
|
Effect of Termination
|
|
|
A-37
|
|
8.3
|
|
Fees and Expenses
|
|
|
A-37
|
|
A-ii
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
8.4
|
|
Termination Fee; Expense Reimbursement; Make Whole Payments
|
|
|
A-37
|
|
8.5
|
|
Amendment
|
|
|
A-38
|
|
8.6
|
|
Extension; Waiver
|
|
|
A-38
|
|
|
|
|
|
|
ARTICLE IX GENERAL PROVISIONS
|
|
|
A-38
|
|
9.1
|
|
Closing
|
|
|
A-38
|
|
9.2
|
|
Standard
|
|
|
A-38
|
|
9.3
|
|
Nonsurvival of Representations, Warranties and Agreements
|
|
|
A-39
|
|
9.4
|
|
Notices
|
|
|
A-39
|
|
9.5
|
|
Interpretation
|
|
|
A-39
|
|
9.6
|
|
Counterparts
|
|
|
A-40
|
|
9.7
|
|
Entire Agreement
|
|
|
A-40
|
|
9.8
|
|
Governing Law; Jurisdiction
|
|
|
A-40
|
|
9.9
|
|
Publicity
|
|
|
A-40
|
|
9.10
|
|
Assignment; Third Party Beneficiaries
|
|
|
A-40
|
|
9.11
|
|
Remedies
|
|
|
A-41
|
|
9.12
|
|
Waiver of Jury Trial
|
|
|
A-41
|
|
A-iii
INDEX OF
DEFINED TERMS
|
|
|
|
|
|
|
Section
|
|
1940 Act
|
|
|
3.4(a)
|
|
Administrator
|
|
|
4.18
|
|
Agreement
|
|
|
Preamble
|
|
Alternative Proposal
|
|
|
6.10(a)
|
|
Alternative Transaction
|
|
|
6.10(a)
|
|
Articles of Merger
|
|
|
1.2
|
|
Bankruptcy and Equity Exception
|
|
|
3.3(a)
|
|
Board Recommendation
|
|
|
3.3(a)
|
|
Buyer
|
|
|
Preamble
|
|
Buyer Articles
|
|
|
1.6
|
|
Buyer Board
|
|
|
Recitals
|
|
Buyer Bylaws
|
|
|
1.6
|
|
Buyer Common Stock
|
|
|
1.4(a)
|
|
Buyer Disclosure Schedule
|
|
|
Art. IV
|
|
Buyer DRIP
|
|
|
2.3(d)
|
|
Buyer Regulatory Agreement
|
|
|
4.5(b)
|
|
Buyer Requisite Regulatory Approvals
|
|
|
7.2(d)
|
|
Buyer SEC Reports
|
|
|
4.5(c)
|
|
Certificate
|
|
|
1.4(d)
|
|
Certificate of Merger
|
|
|
1.2
|
|
Change of Recommendation
|
|
|
6.10(e)
|
|
Change of Recommendation Notice
|
|
|
6.10(e)(iv)
|
|
Claim
|
|
|
6.6(a)
|
|
Closing
|
|
|
9.1
|
|
Closing Date
|
|
|
9.1
|
|
Code
|
|
|
Recitals
|
|
Company
|
|
|
Preamble
|
|
Company Benefit Plans
|
|
|
3.11(a)
|
|
Company Board
|
|
|
Recitals
|
|
Company Bylaws
|
|
|
3.1(b)
|
|
Company Certificate
|
|
|
3.1(b)
|
|
Company Common Stock
|
|
|
1.4(b)
|
|
Company Contract(s)
|
|
|
3.3(b)
|
|
Company Disclosure Schedule
|
|
|
Art. III
|
|
Company Options
|
|
|
1.5(a)
|
|
Company Preferred Stock
|
|
|
3.2(a)
|
|
Company Regulatory Agreement
|
|
|
3.5(b)
|
|
Company Requisite Regulatory Approvals
|
|
|
7.3(d)
|
|
Company Restricted Shares
|
|
|
1.5(b)
|
|
Company Restricted Stock Plan
|
|
|
1.5(b)
|
|
Company SEC Reports
|
|
|
3.5(c)
|
|
Company Securitization Documents
|
|
|
1.9
|
|
Company Stock Option Plan
|
|
|
1.5(a)
|
|
A-iv
|
|
|
|
|
|
|
Section
|
|
Company Stock Plans
|
|
|
1.5(b)
|
|
Company Stockholder Meeting
|
|
|
6.3
|
|
Confidentiality Agreement
|
|
|
6.2(c)
|
|
Covered Employees
|
|
|
6.5(a)
|
|
Delaware Secretary
|
|
|
1.2
|
|
DGCL
|
|
|
1.1
|
|
DOJ
|
|
|
6.1(e)
|
|
Effective Time
|
|
|
1.2
|
|
Employees
|
|
|
5.2(c)
|
|
Environmental Laws
|
|
|
3.24
|
|
ERISA
|
|
|
3.11(a)
|
|
ERISA Affiliate
|
|
|
3.11(a)
|
|
Exchange Act
|
|
|
3.5(c)
|
|
Exchange Agent
|
|
|
2.1
|
|
Exchange Agent Agreement
|
|
|
2.1
|
|
Exchange Fund
|
|
|
2.2
|
|
Exchange Ratio
|
|
|
1.4(c)
|
|
Excluded Company Shares
|
|
|
1.4(b)
|
|
Executive Officers
|
|
|
3.8(b)
|
|
Expense Letter
|
|
|
8.3
|
|
Expense Reimbursement
|
|
|
8.4(b)
|
|
FBR
|
|
|
3.7
|
|
Final Company Dividend
|
|
|
2.3(c)
|
|
Form N-14
|
|
|
3.4(a)
|
|
FTC
|
|
|
6.1(e)
|
|
GAAP
|
|
|
3.1(c)
|
|
Governmental Entity
|
|
|
3.4(a)
|
|
HSR Act
|
|
|
3.4(a)
|
|
Indemnified Parties
|
|
|
6.6(a)
|
|
Insurance Amount
|
|
|
6.6(c)
|
|
Intellectual Property Rights
|
|
|
3.16
|
|
Investment Adviser
|
|
|
4.18
|
|
IRS
|
|
|
3.10(a)
|
|
Leased Properties
|
|
|
3.15
|
|
Letter of Transmittal
|
|
|
2.3(a)
|
|
Liens
|
|
|
3.2(c)
|
|
Loan Repayment
|
|
|
1.9
|
|
Make Whole Payment
|
|
|
8.4(c)
|
|
Material Adverse Change
|
|
|
3.8(a)
|
|
MDAT
|
|
|
1.2
|
|
Merger
|
|
|
Recitals
|
|
Merger Consideration
|
|
|
1.4(c)
|
|
Merger Shares
|
|
|
1.4(c)
|
|
MGCL
|
|
|
1.1
|
|
A-v
|
|
|
|
|
|
|
Section
|
|
Option Value
|
|
|
1.5(a)
|
|
Organizational Documents
|
|
|
3.14
|
|
Other Regulatory Approvals
|
|
|
3.4(a)
|
|
Owned Properties
|
|
|
3.15
|
|
Per Share Dividend
|
|
|
1.4(c)
|
|
Permitted Encumbrances
|
|
|
3.15
|
|
PCF
|
|
|
3.1(c)
|
|
Proxy Statement
|
|
|
3.4(a)
|
|
Real Property
|
|
|
3.15
|
|
Regulatory Agencies
|
|
|
3.5(a)
|
|
Requisite Stockholder Approval
|
|
|
3.3(a)
|
|
Sarbanes-Oxley Act
|
|
|
3.5(c)
|
|
SEC
|
|
|
3.4(a)
|
|
Securities Act
|
|
|
3.2(a)
|
|
SRO
|
|
|
3.4(a)
|
|
Subsidiary
|
|
|
3.1(c)
|
|
Superior Proposal
|
|
|
6.10
|
|
Surviving Company
|
|
|
Recitals
|
|
Takeover Statutes
|
|
|
3.17
|
|
Tax(es)
|
|
|
3.10(d)
|
|
Tax Return
|
|
|
3.10(e)
|
|
Termination Fee
|
|
|
8.4(a)
|
|
Third Party
|
|
|
6.10(a)
|
|
Third Party Deposit
|
|
|
6.10(c)
|
|
Voting Debt
|
|
|
3.2(a)
|
|
A-vi
AGREEMENT
AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 3,
2009 (this Agreement), by and between
Patriot Capital Funding, Inc., a Delaware corporation
(Company) and Prospect Capital
Corporation, a Maryland corporation
(Buyer).
WITNESSETH:
WHEREAS, the boards of directors of the Company and Buyer
(the Company Board and the
Buyer Board, respectively) have
determined that it is in the best interests of their respective
companies and stockholders to consummate the merger provided for
in this Agreement in which the Company will, on the terms and
subject to the conditions set forth in this Agreement, merge
with and into Buyer (the Merger), with
Buyer as the surviving company in the Merger (sometimes referred
to in such capacity as the Surviving
Company);
WHEREAS, for federal income Tax purposes, it is the
intent of the parties hereto that the Merger shall qualify as a
reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the Code), and this Agreement
is intended to be and is adopted as a plan of
reorganization for such purposes; and
WHEREAS, the parties desire to make certain
representations, warranties and agreements in connection with
the Merger and also to prescribe certain conditions to the
Merger.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained in this
Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to
the terms and conditions of this Agreement, in accordance with
the Delaware General Corporation Law (the
DGCL) and the General Corporation Law
of the State of Maryland (the MGCL),
at the Effective Time, the Company shall merge with and into
Buyer and the separate corporate existence of the Company shall
cease. Buyer shall be the Surviving Company in the Merger and
shall continue its existence as a corporation under the laws of
the State of Maryland.
1.2 Effective
Time. Contemporaneously with the Closing, the
Surviving Company shall file or cause to be filed (a) a
certificate of merger (the Certificate of
Merger) with the Secretary of State of the State
of Delaware (the Delaware Secretary),
and (b) articles of merger (the Articles of
Merger) with the Maryland State Department of
Assessments and Taxation (MDAT). The
Merger shall become effective at the time (the
Effective Time) set forth in the
Certificate of Merger and Articles of Merger.
1.3 Effects of the
Merger. At and after the Effective Time, the
Merger shall have the effects set forth in the DGCL and the
MGCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the property,
rights, privileges and powers of the Company and Buyer shall be
vested in the Buyer as the Surviving Company, and all debts,
liabilities and duties of the Company shall become the debts,
liabilities and duties of the Buyer as the Surviving Company.
1.4 Conversion of Stock. At
the Effective Time, by virtue of the Merger and without any
action on the part of Buyer, the Company or the holder of any of
the following securities:
(a) each share of common stock, par value $0.001 per share,
of Buyer (the Buyer Common Stock)
issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding and shall not be affected by
the Merger;
(b) each share of common stock, par value $0.01 per share,
of the Company (the Company Common
Stock) issued and outstanding immediately prior to
the Effective Time that is owned by the
A-1
Company, Buyer or any wholly-owned subsidiary of the Company or
Buyer (the Excluded Company Shares)
shall be cancelled and shall cease to exist and no Buyer Common
Stock or other consideration shall be delivered in exchange
therefor;
(c) subject to Section 1.4(e), at the Effective Time
each share of Company Common Stock other than the Excluded
Company Shares shall be converted, in accordance with the
procedures set forth in Article II, into the right to
receive a number of shares of Buyer Common Stock equal to the
result of (i) multiplied by (ii) (the
Exchange Ratio), where (i) and
(ii) are determined as follows:
|
|
|
|
(A)
|
4.0000 minus the Per Share Dividend,
|
divided by
(ii) = a fraction, the numerator of which is
21,584,251, and the denominator of which is the number of shares
of Company Common Stock then outstanding immediately prior to
the Effective Time (including, for the avoidance of doubt,
Company Restricted Shares which vest or have vested prior to the
Effective Time (including as a result of the transactions
contemplated by this Agreement), as well as any shares of
Company Common Stock issued pursuant to the declaration of a
Final Company Dividend or that would have been issued pursuant
to the declaration of a Final Company Dividend, but (in
accordance with Section 6.11(c)(y)) were not issued by the
Company prior to the Closing.
Notwithstanding the foregoing, fractional shares resulting from
the application of the Exchange Ratio shall be paid in cash in
the manner set forth in Section 2.3(g). For these purposes,
the term Per Share Dividend shall mean
the amount of cash (if any, and expressed in Dollar.Cent format
but without regard to dollar sign) per share payable as part of
a Final Company Dividend pursuant to Section 2.3(c). The
aggregate shares of Buyer Common Stock to be so issued (the
Merger Shares), together with any cash
to be paid in lieu of fractional shares in accordance with
Section 2.3(g), shall be referred to collectively as the
Merger Consideration;
(d) any share of Company Common Stock converted into the
right to receive the Merger Consideration pursuant to this
Article I shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist as of the
Effective Time, and each certificate previously representing any
such shares of Company Common Stock (each, a
Certificate) shall thereafter
represent only the right to receive a proportionate share of the
Merger Consideration into which the shares of Company Common
Stock represented by such Certificate have been converted
pursuant to this Section 1.4 and Section 2.3(g), as
well as any dividends to which former holders of Company Common
Stock become entitled in accordance with
Article II; and
(e) if, between the date of this Agreement and the
Effective Time, the outstanding shares of Buyer Common Stock
shall have been increased, decreased, changed into or exchanged
for a different number or kind of shares or securities as a
result of a reclassification, stock dividend, stock split,
reverse stock split, or other similar change and specifically
excluding sales of Buyer Common Stock, sales of Buyer
equity-linked securities, and issuance of Buyer Common Stock
pursuant to Buyers dividend reinvestment plan or otherwise
in lieu of a portion of any cash dividend declared by Buyer, an
appropriate and proportionate adjustment shall be made to the
Exchange Ratio.
1.5 Stock Options and Restricted Stock.
(a) As of the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof, each
option to purchase shares of Company Common Stock granted under
the Patriot Capital Funding, Inc. Amended Stock Option Plan (the
Company Stock Option Plan) that is
outstanding immediately prior to the Effective Time (each, a
Company Option, and collectively, the
Company Options) shall be cancelled
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in exchange for the payment in cash to the holder thereof of
$0.01 per share of Company Common Stock for which such Company
Option is therein exercisable.
(b) As of immediately prior to the Effective Time, each
restricted share of Company Common Stock granted under the
Patriot Capital Funding, Inc. Employee Restricted Stock Plan
(the Company Restricted Stock Plan,
and together with the Company Stock Option Plan, the
Company Stock Plans) that is
outstanding at such time (collectively, the Company
Restricted Shares) shall, in accordance with the
terms of the grant agreements governing the Company Restricted
Shares, become fully vested and all restrictions with respect to
such Company Restricted Shares shall lapse. Immediately prior to
the Effective Time (i) a number of shares of each holder
described in the immediately preceding sentence shall be
cancelled in exchange for the right of such holder to receive
payment in cash (less all Taxes required to be withheld on
account of the vesting event referred to in the immediately
preceding sentence) of the cash value per share at that time of
the Buyer Common Stock per share that would otherwise be
reserved in the Merger such that such holder should receive in
cash the minimum aggregate amount of federal, state and local
Tax required to be withheld on the entire amount of such
holders Company Restricted Shares; and (ii) the
remaining number of Company Restricted Shares held by each such
holder shall participate in the Merger on the same basis as the
other individual holders of Company Common Stock in accordance
with Section 1.4(c). The Company shall, as of immediately
prior to the Effective Time, withhold such amounts as may be
required to be deducted and withheld under the Code and any
applicable state or local Tax law with respect to the lapsing of
restrictions of Company Restricted Shares, which shall result in
no net cash payment being made to any such holder in respect of
such shares.
(c) The Company and Buyer agree that prior to the Effective
Time the Company Stock Plans shall be amended to terminate the
Company Stock Plans effective immediately prior to the Effective
Time (other than with respect to outstanding awards thereunder,
which shall be treated as set forth herein).
1.6 Articles of Incorporation and Bylaws of the
Surviving Company. At the Effective Time, the
articles of incorporation of Buyer (the Buyer
Articles), as in effect immediately prior to the
Effective Time, shall remain the articles of incorporation of
Buyer as the Surviving Company until thereafter amended in
accordance with applicable law. The bylaws of the Buyer (the
Buyer Bylaws), as in effect
immediately prior to the Effective Time, shall remain the bylaws
of Buyer as the Surviving Company until thereafter amended in
accordance with applicable law and the terms of such bylaws.
1.7 Directors and
Officers. Except as otherwise directed in
writing by Buyer, the directors and officers of the Company and
its Subsidiaries immediately prior to the Effective Time shall
submit their resignations to be effective as of the Effective
Time. The directors and officers of Buyer shall, from and after
the Effective Time, become the directors and officers,
respectively, of the Surviving Company until their successors
shall have been duly elected, appointed or qualified or until
their earlier death, resignation or removal in accordance with
the certificate of incorporation of the Surviving Company.
1.8 Tax Consequences. It is
intended that the Merger shall constitute a
reorganization within the meaning of
Section 368(a) of the Code, and that this Agreement shall
constitute a plan of reorganization for such
purposes.
1.9 Repayment of Outstanding
Indebtedness. At the Effective Time, Buyer
shall cause to be paid (i) the full amount of principal and
accrued interest, and (ii) up to $1,350,000 with respect to
any and all of the fees, costs, expenses, penalties and other
amounts (collectively, the Loan
Repayment) due and payable as of the Effective
Time (including any such amounts that become due and payable as
a result of the Merger and the consummation of the other
transactions contemplated by this Agreement) under the Company
Securitization Documents. For these purposes, the term
Company Securitization Documents shall
mean that certain Second Amended and Restated Loan Funding and
Servicing Agreement by and among the Company, Patriot Capital
Funding LLC I and the Lenders specified therein, together with
the following agreements and arrangements entered into in
connection therewith: (i) Agreement, Limited Consent and
Amendment No. 1 to Second Amended and Restated Loan Funding
and Servicing Agreement, dated as of July 9, 2009, entered
into by and among Company, Patriot Capital Funding LLC I,
and the Lenders and other parties specified therein and
(ii) a letter agreement, dated as of July 9, 2009, by
and between Patriot Capital Funding LLC I and Bank
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of Montreal regarding the early termination of certain interest
rate swaps agreements. The Loan Repayment shall occur in the
manner reasonably required by the Lenders and other parties to
whom any portion of the Loan Repayment is owed, and Buyer agrees
to cooperate with, and take all such actions reasonably
requested by, the Lenders and such other parties in connection
therewith.
ARTICLE II
DELIVERY OF
MERGER CONSIDERATION
2.1 Exchange Agent. Prior to
the Effective Time, Buyer shall appoint a bank or trust company
reasonably acceptable to the Company, or Buyers transfer
agent, pursuant to an agreement (the Exchange Agent
Agreement) to act as exchange agent (the
Exchange Agent) hereunder.
2.2 Deposit of Merger
Consideration. At or prior to the Effective
Time, Buyer shall (i) authorize the Exchange Agent to issue
an aggregate number of shares of Buyer Common Stock equal to the
aggregate Merger Shares and (ii) deposit, or cause to be
deposited with, the Exchange Agent sufficient cash to make the
payments to holders of Company Common Stock described in
Section 2.3(g) (collectively, the Exchange
Fund). The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by Buyer;
provided, however, that no gain or loss thereon
shall affect the amounts payable to former holders of Company
Stock pursuant to Article I or Article II of this
Agreement. Any interest or other income resulting from such
investments shall be the sole property of Buyer.
2.3 Delivery of Merger Consideration.
(a) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of
a Certificate(s) which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (other
than Excluded Company Stock) (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk
of loss and title to such Certificate(s) shall pass, only upon
delivery of such Certificate(s) (or affidavits of loss in lieu
of such Certificates)) to the Exchange Agent and shall be
substantially in such form and have such other provisions as
shall be prescribed by the Exchange Agent Agreement (the
Letter of Transmittal) and
(ii) instructions for use in surrendering such
Certificate(s) in exchange for the Merger Consideration and any
dividends or distributions to which such holder is entitled
pursuant to this Article II.
(b) Upon surrender to the Exchange Agent of its Certificate
or Certificates, accompanied by a properly completed Letter of
Transmittal, a holder of Company Common Stock will be entitled
to receive promptly after the Effective Time the Merger
Consideration in respect of the shares of Company Common Stock
represented by its Certificate or Certificates. Until so
surrendered, each such Certificate shall represent after the
Effective Time, for all purposes, only the right to receive,
without interest, the Merger Consideration upon surrender of
such Certificate in accordance with, together with any dividends
or distributions to which such holder is entitled pursuant to,
this Article II.
