Prospect Capital
Annual Report 2013

Plain-text annual report

Use these links to rapidly review the document TABLE OF CONTENTS TABLE OF CONTENTS Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2013 Commission File Number: 814-00659 PROSPECT CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 43-2048643 (I.R.S. Employer Identification No.) 10 East 40 th Street New York, New York (Address of principal executive offices) 10016 (Zip Code) (212) 448-0702 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Title of each class) Common Stock, par value $0.001 per share 6.95% Senior Notes due 2022 (Name of each exchange where registered) NASDAQ Global Select Market New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:3) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No (cid:3) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:3) No (cid:1) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act: Large accelerated filer (cid:3) Accelerated filer (cid:1) Non-accelerated filer (cid:1) (Do not check if a smaller reporting company) Smaller reporting company (cid:1) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes (cid:1) No (cid:3) The aggregate market value of common stock held by non-affiliates of the Registrant on December 31, 2012 based on the closing price on that date of $10.87 on the NASDAQ Global Select Market was $2.303 billion. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. As of August 21, 2013, there were 259,683,651 shares of the registrant's common stock outstanding. Documents Incorporated by Reference Portions of the Registrant's definitive Proxy Statement relating to the 2013 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described therein. Table of Contents PROSPECT CAPITAL CORPORATION FORM 10-K FOR THE YEAR ENDED JUNE 30, 2013 TABLE OF CONTENTS PART I PAGE Business Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Directors, Executive Officers and Corporate Governance Item 10. Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services Item 15. Exhibits and Financial Statement Schedules PART IV 1 30 62 62 62 62 63 69 71 118 119 195 195 197 197 197 197 197 197 198 Table of Contents PART I The terms "we," "us," "our," "Company" and "Prospect Capital" refer to Prospect Capital Corporation; "Prospect Capital Management" or the "Investment Adviser" refers to Prospect Capital Management LLC; "Prospect Administration" or the "Administrator" refers to Prospect Administration LLC. Our $150.0 million of 6.25% Convertible Senior Notes due 2015 are referred to as the 2015 Notes. Our $167.5 million of 5.5% Convertible Senior Notes due 2016 are referred to as the 2016 Notes. Our $130.0 million of 5.375% Convertible Senior Notes due 2017 are referred to as the 2017 Notes. Our $200.0 million of 5.75% Convertible Senior Notes due 2018 are referred to as the 2018 Notes. Our $200.0 million of 5.875% Convertible Senior Notes due 2019 are referred to as the 2019 Notes, and collectively with the 2015 Notes, 2016 Notes, 2017 Notes and the 2018 Notes, the Senior Convertible Notes. Our $100.0 million of 6.95% Senior Notes due 2022 are referred to as the 2022 Notes. Our $250.0 million of 5.875% Senior Notes due 2023 are referred to as the 2023 Notes. Any Prospect Capital InterNotes ® issued pursuant to our medium term notes program are referred to as the Prospect Capital InterNotes, and together with our Senior Convertible Notes, the 2022 Notes and 2023 Notes are referred to as Senior Notes. Item 1. Business. General We are a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company that has filed an election to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development and recapitalization. We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows. We currently have seven origination strategies in which we make investments: (1) lending in private equity sponsored transactions, (2) lending directly to companies not owned by private equity firms, (3) control investments in corporate operating companies, (4) control investments in financial companies, (5) investments in structured credit, (6) real estate investments, and (7) investments in syndicated debt. We continue to evaluate other origination strategies in the ordinary course of business with no specific tops-down allocation to any single origination strategy. Lending in Private Equity Sponsored Transactions—We make loans to companies which are controlled by leading private equity firms. This debt can take the form of first lien, second lien, unitranche or mezzanine loans. In making these investments, we look for a diversified customer base, recurring demand for the product or service, barriers to entry, strong historical cash flow and experienced management teams. These loans typically have significant equity subordinate to our loan position. This strategy has represented approximately 50%-60% of our business. Lending Directly to Companies—We provide debt financing to companies owned by non-private equity firms, the company founder, a management team or a family. Here, in addition to the strengths we look for in a sponsored transaction, we also look for the alignment with the management team with significant invested capital. This strategy often has less competition than the private equity sponsor strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation. Direct lending can result in higher returns and lower leverage than sponsor transactions and may include warrants or equity to us. This strategy generally has comprised approximately 10%-15% of our business. Control Investments in Corporate Operating Companies—This strategy involves acquiring controlling stakes in non-financial operating companies. Our investments in these companies are 1 Table of Contents generally structured as a combination of yield-producing debt and equity. We provide certainty of closure to our counterparties, give the seller personal liquidity and generally look for management to continue on in their current roles. This strategy has comprised approximately 10%-15% of our business. Control Investments in Financial Companies—This strategy involves acquiring controlling stakes in financial companies, including consumer direct lending, subprime auto lending and other strategies. Our investments in these companies are generally structured as a combination of yield-producing debt and equity. These investments are often structured in a tax-efficient RIC (as defined below) compliant partnership, enhancing returns. This strategy has comprised approximately 10%-15% of our business. Investments in Structured Credit—We make investments in Collateralized Loan Obligations ("CLOs"), generally taking a significant position in the subordinated interests (equity) of the CLOs. The CLOs include a diversified portfolio of broadly syndicated loans and do not have direct exposure to real estate, mortgages, sub-prime debt, or consumer based debt. The CLOs in which we invest are managed by top-tier collateral managers that have been thoroughly diligenced prior to investment. This strategy has represented 10%-20% of the portfolio. Real Estate Investments—We make investments in real estate through our wholly-owned tax-efficient real estate investment trust ("REIT"), American Property Holdings Corp. Our real estate investments are in various classes of fully developed and occupied real estate properties that generate current yields. We seek to identify properties that have historically high occupancy and steady cash flow generation. We partner with established property managers with experience in managing the property type to manage such properties after acquisition. This is a more recent investment strategy that has represented less than 5% of our business. Investments in Syndicated Debt—On an opportunistic basis, we make investments in loans and high yield bonds that have been sold to a syndicate of buyers. Here we look for investments with attractive risk-adjusted returns after we have completed a fundamental credit analysis. These investments are purchased with a long term, buy-and-hold outlook and we look to provide significant structuring input by providing anchoring orders. This strategy has represented approximately 5%-10% of the portfolio. Typically, we concentrate on making investments in companies with annual revenues of less than $750 million and enterprise values of less than $1 billion. Our typical investment involves a secured loan of less than $250 million. We also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. In most cases, companies in which we invest are privately held at the time we invest in them. We refer to these companies as "target" or "middle market" companies and these investments as "middle market investments". We seek to maximize total returns to our 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 our investments. We are currently pursuing multiple investment opportunities, including purchases of portfolios from private and public companies, as well as originations and secondary purchases of particular securities. We also regularly evaluate control investment opportunities in a range of industries, and some of these investments could be material to us. There can be no assurance that we will successfully consummate any investment opportunity we are currently pursuing. If any of these opportunities are consummated, there can be no assurance that investors will share our 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 our stock price. We seek to be a long-term investor with our portfolio companies. From our July 27, 2004 inception to the fiscal year ended June 30, 2007, we invested primarily in industries related to the industrial/energy economy. Since then, we have widened our strategy to focus in other sectors of the economy 2 Table of Contents and continue to reduce our exposure to the energy industry, and our holdings in the energy and energy related industries now represent less than 7% of our investment portfolio. We have been organized as a closed-end investment company since April 13, 2004 and have filed an election to be treated as a business development company under the Investment Company Act of 1940 (the "1940 Act"). We are a non-diversified company within the meaning of the 1940 Act. Our headquarters are located at 10 East 40th Street, 44th Floor, New York, NY 10016, and our telephone number is (212) 448- 0702. Our investment adviser is Prospect Capital Management LLC. Our Investment Objective and Policies Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We focus on making investments in private companies. We are a non-diversified company within the meaning of the 1940 Act. We invest primarily in first and second lien senior loans and mezzanine debt. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt and our investments in CLOs are subordinated to senior loans and are generally unsecured. Our investments have generally ranged between $5 million and $250 million each, although the investment size may be more or less than this range. Our investment sizes are expected to grow as our capital base expands. We also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. These may be in several industries, including industrial, service, real estate and financial businesses. We seek to maximize returns and minimize risk for our investors by applying rigorous analysis to make and monitor our investments. While the structure of our investments varies, we 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. While our primary focus is to seek current income through investment in the debt and/or dividend-paying equity securities of eligible privately-held, thinly-traded or distressed companies and long-term capital appreciation by acquiring accompanying warrants, options or other equity securities of such companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek enhanced returns for stockholders. Such investments may include investments in the debt and equity instruments of broadly-traded public companies. We expect that these public companies generally will have debt securities that are non-investment grade. Such investments may also include purchases (either in the primary or secondary markets) of the equity and junior debt tranches of a type of such pools known as CLOs. Structurally, CLOs are entities that are formed to hold a portfolio of senior secured loans ("Senior Secured Loans") made to companies whose debt is rated below investment grade or, in limited circumstances, unrated . The Senior Secured Loans within a CLO are limited to Senior Secured Loans which meet specified credit and diversity criteria and are subject to concentration limitations in order to create an investment portfolio that is diverse by Senior Secured Loan, borrower, and industry, with limitations on non-U.S. borrowers. Within this 30% basket, we have and may make additional investments in debt and equity securities of financial companies and companies located outside of the United States. Our 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 operating cash flow or net income of such company. When determined by the Investment Adviser to be in our best interest, we may acquire a controlling interest in a portfolio company. Any warrants we receive with our debt securities may require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return 3 Table of Contents from this equity interest. We have structured, and will continue to structure, some warrants to include provisions protecting our 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, we obtain registration rights in connection with these equity interests, which may include demand and "piggyback" registration rights. We plan to hold many of our investments to maturity or repayment, but will sell an investment earlier if a liquidity event takes place, such as the sale or recapitalization of a portfolio company, or if we determine a sale of such investment to be in our best interest. We have qualified and elected to be treated for U.S. Federal income tax purposes as a Registered Investment Company ("RIC"), under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level U.S. Federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our "investment company taxable income," which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses. For a discussion of the risks inherent in our portfolio investments, see "Risk Factors—Risks Relating to our Investments." Industry Sectors While our original investments were concentrated in industrial and energy related companies, we continue to widen our focus in other sectors of the economy to diversify our portfolio holdings. Our portfolio is now well diversified into 36 industry categories with no individual industry comprising more than 14.6% of the portfolio on either a cost or fair value basis. Ongoing Relationships with Portfolio Companies Monitoring Prospect Capital Management monitors our 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 our investments, which may include, but are not limited to, the following: • • • • Assessment of success in adhering to the portfolio company's business plan and compliance with covenants; Regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments; Attendance at and participation in board meetings of the portfolio company; and Review of monthly and quarterly financial statements and financial projections for the portfolio company. Investment Valuation To value our assets, we follow the guidance of Accounting Standards Codification ("ASC") 820 that defines fair value, establishes a framework for measuring fair value in conformity with accounting 4 Table of Contents principles generally accepted in the United States or America, or GAAP, and requires disclosures about fair value measurements. ASC 820 classifies the inputs used to measure these fair values into the following hierarchy: Level 1 : Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date. Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical for 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. ASC 820 applies to fair value measurements already required or permitted by other standards. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted. 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) 2) 3) 4) Each portfolio company or investment is reviewed by our investment professionals with an independent valuation firm engaged by our Board of Directors; the independent valuation firms conduct independent appraisals and make their own independent assessment; the Audit Committee of our Board of Directors reviews and discusses the preliminary valuation of the Investment Adviser and that of the independent valuation firms; and 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 the Investment Adviser, the respective independent valuation firm and the Audit Committee. Investments are valued utilizing a shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and market approaches use 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 5 Table of Contents market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors. Our investments in CLOs are classified as ASC 820 level 3 securities, and are valued using discounted cash flow model. The valuations have been accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each security, the most appropriate valuation approach has been chosen from alternative approaches to ensure the most accurate valuation for each security. To value a CLO, both the assets and liabilities of the CLO capital structure need be modeled. We use a waterfall engine to store the collateral data, generate collateral cash flows from the assets, and distributes the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates that incorporate all the risk factors. The main risk factors are: default risk, interest rate risk, downgrade risk, and credit spread risk. For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see "Risk Factors—Risks relating to our business—Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments." Valuation of Other Financial Assets and Financial Liabilities ASC Subtopic 820-10-05-1, The Fair Value Option for Financial Assets and Financial Liabilities, ("ASC 820-10-05-1") permits an entity to elect fair value as the initial and subsequent measurement attribute for many assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. We have elected not to value some assets and liabilities at fair value as would be permitted by ASC 820-10-05-1. 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. Prospect Administration provides such managerial assistance on our behalf to portfolio companies when we are required to provide this assistance. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. Investment Adviser Prospect Capital Management manages our investments as the Investment Adviser. Prospect Capital Management is a Delaware limited liability corporation that has been registered as an investment adviser under the Investment Adviser Act of 1940 (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 the Company's behalf. The principal executive offices of Prospect Capital Management are 10 East 40th Street, 44th Floor, New York, NY 10016. We depend on the due diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent, on the Investment Adviser's investment professionals and the information and deal flow generated by those investment professionals in the course of their investment and portfolio 6 Table of Contents management activities. The Investment Adviser's senior management team evaluates, negotiates, structures, closes, monitors and services our investments. Our 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 the Investment Adviser could have a materially adverse effect on our ability to achieve our investment objective. In addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to its investment professionals or its information and deal flow. Under the Investment Advisory Agreement, we pay Prospect Capital Management investment advisory fees, which consist of an annual base management fee based on our gross assets as well as a two-part incentive fee based on our performance. Mr. Barry currently controls Prospect Capital Management. Investment Advisory Agreement Terms We have entered into an investment advisory and management agreement (the "Investment Advisory Agreement") with Prospect Capital Management, under which the Investment Adviser, subject to the overall supervision of our Board of Directors, manages our day-to-day operations and provides us with investment advisory services. Under the terms of the Investment Advisory Agreement, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make. Prospect Capital Management's services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services, the Investment Adviser receives a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our gross assets (including amounts borrowed). For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. 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 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). 7 Table of Contents 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 with 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 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 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 our 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 out of 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 of. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. 8 Table of Contents 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% 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 us to the 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% 9 Table of Contents 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 us to the 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% (1) Represents 7% annualized hurdle rate. (2) Represents 2% annualized base management fee. (3) Excludes organizational and offering expenses. (*) The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets. Example 2: Capital Gains Incentive Fee: Alternative 1 Assumptions • • • • Year 1: $20 million investment made Year 2: Fair market value ("FMV") of investment determined to be $22 million Year 3: FMV of investment determined to be $17 million Year 4: Investment sold for $21 million The impact, if any, on the capital gains portion of the incentive fee would be: • • • • Year 1: No impact Year 2: No impact Year 3: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation) 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) 10 Table of Contents Alternative 2 Assumptions • • • • • • Year 1: $20 million investment made Year 2: FMV of investment determined to be $17 million Year 3: FMV of investment determined to be $17 million Year 4: FMV of investment determined to be $21 million Year 5: FMV of investment determined to be $18 million Year 6: Investment sold for $15 million The impact, if any, on the capital gains portion of the incentive fee would be: • • • • • • Alternative 3 Assumptions • • • Year 1: No impact Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation) Year 3: No impact Year 4: Increase base amount on which the second part of the incentive fee is calculated by $3 million ( reversal in unrealized capital depreciation) Year 5: Decrease base amount on which the second part of the incentive fee is calculated by $2 million (unrealized capital depreciation) 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) Year 1: $20 million investment made in company A ("Investment A"), and $20 million investment made in company B ("Investment B") Year 2: FMV of Investment A is determined to be $21 million, and Investment B is sold for $18 million Year 3: Investment A is sold for $23 million The impact, if any, on the capital gains portion of the incentive fee would be: Year 1: No impact 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) 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) • • • Alternative 4 Assumptions • Year 1: $20 million investment made in company A ("Investment A"), and $20 million investment made in company B ("Investment B") 11 Table of Contents • • • • Year 2: FMV of Investment A is determined to be $21 million, and FMV of Investment B is determined to be $17 million Year 3: FMV of Investment A is determined to be $18 million, and FMV of Investment B is determined to be $18 million Year 4: FMV of Investment A is determined to be $19 million, and FMV of Investment B is determined to be $21 million Year 5: Investment A is sold for $17 million, and Investment B is sold for $23 million The impact, if any, on the capital gains portion of the incentive fee would be: • • • • • Year 1: No impact 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) 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) 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) 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). Duration and Termination The Investment Advisory Agreement was originally approved by our Board of Directors on June 23, 2004 and was recently re-approved by the Board of Directors on May 3, 2013 for an additional one-year term expiring June 22, 2014. Unless terminated earlier as described below, it will remain in effect from year to year thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our 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. See "Risk factors—Risks relating to our business—We are dependent upon Prospect Capital Management's key management personnel for our future success." 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 us for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of Prospect Capital Management's services under the Investment Advisory Agreement or otherwise as the Investment Adviser. 12 Table of Contents Administration Agreement We have also entered into an administration agreement (the "Administration Agreement") with 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 Brian H. Oswald, our chief financial officer and chief compliance officer, and his staff, including the internal legal staff. 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 Securities and Exchange Commission, or 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 the Investment Adviser. We reimbursed Prospect Administration $8.7 million, $6.8 million and $4.9 million for the twelve months ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively, for services it provided to the Company at cost. Payment of Our Expenses All investment professionals of the Investment Adviser 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 the Investment Adviser. We bear all other costs and expenses of our operations and transactions, including those relating to: organization and offering; calculation of our 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 our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on debt, if any, and dividends payable on preferred stock, if any, incurred to finance our investments; offerings of our debt, our preferred shares, our 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 stockholders, including printing costs; our 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 us, by the Investment Adviser or by Prospect Administration in connection with administering our business, such as our allocable portion of overhead 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 under the sub-administration agreement, as further described below. 13 Table of Contents License Agreement We entered into a license agreement with Prospect Capital Management, pursuant to which Prospect Capital Management agreed to grant us a nonexclusive, royalty free license to use the name "Prospect Capital." Under this agreement, we have a right to use the Prospect Capital name, for so long as Prospect Capital Management or one of its affiliates remains the Investment Adviser. Other than with respect to this limited license, we have no legal right to the Prospect Capital name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with the Investment Adviser is in effect. Determination of Net Asset Value The net asset value per share of our 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 our total assets, we 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 our 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 our Board of Directors. For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see "Risk Factors—Risks Relating to Our Business—Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments." The factors that may be taken into account in valuing such investments include, as relevant, the portfolio company's 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. 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 requiring fair valuation and provides a range of values for each investment, which, along with management's valuation recommendations, is reviewed by our Audit Committee. Management and the independent valuation firm may adjust their preliminary evaluations to reflect comments provided by our Audit Committee. The Audit Committee reviews the final valuation report and management's valuation recommendations and makes a recommendation to the Board of Directors based on its analysis of the methodologies employed and 14 Table of Contents 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 our financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements. Dividend Reinvestment Plan We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, when our Board of Directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. No action is required on the part of a registered stockholder to have their cash dividend reinvested in shares of our common stock. A registered stockholder may elect to receive an entire dividend in cash by notifying the plan administrator and our 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 stockholders. The plan administrator sets up an account for shares acquired through the plan for each stockholder who has not elected to receive dividends in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, the plan administrator will, instead of crediting shares to the participant's account, issue a certificate registered in the participant's name for the number of whole shares of our common stock and a check for any fractional share. Such request by a stockholder 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 stockholder's account; however, future dividends are paid out in cash on all balances. Those stockholders 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. We primarily use newly issued shares to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve the right to purchase shares in the open market in connection with our implementation of the plan. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on The NASDAQ Global Select Market on the last business day before the payment date for such dividend. Market price per share on that date will be the closing price for such shares on The NASDAQ Global Select 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 our 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 our stockholders have been tabulated. Stockholders who do not elect to receive dividends in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium at the time we issue new shares under the plan and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the dividend payable to a stockholder. 15 Table of Contents There are no brokerage charges or other charges to stockholders who participate in the plan. The plan administrator's fees under the plan are paid by us. 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 participant's 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. Stockholders who receive dividends in the form of stock are subject to the same U.S. Federal, state and local tax consequences as are stockholders who elect to receive their dividends in cash. A stockholder's basis for determining gain or loss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable to the stockholder. 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. Stockholder's 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 administrator's Interactive Voice Response System at (888) 888-0313. The plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any payable date for the payment of any dividend by us. 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. Stockholders 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 our dividend reinvestment plan. Such holders of our stock may not be identified as our registered stockholders with the plan administrator and may not automatically have their cash dividend reinvested in shares of our common stock by the administrator. Material U.S. Federal Income Tax Considerations The following discussion is a general summary of the material U.S. Federal income tax considerations applicable to us and to an investment in our shares. This summary does not purport to be a complete description of the income tax considerations applicable to us or our investors on such an investment. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under U.S. Federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S. Stockholders (as defined below) whose functional currency is not the U.S. dollar, persons who mark-to-market our shares and persons who hold our shares as part of a "straddle," "hedge" or "conversion" transaction. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this report and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. Federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets. A "U.S. Stockholder" is a beneficial owner of shares of our common stock that is for U.S. Federal income tax purposes: • a citizen or individual resident of the United States; 16 Table of Contents • • • a corporation, or other entity treated as a corporation for U.S. Federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia; an estate, the income of which is subject to U.S. Federal income taxation regardless of its source; or a trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person. A "Non-U.S. Stockholder" is a beneficial owner of shares of our common stock that is not a partnership and is not a U.S. Stockholder. If a partnership (including an entity treated as a partnership for U.S. Federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a partnership holding shares of our common stock should consult its tax advisors with respect to the purchase, ownership and disposition of shares of our common stock. Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. Federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws. Election To Be Taxed As A RIC As a business development company, we have elected and intend to continue to qualify to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject to corporate-level U.S. Federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to obtain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our "investment company taxable income," which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. Taxation as a RIC In order to qualify as a RIC for U.S. Federal income tax purposes, we must, among other things: • • qualify to be treated as a business development company or be registered as a management investment company under the 1940 Act at all times during each taxable year; derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or currencies or other income derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a "qualified publicly traded partnership" (as defined in the Code), or the 90% Income Test; and • diversify our holdings so that at the end of each quarter of the taxable year: • at least 50% of the value of our 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 our assets or more than 10% of the 17 Table of Contents outstanding voting securities of the issuer (which for these purposes includes the equity securities of a "qualified publicly traded partnership"); and • no more than 25% of the value of our assets is 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 us 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. To the extent that we invest in entities treated as partnerships for U.S. Federal income tax purposes (other than a "qualified publicly traded partnership"), we 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 us directly. In addition, we generally must take into account our proportionate share of the assets held by partnerships (other than a "qualified publicly traded partnership") in which we are a partner for purposes of the diversification tests. If the partnership is a "qualified publicly traded partnership," the net income derived from such partnership will be qualifying income for purposes of the 90% Income Test, and interests in the partnership will be "securities" for purposes of the diversification tests. We intend to monitor our investments in equity securities of entities that are treated as partnerships for U.S. Federal income tax purposes to prevent our disqualification as a RIC. In order to meet the 90% Income Test, we may establish one or more special purpose corporations to hold assets from which we do 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 our assets held by such corporation. Provided that we qualify as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. Federal income tax on the portion of our investment company taxable income and net capital gain (which we define as net long-term capital gains in excess of net short-term capital losses) we timely distribute to stockholders. We 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 our stockholders. We will be subject to a 4% non-deductible U.S. Federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to the sum of (1) 98.2% of our ordinary income for each calendar year, (2) 98% of our 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. We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount, we 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 us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. Gain or loss realized by us from warrants acquired by us 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 we held a particular warrant. As a RIC, we are not 18 Table of Contents allowed to carry forward or carry back a net operating loss for purposes of computing our investment company taxable income in other taxable years. Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. See "Regulation—Senior Securities." Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the diversification tests. If we dispose of assets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge on 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years. Certain of our investment practices may be subject to special and complex U.S. 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 and qualified dividend income 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 us 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. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions. We may invest in preferred securities or other securities the U.S. Federal income tax treatment of which may be unclear or may be subject to recharacterization 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 us to purchase or sell securities, or otherwise change our portfolio, in order to comply with the tax rules applicable to RICs under the Code. Taxation of U.S. Stockholders Distributions by us generally are taxable to U.S. Stockholders as ordinary income or capital gains. Distributions of our "investment company taxable income" (which is, generally, our ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be 19 Table of Contents taxable as ordinary income to U.S. Stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. Provided that certain holding period and other requirements are met, such distributions (if designated by us) may qualify (i) for the dividends received deduction available to corporations, but only to the extent that our income consists of dividend income from U.S. corporations and (ii) in the case of individual shareholders, as qualified dividend income eligible to be taxed at long-term capital gain rates to the extent that we receive qualified dividend income (generally, dividend income from taxable domestic corporations and certain qualified foreign corporations). There can be no assurance as to what portion, if any, of our distributions will qualify for favorable treatment as qualified dividend income. Distributions of our net capital gain (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly designated by us as "capital gain dividends" will be taxable to a U.S. Stockholder as long-term capital gains, regardless of the U.S. Stockholder's holding period for its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. Stockholder's adjusted tax basis in such stockholder's common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. Stockholder. Although we currently intend to distribute any long-term capital gains at least annually, we may in the future decide to retain some or all of our long-term capital gains, and designate the retained amount as a "deemed distribution." In that case, among other consequences, we will pay tax on the retained amount, each U.S. Stockholder will be required to include his, her or its proportionate share of the deemed distribution in income as if it had been actually distributed to the U.S. Stockholder, and the U.S. Stockholder will be entitled to claim a credit equal to its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. Stockholder's tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. Stockholder's other U.S. Federal income tax obligations or may be refunded to the extent it exceeds a stockholder's liability for U.S. Federal income tax. A stockholder that is not subject to U.S. Federal income tax or otherwise required to file a U.S. Federal income tax return would be required to file a U.S. Federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a "deemed distribution." For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. Stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in any such month and actually paid during January of the following year, will be treated as if it had been received by our U.S. Stockholders on December 31 of the year in which the dividend was declared. If a U.S. Stockholder purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of its investment. 20 Table of Contents A U.S. Stockholder generally will recognize taxable gain or loss if such U.S. Stockholder sells or otherwise disposes of its shares of our common stock. Any gain or loss arising from such sale or taxable disposition generally will be treated as long-term capital gain or loss if the U.S. Stockholder has held his, her or its shares for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or taxable disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a taxable disposition of shares of our common stock may be disallowed if other substantially identical shares are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. Capital losses are deductible only to the extent of capital gains (subject to an exception for individuals under which a limited amount of capital losses may be offset against ordinary income). In general, individual U.S. Stockholders currently are subject to a preferential rate on their net capital gain, or the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year, including long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. Stockholders currently are subject to U.S. Federal income tax on net capital gain at ordinary income rates. Certain U.S. Stockholders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their "net investment income," which includes dividends received from us and capital gains from the sale or other disposition of our stock. We will send to each of our U.S. Stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share basis, the amounts includible in such U.S. Stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the amount and the U.S. federal tax status of each year's distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. Stockholder's particular situation. Payments of dividends, including deemed payments of constructive dividends, or the proceeds of the sale or other taxable disposition of our common stock generally are subject to information reporting unless the U.S. Stockholder is an exempt recipient. Such payments may also be subject to U.S. federal backup withholding at the applicable rate if the recipient of such payment fails to supply a taxpayer identification number and otherwise comply with the rules for establishing an exemption from backup withholding. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against the holder's U.S. Federal income tax liability, provided that certain information is provided timely to the IRS. Taxation of Non-U.S. Stockholders Whether an investment in our common stock is appropriate for a Non-U.S. Stockholder will depend upon that person's particular circumstances. An investment in our common stock by a Non-U.S. Stockholder may have adverse tax consequences. Non-U.S. Stockholders should consult their tax advisers before investing in our common stock. Distributions of our "investment company taxable income" to Non-U.S. Stockholders that are not "effectively connected" with a U.S. trade or business conducted by the Non-U.S. Stockholder, will generally be subject to withholding of U.S. Federal income tax at a rate of 30% (or lower applicable treaty rate) to the extent of our current and accumulated earnings and profits. 21 Table of Contents For our taxable years beginning before January 1, 2014 (and, if extended as has happened in the past, for taxable years covered by such extension), properly reported distributions to Non-U.S. Stockholders are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of our "qualified net interest income" (generally, our U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we are at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of our "qualified short-term capital gains" (generally, the excess of our net short-term capital gain over our long-term capital loss for such taxable year). There can be no assurance as to whether this provision will be extended. In addition, depending on our circumstances, we may report all, some or none of our potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a Non-U.S. Stockholder needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares held through an intermediary, the intermediary may withhold even if we report the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. Stockholders should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of our distributions will qualify for favorable treatment as qualified net interest income or qualified short-term capital gains. Actual or deemed distributions of our net capital gain to a Non-U.S. Stockholder, and gains recognized by a Non-U.S. Stockholder upon the sale of our common stock, that are not effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder, will generally not be subject to U.S. Federal withholding tax and generally will not be subject to U.S. Federal income tax unless the Non-U.S. Stockholder is a nonresident alien individual and is physically present in the United States for 183 or more days during the taxable year and meets certain other requirements. Distributions of our "investment company taxable income" and net capital gain (including deemed distributions) to Non-U.S. Stockholders, and gains realized by Non-U.S. Stockholders upon the sale of our common stock that are effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder, will be subject to U.S. Federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. In addition, if such Non-U.S. Stockholder is a foreign corporation, it may also be subject to a 30% (or lower applicable treaty rate) branch profits tax on its effectively connected earnings and profits for the taxable year, subject to adjustments, if its investment in our common stock is effectively connected with its conduct of a U.S. trade or business. If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. Stockholder will be entitled to a U.S. Federal income tax credit or tax refund equal to the stockholder's allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. Stockholder must obtain a U.S. taxpayer identification number and file a U.S. Federal income tax return even if the Non-U.S. Stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. Federal income tax return. In addition, after June 30, 2014, withholding at a rate of 30% will be required on dividends in respect of, and after December 31, 2016, withholding at a rate of 30% will be required on gross proceeds from the sale of, shares of our stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons or by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which our shares are held will affect the determination of whether such withholding is required. An intergovernmental agreement between the 22 Table of Contents United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. Similarly, dividends in respect of, and gross proceeds from the sale of, our shares held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us that such entity does not have any "substantial United States owners" or (ii) provides certain information regarding the entity's "substantial United States owners," which we will in turn provide to the Internal Revenue Service. We will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. Stockholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our shares. A Non-U.S. Holder generally will be required to comply with certain certification procedures to establish that such holder is not a U.S. person in order to avoid backup withholding with respect to payments of dividends, including deemed payments of constructive dividends, or the proceeds of a disposition of our common stock. In addition, we are required to annually report to the IRS and each Non-U.S. Holder the amount of any dividends or constructive dividends treated as paid to such Non-U.S. Holder, regardless of whether any tax was actually withheld. Copies of the information returns reporting such dividend or constructive dividend payments and the amount withheld may also be made available to the tax authorities in the country in which a Non-U.S. Holder resides under the provisions of an applicable income tax treaty. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against a Non-U.S. Holder's U.S. Federal income tax liability, if any, provided that certain required information is provided timely to the IRS. Non-U.S. persons should consult their tax advisors with respect to the U.S. Federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in our common stock. Failure to Obtain RIC Tax Treatment If we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Distributions would generally be taxable to our stockholders as ordinary dividend income eligible for the reduced maximum rate applicable for qualified dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and any remaining distributions would be treated as a capital gain. The discussion set forth herein does not constitute tax advice, and potential investors should consult their own tax advisors concerning the tax considerations relevant to their particular situation. Regulation as a Business Development Company General We are 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 we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities. 23 Table of Contents We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an "underwriter" as that term is defined in the Securities Act of 1933 (the "Securities Act"). Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we 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, we may purchase or otherwise receive warrants to purchase the common stock of the portfolio company. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except with respect to money market funds, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments subject our stockholders indirectly to additional expenses. None of these policies are fundamental and may be changed without stockholder 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 company's total assets. The principal categories of qualifying assets relevant to our 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 and rules adopted pursuant thereto 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 for certain financial companies such as banks, brokers, commercial finance companies, mortgage companies and insurance companies; and (c) satisfies any of the following: 1. 2. 3. does not have any class of securities with respect to which a broker or dealer may extend margin credit; 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 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; 4. does not have any class of securities listed on a national securities exchange; or 24 Table of Contents 5. 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. (2) Securities in companies that were eligible portfolio companies when we made our initial investment if certain other requirements are satisfied. (3) Securities of any eligible portfolio company which we control. (4) (5) (6) (7) 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. Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. 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. 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), (3) or (4) above. Managerial Assistance to Portfolio Companies In order to count portfolio securities as qualifying assets for the purpose of the 70% test, a 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, exercising control, either on its own or together with others, over a portfolio company, or 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, our 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 we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in money market funds, U.S. treasury bills or in repurchase agreements that 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 25 Table of Contents percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for U.S. Federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. The Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions. Senior Securities We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any preferred stock or public debt securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios after giving effect to such distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see "Risk Factors." Code of Ethics We, 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 us, so long as such investments are made in accordance with the code's requirements. For information on how to obtain a copy of each code of ethics, see "Available Information." Compliance Policies and Procedures We and the Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the U.S. 