NEW YORK, NY — (MARKET WIRE) — 02/09/05 — Prospect Energy Corporation (NASDAQ: PSEC)(“Prospect Energy,” “the Company” or “we”) today announced financialresults for its second fiscal quarter ended December 31, 2004. Amounts areexpressed in thousands except per share amounts. PSEC commenced operationson July 30, 2004 after closing its initial public offering of 7,000,000shares of common stock at $15.00 per share (with a subsequent greenshoesale of 55,000 shares). After deducting underwriting discounts, commissionsand offering expenses, PSEC received net proceeds of $96,961. At December31, 2004, our net asset value was $13.74 per share. The primary purpose ofthe initial public offering was to obtain capital with which to investprimarily in mezzanine loans, senior secured loans and equity investmentsin U.S. middle-market energy-related companies.
We are pleased to announce that our Board of Directors has approved adividend of $0.125 per share to holders of record on March 11, payable onMarch 31, 2005. That amounts to an annualized book dividend yield ofapproximately 3.6%, and an increase from the prior quarter’s dividend of$0.10 per share.
SECOND FISCAL QUARTER HIGHLIGHTS
Stockholders' equity: $96,952Net asset value per share: $13.74Market value per share: $12.00Market value discount to net asset value: 12.7%Net increase in stockholders' equity from operations: $1,229
PORTFOLIO AND INVESTMENT ACTIVITY
We completed our second quarter, which was our first full quarter sincecompletion of our initial public offering, on December 31, 2004, with ourportfolio invested approximately $23,744 in Gas Solutions, a gas gatheringand processing business, and the remainder in cash and short-terminstruments.
The Company owns 100% of the equity of Gas Solutions, a business weacquired on September 24, 2004, for less than four times expected operatingcash flow. Following a refinancing with a senior secured lender, ourinvestment in Gas Solutions consists of a second-lien debt investment of$18,400 at an annualized coupon of 18%, as well as an equity investment of$5,344. We expect to take current equity distributions from Gas Solutionsin addition to our debt interest payments. Management believes thefinancial performance of Gas Solutions has been strong, and based oninterest and dividends received from the Gas Solutions investment in thequarter, our all-in stated annualized yield from Gas Solutions was inexcess of 30%. Although this performance may fluctuate due to changes inbusiness conditions and commodity prices, we believe that Gas Solutions hasmitigated some of this risk through hedging. On December 3, 2004, GasSolutions entered into a hedge with J. Aron (a wholly owned subsidiary ofGoldman Sachs & Co.) in which Gas Solutions purchased propane puts from J.Aron for 90% of the projected net monthly volumes for the next two years.
Since December 31, 2004, we have completed two new investments totalingapproximately $6,900 in Unity Virginia Holdings LLC, a coal productionbusiness, and Natural Gas Systems, Inc., an oil and gas productionbusiness. Based on interest and dividends that we expect to receive in theMarch quarter from these three long-term investments, we expect that theall-in stated annualized yield from these three long-term investments willexceed 25%, including a more than 17% weighted average stated yield on ourdebt instruments, equivalent to a weighted average stated debt yield ofmore than 14% across all of our long-term capital (assuming no return onthe equity portion of our portfolio).
To date, we have invested approximately 32% of our net assets in long-terminvestments. In the prospectus filed in connection with our initial publicoffering, we identified 12 companies as potential investment candidates.At that time, we stated that the consummation of any such transactionswould be subject to the satisfactory completion of due diligence and thenegotiation of customary documentation in forms mutually satisfactory tothe parties. While future circumstances may change, at the present time,we do not believe that more than one or two of the proposed investments inthe companies named in our initial prospectus will be completed, primarilybecause these prospective investments have not passed our due diligencerequirements. We are highly motivated to get our portfolio fully invested,but are even more determined to avoid weak investments that would bedifficult to exit for many years.