(c) Prior to the Closing Date, in the event that the
Company has undistributed investment company taxable income (as
defined in Section 852(b)(2) of the Code) or net capital
gain (as defined in Section 1221(11) of the Code) for the
Companys short taxable year ending on the Closing Date,
the Company shall declare a dividend, payable in cash or Company
Common Stock or a combination thereof (the Final
Company Dividend), to holders of Company Common
Stock. The Final Company Dividend, together with all previous
Company dividends with respect to the Companys taxable
year ending on the Closing Date, shall result in the Company
distributing to the Companys stockholders all of the
Companys undistributed investment company taxable income
(as defined in Section 852(b)(2) of the Code) and all of
the Companys net capital gain (as defined in
Section 1221(11) of the Code) for the Companys
taxable year ending on the Closing Date. If the Company
determines it necessary to declare a Final Company Dividend, it
shall notify Buyer at least ten (10) days prior to the
Company Stockholder Meeting. In calculating its investment
company taxable income (as defined in Section 852(b)(2) of
the Code) for its taxable year ending on the Closing Date, the
Company shall not deduct any loss with respect to its investment
in the debt of any portfolio company as an ordinary loss, unless
the Company has received an opinion of its counsel, Sutherland
Asbill & Brennan LLP, the form
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and substance of which opinion shall be subject to the
reasonable approval of the Buyer, substantially to the effect
that, on the basis of the law in effect at the time the opinion
is provided, and facts, representations and assumptions set
forth in such opinion that are consistent with the state of
facts existing at the time the opinion is provided, in the case
of a loan originated by the Company, such loss should constitute
an ordinary loss deduction for U.S. federal income tax
purposes or in the case of a loan that is not originated by the
Company, such loss will constitute an ordinary loss deduction
for U.S. federal income tax purposes.
(d) No dividends or other distributions declared with
respect to Buyer Common Stock to stockholders of record on or
after the Effective Time shall be delivered to the holder of any
unsurrendered Certificate with respect to the shares of Buyer
Common Stock represented thereby, in each case unless and until
the surrender of such Certificate in accordance with this
Article II. Subject to the effect of applicable abandoned
property, escheat or similar laws, following surrender of any
such Certificate in accordance with this Article II, the
record holder thereof shall be entitled to receive, without
interest, (i) the amount of dividends or other
distributions with a record date after the Effective Time
theretofore payable with respect to the whole shares of Buyer
Common Stock represented by such Certificate and not paid
and/or
(ii) at the appropriate payment date, the amount of
dividends or other distributions payable with respect to shares
of Buyer Common Stock represented by such Certificate with a
record date after the Effective Time (but before such surrender
date) and with a payment date subsequent to the issuance of the
Buyer Common Stock issuable with respect to such Certificate;
provided, however, that all dividends payable to
record holders of Certificates in accordance with this
Section 2.3(d) shall be payable in the form of shares of
Buyer Common Stock in accordance with Buyers dividend
reinvestment plan (the Buyer DRIP),
which form of payment the holder shall be deemed to have
elected. From and after the Effective Time, all dividends
payable with respect to Merger Shares or Buyer Common Stock
issued in lieu of a cash dividend in accordance with this
Section 2.3(d) shall be issued in the form of Buyer Common
Stock under the Buyer DRIP until such time, if any, as the
relevant holder elects to opt out of the Buyer DRIP.
(e) In the event of a transfer of ownership of a
Certificate representing Company Common Stock that is not
registered in the stock transfer records of the Company, the
shares of Buyer Common Stock and cash in lieu of fractional
shares of Buyer Common Stock comprising the Merger Consideration
shall be issued or paid in exchange therefor to a person other
than the person in whose name the Certificate so surrendered is
registered if the Certificate formerly representing such Company
Common Stock shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such payment
or issuance shall pay any transfer or other similar Taxes
required by reason of the payment or issuance to a person other
than the registered holder of the Certificate or establish to
the satisfaction of Buyer that the Tax has been paid or is not
applicable. The Exchange Agent (or, subsequent to the earlier of
(x) the one-year anniversary of the Effective Time and
(y) the expiration or termination of the Exchange Agent
Agreement, Buyer) shall be entitled to deduct and withhold from
any cash in lieu of fractional shares of Buyer Common Stock
otherwise payable pursuant to this Agreement to any holder of
Company Common Stock such amounts as the Exchange Agent or
Buyer, as the case may be, is required to deduct and withhold
under the Code, or any provision of state, local or foreign Tax
law, with respect to the making of such payment. To the extent
the amounts are so withheld by the Exchange Agent or Buyer, as
the case may be, and timely paid over to the appropriate
Governmental Entity, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder
of shares of Company Common Stock in respect of whom such
deduction and withholding was made by the Exchange Agent or
Buyer, as the case may be.
(f) After the Effective Time, there shall be no transfers
on the stock transfer books of the Company of the shares of
Company Common Stock that were issued and outstanding
immediately prior to the Effective Time other than to settle
transfers of Company Common Stock that occurred prior to the
Effective Time. If, after the Effective Time, Certificates
representing such shares are presented for transfer to the
Exchange Agent, they shall be cancelled and exchanged for the
Merger Consideration, together with any distributions to which
such holder is entitled in accordance with this Article II.
(g) Notwithstanding anything to the contrary contained in
this Agreement, no fractional shares of Buyer Common Stock shall
be issued upon the surrender of Certificates for exchange, no
dividend or distribution with respect to Buyer Common Stock
shall be payable on or with respect to any fractional share, and
such
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fractional share interests shall not entitle the owner thereof
to vote or to any other rights of a stockholder of Buyer. In
lieu of the issuance of any such fractional share, Buyer shall
pay to each former stockholder of the Company who otherwise
would be entitled to receive such fractional share an amount in
cash (rounded to the nearest cent) determined by multiplying
(i) the average, rounded to the nearest one ten thousandth,
of the closing sale prices of Buyer Common Stock on The NASDAQ
Stock Market as reported by The Wall Street Journal for the five
trading days immediately preceding the date of the Effective
Time by (ii) the fraction of a share (after taking into
account all shares of Company Common Stock held by such holder
at the Effective Time and rounded to the nearest thousandth when
expressed in decimal form) of Buyer Common Stock to which such
holder would otherwise be entitled to receive pursuant to
Section 1.4.
(h) Any portion of the Exchange Fund that remains unclaimed
by the stockholders of the Company as of the first anniversary
of the Effective Time may be paid to Buyer. In such event, any
former stockholders of the Company who have not theretofore
complied with this Article II shall thereafter look only to
Buyer with respect to the Merger Consideration, any cash in lieu
of any fractional shares and any unpaid dividends and
distributions in respect of each share of Buyer Common Stock
such stockholder is entitled to, as determined pursuant to this
Agreement, in each case, without any interest thereon.
Notwithstanding the foregoing, none of Buyer, the Surviving
Company, the Exchange Agent or any other person shall be liable
to any former holder of shares of Company Common Stock for any
amount delivered in good faith to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(i) In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such Certificate to be lost, stolen
or destroyed and, if reasonably required by Buyer or the
Exchange Agent, the posting by such person of a bond in such
amount as Buyer may determine is reasonably necessary as
indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the
Merger Consideration and any unpaid dividends or distributions
deliverable in respect thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except as disclosed in (i) the Company SEC Reports (as
defined in Section 3.5(c) below) filed prior to the date of
this Agreement, or (ii) the disclosure schedule (the
Company Disclosure Schedule) delivered
by the Company to Buyer prior to the execution of this Agreement
(which schedule sets forth, among other things, items the
disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a
provision hereof or as an exception to one or more
representations or warranties contained in this
Article III, or to one or more of the Companys
covenants contained herein), the Company hereby represents and
warrants to Buyer as follows:
3.1 Corporate Organization.
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware. The Company has the requisite corporate power and
corporate authority to own or lease all of its properties and
assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in
each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets
owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed or
qualified would not, individually or in the aggregate, have a
material adverse effect on the Company.
(b) True, complete and correct copies of the certificate of
incorporation of the Company, as amended
and/or
restated through the date hereof (the Company
Certificate), and the bylaws of the Company, as
amended
and/or
restated through the date hereof (the Company
Bylaws), have previously been made available to
Buyer.
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(c) The Company has no Subsidiary other than Patriot
Capital Funding LLC I (PCF). PCF
(i) is duly formed and validly existing and in good
standing under the laws of the State of Delaware, (ii) has
the requisite limited liability company power and authority to
own or lease all of its properties and assets and to carry on
its business as it is now being conducted and (iii) is duly
licensed or qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the
character or location of the properties and assets owned or
leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would
not, individually or in the aggregate, have a material adverse
effect on the Company. The certificate of formation and
operating agreement of PCF, copies of which have previously been
made available to Buyer, are true, complete and correct copies
of such documents as of the date of this Agreement. As used in
this Agreement, the term Subsidiary,
when used with respect to either party, means any corporation,
partnership, limited liability company or other organization,
whether incorporated or unincorporated, that is consolidated
with such party for financial reporting purposes under United
States generally accepted accounting principles
(GAAP) and, in the case of the
Company, Article 6 of the SECs
Regulation S-X.
Section 3.1(c) of the Company Disclosure Schedule contains
a detailed calculation of the total amount of the Loan Repayment
that would be due if the Loan Repayment were to be made on the
date of this Agreement, recognizing that such calculation made
as of the Closing Date may vary.
(d) The minute books of the Company previously made
available to Buyer contain true, complete and correct records of
all meetings and other corporate actions held or taken since
December 31, 2008 of its stockholders and Board of
Directors (including committees of its Board of Directors);
provided, however, that the Company has redacted
such minutes to the extent necessary to omit any information
concerning the potential strategic transaction involving or sale
of the Company, the bidders therefor and any similar information
of a confidential or sensitive nature (recognizing that complete
minutes and records shall be in the possession of the Company at
Closing).
3.2 Capitalization. (a) The
authorized capital stock of the Company consists of
49,000,000 shares of Company Common Stock, par value $0.01
per share, of which, as of the date of this Agreement,
21,584,251 shares, including all Company Restricted Shares,
were issued and outstanding, and 1,000,000 shares of
preferred stock, par value $0.01 per share (the
Company Preferred Stock), of which, as
of the date of this Agreement, no shares were issued and
outstanding. As of the date of this Agreement, 633,750 Company
Restricted Shares were issued and outstanding and subject to
restrictions and no shares of Company Common Stock or Company
Preferred Stock were reserved for issuance except for
(i) 3,644,677 shares of Company Common Stock reserved
for issuance in connection with Company Options under the
Company Stock Option Plan that are outstanding as of the date of
this Agreement, and (ii) 2,065,045 shares of Company
Common Stock reserved for issuance under the Company Restricted
Stock Plan. All of the issued and outstanding shares of Company
Common Stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof.
As of the date of this Agreement, no bonds, debentures, notes or
other indebtedness having the right to vote on any matters on
which shareholders of the Company may vote (Voting
Debt) are issued or outstanding. As of the date of
this Agreement, except pursuant to this Agreement, including
with respect to the Company Stock Plans as set forth herein, the
Company does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, rights, commitments or
agreements of any character calling for the purchase or issuance
of, or the payment of any amount based on, any shares of Company
Common Stock, Company Preferred Stock, Voting Debt or any other
equity securities of the Company or any securities representing
the right to purchase or otherwise receive any shares of Company
Common Stock, Company Preferred Stock, Voting Debt or other
equity securities of the Company. As of the date of this
Agreement, there are no contractual obligations of the Company
or any of its Subsidiaries (A) to repurchase, redeem or
otherwise acquire any shares of capital stock of the Company or
any equity security of the Company or its Subsidiaries or any
securities representing the right to purchase or otherwise
receive any shares of capital stock or any other equity security
of the Company or its Subsidiaries or (B) pursuant to which
the Company or any of its Subsidiaries is or could be required
to register shares of Company capital stock or other securities
under the Securities Act of 1933, as amended (the
Securities Act).
(b) Section 3.2(b) of the Company Disclosure Schedule
includes a true, complete and correct list of the aggregate
number of shares of Company Common Stock issuable upon the
exercise of each Company Option
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granted under the Company Stock Option Plan that were
outstanding as of the date of this Agreement and the exercise
price for each such Company Option. Other than the Company
Options and Company Restricted Shares that are outstanding as of
the date of this Agreement, no other equity-based awards are
outstanding as of the date hereof.
(c) Except as set forth in Section 3.2(c) of the
Company Disclosure Schedule, all of the issued and outstanding
shares of capital stock or other equity ownership interests of
each Subsidiary of the Company are owned by The Company, free
and clear of any liens, pledges, charges, claims and security
interests and similar encumbrances
(Liens), and all of such shares or
equity ownership interests are duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive
rights. No Subsidiary of The Company has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments
or agreements of any character calling for the purchase or
issuance of any shares of capital stock or any other equity
security of such Subsidiary or any securities representing the
right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
3.3 Authority; No
Violation. (a) The Company has full
corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been
duly, validly and unanimously approved by the Company Board.
Company Board has determined unanimously that this Agreement is
advisable and in the best interests of the Company and its
stockholders and has directed that this Agreement be submitted
to the Companys stockholders for approval and adoption at
a duly held meeting of such stockholders, together with the
recommendation of the Board of Directors that the stockholders
approve and adopt this Agreement (the Board
Recommendation) and has adopted a resolution to
the foregoing effect. Except for the approval and adoption of
this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock
entitled to vote at such meeting (the Requisite
Stockholder Approval), no other corporate
proceedings on the part of the Company are necessary to approve
this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and
delivered by the Company and (assuming due authorization,
execution and delivery by Buyer) constitutes the valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms (except as may be limited
by bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization or similar laws of general applicability relating
to or affecting the rights of creditors generally and subject to
general principles of equity (the Bankruptcy and
Equity Exception)).
(b) Neither the execution and delivery of this Agreement by
the Company nor the consummation by the Company of the
transactions contemplated hereby, nor compliance by the Company
with any of the terms or provisions of this Agreement, will
(i) violate any provision of the Company Certificate or
Company Bylaws, or (ii) assuming that the consents,
approvals and filings referred to in Section 3.4 are duly
obtained
and/or made,
(A) violate any law, judgment, order, injunction or decree
applicable to Company, any of its Subsidiaries or any of their
respective properties or assets or (B) except as would not,
individually or in the aggregate, have a material adverse effect
on the Company, violate, conflict with, result in a breach of
any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under,
accelerate the performance required by, or result in the
creation of any Lien upon any of the respective properties or
assets of the Company or any of its Subsidiaries under, any of
the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, franchise, permit,
agreement, by-law or other instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of
them or any of their respective properties or assets is bound
(collectively, the Company Contracts).
3.4 Consents and Approvals.
(a) Except for (i) the filing with the Securities and
Exchange Commission (the SEC) of a
Proxy Statement in definitive form relating to the meeting of
the Companys stockholders to be held in connection with
this Agreement and the transactions contemplated by this
Agreement (the Proxy Statement) and of
a registration statement on
Form N-14
(the
Form N-14)
in which the Proxy Statement will be included as a
prospectus, and declaration of effectiveness of the
Form N-14,
(ii) the filing of the Certificate of Merger with
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the Delaware Secretary pursuant to the DGCL and the filing of
the Articles of Merger with MDAT, (iii) any notices,
consents, authorizations, approvals, filings or exemptions in
connection with compliance with the rules and regulations of any
applicable industry self-regulatory organization
(SRO), and the rules of The NASDAQ
Stock Market, (iv) any notices or filings under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the
HSR Act), (v) such filings and
approvals as are required to be made or obtained under the
securities or Blue Sky laws of various states in
connection with the issuance of the shares of Buyer Common Stock
pursuant to this Agreement, and (vi) compliance with the
Investment Company Act of 1940, as amended (the 1940
Act), and the rules and regulations promulgated
thereunder, no consents or approvals of or filings or
registrations with any federal, state or local government or any
court, administrative or regulatory agency or commission or
other governmental authority or agency, domestic or foreign
(each a Governmental Entity) and
approval of or non-objection to such applications, filings and
notices (the Other Regulatory
Approvals) are necessary in connection with the
execution and delivery by the Company of this Agreement or the
consummation by the Company of the Merger and the other
transactions contemplated by this Agreement.
(b) Except for (i) receipt of the Requisite
Stockholder Approval, (ii) payment of the Loan Repayment
and receipt of the relevant consents and releases under the
Company Securitization Documents, (iii) consents under
Company Contracts, and (iv) matters covered in the
immediately preceding Section 3.4(a), no consents or
approvals of any Person are necessary in connection with the
execution and delivery by Company of this Agreement or the
consummation by the Company of the Merger and the other
transactions contemplated by this Agreement.
3.5 Reports; Regulatory Matters.
(a) The Company and each of its Subsidiaries have timely
filed all reports, registrations, statements and certifications,
together with any amendments required to be made with respect
thereto, that they were required to file since December 31,
2005 with (i) The NASDAQ Stock Market, (ii) the SEC
(other than the filing of the Companys fidelity bond in
accordance with
Rule 17g-1
under the 1940 Act) and (iii) any SRO (collectively, and
together with any other applicable regulatory authorities,
Regulatory Agencies) and with each
other applicable Governmental Entity, and all other reports and
statements required to be filed by them since December 31,
2005, including any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States,
any state, any foreign entity, or any Regulatory Agency or other
Governmental Entity, and have paid all fees and assessments due
and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency or other
Governmental Entity in the ordinary course of the business of
the Company and its Subsidiaries (copies of any deficiency
letter of the SEC and any correspondence relating thereto having
been furnished to Buyer), no Regulatory Agency or other
Governmental Entity has initiated since December 31, 2005
or has pending any proceeding, enforcement action or, to the
knowledge of the Company, investigation into the business,
disclosures or operations of the Company or any of its
Subsidiaries. Since December 31, 2005, no Regulatory Agency
or other Governmental Entity has resolved any proceeding,
enforcement action or, to the knowledge of the Company,
investigation into the business, disclosures or operations of
the Company or any of its Subsidiaries. There is no unresolved,
or, to the Companys knowledge, threatened criticism,
comment, exception or stop order by any Regulatory Agency or
other Governmental Entity with respect to any report or
statement relating to any examinations or inspections of the
Company or any of its Subsidiaries. Since December 31,
2005, there have been no formal or informal inquiries by, or
disagreements or disputes with, any Regulatory Agency or other
Governmental Entity with respect to the business, operations,
policies or procedures of the Company or any of its Subsidiaries
(other than normal examinations conducted by a Regulatory Agency
or other Governmental Entity in the Companys ordinary
course of business).
(b) Neither the Company nor any of its Subsidiaries is
subject to any
cease-and-desist
or other order or enforcement action issued by, or is a party to
any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive
by, or has been ordered to pay any civil money penalty by, or
has been since December 31, 2005 a recipient of any
supervisory letter from, or since December 31, 2005 has
adopted any policies, procedures or board resolutions at the
request or suggestion of, any Regulatory Agency or other
Governmental Entity that
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currently restricts in any material respect the conduct of its
business (or to the Companys knowledge that, upon
consummation of the Merger, would restrict in any material
respect the conduct of the business of Buyer or any of its
Subsidiaries), or that in any material manner relates to its
credit, risk management or compliance policies, its internal
controls, its management or its business (each item in this
sentence, a Company Regulatory
Agreement), nor has the Company or any of its
Subsidiaries been advised since December 31, 2005 by any
Regulatory Agency or other Governmental Entity that it is
considering issuing, initiating, ordering, or requesting any
such Company Regulatory Agreement.
(c) The Company has previously made available to Buyer an
accurate and complete copy of each (i) final registration
statement, prospectus, report, schedule and definitive proxy
statement filed with or furnished to the SEC by the Company or
any of its Subsidiaries pursuant to the Securities Act or the
Securities Exchange Act of 1934, as amended (the
Exchange Act) since December 31,
2005 (the Company SEC Reports) and
prior to the date of this Agreement and (ii) communication
mailed by the Company to its stockholders since
December 31, 2005 and prior to the date of this Agreement.
No such Company SEC Report or communication, at the time filed,
furnished or communicated (and, in the case of registration
statements and proxy statements, on the dates of effectiveness
and the dates of the relevant meetings, respectively), contained
any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except
as set forth in Section 3.5(c) of the Company Disclosure
Schedule and except that information as of a later date (but
before the date of this Agreement) shall be deemed to modify
information as of an earlier date. As of their respective dates,
all Company SEC Reports complied as to form in all material
respects with the published rules and regulations of the SEC
with respect thereto. No executive officer of the Company has
failed in any respect to make the certifications required of him
or her under Section 302 or 906 of the Sarbanes-Oxley Act
of 2002 (the Sarbanes-Oxley Act).
3.6 Financial Statements.
(a) Except as set forth in Section 3.6(a) of the
Company Disclosure Schedule, the financial statements of the
Company and its Subsidiaries included in the Company SEC Reports
(including the related notes, where applicable) (i) have
been prepared from, and are in accordance with, the books and
records of the Company and its Subsidiaries, (ii) fairly
present in all material respects the consolidated results of
operations, cash flows, changes in stockholders equity and
consolidated financial position of the Company and its
Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth (subject in the case of
unaudited statements to recurring year-end audit adjustments
normal in nature and amount), (iii) complied as to form, as
of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect
thereto and (iv) have been prepared in accordance with GAAP
consistently applied during the periods involved, except, in
each case, as indicated in such statements or in the notes
thereto.
(b) The Company (i) has implemented and maintains
disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the Exchange Act) to ensure that material information
relating to the Company, including its consolidated
Subsidiaries, is made known to the chief executive officer and
the chief financial officer of the Company by others within
those entities and (ii) has disclosed, based on its most
recent evaluation prior to the date hereof, to the
Companys outside auditors and the audit committee of
Company Board (A) any significant deficiencies and material
weaknesses in the design or operation of internal control over
financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect the Companys ability to record, process, summarize
and report financial information and (B) any fraud, whether
or not material, that involves management or other employees who
have a significant role in the Companys internal control
over financial reporting. These disclosures, if any, were made
in writing by management to the Companys auditors and
audit committee, a copy of which has previously been made
available to Buyer. As of the date hereof, the Company has no
reason to believe that the Companys outside auditors,
chief executive officer and chief financial officer will not be
able to give the certifications and attestations required
pursuant to the rules and regulations adopted pursuant to
Section 404 of the Sarbanes-Oxley Act, without
qualification, when next due.