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 our Chief Compliance Officer. Proxy Voting Policies and Procedures We have delegated our proxy voting responsibility to Prospect Capital Management. The Proxy Voting Policies and Procedures of Prospect Capital Management are set forth below. The guidelines are reviewed periodically by Prospect Capital Management and our independent directors, and, accordingly, are subject to change. Introduction. As an investment adviser registered under the Advisers Act, Prospect Capital Management has a fiduciary duty to act solely 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. These policies and procedures for voting proxies for Prospect Capital Management's Investment Advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act. Proxy policies. These policies are designed to be responsive to the wide range of subjects that may be the subject of a proxy vote. These policies are not exhaustive due to the variety of proxy voting issues that Prospect Capital Management may be required to consider. In general, Prospect Capital 26 Table of Contents Management will vote proxies in accordance with these guidelines unless: (1) Prospect Capital Management has determined to consider the matter on a case-by-case basis (as is stated in these guidelines), (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) Prospect Capital Management might find it necessary to vote contrary to its general guidelines to maximize stockholder value and vote in its clients' best interests. In such cases, a decision on how to vote will be made by the Proxy Voting Committee (as described below). In reviewing proxy issues, Prospect Capital Management will apply the following general policies: Elections of directors. In general, Prospect Capital Management will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on the Board of Directors or Prospect Capital Management determines that there are other compelling reasons for withholding votes for directors, the Proxy Voting Committee will determine the appropriate vote on the matter. Prospect Capital Management believes that directors have a duty to respond to stockholder actions that have received significant stockholder support. Prospect Capital Management may withhold votes for directors that fail to act on key issues such as failure to implement proposals to declassify boards, failure to implement a majority vote requirement, failure to submit a rights plan to a stockholder vote and failure to act on tender offers where a majority of stockholders have tendered their shares. Finally, Prospect Capital Management may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement. Appointment of auditors. Prospect Capital Management believes that the Company remains in the best position to choose the auditors and will generally support management's recommendation. Changes in capital structure. Changes in a company's charter, articles of incorporation or by-laws may be required by state or U.S. Federal regulation. In general, Prospect Capital Management will cast its votes in accordance with the Company's management on such proposal. However, the Proxy Voting Committee will review and analyze on a case-by-case basis any proposals regarding changes in corporate structure that are not required by state or U.S. Federal regulation. Corporate restructurings, mergers and acquisitions. Prospect Capital Management believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, the Proxy Voting Committee will analyze such proposals on a case-by- case basis. Proposals affecting the rights of stockholders. Prospect Capital Management will generally vote in favor of proposals that give stockholders a greater voice in the affairs of the Company and oppose any measure that seeks to limit those rights. However, when analyzing such proposals, Prospect Capital Management will weigh the financial impact of the proposal against the impairment of the rights of stockholders. Corporate governance. Prospect Capital Management recognizes the importance of good corporate governance in ensuring that management and the Board of Directors fulfill their obligations to the stockholders. Prospect Capital Management favors proposals promoting transparency and accountability within a company. Anti-takeover measures. The Proxy Voting Committee will evaluate, on a case-by-case basis, proposals regarding anti-takeover measures to determine the measure's likely effect on stockholder value dilution. Stock splits. Prospect Capital Management will generally vote with the management of the Company on stock split matters. Limited liability of directors. Prospect Capital Management will generally vote with management on matters that would affect the limited liability of directors. 27 Table of Contents Social and corporate responsibility. The Proxy Voting Committee may review and analyze on a case-by-case basis proposals relating to social, political and environmental issues to determine whether they will have a financial impact on stockholder value. Prospect Capital Management may abstain from voting on social proposals that do not have a readily determinable financial impact on stockholder value. Proxy voting procedures. Prospect Capital Management will generally vote proxies in accordance with these guidelines. In circumstances in which (1) Prospect Capital Management has determined to consider the matter on a case-by-case basis (as is stated in these guidelines), (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) Prospect Capital Management might find it necessary to vote contrary to its general guidelines to maximize stockholder value and vote in its clients' best interests, the Proxy Voting Committee will vote the proxy. Proxy voting committee. Prospect Capital Management has formed a proxy voting committee to establish general proxy policies and consider specific proxy voting matters as necessary. In addition, members of the committee may contact the management of the Company and interested stockholder groups as necessary to discuss proxy issues. Members of the committee will include relevant senior personnel. The committee may also evaluate proxies where we face a potential conflict of interest (as discussed below). Finally, the committee monitors adherence to guidelines, and reviews the policies contained in this statement from time to time. Conflicts of interest. Prospect Capital Management recognizes that there may be a potential conflict of interest when it votes a proxy solicited by an issuer that is its advisory client or a client or customer of one of our affiliates or with whom it has another business or personal relationship that may affect how it votes on the issuer's proxy. Prospect Capital Management believes that adherence to these policies and procedures ensures that proxies are voted with only its clients' best interests in mind. To ensure that its votes are not the product of a conflict of interests, Prospect Capital Management requires that: (i) anyone involved in the decision making process (including members of the Proxy Voting Committee) disclose to the chairman of the Proxy Voting Committee 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 Prospect Capital Management intends to vote on a proposal in order to reduce any attempted influence from interested parties. Proxy voting. Each account's custodian will forward all relevant proxy materials to Prospect Capital Management, either electronically or in physical form to the address of record that Prospect Capital Management has provided to the custodian. Proxy recordkeeping. Prospect Capital Management must retain the following documents pertaining to proxy voting: • • • • • copies of its proxy voting policies and procedures; copies of all proxy statements; records of all votes cast by Prospect Capital Management; copies of all documents created by Prospect Capital Management that were material to making a decision how to vote proxies or that memorializes the basis for that decision; and copies of all written client requests for information with regard to how Prospect Capital Management voted proxies on behalf of the client as well as any written responses provided. All of the above-referenced records will be maintained and preserved for a period of not less than five years from the end of the fiscal year during which the last entry was made. The first two years of records must be maintained at our office. 28 Table of Contents Proxy voting records. Clients may obtain information about how Prospect Capital Management voted proxies on their behalf by making a written request for proxy voting information to: 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 our Chief Executive and Chief Financial Officers' required certifications as to the accuracy of our financial reporting, we are also required to disclose the effectiveness of our disclosure controls and procedures as well as report on our assessment of our internal controls over financial reporting, the latter of which must be audited by our independent registered public accounting firm. The Sarbanes-Oxley Act also requires us to continually review our policies and procedures to ensure that we remain in compliance with all rules promulgated under the Act. Available Information We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934, or the Exchange Act. This information is available free of charge by contacting us at 10 East 40th Street, 44th floor, New York, NY 10016 or by telephone at (212) 448-0702. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC's Internet site at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following E- mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. 29 Table of Contents Item 1A. Risk Factors. Investing in our Securities involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before you decide whether to make an investment in our Securities. The risks set forth below are not the only risks we face. If any of the adverse events or conditions described below occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, our NAV, and the trading price of our common stock could decline, or the value of our preferred stock, debt securities, and warrants, if any are outstanding, may decline, and you may lose all or part of your investment. Forward Looking Information Our annual report on Form l0-K for the year ended June 30, 2013, any of our quarterly reports on Form 10-Q or current reports on Form 8- K, or any other oral or written statements made in press releases or otherwise by or on behalf of Prospect Capital Corporation may contain forward looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward looking statements predict or describe our future operations, business plans, business and investment strategies and portfolio management and the performance of our investments and our investment management business. These forward looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "seeks," "anticipates," "anticipated," "should," "could," "may," "will," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Our actual results may differ significantly from any results expressed or implied by these forward looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to: • • • • • • • • • • our future operating results; our business prospects and the prospects of our portfolio companies; the impact of investments that we expect to make; our contractual arrangements and relationships with third parties; the dependence of our future success on the general economy and its impact on the industries in which we invest; the ability of our portfolio companies to achieve their objectives; difficulty in obtaining financing or raising capital, especially in the current credit and equity environment; the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets; adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise; a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us; 30 Table of Contents • • • • • our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company; the adequacy of our cash resources and working capital; the timing of cash flows, if any, from the operations of our portfolio companies; the ability of the Investment Adviser to locate suitable investments for us and to monitor and administer our investments.; authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ Global Select Market, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business; and • the risk factors set forth below. Risks Relating to Our Business Capital markets could experience a period of disruption and instability. Such market conditions have historically and could again have a material and adverse effect on debt and equity capital markets in the United States and abroad, which had, and may in the future have, a negative impact on our business and operations. The global capital markets have historically experienced an extended period of instability as evidenced by the periodic disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions. Despite actions of the U.S. federal government and foreign governments during such period, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. While recent market conditions have improved, there can be no assurance that adverse market conditions will not repeat themselves or worsen in the future. If these adverse and volatile market conditions repeat themselves or worsen in the future, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow. Equity capital may be difficult to raise because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. At our annual meeting of stockholders held on December 7, 2012, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as calculated in accordance with the Investment Company Act, must equal at least 200% immediately after each time we incur indebtedness. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations. Moreover, the re-appearance of market conditions similar to those experienced from 2007 through 2009 for any substantial length of time could make it difficult to extend the maturity of or refinance 31 Table of Contents our existing indebtedness under similar terms and any failure to do so could have a material adverse effect on our business. Given the extreme volatility and dislocation that the capital markets have historically experienced, many BDCs have faced, and may in the future face, a challenging environment in which to raise or access capital. In addition, significant changes in the capital markets, including the extreme volatility and disruption over the past several years, has had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our investment valuations. Further, the illiquidity of our investments may make it difficult for us to sell such investments to access capital if required. As a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital could have a material adverse impact on our business, financial condition or results of operations. The current financial market situation, as well as various social and political tensions in the United States and around the world, particularly in the Middle East, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Since 2010, several European Union ("EU") countries, including Greece, Ireland, Italy, Spain, and Portugal have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. We do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seeks to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that it will be successful in doing so; and we may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments in the current or future market environment. We may suffer credit losses. Investment in small and middle-market companies is highly speculative and involves a high degree of risk of credit loss. These risks are likely to increase during volatile economic periods, such as the U.S. and many other economies have recently been experiencing. See "Risks Related to Our Investments." Our financial condition and results of operations will depend on our ability to manage our future growth effectively. Prospect Capital Management has been registered as an investment adviser since March 31, 2004, and we have been organized as a closed- end investment company since April 13, 2004. Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on the Investment Adviser's ability to continue to identify, analyze, invest in and monitor companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of the Investment Adviser's structuring of investments, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. As we continue to grow, Prospect Capital Management will need to continue to hire, train, supervise and manage new employees. Failure to manage our future growth effectively could have a materially adverse effect on our business, financial condition and results of operations. 32 Table of Contents We are dependent upon Prospect Capital Management's key management personnel for our future success. We depend on the diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent, on the Investment Adviser's 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 the Investment Adviser evaluates, negotiates, structures, closes, monitors and services our investments. Our 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 our ability to achieve our investment objective. In addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to its investment professionals or its information and deal flow. We operate in a highly competitive market for investment opportunities. A number of entities compete with us to make the types of investments that we make in middle-market companies. We compete with other BDCs, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC and that the Code imposes on us as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to pursue attractive investment opportunities from time to time. We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our existing investment platform, seasoned investment professionals, experience and focus on middle-market companies, disciplined investment philosophy, extensive industry focus and flexible transaction structuring. We may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we match our competitors' pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on less favorable terms than what we may have originally anticipated, which may impact our return on these investments. We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us. Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Our lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase 33 Table of Contents more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique. Changes in interest rates may affect our cost of capital and net investment income. A portion of the debt investments we make bears interest at fixed rates and other debt investments bear interest at variable rates with floors and the value of these investments could be negatively affected by increases in market interest rates. In addition, as the interest rate on our 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 our investments. As a result, an increase in market interest rates could both reduce the value of our portfolio investments and increase our cost of capital, which could reduce our net investment income or net increase in net assets resulting from operations. We need to raise additional capital to grow because we must distribute most of our income. We need additional capital to fund growth in our investments. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders to maintain our status as a regulated investment company, or RIC, for U.S. federal income tax purposes. As a result, such earnings are not available to fund investment originations. We have sought additional capital by borrowing from financial institutions and may issue debt securities or additional equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, we could be limited in our ability to grow, which may have an adverse effect on the value of our common stock. In addition, as a business development company, we generally may not borrow money or issue debt securities or issue preferred stock unless immediately thereafter our ratio of total assets to total borrowings and other senior securities is at least 200%. This may restrict our ability to obtain additional leverage in certain circumstances. We may experience fluctuations in our quarterly results. We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest or dividend rates payable on the debt or equity securities we hold, the default rate on debt securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our 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. Our most recent NAV was calculated on June 30, 2013 and our NAV when calculated effective September 30, 2013 and thereafter may be higher or lower. Our most recently estimated NAV per share is $10.73 on an as adjusted basis solely to give effect to our issuance of common stock since June 30, 2013 in connection with our dividend reinvestment plan, shares issued in connection with investment transactions, and our issuance of 9,818,907 shares of common stock during the period from July 1, 2013 to August 21, 2013 under our at-the-market program (the "ATM Program"), $0.01 higher than the $10.72 determined by us as of June 30, 2013. NAV per share as of September 30, 2013 may be higher or lower than $10.73 based on potential changes in valuations, issuances of securities, dividends paid and earnings for the quarter then ended. Our Board of Directors has not yet determined the fair value of portfolio investments at any date subsequent to June 30, 2013. Our Board of Directors determines the fair value of our portfolio investments on a quarterly basis in connection with the preparation of quarterly financial statements 34 Table of Contents and based on input from independent valuation firms, the Investment Adviser, the Administrator and the Audit Committee of our Board of Directors. The Investment Adviser's liability is limited under the Investment Advisory Agreement, and we are required to indemnify the Investment Adviser against certain liabilities, which may lead the Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account. The Investment Adviser has not assumed any responsibility to us other than to render the services described in the Investment Advisory Agreement, and it will not be responsible for any action of our Board of Directors in declining to follow the Investment Adviser's advice or recommendations. Pursuant to the Investment Advisory Agreement, the Investment Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and members and any other person or entity affiliated with it will not be liable to us for their acts under the Investment Advisory Agreement, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect the Investment Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and members and any other person or entity affiliated with it with respect to all damages, liabilities, costs and expenses resulting from acts of the Investment Adviser not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Investment Advisory Agreement. These protections may lead the Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account. Potential conflicts of interest could impact our investment returns. Our executive officers and directors, and the executive officers of the Investment Adviser, may serve as officers, directors or principals of entities that operate in the same or related lines of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our best interests or those of our stockholders. Nevertheless, it is possible that new investment opportunities that meet our investment objective 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 us. However, as an investment adviser, Prospect Capital Management has a fiduciary obligation to act in the best interests of its clients, including us. 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 our investing activities, under the Investment Advisory Agreement we pay base management and incentive fees to Prospect Capital Management, and reimburse Prospect Capital Management for certain expenses it incurs. As a result of the Investment Advisory Agreement, there may be times when the senior management team of Prospect Capital Management has interests that differ from those of our stockholders, giving rise to a conflict. The Investment Adviser receives a quarterly income incentive fee based, in part, on our 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 our 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 our investments remained constant or decreased. Subject to the receipt of any requisite stockholder approval under the 1940 Act, our Board of Directors may adjust the hurdle rate by amending the Investment Advisory Agreement. 35 Table of Contents The income incentive fee payable by us 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 us for any such income incentive fee payments. If we do not have sufficient liquid assets to pay this incentive fee or distributions to stockholders on such accrued income, we 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. We have entered into a royalty-free license agreement with Prospect Capital Management. Under this agreement, Prospect Capital Management agrees to grant us a non-exclusive license to use the name "Prospect Capital." Under the license agreement, we have the right to use the "Prospect Capital" name for so long as Prospect Capital Management or one of its affiliates remains our investment adviser. In addition, we rent office space from Prospect Administration, an affiliate of Prospect Capital Management, and pay Prospect Administration our allocable portion of overhead and other expenses incurred by Prospect Administration in performing its obligations as Administrator under the Administration Agreement, including rent and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. This may create conflicts of interest that our Board of Directors monitors. Our incentive fee could induce Prospect Capital Management to make speculative investments. The incentive fee payable by us to Prospect Capital Management may create an incentive for the Investment Adviser to make investments on our 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 the Investment Adviser to use leverage to increase the return on our 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 our common stock. Similarly, because the Investment Adviser will receive an incentive fee based, in part, upon net capital gains realized on our investments, the Investment Adviser 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 our 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 us to Prospect Capital Management could create an incentive for the Investment Adviser to invest on our behalf in instruments, such as zero coupon bonds, that have a deferred interest feature. Under these investments, we 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. Our net investment income used to calculate the income incentive fee, however, includes accrued interest. For example, accrued interest, if any, on our investments in zero coupon bonds will be included in the calculation of our incentive fee, even though we 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 we may not have yet received in cash in the event of default may never receive. We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss. The Investment Adviser is entitled to incentive compensation for each fiscal quarter based, in part, on our pre-incentive fee net investment income if any, for the immediately preceding calendar quarter above a performance threshold for that quarter. Accordingly, since the performance threshold is based 36 Table of Contents on a percentage of our net asset value, decreases in our net asset value make it easier to achieve the performance threshold. Our pre-incentive fee net investment income for incentive compensation purposes excludes realized and unrealized capital losses or depreciation that we may incur in the fiscal quarter, even if such capital losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Investment Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. The Investment Adviser and Administrator have the right to resign on 60 days' notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations. The Investment Adviser and Administrator have the right, under the Investment Advisory Agreement and Administration Agreement, respectively, to resign at any time upon not less than 60 days' written notice, whether we have found a replacement or not. If the Investment Adviser or Administrator resigns, we may not be able to find a replacement or hire internal management or administration with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our business, financial condition and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities or our internal administration activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Investment Adviser and its affiliates or the Administrator and its affiliates. Even if we are able to retain comparable management or administration, whether internal or external, the integration of such management or administration and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition and results of operations. Changes in the laws or regulations governing our business or the businesses of our portfolio companies and any failure by us or our portfolio companies to comply with these laws or regulations, could negatively affect the profitability of our operations or of our portfolio companies. We are subject to changing rules and regulations of federal and state governments, as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and The NASDAQ Global Select Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations. In particular, changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, financial condition and results of operations. 37 Table of Contents Foreign and domestic political risk may adversely affect our business. We are exposed to political risk to the extent that Prospect Capital Management, on its behalf and subject to its investment guidelines, transacts in securities in the U.S. and foreign markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material adverse impact on our strategy. Risks Relating to Our Operation as a Business Development Company If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy. As a BDC, we may not acquire any assets other than "qualifying assets" unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions applicable to BDCs, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. Because most of our 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. If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income, and our income available for distribution would be reduced. To maintain our qualification for U.S. federal income tax purposes as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and obtain RIC tax treatment, we must meet certain source of income, asset diversification and annual distribution requirements. The source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such 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 we distribute at least 90% of our ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants that could, under certain circumstances, restrict us from making distributions necessary to qualify for RIC tax treatment. If we are unable to obtain cash from other sources, we may fail to qualify for RIC tax treatment and, thus, may be subject to corporate-level income tax on all of our taxable income. To maintain our qualification as a RIC, we must also meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify as a RIC for any reason or become subject to corporate income tax, the resulting corporate taxes would substantially reduce our net assets, the amount of income available for 38 Table of Contents distribution, and the actual amount of our distributions. Such a failure would have a materially adverse effect on us and our stockholders. For additional information regarding asset coverage ratio and RIC requirements, see "Business—Tax Considerations" and "Business—Regulation as a Business Development Company". We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount or payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such amounts could be significant relative to our overall investment activities. We also may be required to include in taxable income certain other amounts that we do not receive in cash. While we focus primarily on investments that will generate a current cash return, our investment portfolio currently includes, and we 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 us 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 we may recognize taxable income before or without receiving cash representing such income, we may have difficulty distributing at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, as required to maintain RIC tax treatment. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC treatment and thus become subject to corporate-level income tax. See "Business—Tax Considerations" and "Business—Regulation as a Business Development Company". Regulations governing our operation as a business development company affect our ability to raise, and the way in which we raise, additional capital. We have incurred indebtedness under our revolving credit facility and through the issuance of the Notes and, in the future, may issue preferred stock or debt securities and/or borrow additional money from banks or other financial institutions, which we refer to collectively as "senior securities," up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test, which would prohibit us from paying dividends in cash or other property and could prohibit us from qualifying as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments or sell additional shares of common stock at a time when such sales may be disadvantageous in order to repay a portion of our indebtedness or otherwise increase our net assets. In addition, issuance of additional common stock could dilute the percentage ownership of our current stockholders in us. As a BDC regulated under provisions of the 1940 Act, we are not generally able to issue and sell our common stock at a price below the current net asset value per share without stockholder approval. If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of our common stock in certain 39 Table of Contents circumstances, including if (i)(1) the holders of a majority of our shares (or, if less, at least 67% of a quorum consisting of a majority of our shares) and a similar majority of the holders of our shares who are not affiliated persons of us approve the sale of our common stock at a price that is less than the current net asset value, and (2) a majority of our Directors who have no financial interest in the transaction and a majority of our independent Directors (a) determine that such sale is in our and our stockholders' 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 us or on our 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 or if (ii) a majority of the number of the beneficial holders of our common stock entitled to vote at our annual meeting, without regard to whether a majority of such shares are voted in favor of the proposal, approve the sale of our common stock at a price that is less than the current net asset value per share. To generate cash for funding new investments, we pledged a substantial portion of our portfolio investments under our revolving credit facility. These assets are not available to secure other sources of funding or for securitization. Our ability to obtain additional secured or unsecured financing on attractive terms in the future is uncertain. Alternatively, we may securitize our future loans to generate cash for funding new investments. See "Securitization of our assets subjects us to various risks." Securitization of our assets subjects us to various risks. We may securitize assets to generate cash for funding new investments. We refer to the term securitize to describe a form of leverage under which a company such as us (sometimes referred to as an "originator" or "sponsor") transfers income producing assets to a single-purpose, bankruptcy-remote subsidiary (also referred to as a "special purpose entity" or SPE), which is established solely for the purpose of holding such assets and entering into a structured finance transaction. The SPE then issues notes secured by such assets. The special purpose entity may issue the notes in the capital markets either publicly or privately to a variety of investors, including banks, non-bank financial institutions and other investors. There may be a single class of notes or multiple classes of notes, the most senior of which carries less credit risk and the most junior of which may carry substantially the same credit risk as the equity of the SPE. An important aspect of most debt securitization transactions is that the sale and/or contribution of assets into the SPE be considered a true sale and/or contribution for accounting purposes and that a reviewing court would not consolidate the SPE with the operations of the originator in the event of the originator's bankruptcy based on equitable principles. Viewed as a whole, a debt securitization seeks to lower risk to the note purchasers by isolating the assets collateralizing the securitization in an SPE that is not subject to the credit and bankruptcy risks of the originator. As a result of this perceived reduction of risk, debt securitization transactions frequently achieve lower overall leverage costs for originators as compared to traditional secured lending transactions. In accordance with the above description, to securitize loans, we may create a wholly owned subsidiary and contribute a pool of our assets to such subsidiary. The SPE may be funded with, among other things, whole loans or interests from other pools and such loans may or may not be rated. The SPE would then sell its notes to purchasers who we would expect to be willing to accept a lower interest rate and the absence of any recourse against us to invest in a pool of income producing assets to which none of our creditors would have access. We would retain all or a portion of the equity in the SPE. An inability to successfully securitize portions of our portfolio or otherwise leverage our portfolio through secured and unsecured borrowings could limit our ability to grow our business and fully execute our business strategy, and could decrease our earnings. However, the successful securitization 40 Table of Contents of portions of our portfolio exposes us to a risk of loss for the equity we retain in the SPE and might expose us to greater risk on our remaining portfolio because the assets we retain 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 our business activities and may include limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code. The 1940 Act may also impose restrictions on the structure of any securitizations. Interests we hold in the SPE, if any, will be subordinated to the other interests issued by the SPE. As such, we will only receive cash distributions on such interests if the SPE has made all cash interest and other required payments on all other interests it has issued. In addition, our subordinated interests will likely be unsecured and rank behind all of the secured creditors, known or unknown, of the SPE, including the holders of the senior interests it has issued. Consequently, to the extent that the value of the SPEs portfolio of assets has been reduced as a result of conditions in the credit markets, or as a result of defaults, the value of the subordinated interests we retain would be reduced. Securitization imposes on us the same risks as borrowing except that our risk in a securitization is limited to the amount of subordinated interests we retain, whereas in a borrowing or debt issuance by us directly we would be at risk for the entire amount of the borrowing or debt issuance. If the SPE is not consolidated with us, our only interest will be the value of our retained subordinated interest and the income allocated to us, which may be more or less than the cash we receive from the SPE, and none of the SPEs liabilities will be reflected as our liabilities. If the assets of the SPE are not consolidated with our assets and liabilities, then our interest in the SPE may be deemed not to be a qualifying asset for purposes of determining whether 70% of our assets are qualifying assets and the leverage incurred by such SPE may or may not be treated as borrowings by us for purposes of the requirement that we not issue senior securities in an amount in excess of our net assets. We may also engage in transactions utilizing SPEs and securitization techniques where the assets sold or contributed to the SPE remain on our balance sheet for accounting purposes. If, for example, we sell the assets to the SPE with recourse or provide a guarantee or other credit support to the SPE, its assets will remain on our balance sheet. Consolidation would also generally result if we, in consultation with the SEC, determine that consolidation would result in a more accurate reflection of our assets, liabilities and results of operations. In these structures, the risks will be essentially the same as in other securitization transactions but the assets will remain our assets for purposes of the limitations described above on investing in assets that are not qualifying assets and the leverage incurred by the SPE will be treated as borrowings incurred by us for purposes of our limitation on the issuance of senior securities. The Investment Adviser may have conflicts of interest with respect to potential securitizations in as much as securitizations that are not consolidated may reduce our assets for purposes of determining its investment advisory fee although in some circumstances the Investment Adviser may be paid certain fees for managing the assets of the SPE so as to reduce or eliminate any potential bias against securitizations. Our ability to invest in public companies may be limited in certain circumstances. As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a market capitalization that is less than $250 million at the time of such investment. 41 Table of Contents Risks Relating to Our Investments We may not realize gains or income from our investments. We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate and, in fact, may decline in value, and the issuers of debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains from our investments, and any gains that we do realize may not be sufficient to offset any losses we experience. See "Business—Our Investment Objective and Policies". Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments. A large percentage of our 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 we may incur in any year, is to a degree subjective, and the Investment Adviser has a conflict of interest in making the determination. We value these securities quarterly at fair value as determined in good faith by our Board of Directors based on input from the Investment Adviser, our Administrator, a third party independent valuation firm and our Audit Committee. Our 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 our investments include the nature and realizable value of any collateral, the portfolio company's 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 our 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. Our net asset value could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. In addition, decreases in the market values or fair values of our investments are recorded as unrealized depreciation. Unprecedented declines in prices and liquidity in the corporate debt markets experienced during the recent financial crises resulted in significant net unrealized depreciation in our portfolio in the past. The effect of all of these factors on our portfolio reduced our NAV by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may continue to suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations. We have no policy regarding holding a minimum level of liquid assets. As such, a high percentage of our portfolio generally is not liquid at any given point in time. See "The lack of liquidity may adversely affect our business." Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our Board of Directors. As part of the valuation process, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, 42 Table of Contents applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations. Our investments in prospective portfolio companies may be risky and we could lose all or part of our investment. Some of our 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 our investment in them may decline substantially or fall to zero. In addition, investment in the middle market companies that we are targeting involves a number of other significant risks, including: • • • • • • • • these companies may have limited financial resources and may be unable to meet their obligations under their securities that we hold, 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 our realizing on any guarantees we may have obtained in connection with our investment; 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; because many of these companies are privately held companies, public information is generally not available about these companies. As a result, we will depend on the ability of the Investment Adviser to obtain adequate information to evaluate these companies in making investment decisions. If the Investment Adviser is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and we may lose money on our investments; 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 our portfolio company and, in turn, on us; 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; they may have difficulty accessing the capital markets to meet future capital needs; changes in laws and regulations, as well as their interpretations, may adversely affect their business, financial structure or prospects; and increased taxes, regulatory expense or the costs of changes to the way they conduct business due to the effects of climate change may adversely affect their business, financial structure or prospects. 43 Table of Contents In addition, our executive officers, directors and the Investment Adviser could, in the ordinary course of business, be named as defendants in litigation arising from proposed investments or from our investments in the portfolio companies. The lack of liquidity in our investments may adversely affect our business. We make 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 our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or the Investment Adviser has or could be deemed to have material non-public information regarding such business entity. Economic recessions or downturns could impair our portfolio companies and harm our operating results. Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans or meet other obligations during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results. A portfolio company's failure to satisfy financial or operating covenants imposed by us 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 company's ability to meet its obligations under the debt or equity securities that we hold. We 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 our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt or preferred equity, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt or equity holding and subordinate all or a portion of our claim to those of other creditors. Investments in equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk. We may purchase common and other equity securities. Although common stock has historically generated higher average total returns than fixed income securities over the long-term, common stock also has experienced significantly more volatility in those returns and in recent years has significantly under performed relative to fixed income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company's success. Investments in equity securities involve a number of significant risks, including: • any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness (including trade creditors) or senior securities in the 44 Table of Contents event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process; • • to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment; and in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of the portfolio company. Even if the portfolio company is successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can otherwise sell our investment. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell them. There are special risks associated with investing in preferred securities, including: • • • • preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes before we receive such distributions; preferred securities are subordinated to debt in terms of priority to income and liquidation payments, and therefore will be subject to greater credit risk than debt; preferred securities may be substantially less liquid than many other securities, such as common stock or U.S. government securities; and generally, preferred security holders have no voting rights with respect to the issuing company, subject to limited exceptions. Additionally, when we invest in first lien senior secured loans (including unitranche loans), second lien senior secured loans or mezzanine debt, we may acquire warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We may invest, to the extent permitted by law, in the equity securities of investment funds that are operating pursuant to certain exceptions to the Investment Company Act and in advisers to similar investment funds and, to the extent we so invest, will bear our ratable share of any such company's expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to Prospect Capital Management with respect to the assets invested in the securities and instruments of such companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of Prospect Capital Management as well as indirectly bearing the management and performance fees and other expenses of any such investment funds or advisers. There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims. If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, a bankruptcy court might recharacterize our debt holding as an equity investment and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken 45 Table of Contents by them where they become too involved in the borrower's business or exercise control over the borrower. For example, we could become subject to a lender's liability claim, if, among other things, we actually render significant managerial assistance. Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies. Our portfolio companies may have, or may be permitted to incur, other debt, or issue other equity securities, that rank equally with, or senior to, our investments. 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 we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company typically are entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we 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. The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements (including agreements governing "first out" and "last out" structures) that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected. When we are a debt or minority equity investor in a portfolio company, we are often not in a position to exert influence on the entity, and other equity holders and management of the company may make decisions that could decrease the value of our portfolio holdings. When we make debt or minority equity investments, we are subject to the risk that a portfolio company may make business decisions with which we disagree and the other equity holders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our investment. Our portfolio companies may be highly leveraged. Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies' ability to finance their future operations and capital needs. As a result, these companies' flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company's income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. 46 Table of Contents Our portfolio contains a limited number of portfolio companies, which subjects us to a greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities. A consequence of the limited number of investments in our portfolio is that the aggregate returns we realize may be significantly adversely affected if one or more of our significant portfolio company investments perform poorly or if we need to write down the value of any one significant investment. Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification, and our portfolio could contain relatively few portfolio companies. Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio. Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as "follow-on" investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing or (3) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments, may be constrained in our ability to employ available funds, or otherwise may lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with BDC requirements or the desire to maintain our tax status. We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial condition and operating results. Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings and repayments from investments in interest-bearing deposits or other short-term instruments or use the net proceeds from such offerings to reduce then-outstanding obligations under our credit facility. We cannot assure you that we will be able to find enough appropriate investments that meet our investment criteria or that any investment we complete using the proceeds from an offering will produce a sufficient return. We may have limited access to information about privately held companies in which we invest. We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of the Investment Adviser's 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 of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investment. 47 Table of Contents We may not be able to fully realize the value of the collateral securing our debt investments. Although a substantial amount of our debt investments are protected by holding security interests in the assets of the portfolio companies, we may not be able to fully realize the value of the collateral securing our investments due to one or more of the following factors: • • • • • • our debt investments may be in the form of mezzanine loans, therefore our liens on the collateral, if any, are subordinated to those of the senior secured debt of the portfolio companies, if any. As a result, we may not be able to control remedies with respect to the collateral; the collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of secured debt of the portfolio company that ranks senior to our loan; bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process; our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral; 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 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. Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. Our investment strategy contemplates potential investments in securities of foreign companies, including those located in emerging market countries. Investing in foreign companies may expose us 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. Such risks are more pronounced in emerging market countries Although currently all of our investments are, and we expect that most of our investments will be, U.S. dollar-denominated, 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. We may expose ourselves to risks if we engage in hedging transactions. We may employ hedging techniques to minimize certain investment risks, such as fluctuations in interest and currency exchange rates, but we can offer no assurance that such strategies will be effective. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We 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 our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the 48 Table of Contents 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 we are not able to enter into a hedging transaction at an acceptable price. Furthermore, our ability to engage in hedging transactions may also be adversely affected by recent rules adopted by the CFTC. The success of our hedging transactions depends on our ability to correctly predict movements, currencies and interest rates. Therefore, while we 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 we 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, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us 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. The Company has no current intention of engaging in any of the hedging transaction described above, although it reserves the right to do so in the future. Our Board of Directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to us and could impair the value of our stockholders' investment. Our Board of Directors has the authority to modify or waive our current operating policies and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause stockholders to lose all or part of their investment. Our investments in CLOs may be riskier and less transparent to us and our stockholders than direct investments in the underlying companies. We invest in CLOs. Generally, there may be less information available to us regarding the underlying debt investments held by CLOs than if we had invested directly in the debt of the underlying companies. As a result, our stockholders will not know the details of the underlying securities of the CLOs in which we will invest. Our CLO investments are subject to the risk of leverage associated with the debt issued by such CLOs and the repayment priority of senior debt holders in such CLOs. Our investments in portfolio companies may be risky, and we could lose all or part of our investment. CLOs typically will have no significant assets other than their underlying Senior Secured Loans; payments on CLO investments are and will be payable solely from the cashflows from such Senior Secured Loans. CLOs typically will have no significant assets other than their underlying Senior Secured Loans. Accordingly, payments on CLO investments are and will be payable solely from the cashflows from such Senior Secured Loans, net of all management fees and other expenses. Payments to us as a holder of CLO junior securities are and will be made only after payments due on the senior secured notes, and, where appropriate, the junior secured notes, have been made in full. This means that relatively small numbers of defaults of Senior Secured Loans may adversely impact our returns. 49 Table of Contents Our CLO investments are exposed to leveraged credit risk. Generally, we are in a subordinated position with respect to realized losses on the Senior Secured Loans underlying our investments in CLOs. The leveraged nature of CLOs, in particular, magnifies the adverse impact of Senior Secured Loan defaults. CLO investments represent a leveraged investment with respect to the underlying Senior Secured Loans. Therefore, changes in the market value of the CLO investments could be greater than the change in the market value of the underlying Senior Secured Loans, which are subject to credit, liquidity and interest rate risk. There is the potential for interruption and deferral of cashflow from CLO investments. If certain minimum collateral value ratios and/or interest coverage ratios are not met by a CLO, primarily due to Senior Secured Loan defaults, then cashflow that otherwise would have been available to pay distributions to us on our CLO investments may instead be used to redeem any senior notes or to purchase additional Senior Secured Loans, until the ratios again exceed the minimum required levels or any senior notes are repaid in full. This could result in an elimination, reduction or deferral in the distribution and/or principal paid to the holders of the CLO investments, which would adversely impact our returns. Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. Our CLO investment strategy involves investments in foreign CLOs. Investing in foreign entities may expose us to additional risks not typically associated with investing in U.S. issuers. 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. Further, we, and the CLOs in which we invest, may have difficulty enforcing creditor's rights in foreign jurisdictions. In addition, the underlying companies of the CLOs in which we invest may be foreign, which may create greater exposure for us to foreign economic developments. The payment of underlying portfolio manager fees and other charges on CLO investments could adversely impact our returns. We may invest in CLO investments where the underlying portfolio securities may be subject to management, administration and incentive or performance fees, in addition to those payable by us. Payment of such additional fees could adversely impact the returns we achieve. The inability of a CLO collateral manager to reinvest the proceeds of the prepayment of senior secured loans may adversely affect us. There can be no assurance that for any CLO investment, in the event that any of the senior secured loans of a CLO underlying such investment are prepaid, the CLO collateral manager will be able to reinvest such proceeds in new Senior Secured Loans with equivalent investment returns. If the CLO collateral manager cannot reinvest in new Senior Secured Loans with equivalent investment returns, the interest proceeds available to pay interest on the rated liabilities and investments may be adversely affected. 50 Table of Contents Our CLO investments are subject to prepayments and calls, increasing re-investment risk. Our CLO investments and/or the underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on our value. Prepayment rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond our control and consequently cannot be predicted with certainty. In addition, for a CLO collateral manager there is often a strong incentive to refinance well performing portfolios once the senior tranches amortize. The yield to maturity of the investments will depend on the amount and timing of payments of principal on the loans and the price paid for the investments. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments of the debt. Furthermore, our CLO investments generally do not contain optional call provisions, other than a call at the option of the holders of the equity tranches for the senior notes and the junior secured notes to be paid in full after the expiration of an initial period in the deal (referred to as the "non-call period"). The exercise of the call option is by the relevant percentage (usually a majority) of the holders of the equity tranches and, therefore, where we do not hold the relevant percentage we will not be able to control the timing of the exercise of the call option. The equity tranches also generally have a call at any time based on certain tax event triggers. In any event, the call can only be exercised by the holders of equity tranches if they can demonstrate (in accordance with the detailed provisions in the transaction) that the senior notes and junior secured notes will be paid in full if the call is exercised. Early prepayments and/or the exercise of a call option otherwise than at our request may also give rise to increased re-investment risk with respect to certain investments, as we may realize excess cash earlier than expected. If we are unable to reinvest such cash in a new investment with an expected rate of return at least equal to that of the investment repaid, this may reduce our net income and, consequently, could have an adverse impact on our ability to pay dividends. We have limited control of the administration and amendment of Senior Secured Loans owned by the CLOs in which we invest. We are not be able to directly enforce any rights and remedies in the event of a default of a Senior Secured Loan held by a CLO vehicle. In addition, the terms and conditions of the Senior Secured Loans underlying our CLO investments may be amended, modified or waived only by the agreement of the underlying lenders. Generally, any such agreement must include a majority or a super majority (measured by outstanding loans or commitments) or, in certain circumstances, a unanimous vote of the lenders. Consequently, the terms and conditions of the payment obligations arising from Senior Secured Loans could be modified, amended or waived in a manner contrary to our preferences. We have limited control of the administration and amendment of any CLO in which we invest. The terms and conditions of target securities may be amended, modified or waived only by the agreement of the underlying security holders. Generally, any such agreement must include a majority or a super majority (measured by outstanding amounts) or, in certain circumstances, a unanimous vote of the security holders. Consequently, the terms and conditions of the payment obligation arising from the CLOs in which we invest be modified, amended or waived in a manner contrary to our preferences. Senior Secured Loans of CLOs may be sold and replaced resulting in a loss to us. The Senior Secured Loans underlying our CLO investments may be sold and replacement collateral purchased within the parameters set out in the relevant CLO indenture between the CLO and the CLO trustee and those parameters may typically only be amended, modified or waived by the agreement of a majority of the holders of the senior notes and/or the junior secured notes and/or the 51 Table of Contents equity tranche once the CLO has been established. If these transactions result in a net loss, the magnitude of the loss from the perspective of the equity tranche would be increased by the leveraged nature of the investment. Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment obligations or fails to perform as we expect. We expect that a majority of our portfolio will consist of equity and junior debt investments in CLOs, which involve a number of significant risks. CLOs are typically highly levered up to approximately 10 times, and therefore the junior debt and equity tranches that we will invest in are subject to a higher risk of total loss. In particular, investors in CLOs indirectly bear risks of the underlying debt investments held by such CLOs. We will generally have the right to receive payments only from the CLOs, and will generally not have direct rights against the underlying borrowers or the entities that sponsored the CLOs. Although it is difficult to predict whether the prices of indices and securities underlying CLOs will rise or fall, these prices, and, therefore, the prices of the CLOs will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. The investments we make in CLOs are thinly traded or have only a limited trading market. CLO investments are typically privately offered and sold, in the primary and secondary markets. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in debt securities, CLOs carry additional risks, including, but not limited to: (i) the possibility that distributions from the underlying Senior Secured Loans will not be adequate to make interest or other payments; (ii) the quality of the underlying Senior Secured Loans may decline in value or default; and (iii) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO or unexpected investment results. Further, our investments in equity and junior debt tranches of CLOs are subordinate to the senior debt tranches thereof. Investments in structured vehicles, including equity and junior debt instruments issued by CLOs, involve risks, including credit risk and market risk. Changes in interest rates and credit quality may cause significant price fluctuations. Additionally, changes in the underlying Senior Secured Loans held by a CLO may cause payments on the instruments we hold to be reduced, either temporarily or permanently. Structured investments, particularly the subordinated interests in which we invest, are less liquid than many other types of securities and may be more volatile than the Senior Secured Loans underlying the CLOs in which we invest. Non-investment grade debt involves a greater risk of default and higher price volatility than investment grade debt. The Senior Secured Loans underlying our CLO investments typically are BB or B rated (non-investment grade) and in limited circumstances, unrated, Senior Secured Loans. Non-investment grade securities are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal when due and therefore involve a greater risk of default and higher price volatility than investment grade debt. We will have no influence on management of underlying investments managed by non-affiliated third party CLO collateral managers. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold as those portfolios are managed by non-affiliated third party CLO collateral managers. Similarly, we are not responsible for and have no influence over the day-to-day management, administration or any other aspect of the issuers of the individual securities. 52 Table of Contents As a result, the values of the portfolios underlying our CLO investments could decrease as a result of decisions made by third party CLO collateral managers. Risks Relating To Our Securities Our credit ratings may not reflect all risks of an investment in our debt securities. Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities. Senior securities, including debt, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business, financial condition and results of operations. We currently use our revolving credit facility to leverage our portfolio and we expect in the future to borrow from and issue senior debt securities to banks and other lenders and may securitize certain of our portfolio investments. We also have the Senior Notes outstanding, which are a form of leverage and are senior in payment rights to our common stock. With certain limited exceptions, as a business development company, or a BDC, we are only allowed to borrow amounts or otherwise issue senior securities such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing or other issuance. The amount of leverage that we employ will depend on the Investment Adviser's and our 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 stockholders, any of which could adversely affect our business, financial condition and results of operations, including the following: • • • • • • • • A likelihood of greater volatility in the net asset value and market price of our common stock; Diminished operating flexibility as a result of asset coverage or investment portfolio composition requirements required by lenders or investors that are more stringent than those imposed by the 1940 Act; 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; Increased operating expenses due to the cost of leverage, including issuance and servicing costs; Convertible or exchangeable securities, such as the Senior Convertible Notes outstanding or those issued in the future may have rights, preferences and privileges more favorable than those of our common stock; Subordination to lenders' superior claims on our assets as a result of which lenders will be able to receive proceeds available in the case of our liquidation before any proceeds will be distributed to our stockholders; Making it more difficult for us to meet our payment and other obligations under the Notes and our other outstanding debt; The occurrence of an event of default if we fail to comply with the financial and/or other restrictive covenants contained in our debt agreements, including the credit agreement and each indenture governing the Notes, which event of default could result in all or some of our debt becoming immediately due and payable; 53 Table of Contents • • • Reduced availability of our cash flow to fund investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes; The risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our amended senior credit facility; and Reduced flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy. For example, the amount we may borrow under our revolving credit facility is determined, in part, by the fair value of our investments. If the fair value of our investments declines, we may be forced to sell investments at a loss to maintain compliance with our borrowing limits. Other debt facilities we may enter into in the future may contain similar provisions. Any such forced sales would reduce our net asset value and also make it difficult for the net asset value to recover. The Investment Adviser and our Board of Directors in their best judgment nevertheless may determine to use leverage if they expect that the benefits to our stockholders of maintaining the leveraged position will outweigh the risks. In addition, our ability to meet our payment and other obligations of the Notes and our credit facility depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, including the Notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of interest expense. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $4.4 billion in total assets, (ii) an average cost of funds of 5.63%, (iii) $1.7 billion in debt outstanding and (iv) $2.7 billion of shareholders' equity. Assumed Return on Our Portfolio (net of expenses) Corresponding Return to Stockholder (10 )% (5 )% 0 % 5 % 10 % (19.8 )% (11.7 )% (3.5 )% 4.6 % 12.7 % The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance. Actual returns may be greater or less than those appearing in the table. The Senior Convertible Notes, the 2022 Notes and the 2023 Notes present other risks to holders of our common stock, including the possibility that such Notes could discourage an acquisition of the Company by a third party and accounting uncertainty. Certain provisions of the Senior Convertible Notes, the 2022 Notes and the 2023 Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of the Senior Convertible Notes, the 2022 Notes and the 2023 Notes will have the right, at their option, to require us to repurchase all of their Senior Convertible Notes, the 2022 Notes and the 2023 Notes or any portion of the principal amount of such Senior Convertible Notes, the 2022 Notes and the 2023 Notes in integral multiples of $1,000, in the case of the Senior Convertible Notes and the 2023 Notes, and $25, in the case of the 54 Table of Contents 2022 Notes. We may also be required to increase the conversion rate or provide for conversion into the acquirer's capital stock in the event of certain fundamental changes with respect to the Senior Convertible Notes. These provisions could discourage an acquisition of us by a third party. The accounting for convertible debt securities is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or when any such change could be made and any such change could have an adverse impact on our reported or future financial results. Any such impacts could adversely affect the market price of our common stock. We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings. Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference. Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters. Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of the board of directors at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the directors until such arrearage is completely eliminated. In addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies or the terms of our credit facilities, might impair our ability to maintain our qualification as a RIC for federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements. In addition to regulatory restrictions that restrict our ability to raise capital, our credit facility contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. The agreement governing our credit facility requires us to comply with certain financial and operational covenants. These covenants include: • • • restrictions on the level of indebtedness that we are permitted to incur in relation to the value of our assets; restrictions on our ability to incur liens; and maintenance of a minimum level of stockholders' equity. As of June 30, 2013, we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, some of which are beyond our control. Accordingly, there are no assurances that we will continue to comply with the covenants in our credit facility. Failure to comply with these covenants would result in a default under this facility which, if we were unable to obtain a waiver from the lenders thereunder, could result in an acceleration of 55 Table of Contents repayments under the facility and thereby have a material adverse impact on our business, financial condition and results of operations. Failure to extend our existing credit facility, the revolving period of which is currently scheduled to expire on March 27, 2015, could have a material adverse effect on our results of operations and financial position and our ability to pay expenses and make distributions. The revolving period for our credit facility with a syndicate of lenders is currently scheduled to terminate on March 27, 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due if required by the lenders. If the credit facility is not renewed or extended by the participant banks by March 27, 2015, we will not be able to make further borrowings under the facility after such date and the outstanding principal balance on that date will be due and payable on March 27, 2017. At June 30, 2013 we had $124.0 million of outstanding borrowings under our credit facility. Interest on borrowings under the credit facility is one-month LIBOR plus 275 basis points with no minimum LIBOR floor. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The credit facility requires us to pledge assets as collateral in order to borrow under the credit facility. If we are unable to extend our facility or find a new source of borrowing on acceptable terms, we will be required to pay down the amounts outstanding under the facility during the two-year term-out period through one or more of the following: (1) principal collections on our securities pledged under the facility, (2) at our option, interest collections on our securities pledged under the facility and cash collections on our securities not pledged under the facility, or (3) possible liquidation of some or all of our loans and other assets, any of which could have a material adverse effect on our results of operations and financial position and may force us to decrease or stop paying certain expenses and making distributions until the facility is repaid. In addition, our stock price could decline significantly, we would be restricted in our ability to acquire new investments and, in connection with our year-end audit, our independent registered accounting firm could raise an issue as to our ability to continue as a going concern. Failure to refinance our existing Senior Notes, could have a material adverse effect on our results of operations and financial position. Our Senior Notes mature at various dates from December 15, 2015 to June 15, 2043. If we are unable to refinance our Senior Notes or find a new source of borrowing on acceptable terms, we will be required to pay down the amounts outstanding at maturity under the facility during the two-year term-out period through one or more of the following: (1) borrowing additional funds under our then current credit facility, (2) issuance of additional common stock or (3) possible liquidation of some or all of our loans and other assets, any of which could have a material adverse effect on our results of operations and financial position. In addition, our stock price could decline significantly; we would be restricted in our ability to acquire new investments and, in connection with our year-end audit, our independent registered accounting firm could raise an issue as to our ability to continue as a going concern. The trading market or market value of our publicly issued debt securities may fluctuate. Our publicly issued debt securities may or may not have an established trading market. We cannot assure our noteholders that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely 56 Table of Contents affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following: • • • • • • • • the time remaining to the maturity of these debt securities; the outstanding principal amount of debt securities with terms identical to these debt securities; the ratings assigned by national statistical ratings agencies; the general economic environment; the supply of debt securities trading in the secondary market, if any; the redemption or repayment features, if any, of these debt securities; the level, direction and volatility of market interest rates generally; and market rates of interest higher or lower than rates borne by the debt securities. Our noteholders should also be aware that there may be a limited number of buyers when they decide to sell their debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities. Terms relating to redemption may materially adversely affect our noteholders return on any debt securities that we may issue. If our noteholders' debt securities are redeemable at our option, we may choose to redeem their debt securities at times when prevailing interest rates are lower than the interest rate paid on their debt securities. In addition, if our noteholders' debt securities are subject to mandatory redemption, we may be required to redeem their debt securities also at times when prevailing interest rates are lower than the interest rate paid on their debt securities. In this circumstance, our noteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as their debt securities being redeemed. Our shares of common stock have traded at a discount from net asset value and may do so again in the future, which could limit our ability to raise additional equity capital. Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether any shares of our common stock will trade at, above, or below net asset value. In the recent past, including during much of 2009, the stocks of BDCs as an industry, including at times shares of our common stock, traded below net asset value and at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. When our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors. At our 2012 annual meeting of stockholders held on December 7, 2012, our stockholders approved our ability, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, to sell shares of our common stock at any level of discount from net asset value per share during the 12 month period following December 7, 2012. 57 Table of Contents There is a risk that investors in our common stock may not receive dividends or that our dividends may not grow over time and investors in our debt securities may not receive all of the interest income to which they are entitled. We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash dividend payments. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution. The above-referenced restrictions on distributions may also inhibit our ability to make required interest payments to holders of our debt, which may cause a default under the terms of our debt agreements. Such a default could materially increase our cost of raising capital, as well as cause us to incur penalties under the terms of our debt agreements. Investing in our securities may involve a high degree of risk and is highly speculative. The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be speculative and aggressive, and therefore, an investment in our shares may not be suitable for someone with low risk tolerance. Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan. All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over time. Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock. Sales of substantial amounts of our common stock, or the availability of such common stock for sale (including as a result of the conversion of our Senior Convertible Notes into common stock), could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so. If we sell shares of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to our net asset value per share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may be material. At our 2012 annual meeting of stockholders held on December 7, 2012, our stockholders approved our ability, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, to sell shares of our common stock at any level of discount from net asset value per share during the 12 month period following December 7, 2012. The issuance or sale by us of shares of our common stock or securities to 58 Table of Contents subscribe for or are convertible into shares of our common stock at a discount to net asset value poses a risk of dilution to our stockholders. In particular, stockholders who do not purchase additional shares of common stock 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 of common stock if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades. We have sold shares of our common stock at prices below net asset value per share in the past and may do so to the future. We have not sold any shares of our common stock at prices below net asset value per share since July 18, 2011. Our ability to enter into transactions with our affiliates is restricted. We are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent directors. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security or other property from or to such affiliate, absent the prior approval of our 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 our independent directors. Subject to certain limited exceptions, we are prohibited from buying or selling any security or other property from or to the Investment Adviser and its affiliates and persons with whom we are in a control relationship, or entering into joint transactions with any such person, absent the prior approval of the SEC. The market price of our securities may fluctuate significantly. The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include: • • • • • • • • • • • 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; price and volume fluctuations in the overall stock market from time to time; changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies; loss of RIC qualification; changes in earnings or variations in operating results; changes in the value of our portfolio of investments; any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; departure of one or more of Prospect Capital Management's key personnel; operating performance of companies comparable to us; short-selling pressure with respect to shares of our common stock or BDCs generally; future sales of our securities convertible into or exchangeable or exercisable for our common stock or the conversion of such securities, including the Convertible Unsecured Notes; 59 Table of Contents • • • • • • uncertainty surrounding the strength of the U.S. economic recovery; concerns regarding European sovereign debt; changes in prevailing interest rates; litigation matters; general economic trends and other external factors; and loss of a major funding source. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has, from time to time, been brought against that company. If our stock price fluctuates significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business. There is a risk that you may not receive distributions or that our distributions may not grow over time. We have made and intend to continue to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we 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 us as a business development company, we may be limited in our ability to make distributions. Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock. Our 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 our stockholders or otherwise be in their best interest. These provisions may prevent stockholders from being able to sell shares of our common stock at a premium over the current of prevailing market prices. Our charter provides for the classification of our Board of Directors into three classes of directors, serving staggered three-year terms, which may render a change of control or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our 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. Our 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, without stockholder approval, to amend our charter to increase or decrease the number of shares of common stock that we have authority to issue, which could have the effect of diluting a stockholder's ownership interest. Prior to the issuance of shares of common stock of each class or series, including any reclassified series, our Board of Directors is required by our 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. Our charter and bylaws also provide that our Board of Directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General 60 Table of Contents Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as: • • The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an "interested stockholder" (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 stockholder becomes an interested stockholder and, thereafter, imposes special minimum price provisions and special stockholder voting requirements on these combinations; and 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 stockholder, entitles the stockholder to exercise one of three increasing ranges of voting power in electing directors, as described more fully below) 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 stockholders 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. The provisions of the Maryland Business Combination Act will not apply, however, if our Board of Directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Our Board of Directors has adopted a resolution that any business combination between us 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. 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 us. As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our Board of Directors at any time in the future, provided that we will notify the Division of Investment Management at the SEC prior to amending or eliminating this provision. However, as noted above, the SEC has recently taken the position that the Maryland Control Share Acquisition Act is inconsistent with the 1940 Act and may not be invoked by a BDC. It is the view of the staff of the SEC that opting into the Maryland Control Share Acquisition Act would be acting in a manner inconsistent with section 18(i) of the 1940 Act. Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares. In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering. In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on 61 Table of Contents the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial. We may in the future choose to pay dividends in our own stock, in which case our stockholders may be required to pay tax in excess of the cash they receive. We may distribute taxable dividends that are payable in part in our stock. The IRS has issued private letter rulings on cash/stock dividends paid by RICs and real estate investment trusts if certain requirements are satisfied, and we have received such a ruling permitting us to declare such taxable cash/stock dividends, up to 80% in stock, with respect to our taxable years ending August 31, 2012 and August 31, 2013. 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 our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. Stockholder (as defined in "Material U.S. Federal Income Tax Considerations") 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 of its stock at the time of the sale. Furthermore, with respect to Non-U.S. Stockholders (as defined in "Material U.S. Federal Income Tax Considerations"), we 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 our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. It is unclear whether and to what extent we will be able to pay dividends in cash and our stock. Item 1B. Unresolved Staff Comments. Not applicable. Item 2. Properties. We do not own any real estate or other physical properties materially important to our operation. Our principal executive offices are located at 10 East 40th Street, New York, New York 10016, where we occupy our office space pursuant to our Administration Agreement with Prospect Administration. The office facilities, which are shared with the Investment Adviser and Administrator, consist of approximately 28,633 square feet, with leases expiring through 2023. We believe that our office facilities are suitable and adequate for our business as currently conducted. Item 3. Legal Proceedings. From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any such litigation as of June 30, 2013. Item 4. Mine Safety Disclosures. Not applicable. 62 Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is quoted on the NASDAQ Global Select Market under the symbol "PSEC." The following table sets forth, for the periods indicated, our net asset value per share of common stock and the high and low closing prices per share of our common stock as reported on the NASDAQ Global Select Market. Our common stock historically has traded at prices both above and below its net asset value. There can be no assurance, however, that such premium or discount, as applicable, to net asset value will be maintained. Net Asset Value Per Share(1) Stock Price High Year Ended June 30, 2013 First quarter $ 10.88 $ 12.21 $ 10.83 Second quarter $ 10.81 $ 11.98 $ 9.89 Third quarter $ 10.71 $ 11.49 $ 10.91 Fourth quarter $ 10.72 $ 11.11 $ 10.08 Low June 30, 2012 First quarter $ 10.41 $ 10.18 $ 7.41 Second quarter $ 10.69 $ 9.88 $ 7.99 Third quarter $ 10.82 $ 11.39 $ 9.43 Fourth quarter $ 10.83 $ 11.39 $ 10.55 June 30, 2011 First quarter $ 10.24 $ 10.00 $ 9.18 Second quarter $ 10.25 $ 10.86 $ 9.69 Third quarter $ 10.33 $ 12.33 $ 10.72 Fourth quarter $ 10.36 $ 12.18 $ 9.95 June 30, 2010 First quarter $ 11.11 $ 10.99 $ 8.82 Second quarter $ 10.10 $ 12.31 $ 9.93 Third quarter $ 10.12 $ 13.20 $ 10.45 Fourth quarter $ 10.30 $ 12.20 $ 9.65 June 30, 2009 First quarter $ 14.63 $ 14.24 $ 11.12 Second quarter $ 14.43 $ 13.08 $ 6.29 Third quarter $ 14.19 $ 12.89 $ 6.38 Fourth quarter $ 12.40 $ 10.48 $ 7.95 Premium (Discount) of High Sales Price to Net Asset Value Premium (Discount) of Low Sales Price to Net Asset Value 12.2 % 10.8 % 7.3 % 3.6 % (2.2 )% (7.6 )% 5.3 % 5.2 % (2.3 )% 6.0 % 19.4 % 17.6 % (1.1 )% 21.9 % 30.4 % 18.4 % (2.7 )% (9.4 )% (9.2 )% (15.5 )% (0.5 )% (8.5 )% 1.9 % (6.0 )% (28.8 )% (25.3 )% (12.8 )% (2.5 )% (10.4 )% (5.5 )% 3.8 % (4.0 )% (20.6 )% (1.7 )% 3.3 % (6.3 )% (24.0 )% (56.4 )% (55.0 )% (35.9 )% (1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high or low sales price. The net asset values shown are based on outstanding shares at the end of each period. On August 16, 2013, the last reported sales price of our common stock was $10.89 per share. As of August 16, 2013, we had approximately 137 stockholders of record, and we had approximately 137,479 beneficial owners whose shares are held in the names of brokers, dealers and clearing agencies. 63 Table of Contents Distributions Through March 2010, we made quarterly distributions to our stockholders out of assets legally available for distribution. In June 2010, we changed our distribution policy from a quarterly payment to a monthly payment and intend to continue with monthly distributions. Our distributions, if any, will be determined by our Board of Directors. Certain amounts of the monthly distributions may from time to time be paid out of our capital rather than from earnings for the quarter as a result of our deliberate planning or by accounting reclassifications. As a RIC, we generally are not subject to U.S. federal income tax on income and gains we distribute each taxable year to our stockholders, provided that in such taxable year we distribute at least 90% of our ordinary income and net short-term capital gains in excess of realized net long-term capital losses. In order to avoid certain excise taxes imposed on RICs, we are required to timely distribute with respect to each calendar year an amount at least equal to the sum of • • • 98% of our ordinary income for the calendar year, 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and any ordinary income and net capital gains for preceding years that were not distributed during such years. At December 31, 2012, we accrued, and subsequently paid, $4,500 for the undistributed ordinary income retained at December 31, 2012. Through June 30, 2013, we have accrued an additional $2,000 as we expect to again retain undistributed ordinary income at December 31, 2013. In addition, although we currently intend to distribute realized net capital gains (which we define 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, we may decide in the future to retain such capital gains for investment. In such event, the consequences of our retention of net capital gains are as described under "Material U.S. Federal Income Tax Considerations." We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders' cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash distributions. Stockholders who receive distributions in the form of stock are subject to the same U.S. Federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. See "Dividend Reinvestment Plan". To the extent prudent and practicable, we intend to declare and pay dividends on a monthly basis. With respect to the distributions paid to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies were treated as taxable income and accordingly, distributed to stockholders. During the fiscal year ended June 30, 2013, we declared total distributions of approximately $271.5 million. Tax characteristics of all distributions will be reported to stockholders, as appropriate, on Form 1099-DIV after the end of the year. Our ability to pay distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants. 64 Table of Contents The following table reflects the distributions per share that we have declared on our common stock to date. In June 2010, we changed our distribution policy from a quarterly payment to a monthly payment. Declaration Date 8/20/2013 8/20/2013 8/20/2013 6/17/2013 6/17/2013 6/17/2013 6/17/2013 5/6/2013 5/6/2013 5/6/2013 5/6/2013 2/7/2013 2/7/2013 2/7/2013 11/7/2012 11/7/2012 11/7/2012 8/21/2012 8/21/2012 5/7/2012 5/7/2012 5/7/2012 5/7/2012 2/6/2012 2/6/2012 2/6/2012 11/7/2011 11/7/2011 11/7/2011 8/24/2011 8/24/2011 5/9/2011 5/9/2011 5/9/2011 5/9/2011 2/8/2011 2/8/2011 2/8/2011 11/8/2010 11/8/2010 11/8/2010 8/26/2010 8/26/2010 6/18/2010 6/18/2010 Prior to 6/30/2010 Record Date 3/31/2014 2/28/2014 1/31/2014 12/31/2013 11/29/2013 10/31/2013 9/30/2013 8/30/2013 7/31/2013 6/28/2013 5/31/2013 4/30/2013 3/29/2013 2/28/2013 1/31/2013 12/31/2012 11/30/2012 10/31/2012 9/30/2012 8/31/2012 7/31/2012 6/29/2012 5/31/2012 4/30/2012 3/30/2012 2/29/2012 1/31/2012 12/31/2011 11/30/2011 10/31/2011 9/30/2011 8/31/2011 7/29/2011 6/30/2011 5/31/2011 4/29/2011 3/31/2011 2/28/2011 1/31/2011 12/31/2010 11/30/2010 10/29/2010 9/30/2010 8/31/2010 7/30/2010 Pay Date 4/17/2014 3/20/2014 2/20/2014 1/23/2014 12/19/2013 11/21/2013 10/24/2013 9/19/2013 8/22/2013 07/18/2013 6/19/2013 5/23/2013 4/18/2013 3/21/2013 2/20/2013 1/23/2013 12/20/2012 11/22/2012 10/24/2012 9/21/2012 8/24/2012 7/24/2012 6/22/2012 5/24/2012 4/20/2012 3/23/2012 2/17/2012 1/25/2012 12/22/2011 11/22/2011 10/25/2011 9/23/2011 8/26/2011 7/22/2011 6/24/2011 5/31/2011 4/29/2011 3/31/2011 2/28/2011 1/31/2011 12/31/2010 11/30/2010 10/29/2010 9/30/2010 8/31/2010 Rate 0.110375 0.110350 0.110325 0.110300 0.110275 0.110250 0.110225 0.110200 0.110175 0.110150 0.110125 0.110100 0.110075 0.110050 0.110025 0.110000 0.101675 0.101650 0.101625 0.101600 0.101575 0.101550 0.101525 0.101500 0.101475 0.101450 0.101425 0.101400 0.101375 0.101350 0.101325 0.101300 0.101275 0.101250 0.101225 0.101200 0.101175 0.101150 0.101125 0.101000 0.100875 0.100750 0.100625 0.100500 0.100250 Amount (in thousands) $ * * * * * * * * 28,001 27,299 27,280 26,619 26,267 25,307 24,641 23,669 21,308 17,736 17,597 16,897 16,886 14,180 12,395 12,384 12,372 12,361 11,134 11,122 11,111 11,098 11,087 11,074 11,060 10,896 9,871 9,861 8,939 8,930 8,919 8,899 8,668 8,347 7,889 7,620 7,330 Since Inception $ 215,157 762,211 * Not yet determinable 65 Table of Contents Dividend Reinvestment We maintain an "opt out" dividend reinvestment and cash purchase plan for our registered stockholders. Under the plan, if shares of our common stock are registered, distributions will be automatically reinvested in additional shares of common stock unless you "opt out" of the plan. Stockholders are advised to consult with their brokers or financial institutions, as appropriate, with respect to the administration of their dividends and related instructions. Assuming that we maintain our status as a RIC under Subchapter M of the Code, we intend to make distributions to our stockholders on a monthly basis of substantially all of our net operating income. We may also make distributions of net realized capital gains, as appropriate. Tax characteristics of all distributions will be reported to stockholders, as appropriate, on Form 1099-DIV after the end of the year. Our Board of Directors presently intends to declare and pay monthly distributions on the common stock. Our ability to make distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants. Stock distributions distributed pursuant to this dividend reinvestment plan may come in the form of the issuance of new shares or the distribution of pre-existing shares re-acquired from the open market. How the stock to be distributed as part of this plan is made available is a determination made by our Board of Directors. During the year ended June 30, 2013, we distributed 1,450,578 shares of common stock in accordance with this dividend reinvestment plan. All of the shares issued were distributed from new issues. 66 Table of Contents The following table reflects dividend reinvestments distributed through the issuance of new shares: Record Date June 30, 2013 May 31, 2013 April 30, 2013 March 29, 2013 February 28, 2013 January 31, 2013 December 31, 2013 November 30, 2012 October 31, 2012 September 30, 2012 August 31, 2012 July 31, 2012 June 29, 2012 May 31, 2012 April 30, 2012 March 30, 2012 February 29, 2012 January 31, 2012 December 30, 2011 November 30, 2011 October 31, 2011 September 30, 2011 August 31, 2011 July 31, 2011 June 30, 2011 May 31, 2011 April 29, 2011 March 31, 2011 February 28, 2011 January 31, 2011 December 31, 2010 November 30, 2010 October 29, 2010 September 30, 2010 August 31, 2010 July 30, 2010 June 30, 2010 Shares Issued Aggregate Offering Price (in thousands) % of Dividend 109,437 117,107 117,497 138,087 132,237 160,941 160,182 100,552 84,904 83,200 74,494 75,543 205,834 72,407 81,773 85,063 77,764 69,864 85,252 90,677 94,213 89,078 100,634 106,869 102,890 92,813 78,689 76,377 76,253 83,021 84,155 89,603 87,941 92,999 90,006 89,620 83,875 67 1,208 1,228 1,277 1,444 1,471 1,820 1,820 1,100 904 981 878 866 2,287 815 893 930 833 771 896 854 868 853 845 931 1,041 941 909 917 926 1,004 958 970 865 913 876 833 822 4.5 % 4.8 % 4.8 % 5.5 % 5.8 % 7.4 % 7.7 % 5.2 % 5.1 % 5.6 % 5.2 % 5.1 % 16.1 % 5.7 % 7.2 % 7.5 % 6.7 % 6.9 % 8.1 % 7.7 % 7.8 % 7.7 % 7.6 % 8.4 % 9.6 % 9.5 % 9.2 % 10.3 % 10.4 % 11.3 % 10.8 % 11.2 % 10.4 % 11.6 % 11.5 % 10.3 % 11.9 % Table of Contents Stock Performance Graph This graph compares the return on our common stock with that of the Standard & Poor's 500 Stock Index and the NASDAQ Financial 100 Index, for the period July 1, 2008 through June 30, 2013. The graph assumes that, on July 1, 2008, a person invested $100 in each of our common stock, the S&P 500 Index, and the NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are invested in like securities. The graph and other information furnished under this Part II, Item 5 of this annual report on Form 10-K shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the 1934 Act. The stock price performance included in the above graph is not necessarily indicative of future stock performance. 68 Table of Contents Item 6. Selected Financial Data. The following selected financial data is derived from our financial statements which have been audited by BDO USA, LLP, our independent registered public accounting firm. The financial data should be read in conjunction with our financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included below in this annual report. 2013 2012 For the Year Ended June 30, 2011 (in thousands except data relating to shares, per share and number of portfolio companies) 2010 2009 435,455 $ 82,705 58,176 576,336 219,536 $ 64,881 36,493 320,910 134,454 $ 15,092 19,930 169,476 86,518 $ 15,366 12,675 114,559 62,926 22,793 14,762 100,481 (76,341 ) (38,534 ) (17,598 ) (8,382 ) (6,161 ) (151,031 ) (24,040 ) (251,412 ) 324,924 (82,507 ) (13,185 ) (134,226 ) 186,684 (46,051 ) (11,606 ) (75,255 ) 94,221 (30,727 ) (8,260 ) (47,369 ) 67,190 (26,705 ) (8,452 ) (41,318 ) 59,163 (104,068 ) 4,220 24,017 (47,565 ) (24,059 ) $ Performance Data: Interest income Dividend income Other income Total investment income Interest and credit facility expenses Investment advisory expense Other expenses Total expenses Net investment income Realized and unrealized (losses) gains Net increase in net assets from operations $ 220,856 $ 190,904 $ 118,238 $ 19,625 $ 35,104 Per Share Data: Net increase in net assets from operations (1) Distributions declared per share Average weighted $ $ 1.07 $ 1.67 $ 1.38 $ 0.33 $ 1.11 (1.28 ) $ (1.22 ) $ (1.21 ) $ (1.33 ) $ (1.62 ) shares outstanding for the period 207,069,971 114,394,554 85,978,757 59,429,222 31,559,905 Assets and Liabilities Data: Investments Other assets Total assets Amount drawn on credit facility Senior convertible notes Senior unsecured notes InterNotes® Amount owed to related parties Other liabilities Total liabilities Net assets Investment Activity Data: $ 4,172,852 $ 2,094,221 $ 1,463,010 $ 86,307 2,255,254 1,549,317 275,365 4,448,217 161,033 748,483 $ 84,212 832,695 547,168 119,857 667,025 124,000 847,500 347,725 363,777 96,000 447,500 100,000 20,638 84,200 322,500 — — 100,300 — — — 6,690 102,031 1,791,723 7,918 20,342 434,960 $ 2,656,494 $ 1,511,974 $ 1,114,357 $ 8,571 70,571 743,280 9,300 11,671 121,271 711,424 $ 124,800 — — — 6,713 2,916 134,429 532,596 No. of portfolio companies at period end Acquisitions Sales, repayments, and other disposals Total return based on market value(3) Total return based on net asset value(3) 85 $ 3,103,217 $ 1,120,659 $ 124 72 953,337 $ 58 364,788 (2) $ 30 98,305 $ 931,534 $ 500,952 $ 285,562 $ 136,221 $ 27,007 6.2 % 27.2 % 17.2 % 17.7 % (18.6 )% 10.9 % 18.0 % 12.5 % (6.8 )% (0.6 )% Weighted average yield at end of period(4) 13.6 % 13.9 % 12.8 % 16.2 % 14.6 % (1) Per share data is based on average weighted shares for the period 69 Table of Contents (2) Includes $207,126 of acquired portfolio investments from Patriot Capital Funding, Inc. (3) 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. (4) Excludes equity investments and non-performing loans. 70 Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (All figures in this item are in thousands except per share and other data) The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this annual report. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Part I, Item 1A "Risk Factors" and "Note about Forward-Looking Statements" appearing elsewhere herein. Overview We are a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company that has filed an election to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development and recapitalization. We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows. We currently have seven origination strategies in which we make investments: (1) lending in private equity sponsored transactions, (2) lending directly to companies not owned by private equity firms, (3) control investments in corporate operating companies, (4) control investments in financial companies, (5) investments in structured credit, (6) real estate investments, and (7) investments in syndicated debt. We continue to evaluate other origination strategies in the ordinary course of business with no specific tops-down allocation to any single origination strategy. Lending in Private Equity Sponsored Transactions—We make loans to companies which are controlled by leading private equity firms. This debt can take the form of first lien, second lien, unitranche or mezzanine loans. In making these investments, we look for a diversified customer base, recurring demand for the product or service, barriers to entry, strong historical cash flow and experienced management teams. These loans typically have significant equity subordinate to our loan position. This strategy has represented approximately 50%-60% of our business. Lending Directly to Companies—We provide debt financing to companies owned by non-private equity firms, the company founder, a management team or a family. Here, in addition to the strengths we look for in a sponsored transaction, we also look for the alignment with the management team with significant invested capital. This strategy often has less competition than the private equity sponsor strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation. Direct lending can result in higher returns and lower leverage than sponsor transactions and may include warrants or equity to us. This strategy generally has comprised approximately 10%-15% of our business. Control Investments in Corporate Operating Companies—This strategy involves acquiring controlling stakes in non-financial operating companies. Our investments in these companies are generally structured as a combination of yield-producing debt and equity. We provide certainty of closure to our counterparties, give the seller personal liquidity and generally look for management to continue on in their current roles. This strategy has comprised approximately 10%-15% of our business. Control Investments in Financial Companies—This strategy involves acquiring controlling stakes in financial companies, including consumer direct lending, subprime auto lending and other strategies. Our investments in these companies are generally structured as a combination of yield-producing debt and equity. These investments are often structured in a tax-efficient RIC-compliant partnership, enhancing returns. This strategy has comprised approximately 10%-15% of our business. 