Following the closing of our initial public offering, and the market’srecognition that Prospect Energy has fresh capital to invest in energytransactions, our investment adviser, Prospect Capital Management, hashired new investment professionals and has seen its pipeline of potentialtransactions grow in variety, number and quality. Transactions originatedafter the initial public offering, such as Gas Solutions, Natural GasSystems and Unity Virginia Holdings, are believed in many cases to carryless risk and offer more attractive returns than many of the proposedtransactions that were described in our prospectus. Many of thetransactions listed in the prospectus have not met our in-depth duediligence standards, and these transactions have been replaced by otherprospective transactions that may meet those standards, which we believe isin the best long-term interest of Prospect’s shareholders.
At present, we have approximately 50 potential investments in our pipeline.While we cannot predict the precise timing of future investments, weanticipate that substantially all of the net proceeds of our initial publicoffering will be invested by July 31, 2005. At that time, we expect thatour portfolio will consist primarily of mezzanine loans and related equityinvestments in energy companies. We can offer no assurances that we will beable to invest all our net proceeds within this time frame, as ourinvestment progress will depend on the availability of appropriateinvestment opportunities consistent with our investment objectives andother market conditions. For budgeting purposes, we look to close at leastone investment of at least $3,000 to $10,000 per month.
TAX/DIVERSIFICATION
On December 23, 2004, Gas Solutions entered into a senior secured loan of$12,500 from First American Bank. The term loan matures on December 22,2010, is repayable in quarterly installments beginning June 30, 2005, andbears interest at LIBOR plus 225 basis points. Gas Solutions usedapproximately $9,307 of the proceeds of this loan to repay $8,312 ofprincipal of debt owed to Prospect Energy, and a further $995 of accruedbut unpaid interest. As a result of this financing, Prospect Energy reducedits debt investment in Gas Solutions from a $25,000 secured promissory notewith an interest rate of 15% per annum to an $18,400 secured promissorynote with an increased interest rate of 18% per annum. The Company retainsa second lien on the assets of Gas Solutions. Accordingly, Gas Solutionsnow comprises less than 25% of the assets of Prospect Energy.
EXTERNAL LEGAL CLAIMS
As discussed in prior disclosures, Prospect Energy is currently a defendantin two claims we believe are without merit. One claim was brought by KarenDonnelly in connection with a potential investment that never proceededbeyond initial due diligence. We have deposed her, and we are aware of nofurther action in that suit. The second claim was brought by Dallas GasPartners, LP (“DGP”), despite our payment to DGP of more than $3,000pursuant to a fully executed purchase and sale agreement and despitereleases provided by and personally signed by each of the principals of DGPwith respect to the transaction that is the plaintiff’s basis for thissuit. While litigation is inherently uncertain, and there can be noguarantees of any particular result, we do not believe either of thesecases will materially impact the Company’s operations or financial results.
INTERNAL PERSONNEL MATTERS
At the request of the Audit Committee of the Board of Directors, WillkieFarr & Gallagher, a major New York City law firm and counsel to theIndependent Directors, conducted an independent investigation frommid-November to mid-December 2004, into the performance of and allegationsmade by Mark Witt and Karen Gattegno, the former chief financial and chiefcompliance officers of Prospect Energy, respectively. After an extensiveinvestigation, which is now complete, Willkie found that the allegations ofimproprieties were meritless. Mr. Witt had already been terminated beforethe investigation, and after the investigation Ms. Gattegno was put on 90day administrative leave. Because internal guidelines would have requiredKPMG to replicate much of the same expensive investigation alreadycompleted by Willkie, KPMG decided to resign. KPMG had concluded that itcould not fully service the needs of the Company, based on KPMG’sassessment of its available resources and the expected future service needsof the Company. Prospect retained BDO Seidman during the first week ofJanuary 2005, and we are delighted with the excellent service BDO hasprovided to us.
The attention that was required to be paid to these allegations andinvestigation by the Company’s senior management was considerable andimpinged upon our primary task of investing the Company’s capital duringthe last quarter. With respect to the investigation, we believe that thispainful chapter in our Company’s history is closed. We also believe thatthe two promising investments that were closed last week for the Companyare a fair indication of what management can achieve in the absence ofthese kinds of distractions.