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(c) Since December 31, 2005, (i) neither the
Company nor any of its Subsidiaries nor, to the knowledge of the
Company, any director, officer, employee, auditor, accountant or
representative of the Company or any of its Subsidiaries has
received or otherwise had or obtained knowledge of any material
complaint, allegation, assertion or claim, whether written or
oral, regarding the accounting or auditing practices,
procedures, methodologies or methods of the Company or any of
its Subsidiaries or their respective internal accounting
controls, including any material complaint, allegation,
assertion or claim that the Company or any of its Subsidiaries
has engaged in questionable accounting or auditing practices and
(ii) no attorney representing the Company or any of its
Subsidiaries, whether or not employed by the Company or any of
its Subsidiaries, has reported evidence of a material violation
of securities laws, breach of fiduciary duty or similar
violation by the Company or any of its officers, directors,
employees or agents to the Company Board or any committee
thereof or to any director or officer of the Company.
(d) Since December 31, 2005 (or such later date, if
the Company only became subject to the applicable provisions,
rules and regulations subsequent to December 31, 2005), the
principal executive officer and the principal financial officer
of the Company have complied in all material respects with
(i) the applicable provisions of the Sarbanes-Oxley Act and
under the Exchange Act and (ii) the applicable listing and
corporate governance rules and regulations of The NASDAQ Stock
Market. The principal executive officer and the principal
financial officer of the Company have made all certifications
required by Sections 302 and 906 of the Sarbanes-Oxley Act
with respect to each Company SEC Document filed by the Company.
For purposes of the preceding sentence, principal
executive officer and principal financial
officer shall have the meanings given to such terms in the
Sarbanes-Oxley Act. Except as permitted in the Exchange Act,
including Sections 12(k)(2) and (3), since the enactment of
the Sarbanes-Oxley Act, neither the Company nor any of its
Affiliates has directly or indirectly extended or maintained
credit, arranged for the extension of credit, renewed the
extension of credit or materially modified an extension of
credit in the form of personal loans to any executive officer or
director (or equivalent thereof) of the Company or PCF.
(e) The Company has delivered to Buyer copies of any
written notifications it has received to date since
December 31, 2005 of a (i) significant
deficiency or (ii) material weakness in
the Companys internal controls. For purposes of this
Agreement, the terms significant deficiency and
material weakness shall have the meaning assigned to
them in the Statements of Auditing Standards No. 60, as in
effect on the date hereof.
3.7 Brokers
Fees. Except for the fees of FBR Capital
Markets & Co. (FBR), neither
the Company nor any of its Subsidiaries nor any of their
respective officers, directors, employees or agents has utilized
any broker, finder or financial advisor or incurred any
liability for any brokers fees, commissions or
finders fees in connection with the Merger or any other
transactions contemplated by this Agreement. A true, complete
and correct copy of the arrangement between FBR and the Company
shall be delivered to Buyer promptly following the Effective
Time.
3.8 Absence of Certain Changes or
Events. (a) Since December 31,
2008, no event or events have occurred that have had or would
reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Change on the Company. As used in
this Agreement, the term Material Adverse
Change means, with respect to Buyer or the
Company, as the case may be, a material adverse effect in
(i) the financial condition, results of operations or
business of such party and its Subsidiaries taken as a whole
(provided, however, that, with respect to this
clause (i), a Material Adverse Change
shall not be deemed to include effects to the extent
resulting from (A) changes, after the date hereof, in GAAP
or regulatory accounting requirements applicable generally to
companies in the industry in which such party and its
Subsidiaries operate, (B) changes, after the date hereof,
in laws, rules or regulations of general applicability to
companies in the industry in which such party and its
Subsidiaries operate, (C) actions or omissions taken with
the prior written consent of the other party, (D) changes,
after the date hereof, in global or national political
conditions or general economic or market conditions generally
affecting other companies in the industry in which such party
and its Subsidiaries operate, (E) conditions arising out of
acts of terrorism, war, weather conditions or other force
majeure events (F) the public disclosure of this Agreement
or the transactions contemplated hereby, (G) any legal
proceedings made or brought by any of the current or former
stockholders of such party (on their own behalf or on behalf of
the such party) arising out of or related to this Agreement or
any of the
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transactions contemplated hereby, (H) any events of default
under the Company Securitization Documents in addition to
already existing events of default, (I) any changes in the
liquidity position of Company that do not create material new
liabilities for the Company (except to the extent that, with
respect to such material new liability, Buyer has agreed to
assume or fund such liability), or (J) relating to the
matters set forth in Section 3.5(c) of the Company
Disclosure Schedule, except, with respect to clauses (A), (B),
(D) and (E), to the extent that the effects of such change
are disproportionately adverse to the financial condition,
results of operations or business of such party and its
Subsidiaries, taken as a whole, as compared to other companies
in the industry in which such party and its Subsidiaries
operate) or (ii) the ability of such party to timely
consummate the transactions contemplated by this Agreement.
(b) Since March 31, 2009, neither the Company nor any
of its Subsidiaries has (i) except for (A) normal
increases for or payments to employees (other than officers
subject to the reporting requirements of Section 16(a) of
the Exchange Act (the Executive
Officers)) made in the ordinary course of business
consistent with past practice or (B) as required by
applicable law or contractual obligations existing as of the
date hereof, increased the wages, salaries, compensation,
pension, or other fringe benefits or perquisites payable to any
Executive Officer or other employee or director from the amount
thereof in effect as of March 31, 2009, granted any
severance or termination pay, entered into any contract to make
or grant any severance or termination pay (in each case, except
as required under the terms of agreements or severance plans
listed on Section 3.11 of the Company Disclosure Schedule,
as in effect as of the date hereof), or paid any bonus other
than the customary year-end bonuses in amounts consistent with
past practice, (ii) granted any options to purchase shares
of Company Common Stock, any restricted shares of Company Common
Stock or any right to acquire any shares of its capital stock,
or any right to payment based on the value of the Companys
capital stock, to any Executive Officer or other employee or
director, (iii) changed any financial accounting methods,
principles or practices of the Company or its Subsidiaries
affecting its assets, liabilities or businesses,
(iv) suffered any strike, work stoppage, slowdown, or other
labor disturbance or (v) except for publicly disclosed
ordinary dividends on the Company Common Stock and except for
distributions by wholly-owned Subsidiaries of the Company to the
Company or another wholly-owned Subsidiary of the Company, made
or declared any distribution in cash or kind to its stockholders
or repurchased any shares of its capital stock or other equity
interests.
3.9 Legal
Proceedings. (a) Except as set forth in
Section 3.9 of the Company Disclosure Schedule, neither the
Company nor any of its Subsidiaries is a party to any, and there
are no pending or, to the best of the Companys knowledge,
threatened, legal, administrative, arbitral or other
proceedings, claims, actions, suits or governmental or
regulatory investigations of any nature against the Company or
any of its Subsidiaries or to which any of their assets are
subject.
(b) There is no judgment, settlement agreement, order,
injunction, decree or regulatory restriction (other than those
of general application that apply to similarly situated
companies or their Subsidiaries) imposed upon the Company, any
of its Subsidiaries or the assets of the Company or any of its
Subsidiaries (or that, upon consummation of the Merger, would
apply to Buyer or any of its Subsidiaries).
3.10 Taxes and Tax Returns.
(a) Each of the Company and its Subsidiaries (i) has
duly and timely filed (including all applicable extensions) all
federal, state, local and foreign income and other material Tax
Returns required to be filed by it on or prior to the date of
this Agreement and all such Tax Returns are accurate and
complete, (ii) has paid all Taxes shown thereon as due and
(iii) has duly paid or made provision for the payment of
all Taxes that have been incurred or are due or claimed to be
due from it by federal, state, foreign or local taxing
authorities other than Taxes that are not yet delinquent or are
being contested in good faith, have not been finally determined
and have been adequately reserved against under GAAP. There are
no material disputes pending, or written claims asserted, for
Taxes or assessments upon the Company or any Subsidiary for
which the Company does not have reserves that are adequate under
GAAP. Neither the Company nor any Subsidiary is a party to or is
bound by any Tax sharing, allocation or indemnification
agreement or arrangement (other than such an agreement or
arrangement exclusively between or among the Company and its
Subsidiaries as described in the Company Disclosure Schedule).
Within the past five years (or otherwise as part of a plan
(or
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series of related transactions) within the meaning of
Section 355(e) of the Code of which the Merger is also a
part), neither the Company nor any of its Subsidiaries has been
a distributing corporation or a controlled
corporation in a distribution intended to qualify under
Section 355(a) of the Code. Neither the Company nor any of
its Subsidiaries is required to include in income any adjustment
pursuant to Section 481(a) of the Code, no such adjustment
has been proposed by the Internal Revenue Service (the
IRS) and no pending request for
permission to change any accounting method has been submitted by
the Company or any of its Subsidiaries.
(b) Effective as of August 1, 2005, the Company made a
valid election under Subchapter M of Chapter 1 of the Code
to be taxed as a regulated investment company. The Company has
qualified as a regulated investment at all times subsequent to
August 1, 2005, and expects to qualify as such for its
current taxable year ending on the Closing Date. At all times
since August 1, 2005 the Company has satisfied the
distribution requirements imposed on a regulated investment
company under Section 852 of the Code and will either
(i) satisfy such distribution requirements for its current
taxable year ending on the Closing Date or (ii) make a
Final Company Dividend declaration as set forth in
Section 2.3(c). For any taxable year commencing prior to
August 1, 2005 during which the Company was not a regulated
investment company, the Company has no outstanding Taxes for
which it does not have reserves adequate under GAAP. The Company
has no earnings and profits accumulated in any
taxable year in which the Company was not a regulated investment
company under Subchapter M of Chapter 1 of the Code.
(c) PCF is classified (and at all times during its
existence, has been classified) as a disregarded entity for
federal tax purposes under
Section 301.7701-3
of the Income Tax Regulations. On the Company Disclosure
Schedule, the Company has provided a description of the nature
of the business conducted by PCF and listed the assets held by
PCF as of June 30, 2009.
(d) As used in this Agreement, the term
Tax or Taxes
means (i) all federal, state, local, and foreign
income, excise, gross receipts, gross income, ad
valorem, profits, gains, property, capital, sales,
transfer, use, payroll, employment, severance, withholding,
duties, intangibles, franchise, backup withholding, value added
and other taxes, charges, levies or like assessments together
with all penalties and additions to tax and interest thereon and
(ii) any liability for Taxes described in clause (i)
above under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local or foreign law).
(e) As used in this Agreement, the term Tax
Return means a report, return or other information
(including any amendments) required to be supplied to a
governmental entity with respect to Taxes including, where
permitted or required, combined or consolidated returns for any
group of entities that includes the Company or any of its
Subsidiaries.
(f) The Company and its Subsidiaries have complied in all
material respects with all applicable laws relating to the
payment and withholding of Taxes (including withholding of Taxes
pursuant to Sections 1441, 1442 and 3402 of the Code or any
comparable provision of any state, local or foreign laws) and
have, within the time and in the manner prescribed by applicable
law, withheld from and paid over all amounts required to be so
withheld and paid over under applicable laws.
(g) There are no limitations on the utilization of the
built-in-losses,
capital losses or other similar items of the Company and its
Subsidiaries under Section 382, 384 or 269 of the Code (or
any similar state, local or foreign law).
(h) Neither the Company nor any Subsidiary has any
liability for Taxes of any person or entity other than the
Company or any Subsidiary (i) under
Section 1.1502-6
of the Treasury regulations (or any similar provision of state,
local or foreign Law), (ii) as a transferee or successor,
or (iii) by contract or otherwise.
(i) There are no liens for Taxes upon the assets of the
Company or any of the Subsidiaries, except for liens for Taxes
not yet due and payable and liens for Taxes that are both being
contested in good faith and adequately reserved for in
accordance with GAAP.
(j) Neither the Company nor any Subsidiary is or has been
required to make any disclosure to the IRS pursuant to
Section 6011 of the Code or
Section 1.6011-4
of the Treasury regulations promulgated thereunder.
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(k) Neither the Company nor any Subsidiary is, or has been
at any time since the date that is five years prior to the date
hereof, a United States real property holding
corporation within the meaning of Section 897(c)(2)
of the Code.
(l) Neither the Company nor any Subsidiary has granted any
waiver, extension, or comparable consent regarding the
application of the statute of limitations with respect to any
Taxes or Tax Return that is outstanding, nor any request for
such waiver or consent has been made.
3.11 Employee Matters.
(a) Section 3.11(a) of the Company Disclosure Schedule
sets forth a true, complete and correct list of each
employee benefit plan as defined in
Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), whether
or not subject to ERISA, and each employment, consulting, bonus,
incentive or deferred compensation, vacation or other paid time
off, stock option or other equity-based, severance, termination,
retention, change of control, profit-sharing, welfare benefit,
fringe benefit, retirement or other similar plan, program,
agreement, arrangement or commitment for the benefit of any
employee, former employee, director or former director of the
Company or any of its Subsidiaries entered into, maintained or
contributed to, or required to be maintained or contributed to
by the Company, any of its Subsidiaries or any Person or entity
that, together with the Company, is treated as a single employer
under Section 414(b), (c), (m) or (o) of the
Code, (each such person or entity, an ERISA
Affiliate) (such plans, programs, agreements,
arrangements and commitments, herein referred to as the
Company Benefit Plans).
(b) With respect to each Company Benefit Plan, the Company
has made available to Buyer true, complete and correct copies of
the following (as applicable): (i) the written document
evidencing such Company Benefit Plan or, with respect to any
such plan that is not in writing, a written description of the
material terms thereof, (ii) the summary plan description,
(iii) the two (2) most recent annual reports,
financial statements
and/or
actuarial reports, (iv) the most recent determination
letter from the IRS, (v) the two (2) most recent
Form 5500s required to have been filed with the IRS,
including all schedules thereto and (vi) any related trust
agreements or documents of any other funding arrangements.
(c) (i) Each Company Benefit Plan has been
administered in accordance with its terms in all material
respects, (ii) all Company Benefit Plans are in compliance
with the applicable provisions of ERISA, the Code and all other
applicable laws, including Section 409A of the Code in all
material respects, (iii) no non-exempt prohibited
transaction (as defined in Section 4975 of the Code
or Section 406 of ERISA) has occurred with respect to any
Company Benefit Plan, (iv) all contributions to, and
payments from, the Company Benefit Plans have been made in
accordance with the terms of the Company Benefit Plans, ERISA,
the Code and all other applicable laws in all material respects,
(v) in all material respects all reports, returns and
similar documents with respect to the Company Benefit Plans
required to be filed with any Governmental Entity or distributed
to any Company Benefit Plan participant have been duly and
timely filed or distributed and (vi) there are no current
or, to the Companys knowledge, threatened investigations
by any Governmental Entity, termination proceedings, or other
claims by any Person (except routine claims for benefits) with
respect to the Company Benefit Plans.
(d) None of the Company Benefit Plans are pension benefit
plans (within the meaning of ERISA) subject to Title IV of
ERISA and no liability has been incurred by the Company or any
ERISA Affiliate under Title IV of ERISA that has not been
satisfied in full and no condition exists that presents a risk
of such liability. No Company Benefit Plan is a multiemployer
plan (as defined in Section 3(37) of ERISA). No Company
Benefit Plan provides for healthcare benefits after termination
of employment or service as a director, except as required by
applicable law.
(e) Neither the execution of this Agreement, nor the
consummation of the transactions contemplated hereby (either
alone or in connection with any event) will (i) entitle any
employee of the Company or its Subsidiaries to severance pay or
any increase in severance pay upon any termination of employment
after the date hereof, except as set forth in
Section 3.11(e)(i) of the Company Disclosure Schedule,
(ii) accelerate the time of payment or vesting or result in
any payment or funding (through a grantor trust or otherwise) of
compensation or benefits under, increase the amount payable or
result in any other material obligation pursuant
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to, any of the Company Benefit Plans, except as set forth in
Section 3.11(e)(ii) of the Company Disclosure Schedule,
(iii) limit or restrict the right of the Company or its
Subsidiaries to merge, amend or terminate any of the Company
Benefit Plans or (iv) result in payments by the Company or
its Subsidiaries under any of the Company Benefit Plans which
would not be deductible by the Company or its Subsidiaries under
Section 162(m) or Section 280G of the Code, except as
set forth in Schedule 3.11(e)(iv) of the Company Disclosure
Schedule.
(f) Neither the Company nor any of its Subsidiaries is a
party to or bound by any labor or collective bargaining
agreement and there are no organizational campaigns, petitions
or other activities or proceedings of any labor union,
workers council or labor organization seeking recognition
of a collective bargaining unit with respect to, or otherwise
attempting to represent, any of the employees of the Company or
any of its Subsidiaries or compel the Company or any of its
Subsidiaries to bargain with any such labor union, works council
or labor organization. There are no labor related controversies,
strikes, slowdowns, walkouts or other work stoppages pending or,
to the knowledge of the Company, threatened and neither the
Company nor any of its Subsidiaries has experienced any such
labor related controversy, strike, slowdown, walkout or other
work stoppage within the past three years.
(g) Neither the Company nor any of its Subsidiaries is a
party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Entity relating to employees or
employment practices. (i) Each of the Company and its
Subsidiaries are in compliance in all material respects with all
applicable laws relating to labor, employment, termination of
employment or similar matters, including but not limited to laws
relating to discrimination, disability, labor relations, hours
of work, payment of wages and overtime wages, pay equity,
immigration, workers compensation, working conditions, employee
scheduling, occupational safety and health, family and medical
leave, and employee terminations, and have not engaged in any
unfair labor practices or similar prohibited practices and
(ii) there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other proceedings of any nature
pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries brought by or on behalf
of any applicant for employment, any current or former employee,
any person alleging to be a current or former employee, any
class of the foregoing, or any Governmental Entity, relating to
any such law or regulation, or alleging breach of any express or
implied contract of employment, wrongful termination of
employment, or alleging any other discriminatory, wrongful or
tortious conduct in connection with the employment relationship.
3.12 Compliance with Applicable
Law. The Company and each of its Subsidiaries
hold all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses
under and pursuant to each, and have complied in all respects
with and are not in default in any respect under any, law
applicable to the Company or any of its Subsidiaries, except for
such failures, non-compliance or defaults that would not,
individually or in the aggregate, have a material adverse effect
on the Company.
3.13 Certain
Contracts. (a) Except as set forth in
Section 3.13 of the Company Disclosure Schedule or as
expressly contemplated by this Agreement, neither the Company
nor any of its Subsidiaries is a party to or bound by any
contract, arrangement, commitment or understanding (whether
written or oral) (i) which, upon execution of this
Agreement or consummation or stockholder approval of the
transactions contemplated by this Agreement will (either alone
or upon the occurrence of any additional acts or events) result
in any payment or benefits (whether of severance pay or
otherwise) becoming due from Buyer, the Company, the Surviving
Company, or any of their respective Subsidiaries to any
Executive Officer or employee of the Company or any of its
Subsidiaries, (ii) that is a material contract
(as such term is defined in Item 601(b)(10) of
Regulation S-K
of the SEC) to be performed after the date of this Agreement
that has not been filed or incorporated by reference in the
Company SEC Reports filed prior to the date hereof or
(iii) including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the execution of
this Agreement, the occurrence of any stockholder approval or
the consummation of any of the
A-15
transactions contemplated by this Agreement, or the value of any
of the benefits of which will be calculated on the basis of or
affected by any of the transactions contemplated by this
Agreement.
(b) Except as set forth in Section 3.13 of the Company
Disclosure Schedule, (i) each Company Contract is valid and
binding on the Company or its applicable Subsidiary, enforceable
against it in accordance with its terms (subject to the
Bankruptcy and Equity Exception), and is in full force and
effect, (ii) the Company and each of its Subsidiaries and,
to the Companys knowledge, each other party thereto has
duly performed all obligations required to be performed by it to
date under each Company Contract and (iii) other than with
respect to the Company Securitization Documents, no event or
condition exists that constitutes or, after notice or lapse of
time or both, will constitute, a breach, violation or default on
the part of the Company or any of its Subsidiaries or, to the
Companys knowledge, any other party thereto under any such
Company Contract. Other than with respect to the Company
Securitization Documents, or as set forth in Section 3.13
of the Company Disclosure Schedule, there are no disputes
pending or, to the Companys knowledge, threatened with
respect to any Company Contract.
(c) Section 3.13 of the Company Disclosure Schedule
sets forth each portfolio asset held by the Company and its
Subsidiaries on June 30, 2009 together with the internal
credit quality rating of such asset as of June 30, 2009, a
notation of any such asset that is on non-accrual status as of
June 30, 2009 or that is in default (whether payment or
otherwise) and a statement as to the percentage of the aggregate
unpaid principal amount of the indebtedness included in the
Companys total assets as of June 30, 2009 that have
an internal credit quality rating of 4 or 5 as of June 30,
2009 or as to which one of the foregoing notations is made on
such listing.