71 Table of Contents Investments in Structured Credit—We make investments in CLOs, generally taking a significant position in the subordinated interests (equity) of the CLOs. The CLOs include a diversified portfolio of broadly syndicated loans and do not have direct exposure to real estate, mortgages, sub-prime debt, or consumer based debt. The CLOs in which we invest are managed by top-tier collateral managers that have been thoroughly diligenced prior to investment. This strategy has represented 10%-20% of the portfolio. Real Estate Investments—We make investments in real estate through our wholly-owned tax-efficient REIT, APHC. Our real estate investments are in various classes of fully developed and occupied real estate properties that generate current yields. We seek to identify properties that have historically high occupancy and steady cash flow generation. We partner with established property managers with experience in managing the property type to manage such properties after acquisition. This is a more recent investment strategy that has represented less than 5% of our business. Investments in Syndicated Debt—On an opportunistic basis, we make investments in loans and high yield bonds that have been sold to a syndicate of buyers. Here we look for investments with attractive risk-adjusted returns after we have completed a fundamental credit analysis. These investments are purchased with a long term, buy-and-hold outlook and we look to provide significant structuring input by providing anchoring orders. This strategy has represented approximately 5%-10% of the portfolio. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt and our investments in CLOs are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of CLOs which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. Our CLO investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B depending on the tranche. We seek to be a long-term investor with our portfolio companies. The aggregate value of our portfolio investments was $4,172,852 and $2,094,221 as of June 30, 2013 and June 30, 2012, respectively. During the year ended June 30, 2013, our net cost of investments increased by $2,156,465, or 102.7%, as a result of 68 new investments, 25 follow-on investments and several revolver advances of $3,043,531, accrued of payment-in-kind interest of $10,947, structuring fees of $52,699 and amortization of discounts and premiums of $11,016, while we received full repayment on 23 investments, sold ten investments, impaired one investment, and received several partial prepayments, amortization payments and a revolver repayment, totaling $931,534. Compared to the end of last fiscal year (ended June 30, 2012), net assets increased by $1,144,520, or 75.7% during the year ended June 30, 2013, from $1,511,974 to $2,656,494. This increase resulted from the issuance of new shares of our common stock (less offering costs) in the amount of $1,179,084, dividend reinvestments of $16,087, and $220,856 from operations. These increases, in turn, were offset by $271,507 in dividend distributions to our stockholders. The $220,856 increase in net assets resulting from operations is net of the following: net investment income of $324,924, net realized loss on investments of $26,234, and a decrease in net assets due to changes in net unrealized depreciation of investments of $77,834. 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, and these differences could be material. 72 Table of Contents Fourth Quarter Highlights Investment Transactions On April 1, 2013, we refinanced our existing $18,635 of subordinated loans to Ajax Rolled Ring & Machine, Inc. ("Ajax"), increasing the size of our debt investment to $38,537. Concurrent with the refinancing, we received repayment of the $18,635 subordinated loans that were previously outstanding. The subordinated unsecured term loan bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 6.0% and has a final maturity of March 30, 2018. On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. Our cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors , and is equal to the fair value of assets at the time of transfer and we recorded a realized loss of $19,647 in connection with the foreclosure on the assets. On May 17, 2013, Wolf sold certain of the assets that had been previously held by H&M that were located in Martin County to Hibernia for $66,000. Proceeds from the sale were primarily used to repay the loan and NPI receivable due to us and we recognized as a realized gain of $11,826 partially offsetting the previously recorded loss. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the NPI agreement which was recognized as other income during the fiscal year ended June 30, 2013. On April 17, 2013, we made an investment of $43,650 to purchase 97% of the subordinated notes in Mountain View CLO 2013-I Ltd. ("Mountain View"). On April 22, 2013, we provided $34,375 of senior secured financing, of which $31,875 was funded at closing, to support the acquisition of Pegasus Business Intelligence, LP ("Pegasus"), the world's largest processor of commissions paid by hotels to travel agencies for room booking services. The $15,938 Term Loan A note bears interest in cash at the greater of 6.75% or Libor plus 5.5% and has a final maturity of April 18, 2018. The $15,938 Term Loan B note bears interest in cash at the greater of 13.75% or Libor plus 12.5% and has a final maturity of April 18, 2018. The $2,500 senior secured revolver, which was unfunded at closing, bears interest in cash at the greater of 9.0% or Libor plus 7.75% and has a final maturity of April 18, 2014. On April 25, 2013, we made an investment of $26,000 to purchase 50.9% of the subordinated notes in Brookside Mill CLO Ltd. ("Brookside"). On April 30, 2013, we made a $21,247 follow-on investment in APH, to acquire Lofton Place Apartments and Vista at Palma Sola, multi- family residential properties located in Florida. We invested $3,247 of equity and $18,000 of debt in APH. The senior secured note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On April 30, 2013, we sold our investment in Fischbein, LLC ("Fischbein") for net proceeds of $3,168, recognizing a realized gain of $2,293 on the sale. In addition, there is $310 being held in escrow which will be recognized as additional gain if and when received. On May 8, 2013, we made a $6,119 follow-on investment in APH, to acquire Arlington Park, a multi-family residential property located in Marietta, Georgia. We invested $2,119 of equity and $4,000 of debt in APH. The senior secured note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On May 9, 2013, we provided a $55,000 senior secured credit facility to support the recapitalization of Sandow Media, LLC ("Sandow"), a provider of multimedia content and services to businesses and consumers focused on the areas of design and luxury. The senior secured first lien loan bears interest in cash at the greater of 10.5% or Libor plus 8.5% and interest payment in kind of 1.5% and has a final maturity of May 8, 2018. 73 Table of Contents On May 10, 2013, we provided $150,000 of secured second lien financing to support the recapitalization of Arctic Glacier, Inc. ("Arctic Glacier"), a leading producer, marketer, and distributor of high-quality packaged ice to consumers in the United States and Canada. After the financing, we received repayment of $86,982 of subordinated unsecured term loan previously outstanding. The senior secured second lien loan bears interest in cash at the greater of 11.25% or Libor plus 10.0% and has a final maturity of November 10, 2019. On May 14, 2013, we provided $4,000 of senior secured financing to SourceHOV, LLC ("SourceHOV"), a leading provider of business and knowledge process outsourcing. The second lien term loan bears interest in cash at the greater of 8.75% or Libor plus 7.5% and has a final maturity of April 30, 2019. On June 13, 2013, we sold our $4,000 investment in SourceHOV and realized a gain of $40 on this investment. On May 16, 2013, Out Rage, LLC ("Out Rage") repaid the $11,836 loan receivable to us. On May 23, 2013, Snacks Holding Corporation ("Snacks Holding") repaid the $15,366 loan receivable to us. On May 31, 2013, we made a follow-on secured second lien debt investment of $7,190 in Injured Workers Pharmacy LLC ("IWP"), a specialty pharmacy services company. The secured second lien loan bears interest in cash at the greater of 11.5% or Libor plus 7.0% and interest payment in kind of 1.0% and has a final maturity of May 31, 2019. On June 3, 2013, Nobel Learning Communities, Inc. ("Nobel") repaid the $15,262 loan receivable to us. On June 4, 2013, Springs Window Fashions, LLC ("Springs") repaid the $35,000 loan receivable to us. On June 11, 2013, we provided $115,000 of senior secured financing to CI Holdings ("Transplace"), a third-party logistics company that services many of the largest shippers in the world. The senior secured first lien loan bears interest in cash at the greater of 10.0% or Libor plus 5.0% and has a final maturity of June 11, 2019. On June 11, 2013, we provided $7,000 of secured second lien financing to Armor Holding II LLC ("AST"), a leading North American third-party provider of share registry and associated value added services to shareholders on behalf of listed public companies. The second lien loan bears interest in cash at the greater of 9.25% or Libor plus 8.0% and has a final maturity of December 26, 2020. On June 12, 2013, we made a $23,250 follow-on investment in R-V Industries, Inc. ("R-V"). The senior subordinated note bears interest in cash at the greater of 10.0% or Libor plus 9.0% and has a final maturity of June 12, 2018. On June 14, 2013, we sold our $10,000 investment in Transaction Networks Services, Inc. ("TNS") and realized a gain of $117 on this investment. On June 18, 2013, we served as sole agent and provider of $70,000 senior secured financing, of which $65,643 was funded at closing, to support the recapitalization of Traeger Pellet Grills LLC ("Traeger"), a leading designer, marketer, and distributor of wood pellet grills, flavored wood pellets, and grill accessories. The $30,000 Term Loan A note bears interest in cash at the greater of 6.5% or Libor plus 4.5% and has a final maturity of June 18, 2018. The $30,000 Term Loan B note bears interest in cash at the greater of 11.5% or Libor plus 9.5% and has a final maturity of June 18, 2018. The $10,000 senior secured revolver, of which $5,643 was drawn at closing, bears interest in cash at the greater of 9.0% or Libor plus 7.0% and has a final maturity of June 18, 2014. On June 24, 2013, we made a $76,533 follow-on investment in APH, to acquire Arium Resort (f/k/a The Resort at Pembroke Pines), a prominent multi-family residential community located in 74 Table of Contents Pembroke Pines, Florida. We invested $13,533 of equity and $63,000 of debt in APH. The senior secured note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On June 25, 2013, we made an investment of $26,500 to purchase 84.13% of the subordinated notes in LCM XIV CLO Ltd. ("LCM XIV"). On June 27, 2013, we provided $11,000 of secured second lien financing to Blue Coat Systems, Inc. ("Blue Coat"), a leading provider of web security and wide area network (WAN) optimization solutions. The second lien note bears interest in cash at the greater of 9.5% or Libor plus 8.5% and has a final maturity of June 28, 2020. On June 27, 2013, we made a follow-on secured debt investment of $87,500 to support the recapitalization of Progrexion Holdings, Inc. ("Progrexion"). After the financing, we now hold $241,033 of senior secured debt of Progrexion. The senior secured first lien note bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of September 14, 2017. On June 28, 2013, Sandow repaid $30,100 of the $55,000 loan receivable to us. After the repayment, we now hold $24,900 of senior secured debt of Sandow. On June 28, 2013, we made a $1,000 follow-on investment in Ajax. The subordinated unsecured term loan bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 6.0% and has a final maturity of March 30, 2018. On June 28, 2013, we made an $18,000 secured debt follow-on investment in New Star Metals, Inc. ("New Star"), a provider of specialized processing services to the steel industry. The senior subordinated term loan bears interest in cash at 11.5% and interest payment in kind of 1.0% and has a final maturity of February 2, 2018. In June 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair market value. Equity Issuance During the period from April 1, 2013 to May 31, 2013, we sold 8,836,237 shares of our common stock at an average price of $10.92 per share, and raised $96,476 of gross proceeds, under the ATM Program. Net proceeds were $95,474 after commissions to the broker-dealer on shares sold and offering costs. No additional shares were sold from June 1, 2013 to June 30, 2013. On April 18, 2013, May 23, 2013 and June 20, 2013, we issued 138,087, 117,497 and 117,107 shares of our common stock in connection with the dividend reinvestment plan, respectively. Dividend On May 6, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • • $0.110125 per share for May 2013 to holders of record on May 31, 2013 with a payment date of June 20, 2013; $0.110150 per share for June 2013 to holders of record on June 28, 2013 with a payment date of July 18, 2013; $0.110175 per share for July 2013 to holders of record on July 31, 2013 with a payment date of August 22, 2013; and $0.110200 per share for August 2013 to holders of record on August 30, 2013 with a payment date of September 19, 2013. 75 Table of Contents On June 17, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • • $0.110225 per share for September 2013 to holders of record on September 30, 2013 with a payment date of October 24, 2013; $0.110250 per share for October 2013 to holders of record on October 31, 2013 with a payment date of November 21, 2013; $0.110275 per share for November 2013 to holders of record on November 29, 2013 with a payment date of December 19, 2013; and $0.110300 per share for December 2013 to holders of record on December 31, 2013 with a payment date of January 23, 2014. Debt Issuance During the quarter ended June 30, 2013, we issued $164,376 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $159,983, as follows: Principal Amount Interest Rate Range Weighted Average Interest Rate Date of Issuance April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 12,280 42,482 10,000 7,548 33,641 $ 29,528 4.50% - 5.00% 264 3.78% - 3.78% 5,164 4.63% - 5.50% 6.00% 5.00% 5.00% 5.75% 6.25% 9,905 5.00% - 5.25% 5,000 5.00% 1,707 5.75% - 6.00% 6,857 6.25% - 6.50% $ 164,376 Maturity Date 4.96 % April 15, 2020 3.78 % April 15, 2023 5.34 % April 15, 2031 6.00 % April 15, 2043 5.00 % May 15, 2020 5.00 % May 15, 2028 5.75 % May 15, 2031 6.25 % May 15, 2043 5.04 % June 15, 2020 5.00 % June 15, 2028 5.85 % June 15, 2031 6.31 % June 15, 2043 Investment Holdings As of June 30, 2013, we continue to pursue our diversified investment strategy. At June 30, 2013, approximately $4,172,852 or 157.1% of our net assets are invested in 124 long-term portfolio investments and CLOs and 5.4% of our net assets are invested in money market funds. During the year ended June 30, 2013, we originated $3,103,217 of new investments. Our origination efforts are focused primarily on secured lending, to reduce the risk in the portfolio, investing primarily in first lien loans, and subordinated notes in CLOs, though we also continue to close select junior debt and equity investments. In addition to targeting investments senior in corporate capital structures with our new originations, we have also increased our origination business mix of third party private equity sponsor owned companies, which tend to have more third party equity capital supporting our debt investments than non-sponsor transactions. Our annualized current yield was 13.9% and 13.6% as of June 30, 2012 and June 30, 2013, respectively, across all performing interest bearing investments. The decrease in our current yield is primarily due to recent originations being at lower yields than the existing portfolio. Monetization of equity positions that we hold and loans on non-accrual status are not included in this yield calculation. In many of our portfolio companies we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to 76 Table of Contents contribute to our investment returns. Some of these equity positions include features such as contractual minimum internal rates of returns, preferred distributions, flip structures and other features expected to generate additional investment returns, as well as contractual protections and preferences over junior equity, in addition to the yield and security offered by our cash flow and collateral debt protections. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of more than 25% 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 the investee company. As of June 30, 2013, we own controlling interests in AIRMALL USA, Inc. ("AIRMALL"), Ajax, APH, AWCNC, LLC, Borga, Inc., CCPI Holdings, Inc. ("CCPI"), Credit Central Holdings of Delaware, LLC ("Credit Central"), Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) ("Energy Solutions"), First Tower Holdings of Delaware, LLC ("First Tower Delaware"), Manx Energy, Inc. ("Manx"), Nationwide Acceptance Holdings, LLC ("Nationwide"), NMMB Holdings, Inc. ("NMMB"), R-V Industries, Inc. ("R-V"), The Healing Staff, Inc. ("THS"), Valley Electric Holdings I, Inc. ("Valley Electric") and Wolf Energy Holdings, Inc. ("Wolf"). We also own an affiliated interest in BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork) ("Biotronic"), Boxercraft Incorporated ("Boxercraft") and Smart, LLC. The following is a summary of our investment portfolio by level of control at June 30, 2013 and June 30, 2012, respectively: June 30, 2013 June 30, 2012 Percent of Percent of Portfolio $ 830,151 19.5 % $ 811,634 19.5 % $ 518,015 24.7 % $ 564,489 27.0 % 2.2 % Percent of Portfolio Portfolio Fair Value Portfolio Fair Value Percent of 46,116 49,189 42,443 44,229 2.1 % 1.2 % 1.0 % Cost Cost Level of Control Control Affiliate Non- control/Non -affiliate Total 3,376,438 79.3 % 3,318,775 79.5 % 1,537,069 73.2 % 1,483,616 70.8 % Portfolio $ 4,255,778 100.0 % $ 4,172,852 100.0 % $ 2,099,313 100.0 % $ 2,094,221 100.0 % 77 Table of Contents The following is our investment portfolio presented by type of investment at June 30, 2013 and June 30, 2012, respectively: June 30, 2013 Percent of Cost Portfolio Fair Value Percent of Portfolio June 30, 2012 Percent of Cost Portfolio Fair Value Percent of Portfolio 9,238 0.2 % $ 8,729 0.2 % $ 1,145 0.1 % $ 868 0.0 % 2,262,327 53.1 % 2,207,091 52.8 % 1,146,454 54.6 % 1,080,053 52.0 % Subordinated Secured Debt 1,062,386 25.0 % 1,024,901 24.6 % 536,900 25.6 % 488,113 22.9 % 88,470 27,667 2.1 % 0.7 % 88,827 28,589 2.1 % 0.7 % 72,617 27,258 3.5 % 1.3 % 73,195 27,717 3.5 % 1.3 % 660,619 15.5 % 658,086 15.8 % 214,559 10.2 % 218,009 10.4 % 1.4 % 6.6 % 0.6 % 14,742 2.7 % 108,494 1.5 % 29,155 2.9 % 137,198 31,323 61,459 0.4 % 2.6 % 0.0 % 492 0.0 % 5,437 0.2 % 13,844 0.7 % Type of Investment Revolving Line of Credit Senior Secured $ Debt Subordinated Unsecured Debt CLO Debt CLO Residual Interest Preferred Stock 25,016 Common Stock 117,678 Membership Interests Overriding Royalty Interests 216 — —% — —% — —% 1,623 0.1 % Net Profit Interests Escrows Receivable Warrants Total Portfolio — —% 20,959 0.5 % — —% — —% — —% 0.1 % 2,161 4,662 7,280 0.1 % 0.2 % — —% 0.1 % 2,161 17,686 6,760 0.8 % 0.3 % $ 4,255,778 100.0 % $ 4,172,852 100.0 % $ 2,099,313 100.0 % $ 2,094,221 100.0 % The following is our investments in interest bearing securities presented by type of security at June 30, 2013 and June 30, 2012, respectively: June 30, 2013 June 30, 2012 Type of Investment First Lien Second Lien Unsecured CLO Residual Interest CLO Debt Cost Percent of Debt Securities Fair Value Percent of Debt Securities $ 2,271,565 55.3 % $ 2,215,820 55.2 % $ 1,147,599 57.4 % $ 1,088,887 57.6 % 1,062,386 25.8 % 1,024,901 25.5 % 536,900 26.9 % 480,147 25.4 % 3.9 % Percent of Debt Securities Fair Value Percent of Debt Securities 88,470 88,827 72,617 73,195 3.6 % 2.2 % 2.2 % Cost 660,619 16.0 % 658,086 16.4 % 214,559 10.7 % 218,009 11.6 % 1.5 % 27,667 28,589 27,258 27,717 1.4 % 0.7 % 0.7 % Total Debt Securities $ 4,110,707 100.0 % $ 4,016,223 100.0 % $ 1,998,933 100.0 % $ 1,887,955 100.0 % 78 Table of Contents The following is our investment portfolio presented by geographic location of the investment at June 30, 2013 and June 30, 2012, respectively: June 30, 2013 June 30, 2012 4.0 % $ 14,927 Percent of Percent of Portfolio Fair Value 3.9 % $ 165,000 Percent of Portfolio Cost $ 165,000 Percent of Portfolio Geographic Location Canada 0.8 % Cayman Islands 688,286 16.2 % 686,675 16.5 % 241,817 11.5 % 245,726 11.7 % Ireland 0.7 % Midwest US 565,239 13.3 % 531,934 12.7 % 427,430 20.4 % 377,139 18.0 % Northeast US 649,484 15.3 % 663,025 15.9 % 293,181 14.0 % 313,437 15.0 % Puerto Rico — —% Southeast US 1,111,946 26.0 % 1,081,320 25.8 % 642,984 30.6 % 634,945 30.4 % Southwest US 345,392 9.2 % 234,433 11.2 % Western US 674,152 15.8 % 652,184 15.6 % 270,222 12.9 % 256,501 12.2 % Total Portfolio $ 4,255,778 100.0 % $ 4,172,852 100.0 % $ 2,099,313 100.0 % $ 2,094,221 100.0 % Cost 15,134 8.1 % 336,362 8.1 % 193,627 Portfolio Fair Value — —% 41,352 17,040 41,352 15,000 15,000 14,918 0.7 % $ 0.7 % 0.4 % 1.0 % 0.4 % 1.0 % 79 Table of Contents The following is our investment portfolio presented by industry sector of the investment at June 30, 2013 and June 30, 2012, respectively: June 30, 2013 Percent of Cost Portfolio Fair Value Percent of Portfolio June 30, 2012 Percent of Cost Portfolio Fair Value Percent of Portfolio 56 0.0 % $ — —% $ 56 0.0 % $ — —% 23,214 0.6 % — —% 22,917 14 0.5 % 0.0 % 32,806 1.6 % — —% 32,478 1.6 % — —% 180,793 28,364 4.2 % 179,544 28,648 0.7 % 4.3 % 0.7 % 3,164 58,104 0.2 % 2.8 % 3,288 58,104 0.2 % 2.8 % 252,073 5.9 % 252,073 6.0 % 80,418 3.8 % 80,407 3.8 % Industry Aerospace and Defense Automobile / $ Auto Finance Biotechnology Business Services Chemicals Commercial Services Construction and Engineering 53,615 1.3 % 53,615 1.3 % — —% — —% Consumer Finance Consumer Services Contracting Diversified Financial Services Diversified / 413,332 9.7 % 406,964 9.8 % 305,521 14.6 % 305,521 14.6 % 330,343 2,145 7.8 % 332,394 0.1 % — —% 8.0 % 146,335 15,949 7.0 % 147,809 0.8 % 7.1 % — —% 745,705 17.5 % 742,434 17.8 % 260,219 12.3 % 264,128 12.6 % Conglomerate Service Durable — —% 143 0.0 % — —% 35 0.0 % 380,225 141 Consumer Products Ecological Electronics Energy 63,895 Food Products 177,423 Healthcare 275,124 Hotel, 8.9 % 370,207 335 0.0 % 149 — —% 1.5 % 56,321 4.2 % 177,428 6.5 % 273,838 8.9 % 153,327 0.0 % 141 0.0 % 1.3 % 63,245 4.3 % 101,975 6.6 % 141,990 7.3 % 152,862 240 0.0 % 144 — —% 3.0 % 126,868 4.9 % 96,146 6.8 % 143,561 7.3 % 0.0 % 0.0 % 6.1 % 4.5 % 6.9 % 11,764 Restaurant & Leisure Insurance Machinery 396 Manufacturing 163,431 Media 171,290 Metal 12,000 0.3 % — —% 0.0 % 790 3.8 % 167,584 4.0 % 161,325 0.3 % — —% 83,461 0.0 % 4,684 95,191 4.0 % 3.9 % 165,866 — —% 83,461 4.0 % 0.2 % 6,485 4.5 % 127,127 7.9 % 161,843 — —% 4.0 % 0.3 % 6.1 % 7.7 % Services and Minerals Oil and Gas Equipment Services Oil and Gas Production Personal and Nondurable Consumer Products Production Services Property 60,162 1.4 % 60,274 1.4 % — —% — —% — —% — —% 7,188 0.3 % 7,391 0.4 % 75,126 1.8 % 24,420 0.6 % 130,928 6.2 % 38,993 1.9 % 39,000 0.9 % 39,630 0.9 % 39,351 1.8 % 39,968 1.9 % — —% — —% 268 0.0 % 2,040 0.1 % 51,170 152,540 14,190 54,648 1.2 % 3.6 % 152,540 14,569 0.3 % 1.3 % 3.7 % 0.3 % 51,770 2.5 % — —% 0.0 % 63 47,982 2.2 % — —% 0.0 % 129 Management Real Estate Retail Software & Computer Services Specialty Minerals Textiles, 307,734 7.2 % 309,308 7.4 % 53,908 2.6 % 54,711 2.6 % 38,500 0.9 % 42,558 1.0 % 37,732 1.8 % 44,562 2.1 % Apparel & Luxury Goods Textiles and Leather 99,500 2.3 % 99,323 2.4 % — —% — —% 16,760 Transportation 127,767 0.4 % 9,385 3.0 % 127,474 0.2 % 3.1 % 15,123 50,530 0.7 % 2.4 % 17,161 50,777 0.8 % 2.4 % Total Portfolio $ 4,255,778 100.0 % $ 4,172,852 100.0 % $ 2,099,313 100.0 % $ 2,094,221 100.0 % 80 Table of Contents Portfolio Investment Activity During the year ended June 30, 2013, we acquired $2,574,755 of new investments, completed follow-on investments in existing portfolio companies, totaling approximately $496,371, funded $21,143 of revolver advances, and recorded PIK interest of $10,947, resulting in gross investment originations of $3,103,217. The more significant of these investments are described briefly in the following: On July 5, 2012, we made a senior secured debt investment of $28,000 to support the acquisition of Material Handling Services, LLC, d/b/a/ Total Fleet Solutions ("TFS"), a provider of forklift and other material handling equipment fleet management and procurement services, by funds managed by CI Capital Partners, LLC. The senior secured term loan bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of July 5, 2017. On July 16, 2012, we provided $15,000 of secured second lien financing to Pelican Products, Inc., a leading provider of unbreakable, watertight protective cases and technically advanced professional lighting equipment. The second lien term loan bears interest in cash at the greater of 11.5% or Libor plus 10.0% and has a final maturity of June 14, 2019. On July 20, 2012, we provided $12,000 of senior secured financing to EIG Investors Corp ("EIG"), a provider of an array of online services such as web presence, domain hosting, e-commerce, e-mail and other related services to small- and medium-sized businesses. The second lien term loan bears interest in cash at the greater of 11.0% or Libor plus 9.5% and has a final maturity of October 22, 2018. On July 20, 2012, we provided $10,000 of senior secured financing to FPG, LLC ("FPG"), a supplier of branded consumer and commercial products sold to the retail, foodservice, and hospitality sectors. The note payable bears interest in cash at the greater of 12.0% or Libor plus 11.0% and has a final maturity of January 20, 2017. On July 27, 2012, we provided $85,000 of subordinated financing to support the acquisition of substantially all the assets of Arctic Glacier Income Funds by funds affiliated with H.I.G. The new company, Arctic Glacier U.S.A., Inc., will continue to conduct business under the "Arctic Glacier" name and be a leading producer, marketer, and distributor of high-quality packaged ice to consumers in Canada and the United States. The unsecured subordinated term loan bears interest in cash at 12.0% and interest payment in kind of 3.0% and has a final maturity of July 27, 2019. On August 2, 2012, we provided a $27,000 secured loan to support the acquisition of New Star, a provider of specialized processing services to the steel industry, by funds managed by Insight Equity Management Company. The senior subordinated note bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 1.0% and has a final maturity of February 2, 2018. On August 3, 2012, we provided $120,000 of senior secured financing, of which $110,000 was funded at closing, to support the acquisition of InterDent, Inc. ("Interdent"), a leading provider of dental practice management services to dental professional corporations and associations in the United States, by funds managed by H.I.G. The $55,000 Term Loan A note bears interest in cash at the greater of 8.0% or Libor plus 6.5% and has a final maturity of August 3, 2017. The $55,000 Term Loan B note bears interest in cash at the greater of 13.0% or Libor plus 10.0% and has a final maturity of August 3, 2017. The $10,000 senior secured revolver, which was unfunded at closing, bears interest in cash at the greater of 10.5% or Libor plus 8.25% and matured on February 3, 2013. On August 3, 2012, we provided $44,000 of secured subordinated financing to support the refinancing of New Century Transportation, Inc., a leading transportation and logistics company. 81 Table of Contents The senior subordinated loan bears interest in cash at the greater of 12.0% or Libor plus 10.0% and interest payment in kind of 3.0% and has a final maturity of February 3, 2018. On August 3, 2012, we provided $10,000 of senior secured financing to Pinnacle (US) Acquisition Co Limited, the largest multi- national software company focused on the delivery of analytical and information management solutions for the discovery and extraction of subsurface natural resources. The second lien term loan originally bore interest in cash at the greater of 10.5% or Libor plus 8.25%. On January 17, 2013, we amended the terms of this investment and the first lien note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.5% as of June 30, 2013. The second lien term loan has a final maturity of August 3, 2020. On August 6, 2012, we made an investment of $22,210 to purchase 62.9% of the subordinated notes in Halcyon Loan Advisors Funding 2012-I, Ltd. On August 7, 2012, we made an investment of $36,798 to purchase 95.0% of the subordinated notes in ING IM CLO 2012-II, Ltd. On August 17, 2012, we made a secured second lien investment of $38,500 to support the recapitalization of American Gilsonite Company. The secured note bears interest in cash at 11.5% and has a final maturity of September 1, 2017. After the financing, on August 28, 2012, we received repayment of the $37,732 loan previously outstanding. On September 14, 2012, we invested an additional $10,000 in Hoffmaster Group, Inc. The second lien term loan bears interest in cash at the greater of 11.0% or Libor plus 9.5% and has a final maturity of January 3, 2019. On September 14, 2012, we made a secured investment of $135,000 to support the recapitalization of Progrexion. Concurrent with the financing, we received repayment of the $62,680 of loans that were previously outstanding. The senior secured loan bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of September 14, 2017. On September 27, 2012, we made an investment of $45,746 to purchase 95% of the subordinated notes in ING IM CLO 2012- III, Ltd. On September 28, 2012, we made an unsecured investment of $10,400 to support the acquisition of Evanta Ventures, Inc., a diversified event management company. The subordinated note bears interest in cash at 12.0% and interest payment in kind of 1.0% and has a final maturity of September 28, 2018. On September 28, 2012, we made a secured second lien investment of $100,000 to support the recapitalization of United Sporting Companies, Inc. ("USC"), a national distributor of hunting, outdoor, marine and tackle products. The secured loan bears interest in cash at the greater of 12.75% or Libor plus 11.0% and has a final maturity of May 16, 2018. On October 3, 2012, we made a senior secured investment of $21,500 to support the acquisition of CP Well Testing, LLC, a leading provider of flowback services to oil and gas companies operating in Western Oklahoma and the Texas Panhandle. The first lien note bears interest in cash at the greater of 13.5% or Libor plus 11.0% and has a final maturity of October 3, 2017. On October 11, 2012, we made a secured second lien investment of $12,000 in Deltek, Inc., an enterprise software and information solutions provider for professional services firms, government contractors, and government agencies. The second lien note bears interest in cash at the greater of 10.0% or Libor plus 8.75% and has a final maturity of October 10, 2019. 82 Table of Contents On October 12, 2012, we made a senior secured investment of $42,000 to support the acquisition of Gulf Coast Machine and Supply Company, a preferred provider of value-added forging solutions to energy and industrial end markets. The first lien note bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of October 12, 2017. On October 18, 2012, we made a follow-on senior secured debt investment of $20,000 in First Tower Delaware, to support seasonal growth in finance receivables due to increased holiday borrowing activity among its customer base. The first lien note bears interest in cash at the greater of 20.0% or Libor plus 18.5% and has a final maturity of June 30, 2022. On October 24, 2012, we made an investment of $7,800 in APH, to acquire an industrial real estate property occupied by Filet-of- Chicken, a chicken processor in Georgia. We invested $1,809 of equity and $6,000 of debt in APH. The first lien note originally bore interest in cash at the greater of 10.5% or Libor plus 8.5% and interest payment in kind of 2.0%. On January 17, 2013, we amended the terms of this investment and the first lien note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.5% as of June 30, 2013. The first lien note has a final maturity of October 24, 2020. On November 5, 2012, we made an investment of $39,475 to purchase 95.0% of the income notes in ING IM CLO 2012-IV, Ltd. On November 9, 2012, we made a secured second lien investment of $22,000 to support the recapitalization of EIG. Concurrent with the financing, we received a repayment of the $12,000 loan previously outstanding. The new note bears interest in cash at the greater of 10.25% or Libor plus 9.0% and has a final maturity of May 9, 2020. On November 26, 2012, we made a secured second lien investment of $22,000 in The Petroleum Place, Inc., a provider of enterprise resource planning software focused on the oil & gas industry. The second lien note bears interest in cash at the greater of 10.0% or Libor plus 8.75% and has a final maturity of May 20, 2019. On November 30, 2012, we made a secured second lien investment of $9,500 to support the recapitalization of R-V. The second lien note bears interest in cash at the greater of 12.0% or Libor plus 9.0% and has a final maturity of May 30, 2018. As part of the recapitalization, we received a dividend of $11,073 for our investment in R-V's common stock. On December 6, 2012, we made an investment of $38,291 to purchase 90% of the subordinated notes in Apidos CLO XI, LLC. On December 13, 2012, we completed a $33,921 recapitalization of CCPI, an international manufacturer of refractory materials and other consumable products for industrial applications. Through the recapitalization, Prospect acquired a controlling interest in CCPI for $28,334 in cash and 467,928 unregistered shares of our common stock. The first lien note issued to CCPI bears interest in cash at a fixed rate of 10.0% and has a final maturity of December 31, 2017. The first lien note issued to CCPI bears interest in cash at a fixed rate of 12.0% and interest payment in kind of 7.0%, and has a final maturity of June 30, 2018. On December 14, 2012, we provided $10,000 of first lien financing to support the recapitalization of Prince Mineral Holding Corp. ("Prince"), a leading global specialty mineral processor and consolidator. The first lien note bears interest in cash at a fixed rate of 11.5% and has a final maturity of December 15, 2019. On December 14, 2012, we made a $3,000 follow-on investment in Focus Brands, Inc. The second lien note bears interest in cash at the greater of 10.25% or Libor plus 9.0% and has a final maturity of August 21, 2018. 83 Table of Contents On December 17, 2012, we made a $39,800 first lien investment in Coverall North America, Inc. ("Coverall"), a leading franchiser of commercial cleaning businesses. The first lien note bears interest in cash at the greater of 11.5% or Libor plus 8.5% and has a final maturity of December 17, 2017. On December 17, 2012, we made a $38,150 first lien follow-on investment in TFS, to support the acquisition of Miner Holding Company, Inc. The first lien note bears interest in cash at the greater of 10.0% or Libor plus 8.0% and has a final maturity of December 21, 2017. On December 17, 2012, we made a secured debt investment of $30,000 to support the recapitalization of Biotronic. After the financing, we received repayment of the $26,227 loan that was previously outstanding. The new note bears interest in cash at the greater of 10.0% or Libor plus 8.0% and has a final maturity of December 17, 2017. On December 19, 2012, we provided $17,500 of senior secured second lien financing to Grocery Outlet, Inc., to support the recapitalization of a retailer of food, beverages and general merchandise. The second lien note bears interest in cash at the greater of 10.5% or Libor plus 9.25% and has a final maturity of June 17, 2019. On December 19, 2012, we provided $23,200 of senior secured second lien financing to support the recapitalization of TB Corp., a Mexican restaurant chain. The second lien note bears interest in cash at a fixed rate of 12.0% and interest payment in kind of 1.5% and has a final maturity of December 18, 2018. On December 20, 2012, we made an additional follow-on senior secured debt investment of $19,500 to support the recapitalization of Progrexion. After the financing, we held $154,500 of senior secured debt of Progrexion. The first lien note bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of September 14, 2017. On December 21, 2012, we made a $10,000 senior secured second lien follow-on investment in Seaton Corp. The second lien note bears interest in cash at the greater of 12.5% or Libor plus 9.0% and interest payment in kind of 2.0% and has a final maturity of March 14, 2015. On December 21, 2012, we made a $37,500 senior secured first lien investment in Lasership, Inc., a leading provider of regional same day and next day distribution services for premier e-commerce and product supply businesses. The first lien note bears interest in cash at the greater of 10.25% or Libor plus 8.25% and has a final maturity of December 21, 2017. On December 21, 2012, we made a $12,000 senior secured first lien follow-on investment in FPG, a supplier of branded consumer and commercial products sold to the retail, foodservice, and hospitality sectors. The first lien note bears interest in cash at the greater of 12.0% or Libor plus 11.0% and has a final maturity of January 20, 2017. On December 24, 2012, we made a follow-on secured debt investment of $5,000 in New Star. The second lien note bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 1.0% and has a final maturity of February 2, 2018. On December 24, 2012, we made a $7,000 second lien secured investment in Aderant North America, Inc., a leading provider of enterprise software solutions to professional services organizations. The second lien note bears interest in cash at the greater of 11.0% or PRIME plus 7.75% and has a final maturity of June 20, 2019. On December 28, 2012, we made a $9,500 first lien secured investment in APH, to acquire Abbington Pointe, Inc., a multi-family property in Marietta, Georgia. We invested $3,193 of equity and $6,400 of debt in APH. The first lien note originally bore interest in cash at the greater of 10.5% or Libor plus 8.5% and interest payment in kind of 2.0%. On January 17, 2013, we 84 Table of Contents amended the terms of this investment and the first lien note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.5% as of June 30, 2013. The first lien note has a final maturity of October 24, 2020. On December 28, 2012, we made a $5,000 second lien secured investment in TransFirst Holdings, Inc., a payments processing firm that provides electronic credit card authorization to merchants located throughout the United States. The second lien note bears interest in cash at the greater of 11.0% or Libor plus 9.75% and has a final maturity of June 27, 2018. On December 28, 2012, we completed a $47,900 recapitalization of Credit Central, a branch-based provider of installment loans. Through the recapitalization, we acquired a controlling interest in Credit Central for $38,082 in cash and 897,906 unregistered shares of our common stock. The first lien note bears interest in cash at the greater of 20.0% or Libor plus 18.5% and has a final maturity of December 31, 2020. On December 28, 2012, we made a $3,600 follow-on subordinated unsecured investment in Ajax. The unsecured note bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 6.00% and has a final maturity of December 31, 2017. On December 28, 2012, we made a $30,000 first lien senior secured investment to support the recapitalization of Spartan Energy Services, LLC ("Spartan"), a leading provider of thru tubing and flow control services to oil and gas companies. The first lien note bears interest in cash at the greater of 10.5% or Libor plus 9.0% and has a final maturity of December 28, 2017. On December 31, 2012, we provided $32,000 senior secured loan to support the acquisition of System One Holdings, LLC, a leading provider of professional staffing services. The first lien note bears interest in cash at the greater of 11.0% or Libor plus 9.5% and has a final maturity of December 31, 2018. On December 31, 2012, we funded a recapitalization of Valley Electric with $42,572 of debt and $9,526 of equity financing. Through the recapitalization, we acquired a controlling interest in Valley Electric for $7,449 in cash and 4,141,547 unregistered shares of our common stock. The first lien note issued to Valley Electric bears interest in cash at the greater of 9.0% or Libor plus 6.0% and interest payment in kind of 9.0% and has a final maturity of December 31, 2018. The first lien note issued to Valley Electric Co. of Mt. Vernon Inc. bears interest in cash at the greater of 8.0% or Libor plus 5.0% and interest payment in kind of 2.5% and has a final maturity of December 31, 2017. On December 31, 2012, we provided $70,000 of secured second lien debt financing for the acquisition of Thomson Reuters Property Tax Services by Ryan, LLC ("Ryan"). The second lien note bears interest in cash at the greater of 12.0% or Libor plus 9.0% and interest payment in kind of 3.0% and has a final maturity of June 30, 2018. On January 11, 2013, we provided $27,100 of debt financing to Correctional Healthcare Holding Company, Inc. ("CHC"), a national provider of correctional medical and behavioral healthcare solutions. The subordinated secured second lien loan bears interest in cash at 11.25% and has a final maturity of January 11, 2020. On January 17, 2013, we made a $30,348 follow-on investment in APH, to acquire 5100 Live Oaks Blvd, LLC, a multi-family residential property located in Tampa, Florida. We invested $2,748 of equity and $27,600 of debt in APH. The first lien note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On January 24, 2013, we made an investment of $24,870 to purchase 56.14% of the subordinated notes in Cent 17 CLO Limited. 85 Table of Contents On January 24, 2013, we made an investment of $26,901 to purchase 50.12% of the subordinated notes in Octagon Investment Partners XV, Ltd. On January 29, 2013, we provided $8,000 of secured second lien financing to TGG Medical Transitory, Inc., a developer of technologies for extracorporeal photopheresis treatments. The senior secured second lien term loan bears interest in cash at the greater of 11.25% or Libor plus 10.0% and has a final maturity of June 27, 2018. On January 31, 2013, we funded an acquisition of the subsidiaries of Nationwide, which operate a specialty finance business based in Chicago, Illinois, with $21,308 of debt and $3,843 of equity financing. The senior secured term loan bears interest in cash at the greater of 20.0% or Libor plus 18.5% and has a final maturity of January 31, 2023. On February 5, 2013, we received a distribution of $3,250 related to our investment in NRG Manufacturing, Inc. ("NRG"), for which we realized a gain of the same amount. This was a partial release of the amount held in escrow. On February 5, 2013, we made a secured debt investment of $2,000 in Healogics, Inc. ("Healogics"), a provider of outpatient wound care management services located in Jacksonville, Florida. On February 13, 2013, we made an investment of $35,025 to purchase 50.34% of the subordinated notes in Galaxy XV CLO, Ltd. On February 14, 2013, we made a $2,000 secured second lien debt investment in J.G. Wentworth, LLC ("J.G. Wentworth"), the largest purchaser of structured settlement and annuity payments in the United States. The second lien term loan bears interest in cash at the greater of 9.0% or Libor plus 7.5% and has a final maturity of February 8, 2019. On February 14, 2013, we provided $15,000 of senior secured financing to Speedy Group Holdings Corp., a leading provider of short-term loans and financial services in the United States, the United Kingdom and Canada. The unsecured subordinated term loan bears interest in cash at 12.0% and has a final maturity of November 15, 2017. On February 15, 2013, we made a $6,000 secured second lien debt investment in SESAC Holdco II LLC, a performing rights organization based in Nashville, Tennessee. The second lien term loan bears interest in cash at the greater of 10.0% or Libor plus 8.75% and has a final maturity of July 12, 2019. On February 21, 2013, we provided $39,550 of senior secured first lien financing to Atlantis Healthcare Group (Puerto Rico), Inc., a leading owner and operator of dialysis stations. The senior secured term loan bears interest in cash at the greater of 10.0% or Libor plus 8.0% and has a final maturity date of February 21, 2018. On February 25, 2013, we made a $10,000 secured second lien loan and a $2,000 secured first lien debt investment in TNS, an international data communications company that provides networking, data communications and other value added services. The second lien term loan bears interest in cash at the greater of 9.0% or Libor plus 8.0% and has a final maturity of August 14, 2020. On March 1, 2013, we made a $70,000 secured term loan investment in a subsidiary of Cinedigm DC Holdings, LLC, a leading provider of digital cinema services, software and content marketing and distribution. The senior secured term loan bears interest in cash at the greater of 11.0% or Libor plus 9.0% and interest payment in kind of 2.5% and has a final maturity of March 31, 2021. 86 Table of Contents On March 6, 2013, we made a $5,000 follow-on investment in Rocket Software, Inc. The senior secured second lien term loan bears interest in cash at the greater of 10.25% or Libor plus 8.75% and has a final maturity of February 8, 2019. On March 7, 2013, we made a secured second lien follow-on investment of $60,000 in USC. The senior secured second lien term loan bears interest in cash at the greater of 12.75% or Libor plus 11.0% and has a final maturity of May 16, 2018. On March 8, 2013, we made an investment of $40,400 to purchase 78.60% of the subordinated notes in Halcyon Loan Advisors Funding 2013-I Ltd. On March 12, 2013, we provided $12,000 of secured second lien financing to ALG USA Holding, LLC, a vertically integrated travel company that focuses on providing all-inclusive vacations in Mexico and the Caribbean to U.S. customers. The senior secured second lien term loan bears interest in cash at the greater of 10.25% or Libor plus 9.0% and has a final maturity of February 28, 2020. On March 15, 2013, we made an investment of $44,063 to purchase 95.27% of the subordinated notes in Apidos CLO XII, Ltd. On March 18, 2013, we provided a $197,291 first lien senior secured credit facility to support the refinancing of Capstone Logistics, LLC ("Capstone"), a logistics services portfolio company. After the financing, we received repayment of $69,139 of loans previously outstanding. The $97,291 Term Loan A note bears interest in cash at the greater of 6.5% or Libor plus 5.0% and has a final maturity of September 16, 2016. The $100,000 Term Loan B note bears interest in cash at the greater of 11.5% or Libor plus 10.0% and has a final maturity of September 16, 2016. On March 27, 2013, we provided $100,000 of senior secured debt financing to support the recapitalization of Broder Bros., Co. ("Broder"), a leading distributor of imprintable sportswear and accessories in the United States. The senior secured term loan bears interest in cash at the greater of 10.75% or Libor plus 9.0% and has a final maturity of June 27, 2018. On April 1, 2013, we refinanced our existing $38,472 senior and subordinated loans to Ajax, increasing the size of our debt investment to $38,537. Concurrent with the refinancing, we received repayment of the $18,635 loans that were previously outstanding. The subordinated unsecured term loan bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 6.0% and has a final maturity of March 30, 2018. On April 17, 2013, we made an investment of $43,650 to purchase 97% of the subordinated notes in Mountain View. On April 22, 2013, we provided $34,375 of senior secured financing, of which $31,875 was funded at closing, to support the acquisition of Pegasus, the world's largest processor of commissions paid by hotels to travel agencies for room booking services. The Term Loan A note bears interest in cash at the greater of 6.75% or Libor plus 5.5% and has a final maturity of April 18, 2018. The Term Loan B note bears interest in cash at the greater of 13.75% or Libor plus 12.5% and has a final maturity of April 18, 2018. The $5,000 senior secured revolver bears interest in cash at the greater of 9.0% or Libor plus 7.75% and has a final maturity of April 18, 2014. On April 25, 2013, we made an investment of $26,000 to purchase 50.9% of the subordinated notes in Brookside. On April 30, 2013, we made a $21,247 follow-on investment in APH, to acquire Lofton Place Apartments and Vista at Palma Sola, multi-family residential properties located in Florida. We invested $3,247 of equity and $18,000 of debt in APH. The senior secured note bears interest in 87 Table of Contents cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On May 8, 2013, we made a $6,119 follow-on investment in APH, to acquire Arlington Park, a multi-family residential property located in Marietta, Georgia. We invested $2,118 of equity and $4,000 of debt in APH. The senior secured note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On May 9, 2013, we provided a $60,000 senior secured credit facility, of which $55,000 was funded at closing, to support the recapitalization of Sandow, a provider of multimedia content and services to businesses and consumers focused on the areas of design and luxury. The senior secured first lien loan bears interest in cash at the greater of 10.5% or Libor plus 8.5% and interest payment in kind of 1.5% and has a final maturity of May 8, 2018. On May 10, 2013, we provided a $150,000 senior secured term loan to support the recapitalization of Arctic Glacier, a leading producer, marketer, and distributor of high-quality packaged ice to consumers in the United States and Canada. After the financing, we received repayment of $86,982 of subordinated unsecured term loan previously outstanding. The senior secured second lien loan bears interest in cash at the greater of 11.25% or Libor plus 10.0% and has a final maturity of November 10, 2019. On May 14, 2013, we provided $4,000 of senior secured financing to SourceHOV, a leading provider of business and knowledge process outsourcing. The senior secured second lien loan bears interest in cash at the greater of 8.75% or Libor plus 7.5% and has a final maturity of April 30, 2019. On May 31, 2013, we made a follow-on secured second lien debt investment of $7,190 in IWP, a specialty pharmacy services company. The secured second lien loan bears interest in cash at the greater of 11.5% or Libor plus 7.0% and interest payment in kind of 1.0% and has a final maturity of May 31, 2019. On June 11, 2013, we provided $115,000 of senior secured financing to Transplace, a third-party logistics company that services many of the largest shippers in the world. The senior secured first lien loan bears interest in cash at the greater of 10.0% or Libor plus 5.0% and has a final maturity of June 11, 2019. On June 11, 2013, we provided $7,000 of secured second lien financing to AST, a leading North American third-party provider of share registry and associated value added services to shareholders on behalf of listed public companies. The second lien loan bears interest in cash at the greater of 9.25% or Libor plus 8.0% and has a final maturity of December 26, 2020. On June 12, 2013, we made a $23,250 follow-on investment in R-V. The senior subordinated note bears interest in cash at the greater of 10.0% or Libor plus 9.0% and has a final maturity of June 12, 2018. On June 18, 2013, we served as sole agent and provider of $70,000 senior secured financing, of which $65,643 was funded at closing, to support the recapitalization of Traeger, a leading designer, marketer, and distributor of wood pellet grills, flavored wood pellets, and grill accessories. The $30,000 Term Loan A note bears interest in cash at the greater of 6.5% or Libor plus 4.5% and has a final maturity of June 18, 2018. The $30,000 Term Loan B note bears interest in cash at the greater of 11.5% or Libor plus 9.5% and has a final maturity of June 18, 2018. The $10,000 senior secured revolver, of which $5,643 was drawn at closing, bears interest in cash at the greater of 9.0% or Libor plus 7.0% and has a final maturity of June 18, 2014. 