We have also continued to improve our operations through the retention ofsenior officers who are focused on enhancing operations of the Company andshareholder value. On January 3, 2005, after an extensive search, we hiredGene Stark as our chief financial officer and Bill Vastardis as our chiefcompliance officer. Mr. Stark was previously with Prudential and has over20 years of experience with investment companies and public accounting.Mr. Vastardis is Co-Chief Executive Officer of EOS Compliance Services LLC,a provider of compliance-related services to investment companies withtotal assets in excess of $15 billion. Mr. Vastardis has more than 26years of experience in fund oversight and administration and was formerly asenior officer of Vanguard in charge of accounting oversight for public andprivate funds for both Vanguard and outside clients of The Vanguard Groupduring his tenure there of sixteen years.
“We are, of course, pleased to have the personnel distractions of the pastfew months behind us and to get on with the business of investing for ourshareholders,” said John Barry, our Chief Executive Officer. “Gene andBill are seasoned additions to our management team, with considerableexperience that will be valuable to us for years to come.”
OPERATING RESULTS
Investment income totaled $2,947 for the three months ended December 31,2004 and $3,213 for the six months ended December 31, 2004. As we continueinvesting the net proceeds from the initial offering, we expect to continuegenerating additional income at rates greater than the rates we receive oncash and cash equivalents.
Operating expenses totaled $1,718 for the three months ended December 31,2004 and $2,418 for the six months ended December 31, 2004. This amountprimarily consisted of investment advisory and administrative servicesfees, professional fees, insurance expenses, directors’ fees and othergeneral and administrative expenses. The base investment advisory fee was$495 for the three months ended December 31, 2004, and $832 for the sixmonths ended December 31, 2004. No incentive fee has yet been earnedpursuant to the Investment Advisory Agreement. Administrative servicescosts incurred under the Administration Agreement were $96 for the threemonths ended December 31, 2004 and $169 for the six months ended December31, 2004. Legal and professional fees were significantly higher during thethree months and six months ended December 31, 2004 than we would expect infuture periods due to the occurrence of certain items and their associatedcosts, which we would not expect to occur at this level in the future.These items include consultation and preparation of initial corporatedocuments including the initial Form 10-Q and compliance and proceduralmanuals; tax compliance consultation and analysis; Sarbanes-Oxley relatedmatters; costs associated with an internal investigation; and the costs ofhiring personnel.
Prospect Energy’s net investment income and net increase in stockholders’equity resulting from operations was $1,229 for the three months endedDecember 31, 2004 and $795 for the six months ended December 31, 2004. Netinvestment income during the recent quarter was higher than net investmentincome during the six-month period due to an operating loss during theCompany’s first quarter of operations. The operating loss was eliminatedprimarily as a result of the investment in Gas Solutions late in the firstquarter of operations and the resulting income that was generated by thatinvestment somewhat offset by the higher operating expenses describedabove.
During the six months ended December 31, 2004, we generated $96,961 in cashfrom the net proceeds of our initial offering. We also generated $2,302 incash flow from operations (investment income less operating expenses) and$26,712 from the sale of securities. We expended $112,423 in cash throughthe acquisition of investments and an additional $705 through the paymentof a quarterly dividend. In the future, we may also fund a portion of ourinvestments through borrowings from banks, issuances of senior securitiesor secondary offerings. We may also securitize a portion of ourinvestments in mezzanine or senior secured loans or other assets. Ourprimary use of funds will be investments in portfolio companies and cashdistributions to holders of our common stock.
At December 31, 2004, we had $12,848 in cash which was held in a segregatedaccount in conjunction with a limited indemnity issued to FAB. The limitedindemnity with FAB provides assurance to FAB with respect to realizedlosses of its term loan resulting only from potential legal claims thatmight or could be asserted by certain third parties. These funds are to bereleased after the earlier of legal resolution of such claims, should anybe made, or 91 days after the FAB loan is refinanced or otherwise repaid.
CONFERENCE CALL
The Company will host a conference call for the fiscal quarter endedDecember 31, 2004, at approximately 12:00 p.m. (Eastern Time), Thursday,February 10, 2005. The conference call dial-in number will be1-877-407-8289. A recording of the conference call will be available forapproximately 7 days. To hear a replay, call 1-877-660-6853 and usePlayback Account # 1628 and Playback Conference ID # 138714.