3.14 Investment
Securities. Each of the Company and its
Subsidiaries has good title to all securities (including any
evidence of indebtedness) owned by it, free and clear of any
Liens, except (a) for those Liens or restrictions arising
under the Organizational Documents of the issuers of such
securities, (b) to the extent such securities are pledged
in connection with the Company Securitization Documents,
(c) for restrictions on transferability arising under
federal or state securities laws or (d) for Liens or
restrictions which would not individually or in the aggregate be
material with respect to the value, ownership or transferability
of such securities. Such securities are valued on the books of
the Company in accordance with GAAP and the 1940 Act in all
material respects. For purposes of this Agreement, the term
Organizational Documents shall mean,
with respect to a Person other than a natural person,
(i) the articles or certificate of incorporation and the
bylaws of a corporation; (ii) the certificate of formation
and operating agreement of a limited liability company,
(iii) the partnership agreement and any statement of
partnership of a general partnership; (iv) the limited
partnership agreement and the certificate of limited partnership
of a limited partnership; (v) any charter or similar
document adopted or filed in connection with the creation,
formation, or organization of any other Person; (vi) any
stockholder or similar agreement among holders of securities of
an issuer, and (vii) any amendment to any of the foregoing.
3.15 Property. The Company
or one of its Subsidiaries (a) has good and marketable
title to all the properties and assets (excluding securities,
which are addressed in Section 3.14 above) reflected in the
latest audited balance sheet included in such Company SEC
Reports as being owned by the Company or one of its Subsidiaries
or acquired after the date thereof (except properties sold or
otherwise disposed of since the date thereof in the ordinary
course of business) (the Owned
Properties), free and clear of all Liens of any
nature whatsoever, except (i) statutory Liens securing
payments not yet due, (ii) Liens relating to the Company
Securitization Documents, (iii) easements, rights of way,
and other similar encumbrances that do not materially affect the
use of the properties or assets subject thereto or affected
thereby or otherwise materially impair business operations at
such properties and (iv) such imperfections or
irregularities of title or Liens as do not materially affect the
use of the properties or assets subject thereto or affected
thereby or otherwise materially impair business operations at
such properties (collectively, Permitted
Encumbrances), and (b) is the lessee of all
leasehold estates reflected in the latest audited financial
statements included in such Company SEC Reports or acquired
after the date thereof (except for leases that have expired by
their terms since the date thereof) (the Leased
Properties and, collectively with the Owned
Properties, the Real Property), free
and clear of all Liens of any nature whatsoever, except for
Permitted Encumbrances, and is in possession of the
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properties purported to be leased thereunder, and each such
lease is valid without default thereunder by the lessee or, to
the Companys knowledge, the lessor.
3.16 Intellectual
Property. The Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights,
domain names, licenses, approvals, trade secrets and other
similar rights (collectively, Intellectual Property
Rights) reasonably necessary to conduct its
business as now conducted and as described in the Company SEC
reports, except where the failure to own or possess such rights
would not reasonably be expected to result in a material adverse
effect on the Company; and the expected expiration of any of
such Intellectual Property Rights would not result in a material
adverse effect on the Company. To the Companys knowledge,
none of the technology employed by the Company has been obtained
or is being used by the Company in violation of any contractual
obligation binding on the Company or, to the Companys
knowledge, any of its officers, directors or employees in
violation of the rights of any persons, except to the extent
that any such violation would not reasonably be expected to
result in a material adverse effect on the Company.
3.17 State Takeover
Laws. The Company Board has unanimously
approved this Agreement and the transactions contemplated hereby
as required to render inapplicable to this Agreement and such
transactions the restrictions on business
combinations set forth in Section 203 of the DGCL or
any other moratorium, control share,
fair price, takeover or interested
stockholder law (any such laws, Takeover
Statutes).
3.18 Interested Party
Transactions. Except as set forth in the
Company SEC Documents, no event has occurred since
December 31, 2008 that would be required to be reported by
the Company pursuant to Item 404(a) of
Regulation S-K
promulgated by the SEC.
3.19 Reorganization;
Approvals. As of the date of this Agreement,
the Company (a) is not aware of any fact or circumstance
that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of
Section 368(a) of the Code and (b) knows of no reason
why all regulatory approvals from any Governmental Entity
required for the consummation of the transactions contemplated
by this Agreement should not be obtained on a timely basis.
3.20 Opinion. The Company
Board has received the opinion of FBR to the effect that,
subject to certain assumptions, limitations, qualifications and
other matters, the Exchange Ratio set forth in this Agreement is
fair, from a financial point of view, to the holders of Company
Common Stock; it being agreed that Buyer is not entitled to rely
upon such opinion.
3.21 Company
Information. The information relating to the
Company and its Subsidiaries that is provided by the Company or
its representatives for inclusion in the Proxy Statement and
Form N-14,
or in any application, notification or other document filed with
any other Regulatory Agency or other Governmental Entity in
connection with the transactions contemplated by this Agreement,
will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements
therein, in light of the circumstances in which they are made,
not misleading. The portions of the Proxy Statement relating to
the Company and its Subsidiaries and other portions within the
reasonable control of the Company and its Subsidiaries will
comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
3.22 Undisclosed
Liabilities. The Company and PCF do not have
any liabilities or obligations, known or unknown, contingent or
otherwise, except (i) liabilities and obligations in the
respective amounts reflected on or reserved against in the
consolidated balance sheet of the Company and PCF included in
the financial statements of the Company (or readily apparent in
the notes thereto), and (ii) liabilities and obligations
incurred in a commercially reasonable manner consistent with
industry practice since the date of such balance sheet.
3.23 Insurance. The Company
and PCF maintain policies of insurance in such amounts and
against such risks as are customary in the industries in which
the Company and PCF operate. Except as would not be reasonably
expected to have a material adverse effect on the Company, all
such insurance policies are in full force and effect and will
not in any way be affected by, or terminate or lapse by reason
of, the execution (but not the performance) of this Agreement.
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3.24 Environmental
Matters. Except as would not, individually or
in the aggregate, have a material adverse effect on the Company
and its Subsidiaries, taken as a whole, there are no legal,
administrative, arbitral or other proceedings, claims, actions,
causes of action or notices with respect to any environmental,
health or safety matters or any private or governmental
environmental, health or safety investigations or remediation
activities of any nature with respect to any real property owned
by the Company or its Subsidiaries seeking to impose, or that
are reasonably likely to result in, any liability or obligation
of the Company or any of its Subsidiaries arising under any
local, state or federal environmental, health or safety statute,
regulation, ordinance, or other requirement of any Governmental
Entity, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and any
similar state laws (collectively, Environmental
Laws), pending or threatened against the Company
or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries is subject to any agreement, order, judgment,
decree, letter or memorandum by or with any Governmental Entity
or third party imposing any liability or obligation with respect
to any of the foregoing.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF BUYER
Except as disclosed in (i) the Buyer SEC Reports (as
defined in Section 4.5(c) below) filed prior to the date of
this Agreement, or (ii) the disclosure schedule (the
Buyer Disclosure Schedule) delivered
by Buyer to the Company prior to the execution of this Agreement
(which schedule sets forth, among other things, items the
disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in a
provision hereof or as an exception to one or more
representations or warranties contained in this Article IV,
or to one or more of Buyers covenants contained herein,
Buyer represents and warrants to the Company as follows:
4.1 Corporate
Organization. (a) Buyer is a corporation
duly incorporated, validly existing and in good standing under
the laws of the State of Maryland. Buyer has the requisite
corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now
being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to be so
licensed or qualified would not, individually or in the
aggregate, have a material adverse effect on Buyer. True,
complete and correct copies of the Organizational Documents of
Buyer, as in effect as of the date of this Agreement, have
previously been made available to the Company.
(b) Buyer has no Subsidiary other than Prospect Capital
Funding LLC. Prospect Capital Funding LLC (i) is duly
formed and validly existing and in good standing under the laws
of the State of Delaware, (ii) has the requisite limited
liability company power and authority to own or lease all of its
properties and assets and to carry on its business as it is now
being conducted and (iii) is duly qualified to do business
in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so
licensed or qualified would not, individually or in the
aggregate, have a material adverse effect on Buyer.
4.2 Capitalization. The
authorized capital stock of Buyer consists of
100,000,000 shares of stock, initially consisting of
100,000,000 shares of Buyer Common Stock. As of the date
hereof (a) 48,415,358 shares of Buyer Common Stock
were issued and outstanding, and (b) no unissued shares of
stock have been classified, and no previously classified but
unissued shares of stock of any class or series have been
reclassified, as preferred stock. As of the date of this
Agreement, no shares of Buyer Common Stock were held in
Buyers treasury. As of the date of this Agreement, no
shares of Buyer Common Stock were reserved for issuance. All of
the issued and outstanding shares of Buyer Common Stock have
been (duly authorized and validly issued, and are fully paid,
non-assessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof). The Merger
Shares, when issued as contemplated by this Agreement,
(a) will be validly issued, fully paid, non-assessable and
free preemptive rights, with no personal liability
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attaching to the ownership thereof and (b) will be issued
in accordance with the requirements of the 1940 Act. As of the
date of this Agreement, no Voting Debt of Buyer is issued or
outstanding. As of the date of this Agreement, except pursuant
to this Agreement, Buyers dividend reinvestment plan and
stock repurchase plans entered into by Buyer from time to time,
Buyer does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, rights, commitments or
agreements of any character calling for the purchase or issuance
of any shares of Buyer Common Stock, Buyer preferred stock,
Voting Debt of Buyer or any other equity securities of Buyer or
any securities representing the right to purchase or otherwise
receive any shares of Buyer Common Stock, Buyer preferred stock,
Voting Debt of Buyer or other equity securities of Buyer.
4.3 Authority; No
Violation. (a) Buyer has full corporate
power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby, including the
Loan Repayment. The execution and delivery of this Agreement and
the consummation of the transactions contemplated (including the
Loan Repayment) hereby have been duly and validly approved by
the Buyer Board and no other corporate proceedings on the part
of Buyer are necessary to approve this Agreement or to
consummate the transactions contemplated hereby, including the
Loan Repayment. This Agreement has been duly and validly
executed and delivered by Buyer and (assuming due authorization,
execution and delivery by the Company) constitutes the valid and
binding obligation of each of Buyer, enforceable against Buyer
in accordance with its terms (subject to the Bankruptcy and
Equity Exception).
(b) Neither the execution and delivery of this Agreement by
Buyer nor the consummation by Buyer of the transactions
contemplated hereby (including the Loan Repayment), nor
compliance by Buyer with any of the terms or provisions of this
Agreement, will (i) violate any provision of the
Organizational Documents of Buyer, or (ii) assuming that
the consents, approvals and filings referred to in
Section 4.4 are duly obtained
and/or made,
(A) violate any law, judgment, order, injunction or decree
applicable to Buyer or any of its Subsidiaries, properties or
assets or (B) except as would not, individually or in the
aggregate, have a material adverse effect on Buyer, violate,
conflict with, result in a breach of any provision of or the
loss of any benefit under, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance
required by, or result in the creation of any Lien upon any of
the respective properties or assets of Buyer or any of its
Subsidiaries under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which
Buyer or any of its Subsidiaries is a party or by which any of
them or any of their respective properties or assets is bound.
4.4 Consents and
Approvals. Except for (i) the filing
with the SEC of the Proxy Statement and the filing and
declaration of effectiveness of the
Form N-14,
(ii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware pursuant to the
DGCL, (iii) the filing of the Articles of Merger with MDAT
pursuant to the MGCL, (iv) any notices, consents,
authorizations, approvals, filings or exemptions in connection
with compliance with the rules and regulations of any applicable
SRO, and the rules of The NASDAQ Stock Market, (v) any
notices or filings that may be required under the HSR Act and
(vi) such filings and approvals as are required to be made
or obtained under the securities or Blue Sky laws of
various states in connection with the issuance of the shares of
Buyer Common Stock pursuant to this Agreement, no consents or
approvals of or filings or registrations with any Governmental
Entity, and no Other Regulatory Approvals are necessary in
connection with the execution and delivery by Buyer of this
Agreement or the consummation by Buyer of the Merger or the
other transactions contemplated by this Agreement.
4.5 Reports; Regulatory Matters.
(a) Buyer and each of its Subsidiaries have timely filed
all reports, registration statements, proxy statements and other
materials, together with any amendments required to be made with
respect thereto, that they were required to file since
December 31, 2005 with the Regulatory Agencies and each
other applicable Governmental Entity, and all other reports and
statements required to be filed by them since December 31,
2005, including any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States,
any state, any foreign entity, or any Regulatory Agency or other
Governmental Entity, and have paid all fees and assessments due
and payable in connection therewith. Except for normal
examinations
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conducted by a Regulatory Agency or other Governmental Entity in
the ordinary course of the business of Buyer and its
Subsidiaries (copies of any deficiency letter of the SEC and any
correspondence relating thereto having been furnished to the
Company), no Regulatory Agency or other Governmental Entity has
initiated since December 31, 2005 or has pending any
proceeding, enforcement action or, to the knowledge of Buyer,
investigation into the business, disclosures or operations of
Buyer or any of its Subsidiaries. Since December 31, 2005,
no Regulatory Agency or other Governmental Entity has resolved
any proceeding, enforcement action or, to the knowledge of
Buyer, investigation into the business, disclosures or
operations of Buyer or any of its Subsidiaries. There is no
unresolved violation, criticism, comment or exception by any
Regulatory Agency or other Governmental Entity with respect to
any report or statement relating to any examinations or
inspections of Buyer or any of its Subsidiaries. Since
December 31, 2005 there has been no formal or informal
inquiries by, or disagreements or disputes with, any Regulatory
Agency or other Governmental Entity with respect to the
business, operations, policies or procedures of Buyer or any of
its Subsidiaries (other than normal examinations conducted by a
Regulatory Agency or other Governmental Entity in Buyers
ordinary course of business).
(b) Neither Buyer nor any of its Subsidiaries is subject to
any
cease-and-desist
or other order or enforcement action issued by, or is a party to
any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive
by, or has been since December 31, 2005 a recipient of any
supervisory letter from, or has been ordered to pay any civil
money penalty by, or since December 31, 2005 has adopted
any policies, procedures or board resolutions at the request or
suggestion of, any Regulatory Agency or other Governmental
Entity that currently restricts in any material respect the
conduct of its business or that in any material manner relates
to its credit, risk management or compliance policies, its
internal controls, its management or its business (each, a
Buyer Regulatory Agreement), nor has
Buyer or any of its Subsidiaries been advised since
December 31, 2005 by any Regulatory Agency or other
Governmental Entity that it is considering issuing, initiating,
ordering or requesting any such Buyer Regulatory Agreement.
(c) Buyer has previously made available to the Company an
accurate and complete copy of each (i) final registration
statement, prospectus, report, schedule and definitive proxy
statement filed with or furnished to the SEC by Buyer pursuant
to the Securities Act or the Exchange Act since
December 31, 2005 (the Buyer SEC
Reports) and prior to the date of this Agreement
and (ii) communication mailed by Buyer to its stockholders
since December 31, 2005 and prior to the date of this
Agreement. No such Buyer SEC Report or communication, at the
time filed, furnished or communicated (and, in the case of
registration statements and proxy statements, on the dates of
effectiveness and the dates of the relevant meetings,
respectively), contained any untrue statement of a material fact
or omitted to state any material fact required to be stated
therein or necessary in order to make the statements made
therein, in light of the circumstances in which they were made,
not misleading, except that information as of a later date (but
before the date of this Agreement) shall be deemed to modify
information as of an earlier date. As of their respective dates,
all Buyer SEC Reports complied as to form in all material
respects with the published rules and regulations of the SEC
with respect thereto. No executive officer of Buyer has failed
in any respect to make the certifications required of him or her
under Section 302 or 906 of the Sarbanes-Oxley Act.
4.6 Financial Statements.
(a) The financial statements of Buyer and its Subsidiaries
included (or incorporated by reference) in the Buyer SEC Reports
(including the related notes, where applicable) (i) have
been prepared from, and are in accordance with, the books and
records of Buyer and its Subsidiaries, (ii) fairly present
in all material respects the consolidated results of operations,
cash flows, changes in stockholders equity and
consolidated financial position of Buyer and its Subsidiaries
for the respective fiscal periods or as of the respective dates
therein set forth (subject in the case of unaudited statements
to recurring year-end audit adjustments normal in nature and
amount), (iii) complied as to form, as of their respective
dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto and
(iv) have been prepared in accordance with GAAP
consistently applied during the periods involved, except, in
each case, as indicated in such statements or in the notes
thereto. The books and records
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of Buyer and its Subsidiaries have been, and are being,
maintained in all material respects in accordance with GAAP and
any other applicable legal and accounting requirements and
reflect only actual transactions.
(b) Neither Buyer nor any of its Subsidiaries has any
material liability or obligation of any nature whatsoever
required by GAAP to be reserved for in a balance sheet (whether
absolute, accrued, contingent or otherwise and whether due or to
become due), except for those liabilities that are reflected or
reserved against on the consolidated balance sheet of Buyer
included in its Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2009 (including
any notes thereto) and for liabilities and obligations incurred
in a commercially reasonable manner since the date of such
balance sheet.
(c) Buyer (i) has implemented and maintains disclosure
controls and procedures (as defined in
Rule 13a-15(e)
of the Exchange Act) to ensure that material information
relating to Buyer, including its consolidated Subsidiaries, is
made known to the chief executive officer and the chief
financial officer of Buyer by others within those entities and
(ii) has disclosed, based on its most recent evaluation
prior to the date hereof, to Buyers outside auditors and
the audit committee of Buyers Board (A) any
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting (as
defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect Buyers ability to record, process, summarize and
report financial information and (B) any fraud, whether or
not material, that involves management or other employees who
have a significant role in Buyers internal control over
financial reporting. These disclosures, if any, were made in
writing by management to Buyers auditors and audit
committee, a copy of which has previously been made available to
the Company. As of the date hereof, there is no reason to
believe that Buyers outside auditors, chief executive
officer and chief financial officer will not be able to give the
certifications and attestations required pursuant to the rules
and regulations adopted pursuant to Section 404 of the
Sarbanes-Oxley Act, without qualification, when next due.
(d) Since December 31, 2005, (i) neither Buyer
nor any of its Subsidiaries nor, to the knowledge of the
officers of Buyer, any director, officer, employee, auditor,
accountant or representative of Buyer or any of its Subsidiaries
has received or otherwise had or obtained knowledge of any
material complaint, allegation, assertion or claim, whether
written or oral, regarding the accounting or auditing practices,
procedures, methodologies or methods of Buyer or any of its
Subsidiaries or their respective internal accounting controls,
including any material complaint, allegation, assertion or claim
that Buyer or any of its Subsidiaries has engaged in
questionable accounting or auditing practices and (ii) no
attorney representing Buyer or any of its Subsidiaries, whether
or not employed by Buyer or any of its Subsidiaries, has
reported evidence of a material violation of securities laws,
breach of fiduciary duty or similar violation by Buyer or any of
its officers, directors, employees or agents to the Buyer Board
or any committee thereof or to any director or officer of Buyer.
(e) Since December 31, 2005 (or such later date, if
Buyer only became subject to the applicable provisions, rules
and regulations subsequent to December 31, 2005), the
principal executive officer and the principal financial officer
of Buyer have complied in all material respects with
(1) the applicable provisions of the Sarbanes-Oxley Act and
under the Exchange Act and (ii) the applicable listing and
corporate governance rules and regulations of The NASDAQ Stock
Market. The principal executive officer and the principal
financial officer of Buyer have made all certifications required
by Sections 302 and 906 of the Sarbanes-Oxley Act with
respect to each Buyer SEC Document filed by the Company. For
purposes of the preceding sentence, principal executive
officer and principal financial officer shall
have the meanings given to such terms in the Sarbanes-Oxley Act.
Except as permitted in the Exchange Act, including
Sections 12(k)(2) and (3), since the enactment of the
Sarbanes-Oxley Act, neither Buyer nor any of its Affiliates has
directly or indirectly extended or maintained credit, arranged
for the extension of credit, renewed the extension of credit or
materially modified an extension of credit in the form of
personal loans to any executive officer or director (or
equivalent thereof) of Buyer.
(f) Buyer has delivered to the Company copies of any
written notifications it has received to date since
December 31, 2005 of a (i) significant
deficiency or (ii) material weakness in
Buyers internal controls. For purposes of this Agreement,
the terms significant deficiency and material
weakness shall have the meaning assigned to them in the
Statements of Auditing Standards No. 60, as in effect on
the date hereof.
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4.7 Brokers
Fees. Neither Buyer nor any of its
Subsidiaries nor any of their respective officers or directors
has employed any broker or finder or incurred any liability for
any brokers fees, commissions or finders fees in
connection with the Merger or related transactions contemplated
by this Agreement.
4.8 Absence of Certain Changes or
Events. Since December 31, 2008, no
event or events have occurred that have had or would reasonably
be expected to have a Material Adverse Change on Buyer.
4.9 Legal Proceedings.
(a) Neither Buyer nor any of its Subsidiaries is a party to
any, and there are no pending or, to the best of Buyers
knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory
investigations of any nature against Buyer or any of its
Subsidiaries or to which any of their assets are subject that,
if decided adversely to Buyer and its Subsidiaries, would have a
material adverse effect on Buyer.
(b) There is no judgment, order, injunction, decree or
regulatory restriction other than those of general application
that apply to similarly situated companies or their Subsidiaries
imposed upon Buyer, any of its Subsidiaries or the assets of the
Buyer or any of its Subsidiaries that has or could have a
material adverse effect on Buyer.