88 Table of Contents On June 24, 2013, we made a $76,533 follow-on investment in APH, to acquire Arium Resort (f/k/a The Resort at Pembroke Pines), a prominent multi-family residential community located in Pembroke Pines, Florida. We invested $13,533 of equity and $63,000 of debt in APH. The senior secured note bears interest in cash at the greater of 6.0% or Libor plus 4.0% and interest payment in kind of 5.50% and has a final maturity of October 24, 2020. On June 25, 2013, we made an investment of $26,500 to purchase 84.13% of the subordinated notes in LCM XIV. On June 27, 2013, we provided $11,000 of secured second lien financing to Blue Coat, a leading provider of web security and wide area network (WAN) optimization solutions. The second lien note bears interest in cash at the greater of 9.5% or Libor plus 8.5% and has a final maturity of June 28, 2020. On June 27, 2013, we made a follow-on secured debt investment of $87,500 to support the recapitalization of Progrexion. After the financing, we now hold $241,033 of senior secured debt of Progrexion. The senior secured first lien note bears interest in cash at the greater of 10.5% or Libor plus 8.5% and has a final maturity of September 14, 2017. On June 28, 2013, we made a $1,000 follow-on investment in Ajax. The subordinated unsecured term loan bears interest in cash at the greater of 11.5% or Libor plus 8.5% and interest payment in kind of 6.0% and has a final maturity of March 30, 2018. On June 28, 2013, we made an $18,000 secured debt follow-on investment in New Star, a provider of specialized processing services to the steel industry. The senior subordinated term loan bears interest in cash at 11.5% and interest payment in kind of 1.0% and has a final maturity of February 2, 2018. During the year ended June 30, 2013, we closed-out twenty-three positions which are briefly described below. On July 24, 2012, we sold our 3,821 shares of Iron Horse Coiled Tubing, Inc. ("Iron Horse") common stock in connection with the exercise of an equity buyout option, receiving $2,040 of net proceeds and realizing a gain of approximately $1,772 on the sale. On August 3, 2012, Pinnacle Treatment Centers, Inc. repaid the $17,475 loan receivable to us. On August 10, 2012, U.S. HealthWorks Holding Company, Inc. repaid the $25,000 loan receivable to us. On September 20, 2012, Fischbein repaid the $3,425 loan receivable to us. On October 5, 2012, Northwestern Management Services, LLC ("Northwestern") repaid the $15,092 loan receivable to us and we sold our 50 shares of Northwestern common stock for total proceeds of $2,233, realizing a gain of $1,862. On October 16, 2012, Blue Coat repaid the $25,000 loan receivable to us. On October 18, 2012, Hi-Tech Testing Services, Inc. and Wilson Inspection X-Ray Services, Inc. repaid the $7,200 loan receivable to us. On October 19, 2012, Mood Media Corporation repaid the $15,000 loan receivable to us. On October 31, 2012, Shearer's Foods, Inc. ("Shearer's") repaid the $37,999 loan receivable to us. On November 7, 2012, we redeemed our membership interests in Mistral Chip Holdings, LLC, Mistral Chip Holdings 2, LLC and Mistral Chip Holdings 3, LLC in connection with the sale of Shearer's, receiving $6,022 of net proceeds and realizing a gain of approximately $2,027 on the redemption. 89 Table of Contents On November 8, 2012, Potters Holdings II, L.P. repaid the $15,000 loan receivable to us. On November 15, 2012, Renaissance Learning, Inc. repaid the $6,000 loan receivable to us. On December 3, 2012, VanDeMark Chemicals, Inc. repaid the $29,658 loan receivable to us. On December 7, 2012, Hudson Products Holdings, Inc. ("Hudson") repaid the $6,267 loan receivable to us. On December 21, 2012, ST Products, LLC repaid the $23,162 loan receivable to us. On December 21, 2012, SG Acquisition, Inc. repaid the $83,242 loan receivable to us. On February 5, 2013, we sold our $2,000 investment in Healogics and realized a gain of $60 on this investment. On February 25, 2013, we sold our $2,000 secured first lien investment in TNS and realized a gain of $20 on this investment. On March 18, 2013, we sold our $2,000 investment in J.G. Wentworth and realized a gain of $75 on this investment. On March 28, 2013, we sold our investment in New Meatco Provisions, LLC ("Meatco") for net proceeds of approximately $1,965, realizing a loss of $10,814 on the sale. On March 29, 2013, we received net proceeds of $1,251 for the partial sale of our equity investment in Caleel + Hayden, LLC, realizing a gain of $900 on the sale. On April 30, 2013, we sold our investment in Fischbein for net proceeds of $3,168, recognizing a realized gain of $2,293 on the sale. In addition, there is $310 being held in escrow which will be recognized as additional gain if and when received. On May 16, 2013, Out Rage repaid the $11,836 loan receivable to us. On May 23, 2013, Snacks Holding repaid the $15,366 loan receivable to us. On June 3, 2013, Nobel repaid the $15,262 loan receivable to us. On June 4, 2013, Springs repaid the $35,000 loan receivable to us. On June 13, 2013, we sold our $4,000 investment in SourceHOV and realized a gain of $40 on this investment. On June 14, 2013, we sold our $10,000 investment in TNS and realized a gain of $117 on this investment. On June 28, 2013, Sandow repaid $30,100 of the $55,000 loan receivable to us. After the repayment, we now hold $24,900 of senior secured debt of Sandow. In addition to the repayments noted above, during the year ended June 30, 2013, we received principal amortization payments of $19,568 on several loans, and $99,066 of partial prepayments primarily related to Byrider Systems Acquisition Corp, Capstone, Cargo Airport Services USA, LLC ("Cargo"), Energy Solutions, NMMB, Northwestern, and Sandow. On January 4, 2012, Energy Solutions sold its gas gathering and processing assets ("Gas Solutions") for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. We do not know the timing, if any, related to this potential earnout and have valued the $28,000 at zero as of June 30, 2013. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $158,687 in cash. Currently, a loan to Energy Solutions remains outstanding and is collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas 90 Table of Contents Solutions by Energy Solutions resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were required to be recognized as dividend income, in accordance with ASC 946, Financial Services—Investment Companies , as cash distributions are received from Energy Solutions to the extent there are earnings and profits sufficient to support such recognition. During the year ended June 30, 2013, Energy Solutions repaid $28,500 of senior and subordinated secured debt. We received $19,543 of make-whole fees for early repayment of the outstanding loan receivables, which was recorded as interest income during the year ended June 30, 2013. During the year ended June 30, 2013, we received distributions of $53,820 from Energy Solutions which were recorded as dividend income. Energy Solutions continues to hold $23,979 of cash for future investment and repayment of the remaining debt. During the year ended June 30, 2013, we recognized $1,481 of interest income due to purchase discount accretion from the assets acquired from Patriot Capital Funding, Inc. ("Patriot"). Included in the $1,481 recorded during the year ended June 30, 2013 is $1,111 of normal accretion and $370 of accelerated accretion resulting from the repayment of Hudson. We expect to recognize $240 of normal accretion during the three months ended September 30, 2013. During the year ended June 30, 2012, we recognized $6,613 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $6,613 is $3,083 of normal accretion and $3,530 of accelerated accretion resulting from the repayment of Mac & Massey Holdings, LLC ("Mac & Massey"), Nupla Corporation ("Nupla"), ROM Acquisition Corp and Sport Helmets Holdings, LLC ("Sport Helmets"). During the year ended June 30, 2011, we recognized $22,084 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $22,084 is $4,912 of normal accretion, $12,035 of accelerated accretion resulting from the repayment of Impact Products, LLC, Label Corp Holdings Inc. and Prince, and $4,968 of accelerated accretion resulting from the recapitalization of our debt investments in Arrowhead General Insurance Agency, Inc. ("Arrowhead"), The Copernicus Inc. ("Copernicus"), Fischbein and Northwestern. The restructured loans for Arrowhead, Copernicus, Fischbein and Northwestern were issued at market terms comparable to other industry transactions. In accordance with ASC 320-20-35 the cost basis of the new loans were recorded at par value, which precipitated the acceleration of original purchase discount from the loan repayments which was recognized as interest income. 91 Table of Contents The following is a quarter-by-quarter summary of our investment activity: Quarter-End June 30, 2013 March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 June 30, 2010 March 31, 2010 December 31, 2009(3) September 30, 2009 June 30, 2009 March 31, 2009 December 31, 2008 September 30, 2008 June 30, 2008 March 31, 2008 December 31, 2007 September 30, 2007 June 30, 2007 March 31, 2007 December 31, 2006 September 30, 2006 June 30, 2006 March 31, 2006 December 31, 2005 September 30, 2005 June 30, 2005 March 31, 2005 December 31, 2004 September 30, 2004 Since inception Acquisitions(1) $ Dispositions(2) 798,760 $ 784,395 772,125 747,937 573,314 170,073 154,697 222,575 312,301 359,152 140,933 140,951 88,973 59,311 210,438 6,066 7,929 6,356 13,564 70,456 118,913 31,794 120,846 40,394 130,345 19,701 62,679 24,677 42,783 15,732 — 25,342 17,544 7,332 23,771 30,371 6,352,530 $ 321,615 102,527 349,269 158,123 146,292 188,399 120,206 46,055 71,738 78,571 67,405 68,148 39,883 26,603 45,494 24,241 3,148 10,782 2,128 10,949 61,148 28,891 19,223 17,949 9,857 7,731 17,796 2,781 5,752 901 3,523 — — — 32,083 — 2,089,211 $ (1) Includes new deals, additional fundings, refinancings and PIK interest. (2) Includes scheduled principal payments, prepayments and refinancings. (3) The $210,438 of acquisitions for the quarter ended December 31, 2009 includes $207,126 of portfolio investments acquired from Patriot. 92 Table of Contents Investment Valuation In determining the fair value of our portfolio investments at June 30, 2013, the Audit Committee considered valuations from the independent valuation firms and from management having an aggregate range of $4,081,889 to $4,354,692, excluding money market investments. In determining the range of value for debt instruments, management and the independent valuation firms 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. In determining the range of value for our investments in CLOs, management and the independent valuation firms used discounted cash flow models. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each security, the most appropriate valuation approach was chosen from alternative approaches to ensure the most accurate valuation for each security. A discounted cash flow model is prepared, utilizing a waterfall engine to store the collateral data, generate collateral cash flows from the assets, and distributes the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates that incorporate all the risk factors. 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, comparable multiples for recent sales of companies within the industry and discounted cash flow models for our investments in CLOs. The composite of all these analyses, applied to each investment, was a total valuation of $4,172,852, excluding money market investments. Our portfolio companies are generally lower middle market companies, outside of the financial sector, with less than $150,000 of annual EBITDA. We believe our market has experienced less volatility than others because we believe there are more buy and hold investors who own these less liquid investments. Control investments offer increased risk and reward over straight debt investments. Operating results and changes in market multiples can result in dramatic changes in values from quarter to quarter. Significant downturns in operations can further result in our looking to recoveries on sales of assets rather than the enterprise value of the investment. Several control investments in our portfolio are under enhanced scrutiny by our senior management and our Board of Directors and are discussed below. AIRMALL USA, Inc. AIRMALL is a leading developer and manager of airport retail operations. AIRMALL has developed and presently manages all or substantially all of the retail operations and food and beverage concessions at Baltimore/Washington International Thurgood Marshall Airport (BWI), Boston Logan International Airport (BOS), Cleveland Hopkins International Airport (CLE) and Pittsburgh International Airport (PIT). AIRMALL does so pursuant to long-term, infrastructure-like contracts with the respective municipal agencies that own and operate the airports. On July 30, 2010, we invested $52,420 of combined debt and equity as follows: $30,000 senior term loan, $12,500 senior subordinated note and $9,920 preferred equity. We own 100% of AIRMALL's equity securities. AIRMALL's financial performance has been consistent since the acquisition and we continue to monitor the medium to long-term growth prospects for the company. 93 Table of Contents As a result of improved operating results, the Board of Directors increased the fair value of our investment in AIRMALL to $54,648 as of June 30, 2013, a premium of $3,478 from its amortized cost, compared to the $3,788 unrealized depreciation recorded at June 30, 2012. Ajax Rolled Ring & Machine, Inc. Ajax forges large seamless steel rings on two forging mills in the company's York, South Carolina facility. The rings are used in a range of industrial applications, including in construction equipment and power turbines. Ajax also provides machining and other ancillary services. We acquired a controlling equity interest in Ajax in a recapitalization of Ajax that was closed on April 4, 2008. We funded $22,000 of senior secured term debt, $11,500 of subordinated term debt and $6,300 of equity as of that closing. During the fiscal year ended June 30, 2010, we funded an additional $3,530 of secured subordinated debt to refinance a third-party revolver provider and provide working capital. Ajax repaid $3,461 of this secured subordinated debt during the quarter ended September 30, 2010. During the quarter ended December 31, 2012, we funded an additional $3,600 of unsecured debt to refinance first lien debt held by Wells Fargo. On April 1, 2013, we refinanced our existing $38,472 senior loans to Ajax, increasing the size of our debt investment to $38,537. Concurrent with the refinancing, we received repayment of the $18,635 loans that were previously outstanding. As of June 30, 2013, we control 78.01% of the fully-diluted common and preferred equity. The principal balance of our senior debt to Ajax was $19,737 and our subordinated debt was $19,700 as of June 30, 2013. Due to soft operating results, the Board of Directors decreased the fair value of our investment in Ajax to $39,437 as of June 30, 2013, a reduction of $6,057 from its amortized cost, compared to the $11,151 unrealized appreciation recorded at June 30, 2012. APH Property Holdings, LLC We make investments in real estate through our investment in APH, a holding company that owns 100% of the common equity of APHC. APHC is a Maryland corporation and qualified REIT for federal income tax purposes. During the year ended June 30, 2013, we provided $125,892 and $26,648 of debt and equity financing, respectively, to APH for the acquisition of various industrial and multi-family residential real estate properties in Florida and Georgia. We received structuring fees of $4,511 from APH that were recorded as other income during the year ended June 30, 2013. As of June 30, 2013, APHC's real estate portfolio was comprised of seven investments. The following table shows the mortgages outstanding due to other parties for each of the seven properties: No. Property Name City Date of Acquisition Purchase Price Mortgage Outstanding 146 Forest Parkway Forest Park, GA 1 2 Abbington Pointe Marietta, GA 3 Amberly Place 4 Lofton Place Tampa, FL Tampa, FL 10/24/2012 $ 7,400 $ 12/28/2012 23,500 1/17/2013 63,400 4/30/2013 26,000 — 15,275 39,600 16,965 Vista at Palma Sola 5 6 Arlington Park 7 Arium Resort Bradenton, FL Marietta, GA 4/30/2013 27,000 5/8/2013 14,850 17,550 9,650 Pembroke Pines, GA 6/24/2013 225,000 157,500 The Board of Directors set the fair value of our investment in APH to $152,540 as of June 30, 2013, equal to its amortized cost. 94 Table of Contents Energy Solutions Holdings In c. (f/k/a Gas Solutions Holdings, Inc.) Energy Solutions owns interests in other companies operating in the energy sector. These include operating offshore supply vessels and ownerships of a non-operating biomass plant and several coal mines. Energy Solutions subsidiaries formerly owned interests in a gas gathering and processing system in east Texas. In December 2011, we completed a reorganization of Gas Solutions Holdings, Inc. renaming the company Energy Solutions and transferring ownership of other operating companies owned by us and operating within the energy industry with the intent of strategically expanding Energy Solutions operations across energy sectors. As part of the reorganization, we transferred our equity interests in Change Clean Energy Holdings, Inc. ("CCEHI"), Change Clean Energy, Inc. ("CCEI"), Freedom Marine Holdings, LLC ("Freedom Marine") and Yatesville Coal Holdings, Inc. ("Yatesville") to Energy Solutions. On December 28, 2011, we made a follow-on investment of $4,750 to support the acquisition of a new vessel by Vessel Holdings LLC, a subsidiary of Freedom Marine. On January 4, 2012, Energy Solutions sold Gas Solutions for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $158,687 in cash. Currently, a loan to Energy Solutions remains outstanding and is collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were required to be recognized as dividend income, in accordance with ASC 946, Financial Services—Investment Companies , as cash distributions are received from Energy Solutions to the extent there are current year earnings and profits sufficient to support such recognition. In determining the value of Energy Solutions, we have utilized two valuation techniques to determine the value of the investment. Our Board of Directors has determined the value to be $26,696 for our debt and equity positions at June 30, 2013 based upon a combination of a current value method for the cash balances of Energy Solutions and a liquidation analysis for our interests in CCEHI, CCEI, Freedom Marine and Yatesville. At June 30, 2013 and June 30, 2012, Energy Solutions, including the underlying portfolio companies affected by the reorganization, was valued at $7,574 below and $63,623 above its amortized cost, respectively. We received distributions of $53,820 from Energy Solutions that were recorded as dividend income during the year ended June 30, 2013. We also received $19,543 of make-whole fees from Energy Solutions for early repayments of the outstanding loans, which was recorded as interest income in the year ended June 30, 2013. First Tower Holdings of Delaware, LLC First Tower is a multiline specialty finance company based in Flowood, Mississippi with over 170 branch offices. On June 15, 2012, we acquired 80.1% of First Tower, LLC ("First Tower") businesses for $110,200 in cash and 14,518,207 unregistered shares of our common stock. Based on our share price of $11.06 at the time of issuance, we acquired our 80.1% interest in First Tower for approximately $270,771. As consideration for our investment, First Tower Delaware, which is 100% owned by us, recorded a secured revolving credit facility to us of $244,760 and equity of $43,193. First Tower Delaware owns 80.1% of First Tower Holdings LLC, the holding company of First Tower. The assets of First Tower acquired include, among other things, the subsidiaries owned by First Tower, which hold finance receivables, leaseholds, and tangible property associated with First 95 Table of Contents Tower's businesses. During the three months ended June 30, 2012, we received $8,075 in structuring fee income. During the three months ended December 31, 2012, we funded an additional $20,000 of senior secured debt to support seasonally high demand during the holiday season. As of June 30, 2013, First Tower had total assets of approximately $605,783 including $378,327 of finance receivables net of unearned charges. As of June 30, 2013, First Tower's total debt outstanding to parties senior to us was $264,760. Due to a reduction in public market comparables in the consumer finance industry, the Board of Directors set the fair value of our investment in First Tower at $298,084 as of June 30, 2013, a discount of $9,869 to its amortized cost, compared to $287,953 as of June 30, 2012, equal to its amortized cost at that time. Manx Energy, Inc. Manx was formed for the purpose of rolling up the assets of two existing Prospect portfolio companies, Coalbed, LLC ("Coalbed") and Appalachian Energy Holdings, LLC ("AEH"), bringing them under new management, restructuring the outstanding debt, and infusing additional capital to allow for future growth. Coalbed is the owner of 100% of the outstanding equity interests of Coalbed Pipelines, LLC and Coalbed Operator, LLC. Coalbed was formed in October 2009 to acquire our outstanding senior secured loan and assigned interests in Conquest Cherokee, LLC ("Conquest"). Conquest's assets consisted primarily of coalbed methane reserves in the Cherokee Basin. AEH was formed in 2006 and is the owner of 100% of the outstanding equity interests of East Cumberland L.L.C., a provider of outsourced mine site development and construction services for coal production companies operating in Southern Appalachia, and C&S Oilfield and Pipeline Construction, a provider of support services to companies engaged in the exploration and production of oil and natural gas. On January 19, 2010, we modified the terms of our senior secured debt in AEH and Coalbed in conjunction with the formation of Manx, a new entity consisting of the assets of AEH, Coalbed and Kinley Exploration LLC. The assets of the three companies were combined under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring, and we continue to fully reserve any income accrued for Manx. During the year ended June 30, 2011, we made a follow-on secured debt investments of $750 in Manx to support ongoing operations. On June 30, 2012, Manx assigned the membership interests and associated operating company debt of Coalbed and AEH to Wolf Energy Holdings, Inc. ("Wolf"), a newly-formed company owned by us. During the quarter ended June 30, 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair market value. The Board of Directors set the fair value of our investment in Manx at $346 as of June 30, 2013, a reduction of $154 from its amortized cost, compared to the $11,028 unrealized depreciation recorded at June 30, 2012. The Healing Staff, Inc. During the three months ended December 31, 2012, we determined that the impairment of Integrated Contract Services, Inc. ("ICS") was other-than-temporary and recorded a realized loss of $12,198 for the amount that the amortized cost exceeded the fair market value. Our remaining investments are in THS and Vets Securing America ("VSA"), wholly owned subsidiaries of ICS with ongoing operations. THS provides outsourced medical staffing services to governmental and 96 Table of Contents commercial enterprises. VSA provides out-sourced security guards staffed primarily using retired military and police department veterans. During September and October 2007, we provided $1,170 to THS for working capital through our investment in ICS. In January 2009, we foreclosed on the real and personal property of ICS. Through this foreclosure process, we gained 100% ownership of THS. As part of its strategy to diversify its revenues THS started VSA as a new business in the latter part of 2009. During the year ended June 30, 2011 and the six months ended December 31, 2011, we made follow-on secured debt investments of $1,708 and $874, respectively, to support the ongoing operations of THS and VSA. Effective October 19, 2011, the closing date of the sale by VSA of a commercial real estate asset, $893 of the follow-on secured debt investments were repaid. In early May 2012, we made short-term secured debt investments of $118 and $42, respectively, to support the operations of THS and VSA, which short term debt was repaid in early June 2012. We made no additional fundings during the six months ended June 30, 2012 and the fiscal year ended June 30, 2013. In May 2012, in connection with the implementation of accounts receivable based funding programs for THS and VSA with a third party provider we agreed to subordinate our first priority security interest in all of the accounts receivable and other assets of THS and VSA to the third party provider of that accounts receivable based funding. Based upon an analysis of the liquidation value of assets, our Board of Directors determined the fair value of our investment in THS and VSA to be zero at June 30, 2013 and June 30, 2012, respectively, a reduction of $3,831 and $3,750 from its amortized cost, respectively. Wolf Energy Holdings, Inc. Wolf is a holding company formed to hold 100% of the outstanding membership interests of each of Coalbed and AEH. The membership interests of Coalbed and AEH, which were previously owned by Manx, were assigned to Wolf effective June 30, 2012. The purpose of assignment was to remove those activities from Manx deemed non-core by the Manx convertible debt investors who were not interested in funding those operations. In addition, effective June 29, 2012 C&J Cladding Holding Company, Inc. ("C&J") merged with and into Wolf, with Wolf as the surviving entity. At the time of the merger, C&J held the remaining undistributed proceeds from the sale of its membership interests in C&J Cladding, LLC. The merger was effectuated in connection with the broader simplification of our energy investment holdings. On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. Our cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors , and is equal to the fair value of assets at the time of transfer and we recorded a realized loss of $19,647 in connection with the foreclosure on the assets. On May 17 2013, Wolf sold certain of the assets that had been previously held by H&M that were located in Martin County to Hibernia for $66,000. Proceeds from the sale were primarily used to repay the loan and NPI receivable due to us and we recognized as a realized gain of $11,826 partially offsetting the previously recorded loss. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the NPI agreement which was recognized as other income during the fiscal year ended June 30, 2013. Based on an increase in the liquidation value of Wolf due to the acquisition of assets previously held by H&M, the Board of Directors increased the fair value of our investment in Wolf to $4,949 as of June 30, 2013, a reduction of $3,091 from its amortized cost, compared to the $7,991 unrealized depreciation recorded at June 30, 2012. Equity positions in the portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results. Two of our portfolio companies, 97 Table of Contents Ajax and First Tower Delaware, experienced such volatility and experienced fluctuations in valuation during the year ended June 30, 2013. The valuation of Ajax decreased due to declining operating results. The value of our equity position in Ajax decreased to zero as of June 30, 2013, a discount of $6,057 to its cost, compared to the $11,134 unrealized gain recorded at June 30, 2012. The valuation of First Tower Delaware decreased due to change in current market conditions. The value of our equity position in First Tower decreased to $33,324 as of June 30, 2013, a discount of $9,869 to its cost, compared to the value of $43,193 recorded at June 30, 2012, equal to its cost. Six of the other controlled investments have been valued at discounts to the original investment. Eight of the control investments are valued at the original investment amounts or higher. Overall, at June 30, 2013, the control investments are valued at $18,517 below their amortized cost. We hold three affiliate investments at June 30, 2013. One of our affiliate portfolio companies, Boxercraft, experienced a meaningful decrease in valuation during the year ended June 30, 2013 due to declining operating results. As of June 30, 2013, Boxercraft is valued at $9,385, a reduction of $7,375 to its amortized cost. Overall, at June 30, 2013, affiliate investments are valued at $6,746 below their amortized cost. With the Non-control/Non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments, the fair value is limited on the high side to each loan's par value, plus any prepayment premia that could be imposed. Many of the debt investments in this category have not experienced a significant change in value, as they were previously valued at or near par value. Non-control/Non-affiliate investments did not experience significant changes in valuation and are generally performing as expected or better than expected. As of June 30, 2013 and June 30, 2012, four of our Non-control/Non-affiliate investments, ICON Health & Fitness, Inc. ("ICON"), Gulf Coast Machine & Supply Company ("Gulf Coast"), Stryker Energy, LLC ("Stryker") and Wind River Resources Corp. and Wind River II Corp. ("Wind River"), are valued at a significant discount to amortized cost, due to significant decreases in the operating results of the operating companies. Overall, at June 30, 2013, other Non-control/Non-affiliate investments are valued at $8,427 above their amortized cost, excluding our investments in ICON, Gulf Coast, Stryker and Wind River, as the remaining companies are generally performing as or better than expected. Capitalization Our investment activities are capital intensive and the availability and cost of capital is a critical component of our business. We capitalize our business with a combination of debt and equity. Our debt currently consists of a revolving credit facility availing us of the ability to borrow debt subject to borrowing base determinations and Senior Convertible Notes which we issued in December 2010, February 2011, April 2012, August 2012 and December 2012, Senior Unsecured Notes, and Prospect Capital InterNotes®, which we may issue from time to time, and our equity capital, which is comprised entirely of common equity. The following table shows the Revolving Credit Facility, Senior Convertible Notes, Senior Unsecured Notes and InterNotes® amounts and outstanding borrowings at June 30, 2013 and June 30, 2012: Revolving Credit Facility Senior Convertible Notes Senior Unsecured Notes InterNotes® As of June 30, 2013 As of June 30, 2012 Maximum Draw Amount Amount Outstanding Maximum Draw Amount Amount Outstanding $ $ $ $ 552,500 $ 124,000 $ 847,500 $ 847,500 $ 347,725 $ 347,725 $ 363,777 $ 363,777 $ 492,500 $ 96,000 447,500 $ 447,500 100,000 $ 100,000 20,638 20,638 $ 98 Table of Contents The following table shows the contractual maturity of our Revolving Credit Facility, Senior Convertible Notes, Senior Unsecured Notes and InterNotes® at June 30, 2013: Payments Due by Period Revolving Credit Facility Senior Convertible Notes Senior Unsecured Notes InterNotes® Total contractual obligations $ Total 124,000 $ 847,500 347,725 363,777 $ 1,683,002 $ Less than 1 year After 5 Years 1 - 3 Years 3 - 5 Years — — $ — $ 124,000 $ 400,000 — 150,000 297,500 347,725 — — — — 363,777 — — — $ 150,000 $ 421,500 $ 1,111,502 We have and expect to continue to fund a portion of our cash needs through borrowings from banks, issuances of senior securities, including secured, unsecured and convertible debt securities, or issuances of common equity. For flexibility, we maintain a universal shelf registration statement that allows for the public offering and sale of our debt securities, common stock, preferred stock, subscription rights, and warrants and units to purchase such securities in an amount up to $3,000,000 less issuances to date. As of June 30, 2013, we can issue up to $1,743,217 of additional debt and equity securities in the public market under this shelf registration. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. Revolving Credit Facility On June 11, 2010, we closed an extension and expansion of our existing credit facility with a syndicate of lenders through PCF (the "2010 Facility"). The 2010 Facility, which had $325,000 total commitments as of June 30, 2011, included an accordion feature which allowed the 2010 Facility to accept up to an aggregate total of $400,000 of commitments, a limit which was met on September 1, 2011. Interest on borrowings under the 2010 Facility was one-month Libor plus 325 basis points, subject to a minimum Libor floor of 100 basis points. Additionally, the lenders charged a fee on the unused portion of the 2010 Facility equal to either 75 basis points if at least half of the credit facility was used or 100 basis points otherwise. On March 27, 2012, we renegotiated the 2010 Facility and closed on an expanded five-year $650,000 revolving credit facility (the "2012 Facility"). The lenders have extended commitments of $552,500 under the 2012 Facility as of June 30, 2013. The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders. The 2012 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2012 Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the 2012 Facility. The 2012 Facility also requires the maintenance of a minimum liquidity requirement. At June 30, 2013, we were in compliance with the applicable covenants. Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility 99 Table of Contents equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of June 30, 2013 and June 30, 2012, we had $473,508 and $418,980, respectively, available to us for borrowing under our 2012 Facility, of which the amount outstanding was $124,000 and $96,000, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $552,500. At June 30, 2013, the investments used as collateral for the 2012 Facility had an aggregate market value of $833,310, which represents 31.4% of our net assets. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at market value as of June 30, 2013. The release of any assets from PCF requires the approval of the facility agent. In connection with the origination and amendments of the 2012 Facility, we incurred $11,150 of fees, including $1,319 of fees carried over from the previous facility, which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments , of which $6,722 remains to be amortized as of June 30, 2013. During the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we recorded $9,082, $14,883 and $8,507 of interest costs, unused fees and amortization of financing costs on our credit facility as interest expense, respectively. Senior Convertible Notes On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 ("2015 Notes") for net proceeds following underwriting expenses of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 88.0902 and 88.1429 shares of common stock, respectively, per $1 principal amount of 2015 Notes, which is equivalent to a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (December 21, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2015 Notes is increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 per share, subject to adjustment. On February 18, 2011, we issued $172,500 in aggregate principal amount of our 5.50% senior convertible notes due 2016 ("2016 Notes") for net proceeds following underwriting expenses of approximately $167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 of our 2016 Notes at a price of 97.5, including commissions. The transactions resulted in our recognizing $10 of loss in the year ended June 30, 2012. Interest on the remaining $167,500 of 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year, commencing August 15, 2011. The 2016 Notes mature on August 15, 2016 unless converted earlier. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 78.3699 and 78.5395 shares, respectively, of common stock per $1 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.73 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (February 14, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2016 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101150 per share. 100 Table of Contents On April 16, 2012, we issued $130,000 in aggregate principal amount of our 5.375% senior convertible notes due 2017 ("2017 Notes") for net proceeds following underwriting expenses of approximately $126,035. Interest on the 2017 Notes is paid semi-annually in arrears on October 15 and April 15, at a rate of 5.375% per year, commencing October 15, 2012. The 2017 Notes mature on October 15, 2017 unless converted earlier. The 2017 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 85.8442 and 86.1162 shares of common stock, respectively, per $1 principal amount of 2017 Notes, which is equivalent to a conversion price of approximately $11.61 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (April 16, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2017 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.10150 per share. On August 14, 2012, we issued $200,000 in aggregate principal amount of our 5.75% senior convertible notes due 2018 ("2018 Notes") for net proceeds following underwriting expenses of approximately $193,600. Interest on the 2018 Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 5.75% per year, commencing March 15, 2013. The 2018 Notes mature on March 15, 2018 unless converted earlier. The 2018 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 82.3451 shares of common stock per $1 principal amount of 2018 Notes, which is equivalent to a conversion price of approximately $12.07 per share of common stock, subject to adjustment in certain circumstances. The conversion price has not been adjusted since the issuance (August 14, 2012) and will next be adjusted on the first anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2018 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101600 per share. On December 21, 2012, we issued $200,000 in aggregate principal amount of 5.875% senior convertible notes due 2019 (the "2019 Notes") for net proceeds following underwriting and other expenses of approximately $193,600. Interest on the 2019 Notes is paid semi-annually in arrears on January 15 and July 15, at a rate of 5.875% per year, commencing July 15, 2013. The 2019 Notes mature on January 15, 2019 unless converted earlier. The 2019 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 79.7766 shares of common stock per $1 principal amount of 2019 Notes, which is equivalent to a conversion price of approximately $12.54 per share of common stock, subject to adjustment in certain circumstances. The conversion price has not been adjusted since the issuance (December 21, 2012) and will next be adjusted on the first anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2019 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.110025 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 96.8992 per $1 principal amount of the 2015 Notes (the "conversion rate cap"), except that, to the extent we receive written guidance or a no-action letter from the staff of the Securities and Exchange Commission (the "Guidance") permitting us to adjust the conversion rate in certain instances without regard to the conversion rate cap and to make the 2015 Notes convertible into certain reference property in accordance with certain reclassifications, business combinations, asset sales and corporate events by us without regard to the conversion rate cap, we will make such adjustments without regard to the conversion rate cap and will also, to the extent that we make any such adjustment without regard to the conversion rate cap pursuant to the Guidance, adjust the conversion rate cap accordingly. We will use our commercially reasonable efforts to obtain such Guidance as promptly as practicable. 101 Table of Contents Prior to obtaining the Guidance, we will not engage in certain transactions that would result in an adjustment to the conversion rate of the 2015 Notes increasing the conversion rate beyond what it would have been in the absence of such transaction unless we have engaged in a reverse stock split or share combination transaction such that in our reasonable best estimation, the conversion rate following the adjustment for such transaction will not be any closer to the conversion rate cap than it would have been in the absence of such transaction. Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the 2015 Notes and 2016 Notes (collectively, "Senior Convertible Notes"). No holder of Senior Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules. Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Notes upon a fundamental change at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Senior Convertible Notes through and including the maturity date. In connection with the issuance of the Senior Convertible Notes, we incurred $27,032 of fees which are being amortized over the terms of the notes in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $20,254 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities as of June 30, 2013. During the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we recorded $45,878, $22,197 and $9,090 of interest costs and amortization of financing costs on the Senior Convertible Notes as interest expense, respectively. Senior Unsecured Notes On May 1, 2012, we issued $100,000 in aggregate principal amount of 6.95% senior unsecured notes due 2022 for proceeds net of offering expenses of $97,000 (the "2022 Notes"). Interest on the 2022 Notes is paid quarterly in arrears on August 15, November 15, February 15 and May 15, at a rate of 6.95% per year, commencing on August 15, 2012. The 2022 Notes mature on November 15, 2022. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding. On March 15, 2013, we issued $250,000 in aggregate principal amount of 5.875% senior unsecured notes due 2023 (the "2023 Notes") for net proceeds following underwriting and other expenses of approximately $245,885. Interest on the 2023 Notes is paid semi-annually. The 2023 Notes matured on March 15, 2023. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding. 102 Table of Contents In connection with the issuance of the 2022 Notes and 2023 Notes (collectively the "Senior Unsecured Notes"), we incurred $7,480 of fees which are being amortized over the term of the notes in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $7,114 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities. During the years ended June 30, 2013 and June 30, 2012, we recorded $11,672 and $1,178 of interest costs and amortization of financing costs on the Senior Unsecured Notes as interest expense, respectively. Prospect Capital InterNotes ® On February 16, 2012, we entered into a Selling Agent Agreement (the "Selling Agent Agreement") with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes® (the "InterNotes® Offering"), which was subsequently increased to $1,000,000. Additional agents appointed by us from time to time in connection with the InterNotes Offering may become parties to the Selling Agent Agreement. These notes are direct unsecured senior obligations and will rank equally with all of our unsecured senior indebtedness outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance. During the year ended June 30, 2013, we issued $343,139 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $334,243. These notes were issued with stated interest rates ranging from 3.28% to 6.63% with a weighted average rate of 5.59%. These notes mature between July 15, 2019 and June 15, 2043. 103 Table of Contents The bonds outstanding as of June 30, 2013 are: Date of Issuance March 1, 2012 - March 8, 2012 April 5, 2012 - April 26, 2012 June 14, 2012 June 28, 2012 July 6, 2012 - July 26, 2012 August 2, 2012 - August 23, 2012 September 7, 2012 - September 27, October 4, 2012 November 23, 2012 - November 29, November 29, 2012 November 23, 2012 - November 29, December 6, 2012 - December 28, December 6, 2012 December 13, 2012 - December 28, December 6, 2012 - December 28, January 4, 2013 - January 31, 2013 January 4, 2013 - January 31, 2013 January 4, 2013 - January 31, 2013 February 4, 2013 - February 28, 2012 2012 2012 2012 2012 2012 2013 2013 February 4, 2013 - February 28, 2013 February 4, 2013 - February 28, March 4, 2013 - March 28, 2013 March 4, 2013 - March 28, 2013 March 4, 2013 - March 28, 2013 March 14, 2013 - March 28, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 Principal Amount Interest Rate Range Weighted Average Interest Rate $ 5,465 8,516 2,657 4,000 20,928 17,545 6.90% - 7.00% 6.50% - 6.85% 6.95% 6.55% 6.20% - 6.45% 6.05% - 6.15% 6.97 % 6.72 % 6.95 % 6.55 % 6.31 % 6.09 % Maturity Date March 15, 2022 April 15, 2022 June 15, 2022 June 15, 2019 July 15, 2019 August 15, 2019 29,406 7,172 5.85% - 6.00% 5.70% 5.92 % September 15, 2019 5.70 % October 19, 2019 13,754 1,979 5.00% - 5.13% 5.75% 5.09 % November 15, 2019 5.75 % November 15, 2032 16,437 6.50% - 6.63% 6.58 % November 15, 2042 9,339 1,127 4.50% - 4.86% 5.63% 4.73 % December 15, 2019 5.63 % December 15, 2032 3,702 5.00% - 5.13% 5.11 % December 15, 2030 6.00% - 6.38% 22,966 4,427 4.00% - 4.375% 2,388 4.50% - 4.875% 9,338 5.50% - 5.875% 6.21 % December 15, 2042 January 15, 2020 4.15 % January 15, 2031 4.74 % January 15, 2043 5.63 % 2,619 664 4.00% 4.00 % February 15, 2031 4.50% 4.50 % February 15, 2031 4,623 3,832 5.50% 4.00% 984 4.125% - 4.50% 5.50% L+3.00% 4.50% - 5.00% L+3.50% 4.63% - 5.50% 6.00% 5.00% 5.00% 5.75% 6.25% 5.00% - 5.25% 5.00% 5.75% - 6.00% 6.25% - 6.50% 4,308 1,225 29,528 264 5,164 12,280 42,482 10,000 7,548 33,641 9,905 5,000 1,707 6,857 $ 363,777 5.50 % February 15, 2043 March 15, 2020 4.00 % March 15, 2031 4.24 % March 15, 2043 5.50 % March 15, 2023 3.27 % April 15, 2020 4.96 % April 15, 2023 3.78 % April 15, 2031 5.34 % April 15, 2043 6.00 % May 15, 2020 5.00 % May 15, 2028 5.00 % May 15, 2031 5.75 % May 15, 2043 6.25 % June 15, 2020 5.04 % June 15, 2028 5.00 % June 15, 2031 5.85 % June 15, 2043 6.31 % In connection with the issuance of the Prospect Capital InterNotes®, we incurred $10,598 of fees which are being amortized over the term of the notes in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $10,248 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities. 104 Table of Contents During the years ended June 30, 2013 and June 30, 2012, we recorded $9,707 and $276 of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense, respectively. Net Asset Value During the year ended June 30, 2013, we raised $1,179,084 of additional equity, net of offering costs, by issuing 106,752,517 shares of our common stock. The following table shows the calculation of net asset value per share as of June 30, 2013 and June 30, 2012: Net Assets Shares of common stock outstanding Net asset value per share Results of Operations As of June 30, 2013 $ 2,656,494 $ 247,836,965 $10.72 $ $ As of June 30, 2012 1,511,974 139,633,870 10.83 Net increase in net assets resulting from operations for the years ended June 30, 2013, 2012 and 2011 was $220,856, $190,904 and $118,238, respectively, representing $1.07, $1.67 and $1.38 per weighted average share, respectively. During the year ended June 30, 2013, we experienced net unrealized and realized losses of $104,068 or approximately $0.50 per weighted average share primarily due to the reduction in the fair value of our investments in Ajax, Boxercraft and First Tower because of changes in current market conditions and Energy Solutions for which we received $19,543 of make-whole fees for early repayment of the outstanding loan and dividends of $53,820 during the year, which were recorded as interest and dividend income, respectively, reducing the amount previously recorded as unrealized appreciation. These losses were partially offset by net realized gains from the sale of assets in Wolf, assets formerly held by H&M, and distributions received from our escrow receivable account, primarily from NRG. During the year ended June 30, 2012, we experienced net unrealized and realized gains of $4,220 or approximately $0.04 per weighted average share primarily from significant write-ups of our investments in Ajax, Energy Solutions and R-V, and our sale of NRG for which we realized a gain of $36,940. These instances of appreciation were partially offset by unrealized depreciation in Biotronic, H&M, Meatco, NMMB, Stryker and Wind River. Net investment income decreased on a weighted average per share basis from $1.63 to $1.57 for the years ended June 30, 2012 and 2013, respectively. The decrease is primarily due to an increase of $6,500 in accrued excise as the result of undisturbed ordinary income at December 31, 2012 and expected at December 31, 2013, and higher levels of cash awaiting deployment during the year ended June 30, 2013. Net investment income increased on a weighted average per share basis from $1.10 to $1.63 for the years ended June 30, 2011 and 2012, respectively. This increase is primarily due to the sale of NRG, for which we received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the year ended June 30, 2012, and an increase in dividend income received from Energy Solutions and NRG of $38,000 and $11,411, respectively. These increases were partially offset by a $15,471 decline in interest income from purchase discount accretion from the assets acquired from Patriot. While we seek to maximize gains and minimize losses, our investments in portfolio companies can expose our capital to risks greater than those we may anticipate. These companies are typically not issuing securities rated investment grade, have limited resources, have limited operating history, have concentrated product lines or customers, are generally private companies with limited operating information available and are likely to depend on a small core of management talents. Changes in any of these factors can have a significant impact on the value of the portfolio company. 105 Table of Contents Investment Income We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees generated from the structuring of new deals. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies' assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including prepayment penalties and possibly consulting fees. Any such fees generated in connection with our investments are recognized as earned. Investment income, which consists of interest income, including accretion of loan origination fees and prepayment penalty fees, dividend income and other income, including net profits interests revenue, overriding royalty interests and structuring fees, was $576,336, $320,910, and $169,476, for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. During the year ended June 30, 2013, the increase in investment income is primarily the result of a larger income producing portfolio, increased structuring, advisory and amendment fees from the deployment of additional capital in revenue-producing assets, make-whole fees from Energy Solutions for early repayment of our outstanding loan, and increased dividends received from Energy Solutions and R-V. The following table describes the various components of investment income and the related levels of debt investments: Year Ended June 30, 2013 Year Ended June 30, 2012 Year Ended June 30, 2011 Interest income Dividend income Other income $ Total investment income $ 435,455 $ 82,705 58,176 576,336 $ 219,536 $ 64,881 36,493 320,910 $ 134,454 15,092 19,930 169,476 Average debt principal of performing investments Weighted average interest rate earned on performing assets $ 2,878,421 $ 1,466,703 $ 871,400 15.1 % 15.0 % 15.2 % Average interest income producing assets have increased from $871,400 for the year ended June 30, 2011 to $1,466,703 for the year ended June 30, 2012 to $2,878,421 for the year ended June 30, 2013. The average yield on performing interest bearing assets remained relatively consistent over the three year period. Investment income is also generated from dividends and other income. Dividend income increased from $64,881 for the year ended June 30, 2012 to $82,705 for the year ended June 30, 2013. This $17,824 increase in dividend income is primarily attributed to an increase in the level of dividends received from our investments in Energy Solutions and R-V due to increased profits generated by the portfolio companies. We received dividends from Energy Solutions of $53,820 and $47,850 during the years ended June 30, 2013 and June 30, 2012, respectively. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were recognized as dividend income, in accordance with ASC 946, Financial Services—Investment Companies , as cash distributions are received from Energy Solutions to the extent there are earnings and profits sufficient to support such recognition. We received dividends from R-V of $24,462 and $283 during the years ended June 30, 2013 and June 30, 2012, respectively. The $24,462 of dividends received from R-V 106 Table of Contents during the year ended June 30, 2013 include a $11,073 distribution as part of R-V's recapitalization in November 2012 for which we provided an additional $9,500 of senior secured financing. The increases in dividend income from our investments in Energy Solutions and R-V were offset by a reduction in dividends received from NRG. We received dividends from NRG of $15,011 during the year ended June 30, 2012. There were no dividends from NRG received during the year ended June 30, 2013 as NRG has been sold. Dividend income increased from $15,092 for the year ended June 30, 2011 to $64,881 for the year ended June 30, 2012. This $49,789 increase in dividend income is primarily attributed to an increase in the dividends received from our investments in Energy Solutions and NRG due to increased profits generated by the portfolio companies. We received dividends from NRG of $15,011 and $3,600 during the years ended June 30, 2012 and June 30, 2011, respectively. We received dividends from Energy Solutions of $47,850 and $9,850 during the years ended June 30, 2012 and June 30, 2011, respectively. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were recognized as dividend income, in accordance with ASC 946, Financial Services—Investment Companies , as cash distributions are received from Energy Solutions to the extent there are earnings and profits sufficient to support such recognition. Other income has come primarily from structuring fees, overriding royalty interests, and settlement of net profits interests. Comparing the year ended June 30, 2012 to the year ended June 30, 2013, income from other sources increased from $36,493 to $58,176, respectively. This $21,683 increase is primarily due to $52,699 of structuring fees recognized during the year ended June 30, 2013 primarily from our investments in APH, Arctic Glacier, Broder, InterDent, Progrexion, Ryan, TransPlace, USC and Wolf originations, in comparison to $26,443 of structuring fees recognized during the year ended June 30, 2012. This $26,256 increase in structuring fees is partially offset by a decrease in advisory fees recognized during the year ended June 30, 2013 from our investments in Energy Solutions and NRG. We received $8,783 of advisory fees from Energy Solutions and NRG during the year ended June 30, 2012. No such fee was received during the year ended June 30, 2013. The remaining $4,210 increase is primarily due to $4,122 of royalty income recognized during the year ended June 30, 2013 primarily from First Tower and Wolf, in comparison to $224 of royalty income recognized during the year ended June 30, 2012. Comparing the year ended June 30, 2011 to the year ended June 30, 2012, income from other sources increased from $19,930 to $36,493. This $16,563 increase is primarily due to $14,137 of structuring and advisory fees recognized during the year ended June 30, 2012 from our investments in Energy Solutions and NRG. The remaining $2,426 increase is primarily due to $21,088 of structuring fees recognized, excluding those received from our investments in Energy Solutions and NRG, during the year ended June 30, 2012 primarily from the Capstone, First Tower, Naylor, LLC and Totes Isotoner Corporation ("Totes") originations, in comparison to $18,494 of structuring fees recognized during the year ended June 30, 2011. Operating Expenses Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees and other operating and overhead-related expenses. These expenses include our allocable portion of overhead under the Administration Agreement with Prospect Administration under which Prospect Administration provides administrative services and facilities for us. Our investment advisory fees compensate Prospect Capital Management (the "Investment Adviser") for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions in accordance with our Administration Agreement with Prospect Administration. Operating expenses were $251,412, $134,226 and $75,255 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. 107 Table of Contents The base investment advisory expenses were $69,800, $35,836 and $22,496 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. These increases are directly related to our growth in total assets. For the years ended June 30, 2013, June 30, 2012 and June 30, 2011, income incentive fees incurred were $81,231, $46,761 and $23,555, respectively. The $34,470 increase in the income incentive fee for the year ended June 30, 2013 is driven by an increase in pre-incentive fee net investment income of $172,800 primarily due to an increase in interest income from a larger asset base. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement. During the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we incurred $76,341, $38,534 and $17,598, respectively, of expenses related to our 2012 Facility, InterNotes®, Senior Unsecured Notes and Senior Convertible Notes. 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 expenses of our 2012 Facility, InterNotes®, Senior Unsecured Notes and Senior Convertible Notes and the related indicators of leveraging capacity and indebtedness during these years. Interest on borrowings Amortization of deferred financing costs Commitment and other fees Total Weighted-average debt outstanding Weighted average interest rate on borrowings Year Ended June 30, 2013 Year Ended June 30, 2012 Year Ended June 30, 2011 $ $ 62,657 $ 8,283 5,401 76,341 $ 27,346 $ 8,510 2,678 38,534 $ 9,861 5,366 2,371 17,598 $ 1,066,368 $ 502,038 $ 176,277 (excluding amortization and undrawn facility fees) $ Facility amount at beginning of year 5.88 % 492,500 $ 5.45 % 325,000 $ 5.59 % 210,000 The increase in interest expense for the year ended June 30, 2013 is primarily due to the issuance of the 2022 Notes, 2023 Notes and the Senior Convertible Notes on April 16, 2012, August 14, 2012 and December 21, 2012, for which we incurred $34,551 of collective interest expense. The weighted average interest rate on borrowings (excluding amortization and undrawn facility fees) increased from 5.45% to 5.88% as of June 30, 2012 and June 30, 2013, respectively. This increase is primarily due to a decrease in utilization of our credit facility in favor of longer term financing. The allocation of overhead expense from Prospect Administration was $8,737, $6,848 and $4,979 for the years ended June 30, 2013, 2012 and 2011, respectively. As our portfolio continues to grow, we expect Prospect Administration to continue to increase the size of its administrative and financial staff. Total operating expenses, net of investment advisory fees, interest costs, excise tax and allocation of overhead from Prospect Administration ("Other Operating Expenses"), were $8,803, $6,337 and $6,627 for the years ended June 30, 2013, 2012 and 2011, respectively. The increase in Other Operating Expenses during the year ended June 30, 2013 when compared to the year ended June 30, 2012 is primarily the result of a $1,000 insurance claim settlement for legal fees expensed in previous periods that was received during the year ended June 30, 2012. The decrease in Other Operating Expenses during the year ended June 30, 2012 when compared to the year ended June 30, 2011 is primarily the result of a $1,000 insurance claim settlement for legal fees expensed in previous periods that was received during the year ended June 30, 2012. Net Investment Income Net investment income represents the difference between investment income and operating expenses. Our net investment income was $324,924, $186,684 and $94,221 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively, or $1.57 per share, $1.63 per share and $1.10 per 108 Table of Contents share, respectively. The $138,240 increase for the year ended June 30, 2013 is primarily due to an increase of $215,919 in interest income, due to the increased size of our portfolio for which we have recognized additional interest income. The $255,426 increase in investment income is offset by an increase in operating expenses of $117,186, primarily due to a $68,524 increase in advisory fees due to the growing size of our portfolio and related income, and $37,807 of additional interest and credit facility expenses. For the calendar year ended December 31, 2012, we elected to retain a portion of our annual taxable income and have paid $4,500 for the excise tax due with the filing of the return. As of June 30, 2013, we have $2,000 accrued as an estimate of two quarters of the excise tax due for the calendar year ending December 31, 2013. The per share decrease is primarily due to an increase of $6,500 in excise taxes and higher levels of cash awaiting deployment during the year ended June 30, 2013. The $92,463 increase for the year ended June 30, 2012 is primarily due to a $151,434 increase in investment income offset by an increase in operating expenses of $58,971. The $151,434 increase in investment income is due to increases of $85,082, $49,789 and $16,563 in interest income, dividend income and other income, respectively, due to the increased size of our portfolio for which we have recognized additional interest income, dividends, structuring fees and advisory fees recognized primarily from our investments in Energy Solutions, First Tower and NRG. In conjunction with the sale of NRG we also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the year ended June 30, 2012. The offsetting $58,971 increase in operating expenses is primarily due to a $36,456 increase in advisory fees due to the growing size of our portfolio and related income, $20,936 of additional interest and credit facility expenses and a $1,869 increase in overhead allocated from Prospect Administration. Net Realized (Losses) Gains, (Decrease) Increase in Net Assets from Net Changes in Unrealized Appreciation/Depreciation Net realized (losses) gains were ($26,234), $36,588 and $16,465 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. The net realized loss for the year ended June 30, 2013 was primarily due to the sale of Meatco (realized loss of $10,814), the other- than-temporary impairment of ICS (realized loss of $12,117) and restructuring of the H&M debt in conjunction with the foreclosure on the assets of H&M (realized loss of $19,647). These losses were partially offset by net realized gains from the sale of our assets in Wolf (realized gain of $11,826), assets formerly held by H&M, and distributions received from our escrow receivable account, primarily NRG (resulting in realized gains of $3,252). The net realized gain for the year ended June 30, 2012 was due primarily to the sale of NRG common stock for which we realized a gain of $36,940 and the sale of our equity interests in Copernicus, C&J, Fairchild Industrial Products, Co., Fischbein, Mac & Massey, Nupla and Sport Helmets for which we realized a total gain of $14,317. These gains were offset by our impairment of Deb Shops. During the year ended June 30, 2012, Deb Shops filed for bankruptcy and a plan for reorganization was proposed. The plan was approved by the bankruptcy court and our debt position was eliminated with no payment to us. We determined that the impairment of Deb Shops was other-than-temporary on September 30, 2011 and recorded a realized loss of $14,607 for the full amount of the amortized cost. The asset was completely written off when the plan of reorganization was approved. The net realized gain for the year ended June 30, 2011 was due primarily to gains from the sales of our common equity in Fischbein and Miller of $9,893 and $7,977, respectively. 109 Table of Contents Net (decrease) increase in net assets from changes in unrealized (depreciation) appreciation was ($77,834), ($32,368), and $7,552 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively, or ($0.37) per share, ($0.28) per share and $0.09 per share, respectively. For the year ended June 30, 2013, the $77,834 decrease in net assets from the net change in unrealized depreciation was driven by reduction in the fair value of our investments in Ajax, Boxercraft and First Tower because of changes in current market conditions and Energy Solutions for which we received $19,543 of make-whole fees for early repayment of the outstanding loan and distributions of $53,820 during the year, which were recorded as interest and dividend income, respectively, reducing the amount previously recorded as unrealized appreciation. These instances of unrealized depreciation were partially offset by the elimination of the unrealized depreciation resulting from the H&M foreclosure mentioned above. For the year ended June 30, 2012, the $32,368 decrease in net assets from the net change in unrealized appreciation/depreciation was driven by write-downs of $68,197 related to our investments in H&M, Meatco and Stryker, as well as the elimination of the unrealized appreciation resulting from the sale of NRG mentioned above. The unrealized depreciation was partially offset by unrealized appreciation of approximately $34,712 related to our investments in Ajax and R-V. For the year ended June 30, 2011, the $7,552 increase in net assets from the net change in unrealized appreciation was driven by significant write-ups of $54,916 related to our investments in Ajax, Biotronic, ESHI, Iron Horse, NRG and Sport Helmets. The unrealized appreciation were partially offset by unrealized depreciation of approximately $35,689 related to our investments in H&M, ICS, Manx, Shearer's, Stryker, and $10,840 related to the repayment of Prince. Financial Condition, Liquidity and Capital Resources For the years ended June 30, 2013, June 30, 2012 and June 30, 2011, our operating activities used $1,811,101, $287,881 and $581,609 of cash, respectively. There were no investing activities for the years ended June 30, 2013, June 30, 2012 and June 30, 2011. Financing activities provided cash flows of $1,868,250, $289,214 and $582,020 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. Dividends paid were $242,301, $127,564 and $91,247 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. Our primary uses of funds have been to continue to invest in portfolio companies, through both debt and equity investments, repay outstanding borrowings and to make cash distributions to holders of our common stock. Our primary sources of funds have been issuances of debt and equity. We have and may continue to fund a portion of our cash needs through borrowings from banks, issuances of senior securities or secondary offerings. We may also securitize a portion of our investments in mezzanine or senior secured loans or other assets. Our objective is to put in place such borrowings in order to enable us to expand our portfolio. During the year ended June 30, 2013, we borrowed $223,000 and made repayments totaling $195,000 under our 2012 Facility. As of June 30, 2013, we had $124,000 outstanding on our revolving credit facility, $847,500 outstanding on our Senior Convertible Notes, $347,725 outstanding on our Senior Unsecured Notes and $363,777 outstanding on InterNotes®. (See Capitalization .) Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of June 30, 2013 and June 30, 2012, we have $202,518 and $180,646 of undrawn revolver commitments to our portfolio companies, respectively. Our Board of Directors, pursuant to the Maryland General Corporation Law, executed Articles of Amendment to increase the number of shares authorized for issuance from 200,000,000 to 500,000,000 in the aggregate. The amendment became effective July 30, 2012. 110 Table of Contents On October 29, 2012, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to an additional $1,743,217 of debt and equity securities in the public market at June 30, 2013. We also continue to generate liquidity through public and private stock offerings. On June 1, 2012, we entered into an ATM Program with KeyBanc through which we could sell, by means of at-the-market offerings from time to time, of up to 9,500,000 shares of our common stock. During the period from July 2, 2012 to July 12, 2012, we sold 2,247,275 shares of our common stock at an average price of $11.59 per share, and raised $26,040 of gross proceeds, under the ATM Program. Net proceeds were $25,779 after commission to KeyBanc on shares sold. On July 16, 2012, we issued 21,000,000 shares of our common stock at $11.15 per share (or $11.05 per share net proceeds excluding expenses), raising $234,150 of gross proceeds. On July 27, 2012, we issued 3,150,000 shares in connection with the exercise of an option granted with the July 12, 2012 offering of 21,000,000 shares which were delivered July 16, 2012, raising an additional $35,123 of gross proceeds and $34,808 of net proceeds. On September 10, 2012, we entered into an ATM Program with KeyBanc through which we could sell, by means of at-the-market offerings from time to time, of up to 9,750,000 shares of our common stock. During the period from October 1, 2012 to October 9, 2012, we sold 1,245,655 shares of our common stock at an average price of $11.53 per share, and raised $14,361 of gross proceeds, under this program. Net proceeds were $14,217 after commission to the broker-dealer on shares sold and offering costs. On November 7, 2012, we issued 35,000,000 shares of our common stock at $11.10 per share (or $10.96 per share net proceeds excluding expenses), raising $383,600 of net proceeds. On December 21, 2012, we entered into an ATM Program with KeyBanc through which we could sell, by means of at-the-market offerings from time to time, of up to 17,500,000 shares of our common stock. During the period from January 7, 2013 to February 5, 2013, we sold 10,248,051 shares of our common stock at an average price of $11.25 per share, and raised $115,315 of gross proceeds, under this program. Net proceeds were $114,162 after commission to KeyBanc on shares sold. On February 11, 2013, we entered into an ATM Program with KeyBanc through which we could sell, by means of at-the-market offerings from time to time, of up to 45,000,000 shares of our common stock. During the period from February 14, 2013 to May 3, 2013, we sold 17,230,253 shares of our common stock at an average price of $11.14 per share, and raised $191,897 of gross proceeds, under the ATM Program. Net proceeds were $190,109 after commissions to KeyBanc on shares sold. On May 8, 2013, we entered into an ATM Program with BB&T Capital Markets, BMO Capital Markets, and KeyBanc through which we could sell, by means of at-the-market offerings from time to time, of up to 45,000,000 shares of our common stock. During the period from May 14, 2013 to June 30, 2013, we sold 4,359,200 shares of our common stock at an average price of $10.91 per share, and raised $47,532 of gross proceeds, under the ATM Program. Net proceeds were $47,133 after commissions to BB&T Capital Markets, BMO Capital Markets, and KeyBanc on shares sold. During the period from July 1, 2013 to August 21, 2013, we sold 9,818,907 shares of our common stock at an average price of $10.97 per share, and raised $107,725 of gross proceeds, under the ATM Program. Net proceeds were $106,822 after commissions to BB&T Capital Markets, BMO Capital Markets, and KeyBanc on shares sold. (See Recent Developments .) Off-Balance Sheet Arrangements At June 30, 2013, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition, other 111 Table of Contents than those which originate from 1) the investment advisory and management agreement and the administration agreement and 2) the portfolio companies. Recent Developments During the period from July 1, 2013 to August 21, 2013, we issued $58,607 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $57,344. In addition, we sold $7,682 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $7,513 with expected closing on August 22, 2013. During the period from July 1, 2013 to August 21, 2013, we sold 9,818,907 shares of our common stock at an average price of $10.97 per share, and raised $107,725 of gross proceeds, under the ATM Program. Net proceeds were $106,822 after commissions to the broker-dealer on shares sold and offering costs. On July 1, 2013, Pre-Paid Legal Services, Inc. repaid the $5,000 loan receivable to us. On July 9, 2013, Southern Management Corporation repaid the $17,565 loan receivable to us. On July 12, 2013, we provided $11,000 of secured second lien financing to Water PIK, Inc., a leader in developing innovative personal and oral healthcare products. On July 23, 2013, we made a $2,000 investment in Carolina Beverage Group, LLC ("Carolina Beverage"), a contract beverage manufacturer. On July 24, 2013, we sold our $2,000 investment in Carolina Beverage and realized a gain of $45 on this investment. On July 26, 2013, we made a $2,000 follow-on senior secured debt investment in Spartan, a leading provider of thru tubing and flow control services to oil and gas companies. On July 26, 2013, we made a $20,000 follow-on secured second lien investment in Royal Adhesives & Sealants, LLC ("Royal"), a leading producer of proprietary, high-performance adhesives and sealants. On July 31, 2013, we made a $5,100 follow-on investment in Coverall, a leading franchiser of commercial cleaning businesses. On July 31, 2013, Royal repaid the $28,364 subordinated unsecured loan receivable to us. On July 31, 2013, Cargo repaid the $43,399 loan receivable to us. On August 1, 2013, Medical Security Card Company, LLC repaid the $13,214 loan receivable to us. On August 2, 2013, we made an investment of $44,100 to purchase 90% of the subordinated notes in CIFC Funding 2013-III, Ltd. On August 2, 2013, we funded a recapitalization of CP Energy Services, Inc. ("CP Energy") with $81,273 of debt and $12,741 of equity financing. Through the recapitalization, we acquired a controlling interest in CP Energy for $73,009 in cash and 1,918,342 unregistered shares of our common stock. After the financing, we received repayment of the $18,991 loan previously outstanding. On August 12, 2013, we provided $80,000 in senior secured loans and a senior secured revolving loan facility, of which $70,000 was funded at closing, for the recapitalization of Matrixx Initiatives, Inc., owner of Zicam, a leading developer and marketer of OTC cold remedy products under the Zicam brand. 112 Table of Contents On August 14, 2013, we announced the revised conversion rate on the 2018 Notes of 82.8631 shares of common stock per $1 principal amount of 2018 Notes, which is equivalent to a conversion price of approximately $12.07. On August 15, 2013, we announced an increase of $15,000 to our commitments to our credit facility. The commitments to the credit facility now stand at $567,500. On August 15, 2013, we made a $14,000 follow-on investment in Totes, a leading designer, distributer and retailer of high quality, branded functional accessories. On August 21, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • $0.110325 per share for January 2014 to holders of record on January 31, 2014 with a payment date of February 20, 2014; $0.110350 per share for February 2014 to holders of record on February 28, 2014 with a payment date of March 20, 2014; and $0.110375 per share for March 2014 to holders of record on March 31, 2014 with a payment date of April 17, 2014. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our critical accounting policies are further described in the notes to the financial statements. Basis of Consolidation Under the 1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X and the American Institute of Certified Public Accountants' Audit and Accounting Guide for Investment Companies, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to us. Our financial statements include our accounts and the accounts of PCF, our only wholly-owned, closely-managed subsidiary that is also an investment company. All intercompany balances and transactions have been eliminated in consolidation. Investment Classification We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the 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 113 Table of Contents 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 To value our assets, we follow the guidance of ASC 820 that defines fair value, establishes a framework for measuring fair value in conformity with accounting principles generally accepted in the United States or America, or GAAP, and requires disclosures about fair value measurements. ASC 820 classifies the inputs used to measure these fair values into the following hierarchy: Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date. Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical for 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. ASC 820 applies to fair value measurements already required or permitted by other standards. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted. 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) 2) 3) 4) Each portfolio company or investment is reviewed by our investment professionals with an independent valuation firm engaged by our Board of Directors; the independent valuation firms conduct independent appraisals and make their own independent assessment; the Audit Committee of our Board of Directors reviews and discusses the preliminary valuation of the Investment Adviser and that of the independent valuation firms; and 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 the Investment Adviser, the respective independent valuation firm and the Audit Committee. 114 Table of Contents Investments are valued utilizing a shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and market approaches use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors. Our investments in CLOs are classified as ASC 820 level 3 securities, and are valued using discounted cash flow model. The valuations have been accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each security, the most appropriate valuation approach has been chosen from alternative approaches to ensure the most accurate valuation for each security. To value a CLO, both the assets and liabilities of the CLO capital structure need be modeled. We use a waterfall engine to store the collateral data, generate collateral cash flows from the assets, and distributes the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates that incorporate all the risk factors. The main risk factors are: default risk, interest rate risk, downgrade risk, and credit spread risk. For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see "Risk Factors—Risks relating to our business—Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments." Valuation of Other Financial Assets and Financial Liabilities ASC Subtopic 820-10-05-1, The Fair Value Option for Financial Assets and Financial Liabilities ("ASC 820-10-05-1") permits an entity to elect fair value as the initial and subsequent measurement attribute for many of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. We have elected not to value some assets and liabilities at fair value as would be permitted by ASC 820-10-05-1. 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 at least 98% of our annual income and 98.2% of our capital gains in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains exceeds the distributions 115 Table of Contents 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. For the calendar year ended December 31, 2012, we elected to retain a portion of our annual taxable income and have paid $4,500 for the excise tax due with the filing of the return. As of June 30, 2013, we have $2,000 accrued as an estimate of two quarters of the excise tax due for the calendar year ending December 31, 2013. If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge of 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years. We adopted FASB ASC 740, Income Taxes ("ASC 740"). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Adoption of ASC 740 was applied to all open tax years as of July 1, 2007. The adoption of ASC 740 did not have an effect on our net asset value, financial condition or results of operations as there was no liability for unrecognized tax benefits and no change to our beginning net asset value. As of June 30, 2012 and for the year then ended, we did not have a liability for any unrecognized tax benefits. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. 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. Interest income from investments in the "equity" class of security of CLO Funds (typically income notes or subordinated notes) is recorded based upon an estimation of an effective yield to expected 116 Table of Contents maturity utilizing assumed cash flows in accordance with ASC 325-40-35, Beneficial Interests in Securitized Financial Assets . We monitor the expected cash inflows from our CLO equity investments, including the expected residual payments and the effective yield is determined and updated periodically. 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 management's judgment. Non- accrual loans are restored to accrual status when past due principal and interest is paid and in management's judgment, are likely to remain current. As of June 30, 2012, approximately 2.9% of our net assets are in non-accrual status. 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. Dividends and Distributions Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a dividend or distribution is approved by our Board of Directors each quarter and is generally based upon our management's estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually. Financing Costs We record origination expenses related to our credit facility and Senior Notes as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method for our revolving credit facility and the effective interest method for our Senior Notes, over the respective expected life. We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission ("SEC") registration fees, legal fees and accounting fees incurred. These prepaid assets will be charged to capital upon the receipt of an equity offering proceeds or charged to expense if no offering completed. Guarantees and Indemnification Agreements We follow ASC 460, Guarantees ("ASC 460"). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees. Per Share Information Net increase or decrease in net assets resulting from operations per common share are calculated using the weighted average number of common shares outstanding for the period presented. In accordance with ASC 946, Financial Services—Investment Companies , convertible securities are not considered in the calculation of net assets per share. 117 Table of Contents Recent Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). ASU 2011-04 amends Topic 820, Fair Value Measurements , ("ASC 820") by: (1) clarifying that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of non-financial assets; (2) allowing a reporting entity to measure the fair value of the net asset or net liability position in a manner consistent with how market participants would price the net risk position, if certain criteria are met; (3) providing a framework for considering whether a premium or discount can be applied in a fair value measurement; (4) providing that the fair value of an instrument classified in a reporting entity's shareholders' equity is estimated from the perspective of a market participant that holds the identical item as an asset; and (5) expanding the qualitative and quantitative fair value disclosure requirements. The expanded disclosures include, for Level 3 items, a description of the valuation process and a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-4 also requires disclosures about the highest-and-best-use of a non-financial asset when this use differs from the asset's current use and the reasons for such a difference. In addition, this ASU amends ASC 820, Fair Value Measurements , to require disclosures to include any transfers between Level 1 and Level 2 of the fair value hierarchy. These amendments were effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The adoption of the amended guidance in ASU 2011-04 did not have a significant effect on our financial statements. See Note 3 for the disclosure required by ASU 2011-04. In August 2012, the FASB issued Accounting Standards Update 2012-03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114 ("SAB No. 114"), Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 ("ASU 2012-03"). The update amends various SEC paragraphs pursuant to the issuance of SAB No. 114 and is effective upon issuance. The adoption of the amended guidance in ASU 2012- 03 did not have a significant effect on our financial statements. In October 2012, the FASB issued Accounting Standards Update 2012-04, Technical Corrections and Improvements ("ASU 2012-04"). The amendments in this update cover a wide range of Topics in the ASC. These amendments include technical corrections and improvements to the ASC and conforming amendments related to fair value measurements. The adoption of the amended guidance in ASU 2012-04 did not have a significant effect on our financial statements. In June 2013, the FASB issued Accounting Standards Update 2013-08, Financial Services—Investment Companies (Topic 946)— Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08"). ASU 2013-08 clarifies the approach to be used for determining whether an entity is an investment company and provides new measurement and disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. The adoption of ASU 2013-08 is not expected to materially effect on our financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are subject to financial market risks, including changes in interest rates and equity price risk. Some of the loans in our portfolio have floating interest rates. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the twelve months ended June 30, 2013, we did not engage in hedging activities. 118 Table of Contents Item 8. Financial Statements and Supplementary Data. TABLE OF CONTENTS AUDITED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Statements of Assets and Liabilities as of June 30, 2013 and June 30, 2012 Consolidated Statements of Operations—For the Years Ended June 30, 2013, June 30, 2012 and June 30, 2011 Consolidated Statements of Changes in Net Assets—For the Years Ended June 30, 2013, June 30, 2012 and June 30, 2011 PAGE 120 121 122 123 Consolidated Statements of Cash Flows—For the Years Ended June 30, 2013, June 30, 2012 and June 30, 2011 Consolidated Schedules of Investments as of June 30, 2013 and June 30, 2012 Notes to Consolidated Financial Statements 124 125 160 119 Table of Contents Board of Directors and Stockholders Prospect Capital Corporation New York, New York Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated statements of assets and liabilities of Prospect Capital Corporation, the "Company", including the consolidated schedule of investments, as of June 30, 2013 and 2012, 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, 2013, and the financial highlights for each of the five years in the period ended June 30, 2013. These consolidated financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated financial statements. Our procedures include confirmation of securities owned as of June 30, 2013 and 2012 by correspondence with the custodian, trustees and portfolio companies, and alternative procedures. 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 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, 2013 and 2012, the results of its operations, the changes in its net assets, and its cash flows for each of the three years in the period ended June 30, 2013, and the financial highlights for each of the five years in the period ended June 30, 2013, 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 Corporation's internal control over financial reporting as of June 30, 2013, 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 August 21, 2013 expressed an unqualified opinion thereon. /s/ BDO USA, LLP BDO USA, LLP New York, New York August 21, 2013 120 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (in thousands, except share and per share data) Assets (Note 4) Investments at fair value: Control investments (net cost of $830,151 and $518,015, respectively) $ Affiliate investments (net cost of $49,189 and $44,229, respectively) Non-control/Non-affiliate investments (net cost of $3,376,438 and $1,537,069, respectively) Total investments at fair value (net cost of $4,255,778 and $2,099,313, respectively, Note 3) Investments in money market funds Cash Receivables for: Interest, net Other Prepaid expenses Deferred financing costs Total Assets Liabilities Credit facility payable (Notes 4 and 8) Senior convertible notes (Notes 5 and 8) Senior unsecured notes (Notes 6 and 8) Prospect Capital InterNotes® (Notes 7 and 8) Due to Broker Dividends payable Due to Prospect Administration (Note 12) Due to Prospect Capital Management (Note 12) Accrued expenses Interest payable Other liabilities Total Liabilities Net Assets Components of Net Assets Common stock, par value $0.001 per share (500,000,000 common shares authorized; 247,836,965 and 139,633,870 issued and outstanding, respectively) (Note 9) Paid-in capital in excess of par (Note 9) Undistributed net investment income Accumulated realized losses on investments Unrealized depreciation on investments Net Assets Net Asset Value Per Share June 30, 2013 June 30, 2012 811,634 $ 42,443 564,489 46,116 3,318,775 1,483,616 4,172,852 2,094,221 118,369 2,825 143,262 59,974 22,863 4,397 540 44,329 14,219 784 421 24,415 4,448,217 2,255,254 124,000 96,000 847,500 447,500 347,725 100,000 363,777 20,638 43,588 44,533 27,299 14,180 1,366 658 5,324 7,913 2,345 2,925 24,384 6,723 4,415 2,210 743,280 1,791,723 $ 2,656,494 $ 1,511,974 $ 140 248 $ 2,739,864 1,544,801 23,667 (51,542 ) (5,092 ) $ 2,656,494 $ 1,511,974 10.83 $ 77,084 (77,776 ) (82,926 ) 10.72 $ See notes to consolidated financial statements. 121 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Investment Income Interest income: (Note 3) Control investments Affiliate investments Non-control/Non-affiliate investments CLO Fund securities Total interest income Dividend income: Control investments Affiliate Investments Non-control/Non-affiliate investments Money market funds Total dividend income Other income: (Note 10) Control investments Affiliate investments Non-control/Non-affiliate investments Total other income Total Investment Income Operating Expenses Investment advisory fees: Base management fee (Note 12) Income incentive fee (Note 12) Total investment advisory fees Interest and credit facility expenses Legal fees Valuation services Audit, compliance and tax related fees Allocation of overhead from Prospect Administration (Note 12) Insurance expense Directors' fees Excise tax Other general and administrative expenses Total Operating Expenses Net Investment Income Net realized (loss) gain on investments (Note 3) Net change in unrealized (depreciation) appreciation on investments (Note 3) Net Increase in Net Assets Resulting from Operations June 30, 2013 Year Ended June 30, 2012 June 30, 2011 $ 106,425 $ 6,515 234,013 88,502 435,455 53,408 $ 12,155 144,592 9,381 219,536 21,747 11,307 101,400 — 134,454 78,282 728 3,656 39 82,705 16,821 623 40,732 58,176 576,336 69,800 81,231 151,031 76,341 1,918 1,579 1,566 8,737 356 300 6,500 3,084 251,412 324,924 (26,234 ) 63,144 — 1,733 4 64,881 13,569 — 1,507 16 15,092 25,464 108 10,921 36,493 320,910 2,829 190 16,911 19,930 169,476 35,836 46,671 82,507 38,534 279 1,212 1,446 6,848 324 273 — 2,803 134,226 186,684 36,588 22,496 23,555 46,051 17,598 1,062 992 876 4,979 285 255 — 3,157 75,255 94,221 16,465 (77,834 ) (32,368 ) 7,552 $ 220,856 $ 190,904 $ 118,238 Net increase in net assets resulting from operations per share: (Notes 11 and 15) Weighted average shares of common stock outstanding: $ 1.07 $ 1.67 $ 1.38 207,069,971 114,394,554 85,978,757 See notes to consolidated financial statements. 122 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (in thousands, except share data) Increase in Net Assets from Operations: Net investment income Net (loss) gain on investments Net change in unrealized (depreciation) appreciation on investments Net Increase in Net Assets Resulting from Operations Dividends to Shareholders: Distribution of net investment income Distribution of return of capital Total Dividends to Shareholders Capital Share Transactions: Net proceeds from capital shares sold Less: Offering costs of public share offerings Reinvestment of dividends Net Increase in Net Assets Resulting from Capital Share Transactions Total Increase in Net Assets: Net assets at beginning of year Net Assets at End of Year June 30, 2013 Year Ended June 30, 2012 June 30, 2011 $ 324,924 $ (26,234 ) 186,684 $ 36,588 94,221 16,465 (77,834 ) (32,368 ) 7,552 220,856 190,904 118,238 (271,507 ) — (271,507 ) (136,875 ) (4,504 ) (141,379 ) (94,326 ) (11,841 ) (106,167 ) 1,180,899 (1,815 ) 16,087 338,270 (708 ) 10,530 381,316 (1,388 ) 10,934 1,195,171 1,144,520 1,511,974 2,656,494 $ 348,092 397,617 1,114,357 1,511,974 $ 390,862 402,933 711,424 1,114,357 $ Capital Share Activity: Shares sold Shares issued to acquire controlled investments Shares issued through reinvestment of dividends Net increase in capital share activity Shares outstanding at beginning of year Shares Outstanding at End of Year 37,494,476 30,970,696 101,245,136 — — 5,507,381 1,025,352 1,056,484 1,450,578 38,519,828 108,203,095 32,027,180 139,633,870 107,606,690 69,086,862 247,836,965 139,633,870 107,606,690 See notes to consolidated financial statements. 123 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except share data) Cash Flows from Operating Activities: Net increase in net assets resulting from operations Net realized loss (gain) on investments Net change in unrealized depreciation (appreciation) on investments Amortization of discounts and premiums Amortization of deferred financing costs Payment-in-kind interest Structuring fees Change in operating assets and liabilities: Payments for purchases of investments Proceeds from sale of investments and collection of Net (increase) decrease of investments in money investment principal market funds Increase in interest receivable, net (Increase) decrease in other receivables (Increase) decrease in prepaid expenses Decrease in other assets Decrease in due to Broker Increase (decrease) in due to Prospect Administration Increase (decrease) in due to Prospect Capital Management (Decrease) increase in accrued expenses Increase in interest payable Increase (decrease) in other liabilities Net Cash Used In Operating Activities: Cash Flows from Financing Activities: Borrowings under credit facility (Note 4) Payments under credit facility (Note 4) Issuance of Senior Convertible Notes (Note 5) Repurchases under Senior Convertible Notes (Note 5) Issuance of Senior Unsecured Notes Issuance of Prospect Capital InterNotes® (Note 7) Financing costs paid and deferred Net proceeds from issuance of common stock Offering costs from issuance of common stock Dividends paid Net Cash Provided By Financing Activities: Total Increase in Cash Cash balance at beginning of year Cash Balance at End of Year Cash Paid For Interest Non-Cash Financing Activity: June 30, 2013 Year Ended June 30, 2012 June 30, 2011 $ 220,856 $ 190,904 $ 118,238 (16,465 ) 26,234 (36,588 ) 77,834 (11,016 ) 8,232 (10,947 ) (52,699 ) 32,368 (7,284 ) 8,511 (5,647 ) (8,075 ) (7,552 ) (23,035 ) 5,365 (9,634 ) (13,460 ) (2,980,320 ) (901,833 ) (930,243 ) 931,534 500,952 285,862 (24,893 ) (8,644 ) (3,613 ) (119 ) — (945 ) 708 (58,466 ) (4,950 ) (517 ) (320 ) — — 446 8,968 (3,913 ) 153 270 534 — (82 ) (2,589 ) (580 ) 17,661 2,205 (1,300 ) (1,998 ) 3,817 2,866 (1,811,101 ) (287,881 ) (581,609 ) 207 1,052 2,720 (1,361 ) — (5,000 ) 247,725 100,000 20,638 343,139 (17,651 ) (28,146 ) 223,000 726,800 465,900 (195,000 ) (715,000 ) (482,000 ) 400,000 130,000 322,500 — — — (13,061 ) 1,121,648 177,699 381,316 (1,388 ) (91,247 ) 1,868,250 289,214 582,020 411 1,081 1,492 (708 ) (242,301 ) (127,564 ) 57,149 2,825 59,974 $ 1,333 1,492 2,825 $ (1,815 ) $ $ 45,363 $ 24,515 $ 6,101 Amount of shares issued in connection with dividend reinvestment plan Amount of shares issued in conjunction with controlled investments $ 16,087 $ 10,530 $ 10,934 $ 59,251 $ 160,571 $ — See notes to consolidated financial statements. 124 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry LEVEL 3 PORTFOLIO INVESTMENTS: Control Investments (greater than 25.00% voting control) AIRMALL Pennsylvania / Investments(1) USA, Inc.(27) Property Management Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/30/2015)(3)(4) Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015) Convertible Preferred Stock (9,919.684 shares) Common Stock (100 shares) Ajax Rolled Ring & Machine, Inc. South Carolina / Manufacturing Senior Secured Note—Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/30/2018)(3)(4) Subordinated Unsecured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 6.00% PIK, due 3/30/2018)(4) (6,142.6 shares) Convertible Preferred Stock—Series A Unrestricted Common Stock (6 shares) APH Property Georgia / Real Estate Senior Secured Note (6.00% Holdings, LLC (32) (LIBOR + 4.00% with 2.00% LIBOR floor) plus 5.50% PIK, due 10/24/2020) (4) Common Stock (148,951 shares) AWCNC, LLC(19) North Carolina / Machinery Borga, Inc. California / Manufacturing Members Units—Class A (1,800,000 units) Members Units—Class B-1 (1 unit) Members Units—Class B-2 (7,999,999 units) Revolving Line of Credit—$1,150 Commitment (5.00% (PRIME + 1.75%) plus 3.00% default interest, in non- accrual status effective 03/02/2010, past due)(4)(25) Senior Secured Term Loan B (8.50% (PRIME + 5.25%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4) Senior Secured Term Loan C (12.00% plus 4.00% PIK plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due) Common Stock (100 shares)(21) Warrants (33,750 warrants)(21) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 28,750 $ 28,750 $ 28,750 1.1 % 12,500 12,500 12,500 0.5 % 9,920 — 51,170 9,920 3,478 54,648 0.4 % 0.1 % 2.1 % 19,737 19,737 19,737 0.7 % 19,700 19,700 19,700 0.7 % 6,057 — 45,494 — — 39,437 0.0 % 0.0 % 1.4 % 125,892 125,892 125,892 26,648 4.8 % 26,648 1.0. % 5.8 % 0.0 % 0.0 % 152,540 152,540 — — — — — — — — 0.0 % 0.0 % 1,150 1,095 586 0.0 % 1,611 1,501 — 0.0 % 9,738 706 — — 3,302 — — — 586 0.0 % 0.0 % 0.0 % 0.0 % See notes to consolidated financial statements. 125 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) Portfolio Company Locale / Industry CCPI Holdings, Inc. Ohio / Manufacturing Senior Secured Note (10.00%, due (33) June 30, 2013 and June 30, 2012 (in thousands, except share data) Investments(1) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets 12/31/2017)(3) Senior Secured Note (12.00% plus 7.00% PIK, due 6/30/2018) Common Stock (100 shares) Net Revenue Interest (4% of Net Revenue) $ 17,663 $ 17,663 $ 17,663 7,659 7,659 8,581 — 33,903 7,659 7,977 604 33,903 0.7 % 0.3 % 0.3 % 0.0 % 1.3 % Credit Central Holdings of Delaware, LLC (22)(34) Ohio / Consumer Senior Secured Revolving Credit Facility— Finance $60,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 12/31/2022)(4) (25) Common Stock (100 shares) Net Revenue Interest (5% of Net Revenue) Energy Solutions Holdings, Inc.(8) Texas / Gas Gathering and Processing Junior Secured Note (18.00%, due 12/12/2016) Senior Secured Note to Vessel 38,082 8,500 38,082 9,581 — 47,663 8,500 38,082 8,361 4,019 50,462 8,500 1.4 % 0.3 % 0.2 % 1.9 % 0.3 % Holdings LLC (18.00%, due 12/12/2016) 3,500 3,500 3,500 0.1 % Subordinated Secured Note to Freedom Marine Holdings, LLC (12.00% (LIBOR + 6.11% with 5.89% LIBOR floor) plus 4.00% PIK, in non-accrual status effective 10/1/2010, past due)(4) Senior Secured Debt to Yatesville Coal Holdings, Inc. (Non-accrual status effective 1/1/2009, past due) Escrow Receivable Common Stock (100 shares) First Tower Mississippi / Senior Secured Revolving Credit Facility— Holdings of Delaware, LLC (22)(29) Consumer Finance $400,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 6/30/2022)(4) (25) Common Stock (83,729,323 shares) Net Revenue Interest (5% of Net Revenue & Distributions) Manx Energy, Inc. ("Manx")(12) Kansas / Oil & Gas Senior Secured Note (13.00%, in non- Production accrual status effective 1/19/2010, past due) Preferred Stock (6,635 shares) Common Stock (17,082 shares) 13,906 12,503 8,449 0.3 % 1,449 1,449 — 8,318 34,270 — — 6,247 26,696 0.0 % 0.0 % 0.2 % 0.9 % 264,760 264,760 264,760 10.0 % 0.8 % 20,447 43,193 — 0.5 % 307,953 298,084 11.3 % 12,877 500 500 — — 500 346 — — 346 0.0 % 0.0 % 0.0 % 0.0 % See notes to consolidated financial statements. 126 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Chicago / Consumer Nationwide Investments(1) Senior Secured Revolving Credit Facility— June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets Acceptance Holdings, LLC (22)(36) Finance $30,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 1/31/2023)(4)(25) Membership Units (100 shares) Net Revenue Interest (5% of Net Revenue) $ 21,308 $ 21,308 $ 21,308 3,843 2,142 1,701 — 25,151 25,151 0.8 % 0.1 % 0.1 % 1.0 % NMMB Holdings, Inc. (24) New York / Media Senior Term Loan (14.00%, due 5/6/2016) 16,000 16,000 13,149 0.5 % R-V Industries, Inc. Pennsylvania / Manufacturing The Healing Staff, Inc.(9) North Carolina / Contracting Valley Electric Holdings I, Inc. Washington / Construction & Engineering Senior Subordinated Term Loan (15.00%, Series A Preferred Stock (4,400 shares) due 5/6/2016) Senior Subordinated Note (10.00% (LIBOR + 9.00% with 1.00% LIBOR floor), due 6/12/2018)(4) 6/30/2017) Warrants (200,000 warrants, expiring Common Stock (545,107 shares) Secured Promissory Notes (15.00%, in non- accrual status effective 12/22/2010, past due) Senior Demand Note (15.00%, in non- accrual status effective 11/1/2010, past due) Common Stock (1,000 shares) Senior Secured Note (9.00% (LIBOR + 6.00%, with 3.00% LIBOR floor) plus 9.00% PIK, due 12/31/2018) (4) Senior Secured Note (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor) plus 2.50% PIK, due 12/31/2017) (3)(4) Common Stock (50,000 shares) Net Revenue Interest (5% of Net Revenue) 2,800 2,800 4,400 — — 23,200 13,149 0.0 % 0.0 % 0.5 % 32,750 32,750 32,750 1.2 % 1,682 6,796 5,087 18,522 39,519 58,068 0.3 % 0.7 % 2.2 % 1,688 1,686 — 0.0 % 1,170 1,170 975 3,831 — — — 0.0 % 0.0 % 0.0 % 34,063 34,063 34,063 1.3 % 10,026 10,026 10,026 8,288 9,526 1,238 — 53,615 53,615 0.4 % 0.3 % 0.1 % 2.1 % See notes to consolidated financial statements. 127 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Kansas / Oil & Gas Wolf Energy Holdings, Inc. (12)(37) Production Investments(1) Senior Secured Promissory Note secured by assets formerly owned by H&M (18.00%, in non-accrual status effective 4/15/2013, due 4/15/2018) Appalachian Energy Holdings, LLC ("AEH")—Senior Secured First Lien Note (8.00%, in non-accrual status effective 1/19/2010, past due) Appalachian Energy Holdings, LLC ("AEH")—Senior Secured First Lien Note (8.00%, in non-accrual status, past due) Coalbed, LLC—Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, past due)(6) Common Stock (100 shares) Net Profits Interest (8.00% payable on Equity distributions)(7) Total Control Investments June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 22,000 $ — $ 3,832 0.1 % 2,642 2,000 546 0.0 % 51 50 51 0.0 % 7,930 5,990 — — — 0.0 % 0.0 % — 8,040 0.0 % 0.1 % 830,151 811,634 30.6 % 520 4,949 Affiliate Investments (5.00% to 24.99% voting control) BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork) Michigan / Healthcare Senior Secured Note (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 12/17/2017)(3)(4) Preferred Stock Series A (9,925.455 shares) Preferred Stock Series B (1,753.64 shares) (13) (13) Boxercraft Incorporated(20) Leather Georgia / Textiles & Senior Secured Term Loan A (10.00% plus Senior Secured Term Loan C (10.00% plus Senior Secured Term Loan B (10.00% plus 1.00% PIK, due 9/15/2015) 1.00% PIK, due 9/15/2015) 1.00% PIK, due 9/15/2015) Senior Secured Term Loan (10.00% plus 1.00% PIK, due 9/15/2015) Preferred Stock (1,000,000 shares) Common Stock (10,000 shares) Warrants (1 warrant, expiring 8/31/2022) Smart, LLC(14) New York / Diversified / Conglomerate Service Membership Interest 29,550 29,550 29,550 1.1 % 2,300 2,832 0.1 % 579 32,429 533 32,915 0.0 % 1.2 % 1,712 1,702 1,712 0.1 % 4,892 4,809 4,892 0.2 % 2,371 2,371 2,371 0.1 % 8,325 7,878 — — — 16,760 — 410 — — — 9,385 143 0.0 % 0.0 % 0.0 % 0.0 % 0.4 % 0.0 % Total Affiliate Investments — 49,189 143 42,443 0.0 % 1.6 % See notes to consolidated financial statements. 128 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Non-control/Non-affiliate Investments (less than 5.00% of voting control) Common Stock (5,000 shares) ADAPCO, Inc. Florida / Ecological Investments(1) Aderant North America, Inc. Georgia / Software & Computer Services Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 6/20/2019)(4) Aircraft Fasteners International, LLC California / Machinery Convertible Preferred Stock (32,500 units) ALG USA Holdings, LLC Pennsylvania / Hotels, Restaurants & Leisure Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 2/28/2020)(4) American Gilsonite Company Utah / Specialty Minerals Second Lien Term Loan (11.50%, due Membership Interest in AGC/PEP, LLC 9/1/2017) (99.9999%)(15) Apidos CLO VIII, Ltd.(22) Cayman Islands / Diversified Financial Services Apidos CLO IX, Ltd.(22) Cayman Islands / Diversified Financial Services Apidos CLO XI, Ltd.(22) Cayman Islands / Diversified Financial Services Apidos CLO XII, Ltd.(22) Cayman Islands / Diversified Financial Services Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Arctic Glacier U.S.A, Inc.(4) Canada / Food Products Second Lien Term Loan (11.25% (LIBOR + 10.00% with 1.25% LIBOR floor), due 11/10/2019) Armor Holding II LLC(4) New York / Diversified Financial Services Second Lien Term Loan (9.25% (LIBOR + 8.00% with 1.25% LIBOR floor), due 12/26/2020) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 141 $ 141 335 335 0.0 % 0.0 % $ 7,000 6,900 6,900 7,000 7,000 0.3 % 0.3 % 396 396 565 565 0.0 % 0.0 % 12,000 11,764 11,764 12,000 12,000 0.4 % 0.4 % 38,500 38,500 38,500 1.4 % — 38,500 4,058 42,558 0.2 % 1.6 % 19,730 19,931 19,931 19,718 19,718 0.7 % 0.7 % 20,525 19,609 19,609 19,294 19,294 0.7 % 0.7 % 38,340 39,239 39,239 37,972 37,972 1.4 % 1.4 % 44,063 43,480 43,480 40,294 40,294 1.5 % 1.5 % 150,000 150,000 150,000 150,000 150,000 5.6 % 5.6 % 7,000 6,860 6,860 7,000 7,000 0.3 % 0.3 % See notes to consolidated financial statements. 129 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Atlantis Healthcare Group (Puerto Rico), Inc.(4) Puerto Rico / Healthcare Babson CLO Ltd 2011-I(22) Cayman Islands / Diversified Financial Services Babson CLO Ltd 2012-IA(22) Cayman Islands / Diversified Financial Services Babson CLO Ltd 2012-IIA(22) Cayman Islands / Diversified Financial Services Investments(1) Revolving Line of Credit—$7,000 Commitment (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 2/21/2014)(25)(26) Senior Term Loan (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 2/21/2018)(3) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Blue Coat Systems, Inc. Massachusetts / Software & Computer Services Second Lien Term Loan (9.50% (LIBOR + 8.50% with 1.00% LIBOR floor), due 6/28/2020)(4) Broder Bros., Co Pennsylvania / Textiles, Apparel & Luxury Goods Senior Secured Notes (10.75% (LIBOR + 9.00% with 1.75% LIBOR floor), due 6/27/2018(3)(4) Brookside Mill CLO Ltd.(22) Cayman Islands / Diversified Financial Services Subordinated Notes (Residual Interest) Byrider Systems Indiana / Auto Acquisition Corp (22) Finance Senior Subordinated Notes (12.00% plus 2.00% PIK, due 11/3/2016)(3) Caleel + Hayden, LLC(14)(31) Colorado / Personal & Nondurable Consumer Products Membership Units (13,220 shares) Escrow Receivable June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 2,000 $ 2,000 $ 2,000 0.1 % 39,352 39,352 39,352 41,352 41,352 1.5 % 1.6 % 35,000 34,499 34,450 34,499 34,450 1.3 % 1.3 % 29,075 25,917 27,269 25,917 27,269 1.0 % 1.0 % 27,850 28,863 27,510 28,863 27,510 1.0 % 1.0 % 11,000 10,890 11,000 10,890 11,000 0.4 % 0.4 % 99,500 99,500 99,323 99,500 99,323 3.7 % 3.7 % 26,000 23,896 23,743 23,896 23,743 0.9 % 0.9 % 10,914 10,914 10,417 10,914 10,417 0.4 % 0.4 % — 104 0.0 % — — 137 241 0.0 % 0.0 % See notes to consolidated financial statements. 130 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Capstone Georgia / Logistics, LLC(4) Commercial Services Cargo Airport Services USA, LLC New York / Transportation Cent 17 CLO Limited(22) Cayman Islands / Diversified Financial Services Investments(1) Senior Secured Term Loan A (6.50% (LIBOR + 5.00% with 1.50% LIBOR floor), due 9/16/2016)(3) Senior Secured Term Loan B (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 9/16/2016) Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/31/2016)(3)(4) Common Equity (1.6 units) Subordinated Notes (Residual Interest) CI Holdings(4) Texas / Software & Computer Services Senior Secured Term Loan (10.00% (LIBOR + 5.00% with 5.00% LIBOR floor), due 6/11/2019) CIFC Funding Cayman Islands / 2011-I, Ltd.