BALANCE SHEETS (UNAUDITED) December 31, June 30, 2004 2004 ------- -------AssetsCash held in segregated account $12,848 $1Investments (cost - $85,711) 85,775Due from affiliate 42Prepaid expenses 213Total assets $98,878 $1LiabilitiesAccounts payable $581Accrued liabilities 614Due to Investment Adviser $166 $100Due to Prospect Administration 425Other current liabilities 140Total liabilities 1,926 100Stockholders' EquityCommon stock, par value $.001 per share, 100,000,000 common shares authorized, 7,055,100 issued and outstanding $7Paid-in capital in excess of par 96,955 1Overdistributed net investment income/(loss) (10) (100)Total stockholders' equity $96,952 $(99)Total liabilities and stockholders' equity $98,878 $1STATEMENTS OF OPERATIONS Three months ended Six months ended(UNAUDITED) December 31, December 31, 2004 2004 ------- -------Investment IncomeInterest income $1,247 $1,513Dividend income 1,700 1,700Total investment income 2,947 3,213Operating ExpensesInvestment advisory fee $495 $832Administration costs 96 169Legal and professional fees 984 1,144Insurance expense 87 148Directors fees 55 92General and administrative expenses 1 33Total operating expenses 1,718 2,418Net investment income 1,229 795Net increase in stockholders' equity resulting from operations $1,229 $795Basic net increase in stockholders' equity per common share resulting from operations $0.17 $0.11PER SHARE DATA (UNAUDITED) For the For the Three months ended Six months ended December 31, December 31, 2004 2004 ------- -------Net asset value, beginning of period $ 13.67 $ (.01)Proceeds from initial public offering - 13.95Costs related to the initial public offering - (.21)Net investment income and net increase in stockholders' equity resulting from operations 0.17 0.11Dividend declared and paid (.10) (.10)Net asset value at end of period $ 13.74 $ 13.74
ABOUT PROSPECT ENERGY CORPORATION
Prospect Energy Corporation is a financial services company that lends toand invests in energy-related businesses and assets. Prospect Energy’sinvestment objective is to generate both current income and long-termcapital appreciation through debt and equity investments.
Prospect Energy has elected to be treated as a business development companyunder the Investment Company Act of 1940 (“1940 Act”). Accordingly, we arerequired to comply with a series of regulatory requirements under the 1940Act as well as applicable NASDAQ, state, and federal rules and regulations.In addition, we have elected to be treated as a regulated investmentcompany under the Internal Revenue Code of 1986 (“Code”). The Codespecifies certain quarterly asset diversification and annual source ofincome requirements. Certain investments in the partnerships, limitedliability companies, joint ventures and other “pass through” entitiescommon in the energy industry can create enhanced risks of compliance withthe Code. To the extent we remain in compliance with the applicableprovisions of the Code, we will not be required to pay corporate-leveltaxes on any income that we earn. To the extent we do not qualify aselected, corporate-level taxes may be imposed upon our net income.
This press release contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements involve risks and uncertainties, including, but not limited to,statements as to our future operating results; our business prospects andthe prospects of our portfolio companies; the impact of investments that weexpect to make; the dependence of our future success on the general economyand its impact on the industries in which we invest; the ability of ourportfolio companies to achieve their objectives; our expected financingsand investments; the adequacy of our cash resources and working capital;and the timing of cash flows, if any, from the operations of our portfoliocompanies.
We may use words such as “anticipates,” “believes,” “expects,” “intends,””will,” “should,” “may” and similar expressions to identify forward-lookingstatements. Such statements are based on currently available operating,financial and competitive information and are subject to various risks anduncertainties that could cause actual results to differ materially from ourhistorical experience and our present expectations. Undue reliance shouldnot be placed on such forward-looking statements as such statements speakonly as of the date on which they are made. We do not undertake to updateour forward-looking statements unless required by law.
Please send investment proposals to:Prospect Energy CorporationJohn BarryChairman and Chief Executive Officerjbarry@prospectstreet.comGrier EliasekPresident and Chief Operating Officergrier@prospectstreet.comMain (212) 448-0702