4.10 Taxes and Tax
Returns. (a) Each of Buyer and its
Subsidiaries has duly and timely filed (including all applicable
extensions) all material Tax Returns required to be filed by it
on or prior to the date of this Agreement (all such Tax Returns
being accurate and complete in all material respects), has paid
all Taxes shown thereon as arising and has duly paid or made
provision for the payment of all material Taxes that have been
incurred or are due or claimed to be due from it by federal,
state, foreign or local taxing authorities other than Taxes that
are not yet delinquent or are being contested in good faith,
have not been finally determined and have been adequately
reserved against under GAAP. There are no material disputes
pending, or written claims asserted, for Taxes or assessments
upon Buyer nor any Subsidiary for which Buyer does not have
reserves that are adequate under GAAP. Neither Buyer nor any
Subsidiary is a party to or is bound by any Tax sharing,
allocation or indemnification agreement or arrangement (other
than such an agreement or arrangement exclusively between or
among Buyer and its Subsidiaries). Neither Buyer nor any of its
Subsidiaries is required to include in income any adjustment
pursuant to Section 481(a) of the Code, no such adjustment
has been proposed by the IRS and no pending request for
permission to change any accounting method has been submitted by
Buyer or any of its Subsidiaries.
(b) Effective as of April 16, 2004, the Buyer made a
valid election under Subchapter M of Chapter 1 of the Code
to be taxed as a regulated investment company. The Buyer has
qualified as a regulated investment at all times subsequent to
April 16, 2004, and expects to qualify as such for its
current taxable year. For any taxable year commencing prior to
April 16, 2004 during which the Buyer was not a regulated
investment company, the Buyer has no outstanding Taxes for which
it does not have reserves adequate under GAAP. The Buyer has no
earnings and profits accumulated in any taxable year
in which the Buyer was not a regulated investment company under
Subchapter M of Chapter 1 of the Code.
(c) Buyer and its Subsidiaries have complied in all
material respects with all applicable laws relating to the
payment and withholding of Taxes (including withholding of Taxes
pursuant to Sections 1441, 1442 and 3402 of the Code or any
comparable provision of any state, local or foreign laws) and
have, within the time and in the manner prescribed by applicable
law, withheld from and paid over all amounts required to be so
withheld and paid over under applicable laws.
(d) There are no limitations on the utilization of the
built-in-losses,
capital losses or other similar items of the Buyer and its
Subsidiaries under Section 382, 384 or 269 of the Code (or
any similar state, local or foreign law).
(e) No Buyer or Subsidiary has any liability for Taxes of
any person or entity other than the Buyer or any Subsidiary
(i) under
Section 1.1502-6
of the Treasury regulations (or any similar provision of state,
local or foreign Law), (ii) as a transferee or successor,
or (iii) by contract or otherwise.
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(f) There are no liens for Taxes upon the assets of the
Buyer or any of the Subsidiaries, except for liens for Taxes not
yet due and payable and liens for Taxes that are both being
contested in good faith and adequately reserved for in
accordance with GAAP.
(g) No Buyer or Subsidiary is or has been required to make
any disclosure to the IRS pursuant to Section 6011 of the
Code or
Section 1.6011-4
of the Treasury regulations promulgated thereunder.
(h) No Buyer or Subsidiary is, or has been at any time
since the date that is five years prior to the date hereof, a
United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code.
(i) No Buyer or Subsidiary has granted any waiver,
extension, or comparable consent regarding the application of
the statute of limitations with respect to any Taxes or Tax
Return that is outstanding, nor any request for such waiver or
consent has been made.
4.11 Compliance with Applicable
Law. Buyer and each of its Subsidiaries hold
all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their respective businesses under and
pursuant to each, and have complied in all respects with and are
not in default in any respect under any, law applicable to Buyer
or any of its Subsidiaries, except as would not, individually or
in the aggregate, have a material adverse effect on Buyer.
4.12 Reorganization;
Approvals. As of the date of this Agreement,
Buyer (a) is not aware of any fact or circumstance that
could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of
Section 368(a) of the Code, and (b) knows of no reason
why all regulatory approvals from any Governmental Entity
required for the consummation of the transactions contemplated
by this Agreement should not be obtained on a timely basis.
4.13 Buyer Information. The
information relating to Buyer and its Subsidiaries that is
provided by Buyer or its representatives for inclusion in the
Proxy Statement and the
Form N-14,
or in any application, notification or other document filed with
any other Regulatory Agency or other Governmental Entity in
connection with the transactions contemplated by this Agreement,
will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements
therein, in light of the circumstances in which they are made,
not misleading. The portions of the Proxy Statement relating to
Buyer and its Subsidiaries and other portions within the
reasonable control of Buyer and its Subsidiaries will comply in
all material respects with the provisions of the Exchange Act
and the rules and regulations thereunder. The
Form N-14
will comply in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
4.14 No Financing
Condition. Buyer has sufficient immediately
available funds in cash or cash equivalents, or available under
lines of credit in effect as of the date hereof, and at Closing
will have sufficient immediately available funds in cash or cash
equivalents, in each case as necessary to pay the full amount of
the Loan Repayment and to perform its obligations with respect
to the transactions contemplated by this Agreement.
4.15 Undisclosed
Liabilities. Buyer and its Subsidiaries do
not have any liabilities or obligations, known or unknown,
contingent or otherwise, except (i) liabilities and
obligations in the respective amounts reflected on or reserved
against in the consolidated balance sheet of Buyer and its
Subsidiaries included in the financial statements of Buyer (or
readily apparent in the notes thereto), and
(ii) liabilities and obligations incurred in a commercially
reasonable manner since the date of such balance sheet.
4.16 Insurance. Buyer and
its Subsidiaries maintain policies of insurance in such amounts
and against such risks as are customary in the industries in
which Buyer and its Subsidiaries operate. Except as would not
reasonably be expected to have a material adverse effect on
Buyer, all such insurance policies are in full force and effect
and will not in any way be affected by, or terminate or lapse by
reason of, this Agreement or the consummation of any of the
transactions contemplated hereby.
4.17 Environmental
Matters. Except as would not, individually or
in the aggregate, have a material adverse effect on Buyer, there
are no legal, administrative, arbitral or other proceedings,
claims, actions, causes
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of action or notices with respect to any environmental, health
or safety matters or any private or governmental environmental,
health or safety investigations or remediation activities of any
nature with respect to any real property owned by the Buyer or
its Subsidiaries seeking to impose, or that are reasonably
likely to result in, any liability or obligation of Buyer or any
of its Subsidiaries arising under any Environmental Laws,
pending or threatened against Buyer or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries is subject to
any material agreement, order, judgment, decree, letter or
memorandum by or with any Governmental Entity or third party
imposing any liability or obligation with respect to any of the
foregoing.
4.18 Investment Adviser and
Administrator.
(a) Prospect Capital Management LLC (the
Investment Adviser) is a limited
liability company duly formed, validly existing and in good
standing under the laws of the State of Delaware. Prospect
Administration LLC (the Administrator)
is a limited liability company duly formed, validly existing and
in good standing under the laws of the State of Delaware. True,
complete and correct copies of the Organizational Documents of
Investment Adviser and Administrator, each as in effect as of
the date of this Agreement, have previously been made available
to the Company. Each of Investment Adviser and Administrator has
the requisite corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it
is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to be so
licensed or qualified would not, individually or in the
aggregate, have a material adverse effect on the Buyer.
(b) Since the respective dates as of which information is
given in the Buyer SEC Reports, except as otherwise stated
therein, there has been no material adverse change in the
operations, affairs or regulatory status of the Investment
Adviser or the Administrator that would reasonably be expected
to result in a material adverse effect on the Buyer.
(c) The Investment Adviser is duly registered with the SEC
as an investment adviser under the Investment Advisers Act of
1940 and is not prohibited by such act or the 1940 Act from
acting as the investment adviser of Buyer under the Investment
Advisory Agreement as contemplated by the Buyer SEC Reports.
There does not exist any proceeding or, to the Buyers
knowledge, any facts or circumstances the existence of which
would be reasonably adversely affect the registration of the
Investment Adviser with the SEC or the ability of the Investment
Adviser to perform its obligations under the Investment Advisory
Agreement.
(d) There is no action, suit or proceeding or, to the
knowledge of the Investment Adviser or the Administrator,
inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Buyer, threatened, against or
affecting either the Investment Adviser or the Administrator,
which is required to be disclosed in the Buyer SEC Reports or
which would reasonably be expected to result in a material
adverse effect on the Buyer.
(e) The Investment Advisory Agreement has been duly
authorized, executed and delivered by Buyer and Investment
Adviser, is in full force and effect, and no party thereto is in
default or breach of any of its obligations thereunder. The
Administration Agreement has been duly authorized, executed and
delivered by Buyer and Administrator, is in full force and
effect, and no party thereto is in default or breach of any of
its obligations thereunder. Each of the Investment Advisory
Agreement and the Administration Agreement constitute valid and
legally binding agreements of the Investment Adviser and the
Administrator, respectively, subject to the Bankruptcy and
Equity Exception.
(f) Neither the Investment Adviser nor the Administrator is
in violation of its Organizational Documents or in default in
the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument to which the Investment Adviser
or the Administrator is a party or by which it or any of them
may be bound, or to which any of the property or assets of the
Investment Adviser or the Administrator is subject, or in
violation of any law, statute, rule, regulation, judgment, order
or decree, except for such violations or defaults that would not
reasonably be expected to result in a material adverse effect on
the Buyer.
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ARTICLE V
COVENANTS
RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the
Effective Time. Except as expressly
contemplated by or permitted by this Agreement or with the prior
written consent of the other party, during the period from the
date of this Agreement to the Effective Time, (a) the
Company shall, and shall cause each of its respective
Subsidiaries to, (i) conduct its business in the ordinary
course in all material respects, as such business is being
conducted as of the date hereof, (ii) use reasonable best
efforts to maintain and preserve intact its business
organization and advantageous business relationships and retain
the services of its key officers and key employees, and
(b) each of the Company and Buyer shall, and shall cause
each of its respective Subsidiaries to, and take no action that
is intended to or would reasonably be expected to adversely
affect or materially delay the ability of the Company or Buyer
either to obtain any necessary approvals of any Regulatory
Agency or other Governmental Entity required for the
transactions contemplated hereby or to perform its covenants and
agreements under this Agreement or to consummate the
transactions contemplated hereby or thereby.
5.2 Company
Forbearances. During the period from the date
of this Agreement to the Effective Time, except as expressly
contemplated or permitted by this Agreement, the Company shall
not, and shall not permit any of its Subsidiaries to, without
the prior written consent of Buyer:
(a) incur any indebtedness for borrowed money, assume,
guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual,
corporation or other entity, or, other than in the ordinary
course of business consistent with past practice, make any loan
or advance or capital contribution to, or investment in, any
person;
(b) (i) adjust, split, combine or reclassify any of
its capital stock;
(ii) make, declare or pay any dividend, other than the
Final Company Dividend, or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire,
any shares of its capital stock or any securities or obligations
convertible (whether currently convertible or convertible only
after the passage of time or the occurrence of certain events)
into or exchangeable for any shares of its capital stock (except
dividends paid by any of the Subsidiaries of the Company to the
Company or to any of its wholly-owned Subsidiaries);
(iii) grant any stock options or restricted shares under
any of the Company Stock Plans or otherwise, or grant any
individual, corporation or other entity any right to acquire any
shares of its capital stock; or
(iv) issue any additional shares of capital stock or other
securities, except pursuant to the exercise of stock options
granted under the Company Stock Option Plan that are outstanding
as of the date of this Agreement;
(c) except as required under any Company Contract (other
than those employment agreements listed on Section 3.11 of
the Company Disclosure Schedule) or Company Benefit Plan
existing as of the date hereof, (i) increase in any manner
the compensation or benefits of any of the current or former
directors, officers or employees of the Company or its
Subsidiaries (collectively,
Employees), (ii) pay any amounts
to Employees not required by any current plan or agreement
(other than base salary in the ordinary course of business),
(iii) become a party to, establish, amend, commence
participation in, terminate or commit itself to the adoption of
any stock option plan or other stock-based compensation plan,
compensation (including any employee co-investment fund),
severance, pension, retirement, profit-sharing, welfare benefit,
or other employee benefit plan or agreement or employment
agreement with or for the benefit of any Employee (or newly
hired employees) or any other plan, agreement or arrangement
which would be a Company Benefit Plan if in effect on the date
hereof, (iv) accelerate the vesting of any stock-based
compensation or other long-term incentive compensation under any
Company Benefit Plans or (v) hire any employee or terminate
the employment of any employee;
(d) sell, transfer, pledge, lease, license, mortgage,
encumber or otherwise dispose of any material amount of its
properties or assets (including pursuant to securitizations) to
any individual, corporation or other entity other than a
Subsidiary or cancel, release or assign any material amount of
indebtedness to
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any such person or any claims held by any such person, in each
case other than pursuant to contracts in force at the date of
this Agreement;
(e) transfer ownership, or grant any license or other
rights, to any person or entity of or in respect of any material
Intellectual Property Rights;
(f) make any material investment or loan (other than any
unfunded commitments existing as of June 30,
2009) either by purchase of stock or securities or
otherwise, contributions to capital, property transfers, or
purchase of any property or assets of any other individual,
corporation or other entity;
(g) take any action, or knowingly fail to take any action,
which action or failure to act is reasonably likely to prevent
the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code;
(h) amend its charter or bylaws, or take any action to
exempt any person or entity (other than Buyer or its
Subsidiaries) or any action taken by any person or entity from
any Takeover Statute or similarly restrictive provisions of its
Organizational Documents;
(i) (i) amend or otherwise modify or knowingly violate
in any material respect the terms of, any Company Contract or
(ii) create, renew or amend any agreement or contract or,
except as may be required by applicable law, other binding
obligation of the Company or its Subsidiaries containing
(A) any material restriction on the ability of the Company
or its Subsidiaries to conduct its business as it is presently
being conducted or (B) any material restriction on the
ability of the Company to engage in any type of activity or
business;
(j) commence or settle any material claim, action or
proceeding;
(k) take any action or willfully fail to take any action
that is intended or may reasonably be expected to result in any
of the conditions to the Merger set forth in Article VII
not being satisfied;
(l) implement or adopt any change in its Tax accounting or
financial accounting principles, practices or methods, other
than as may be required by applicable law, GAAP or regulatory
guidelines;
(m) file or amend any Tax Return other than in the ordinary
course of business, make or change any Tax election, or settle
or compromise any Tax liability; or
(n) agree to take, make any commitment to take, or adopt
any resolutions of its board of directors in support of, any of
the actions prohibited by this Section 5.2.
5.3 Buyer
Forbearances. Except as expressly permitted
by this Agreement or with the prior written consent of the
Company, during the period from the date of this Agreement to
the Effective Time, Buyer shall not, and shall not permit any of
its Subsidiaries to, (a) amend, repeal or otherwise modify
any provision of the Buyer Articles or the Buyer Bylaws in a
manner that would adversely affect the Company, the stockholders
of the Company or the transactions contemplated by this
Agreement, (b) take any action, or knowingly fail to take
any action, which action or failure to act is reasonably likely
to prevent the Merger from qualifying as a
reorganization within the meaning of
Section 368(a) of the Code, (c) take any action or
willfully fail to take any action that is intended or may
reasonably be expected to result in any of the conditions to the
Merger set forth in Article VII not being satisfied,
(d) take any action that would be reasonably expected to
prevent, materially impede or delay beyond the date set forth in
Section 8.1(c) the consummation of the transactions
contemplated by this Agreement or (e) agree to take, make
any commitment to take, or adopt any resolutions of its board of
directors in support of, any of the actions prohibited by this
Section 5.3. Without in any way limiting the foregoing, in
no event shall Buyer take any action, or permit the taking of
any action, that will result in Buyer not having in cash or cash
equivalents amounts, or available under Buyer Credit Facilities,
sufficient to make the Loan Repayment at Closing.
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ARTICLE VI
ADDITIONAL
AGREEMENTS
6.1 Regulatory
Matters. (a) Buyer and the Company shall
promptly prepare and file with the SEC the
Form N-14,
in which the Proxy Statement will be included as a prospectus.
Each of Buyer and the Company shall use its reasonable best
efforts to have the
Form N-14
declared effective under the Securities Act as promptly as
practicable after such filing, and the Company shall thereafter
mail or deliver the Proxy Statement to its stockholders. Buyer
shall also use its reasonable best efforts to obtain all
necessary state securities law or Blue Sky permits
and approvals required to carry out the transactions
contemplated by this Agreement, and the Company shall furnish
all information concerning the Company and the holders of
Company Common Stock as may be reasonably requested in
connection with any such action.
(b) The parties shall cooperate with each other and use
their respective reasonable best efforts to promptly prepare and
file all necessary documentation, to effect all applications,
notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations
of all third parties (including any unions, works councils or
other labor organizations) and Governmental Entities that are
necessary or advisable to consummate the transactions
contemplated by this Agreement (including the Merger), and to
comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such third parties
or Governmental Entities. The Company and Buyer shall have the
right to review in advance, and, to the extent practicable, each
will consult the other on, in each case subject to applicable
laws relating to the confidentiality of information, all the
information relating to the Company or Buyer, as the case may
be, and any of their respective Subsidiaries, that appear in any
filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the
transactions contemplated by this Agreement. In exercising the
foregoing right, each of the parties shall act reasonably and as
promptly as practicable. The parties shall consult with each
other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and
Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will
keep the other apprised of the status of matters relating to
completion of the transactions contemplated by this Agreement.
(c) Each of Buyer and the Company shall, upon request,
furnish, and cause its independent registered public accountants
and other agents and service providers to furnish to the other
and the others agents, all information concerning itself,
its Subsidiaries, directors, officers and stockholders and such
other matters as may be reasonably necessary or advisable in
connection with the Proxy Statement, the
Form N-14
or any other statement, filing, notice or application made by or
on behalf of Buyer, the Company or any of their respective
Subsidiaries to any Governmental Entity in connection with the
Merger and the other transactions contemplated by this Agreement.
(d) Each of Buyer and the Company shall promptly advise the
other upon receiving any communication from any Governmental
Entity the consent or approval of which is required for
consummation of the transactions contemplated by this Agreement
that causes such party to believe that there is a reasonable
likelihood that any Buyer Requisite Regulatory Approval or
Company Requisite Regulatory Approval, respectively, will not be
obtained or that the receipt of any such approval may be
materially delayed.
(e) Without in any way limiting the foregoing 6.1(a)
through (d), the Buyer Parties (and their respective Affiliates,
if applicable), on the one hand, and the Company, on the other
hand, shall, if and to the extent required, file with the United
States Federal Trade Commission (FTC)
and the Antitrust Division of the United States Department of
Justice (DOJ) a Notification and
Report Form relating to this Agreement and the transactions
contemplated hereby as required by the HSR Act within ten
(10) calendar days following the execution and delivery of
this Agreement. Each of Buyer and the Company shall
(i) cooperate and coordinate with the other in the making
of such filings (if required), (ii) supply the other with
any information that may be required in order to make such
filings, (iii) supply any additional information that
reasonably may be required or requested by the FTC or the DOJ,
and (iv) take all action reasonably necessary to cause the
expiration or termination of any applicable waiting period under
the HSR Act applicable to the Merger as soon as practicable.
Each of the Buyer Parties (and their respective Affiliates, if
applicable), on the one hand, and the Company, on the other
hand, shall promptly inform the other of any communication from
any
A-27
Governmental Authority regarding any of the transactions
contemplated by this Agreement in connection with such filings.
If any party hereto or Affiliate thereof shall receive a request
for additional information or documentary material from any
Governmental Authority with respect to the transactions
contemplated by this Agreement pursuant to the HSR, then such
party shall make (or cause to be made), as soon as reasonably
practicable and after consultation with the other party, an
appropriate response in compliance with such request.
6.2 Access to
Information. (a) Upon reasonable notice
and subject to applicable laws relating to the confidentiality
of information, each of the Company and Buyer shall, and shall
cause each of its Subsidiaries to, afford to the officers,
employees, accountants, counsel, advisors, agents and other
representatives of the other party, reasonable access, during
normal business hours during the period prior to the Effective
Time, to all its properties, books, contracts, commitments and
records, and, during such period, such party shall, and shall
cause its Subsidiaries to, make available to the other party
(i) a copy of each report, schedule, registration statement
and other document filed or received by it during such period
pursuant to the requirements of federal securities laws (other
than reports or documents that such party is not permitted to
disclose under applicable law) and (ii) all other
information concerning its business, properties and personnel as
the other party may reasonably request (in the case of a request
by the Company, information concerning Buyer that is reasonably
related to the prospective value of Buyer Common Stock or to
Buyers ability to consummate the transactions contemplated
hereby). Neither the Company nor Buyer, nor any of their
Subsidiaries, shall be required to provide access to or to
disclose information where such access or disclosure would
jeopardize the attorney-client privilege of such party or its
Subsidiaries or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties shall make
appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the preceding
sentence apply.
(b) The Company shall promptly (but in no event later than
three (3) business days after the date of filing) provide
Buyer with a copy of each Company SEC Report filed between the
date hereof and the Effective Time. Each such Company SEC Report
shall be prepared in accordance with the applicable forms, rules
and regulations of the SEC and shall satisfy the standard set
forth in Section 3.5(c). Buyer shall promptly (but in no
event later than three (3) business days after the date of
filing) provide the Company with a copy of each Buyer SEC Report
filed between the date hereof and the Effective Time. Each such
Buyer SEC Report shall be prepared in accordance with the
applicable forms, rules and regulations of the SEC and shall
satisfy the standard set forth in Section 4.5(c). In the
event that the Company Board determines in good faith that a
restatement of any previously filed SEC Company Report is
required, the Company agrees to first consult with Buyer
regarding such filing, and the contents thereof, which, prior to
filing, shall be reasonably acceptable to Buyer.