(4) (22) Diversified Financial Services Secured Class D Notes (5.32% (LIBOR + 5.00%), due 1/19/2023) Unsecured Class E Notes (7.32% (LIBOR + 7.00%), due 1/19/2023) Cinedigm DC New York / Senior Secured Term Loan (11.00% Holdings, LLC(4) Software & Computer Services (LIBOR + 9.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/31/2021) The Copernicus Group, Inc. North Carolina / Healthcare Escrow Receivable Correctional Healthcare Holding Company, Inc. Colorado / Healthcare Second Lien Term Loan (11.25%, due 1/11/2020)(3) Coverall North America, Inc. Florida / Commercial Services Senior Secured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 12/17/2017)(3)(4) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 97,291 $ 97,291 $ 97,291 3.7 % 100,000 100,000 100,000 197,291 197,291 3.8 % 7.5 % 43,977 43,977 1,639 45,616 44,417 1,860 46,277 1.7 % 0.1 % 1.8 % 24,870 24,615 24,615 25,454 25,454 1.0 % 1.0 % 114,713 114,713 114,713 114,713 114,713 4.3 % 4.3 % 19,000 15,029 15,844 0.6 % 15,400 12,638 27,667 12,745 28,589 0.5 % 1.1 % 70,595 70,595 70,595 70,595 70,595 2.7 % 2.7 % — — 130 130 0.0 % 0.0 % 27,100 27,100 27,100 27,100 27,100 1.0 % 1.0 % 39,303 39,303 39,303 39,303 39,303 1.5 % 1.5 % See notes to consolidated financial statements. 131 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry CP Well Oklahoma / Oil & Testing, LLC Gas Products CRT MIDCO, LLC Wisconsin / Media Investments(1) Senior Secured Term Loan (13.50% (LIBOR + 11.00% with 2.50% LIBOR floor), due 10/03/2017)(4) Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2017)(3)(4) Deltek, Inc. Virginia / Software & Computer Services Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 10/10/2019)(4) Diamondback Operating, LP Oklahoma / Oil & Gas Production Net Profits Interest (15.00% payable on Equity distributions)(7) Edmentum, Inc Minnesota / (f/k/a Archipelago Learning, Inc)(4) Consumer Services Second Lien Term Loan (11.25% (LIBOR + 9.75% with 1.50% LIBOR floor), due 5/17/2019) EIG Investors Corp Massachusetts / Software & Computer Services Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 5/09/2020)(4)(16) Empire Today, LLC Illinois / Durable Consumer Products Senior Secured Note (11.375%, due 2/1/2017) EXL Acquisition Corp South Carolina / Biotechnology Escrow Receivable Evanta Ventures, Inc. (11) Oregon / Commercial Services Subordinated Unsecured (12.00% plus 1.00% PIK, due 9/28/2018) Fairchild Industrial Products, Co. North Carolina / Electronics Escrow Receivable Fischbein, LLC North Carolina / Machinery Escrow Receivable Focus Brands, Inc. (4). Georgia / Consumer Services Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 8/21/2018) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 19,125 $ 19,125 $ 19,125 19,125 19,125 0.7 % 0.7 % 71,106 71,106 71,106 71,106 71,106 2.7 % 2.7 % 12,000 11,833 12,000 11,833 12,000 0.5 % 0.5 % — — — — 0.0 % 0.0 % 50,000 48,218 50,000 48,218 50,000 1.9 % 1.9 % 22,000 21,792 22,000 21,792 22,000 0.8 % 0.8 % 15,700 15,332 14,650 15,332 14,650 0.6 % 0.6 % — — — 14 14 0.0 % 0.0 % 10,479 10,479 10,479 10,479 10,479 0.4 % 0.4 % — — — — 149 149 0.0 % 0.0 % 225 225 0.0 % 0.0 % 18,000 17,731 18,000 17,731 18,000 0.7 % 0.7 % See notes to consolidated financial statements. 132 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry FPG, LLC Illinois / Durable Consumer Products Galaxy XII CLO, Ltd.(22) Cayman Islands / Diversified Financial Services Galaxy XV CLO, Ltd.(22) Cayman Islands / Diversified Financial Services Investments(1) Senior Secured Term Loan (12.00% (LIBOR + 11.00% with 1.00% LIBOR floor), due 1/20/2017)(4) Common Stock (5,638 shares) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Grocery Outlet, Inc. California / Retail Second Lien Term Loan (10.50% (LIBOR + 9.25% with 1.25% LIBOR floor), due 6/17/2019)(4) Gulf Coast Texas / Machine & Supply Company Manufacturing Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 10/12/2017)(3)(4) Halcyon Loan Cayman Islands / Advisors Funding 2012-I, Ltd.(22) Diversified Financial Services Halcyon Loan Cayman Islands / Advisors Funding 2013-I, Ltd.(22) Diversified Financial Services Hoffmaster Group, Inc.(4) Wisconsin / Durable Consumer Products Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Second Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 1/3/2019) Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 1/3/2019) ICON Health & Fitness, Inc. Utah / Durable Consumer Products Senior Secured Note (11.875%, due 10/15/2016)(3) IDQ Holdings, Inc. Texas / Automobile Senior Secured Note (11.50%, due 4/1/2017) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 21,401 $ 21,401 $ 21,401 19 27 21,428 21,420 0.8 % 0.0 % 0.8 % 22,000 20,792 21,657 20,792 21,657 0.8 % 0.8 % 35,025 32,119 30,227 32,119 30,227 1.1 % 1.1 % 14,457 14,127 14,457 14,127 14,457 0.5 % 0.5 % 41,213 41,213 31,972 41,213 31,972 1.2 % 1.2 % 23,188 22,279 22,724 22,279 22,724 0.9 % 0.9 % 40,400 41,085 38,291 41,085 38,291 1.4 % 1.4 % 20,000 19,831 19,598 0.7 % 1,000 991 955 20,822 20,553 0.0 % 0.7 % 43,100 43,310 33,929 43,310 33,929 1.3 % 1.3 % 12,500 12,300 12,500 12,300 12,500 0.5 % 0.5 % See notes to consolidated financial statements. 133 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry ING IM CLO 2012- II, Ltd.(22) Cayman Islands / Diversified Financial Services ING IM CLO 2012- III, Ltd.(22) Cayman Islands / Diversified Financial Services ING IM CLO 2012- IV, Ltd.(22) Cayman Islands / Diversified Financial Services Investments(1) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Income Notes (Residual Interest) Injured Workers Pharmacy LLC Massachusetts / Second Lien Debt (11.50% Healthcare (LIBOR + 7.00% with 4.50% LIBOR floor) plus 1.00% PIK, due 5/31/2019)(3) (4) Interdent, Inc.(4) California / Healthcare Senior Secured Term Loan A (8.00% (LIBOR + 6.50% with 1.50% LIBOR floor), due 8/3/2017) Senior Secured Term Loan B (13.00% (LIBOR + 10.00% with 3.00% LIBOR floor), due 8/3/2017)(3) JHH Holdings, Inc. Texas / Healthcare Second Lien Debt (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 1.50% PIK, due 6/23/2018)(3) (4) Revolving Line of Credit—$5,000 Commitment (10.25% (LIBOR + 8.25% with 2.00% LIBOR floor), due 12/21/2014)(25) Senior Secured Term Loan (10.25% (LIBOR + 8.25% with 2.00% LIBOR floor), due 12/21/2017)(3) Subordinated Notes (Residual Interest) LaserShip, Inc.(4) Virginia / Transportation LCM XIV CLO Ltd.(22) Cayman Islands / Diversified Financial Services June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 38,070 $ 34,904 $ 36,848 36,848 34,904 1.4 % 1.4 % 46,632 44,454 44,454 46,361 46,361 1.7 % 1.7 % 40,613 39,255 39,255 41,153 41,153 1.5 % 1.5 % 22,430 22,430 22,430 22,430 22,430 0.8 % 0.8 % 53,475 53,475 53,475 2.0 % 55,000 55,000 55,000 108,475 108,475 2.1 % 4.1 % 16,119 16,119 16,119 16,119 16,119 0.6 % 0.6 % — — — 0.0 % 37,031 37,031 37,031 37,031 37,031 1.4 % 1.4 % 26,500 25,838 25,838 25,838 25,838 1.0 % 1.0 % See notes to consolidated financial statements. 134 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Florida / Healthcare LHC Holdings Corp. Madison Park Cayman Islands / Funding IX, Ltd. (22) Diversified Financial Services Material Handling Services, LLC(4) Ohio / Business Services Investments(1) Revolving Line of Credit—$750 Commitment (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 5/31/2015)(4)(25)(26) 5/31/2015)(3) Senior Subordinated Debt (10.50%, due Membership Interest (125 units) Income Notes (Residual Interest) Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 7/5/2017)(3) Senior Secured Term Loan (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 12/21/2017) Maverick Healthcare, LLC Arizona / Healthcare Preferred Units (1,250,000 units) Common Units (1,250,000 units) Mountain View Cayman Islands / CLO 2013-I Ltd. (22) Diversified Financial Services Subordinated Notes (Residual Interest) Medical Security Arizona / Healthcare Revolving Line of Credit—$1,500 Card Company, LLC (4) Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 2/1/2016) (25) First Lien Term Loan (11.25% (LIBOR + 8.75% with 2.50% LIBOR floor), due 2/1/2016)(3) National Bankruptcy Services, LLC(3) (4) Texas / Diversified Financial Services Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 1.50% PIK, due 7/17/2017) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ — $ — $ — 0.0 % 2,865 2,865 216 3,081 2,865 245 3,110 0.1 % 0.0 % 0.1 % 31,110 26,401 26,596 26,401 26,596 1.0 % 1.0 % 27,580 27,580 27,199 1.0 % 37,959 37,959 37,035 65,539 64,234 1.4 % 2.4 % 1,252 — 1,252 780 — 780 0.0 % 0.0 % 0.0 % 43,650 44,235 43,192 44,235 43,192 1.6 % 1.6 % — — — 0.0 % 13,427 13,427 13,427 13,427 13,427 0.5 % 0.5 % 18,683 18,683 16,883 18,683 16,883 0.6 % 0.6 % See notes to consolidated financial statements. 135 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) Portfolio Company Locale / Industry Naylor, LLC(4) Florida / Media June 30, 2013 and June 30, 2012 (in thousands, except share data) Investments(1) Revolving Line of Credit—$2,500 Commitment (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017) (25) Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017)(3) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ — $ — $ — 0.0 % 46,170 46,170 46,170 46,170 46,170 1.7 % 1.7 % New Century Transportation, Inc. New Jersey / Transportation Senior Subordinated Term Loan (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 3.00% PIK, due 2/3/2018)(3) (4) New Star Metals, Inc. Indiana / Metal Services & Minerals Senior Subordinated Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 1.00% PIK, due 2/2/2018)(4) Nixon, Inc. California / Durable Consumer Products Senior Secured Term Loan (8.75% plus 2.75% PIK, due 4/16/2018)(16) NRG Manufacturing, Inc. Texas / Manufacturing Pegasus Business Intelligence, LP (4) Texas / Diversified Financial Services Octagon Investment Partners XV, Ltd. (22) Cayman Islands / Diversified Financial Services Pelican Products, Inc.(16) California / Durable Consumer Products Escrow Receivable Revolving Line of Credit—$2,500 Commitment (9.00% (LIBOR + 7.75% with 1.25% LIBOR floor), due 4/18/2014)(25) Senior Secured Term Loan A (6.75% (LIBOR + 5.50% with 1.25% LIBOR floor), due 4/18/2018) Senior Secured Term Loan B (13.75% (LIBOR + 12.50% with 1.25% LIBOR floor), due 4/18/2018) Income Notes (Residual Interest) Subordinated Secured (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 6/14/2019)(3)(4) 45,120 45,120 44,166 45,120 44,166 1.7 % 1.7 % 50,274 50,274 50,274 50,274 50,274 1.9 % 1.9 % 15,509 15,252 14,992 15,252 14,992 0.6 % 0.6 % — — 3,618 3,618 0.1 % 0.1 % — — — 0.0 % 15,938 15,938 15,938 0.6 % 15,938 15,938 15,938 31,876 31,876 0.6 % 1.2 % 26,901 26,919 25,515 26,919 25,515 1.0 % 1.0 % 15,000 14,729 15,000 14,729 15,000 0.6 % 0.6 % See notes to consolidated financial statements. 136 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Texas / Software & Pinnacle (US) Computer Services Acquisition Co Limited(16) Investments(1) Second Lien Term Loan (10.50% (LIBOR + 9.25% with 1.25% LIBOR floor), due 8/3/2020)(4) Pre-Paid Legal Oklahoma / Services, Inc.(16) Consumer Services Senior Subordinated Term Loan (11.50% (PRIME + 8.25%), due 12/31/2016)(3) (4) Prince Mineral Holding Corp. New York / Metal Services & Minerals Senior Secured Term Loan (11.50%, due 12/15/2019) Progrexion Holdings, Inc.(4) (28) Utah / Consumer Services Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 9/14/2017)(3) Rocket Software, Inc.(3) (4) Massachusetts / Second Lien Term Loan (10.25% Software & Computer Services (LIBOR + 8.75% with 1.50% LIBOR floor), due 2/8/2019) Royal Adhesives & Sealants, LLC Ryan, LLC(4) Indiana / Chemicals Senior Subordinated Unsecured Term Loan (12.00% plus 2.00% PIK, due 11/29/2016) Texas / Business Subordinated Secured (12.00% Services (LIBOR + 9.00% with 3.00% LIBOR floor) plus 3.00% PIK, due 6/30/2018) Sandow Media, LLC Florida / Media Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor) plus 1.50% PIK, due 5/8/2018)(4) Seaton Corp.(3)(4) Illinois / Business Services Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2014) Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2015) SESAC Holdco II LLC Tennessee / Media Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 7/12/2019)(4) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 10,000 $ 9,815 $ 10,000 10,000 9,815 0.4 % 0.4 % 5,000 5,000 5,000 5,000 5,000 0.2 % 0.2 % 10,000 9,888 9,888 10,000 10,000 0.4 % 0.4 % 241,033 241,033 241,033 241,033 241,033 9.1 % 9.1 % 20,000 19,719 19,719 20,000 20,000 0.8 % 0.8 % 28,364 28,364 28,364 28,648 28,648 1.1 % 1.1 % 70,000 70,000 70,000 70,000 70,000 2.6 % 2.6 % 24,900 24,900 24,900 24,900 24,900 0.9 % 0.9 % 3,305 3,249 3,305 0.1 % 10,005 10,005 13,254 10,005 13,310 0.4 % 0.5 % 6,000 5,914 5,914 6,000 6,000 0.2 % 0.2 % See notes to consolidated financial statements. 137 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Investments(1) Senior Unsecured (11.125%, due 6/1/2018) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 15,000 $ 14,927 $ 15,000 14,927 15,000 0.6 % 0.6 % Series A Preferred Stock (4,021.45 shares) Series B Preferred Stock (1,866.10 shares) Warrant (to purchase 31,196.52 voting common shares, expires 11/12/2020) Portfolio Company Locale / Industry Ireland / Software & Skillsoft Public Computer Services Limited Company(22) Snacks Holding Corporation Minnesota / Food Products Southern Management Corporation (22) (30) South Carolina / Consumer Finance Second Lien Term Loan (12.00% plus 5.00% PIK, due 5/31/2017) Spartan Energy Louisiana / Energy Senior Secured Term Loan (10.50% Services, Inc.(3) (4) (LIBOR + 9.00% with 1.50% LIBOR floor), due 12/28/2017) Speedy Group Holdings Corp. Canada / Consumer Finance Senior Unsecured (12.00%, due 11/15/2017)(22) Sport Helmets Holdings, LLC (14) New York / Personal & Nondurable Consumer Products Escrow Receivable Stauber California / Food Senior Secured Term Loan (10.50% Performance Ingredients, Inc. (3)(4) Products (LIBOR + 7.50% with 3.00% LIBOR floor), due 1/21/2016) Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 5/21/2017) Stryker Energy, LLC Ohio / Oil & Gas Subordinated Secured Revolving Credit Production Facility—$50,300 Commitment (8.50% (LIBOR + 7.00% with 1.50% LIBOR floor) plus 3.75% PIK, in non-accrual status effective 12/1/2011, due 12/1/2015)(4)(25) Overriding Royalty Interests(18) 56 56 479 591 56 56 0.0 % 0.0 % 484 596 0.0 % 0.0 % 17,565 17,565 18,267 17,565 18,267 0.7 % 0.7 % 29,625 29,625 29,625 29,625 29,625 1.1 % 1.1 % 15,000 15,000 15,000 15,000 15,000 0.6 % 0.6 % — — 389 389 0.0 % 0.0 % 16,594 16,594 16,594 0.6 % 10,238 10,238 10,238 26,832 26,832 0.4 % 1.0 % 34,738 32,711 — 32,711 — — — 0.0 % 0.0 % 0.0 % See notes to consolidated financial statements. 138 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Symphony CLO, IX Ltd.(22) Cayman Islands / Diversified Financial Services LP Certificates (Residual Interest) Investments(1) System One Holdings, LLC(3) (4) TB Corp.(3) Targus Group International, Inc. (16) Pennsylvania / Senior Secured Term Loan (11.00% Business Services (LIBOR + 9.50% with 1.50% LIBOR floor), due 12/31/2018) Texas / Consumer Service Senior Subordinated Note (12.00% plus 1.50% PIK, due 12/18/2018) California / Durable Consumer Products First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 5/25/2016)(3)(4) TGG Medical Transitory, Inc. New Jersey / Healthcare Second Lien Term Loan (11.25% (LIBOR + 10.00% with 1.25% LIBOR floor), due 6/27/2018)(4) The Petroleum Place, Inc. Colorado / Software & Computer Services Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 5/20/2019)(4) Totes Isotoner Corporation Ohio / Nondurable Consumer Products Second Lien Term Loan (10.75%, (LIBOR + 9.25% with 1.50% LIBOR floor), due 1/8/2018)(3)(4) Traeger Pellet Grills LLC(4) Oregon / Durable Revolving Line of Credit—$10,000 Consumer Products Commitment (9.00% (LIBOR + 7.00% with 2.00% LIBOR floor), due 6/18/2014)(25) Senior Secured Term Loan A (6.50% (LIBOR + 4.50% with 2.00% LIBOR floor), due 6/18/2018) Senior Secured Term Loan B (11.50% (LIBOR + 9.50% with 2.00% LIBOR floor), due 6/18/2018) TransFirst Holdings, Inc.(4) New York / Software & Computer Services Second Lien Term Loan (11.00%, (LIBOR + 9.75% with 1.25% LIBOR floor), due 6/27/2018) June 30, 2013 Principal Value Cost Fair Value(2) % of Net Assets $ 45,500 $ 42,289 $ 43,980 42,289 43,980 1.7 % 1.7 % 32,000 32,000 32,000 32,000 32,000 1.2 % 1.2 % 23,361 23,361 23,361 23,361 23,361 0.9 % 0.9 % 23,520 23,209 23,520 23,209 23,520 0.9 % 0.9 % 8,000 7,773 7,773 8,000 8,000 0.3 % 0.3 % 22,000 21,690 22,000 21,690 22,000 0.8 % 0.8 % 39,000 39,000 39,000 39,000 39,000 1.5 % 1.5 % 6,143 6,143 6,143 0.3 % 30,000 30,000 30,000 1.1 % 30,000 30,000 30,000 66,143 66,143 1.1 % 2.5 % 5,000 4,860 4,860 5,000 5,000 0.2 % 0.2 % See notes to consolidated financial statements. 139 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry United Sporting South Carolina / Companies, Inc. (5) Durable Consumer Products Principal Investments(1) Value Cost Fair Value(2) % of Net Assets June 30, 2013 Second Lien Term Loan (12.75% (LIBOR + 11.00% with 1.75% LIBOR floor), due 5/16/2018)(4) $ 160,000 $ 160,000 $ 160,000 160,000 160,000 6.0 % 6.0 % Wind River Utah / Oil & Gas Senior Secured Note (13.00% Resources Corp. and Wind River II Corp. Production (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% default interest on principal, 16.00% default interest on past due interest, in non-accrual status effective 12/1/2008, past due)(4) Net Profits Interest (5.00% payable on Equity distributions)(7) Total Non-control/Non-affiliate Investments (Level 3 Investments) Total Level 3 Portfolio Investments 15,000 14,750 — 0.0 % — 14,750 — — 0.0 % 0.0 % 3,376,319 3,318,663 124.9 % 4,255,659 4,172,740 157.1 % LEVEL 1 PORTFOLIO INVESTMENTS: Non-control/Non-affiliate Investments (less than 5.00% of voting control) Common Stock (10,000 shares) Allied Defense Group, Inc. Aerospace & Defense Virginia / Dover Saddlery, Inc. Massachusetts / Retail Common Stock (30,974 shares) 56 56 63 63 — — 0.0 % 0.0 % 112 112 0.0 % 0.0 % Total Non-control/Non-affiliate Investments (Level 1 Investments) Total Portfolio Investments 119 112 0.0 % 4,255,778 4,172,852 157.1 % SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments) Fidelity Institutional Money Market Funds—Government Portfolio (Class I) Fidelity Institutional Money Market Funds—Government Portfolio (Class I)(3) Victory Government Money Market Funds Total Money Market Funds Total Investments 83,456 49,804 10,002 83,456 49,804 10,002 143,262 143,262 3.1 % 1.9 % 0.4 % 5.4 % $ 4,399,040 $ 4,316,114 162.5 % See notes to consolidated financial statements. 140 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry LEVEL 3 PORTFOLIO INVESTMENTS: Control Investments (greater than 25.00% voting control) AIRMALL Pennsylvania / Investments(1) USA, Inc.(27) Property Management Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/30/2015)(3)(4) Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015) Convertible Preferred Stock (9,919.684 shares) Common Stock (100 shares) Ajax Rolled Ring & Machine, Inc. South Carolina / Manufacturing Senior Secured Note—Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 4/01/2013)(3)(4) Subordinated Secured Note—Tranche B (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 6.00% PIK, due 4/01/2013)(3)(4) (6,142.6 shares) Convertible Preferred Stock—Series A Unrestricted Common Stock (6 shares) AWCNC, LLC(19) North Carolina / Machinery Borga, Inc. California / Manufacturing Members Units—Class A (1,800,000 units) Members Units—Class B-1 (1 unit) Members Units—Class B-2 (7,999,999 units) Revolving Line of Credit—$1,000 Commitment (5.00% (PRIME + 1.75%) plus 3.00% default interest, in non- accrual status effective 03/02/2010, past due)(4)(25) Senior Secured Term Loan B (8.50% (PRIME + 5.25%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4) Senior Secured Term Loan C (12.00% plus 4.00% PIK plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due) Common Stock (100 shares)(21) Warrants (33,750 warrants)(21) June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 29,350 $ 29,350 $ 29,350 2.0 % 12,500 12,500 12,500 0.8 % 6,132 9,920 — — 51,770 47,982 0.4 % 0.0 % 3.2 % 20,167 20,167 20,167 1.3 % 15,035 15,035 15,035 1.0 % 6,057 17,191 17 — 41,259 52,410 — — — — — — — — 1.1 % 0.0 % 3.4 % 0.0 % 0.0 % 0.0 % 0.0 % 1,000 945 668 0.0 % 1,612 1,500 — 0.0 % 9,352 707 — — 3,152 — — — 668 0.0 % 0.0 % 0.0 % 0.0 % See notes to consolidated financial statements. 141 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Energy Solutions Texas / Gas Holdings, Inc.(8) Gathering and Processing Investments(1) Senior Secured Note (18.00%, due Junior Secured Note (18.00%, due 12/11/2016)(3) 12/12/2016)(3) Senior Secured Note to Vessel June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 25,000 $ 25,000 $ 25,000 1.7 % 12,000 12,000 12,000 0.8 % Holdings LLC (18.00%, due 12/12/2016) 3,500 3,500 3,500 0.2 % Subordinated Secured Note to Freedom Marine Holdings, LLC (12.00% (LIBOR + 6.11% with 5.89% LIBOR floor) plus 4.00% PIK, in non-accrual status effective 10/1/2010, due 12/31/2011)(4) Senior Secured Debt to Yatesville Coal Holdings, Inc. (Non-accrual status effective 1/1/2009, past due) Escrow Receivable Common Stock (100 shares) First Tower Mississippi / Senior Secured Revolving Credit Facility— Holdings of Delaware, LLC (22)(29) Consumer Finance Integrated Contract Services, Inc.(9) North Carolina / Contracting $400,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 6/30/2022)(25) Common Stock (83,729,323 shares) Net Revenue Interest (5% of Net Revenue & Distributions) Secured Promissory Notes (15.00%, in non- accrual status effective 12/22/2010, due 3/21/2012—12/18/2013)(10) Senior Demand Note (15.00%, in non- accrual status effective 11/1/2010, past due)(10) Senior Secured Note (7.00% plus 7.00% PIK plus 6.00% default interest, in non- accrual status effective 10/9/2007, past due) Junior Secured Note (7.00% plus 7.00% PIK plus 6.00% default interest, in non- accrual status effective 10/9/2007, past due) Preferred Stock—Series A (10 shares) Common Stock (49 shares) Manx Energy, Inc. ("Manx")(12) Kansas / Oil & Gas Senior Secured Note (13.00%, in non- Production accrual status effective 1/19/2010, due 6/21/2013) Preferred Stock (6,635 shares) Common Stock (17,082 shares) 13,352 12,504 5,603 0.4 % 1,449 1,449 — 8,792 — 9,825 70,940 63,245 126,868 0.0 % 0.6 % 4.7 % 8.4 % 244,760 244,760 244,760 16.2 % 2.9 % 43,193 43,193 — 0.0 % 287,953 287,953 19.1 % — 2,581 2,580 — 0.0 % 1,170 1,170 — 0.0 % 300 — — 0.0 % 11,520 3,550 11,520 — 679 15,949 3,550 6,307 1,170 11,027 — — — — 0.0 % 0.0 % 0.0 % 0.0 % — — — — 0.0 % 0.0 % 0.0 % 0.0 % See notes to consolidated financial statements. 142 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry NMMB Holdings, Inc. (24) New York / Media Investments(1) Senior Term Loan (14.00%, due 5/6/2016) Senior Subordinated Term Loan (15.00%, Series A Preferred Stock (4,400 shares) due 5/6/2016) R-V Industries, Inc. Pennsylvania / Manufacturing Warrants (200,000 warrants, expiring Common Stock (545,107 shares) 6/30/2017) Wolf Energy Holdings, Inc. (12) Kansas / Oil & Gas Appalachian Energy Holdings, LLC Production ("AEH")—Senior Secured First Lien Note (8.00%, in non-accrual status effective 1/19/2010, due 6/21/2013) Coalbed, LLC—Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, due 6/21/2013)(6) Common Stock (100 Shares) Total Control Investments Affiliate Investments (5.00% to 24.99% voting control) BNN Holdings Senior Secured Note (11.50% Michigan / Healthcare Corp. (f/k/a Biotronic NeuroNetwork) Preferred Stock Series A (9,925.455 shares) (LIBOR + 7.00% with 4.50% LIBOR floor) plus 1.00% PIK, due 2/21/2013)(3) (4) (13) (13) Preferred Stock Series B (1,753.64 shares) Senior Secured Term Loan A (9.50% (LIBOR + 6.50% with 3.00% LIBOR floor), due 9/16/2013)(3)(4) Senior Secured Term Loan B (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 9/16/2013)(3)(4) Senior Secured Term Loan C (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 9/16/2013)(3)(4) Senior Secured Term Loan (12.00% plus 3.00% PIK, due 3/16/2014)(3) Preferred Stock (1,000,000 shares) Common Stock (10,000 shares) Membership Interest Boxercraft Incorporated Georgia / Textiles & Leather Smart, LLC(14) New York / Diversified / Conglomerate Service June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 21,700 $ 21,700 $ 21,700 1.4 % 2,800 2,800 4,400 28,900 2,800 252 24,752 1,682 5,087 6,769 6,403 17,453 23,856 0.2 % 0.0 % 1.6 % 0.4 % 1.2 % 1.6 % 2,437 2,000 — 0.0 % 7,311 5,991 — 7,991 0.0 % 0.0 % 0.0 % 518,015 564,489 37.3 % — — — 26,227 26,227 26,227 1.8 % 2,300 2,151 0.2 % 579 29,106 542 28,920 0.0 % 2.0 % 1,644 1,532 1,644 0.1 % 4,698 4,265 4,698 0.3 % 2,277 2,277 2,277 0.2 % 7,966 7,049 — — 15,123 7,966 576 — 17,161 0.5 % 0.0 % 0.0 % 1.1 % Total Affiliate Investments — — 44,229 35 35 46,116 0.0 % 0.0 % 3.1 % See notes to consolidated financial statements. 143 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Non-control/Non-affiliate Investments (less than 5.00% of voting control) Common Stock (5,000 shares) ADAPCO, Inc. Florida / Ecological Investments(1) Aircraft Fasteners International, LLC California / Machinery Convertible Preferred Stock (32,500 units) American Gilsonite Company Minerals Utah / Specialty Senior Subordinated Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/10/2016)(3) (4) Senior Subordinated Note (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/10/2016)(4) (99.9999%)(15) Membership Interest in AGC/PEP, LLC Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Apidos CLO VIII, Ltd.(22) Cayman Islands / Diversified Financial Services Apidos CLO IX, Ltd.(22) Cayman Islands / Diversified Financial Services Archipelago Learning, Inc Minnesota / Second Lien Debt (11.25% Consumer Services (LIBOR + 9.75% with 1.50% LIBOR floor), due 5/17/2019)(4)(16) Babson CLO Ltd 2011-I(22) Cayman Islands / Diversified Financial Services Babson CLO Ltd 2012-IA(22) Cayman Islands / Diversified Financial Services Babson CLO Ltd 2012-IIA(22) Cayman Islands / Diversified Financial Services Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Subordinated Notes (Residual Interest) Blue Coat Systems, Inc.(3) (4) Massachusetts / Software & Computer Services Second Lien Term Loan (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 8/15/2018) June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 141 $ 141 240 240 0.0 % 0.0 % 396 396 471 471 0.0 % 0.0 % $ 30,232 30,232 30,232 2.0 % 7,500 7,500 7,500 0.5 % 6,830 — 37,732 44,562 0.5 % 3.0 % 19,730 18,056 19,509 18,056 19,509 1.3 % 1.3 % 20,525 18,723 18,723 18,723 18,723 1.2 % 1.2 % 50,000 48,022 49,271 48,022 49,271 3.3 % 3.3 % 35,000 33,080 34,244 33,080 34,244 2.3 % 2.3 % 29,075 27,014 27,197 27,014 27,197 1.8 % 1.8 % 27,850 27,486 27,017 27,486 27,017 1.8 % 1.8 % 25,000 24,279 25,000 24,279 25,000 1.7 % 1.7 % See notes to consolidated financial statements. 144 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Byrider Systems Indiana / Auto Acquisition Corp (22) Finance Investments(1) Senior Subordinated Notes (12.00% plus 2.00% PIK, due 11/3/2016)(3) Caleel + Hayden, LLC(14)(31) Colorado / Personal & Nondurable Consumer Products Capstone Georgia / Logistics, LLC(4) Commercial Services Membership Units (7,500 shares) Senior Secured Term Loan A (7.50% (LIBOR + 5.50% with 2.00% LIBOR floor), due 9/16/2016) Senior Secured Term Loan B (13.50% (LIBOR + 11.50% with 2.00% LIBOR floor), due 9/16/2016)(3) Cargo Airport Services USA, LLC New York / Transportation Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/31/2016)(3)(4) Common Equity (1.6 units) CIFC Funding 2011-I, Ltd.(4) Cayman Islands / Diversified Financial Services Secured Class D Notes (5.79% (LIBOR + 5.00%), due 1/19/2023) Unsecured Class E Notes (7.79% (LIBOR + 7.00%), due 1/19/2023) The Copernicus Group, Inc. North Carolina / Healthcare Escrow Receivable CRT MIDCO, LLC Wisconsin / Media Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2017)(3)(4) Diamondback Operating, LP Oklahoma / Oil & Gas Production Net Profits Interest (15.00% payable on Equity distributions)(7) Empire Today, LLC Illinois / Durable Consumer Products Senior Secured Note (11.375%, due 2/1/2017) Fairchild Industrial Products, Co. North Carolina / Electronics Escrow Receivable June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 20,546 $ 20,546 $ 19,990 20,546 19,990 1.3 % 1.3 % 351 351 1,031 1,031 0.1 % 0.1 % 33,793 33,793 33,793 2.2 % 41,625 41,625 41,625 75,418 75,418 2.8 % 5.0 % 48,891 48,891 48,891 1,886 1,639 50,530 50,777 3.2 % 0.1 % 3.3 % 19,000 14,778 15,229 1.0 % 15,400 12,480 12,488 27,258 27,717 0.8 % 1.8 % — — 315 315 0.0 % 0.0 % 73,500 73,500 73,491 73,500 73,491 4.9 % 4.9 % — — — — 0.0 % 0.0 % 15,700 15,255 15,700 15,255 15,700 1.0 % 1.0 % — — 144 144 0.0 % 0.0 % See notes to consolidated financial statements. 145 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Fischbein, LLC North Carolina / Machinery Investments(1) Senior Subordinated Debt (12.00% plus 2.00% PIK, due 10/31/2016) Escrow Receivable Escrow Escrow Membership Class A (875,000 units) Focus Brands, Inc. (4) Georgia / Consumer Services Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 8/21/2018) Galaxy XII CLO, Ltd.(22). Cayman Islands / Diversified Financial Services Subordinated Notes (Residual Interest) H&M Oil & Gas, LLC Production Texas / Oil & Gas Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% PIK, plus 2.00% default interest, in non-accrual status effective 1/1/2011, past due)(4) Senior Secured Note (18.00% PIK, in non- accrual status effective 4/27/2012, past due) Equity distributions)(7) Net Profits Interest (8.00% payable on Senior Secured Term Loan (11.00%, due 9/26/2016) Second Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 1/3/2019) Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 1/3/2019) Hi-Tech Testing Texas / Oil & Gas Service, Inc. and Wilson Inspection X-Ray Services, Inc. Equipment & Services Hoffmaster Group, Inc.(4) Wisconsin / Durable Consumer Products June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 3,413 $ 3,413 $ — 875 4,288 3,413 565 2,036 6,014 0.3 % 0.0 % 0.1 % 0.4 % 15,000 14,711 14,711 14,711 14,711 1.0 % 1.0 % 22,000 21,526 21,897 21,526 21,897 1.4 % 1.4 % 62,814 60,019 30,524 2.0 % 4,507 4,430 4,507 0.3 % — — 64,449 35,031 0.0 % 2.3 % 7,400 7,188 7,188 7,391 7,391 0.5 % 0.5 % 10,000 9,810 9,811 0.6 % 1,000 990 951 10,800 10,762 0.1 % 0.7 % Hudson Products Holdings, Inc. (16) Texas / Manufacturing Senior Secured Term Loan (9.00% (PRIME + 5.00% with 4.00% PRIME floor), due 8/24/2015)(3)(4) ICON Health & Fitness, Inc. Utah / Durable Consumer Products Senior Secured Note (11.875% , due 10/15/2016)(3) IDQ Holdings, Inc. Texas / Automobile Senior Secured Note (11.50%, due 4/1/2017) 6,299 5,880 5,880 5,826 5,826 0.4 % 0.4 % 43,100 43,361 43,100 43,361 43,100 2.9 % 2.9 % 12,500 12,260 12,488 12,260 12,488 0.8 % 0.8 % See notes to consolidated financial statements. 146 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Injured Workers Massachusetts / Pharmacy LLC Healthcare Investments(1) Second Lien Debt (12.00% (LIBOR + 7.50% with 4.50% LIBOR floor) plus 1.00% PIK, due 11/4/2017)(3) (4) Iron Horse Coiled Tubing, Inc.(23) Alberta, Canada / Production Services Common Stock (3,821 shares) JHH Holdings, Inc. Texas / Healthcare Second Lien Debt (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 6/23/2016)(3) (4) Florida / Healthcare Revolving Line of Credit—$750 LHC Holdings Corp. Commitment (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 5/31/2015)(4)(25)(26) 5/31/2015)(3) Senior Subordinated Debt (10.50%, due Membership Interest (125 units) Subordinated Notes (Residual Interest) Madison Park Cayman Islands / Funding IX, Ltd. (22) Diversified Financial Services Maverick Healthcare, LLC Arizona / Healthcare Preferred Units (1,250,000 units) Common Units (1,250,000 units) Medical Security Arizona / Healthcare Revolving Line of Credit—$1,500 Card Company, LLC (4) Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 2/1/2016) (25) First Lien Term Loan (11.25% (LIBOR + 8.75% with 2.50% LIBOR floor), due 2/1/2016)(3) Mood Media Corporation(3) (16)(22) Canada / Media Senior Subordinated Term Loan (10.25% (LIBOR + 8.75% with 1.50% LIBOR floor), due 11/6/2018)(4) June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 15,100 $ 15,100 $ 15,100 15,100 15,100 1.0 % 1.0 % 268 268 2,040 2,040 0.1 % 0.1 % 15,736 15,736 15,736 15,736 15,736 1.0 % 1.0 % — — — 0.0 % 4,265 4,125 216 4,341 4,125 225 4,350 0.3 % 0.0 % 0.3 % 31,110 25,810 25,810 25,810 25,810 1.7 % 1.7 % 1,252 — 1,252 1,756 95 1,851 0.1 % 0.0 % 0.1 % — — — 0.0 % 17,317 17,317 17,317 17,317 17,317 1.1 % 1.1 % 15,000 14,866 15,000 14,866 15,000 1.0 % 1.0 % See notes to consolidated financial statements. 147 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Texas / Diversified National Financial Services Bankruptcy Services, LLC(3) (4) Investments(1) Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 1.50% PIK, due 7/16/2017) Naylor, LLC(4) Florida / Media Revolving Line of Credit—$2,500 Commitment (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017) (25) Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017) New Meatco Provisions, LLC California / Food Products Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 4.00%, PIK due 4/18/2016)(4) Nixon, Inc. Nobel Learning Communities, Inc. California / Durable Consumer Products Senior Secured Term Loan (8.75% plus 2.75% PIK, due 4/16/2018)(16) Pennsylvania / Consumer Services Subordinated Unsecured (11.50% plus 1.50% PIK, due 8/9/2017) Northwestern Florida / Healthcare Revolving Line of Credit—$1,500 Management Services, LLC Commitment (10.50% (PRIME + 6.75% with 3.75% PRIME floor), due 7/30/2015)(4)(25) Senior Secured Term Loan A (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 7/30/2015)(3)(4) Common Stock (50 shares) NRG Texas / Manufacturing, Inc. Manufacturing Escrow Receivable Out Rage, LLC(4) Wisconsin / Durable Consumer Products Revolving Line of Credit—$1,500 Commitment (11.0% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/02/2013)(25) Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 3/2/2015) June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 18,402 $ 18,402 $ 18,402 18,402 18,402 1.2 % 1.2 % — — — 0.0 % 48,600 48,600 48,600 48,600 48,600 3.2 % 3.2 % 12,438 12,438 12,438 6,571 6,571 0.4 % 0.4 % 15,085 14,792 14,792 14,792 14,792 1.0 % 1.0 % 15,147 15,147 15,147 15,147 15,147 1.0 % 1.0 % 200 200 200 0.0 % 16,092 16,092 16,092 1,205 16,663 17,497 371 1.1 % 0.1 % 1.2 % — — 6,431 6,431 0.4 % 0.4 % — — — 0.0 % 10,756 10,756 10,686 10,756 10,686 0.7 % 0.7 % See notes to consolidated financial statements. 148 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Pinnacle Treatment Centers, Inc.(4) Pennsylvania / Healthcare Investments(1) Revolving Line of Credit—$1,000 Commitment (8.0% (LIBOR + 5.00% with 3.00% LIBOR floor), due 1/10/2016)(25) Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 1/10/2016)(3) Potters Holdings II, L.P.(16) Pennsylvania / Manufacturing Senior Subordinated Term Loan (10.25% (LIBOR + 8.50% with 1.75% LIBOR floor), due 11/6/2017)(3)(4) Pre-Paid Legal Oklahoma / Services, Inc.(16) Consumer Services Senior Subordinated Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 12/31/2016)(3)(4) Progrexion Holdings, Inc.(4) (28) Utah / Consumer Senior Secured Term Loan A (11.25% Services (LIBOR + 9.25% with 2.00% LIBOR floor), due 12/31/2014)(3) Senior Secured Term Loan B (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 12/31/2014) Renaissance Learning, Inc. (16). Wisconsin / Consumer Services Second Lien Term Loan (12.00% (LIBOR + 10.50% with 1.50% LIBOR floor), due 10/19/2018)(4) Rocket Software, Inc.(3) (4) Massachusetts / Second Lien Term Loan (10.25% Software & Computer Services (LIBOR + 8.75% with 1.50% LIBOR floor), due 2/8/2019) Royal Adhesives & Sealants, LLC Seaton Corp. Indiana / Chemicals Senior Subordinated Unsecured Term Loan (12.00% plus 2.00% PIK due 11/29/2016) Illinois / Business Subordinated Secured (12.50% Services (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2014)(3) (4) 149 June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ — $ — $ — 0.0 % 17,475 17,475 17,475 17,475 17,475 1.2 % 1.2 % 15,000 14,803 14,608 14,803 14,608 1.0 % 1.0 % 5,000 5,000 5,000 4,989 4,989 0.3 % 0.3 % 34,502 34,502 34,502 2.3 % 28,178 28,178 28,178 62,680 62,680 1.9 % 4.2 % 6,000 5,775 5,775 6,000 6,000 0.4 % 0.4 % 15,000 14,711 14,711 14,711 14,711 1.0 % 1.0 % 27,798 27,798 27,798 27,798 27,798 1.8 % 1.8 % 3,288 3,164 3,164 3,288 3,288 0.2 % 0.2 % Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Georgia / Insurance SG Acquisition, Inc. (4) Investments(1) Senior Secured Term Loan A (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 3/18/2016) Senior Secured Term Loan B (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor), due 3/18/2016)(3) Senior Secured Term Loan C (8.50% (LIBOR + 6.50% with 2.00% LIBOR floor), due 3/18/2016) Senior Secured Term Loan D (14.50% (LIBOR + 12.50% with 2.00% LIBOR floor), due 3/18/2016) Shearer's Foods, Inc. Ohio / Food Products Junior Secured Debt (12.00% plus 3.75% PIK (3.75% LIBOR floor), due 3/31/2016)(3)(4) Membership Interest in Mistral Chip Holdings, LLC—Common (2,000 units) (17) Membership Interest in Mistral Chip Holdings, LLC 2—Common (595 units) (17) Membership Interest in Mistral Chip Holdings, LLC 3—Preferred (67 units) (17) Skillsoft Public Limited Company(22) Snacks Holding Corporation Southern Management Corporation(22) (30) Ireland / Software & Computer Services Senior Unsecured (11.125%, due 6/1/2018) Minnesota / Food Senior Subordinated Unsecured Term Loan Products (12.00% plus 1.00% PIK, due 11/12/2017) Series A Preferred Stock (4,021.45 shares) Series B Preferred Stock (1,866.10 shares) Warrant (to purchase 31,196.52 voting common shares, expires 11/12/2020) South Carolina / Consumer Finance Second Lien Term Loan (12.00% plus 5.00% PIK due 5/31/2017) Sport Helmets Holdings, LLC (14) New York / Personal & Nondurable Consumer Products Escrow Receivable June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 27,469 $ 27,469 $ 27,469 1.8 % 29,625 29,625 29,625 2.0 % 12,686 12,686 12,686 0.8 % 13,681 13,681 13,681 83,461 83,461 0.9 % 5.5 % 37,639 37,639 37,639 2.5 % 2,000 2,161 0.1 % 1,322 643 0.0 % 673 883 41,634 41,326 0.1 % 2.7 % 15,000 14,918 15,000 14,918 15,000 1.0 % 1.0 % 15,250 14,754 56 56 5,250 42 42 479 357 15,345 15,691 1.0 % 0.0 % 0.0 % 0.0 % 1.0 % 17,568 17,568 17,568 17,568 17,568 1.2 % 1.2 % — — 406 406 0.0 % 0.0 % See notes to consolidated financial statements. 150 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Wisconsin / Durable Springs Window Fashions, LLC Consumer Products Investments(1) Second Lien Term Loan (11.25% (LIBOR + 9.25% with 2.00% LIBOR floor), due 11/30/2017)(3)(4) ST Products, LLC Pennsylvania/ Manufacturing Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/16/2016)(3)(4) Stauber Performance Ingredients, Inc. (4) Stryker Energy, LLC California / Food Products Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 1/21/2016)(3) Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 5/21/2017) Ohio / Oil & Gas Subordinated Secured Revolving Credit Production Facility—$50,300 Commitment (8.50% (LIBOR + 7.00% with 1.50% LIBOR floor) plus 3.75% PIK, in non-accrual status effective 12/1/2011, due 12/1/2015)(4)(25) Overriding Royalty Interests(18) LP Certificates (Residual Interest) Symphony CLO, IX Ltd.(22) Cayman Islands / Diversified Financial Services Targus Group International, Inc. (16) California / Durable Consumer Products First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 5/25/2016)(3)(4) Totes Isotoner Corporation Ohio / Nondurable Consumer Products Second Lien Term Loan (10.75%, (LIBOR + 9.25% with 1.50% LIBOR floor) due 1/8/2018)(3)(4) U.S. HealthWorks Holding Company, Inc. (16) California / Healthcare Second Lien Term Loan (10.50% (LIBOR + 9.00% with 1.50% LIBOR floor), due 6/15/2017)(3)(4) VanDeMark Chemicals, Inc. (3) New York / Chemicals Senior Secured Term Loan (12.20% (LIBOR + 10.20% with 2.0% LIBOR floor), due 12/31/2014)(4) June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets $ 35,000 $ 35,000 $ 34,062 35,000 34,062 2.3 % 2.3 % 23,328 23,328 23,328 23,328 23,328 1.5 % 1.5 % 22,058 22,058 22,058 1.5 % 10,500 10,500 10,500 32,558 32,558 0.7 % 2.2 % 33,444 32,711 — 32,711 — 1,623 1,623 0.0 % 0.1 % 0.1 % 45,500 42,864 43,612 42,864 43,612 2.9 % 2.9 % 23,760 23,363 23,760 23,363 23,760 1.6 % 1.6 % 39,000 39,000 38,531 39,000 38,531 2.5 % 2.5 % 25,000 25,000 25,000 25,000 25,000 1.7 % 1.7 % 30,306 30,306 30,306 30,306 30,306 2.0 % 2.0 % See notes to consolidated financial statements. 151 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Portfolio Company Locale / Industry Wind River Utah / Oil & Gas Investments(1) Senior Secured Note (13.00% June 30, 2012 Principal Value Cost Fair Value(2) % of Net Assets Resources Corp. and Wind River II Corp. Production (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% default interest on principal, 16.00% default interest on past due interest, in non-accrual status effective 12/1/2008, past due)(4) Net Profits Interest (5.00% payable on Equity distributions)(7) Total Non-control/Non-affiliate Investments (Level 3 Investments) Total Level 3 Portfolio Investments $ 14,750 $ 14,750 $ 2,339 0.2 % — 14,750 — 2,339 0.0 % 0.2 % 1,536,950 1,483,487 98.1 % 2,099,194 2,094,092 138.5 % LEVEL 1 PORTFOLIO INVESTMENTS: Non-control/Non-affiliate Investments (less than 5.00% of voting control) Common Stock (10,000 shares) Allied Defense Group, Inc. Aerospace & Defense Virginia / Dover Saddlery, Inc. Massachusetts / Retail Common Stock (30,974 shares) Total Non-control/Non-affiliate Investments (Level 1 Investments) Total Portfolio Investments SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments) Fidelity Institutional Money Market Funds—Government Portfolio (Class I) Fidelity Institutional Money Market Funds—Government Portfolio (Class I)(3) Victory Government Money Market Funds Total Money Market Funds Total Investments 56 56 63 63 — — 0.0 % 0.0 % 129 129 0.0 % 0.0 % 119 129 0.0 % 2,099,313 2,094,221 138.5 % 86,596 86,596 31,772 31,772 1 1 118,369 118,369 5.7 % 2.1 % 0.0 % 7.8 % 2,217,682 2,212,590 146.3 % See notes to consolidated financial statements. 152 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) Endnote Explanations for the Consolidated Schedule of Investments as of June 30, 2013 and June 30, 2012 (1) (2) (3) (4) (5) 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. Fair value is determined by or under the direction of our Board of Directors. As of June 30, 2013 and June 30, 2012, two of our portfolio investments, Allied Defense Group, Inc. ("Allied") and Dover Saddlery, Inc. ("Dover") were publicly traded and classified as Level 1 within the valuation hierarchy established by Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures ("ASC 820"). As of June 30, 2013 and June 30, 2012, the fair value of our remaining portfolio investments was determined using significant unobservable inputs. ASC 820 classifies such inputs used to measure fair value as Level 3 within the valuation hierarchy. Our investments in money market funds are classified as Level 2. See Note 2 and Note 3 within the accompanying consolidated financial statements for further discussion. Security, or a portion thereof, is held by Prospect Capital Funding LLC, a bankruptcy remote special purpose entity, and is pledged as collateral for the revolving credit facility and such security is not available as collateral to our general creditors (See Note 4). The market values of these investments at June 30, 2013 and June 30, 2012 were $883,114 and $783,384, respectively; they represent 20.5% and 35.4% of total investments at fair value, respectively. Prospect Capital Funding LLC (See Note 1), our wholly-owned subsidiary, holds an aggregate market value of $883,114 and $783,384 of these investments as of June 30, 2013 and June 30, 2012, respectively. Security, or portion thereof, has a floating interest rate which may be subject to a LIBOR or PRIME floor. Stated interest rate was in effect at June 30, 2013 and June 30, 2012. Ellett Brothers, LLC., Evans Sports, Inc., Jerry's Sports, Inc., Simmons Gun Specialties, Inc., Bonitz Brothers, Inc. and Outdoor Sports Headquarters, Inc., are joint borrowers on our second lien loan. United Sporting Companies, Inc., is a parent guarantor of this debt investment. (6) During the quarter ended December 31, 2009, we created two new entities, Coalbed Inc. and Coalbed LLC, to foreclose on the outstanding senior secured loan and assigned rights and interests of Conquest Cherokee, LLC ("Conquest"), as a result of the deterioration of Conquest's financial performance and inability to service debt payments. We own 1,000 shares of common stock in Coalbed Inc., representing 100% of the issued and outstanding common stock. Coalbed Inc., in turn owns 100% of the membership interest in Coalbed LLC. On October 21, 2009, Coalbed LLC foreclosed on the loan formerly made to Conquest. On January 19, 2010, as part of the Manx rollup, the Coalbed LLC assets and loan were assigned to Manx, the holding company. On June 30, 2012, Manx reassigned our investment in Coalbed to Wolf Energy Holdings, Inc. ("Wolf"), a newly-formed, separately owned holding company. Our Board of Directors set value at zero for the loan position in Coalbed LLC investment as of June 30, 2013 and June 30, 2012. (7) In addition to the stated returns, the net profits interest held will be realized upon sale of the borrower or a sale of the interests. 153 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) (8) During the quarter ended December 31, 2011, our ownership of Change Clean Energy Holdings, Inc. ("CCEHI") and Change Clean Energy, Inc. ("CCEI"), Freedom Marine Holding, Inc. ("Freedom Marine") and Yatesville Coal Holdings, Inc. ("Yatesville") was transferred to Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) ("Energy Solutions") to consolidate all of our energy holdings under one management team. We own 100% of Energy Solutions. (9) Entity was formed as a result of the debt restructuring of ESA Environmental Specialist, Inc. In early 2009, we foreclosed on the two loans on non-accrual status and purchased the underlying personal and real property. We own 1,000 shares of common stock in The Healing Staff ("THS"), f/k/a Lisamarie Fallon, Inc. representing 100% ownership. We own 1,500 shares of Vets Securing America, Inc. ("VSA"), representing 100% ownership. During the three months ended December 31, 2012, we determined that the impairment of Integrated Contract Services, Inc. ("ICS") was other-than-temporary and recorded a realized loss of $12,198 for the amount that the amortized cost exceeded the fair market value. Our remaining investment in The Healing Staff ("THS"), an affiliate of ICS, was valued at zero as of June 30, 2013 and continues to provide staffing solutions for health care facilities and security staffing. (10) Loan is with THS, an affiliate of ICS. (11) Evanta Ventures, Inc. and Sports Leadership Institute, Inc. are joint borrowers on our investment. (12) On January 19, 2010, we modified the terms of our senior secured debt in AEH and Coalbed in conjunction with the formation of Manx Energy, a new entity consisting of the assets of AEH, Coalbed and Kinley Exploration. The assets of the three companies were brought under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring. On June 30, 2012, Manx reassigned our investments in Coalbed and AEH to Wolf, a newly-formed, separately owned holding company. We continue to fully reserve any income accrued for Manx. During the quarter ended June 30, 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair market value. The Board of Directors set the fair value of our investment in Manx at $346 as of June 30, 2013. (13) On a fully diluted basis, represents 10.00% of voting common shares. (14) A portion of the positions listed was issued by an affiliate of the portfolio company. (15) We own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,037.65 out of a total of 83,818.69 shares (including 5,111 vested and unvested management options) of American Gilsonite Holding Company which owns 100% of American Gilsonite Company. (16) Syndicated investment which had been originated by another financial institution and broadly distributed. (17) At June 30, 2012, Mistral Chip Holdings, LLC owns 44,800 shares of Chip Holdings, Inc. and Mistral Chip Holdings 2, LLC owns 11,975 shares in Chip Holdings, Inc. Chip Holdings, Inc. is the parent company of Shearer's Foods, Inc. and has 67,936 shares outstanding before adjusting for 154 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) management options. On November 7, 2012, we redeemed our membership interests in Mistral Chip Holdings, LLC, Mistral Chip Holdings 2, LLC and Mistral Chip Holdings 3, LLC in connection with the sale of Shearer's, receiving $6,022 of net proceeds and realizing a gain of approximately $2,027 on the redemption. (18) The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower. (19) On December 31, 2009, we sold our investment in Aylward Enterprises, LLC. AWCNC, LLC is the remaining holding company with zero assets. Our remaining outstanding debt after the sale was written off on December 31, 2009 and no value has been assigned to the equity position as of June 30, 2013 and June 30, 2012. (20) We own a warrant to purchase 3,755,000 shares of Series A Preferred Stock, 625,000 shares of Series B Preferred Stock, and 43,800 shares of Voting Common Stock in Boxercraft Incorporated. (21) We own warrants to purchase 33,750 shares of common stock in Metal Buildings Holding Corporation ("Metal Buildings"), the former holding company of Borga, Inc. Metal Buildings Holding Corporation owned 100% of Borga, Inc. On March 8, 2010, we foreclosed on the stock in Borga, Inc. that was held by Metal Buildings, obtaining 100% ownership of Borga, Inc. (22) Certain investments that we have determined are not "qualifying" assets under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. We monitor the status of these assets on an ongoing basis. (23) On January 1, 2010, we restructured our senior secured and bridge loans investment in Iron Horse Coiled Tubing, Inc. ("Iron Horse") and we reorganized Iron Horse's management structure. The senior secured loan and bridge loan were replaced with three new tranches of senior secured debt. During the period from June 30, 2011 to June 30, 2012, our fully diluted ownership of Iron Horse decreased from 57.8% to 5.0%, respectively, as we continued to transfer ownership interests to Iron Horse's management as they repaid our outstanding debt. Iron Horse management had an option to repurchase our remaining interest for $2,040. On July 24, 2012, we sold our 3,821 shares of Iron Horse Coiled Tubing, Inc. common stock in connection with the exercise of the equity buyout option, receiving $2,040 of net proceeds and realizing a gain of approximately $1,772 on the sale. (24) On May 6, 2011, we made a secured first lien $24,250 debt investment to NMMB Acquisition, Inc., a $2,800 secured debt and $4,400 equity investment to NMMB Holdings, Inc. We own 100% of the Series A Preferred Stock in NMMB Holdings, Inc. NMMB Holdings, Inc. owns 100% of the Convertible Preferred in NMMB Acquisition, Inc. NMMB Acquisition, Inc. has a 5.8% dividend rate which is paid to NMMB Holdings, Inc. Our fully diluted ownership in NMMB Holdings, Inc. is 100% as of June 30, 2013 and June 30, 2012. Our fully diluted ownership in NMMB Acquisition, Inc. is 83.5% as of June 30, 2013 and June 30, 2012. 155 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) (25) Undrawn committed revolvers incur commitment and unused fees ranging from 0.50% to 2.00%. As of June 30, 2013 and June 30, 2012, we had $202,518 and $180,646 of undrawn revolver commitments to our portfolio companies, respectively. (26) Stated interest rates are based on June 30, 2013 and June 30, 2012 one month Libor rates plus applicable spreads based on the respective credit agreements. Interest rates are subject to change based on actual elections by the borrower for a Libor rate contract or Base Rate contract when drawing on the revolver. (27) On July 30, 2010, we made a secured first lien $30,000 debt investment to AIRMALL USA, Inc., a $12,500 secured second lien to AMU Holdings, Inc., and acquired 100% of the Convertible Preferred Stock and Common stock of AMU Holdings, Inc. Our Convertible Preferred Stock in AMU Holdings, Inc. has a 12.0% dividend rate which is paid from the dividends received from the underlying operating company, AIRMALL USA Inc. AMU Holdings, Inc. owns 100% of the common stock in AIRMALL USA, Inc. (28) Progrexion Marketing, Inc., Progrexion Teleservices, Inc., Progrexion ASG, Inc. Progrexion IP, Inc. and Efolks, LLC, are joint borrowers on our senior secured investment. Progrexion Holdings, Inc. and eFolks Holdings, Inc. are the guarantors of this debt investment. (29) Our wholly-owned entity, First Tower Holdings of Delaware, LLC, owns 80.1% of First Tower Holdings LLC, the operating company of First Tower, LLC. (30) Southern Management Corporation, Thaxton Investment Corporation, Southern Finance of Tennessee, Inc., Covington Credit of Texas, Inc., Covington Credit, Inc., Covington Credit of Alabama, Inc., Covington Credit of Georgia, Inc., Southern Finance of South Carolina, Inc. and Quick Credit Corporation, are joint borrowers on our senior secured investment. SouthernCo, Inc. is the guarantor of this debt investment. (31) We own 2.8% (13,220 shares) of the Mineral Fusion Natural, LLC, a subsidiary of Caleel + Hayden, common and preferred interest. (32) Our wholly-owned entity, APH Property Holdings, LLC, owns 100% of the common equity of American Property Holdings Corp., a REIT which holds investments in several real estate properties. (33) Our wholly-owned entity, CCPI Holdings, Inc. owns 95.13% of CCPI Inc., the operating company. (34) Our wholly-owned entity, Credit Central Holdings of Delaware, LLC owns 74.8% of Credit Central Holdings, LLC, which owns 100% of each of Credit Central, LLC, Credit Central South, LLC and Credit Central of Tennessee, LLC, the operating companies. (35) Our wholly-owned entity, Valley Electric Holdings I, Inc. ("HoldCo"), owns 100% of Valley Electric Holdings, II, Inc. ("Valley II"). Valley II owns 96.3% of Valley Electric Co. of Mt. Vernon, Inc. ("OpCo"), the operating company. Our debt investments are with both HoldCo and OpCo. (36) Our wholly-owned entity, Nationwide Acceptance Holdings, LLC owns 93.8% of Nationwide Acceptance LLC, the operating company. 