(c) All information and materials provided pursuant to this
Agreement shall be subject to the provisions of the Mutual
Nondisclosure Agreement entered into between the parties as of
April 13, 2009 (the Confidentiality
Agreement).
(d) No investigation by a party hereto or its
representatives shall affect the representations and warranties
of the other party set forth in this Agreement.
6.3 Stockholder
Approval. The Company shall call a meeting of
its stockholders to be held as soon as reasonably practicable
for the purpose of obtaining the requisite stockholder approval
required in connection with the Merger (the Company
Stockholder Meeting), on substantially the terms
and conditions set forth in this Agreement, and shall, subject
at all times to Section 6.10(e) and Section 8.1, use
its reasonable best efforts to cause such meeting to occur as
soon as reasonably practicable. Subject to Section 6.10(e)
and Section 8.1, the Company Board shall use its reasonable
best efforts to obtain from its stockholders the stockholder
vote approving the Merger, on substantially the terms and
conditions set forth in this Agreement, required to consummate
the transactions contemplated by this Agreement.
6.4 Exchange Listing. Buyer
shall provide The NASDAQ Stock Market with the notification
required by Listing Rule 5250(e)(2) of The NASDAQ Stock
Market no later than fifteen calendar days prior to the
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Effective Time and cause the shares of Buyer Common Stock issued
in the Merger to be approved for listing on The NASDAQ Stock
Market in accordance with the normal practices of The NASDAQ
Stock Market.
6.5 Employee
Matters. (a) Subject to
Section 6.5(d), following the Closing Date and for at least
twelve months thereafter, Buyer shall maintain or cause to be
maintained employee benefit plans and compensation opportunities
for the benefit of employees who are actively employed by the
Company and its Subsidiaries on the Closing Date
(Covered Employees) that provide
employee benefits and compensation opportunities which, in the
aggregate, are substantially comparable to the employee benefits
and compensation opportunities that are generally made available
to similarly situated employees of the Administrator or the
Investment Adviser.
(b) To the extent that a Covered Employee becomes eligible
to participate in an employee benefit plan maintained by Buyer
or any of its Subsidiaries (other than the Company or its
Subsidiaries) or the Administrator or the Investment Adviser,
Buyer shall cause such employee benefit plan to
(i) recognize the service of such Covered Employee with the
Company or its Subsidiaries (or their predecessor entities) for
purposes of eligibility, participation, vesting and, except
under defined benefit pension plans, benefit accrual under such
employee benefit plan of Buyer or any of its Subsidiaries or the
Administrator or the Investment Adviser, to the same extent such
service was recognized immediately prior to the Effective Time
under a comparable Company Benefit Plan in which such Covered
Employee was eligible to participate immediately prior to the
Effective Time or, if there is no such comparable benefit plan,
to the same extent such service was recognized under the Company
401(k) plan immediately prior to the Effective Time, and in each
case only to the extent actually permissible under such employee
benefit plan; provided that such recognition of service
shall not operate to duplicate any benefits of a Covered
Employee with respect to the same period of service and
provided further that any Covered Employee whose
employment is retained by the Administrator or the Investment
Adviser following the Closing Date shall not be credited for
hours worked for the Company or its Subsidiaries during 2009
solely for purposes of determining the Covered Employees
eligibility for participation in any profit sharing plans of the
Administrator or the Investment Adviser during 2009, and
(ii) with respect to any health, dental, vision plan or
other welfare plan of Buyer or any of its Subsidiaries (other
than the Company and its Subsidiaries) or the Administrator or
the Investment Adviser in which any Covered Employee is eligible
to participate for the plan year in which such Covered Employee
is first eligible to participate, use its reasonable best
efforts to cause its third-party insurance providers to
(x) waive any pre-existing condition limitations or
eligibility waiting periods under such plan of Buyer or any of
its Subsidiaries or the Administrator or the Investment Adviser
with respect to such Covered Employee to the extent such
limitation would have been waived or satisfied under the Company
Benefit Plan in which such Covered Employee participated
immediately prior to the Effective Time and (y) recognize
any health, dental or vision expenses incurred by such Covered
Employee in the year that includes the Closing Date (or, if
later, the year in which such Covered Employee is first eligible
to participate) for purposes of any applicable deductible and
annual
out-of-pocket
expense requirements under any such health, dental or vision
plan of Buyer or any of its Subsidiaries or the Administrator or
the Investment Adviser.
(c) From and after the Effective Time, Buyer shall, or
shall cause its Subsidiaries to, honor, in accordance with the
terms thereof as in effect as of the date hereof or as may be
amended after the date hereof with the prior written consent of
Buyer, each employment agreement listed on Section 3.11 of
the Company Disclosure Schedule.
(d) Nothing in this Agreement shall be construed to limit
the right of Buyer or any of its Subsidiaries or the
Administrator or the Investment Adviser (including, following
the Closing Date, the Company and its Subsidiaries) to amend or
terminate any Company Benefit Plan or other employee benefit
plan of Buyer or any of its Subsidiaries or the Administrator or
the Investment Adviser, to the extent such amendment or
termination is permitted by the terms of the applicable plan,
nor shall anything in this Agreement be construed to require
Buyer or any of its Subsidiaries (including, following the
Closing Date, the Company and its Subsidiaries) or the
Administrator or the Investment Adviser, to retain the
employment of any particular Covered Employee for any fixed
period of time following the Closing Date or at all. Without
limiting the generality of Section 9.10, the provisions of
this Agreement are solely for the benefit of the parties to this
Agreement, and no current or former employee, director or
independent contractor or any other individual
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associated therewith shall be regarded for any purpose as a
third-party beneficiary of the Agreement, and nothing herein
shall be construed as an amendment to any Company Benefit Plan
or other employee benefit plan for any purpose and nothing
herein shall provide a basis for any claim by any such employee.
6.6 Indemnification; Directors and
Officers Insurance.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or
administrative (a Claim), including
any such Claim in which any individual who is now, or has been
at any time prior to the date of this Agreement, or who becomes
prior to the Effective Time, a director or officer of the
Company or any of its Subsidiaries or who is or was serving at
the request of the Company or any of its Subsidiaries as a
director or officer of another person (the
Indemnified Parties), is, or is
threatened to be, made a party based in whole or in part on, or
arising in whole or in part out of, or pertaining to
(i) the fact that he or she is or was a director or officer
of the Company or any of its Subsidiaries prior to the Effective
Time or (ii) this Agreement or any of the transactions
contemplated by this Agreement, whether asserted or arising
before or after the Effective Time, the parties shall cooperate
and use their best efforts to defend against and respond
thereto. All rights to indemnification and exculpation from
liabilities for acts or omissions occurring at or prior to the
Effective Time now existing in favor of any Indemnified Party as
provided in their respective certificates or articles of
incorporation or by-laws (or comparable Organizational
Documents), and any existing indemnification agreements set
forth in Section 6.6 of the Company Disclosure Schedule,
shall, notwithstanding that the separate corporate existence of
the Company shall cease as of the Effective Time, survive the
Merger as a contractual obligation of the Buyer as the Surviving
Company and shall continue in full force and effect in
accordance with their terms, and shall not be amended, repealed
or otherwise modified in any manner that would adversely affect
the rights thereunder of such individuals for acts or omissions
occurring at or prior to the Effective Time or taken at the
request of Buyer pursuant to Section 6.7 hereof, it being
understood that nothing in this sentence shall require any
amendment to the certificate of incorporation or by-laws of the
Buyer as the Surviving Company.
(b) From and after the Effective Time, Buyer, as the
Surviving Company in the Merger, shall to the fullest extent
permitted by applicable law, indemnify, defend and hold
harmless, and provide advancement of expenses to, each
Indemnified Party against all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in
settlement of or in connection with any Claim based in whole or
in part on or arising in whole or in part out of the fact that
such person is or was a director or officer of the Company or
any of its Subsidiaries, and pertaining to any matter existing
or occurring, or any acts or omissions occurring, at or prior to
the Effective Time, whether asserted or claimed prior to, or at
or after, the Effective Time (including matters, acts or
omissions occurring in connection with the approval of this
Agreement and the consummation of the transactions contemplated
hereby) or taken at the request of Buyer pursuant to
Section 6.7 hereof.
(c) Buyer shall cause the individuals serving as officers
and directors of the Company or any of its Subsidiaries
immediately prior to the Effective Time to be covered for a
period of six years from the Effective Time by the
directors and officers liability insurance policy
maintained by the Company through the purchase of so-called
tail insurance (provided that Buyer may
substitute therefor policies of at least the same coverage and
amounts containing terms and conditions that are not less
advantageous than such policy) with respect to acts or omissions
occurring prior to the Effective Time that were committed by
such officers and directors in their capacity as such.
Immediately prior to the Effective Time, the Company shall pay
to Buyer the cost of obtaining such insurance for the entire six
year period referred to above; provided, however,
that if Company does not have sufficient funds to pay to Buyer
all or any part of the cost of obtaining such insurance for the
entire six year period referred to above or such funds are not
sufficient to maintain such insurance for the entire six year
period referred to above, then the Buyer shall be obligated to
pay for, obtain and maintain such insurance. In connection with
the foregoing, neither Company nor Buyer shall be required to
expend in the aggregate for the entire six year period referred
to above amount in excess of 300% of the annual premiums
currently paid by the Company for such insurance
(Insurance Amount). If Buyer is unable
to maintain such policy (or such substitute policy) as a result
of the preceding sentence, Buyer shall obtain as much comparable
insurance as is available for Insurance Amount.
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(d) The provisions of this Section 6.6 shall survive
the Effective Time and are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
6.7 Additional
Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement or to vest the
Surviving Company with full title to all properties, assets,
rights, approvals, immunities and franchises of either party to
the Merger, the proper officers and directors of each party and
their respective Subsidiaries shall, at Buyers sole
expense, take all such necessary action as may be reasonably
requested by Buyer.
6.8 Advice of Changes. Each
of Buyer and the Company shall promptly advise the other of any
change or event (i) having or reasonably likely to have a
Material Adverse Change on it, (ii) that it believes would
or would be reasonably likely to cause or constitute a breach of
any of its representations, warranties or covenants contained in
this Agreement or (iii) that would result in the conditions
to closing set forth in Article VII not being satisfied;
provided, however, that no such notification shall
affect the representations, warranties, covenants or agreements
of the parties (or remedies with respect thereto) or the
conditions to the obligations of the parties under this
Agreement.
6.9 Exemption from Liability Under
Section 16(b). Prior to the Effective
Time, Buyer and the Company shall each take all such steps as
may be necessary or appropriate to cause any disposition of
shares of Company Common Stock or conversion of any derivative
securities in respect of such shares of Company Common Stock in
connection with the consummation of the transactions
contemplated by this Agreement to be exempt under
Rule 16b-3
promulgated under the Exchange Act to the extent permitted
thereunder.
6.10 No Solicitation.
(a) As used in this Agreement,
(i) Alternative Proposal means
any written proposal for a merger, share exchange,
consolidation, sale of assets, sale of shares of capital stock
(including by way of a tender offer) or similar transactions
involving the Company or any of its Subsidiaries or the
stockholders of the Company or any of its Subsidiaries received
by the Company from a third party (or group of persons) not
affiliated with the Company or Buyer (a Third
Party) that, if consummated, would constitute an
Alternative Transaction, (ii) Alternative
Transaction means any of (w) a transaction
pursuant to which a Third Party, directly or indirectly,
acquires or would acquire more than 75% of the outstanding
shares of the Company or outstanding voting power or of any
preferred stock that would be entitled to a class or series vote
with respect to a merger or other reorganization involving the
Company, whether from the Company or pursuant to a tender offer
or exchange offer or otherwise, (x) a merger, share
exchange, consolidation or other business combination involving
the Company, (y) any transaction pursuant to which a Third
Party acquires or would acquire control of assets (including for
this purpose the outstanding equity securities of subsidiaries
of the Company and securities of the entity surviving any merger
or business combination including any of the Companys
Subsidiaries) of the Company or any of its Subsidiaries
representing more than 75% of the fair market value of all the
assets, net revenues or net income of the Company and its
Subsidiaries, taken as a whole, immediately prior to such
transaction or (z) any other consolidation, business
combination, recapitalization or similar transaction of similar
scope involving the Company or any of its Subsidiaries other
than the transactions contemplated by this Agreement;
provided that, for purposes of Section 8.4, any
transaction contemplated by clauses (x) or (z) shall
be limited to transactions to which the Company is a party and
in which the stockholders of the Company immediately prior to
the consummation thereof (excluding for this purpose the holders
of any shares of the Company issued after the date hereof) would
not hold at least
662/3%
of the total voting power of the surviving company in such
transaction or of its publicly traded parent corporation and
(iii) Superior Proposal means any
Alternative Proposal made by a Third Party that (A) is
legally binding on the Third Party but not on the Company,
(B) is fully financed (including the payments required by
Section 1.9) and contains no financing contingency or
obligation to obtain consent from a lender or equity source,
(C) contains no condition to closing materially more
burdensome on the Company, or in the Company Boards
reasonable and good faith judgment (after consultation with its
financial advisor and outside legal counsel) making it
materially less likely that the conditions to the closing of
such transaction would be satisfied than, the conditions to
Closing set forth herein (with, for the avoidance of doubt, a
condition for a vote of the Third Partys shareholders on
any matter being materially more burdensome and making it
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materially less likely that all conditions to such Alternative
Proposal will be satisfied), and (D) which is otherwise on
terms which the Company Board determines in its reasonable good
faith judgment (after consultation with its financial advisor
and outside legal counsel), taking into account, among other
things, all legal, financial, regulatory and other aspects of
the proposal and the person making the proposal, that the
proposal, (I) if consummated would result in a transaction
that is more favorable, from a financial point of view, to the
Companys stockholders (after taking into account the
payments required under Section 8.4 hereof) than the Merger
and the other transactions contemplated hereby and (II) is
reasonably certain of being completed.
(b) None of the Company, its Subsidiaries or any officer,
director, employee, agent or representative (including any
investment banker, financial advisor, attorney, accountant or
other representative) of the Company or any of its Subsidiaries
shall directly or indirectly (i) solicit, initiate,
encourage, facilitate (including by way of furnishing
information) or take any other action designed to facilitate any
inquiries or proposals regarding any Alternative Proposal or
Alternative Transaction, (ii) participate in any
discussions or negotiations regarding an Alternative Proposal or
Alternative Transaction or (iii) enter into any agreement
regarding any Alternative Proposal or Alternative Transaction.
Without in any way limiting the foregoing, the Company and its
Subsidiaries shall immediately cease and cause to be terminated
any existing discussions or negotiations with any persons (other
than Buyer) conducted heretofore with respect to any of the
foregoing. the Company shall not, and shall cause its
Subsidiaries not to, terminate, waive, amend or modify any
provision of, or grant permission or request under, any
standstill or confidentiality agreement to which it or any of
its Subsidiaries is or becomes a party, and shall, and shall
cause its Subsidiaries to, use reasonable best efforts to
enforce the provisions of any such agreement.
(c) Notwithstanding the foregoing Section 6.10(b), the
Company Board shall be permitted, prior to the meeting of the
Company stockholders to be held pursuant to Section 6.3,
and subject to compliance with the other terms of this
Section 6.10, to consider and participate in discussions
and negotiations with respect to a bona fide Alternative
Proposal received by the Company from a Third Party, if and only
to the extent that, and so long as (i) such Alternative
Proposal is a Superior Proposal except for clause (A) of
the definition of Superior Proposal (ii) such Alternative
Proposal was not solicited by the Company, its Subsidiaries or
any officer, director, employee, agent or representative
(including any investment banker, financial advisor, attorney,
accountant or other representative) of the Company or any of its
Subsidiaries in violation of Section 6.10(b),
(iii) the Alternative Proposal is from a Third Party that
is qualified to make such proposal, (iv) the Company Board
reasonably determines in good faith (after consultation with
outside legal counsel) that failure to do so would cause it to
violate its fiduciary duties under applicable law,
(v) prior to the Company Board engaging in any such
discussions or negotiations, the Third Party first enters into a
confidentiality agreement with the Company on terms
substantially similar to, and no less favorable to the Company
than, those contained in the Confidentiality Agreement, and
(vi) the Third Party deposits with the Company a
non-refundable cash deposit in an amount equal to the
Termination Fee (the Third Party
Deposit).
(d) The Company shall notify Buyer promptly (but in no
event later than 48 hours) after receipt of any Alternative
Proposal, or any material modification of or material amendment
to any Alternative Proposal, or any request for nonpublic
information relating to the Company or any of its Subsidiaries
or for access to the properties, books or records of the Company
or any of its Subsidiaries, other than any such request that
does not relate to an Alternative Proposal. Such notice to Buyer
shall be made orally and in writing, and shall indicate the
identity of the person making the Alternative Proposal or
intending to make or considering making an Alternative Proposal
or requesting non-public information or access to the books and
records of the Company or any of its Subsidiaries, and a copy
(if in writing) and summary of the material terms of any such
Alternative Proposal or modification or amendment to an
Alternative Proposal. The Company shall keep Buyer fully
informed, on a current basis, of any material changes in the
status and any material changes or modifications in the terms of
any such Alternative Proposal, indication or request. The
Company shall also provide Buyer 72 hours written notice
before it enters into any discussions or negotiations concerning
any Alternative Proposal in accordance with
Section 6.10(c), and from and after receipt of such notice
the Company and its advisors shall negotiate in good faith with
Buyer to make adjustments in the terms and
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conditions of this Agreement such that the proposed Alternative
Proposal would no longer constitute a Superior Proposal.
(e) Except as expressly permitted by this
Section 6.10(e), neither the Company Board nor any
committee thereof shall (i) withdraw, modify or qualify, or
propose publicly to withdraw, modify or qualify, the
recommendation by the Company Board of this Agreement
and/or the
Merger to the Companys stockholders, (ii) take any
public action or make any public statement in connection with
the meeting of the Company stockholders to be held pursuant to
Section 6.3 inconsistent with such recommendation or
(iii) approve or recommend, or publicly propose to approve
or recommend, or fail to recommend against, any Alternative
Proposal (any of the actions described in clauses (i),
(ii) or (iii), a Change of
Recommendation). Notwithstanding the foregoing,
the Company Board may make a Change of Recommendation, if, and
only if, each of the following conditions is satisfied:
(i) it receives, prior to the date on which the
stockholders of the Company have approved the Merger, an
Alternative Proposal not solicited in any manner in violation of
Section 6.10(b);
(ii) the Company has not breached in any material respect
any of the provisions set forth in Section 6.3 or this
Section 6.10;
(iii) it reasonably determines in good faith (after
consultation with outside legal counsel and prior to the date on
which the stockholders of the Company have approved the Merger),
that in light of a Superior Proposal the failure to effect such
Change of Recommendation would cause it to violate its fiduciary
duties to the Company stockholders under applicable law;
(iv) Buyer has received written notice from the Company (a
Change of Recommendation Notice) at
least ten business days prior to such Change of Recommendation,
which notice shall (1) state expressly that the Company has
received a Alternative Proposal which the Company Board has
determined is a Superior Proposal and that the Company intends
to effect a Change of Recommendation and the manner in which it
intends or may intend to do so and (2) include the identity
of the person making such Alternative Proposal and a copy (if in
writing) and summary of material terms of such Alternative
Proposal; provided that any material amendment to the
terms of such Alternative Proposal shall require a Change of
Recommendation Notice at least two business days prior to a new
Change of Recommendation; and
(v) during any such notice period, the Company and its
advisors has negotiated in good faith with Buyer to make
adjustments in the terms and conditions of this Agreement such
that such Alternative Proposal would no longer constitute a
Superior Proposal.
(f) The Company shall ensure that the officers, directors
and all employees, agents and representatives (including any
investment bankers, financial advisors, attorneys, accountants
or other representatives) of the Company or its Subsidiaries are
aware of the restrictions described in this Section 6.10 as
reasonably necessary to avoid violations thereof. It is
understood that any violation of the restrictions set forth in
this Section 6.10 by any officer, director, employee, agent
or representative (including any investment banker, financial
advisor, attorney, accountant or other representative) of the
Company or its Subsidiaries shall be deemed to be a breach of
this Section 6.10 by the Company.
(g) Nothing contained in this Section 6.10 shall
prohibit the Company or its Subsidiaries from taking and
disclosing to its stockholders a position required by
Rule 14e-2(a)
or
Rule 14d-9
promulgated under the Exchange Act.
6.11 Dividends. After the
date of this Agreement, (a) the Company shall terminate
promptly any feature of its dividend reinvestment plan providing
for the issuance of shares by the Company, (b) each of
Buyer and the Company shall coordinate with the other regarding
the declaration of any dividends in respect of Buyer Common
Stock and Company Common Stock and the record dates and payment
dates relating thereto, it being the intention of the parties
that holders of Company Common Stock shall receive the Final
Company Dividend but not any other dividend from the Company for
the quarter in which the Effective Time occurs, and (c) the
Company shall take all appropriate and practicable steps to
ensure, to the Buyers reasonable satisfaction, that
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(x) any Final Company Dividend shall be payable in cash or
, except as provided in clause (y), Company Common Stock in
accordance with IRS Revenue Procedure
2009-15,
2009-4
I.R.B. 356 (Rev. Proc.
2009-15),
and (y) in the event that the Company declares but does not
pay the Final Company Dividend prior to the Closing Date, then
the valuation period for the Company Common Stock for purposes
of Section 3(5) of Rev.Proc.
2009-15
shall end within five (5) business days prior to the
Closing Date, subject to the clerical requirements of the stock
transfer agent.
6.12 Stockholder
Litigation. The Company shall give Buyer the
opportunity to participate in the defense or settlement of any
stockholder litigation against the Company
and/or its
directors relating to the transactions contemplated by this
Agreement. The Company agrees that it shall not settle or offer
to settle any litigation commenced on or after the date hereof
against the Company or any of its directors or executive
officers by any stockholder of the Company relating to this
Agreement, the Merger, any other transaction contemplated hereby
or otherwise, without the prior written consent of Buyer.
6.13 Loss Information. Prior
to the Effective Time, the Company shall deliver to the Buyer a
schedule setting forth the net unrealized built-in gain, net
unrealized built-in losses and capital loss carryforwards of the
Company and each Subsidiary for all taxable years since the
Companys inception.
ARTICLE VII
CONDITIONS
PRECEDENT
7.1 Conditions to Each Partys Obligation
To Effect the Merger. The respective
obligations of the parties to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder
Approval. This Agreement, on substantially
the terms and conditions set forth in this Agreement, shall have
been approved and adopted by the Requisite Stockholder Approval.
(b) Form N-14. The
Form N-14
shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the
Form N-14
shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
(c) No Injunctions or Restraints;
Illegality. No order, injunction or decree
issued by any court or agency of competent jurisdiction or other
law preventing or making illegal the consummation of the Merger
or any of the other transactions contemplated by this Agreement
shall be in effect.
(d) HSR Act. Any applicable
waiting period (and any extension thereof) applicable to the
Merger under the HSR Act shall have expired or been terminated.
(e) No Litigation. There
shall be no pending suit, action or proceeding by any
Governmental Entity, in each case that has a reasonable
likelihood of success, (i) challenging the acquisition by
Buyer of any Company Common Stock, seeking to restrain or
prohibit the consummation of the Merger or any other transaction
or seeking to obtain from the Company or Buyer any damages that
are material in relation to the Company and Company Subsidiaries
taken as a whole, (ii) seeking to prohibit or limit the
ownership or operation by the Company, Buyer or any of their
respective Subsidiaries of any material portion of the business
or assets of the Company, Buyer or any of their respective
Subsidiaries, or to compel the Company, Buyer or any of their
respective Subsidiaries to dispose of or hold separate any
material portion of the business or assets of the Company, Buyer
or any of their respective Subsidiaries, as a result of the
Merger or any other transaction, (iii) seeking to impose
limitations on the ability of Buyer to acquire or hold, or
exercise full rights of ownership of, any shares of Company
Common Stock purchased by it on all matters properly presented
to the stockholders of the Company or (iv) seeking to
prohibit Buyer or any of its Subsidiaries from effectively
controlling in any material respect the business or operations
of the Company and Company Subsidiaries.
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7.2 Conditions to Obligations of
Buyer. The obligation of Buyer to effect the
Merger is also subject to the satisfaction, or waiver by Buyer,
at or prior to the Effective Time, of the following conditions:
(a) Representations and
Warranties. Subject to the standard set forth
in Section 9.2, the representations and warranties of the
Company set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as
though made on and as of the Effective Time (except that
representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date
shall be true and correct as of such date); and Buyer
shall have received a certificate signed on behalf of the
Company by the Chief Executive Officer or the Chief Financial
Officer of the Company to the foregoing effect.
(b) Performance of Obligations of the
Company. The Company shall have performed in
all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time;
and Buyer shall have received a certificate signed on behalf of
the Company by the Chief Executive Officer or the Chief
Financial Officer of the Company to such effect.
(c) Federal Tax
Opinion. Buyer shall have received the
written opinion dated the Closing Date of Sutherland
Asbill & Brennan LLP, the Companys counsel,
substantially to the effect that, on the basis of the law in
effect at the Effective Time, and facts, representations and
assumptions set forth in such opinion that are consistent with
the state of facts existing at the Effective Time, that the
Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code. In rendering such opinion,
counsel may require and rely upon customary representations
contained in certificates of officers of the Company and Buyer.
(d) Regulatory
Approvals. All regulatory approvals set forth
in Section 4.4 required to consummate the transactions
contemplated by this Agreement, including the Merger, and not
otherwise addressed in Section 7.1, shall have been
obtained and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired
(all such approvals and the expiration of all such waiting
periods being referred to as the Buyer Requisite
Regulatory Approvals).
(e) Pay-Off Letters. The
Company shall have delivered to Buyer payoff letters from the
Lenders under the Company Securitization Documents, in form and
substance reasonably satisfactory to Buyer, with respect to the
Company Securitization Documents.
(f) Final Company
Dividend. The Company shall have complied
with Section 2.3(c) of this Agreement.
7.3 Conditions to Obligations of
Company. The obligation of the Company to
effect the Merger is also subject to the satisfaction or waiver
by the Company at or prior to the Effective Time of the
following conditions:
(a) Representations and
Warranties. Subject to the standard set forth
in Section 9.2, the representations and warranties of Buyer
set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Effective Time as though
made on and as of the Effective Time (except that
representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date
shall be true and correct as of such date); and the Company
shall have received a certificate signed on behalf of Buyer by
the Chief Executive Officer or the Chief Financial Officer of
Buyer to the foregoing effect.
(b) Performance of Obligations of
Buyer. Buyer shall have performed in all
material respects all obligations required to be performed by it
under this Agreement at or prior to the Effective Time, and the
Company shall have received a certificate signed on behalf of
Buyer by the Chief Executive Officer or the Chief Financial
Officer of Buyer to such effect.
(c) Legal Opinion. The
Company shall have received the written opinion dated the
Closing Date of Sutherland Asbill & Brennan LLP, the
Companys counsel, substantially to the effect that, on the
basis of the law in effect at the Effective Time, facts,
representations and assumptions set forth in such opinion that
are consistent with the state of facts existing at the Effective
Time, the Merger will be treated as a
A-35
reorganization within the meaning of Section 368(a) of the
Code. In rendering such opinion, counsel may require and rely
upon customary representations contained in certificates of
officers of the Company and Buyer.
(d) Regulatory
Approvals. All regulatory approvals set forth
in Section 3.4 required to consummate the transactions
contemplated by this Agreement, including the Merger, and not
otherwise addressed in Section 7.1, shall have been
obtained and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired
(all such approvals and the expiration of all such waiting
periods being referred as the Company Requisite
Regulatory Approvals).
(e) Payoff Letters. Buyer
shall have taken such steps as reasonably requested by the
Lenders under the Company Securitization Documents so as to
provide for the making of the Loan Repayment contemplated by
Section 1.9, effective as of the Effective Time.
ARTICLE VIII
TERMINATION
AND AMENDMENT
8.1 Termination. This
Agreement may be terminated at any time prior to the Effective
Time, whether before or after receipt of the Requisite
Stockholder Approval:
(a) by mutual consent of the Company and Buyer in a written
instrument authorized by the Company Board and Buyer Board;
(b) by either the Company or Buyer, if any Governmental
Entity that must grant a Buyer Requisite Regulatory Approval or
a Company Requisite Regulatory Approval has denied approval of
the Merger and such denial has become final and nonappealable or
any Governmental Entity of competent jurisdiction shall have
issued a final and nonappealable order, injunction or decree
permanently enjoining or otherwise prohibiting or making illegal
the consummation of the transactions contemplated by this
Agreement;
(c) by either the Company or Buyer, if the Merger shall not
have been consummated on or before December 15, 2009 unless
the failure of the Closing to occur by such date shall be due to
the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party
set forth in this Agreement;
(d) by either Buyer or the Company, at any time prior to
the Effective Time, in the event that the Company shall have
failed to obtain the Requisite Stockholder Approval at the
meeting of Company Stockholders at which a vote is taken on the
Merger; or
(e) by either the Company or Buyer (provided that
the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained
herein), if there shall have been a breach of any of the
covenants or agreements or any of the representations or
warranties set forth in this Agreement on the part of the
Company, in the case of a termination by Buyer, or Buyer, in the
case of a termination by the Company, which breach, either
individually or in the aggregate, would result in, if occurring
or continuing on the Closing Date, the failure of the conditions
set forth in Section 7.2 or 7.3, as the case may be, and
which is not cured within 30 days following written notice
to the party committing such breach or by its nature or timing
cannot be cured within such time period; or
(f) by Buyer, (i) at any time prior to receipt of the
Requisite Stockholder Approval and within ten (10) Business
Days after the Company Board shall have effected a Change of
Recommendation, (ii) in the event that an Alternative
Proposal structured as a tender or exchange offer for Company
Common Stock is commenced by a Person unaffiliated with Buyer
and, within ten (10) Business Days after the public
announcement of the commencement of such proposed Alternative
Proposal, the Company shall not have issued a public statement
(and filed a
Schedule 14D-9
pursuant to
Rule 14e-2
and
Rule 14d-9
promulgated under the Exchange Act) reaffirming the Board
Recommendation and recommending that the Company Stockholders
reject such Acquisition Proposal and not tender any shares of
Company
A-36
Common Stock into such tender or exchange offer or
(iii) the Company shall have materially breached any of its
obligations under Section 6.10, including by the Company
Board approving, or authorizing the Company or any of its
Subsidiaries to enter into, a merger agreement, letter of
intent, acquisition agreement, purchase agreement or other
similar agreement with respect to an Acquisition Proposal.
(g) by the Company, in the event that
(i) (A) the Company shall have received a Superior
Proposal, (B) subject to the Companys obligations
under Section 6.10(e)(v), the Company Board or any
authorized committee thereof shall have authorized the Company
to enter into a definitive agreement to consummate the
transaction contemplated by such Superior Proposal, and
(C) concurrently with the termination of this Agreement,
the Company pays Buyer the Company Termination Fee contemplated
by Section 8.4 and enters into the definitive agreement to
consummate the transaction contemplated by such Superior
Proposal; or
(ii) the Company Board or any authorized committee thereof
shall have effected a Company Board Recommendation Change in
accordance with the terms of Section 6.10.
The party desiring to terminate this Agreement pursuant to
clause (b), (c), (d), (e), (f) or (g) of this
Section 8.1 shall give written notice of such termination
to the other party in accordance with Section 9.4,
specifying the provision or provisions hereof pursuant to which
such termination is effected.
8.2 Effect of
Termination. In the event of termination of
this Agreement by either the Company or Buyer as provided in
Section 8.1, this Agreement shall forthwith become void and
have no effect, and none of the Company, Buyer, any of their
respective Subsidiaries or any of the officers or directors of
any of them shall have any liability of any nature whatsoever
under this Agreement, or in connection with the transactions
contemplated by this Agreement, except that
(i) Sections 6.2(b), 8.2, 8.3, 8.4, 9.3, 9.4, 9.5,
9.6, 9.7, 9.8, 9.9, 9.10, 9.11 and 9.12 shall survive any
termination of this Agreement, and (ii) neither the Company
nor Buyer shall be relieved or released from any liabilities or
damages arising out of its knowing breach of any provision of
this Agreement.
8.3 Fees and Expenses. All
fees and expenses incurred in connection with the Merger, this
Agreement, and the transactions contemplated by this Agreement
(including, without limitation, all fees and expenses of any
advisors to Buyer) shall, to the extent such funds are available
to the Company, be paid by Company at the Closing immediately
prior to the Effective Time. Notwithstanding the foregoing, in
the event the Merger is not consummated, all fees and expenses
incurred in connection with the Merger, this Agreement, and the
transactions contemplated by this Agreement shall be paid by the
party incurring such fees or expenses; provided, that
(a) the costs and expenses of printing and mailing the
Proxy Statement shall be borne by Company, (b) all filing
and other fees paid to the SEC in connection with the Merger
shall be borne by Buyer, (c) the fees of any HSR filing
shall be borne equally by the Buyer and Company, and
(d) the terms of that certain letter agreement executed
between Company and Buyer on July 7, 2009 (the
Expense Letter) with respect to the
payment of certain fees and expenses of Buyer on the terms and
conditions set forth therein shall apply.
8.4 Termination Fee; Expense Reimbursement;
Make Whole Payments.
(a) In the event that this Agreement is terminated pursuant
to Section 8.1(f) or (g) then, provided that
Buyer was not in material breach of its representations,
warranties, covenants or agreements hereunder at the time of
termination, the Company will pay to Buyer a fee in an amount
equal to $3,200,000 (the Termination
Fee).
(b) In the event that this Agreement is terminated by Buyer
pursuant to Section 8.1(d) or (e) then,
provided that Buyer was not in material breach of any of
its representations, warranties, covenants or agreements
hereunder at the time of termination, the Company will pay to
Buyer such amounts owed in accordance with the terms and
conditions of the Expense Letter (the Expense
Reimbursement).
(c) In the event that this Agreement is terminated pursuant
to Section 8.1(d) or (e), and the Company pays to Buyer the
Expense Reimbursement, but not the Termination Fee, and within
one year from the date of
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such termination the Company enters into an agreement to
consummate an Alternative Transaction, then the Company shall
pay to Buyer an amount equal to (i) the Termination Fee,
minus (ii) the Expense Reimbursement (the
Make Whole Payment). For purposes of
this Section 8.4(c) above, an Alternative
Transaction shall be limited to an Alternative Transaction
with respect to which the Company had negotiations prior to
termination of this Agreement.
(d) Payments of any amount under this Section 8.4
shall be payable to Buyer by wire transfer of immediately
available funds as follows: (i) a Termination Fee or
Expense Reimbursement shall be payable no later than two
business days after the date on which this Agreement is
terminated by Buyer and immediately prior to the time of
termination by the Company, and (ii) a Make Whole Payment
shall be due and payable within two business days after entry
into an agreement with respect to the relevant Alternative
Transaction, as determined in accordance with
Section 8.4(c) above. The parties hereto acknowledge and
hereby agree that in no event shall the Company be required to
pay a Termination Fee on more than one occasion, an Expense
Reimbursement on more than one occasion or Make Whole Payment on
more than one occasion, whether or not the relevant fee,
reimbursement or payment may be payable under more than one
provision of this Agreement at the same or at different times
and the occurrence of different events.
8.5 Amendment. This
Agreement may be amended by the parties, by action taken or
authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection
with Merger by the stockholders of the Company; provided,
however, that after any approval of the transactions
contemplated by this Agreement by the stockholders of the
Company, there may not be, without further approval of such
stockholders, any amendment of this Agreement that requires
further approval under applicable law. This Agreement may not be
amended except by an instrument in writing signed on behalf of
each of the parties.
8.6 Extension; Waiver. At
any time prior to the Effective Time, the parties, by action
taken or authorized by their respective Board of Directors, may,
to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations
and warranties contained in this Agreement or (c) waive
compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance
with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE IX
GENERAL
PROVISIONS
9.1 Closing. On the terms
and subject to the conditions set forth in this Agreement, the
closing of the Merger (the Closing)
shall take place at 10:00 a.m. on a date and at a place to
be specified by the parties, which date shall be no later than
five business days after the satisfaction or waiver (subject to
applicable law) of the latest to occur of the conditions set
forth in Article VII (other than those conditions that by
their nature are to be satisfied or waived at the Closing),
unless extended by mutual agreement of the parties (the
Closing Date).
9.2 Standard. No
representation or warranty of the Company contained in
Article III or of Buyer contained in Article IV shall
be deemed untrue, inaccurate or incorrect for purposes of
Section 7.2(a) or 7.3(a), as applicable, under this
Agreement, as a consequence of the existence or absence of any
fact, circumstance or event unless such fact, circumstance or
event, individually or when taken together with all other facts,
circumstances or events inconsistent with any representations or
warranties contained in Article III, in the case of the
Company, or Article IV, in the case of Buyer, has had or
would reasonably be expected to have a Material Adverse Change
with respect to the Company or Buyer, respectively (disregarding
for purposes of this Section 9.2 all qualifications or
limitations set forth in any representations or warranties as to
materiality, material adverse effect and
words of similar import). Notwithstanding the immediately
preceding sentence, the representations and warranties contained
in (x) Section 3.2(a) shall be deemed untrue
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and incorrect if not true and correct except to a de minimis
extent (relative to Section 3.2(a) taken as a whole),
(y) Sections 3.2(b), 3.3(a), 3.3(b)(i), 3.7 and 3.20,
in the case of the Company, and Sections 4.2, 4.3(a),
4.3(b)(i) and 4.7, in the case of Buyer, shall be deemed untrue
and incorrect if not true and correct in all material respects
and (z) Section 3.8(a) and Section 3.10(b), in
the case of the Company, and Section 4.8 and
Section 4.10(b), in the case of Buyer, shall be deemed
untrue and incorrect if not true and correct in all respects.
9.3 Nonsurvival of Representations, Warranties
and Agreements. None of the representations,
warranties, covenants and agreements set forth in this Agreement
or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for Section 6.6 and for
those other covenants and agreements contained in this Agreement
that by their terms apply or are to be performed in whole or in
part after the Effective Time.
9.4 Notices. All notices and
other communications in connection with this Agreement shall be
in writing and shall be deemed given if delivered personally,
sent via facsimile (with confirmation), mailed by registered or
certified mail (return receipt requested) or delivered by an
express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to the Company, to:
Patriot Capital Funding, Inc.
274 Riverside Ave.
Westport, CT 06880
Attention: Richard P. Buckanavage
Fax:
(203) 227-5257
with a copy to:
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Ave., NW
Washington, DC 20004
Attention: Harry S. Pangas, Esq.
Fax:
(202) 637-3593
and
(b) if to Buyer, to:
Prospect Capital Corporation
10 East 40th Street
New York, NY 10016
Attention: Joseph A. Ferraro, Esq.
Facsimile:
(212) 448-9652
with a copy to:
Skadden Arps
4 Times Square
New York, NY 10036
Attention: Richard T. Prins
Fax:
(917) 777-2790
9.5 Interpretation. When a
reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to a Article or
Section of or Exhibit or Schedule to this Agreement unless
otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words include,
includes or including are used in this
Agreement, they shall be deemed to be followed by the
A-39
words without limitation. The Company Disclosure
Schedule and the Buyer Disclosure Schedule, as well as all other
schedules and all exhibits hereto, shall be deemed part of this
Agreement and included in any reference to this Agreement. This
Agreement shall not be interpreted or construed to require any
person to take any action, or fail to take any action, if to do
so would violate any applicable law.
9.6 Counterparts. This
Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each of
the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.
9.7 Entire Agreement. This
Agreement (including the documents and the instruments referred
to in this Agreement), together with the Confidentiality
Agreement and the Expense Letter, constitutes the entire
agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with
respect to the subject matter of this Agreement, other than the
Confidentiality Agreement.
9.8 Governing Law;
Jurisdiction. This Agreement shall be
governed and construed in accordance with the internal laws of
the State of Delaware applicable to contracts made and
wholly-performed within such state, without regard to any
applicable conflicts of law principles. The parties hereto agree
that any suit, action or proceeding brought by either party to
enforce any provision of, or based on any matter arising out of
or in connection with, this Agreement or the transactions
contemplated hereby shall be brought in any federal or state
court located in the State of Delaware. Each of the parties
hereto submits to the jurisdiction of any such court in any
suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of, or in connection with,
this Agreement or the transactions contemplated hereby and
hereby irrevocably waives the benefit of jurisdiction derived
from present or future domicile or otherwise in such action or
proceeding. Each party hereto irrevocably waives, to the fullest
extent permitted by law, any objection that it may now or
hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit,
action or proceeding brought in any such court has been brought
in an inconvenient forum.
9.9 Publicity. Neither the
Company nor Buyer shall, and neither the Company nor Buyer shall
permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement
with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement
without the prior consent (which consent shall not be
unreasonably withheld) of Buyer, in the case of a proposed
announcement or statement by the Company, or the Company, in the
case of a proposed announcement or statement by Buyer;
provided, however, that either party may, without
the prior consent of the other party (but after prior
consultation with the other party to the extent practicable
under the circumstances) issue or cause the publication of any
press release or other public announcement to the extent
required by law or by the rules and regulations of The NASDAQ
Stock Market.
9.10 Assignment; Third Party
Beneficiaries. Neither this Agreement nor any
of the rights, interests or obligations under this Agreement
shall be assigned by either of the parties (whether by operation
of law or otherwise) without the prior written consent of the
other party. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of and be
enforceable by each of the parties and their respective
successors and assigns. Except as otherwise specifically
provided in Section 6.6, this Agreement (including the
documents and instruments referred to in this Agreement) is not
intended to and does not confer upon any person other than the
parties hereto any rights or remedies under this Agreement.
Except as provided in Section 6.6 only, Buyer, Investment
Adviser, Administrator and the Company hereby agree that their
respective representations, warranties and covenants set forth
herein are solely for the benefit of the other parties hereto,
in accordance with and subject to the terms of this Agreement,
and this Agreement is not intended to, and does not, confer upon
any person other than the parties hereto any rights or remedies
hereunder, including, without limitation, the right to rely upon
such representations and warranties set forth herein. The
parties hereto further agree that the rights of third party
beneficiaries under Section 6.6 shall not arise unless and
until the Effective Time occurs. The representations and
warranties in this Agreement are the product of negotiations
among the parties hereto and are for the sole benefit of the
parties hereto. In some instances, the representations and
warranties in this Agreement may represent an allocation among
the parties hereto of risks associated with particular matters
regardless of the knowledge of any of the parties hereto.
A-40
Consequently, persons other than the parties hereto may not rely
upon the representations and warranties in this Agreement as
characterizations of actual facts or circumstances as of the
date of this Agreement or as of any other date.
9.11 Remedies.
(a) Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred
hereby, or by law or equity upon such party, and the exercise by
a party of any one remedy will not preclude the exercise of any
other remedy.
(b) The parties hereto hereby agree that irreparable damage
would occur in the event that any provision of this Agreement to
be performed by Buyer was not performed in accordance with its
specific terms or was otherwise breached, and that money damages
or other legal remedies would not be an adequate remedy for any
such damages. Accordingly, the parties hereto acknowledge and
hereby agree that in the event of any breach or threatened
breach by Buyer of any of its respective covenants or
obligations set forth in this Agreement, the Company shall be
entitled to an injunction or injunctions to prevent or restrain
breaches or threatened breaches of this Agreement and to
specifically enforce the terms and provisions of this Agreement
to prevent breaches or threatened breaches of, or to enforce
compliance with, the covenants and obligations of the other
under this Agreement. Buyer hereby agrees not to raise any
objections to the availability of the equitable remedy of
specific performance to prevent or restrain breaches or
threatened breaches of this Agreement by Buyer, and to
specifically enforce the terms and provisions of this Agreement
to prevent breaches or threatened breaches of, or to enforce
compliance with, the covenants and obligations of Buyer under
this Agreement. The parties hereto further agree that
(i) by seeking the remedies provided for in this
Section 9.11(b), the Company shall not in any respect waive
its right to seek any other form of relief that may be available
to a party under this Agreement (including monetary damages) in
the event that this Agreement has been terminated or in the
event that the remedies provided for in this
Section 9.11(b) are not available or otherwise are not
granted, and (ii) nothing set forth in this
Section 9.11(b) shall require the Company to institute any
proceeding for (or limit the Companys right to institute
any proceeding for) specific performance under this
Section 9.11(b) prior or as a condition to exercising any
termination right under Section 8.1 (and pursuing damages
after such termination), nor shall the commencement of any legal
proceeding pursuant to this Section 9.11(b) or anything set
forth in this Section 9.11(b) restrict or limit the
Companys right to terminate this Agreement in accordance
with Section 8.1 or pursue any other remedies under this
Agreement that may be available then or thereafter.
(c) Notwithstanding anything to the contrary set forth
herein, the parties hereto expressly acknowledge and agree that
the remedies set forth in Section 8.4 shall be the sole and
exclusive remedies available to the Buyer in the event this
Agreement is terminated under Section 8.1(f) or (g). To the
extent Buyer is entitled to receive the Termination Fee, Expense
Reimbursement
and/or Make
Whole Payment, the receipt of such amounts shall be deemed to be
full and final payment for any and all losses or damages
suffered or incurred by Buyer or any of its respective
Affiliates or any other Person in connection with this Agreement
(and the termination hereof), the transactions contemplated
hereby (and the abandonment thereof) or any matter forming the
basis for such termination, and none of Buyer nor any of its
Affiliates or any other Person shall be entitled to bring or
maintain any other claim, action or proceeding against the
Company or any of its Affiliates arising out of this Agreement,
any of the transactions contemplated hereby or any matters
forming the basis for such termination.
9.12 Waiver of Jury
Trial. Each party acknowledges and agrees
that any controversy which may arise under this Agreement is
likely to involve complicated and difficult issues, and
therefore each such party hereby irrevocably and unconditionally
waives any right such party may have to a trial by jury in
respect of any litigation directly or indirectly arising out of
or relating to this Agreement or the transactions contemplated
by this Agreement. Each party certifies and acknowledges that
(i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the
foregoing waiver, (ii) each party understands and has
considered the implications of this waiver, (iii) each
party makes this waiver voluntarily and (iv) each party has
been induced to enter into this Agreement by, among other
things, the mutual waivers and certifications in this
Section 9.12.
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IN WITNESS WHEREOF, the undersigned parties have caused this
Agreement to be executed by their respective officers thereunto
duly authorized as of the date first above written.
PATRIOT CAPITAL FUNDING, INC.
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By:
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Name:
Richard P. Buckanavage
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Title: President and Chief Executive Officer
Signature
Page
A-42
IN WITNESS WHEREOF, the undersigned parties have caused this
Agreement to be executed by their respective officers thereunto
duly authorized as of the date first above written.
PROSPECT CAPITAL CORPORATION
Name: M. Grier Eliasek
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Title:
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President & Chief Operating Officer
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Signature
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A-43
ANNEX B
Board of Directors
Patriot Capital Funding, Inc.
274 Riverside Avenue
Westport, CT 06880
Members of the Board:
You have asked us to advise you with respect to the fairness,
from a financial point of view, to the holders of common stock,
par value $0.01 per share (Company Common Stock), of
Patriot Capital Funding, Inc. (the Company) of the
Exchange Ratio (as defined below) set forth in the Agreement and
Plan of Merger (the Agreement) to be entered into by
and between the Company and Prospect Capital Corporation
(Parent). The Agreement provides for, among other
things, the merger (the Merger) of the Company with
Parent pursuant to which each outstanding share of Company
Common Stock, will be converted into the right to receive a
number of shares (the Exchange Ratio) of common
stock of Parent, par value $0.001 per share (the Parent
Common Stock), equal to the product of (i) the quotient of:
(A) 4.000 minus the amount of cash (if any) per
share payable as the final Company dividends pursuant to
Section 2.3(c) of the Agreement (the Final Company
Dividends), divided by (B) 10.02 and
(ii) a fraction, the numerator of which is 21,584,251, and
the denominator of which is the number of shares of Company
Common Stock then outstanding immediately prior to the effective
time of the Merger (including, for the avoidance of doubt,
vested restricted shares of Company Common Stock granted under
the Companys employee restricted stock plan, as well as
any shares of Company Common Stock issued pursuant to the
declaration of the Final Company Dividends).
In arriving at our opinion, we have, among other things:
(i) reviewed a draft, dated August 3, 2009, of the
Agreement;
(ii) reviewed certain financial statements of the Company
and Parent and certain other business, financial and operating
information relating to the Company and Parent provided to us by
managements of the Company and Parent;
(iii) reviewed certain publicly available business and
financial information relating to the industries in which the
Company and Parent operate;
(iv) met with certain members of the managements of the
Company and Parent to discuss the business and prospects of the
Company and Parent;
(v) reviewed certain business, financial and other
information relating to the Company and Parent, including
financial forecasts for the Company through December 31,
2009 provided to or discussed with us by the management of the
Company;
(vi) reviewed certain financial and stock trading data and
information for the Company and Parent and compared that data
and information with corresponding data and information for
companies with publicly traded securities that we deemed
relevant;
(vii) reviewed certain financial terms of the proposed
Merger and compared those terms with the financial terms of
certain other business combinations and other transactions which
have recently been effected or announced; and
(viii) considered such other information, financial
studies, analyses and investigations and financial, economic and
market criteria that we deemed relevant.
In connection with our review, we have not independently
verified any of the foregoing information and we have assumed
and relied upon such information being complete and accurate in
all material respects. With respect to the financial forecasts
provided or discussed with us by the Company that we have used
in our analyses, management of the Company has advised us, and
we have assumed, that such forecasts have been reasonably
prepared in good faith on bases reflecting the best currently
available estimates and judgments of
B-1
the management of the Company as to the future financial
performance of the Company through December 31, 2009 and we
express no view and assume no responsibility for the
assumptions, estimates and judgments on which such forecasts
were based. As you are aware, Parent has not provided us with
its managements forecasts as to the future financial
performance of Parent. We also have assumed, with your consent,
that, in the course of obtaining any regulatory or third party
consents, approvals or agreements in connection with the Merger,
no delay, limitation, restriction or condition will be imposed
that would have an adverse effect on the Company, Parent, or the
contemplated benefits of the Merger and that the Merger will be
consummated in accordance with the terms of the Agreement
without waiver, modification or amendment of any material term,
condition or agreement thereof. We have also assumed, with your
consent, that the Merger will be treated as a tax-free
reorganization for federal income tax purposes and that the
Agreement, when executed by the parties thereto, will conform to
the draft reviewed by us in all respects material to our
analyses. In addition, you have advised us and for purposes of
our analyses and this opinion, we have assumed that (i) on
April 3, 2009, a termination event occurred under the
Companys second amended and restated securitization
revolving credit facility with an entity affiliated with BMO
Capital Markets Corp. and Branch Banking and Trust Company
(the Facility), (ii) as a result of the
occurrence of the termination event under the Facility, the
Company can no longer make additional advances under the
Facility and all principal, interest and fees collected from the
debt investments secured by the Facility must be used to pay
down amounts outstanding under the Facility within
24 months following the date of the termination event,
(iii) the lenders under the Facility, upon notice to the
Company may accelerate amounts outstanding under the Facility
and exercise other rights and remedies provided by the Facility,
including the right to sell the collateral under the Facility,
(iv) the Company has been unable to obtain alternative
sources of financing to replace the Facility or otherwise
provide access to ongoing liquidity and funding or eliminate the
need for such liquidity and funding, and (v) given the
nature of the Companys various businesses, assets and
financing arrangements and the expected actions of its
counterparties, creditors and employees, if the Merger is not
consummated the Company is unlikely to be able to continue to
function as a going concern which could reasonably result in a
voluntary or involuntary bankruptcy or liquidation of the
Company in which the holders of Company Common Stock would
receive little or no value. We have not evaluated the solvency
or fair value of any party to the Agreement under any state or
federal laws relating to bankruptcy, insolvency or similar
matters and do not express any opinion as to the value of any
asset of the Company, whether at current market prices or in the
future. We note, however, that, under the ownership of a company
with adequate liquidity and capital, such as Parent, the value
of the Company and its subsidiaries could substantially improve,
resulting in significant returns to Parent if the Merger is
consummated. You have further advised us that, as a result of
concerns regarding the viability of the Company as a going
concern, the Company has not prepared, and consequently could
not provide us with, forecasts as to the future financial
performance of the Company beyond December 31, 2009.
Our opinion addresses only the fairness, from a financial point
of view, to the holders of Company Common Stock of the Exchange
Ratio set forth in the Agreement and does not address any other
aspect or implication of the Merger or any agreement,
arrangement or understanding entered into in connection with the
Merger or otherwise or the fairness of the amount or nature of,
or any other aspect relating to, any compensation to any
officers, directors or employees of any party to the Merger, or
class of such persons, relative to the Exchange Ratio or
otherwise. In addition, we have not investigated or otherwise
evaluated the potential affects of the Merger on the federal,
state or other taxes or tax rates payable by the Company, Parent
or the holders of Company Common Stock or Parent Common Stock
and, with your consent, have assumed, that such taxes and tax
rates will not be affected by or after giving effect to the
Merger. The issuance of this opinion was approved by an
authorized internal committee of FBR Capital Markets &
Co. (FBR).
Our opinion is necessarily based upon information made available
to us as of the date hereof and financial, economic, market and
other conditions as they exist and can be evaluated on the date
hereof. We are not expressing any opinion as to what the value
of shares of Parent Common Stock actually will be when issued to
the holders of Company Common Stock pursuant to the Merger or
the prices at which shares of Parent Common Stock will trade at
any time. Our opinion does not address the relative merits of
the Merger as compared to alternative transactions or strategies
that might be available to the Company or any other party to the
Merger, nor does it address the underlying business decision of
the Board of Directors of the Company or any other party to the
Merger to proceed with the Merger.
B-2
Furthermore, in connection with this opinion, we have not been
requested to make, and have not made, any physical inspection or
independent appraisal or evaluation of any of the assets,
properties or liabilities (contingent or otherwise) of the
Company, Parent, or any other party, nor were we provided with
any such appraisal or evaluation. We did not estimate, and
express no opinion regarding, the liquidation value of any
entity.
We have acted as financial advisor to the Company in connection
with the Merger and will receive a fee for our services, a
portion of which is contingent upon the consummation of the
Merger. We will also receive a fee for rendering this opinion,
which is not contingent upon the successful completion of the
Merger. In addition, the Company has agreed to indemnify us and
certain related parties for certain liabilities arising out of
or related to our engagement and to reimburse us for certain
expenses incurred in connection with our engagement.
We and our affiliates may in the future provide financial advice
and services to the Company, Parent and certain of their
respective affiliates for which we and our affiliates would also
expect to receive compensation. We are a full service securities
firm engaged in securities trading and brokerage activities as
well as providing investment banking and other financial
services. In the ordinary course of business, we and our
affiliates may acquire, hold or sell, for our and our affiliates
own accounts and the accounts of customers, equity, debt and
other securities and financial instruments (including bank loans
and other obligations) of the Company and Parent and any other
company that may be involved in the Merger, as well as provide
investment banking and other financial services to such
companies.
It is understood that this letter is for the information of the
Board of Directors of the Company in connection with its
consideration of the Merger and should not be construed as
creating any fiduciary duty on the part of FBR to the Company,
the Board of Directors of the Company, any security holder of
the Company or any other party. This letter does not constitute
advice or a recommendation to any investor or security holder of
the Company or any other person as to how such investor,
security holder or other person should vote or act on any matter
relating to the proposed Merger or otherwise.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Exchange Ratio set forth in the
Agreement is fair, from a financial point of view, to the
holders of Company Common Stock.
Very truly yours,
FBR Capital Markets & Co.
B-3
PART C
OTHER
INFORMATION
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Item 15.
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Indemnification.
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Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (a) actual receipt
of an improper benefit or profit in money, property or services
or (b) active and deliberate dishonesty established by a final
judgment as being material to the cause of action.
Prospects charter contains such a provision which
eliminates directors and officers liability to the
maximum extent permitted by Maryland law, subject to the
requirements of the 1940 Act.
Prospects charter authorizes it, to the maximum extent
permitted by Maryland law and subject to the requirements of the
1940 Act, to obligate it to indemnify any present or former
director or officer or any individual who, while a director or
officer and at Prospects request, serves or has served
another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise
as a director, officer, partner or trustee, from and against any
claim or liability to which that person may become subject or
which that person may incur by reason of his or her service in
any such capacity and to pay or reimburse their reasonable
expenses in advance of final disposition of a proceeding.
Prospects bylaws obligate it, to the maximum extent
permitted by Maryland law and subject to the requirements of the
1940 Act, to indemnify any present or former director or officer
or any individual who, while a director or officer and at
Prospects request, serves or has served another
corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee and who is made, or
threatened to be made, a party to the proceeding by reason of
his or her service in any such capacity from and against any
claim or liability to which that person may become subject or
which that person may incur by reason of his or her service in
any such capacity and to pay or reimburse their reasonable
expenses in advance of final disposition of a proceeding. The
charter and bylaws also permit Prospect to indemnify and advance
expenses to any person who served a predecessor of it in any of
the capacities described above and any of its employees or
agents or any employees or agents of its predecessor. In
accordance with the 1940 Act, Prospect will not indemnify any
person for any liability to which such person would be subject
by reason of such persons willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of his office.
Maryland law requires a corporation (unless its charter provides
otherwise, which our charter does not) to indemnify a director
or officer who has been successful, on the merits or otherwise,
in the defense of any proceeding to which he or she is made, or
threatened to be made, a party by reason of his or her service
in that capacity. Maryland law permits a corporation to
indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made, or threatened to be
made, a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith or (2)
was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any
criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful.
However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right
of the corporation or for a judgment of liability on the basis
that a personal benefit was improperly received, unless in
either case a court orders indemnification, and then only for
expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the
corporations receipt of (a) a written affirmation by the
director or officer of his or her good faith belief that he or
she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking
by him or her or on his or her behalf to repay the amount paid
or reimbursed by the corporation if it is ultimately determined
that the standard of conduct was not met.
C-1
The Investment Advisory Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, Prospect Capital Management LLC (the
Adviser) and its officers, managers, agents,
employees, controlling persons, members and any other person or
entity affiliated with it are entitled to indemnification from
Prospect for any damages, liabilities, costs and expenses
(including reasonable attorneys fees and amounts
reasonably paid in settlement) arising from the rendering of the
Advisers services under the Investment Advisory Agreement
or otherwise as an Investment Adviser of Prospect.
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 LLC and its officers,
manager, agents, employees, controlling persons, members and any
other person or entity affiliated with it are entitled to
indemnification from Prospect for any damages, liabilities,
costs and expenses (including reasonable attorneys fees
and amounts reasonably paid in settlement) arising from the
rendering of Prospect Administration LLCs services under
the Administration Agreement or otherwise as administrator for
Prospect.
The Administrator is authorized to enter into one or more
sub-administration agreements with other service providers (each
a Sub-Administrator) pursuant to which the
Administrator may obtain the services of the service providers
in fulfilling its responsibilities hereunder. Any such
sub-administration agreements shall be in accordance with the
requirements of the 1940 Act and other applicable U.S. Federal
and state law and shall contain a provision requiring the
Sub-Administrator to comply with the same restrictions
applicable to the Administrator.
(1)(a) Articles of Incorporation. (Incorporated by reference to
the Registrants Registration Statement under the
Securities Act of 1933, as amended, on
Form N-2
(File
No. 333-114552),
filed on April 16, 2004.)
(1)(b) Articles of Amendment and Restatement. (Incorporated by
reference to the Registrants Pre-effective Amendment
No. 2 to the Registration Statement under the Securities
Act of 1933, as amended, on
Form N-2
(File
No. 333-114552),
filed on July 6, 2004.)
(1)(c) Articles of Amendment. (Incorporated by reference to the
Registrants Pre-effective Amendment No. 3 to the
Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File
No. 333-143819),
filed on September 5, 2007.)
(2)(a) Bylaws. (Incorporated by reference to the
Registrants Pre-effective Amendment No. 2 to the
Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File No.
333-114552),
filed on July 6, 2004.)
(2)(b) Amended and Restated Bylaws. (Incorporated by reference
to the Registrants Pre-effective Amendment No. 2 to
the Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File
No. 333-114552),
filed on July 6, 2004.)
(2)(c) Amended and Restated Bylaws. (Incorporated by reference
to Exhibit 3.1 to Registrants Form 8-K filed on
September 21, 2009.)
(3) Not applicable.
(4) Agreement and Plan of Merger by and between Patriot
Capital Funding, Inc. and Prospect Capital Corporation, dated as
of August 3, 2009. Filed herewith as Appendix A to the
Registration Statement on Form N-14.
(5) Form of Share Certificate. (Incorporated by reference
to Pre-Effective Amendment No. 2 to the Registrants
Registration Statement on
Form N-2
(File No.
333-114522),
filed on July 6, 2004.)
(6) Investment Advisory Agreement between Registrant and
Prospect Capital Management LLC. (Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrants
Registration Statement on
Form N-2
(File
No. 333-114522),
filed on July 6, 2004.)
C-2
(7)(a) Underwriting Agreement. (Incorporated by reference to the
Registrants Post-effective Amendment No. 15 to the
Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File
No. 333-143819),
filed on July 2, 2009.)
(7)(b) Underwriting Agreement. (Incorporated by reference to the
Registrants Post-effective Amendment No. 13 to the
Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File
No. 333-143819),
filed on May 20, 2009.)
7(c) Underwriting Agreement. (Incorporated by reference to the
Registrants Post-effective Amendment No. 12 to the
Registration Statement under the Securities Act of 1933, as
amended, on
Form N-2
(File
No. 333-143819),
filed on April 23, 2009.)
(8) Not applicable.
(9) Custodian Agreement. (Incorporated by reference to
Pre-Effective Amendment No. 3 to the Registrants
Registration Statement on
Form N-2
(File
No. 333-114522),
filed on July 23, 2004.)
(10) Not applicable
*(11) Opinion and Consent of Venable LLP, as special
Maryland counsel for Registrant.
*(12) Opinion of Sutherland Asbill & Brennan LLP as to
tax matters.
(14)(a) Consent of BDO Seidman LLP, independent registered
public accounting firm.
(14)(b) Consent of Grant Thornton LLP, independent
registered public accounting firm.
(14)(c) Report of Grant Thornton LLP regarding Senior
Securities of Patriot table included herein.**
(15) Not applicable.
(16) Not applicable.
(17)(a) Form of Proxy Card of Patriot Capital Funding, Inc.
(17)(b) Consent of FBR Capital Markets & Co.
* Filed herewith.
** Incorporated by reference to the initial filing of the
Registration Statement on Form
N-14
(333-161764) filed on September 4, 2009.
(1) The undersigned registrant agrees that prior to any
public reoffering of the securities registered through the use
of a prospectus which is a part of this registration statement
by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by person who
may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a
part of an amendment to the registration statement and will not
be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
C-3
SIGNATURES
As required by the Securities Act of 1933, this
Amendment No. 1 to this registration statement has
been signed on behalf of the registrant, in the City of New
York, and State of New York, on the
20th day
of October, 2009.
PROSPECT CAPITAL CORPORATION
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By:
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/s/ John
F. Barry III
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Name: John F. Barry III
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Title:
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Chief Executive Officer and Chairman of the Board of Directors
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As required by the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated:
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Signature
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Title
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Date
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/s/ John
F. Barry III
John
F. Barry III
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Chief Executive Officer and Chairman of the Board of Directors
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October 20, 2009
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/s/ M.
Grier Eliasek
M.
Grier Eliasek
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Chief Operating Officer and Director
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October 20, 2009
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/s/ Brian
H. Oswald
Brian
H. Oswald
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Chief Financial Officer, Treasurer and Secretary (principal
financial and accounting officer)
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October 20, 2009
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/s/ Graham
D.S. Anderson
Graham
D.S. Anderson
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Director
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October 20, 2009
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/s/ Andrew
C. Cooper
Andrew
C. Cooper
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Director
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October 20, 2009
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/s/ Eugene
S. Stark
Eugene
S. Stark
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Director
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October 20, 2009
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C-4