156 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) (37) On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. The cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors , and was equal to the fair value of assets at the time of transfer resulting in a capital loss of $19,647 in connection with the foreclosure on the assets. On May 17 2013, Wolf sold the assets located in Martin County for $66,000. Proceeds from the sale were primarily used to repay the loan and net profits interest receivable due to us resulting in a realized capital gain of $11,826. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the net profits interest agreement which was recognized as other income during the fiscal year ended June 30, 2013. (38) As defined in the Investment Company Act, the Company is deemed to be both an "Affiliated Person" and "Control" this portfolio company because it owns more than 25% of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended June 30, 2013 in which the issuer was both an Affiliated company and a portfolio company that the Company is deemed to Control are as follows: Purchases Redemptions Sales Interest income Dividend income Structuring fee Other income Net realized gains (losses) Net unrealized gains (losses) — $ 600 $ — $ 5,822 $ — $ — $ — $ — $ 7,266 23,300 19,065 — 5,176 151,648 — 150 — — — — — — 2,898 — — 34,081 338 — 1,792 — — — — — 155 — — (17,208 ) 4,511 — — 140 — — 575 32 — — — — — — (232 ) — 47,663 — — 3,893 — 1,440 240 — 2,799 — 28,500 475 24,809 53,820 — — — (71,198 ) Company AIRMALL USA, Inc. $ Ajax Rolled Ring & Machine, Inc. APH Property Holdings, LLC AWCNC, LLC Borga, Inc. CCPI Holdings, Inc. Credit Central Holdings of Delaware, LLC Energy Solutions Holdings, Inc. First Tower Holdings of Delaware, LLC Energy, Inc. Manx Nationwide Acceptance Holdings, LLC NMMB 20,000 — — 52,476 — — — — 25,151 — — 1,787 Holdings, Inc. — — 5,700 3,026 R-V — — — — — 2,426 — (9,869 ) — — (9,397 ) 18,865 753 131 — — — — — (5,903 ) 32,750 — — 781 24,462 143 — — 1,463 975 — 894 2 Holdings I, Inc. 52,098 — 100 3,511 Wolf Energy Holdings, Inc. 50 — — 452 — — — — — (12,117 ) 12,117 1,227 98 — — 3,960 991 11,826 (3,092 ) The Healing Industries, Inc. Staff, Inc. Valley Electric (39) As defined in the Investment Company Act, the Company is deemed to be an "Affiliated Person" of a portfolio company because it owns 5% or more of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio 157 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) company (including through a management agreement). Transactions during the year ended June 30, 2013 in which the issuer was an Affiliated company (but not a portfolio company that the Company ("Controls") are as follows: Purchases (cost) Redemptions (cost) Sales (cost) Interest income Dividend income Structuring fee Other income Net realized gains (losses) Net unrealized gains (losses) 30,000 $ 26,677 $ — $ 3,159 $ — $ 600 $ 22 $ — — — — — — 3,356 — — 728 — — — — — $ — — 672 (9,413 ) 108 (40) As defined in the Investment Company Act, the Company is deemed to be both an "Affiliated Person" and "Control" this portfolio company because it owns more than 25% of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended June 30, 2012 in which the issuer was both an Affiliated company and a portfolio company that the Company is deemed to Control are as follows: Company BNN Holdings Corp. (f/k/a Biotronic $ NeuroNetwork) Boxercraft Smart, LLC Incorporated Company AIRMALL USA, Inc. $ Ajax Rolled Ring & Machine, Inc. AWCNC, LLC Borga, Inc. C&J Cladding LLC Change Clean Energy Holdings, Inc. Energy Solutions Holdings, Inc. First Tower Holdings of Delaware, LLC Integrated Contract Services, Inc. Iron Horse Coiled Tubing, Inc. Manx Energy, Inc. NMMB Holdings, Inc. NRG Manufacturing, Inc. Nupla Corporation Inc. R-V Industries, Yatesville Coal Holdings, Inc. Purchases Redemptions Sales Interest income Dividend income Structuring fee Other income Net realized gains (losses) Net unrealized gains (losses) — $ 650 $ — $ 5,900 $ — $ — $ — $ — $ (3,094 ) — — — — 440 — — — — — 4,849 — — — 580 — — — — — — — — — — — — — — 18,973 — (1,023 ) 1,500 — 2,420 (4,119 ) — — — — — — — — 2,540 5,951 — — 7,174 47,850 5,220 4,983 — (63,403 ) 287,953 — — 2,312 — 8,075 — — — 1,033 1,054 — — — — — — 503 — — 14,338 — 324 — — — — — — — — 802 — — — (1,312 ) — 2,550 — 3,683 — — — — (4,148 ) 37,218 50,299 2,317 28,579 15,011 372 3,800 36,940 (23,655 ) — — 1,995 — 587 — 1,500 14 2,907 (4,194 ) — — — 283 — — — 15,740 — — — — — — — — 1,035 (41) As defined in the Investment Company Act, the Company is deemed to be an "Affiliated Person" of a portfolio company because it owns 5% or more of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the year ended 158 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued) June 30, 2013 and June 30, 2012 (in thousands, except share data) June 30, 2012 in which the issuer was an Affiliated company (but not a portfolio company that the Company ("Controls") are as follows: Company BNN Holdings Corp. (f/k/a Biotronic $ NeuroNetwork) Incorporated Boxercraft Smart, LLC Sport Helmets Holdings, LLC Redemptions (cost) Sales (cost) Interest income Dividend income Structuring fee Other income Net realized gains (losses) Net unrealized gains (losses) Purchases (cost) — $ — $ — $ 3,333 $ — $ — $ — $ — $ (5,099 ) 2,300 — 1,144 — — — 2,947 — — — — — 70 — — — (662 ) 35 — 19,102 — 5,875 — — 38 4,445 (7,483 ) 159 Table of Contents Note 1. Organization PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) References herein to "we", "us" or "our" refer to Prospect Capital Corporation ("Prospect") and its subsidiary unless the context specifically requires otherwise. We were organized on April 13, 2004 and were funded in an initial public offering ("IPO"), completed on July 27, 2004. We are a closed- end investment company that has filed an election to be treated as a Business Development Company ("BDC"), under the Investment Company Act of 1940 (the "1940 Act"). As a BDC, we have qualified and have elected to be treated as a regulated investment company ("RIC"), under Subchapter M of the Internal Revenue Code of 1986 (the "Internal Revenue Code"). We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. On May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital Funding LLC ("PCF"), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the credit facility at PCF. Note 2. Significant Accounting Policies The following are significant accounting policies consistently applied by us: Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the requirements for reporting on Form 10-K and Regulation S-X. The financial results of our portfolio investments are not consolidated in the financial statements. Reclassifications Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of and for the twelve months ended June 30, 2013. 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 160 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) an operating company which provides substantially all of its services and benefits to us. Our consolidated financial statements include our accounts and the accounts of PCF, our only wholly-owned, closely-managed subsidiary that is also an investment company. All intercompany balances and transactions have been eliminated in consolidation. Investment Classification We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person. Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments in other, non-security financial instruments are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled are reported as receivables for investments sold and payables for investments purchased, respectively, in the Consolidated Statements of Assets and Liabilities. Investment Risks The Company's investments are subject to a variety of risks. Those risks include the following: Market Risk Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument. Credit Risk Credit risk represents the risk that the Company would incur if the counterparties failed to perform pursuant to the terms of their agreements with the Company. Liquidity Risk Liquidity risk represents the possibility that the Company may not be able to rapidly adjust the size of its positions in times of high volatility and financial stress at a reasonable price. 161 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) Interest Rate Risk Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument. Prepayment Risk Many of the Company's debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the security and making the security less likely to be an income producing instrument. Investment Valuation To value our assets, we follow the guidance of ASC 820 that defines fair value, establishes a framework for measuring fair value in conformity with accounting principles generally accepted in the United States or America, or GAAP, and requires disclosures about fair value measurements. ASC 820 classifies the inputs used to measure these fair values into the following hierarchy: Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company 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. ASC 820 applies to fair value measurements already required or permitted by other standards. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted. 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 162 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below: 1) 2) 3) 4) Each portfolio company or investment is reviewed by our investment professionals with an independent valuation firm engaged by our Board of Directors; the independent valuation firms conduct independent appraisals and make their own independent assessment; the Audit Committee of our Board of Directors reviews and discusses the preliminary valuation of Prospect Capital Management LLC (the "Investment Adviser") and that of the independent valuation firms; and 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 the Investment Adviser, the respective independent valuation firm and the Audit Committee. Investments are valued utilizing a shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and market approaches use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors. Our investments in CLOs are classified as ASC 820 level 3 securities, and are valued using a discounted cash flow model. The valuations have been accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each security, the most appropriate valuation approach has been chosen from alternative approaches to ensure the most accurate valuation for each security. To value a CLO, both the assets and liabilities of the CLO capital structure need be modeled. We use a waterfall engine to store the collateral data, generate collateral cash flows from the assets, and distributes the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates that incorporate all the risk factors. The main risk factors are: default risk, interest rate risk, downgrade risk, and credit spread risk. For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see "Risk Factors—Risks relating to our business—Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments." 163 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) Valuation of Other Financial Assets and Financial Liabilities ASC Subtopic 820-10-05-1, The Fair Value Option for Financial Assets and Financial Liabilities ("ASC 820-10-05-1") permits an entity to elect fair value as the initial and subsequent measurement attribute for many of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. We have elected not to value some assets and liabilities at fair value as would be permitted by ASC 820-10-05-1. Senior Convertible Notes We have recorded the Senior Convertible Notes (See Note 5) at their contractual amounts. The Senior Convertible Notes were analyzed for any features that would require their accounting to be bifurcated and such features were determined to be immaterial. Revenue Recognition Realized gains or losses on the sale of investments are calculated using the specific identification method. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of such purchase discounts or premiums is calculated by the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. The purchase discount for portfolio investments acquired from Patriot Capital Funding, Inc. ("Patriot") was determined based on the difference between par value and fair market value as of December 2, 2009, and continues to accrete until maturity or repayment of the respective loans. Interest income from investments in the "equity" class of security of CLO Funds (typically income notes or subordinated notes) is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40-35, Beneficial Interests in Securitized Financial Assets . We monitor the expected cash inflows from our CLO equity investments, including the expected residual payments, and the effective yield is determined and updated periodically. Dividend income is recorded on the ex-dividend date. Structuring fees and similar fees are recognized as income as earned, usually when paid. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other income. Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in accordance with the terms of the investment. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non- accrual loans may be recognized as income or applied to principal depending upon management's judgment of collectability. 164 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management's judgment, are likely to remain current. Federal and State Income Taxes We have elected to be treated as a regulated investment company and intend to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies. We are required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital. If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income and 98.2% of our capital gains in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income. If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Internal Revenue Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge of 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years. We follow ASC 740, Income Taxes ("ASC 740"). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" of being 165 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) 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. As of June 30, 2013 and for the year then ended, we did not have a liability for any unrecognized tax benefits. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Dividends and Distributions Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a monthly dividend or distribution is approved by our Board of Directors quarterly and is generally based upon our management's estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually. Financing Costs We record origination expenses related to our credit facility and Senior Convertible Notes, Senior Unsecured Notes and Prospect Capital InterNotes® (collectively, our "Senior Notes"), as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method for our revolving credit facility and the effective interest method for our Senior Notes, over the respective expected life. We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission ("SEC") registration fees, legal fees and accounting fees incurred. These prepaid assets will be charged to capital upon the receipt of an equity offering proceeds or charged to expense if no offering completed. Guarantees and Indemnification Agreements We follow ASC 460, Guarantees ("ASC 460"). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees. Per Share Information Net increase or decrease in net assets resulting from operations per common share are calculated using the weighted average number of common shares outstanding for the period presented. In accordance with ASC 946, Financial Services—Investment Companies , convertible securities are not considered in the calculation of net assets per share. Recent Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"). ASU 2011-04 amends Accounting Standards Codification 820, Fair Value 166 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 2. Significant Accounting Policies (Continued) Measurements ("ASC 820") by: (1) clarifying that the highest-and-best-use and valuation-premise concepts only apply to measuring the fair value of non-financial assets; (2) allowing a reporting entity to measure the fair value of the net asset or net liability position in a manner consistent with how market participants would price the net risk position, if certain criteria are met; (3) providing a framework for considering whether a premium or discount can be applied in a fair value measurement; (4) providing that the fair value of an instrument classified in a reporting entity's shareholders' equity is estimated from the perspective of a market participant that holds the identical item as an asset; and (5) expanding the qualitative and quantitative fair value disclosure requirements. The expanded disclosures include, for Level 3 items, a description of the valuation process and a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-4 also requires disclosures about the highest-and-best-use of a non-financial asset when this use differs from the asset's current use and the reasons for such a difference. In addition, this ASU amends ASC 820, Fair Value Measurements , to require disclosures to include any transfers between Level 1 and Level 2 of the fair value hierarchy. These amendments were effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The adoption of the amended guidance in ASU 2011-04 did not have a significant effect on our financial statements. See Note 3 for the disclosure required by ASU 2011-04. In August 2012, the FASB issued Accounting Standards Update 2012-03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114 ("SAB No. 114"), Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 ("ASU 2012-03"). The update amends various SEC paragraphs pursuant to the issuance of SAB No. 114 and is effective upon issuance. The adoption of the amended guidance in ASU 2012- 03 did not have a significant effect on our financial statements. In October 2012, the FASB issued Accounting Standards Update 2012-04, Technical Corrections and Improvements ("ASU 2012-04"). The amendments in this update cover a wide range of Topics in the ASC. These amendments include technical corrections and improvements to the ASC and conforming amendments related to fair value measurements. The adoption of the amended guidance in ASU 2012-04 did not have a significant effect on our financial statements. In June 2013, the FASB issued Accounting Standards Update 2013-08, Financial Services—Investment Companies (Topic 946)— Amendments to the Scope, Measurement, and Disclosure Requirements ("ASU 2013-08"). ASU 2013-08 clarifies the approach to be used for determining whether an entity is an investment company and provides new measurement and disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. The adoption of ASU 2013-08 is not expected to materially effect on our financial statements. 167 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments At June 30, 2013, we had investments in 124 long-term portfolio investments, which had an amortized cost of $4,255,778 and a fair value of $4,172,852 and at June 30, 2012, we had investments in 85 long-term portfolio investments, which had an amortized cost of $2,099,313 and a fair value of $2,094,221. As of June 30, 2013, we own controlling interests in AIRMALL USA, Inc. ("Airmall"), Ajax Rolled Ring & Machine, Inc., APH Property Holdings, LLC ("APH"), AWCNC, LLC, Borga, Inc. ("Borga"), CCPI Holdings, Inc., Credit Central Holdings of Delaware, LLC, Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) ("Energy Solutions"), First Tower Holdings of Delaware, LLC ("First Tower Delaware"), Manx Energy, Inc. ("Manx"), Nationwide Acceptance Holdings, LLC, NMMB Holdings, Inc., R-V Industries, Inc., The Healing Staff, Inc. ("THS"), Valley Electric Holdings I, Inc. and Wolf Energy Holdings, Inc. ("Wolf"). We also own an affiliated interest in BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork), Boxercraft Incorporated and Smart, LLC. The composition of our investments and money market funds as of June 30, 2013 and June 30, 2012 at cost and fair value was as follows: June 30, 2013 June 30, 2012 Cost Fair Value Cost Fair Value Revolving Line of Credit Senior Secured Debt Subordinated Secured Debt Subordinated Unsecured Debt CLO Debt CLO Residual Interest Equity Total Investments Money Market Funds Total Investments and Money Market Funds 1,145 $ 8,729 $ 9,238 $ 868 $ 2,262,327 2,207,091 1,138,991 1,080,053 488,113 1,062,386 1,024,901 73,195 88,827 27,717 28,589 218,009 658,086 206,266 156,629 4,255,778 4,172,852 2,099,313 2,094,221 118,369 544,363 72,617 27,258 214,559 100,380 88,470 27,667 660,619 145,071 118,369 143,262 143,262 $ 4,399,040 $ 4,316,114 $ 2,217,682 $ 2,212,590 168 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The fair values of our investments and money market funds as of June 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows: Quoted Prices in Active Markets for Identical Securities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ Investments at fair value Revolving Line of Credit Senior Secured Debt Subordinated Secured Debt Subordinated Unsecured Debt CLO Debt CLO Residual Interest Equity Total Investments Money Market Funds — $ — — — — — 112 112 — 143,262 — $ 8,729 8,729 $ — 2,207,091 2,207,091 — 1,024,901 1,024,901 88,827 88,827 — 28,589 28,589 — 658,086 658,086 — — 156,629 156,517 — 4,172,740 4,172,852 143,262 — Total Investments and Money Market Funds $ 112 $ 143,262 $ 4,172,740 $ 4,316,114 Investments at fair value Control investments Affiliate investments Non-control/non-affiliate investments Investments in money market funds Total assets reported at fair value Fair Value Hierarchy Level 1 Level 2 Level 3 Total $ — $ — 112 112 811,634 811,634 $ — $ — 42,443 42,443 — 3,318,663 3,318,775 — 4,172,740 4,172,852 — 143,262 143,262 — $ 112 $ 143,262 $ 4,172,740 $ 4,316,114 169 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The fair values of our investments and money market funds as of June 30, 2012 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows: Quoted Prices in Active Markets for Identical Securities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ Investments at fair value Revolving Line of Credit Senior Secured Debt Subordinated Secured Debt Subordinated Unsecured Debt CLO Debt CLO Residual Interest Equity Total Investments Money Market Funds — $ — — — — — 129 129 — 118,369 — $ 868 868 $ — 1,080,053 1,080,053 488,113 — 73,195 — 27,717 — 218,009 — — 206,266 — 2,094,092 2,094,221 118,369 488,113 73,195 27,717 218,009 206,137 — Total Investments and Money Market Funds $ 129 $ 118,369 $ 2,094,092 $ 2,212,590 Investments at fair value Control investments Affiliate investments Non-control/non-affiliate investments Investments in money market funds Total assets reported at fair value Fair Value Hierarchy Level 1 Level 2 Level 3 Total $ — $ — 129 129 564,489 564,489 $ — $ — 46,116 46,116 — 1,483,487 1,483,616 — 2,094,092 2,094,221 — 118,369 118,369 — $ 129 $ 118,369 $ 2,094,092 $ 2,212,590 170 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The aggregate values of Level 3 portfolio investments changed during the year ended June 30, 2013 as follows: Fair Value Measurements Using Unobservable Inputs (Level 3) Fair value as of June 30, 2012 Total realized loss, net Change in unrealized depreciation Net realized and unrealized loss Purchases of portfolio investments Payment-in-kind interest Accretion of purchase discount Repayments and sales of portfolio investments Transfers within Level 3 Transfers in (out) of Level 3 Fair value as of June 30, 2013 Control Investments $ 564,489 $ (9,688 ) (64,991 ) (74,679 ) 387,866 2,668 — Affiliate Investments Non-Control/ Non-Affiliate Investments Total 46,116 $ 1,483,487 $ 2,094,092 (26,360 ) (16,672 ) — (77,817 ) (4,192 ) (8,634 ) (8,634 ) (104,177 ) (20,864 ) 30,000 2,674,404 3,092,270 10,947 11,017 7,564 10,095 715 922 (68,710 ) — — $ 811,634 $ (26,676 ) — — (931,409 ) — — 42,443 $ 3,318,663 $ 4,172,740 (836,023 ) — — Fair Value Measurements Using Unobservable Inputs (Level 3) Revolver Senior Secured Debt Subordinated Secured Debt Unsecured Debt CLO Debt CLO Residual Interest Equity Total $ Fair value as of June 30, 2012 Total realized loss (gain), net Change in unrealized (depreciation) appreciation Net realized and unrealized (loss) gain Purchases of portfolio investments Payment-in- kind interest Amortization of discounts and premiums Repayments and sales of portfolio investments Transfers within Level 3 Transfers in (out) of Level 3 Fair value as 868 $ 1,080,053 $ 488,113 $ 73,195 $ 27,717 $ 218,009 $ 206,137 $ 2,094,092 — (21,545 ) (22,001 ) — — — 17,186 (26,360 ) (232 ) 3,197 19,265 (222 ) 464 (5,981 ) (94,308 ) (77,817 ) (232 ) (18,348 ) (2,736 ) (222 ) 464 (5,981 ) (77,122 ) (104,177 ) 21,143 1,626,172 812,025 133,700 — 440,050 59,180 3,092,270 — 4,401 3,687 2,859 — — — 10,947 — 1,747 2,346 508 408 6,008 — 11,017 (13,050 ) (499,900 ) (265,568 ) (121,213 ) — — (31,678 ) (931,409 ) — 12,966 (12,966 ) — — — — — — — — — — — — — of June 30, 2013 $ 8,729 $ 2,207,091 $ 1,024,901 $ 88,827 $ 28,589 $ 658,086 $ 156,517 $ 4,172,740 171 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The aggregate values of Level 3 portfolio investments changed during the year ended June 30, 2012 as follows: Fair Value Measurements Using Unobservable Inputs (Level 3) Fair value as of June 30, 2011 Total realized loss (gain), net Change in unrealized appreciation (depreciation) Net realized and unrealized gain (loss) Purchases of portfolio investments Payment-in-kind interest Accretion of purchase discount Repayments and sales of portfolio investments Transfers within Level 3 Transfers in (out) of Level 3 Fair value as of June 30, 2012 Control Investments $ 310,072 $ 42,267 Affiliate Investments Non-Control/ Non-Affiliate Investments Total 72,337 $ 1,080,421 $ 1,462,830 36,597 (10,115 ) 4,445 6,776 49,043 332,156 219 81 (13,617 ) (9,172 ) 2,300 467 4,874 (32,317 ) (25,476 ) 4,280 (35,591 ) 780,556 1,115,012 5,647 7,284 4,961 2,329 (118,740 ) (8,342 ) — $ 564,489 $ (24,690 ) — — (500,961 ) — — 46,116 $ 1,483,487 $ 2,094,092 (357,531 ) 8,342 — Fair Value Measurements Using Unobservable Inputs (Level 3) Revolver Senior Secured Debt Subordinated Secured Debt Subordinated Unsecured Debt CLO Residual Interest CLO Debt Equity Total $ Fair value as of June 30, 2011 Total realized loss (gain), net Change in unrealized (depreciation) appreciation Net realized and unrealized (loss) gain Purchases of portfolio investments Payment-in- kind interest Accretion of purchase discount Repayments and sales of portfolio investments Transfers within Level 3 Transfers in (out) of Level 3 Fair value as of June 30, 7,278 $ 789,981 $ 448,675 $ 55,336 $ — $ — $ 161,560 $ 1,462,830 — 2,686 (14,606 ) — — — 48,517 36,597 (412 ) (26,340 ) (13,737 ) (67 ) 459 3,450 4,330 (32,317 ) (412 ) (23,654 ) (28,343 ) (67 ) 459 3,450 52,847 4,280 1,500 582,566 227,733 17,000 27,072 214,559 44,582 1,115,012 — 304 4,485 858 — — — 5,647 80 3,449 3,501 68 186 — — 7,284 (7,578 ) (272,593 ) (167,938 ) — — — (52,852 ) (500,961 ) — — — — — — — — — — — — — — — — 2012 $ 868 $ 1,080,053 $ 488,113 $ 73,195 $ 27,717 $ 218,009 $ 206,137 $ 2,094,092 For the year ended June 30, 2013 and 2012, the net change in unrealized appreciation on the investments that use Level 3 inputs was $77,488 and $18,866 for assets still held as of June 30, 2013 and 2012, respectively. 172 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2013 were as follows: Unobservable Input Asset Category Fair Value Primary Valuation Technique Input Senior Subordinated Secured Subordinated Unsecured CLO Debt CLO Residual Interest Equity Escrow Total $ 2,215,820 Yield Analysis Market Yield 1,024,901 Yield Analysis Market Yield Market Yield Discount Rate Discount Rate 88,827 28,589 658,086 151,855 4,662 $ 4,172,740 Yield Analysis Discounted Cash Flow Discounted Cash Flow EV Market Multiple Analysis Discounted Cash Flow Range 5.7% - 20.8% 7.7% - 19.8% 6.1% - 14.6% 12.10% - 20.1% 11.3% - 19.8% Weighted Average 10.7 % 11.6 % 10.7 % 15.7 % 15.3 % EV Market Multiple Analysis 3.3x - 8.8x 6.2x Discount Rate 6.5% - 7.5% 7.0 % The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2012 were as follows: Unobservable Input Asset Category Fair Value Primary Valuation Technique Input Senior Subordinated Secured Subordinated Unsecured CLO Debt CLO Residual Interest Equity Escrow Total $ 1,080,921 Yield Analysis Market Yield 488,113 Yield Analysis Market Yield 73,195 27,717 218,009 188,451 17,686 $ 2,094,092 Yield Analysis Discounted Cash Flow Discounted Cash Flow EV Market Multiple Analysis Discounted Cash Flow Market Yield Discount Rate Discount Rate EV Market Multiple Analysis Discount Rate Range 6.7% - 30.0% 7.0% - 30.0% 8.7% - 13.5% 13.0% 8.0% - 14.0% 3.3x - 9.0x 6.5% - 8.5% Weighted Average 11.1 % 12.6 % 11.8 % 13.0 % 10.2 % 6.6x 7.7 % The significant unobservable inputs used in the market approach of fair value measurement of our investments are the market multiples of earnings before income tax, depreciation and amortization ("EBITDA") of the comparable guideline public companies. The independent valuation firm selects a population of public companies for each investment with similar operations and attributes of the subject company. Using these guideline public companies' data, a range of multiples of enterprise value to EBITDA is calculated. The independent valuation firm selects percentages from the range of multiples for purposes of determining the subject company's estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the subject company (or other meaningful measure). Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value estimate of the equity investment. The significant unobservable input used in the income approach of fair value measurement of our investments is the discount rate used to discount the estimated future cash flows expected to be 173 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value measurement. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable company investments, and call provisions. Changes in market yields, discount rates or EBITDA multiples, each in isolation, may change the fair value of certain of our investments. Generally, an increase in market yields or discount rates or decrease in EBITDA multiples may result in a decrease in the fair value of certain of our investments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned. During the year ended June 30, 2013, the valuation methodology for Airmall changed to incorporate the income method (discounted cash flow analysis) in addition to the market method (public comparable company analysis) used in previous quarters. Management adopted the income method to incorporate current financial projections in recognition of the time elapsed since the initial acquisition of the company in June 2010. As a result of this change and in recognition of recent improved company performance, we increased the fair value of our investment in Airmall to $54,648 as of June 30, 2013, a premium of $3,478 from its amortized cost, compared to the $3,788 unrealized depreciation recorded at June 30, 2012. During the year ended June 30, 2013, the valuation methodology for First Tower Delaware changed to incorporate the income method (discounted cash flow analysis) in addition to the market method (public comparable company analysis) used in previous quarters. Management adopted the income method in consideration of management forecasts not previously available. As a result of this change and in recognition of recent company performance and current market conditions we decreased the fair value of our investment in First Tower Delaware to $298,084 as of June 30, 2013, a discount of $13,869 to its amortized cost, compared to $287,953 as of June 30, 2012, equal to its amortized cost at that time. During the year ended June 30, 2013, the valuation methodology for ICON Health & Fitness, Inc. ("ICON") changed to incorporate an enterprise value waterfall analysis in place of a trading analysis in addition to the income method (discounted cash flow analysis) used in previous quarters. Management adopted the enterprise value waterfall analysis due to the impairment of the senior term loan, and removed the trading analysis due to lack of trading activity during the quarter. As a result of this change and in recognition of recent company performance and current market conditions, we decreased 174 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) the fair value of our investment in ICON to $33,929 as of June 30, 2013, a discount of $9,381 to its amortized cost, compared to the $261 unrealized depreciation recorded at June 30, 2012. In December 2011, we completed a reorganization of Gas Solutions Holdings, Inc. renaming the company Energy Solutions and transferring ownership of other operating companies owned by us that operate within the energy industry. As part of the reorganization, our equity interests in Change Clean Energy Holdings, Inc. and Change Clean Energy, Inc., Freedom Marine Holdings, LLC, a subsidiary of Energy Solutions ("Freedom Marine") and Yatesville Coal Holdings, Inc., a subsidiary of Energy Solutions ("Yatesville"), were transferred to Energy Solutions to consolidate all of our energy holdings under one management team strategically expanding Energy Solutions across energy sectors. On January 4, 2012, Energy Solutions sold its gas gathering and processing assets ("Gas Solutions") for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received approximately $158,687 in cash. Currently, a loan to Energy Solutions remains outstanding and is collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were required to be recognized as dividend income, in accordance with ASC 946, Financial Services—Investment Companies , as cash distributions are received from Energy Solutions, to the extent there are current year earnings and profits sufficient to support such recognition. During the year ended June 30, 2013, Energy Solutions repaid $28,500 of senior and subordinated secured debt. We received $19,543 of make-whole fees for early repayment of the outstanding loan receivables, which was recorded as interest income during the year ended June 30, 2013. During the year ended June 30, 2013, we received distributions of $53,820 from Energy Solutions which were recorded as dividend income. Energy Solutions continues to hold $23,979 of cash for future investment and repayment of the remaining debt. During the year ended June 30, 2013, we provided $125,892 and $26,648 of debt and equity financing, respectively, to APH for the acquisition of various industrial and multi-family residential real estate properties in Florida and Georgia. APH is a holding company that owns 100% of the common equity of American Property Holdings Corp. ("APHC"). APHC is a Maryland corporation and qualified REIT for federal income tax purposes. During the year ended June 30, 2013, we received $4,511 of structuring fees related to our investments in APH which were recorded as other income. As of June 30, 2013, APHC's real estate portfolio was comprised of seven investments. The following table shows the mortgages outstanding due to other parties for each of the seven properties: City Property Name No. 1 146 Forest Parkway Forest Park, GA 2 Abbington Pointe 3 Amberly Place 4 Lofton Place 5 Vista at Palma Sola Bradenton, FL 6 Arlington Park Marietta, GA 7 Arium Resort Pembroke Pines, GA Marietta, GA Tampa, FL Tampa, FL Date of Acquisition Purchase Price Mortgage Outstanding 10/24/2012 $ 12/28/2012 1/17/2013 4/30/2013 4/30/2013 5/8/2013 6/24/2013 7,400 $ 23,500 63,400 26,000 27,000 14,850 225,000 — 15,275 39,600 16,965 17,550 9,650 157,500 175 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) At June 30, 2013, eight loan investments were on non-accrual status: Borga, Freedom Marine, THS, formerly a subsidiary of Integrated Contract Services, Inc. ("ICS"), Manx, Stryker Energy, LLC ("Stryker"), Wind River Resources Corp. and Wind River II Corp. ("Wind River"), Wolf and Yatesville. At June 30, 2012, nine loan investments were on non-accrual status: Borga, Freedom Marine, H&M Oil and Gas, LLC ("H&M"), THS, formerly a subsidiary of ICS, Manx, Stryker, Wind River, Wolf and Yatesville. Principal balances of these loans amounted to $106,395 and $171,149 as of June 30, 2013 and June 30, 2012, respectively. The fair value of these loans amounted to $13,810 and $43,641 as of June 30, 2013 and June 30, 2012, respectively. The fair values of these investments represent approximately 0.5% and 2.9% of our net assets as of June 30, 2013 and June 30, 2012, respectively. For the years ended June 30, 2013, June 30, 2012 and June 30, 2011, the income foregone as a result of not accruing interest on non-accrual debt investments amounted to $25,965, $25,460 and $18,535, respectively. On December 3, 2010, we exercised our warrants in Miller Petroleum, Inc ("Miller") and received 2,013,814 shares of Miller common stock. On December 27, 2010, we sold 1,397,510 of these shares receiving $3.95 of net proceeds per share, realizing a gain of $5,415. On January 10, 2011, we sold the remaining 616,304 shares of Miller common stock receiving $4.23 of net proceeds per share, realizing an additional gain of $2,561. The total gain was $7,976 on the sale of the Miller common stock. On May 2, 2011, we sold our membership interests in Fischbein, LLC ("Fischbein") for $12,396 of gross proceeds, $1,479 of which is deferred revenue held in escrow, realizing a gain of $9,893, and received a repayment on the loan that was outstanding. We subsequently made a $3,334 senior secured second lien term loan and invested $875 in the common equity of Fischbein with the new ownership group. During the year ended June 30, 2012, Deb Shops, Inc. ("Deb Shops") filed for bankruptcy and a plan for reorganization was proposed. The plan was approved by the bankruptcy court and our debt position was eliminated with no payment to us. We determined that the impairment of Deb Shops was other-than-temporary on September 30, 2011 and recorded a realized loss of $14,607 for the full amount of the amortized cost. The asset was completely written off when the plan of reorganization was approved. On December 28, 2011, we made a secured debt investment of $37,218 to support the recapitalization of NRG Manufacturing, Inc. ("NRG"). After the financing, we received repayment of the $13,080 loan that was previously outstanding and a dividend of $6,711 as a result of our equity holdings. In addition, we sold 392 shares of NRG common stock held by us back to NRG for $13,266, realizing a gain of $12,131. On February 2, 2012, NRG was sold to an outside buyer for $123,258. In conjunction with the sale, the $37,218 loan that was outstanding was repaid. We also received a $26,936 make-whole fee for early repayment of the outstanding loan, which was recorded as interest income in the year ended June 30, 2012. Further, we received a $3,800 advisory fee for the transaction, which was recorded as other income in the quarter ending March 31, 2012. After expenses, including the make whole and advisory fees discussed above, $40,886 was available to be distributed to stockholders. While our 408 shares of NRG common stock represented 67.1% of the ownership, we received net proceeds of $25,991 as our contribution to the escrow amount was proportionately higher than the other shareholders. In 176 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) connection with the sales, we recognized a realized gain of $24,810 during the year ended June 30, 2012. In total, we received proceeds of $93,977 at closing. In addition, there was $11,125 being held in escrow of which 80% is due to us upon release of the escrowed amounts. During the year ended June 30, 2013, we received $3,251 upon release of escrowed amounts for which we recognized a gain in the same amount. As of June 30, 2013, the fair value of the remaining escrow amounts was $3,618. This will be recognized as a gain if and when received. On February 5, 2013, we received a distribution of $3,250 related to our investment in NRG, for which we realized a gain of the same amount. This was a partial release of the amount held in escrow. On June 15, 2012, we acquired 80.1% of the businesses of First Tower LLC ("First Tower") for $110,200 in cash and 14,518,207 unregistered shares of our common stock. Based on our share price of $11.06 at the time of issuance, we acquired our 80.1% interest in First Tower for approximately $270,771. As consideration for our investment, First Tower Holdings of Delaware, which is 100% owned by us, recorded a secured revolving credit facility to us of $244,760 and equity of $43,193. First Tower Delaware owns 80.1% of First Tower Holdings LLC, the holding company of First Tower. The assets of First Tower acquired include, among other things, the subsidiaries owned by First Tower, which hold finance receivables, leaseholds, and tangible property associated with First Tower's businesses. We received $8,075 in structuring fee income as part of the acquisition. In December 2012, we determined that the impairment of ICS was other-than-temporary and recorded a realized loss of $12,198 for the amount that the amortized cost exceeded the fair market value. Our remaining investment in THS, an affiliate of ICS, was valued at zero as of June 30, 2013 and continues to provide staffing solutions for health care facilities and security staffing. On March 28, 2013, we sold our investment in New Meatco Provisions, LLC for net proceeds of approximately $1,965, recognizing a realized loss of $10,814 on the sale. On April 30, 2013, we sold our investment in Fischbein for net proceeds of $3,168, recognizing a realized gain of $2,293 on the sale. In addition, there is $310 being held in escrow which will be recognized as additional gain if and when received. On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. Our cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors , and is equal to the fair value of assets at the time of transfer and we recorded a realized loss of $19,647 in connection with the foreclosure on the assets. On May 17 2013, Wolf sold certain of the assets that had been previously held by H&M that were located in Martin County to Hibernia for $66,000. Proceeds from the sale were primarily used to repay the loan and net profits interest receivable due to us and we recognized as a realized gain of $11,826 partially offsetting the previously recorded loss. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the net profits interest agreement which was recognized as other income during the fiscal year ended June 30, 2013. In June 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair market value 177 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 3. Portfolio Investments (Continued) The original cost basis of debt placements and equity securities acquired, including follow-on investments for existing portfolio companies, totaled $3,103,217, $1,120,659 and $953,337 during the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. Debt repayments and proceeds from sales of equity securities of $931,534, $500,952 and $285,862 were received during the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. During the year ended June 30, 2013, we recognized $1,481 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $1,481 recorded during the year ended June 30, 2013 is $1,111 of normal accretion and $370 of accelerated accretion resulting from the repayment of Hudson Products Holdings, Inc. During the year ended June 30, 2012, we recognized $6,613 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $6,613 is $3,083 of normal accretion and $3,530 of accelerated accretion resulting from the repayment of Mac & Massey Holdings, LLC, Nupla Corporation, ROM Acquisition Corp and Sport Helmets Holdings, LLC. During the year ended June 30, 2011, we recognized $22,084 of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in the $22,084 is $4,912 of normal accretion, $12,035 of accelerated accretion resulting from the repayment of Impact Products, LLC, Label Corp Holdings Inc. and Prince Mineral Company, Inc., and $4,968 of accelerated accretion resulting from the recapitalization of our debt investments in Arrowhead General Insurance Agency, Inc. ("Arrowhead"), The Copernicus Inc. ("Copernicus"), Fischbein and Northwestern Management Services, LLC ("Northwestern"). The restructured loans for Arrowhead, Copernicus, Fischbein and Northwestern were issued at market terms comparable other industry transactions. In accordance with ASC 320-20-35 the cost basis of the new loan was recorded at par value, which precipitated the acceleration of original purchase discount from the loan repayment which was recognized as interest income. As of June 30, 2013, $540 of purchase discount from the assets acquired from Patriot remains to be accreted as interest income, of which $240 is expected to be amortized during the three months ending September 30, 2013. As of June 30, 2013, $3,005,298 of our loans bear interest at floating rates, $2,976,709 of which have Libor floors ranging from 1.00% to 5.89%. Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of June 30, 2013 and June 30, 2012, we had $202,518 and $180,646 of undrawn revolver commitments to our portfolio companies, respectively. Note 4. Revolving Credit Agreements On June 11, 2010, we closed an extension and expansion of our existing credit facility with a syndicate of lenders through PCF (the "2010 Facility"). The 2010 Facility, which had $325,000 total commitments as of June 30, 2011, included an accordion feature which allowed the 2010 Facility to accept up to an aggregate total of $400,000 of commitments, a limit which was met on September 1, 2011. Interest on borrowings under the 2010 Facility was one-month Libor plus 325 basis points, subject to a minimum Libor floor of 100 basis points. Additionally, the lenders charged a fee on the unused 178 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 4. Revolving Credit Agreements (Continued) portion of the 2010 Facility equal to either 75 basis points if at least half of the credit facility was used or 100 basis points otherwise. On March 27, 2012, we renegotiated the 2010 Facility and closed on an expanded five-year $650,000 revolving credit facility (the "2012 Facility"). The lenders have extended commitments of $552,500 under the 2012 Facility as of June 30, 2013. The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders. The 2012 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2012 Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the 2012 Facility. The 2012 Facility also requires the maintenance of a minimum liquidity requirement. At June 30, 2013, we were in compliance with the applicable covenants. Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of June 30, 2013 and June 30, 2012, we had $473,508 and $418,980, respectively, available to us for borrowing under our 2012 Facility, of which the amount outstanding was $124,000 and $96,000, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $552,500. At June 30, 2013, the investments used as collateral for the 2012 Facility had an aggregate market value of $833,310, which represents 31.37% of our net assets. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at market value as of June 30, 2013. The release of any assets from PCF requires the approval of the facility agent. In connection with the origination and amendments of the 2012 Facility, we incurred $11,150 of fees, including $1,319 of fees carried over from the previous facility, which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments , of which $6,722 remains to be amortized. During the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we recorded $9,082, $14,883 and $8,507 of interest costs, unused fees and amortization of financing costs on our credit facility as interest expense, respectively. 179 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 5. Senior Convertible Notes On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 ("2015 Notes") for net proceeds following underwriting expenses of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 88.0902 and 88.1429 shares of common stock, respectively, per $1 principal amount of 2015 Notes, which is equivalent to a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (December 21, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2015 Notes is increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 cents per share, subject to adjustment. On February 18, 2011, we issued $172,500 in aggregate principal amount of our 5.50% senior convertible notes due 2016 ("2016 Notes") for net proceeds following underwriting expenses of approximately $167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 of our 2016 Notes at a price of 97.5, including commissions. The transactions resulted in our recognizing $10 of loss in the year ended June 30, 2012. Interest on the remaining $167,500 of 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year, commencing August 15, 2011. The 2016 Notes mature on August 15, 2016 unless converted earlier. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 78.3699 and 78.5395 shares, respectively, of common stock per $1 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.73 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (February 14, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2016 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101150 per share. On April 16, 2012, we issued $130,000 in aggregate principal amount of our 5.375% senior convertible notes due 2017 ("2017 Notes") for net proceeds following underwriting expenses of approximately $126,035. Interest on the 2017 Notes is paid semi-annually in arrears on October 15 and April 15, at a rate of 5.375% per year, commencing October 15, 2012. The 2017 Notes mature on October 15, 2017 unless converted earlier. The 2017 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 85.8442 and 86.1162 shares of common stock, respectively, per $1 principal amount of 2017 Notes, which is equivalent to a conversion price of approximately $11.61 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at June 30, 2013 was last calculated on the anniversary of the issuance (April 16, 2012) and will next be adjusted on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2017 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.10150 per share. 180 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 5. Senior Convertible Notes (Continued) On August 14, 2012, we issued $200,000 in aggregate principal amount of our 5.75% senior convertible notes due 2018 ("2018 Notes") for net proceeds following underwriting expenses of approximately $193,600. Interest on the 2018 Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 5.75% per year, commencing March 15, 2013. The 2018 Notes mature on March 15, 2018 unless converted earlier. The 2018 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 82.3451 shares of common stock per $1 principal amount of 2018 Notes, which is equivalent to a conversion price of approximately $12.07 per share of common stock, subject to adjustment in certain circumstances. The conversion price has not been adjusted since the issuance (August 14, 2012) and will next be adjusted on the first anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2018 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101600 per share. On December 21, 2012, we issued $200,000 in aggregate principal amount of 5.875% senior convertible notes due 2019 (the "2019 Notes") for net proceeds following underwriting and other expenses of approximately $193,600. Interest on the 2019 Notes is paid semi-annually in arrears on January 15 and July 15, at a rate of 5.875% per year, commencing July 15, 2013. The 2019 Notes mature on January 15, 2019 unless converted earlier. The 2019 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2013 of 79.7766 shares of common stock per $1 principal amount of 2019 Notes, which is equivalent to a conversion price of approximately $12.54 per share of common stock, subject to adjustment in certain circumstances. The conversion price has not been adjusted since the issuance (December 21, 2012) and will next be adjusted on the first anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2019 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.110025 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 96.8992 per $1 principal amount of the 2015 Notes (the "conversion rate cap"), except that, to the extent we receive written guidance or a no-action letter from the staff of the Securities and Exchange Commission (the "Guidance") permitting us to adjust the conversion rate in certain instances without regard to the conversion rate cap and to make the 2015 Notes convertible into certain reference property in accordance with certain reclassifications, business combinations, asset sales and corporate events by us without regard to the conversion rate cap, we will make such adjustments without regard to the conversion rate cap and will also, to the extent that we make any such adjustment without regard to the conversion rate cap pursuant to the Guidance, adjust the conversion rate cap accordingly. We will use our commercially reasonable efforts to obtain such Guidance as promptly as practicable. Prior to obtaining the Guidance, we will not engage in certain transactions that would result in an adjustment to the conversion rate increasing the conversion rate beyond what it would have been in the absence of such transaction unless we have engaged in a reverse stock split or share combination transaction such that in our reasonable best estimation, the conversion rate following the adjustment for such transaction will not be any closer to the conversion rate cap than it would have been in the absence of such transaction. Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect 181 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 5. Senior Convertible Notes (Continued) to the Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the 2015 Notes and 2016 Notes (collectively, "Senior Convertible Notes"). No holder of Senior Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules. Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Notes upon a fundamental change at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Senior Convertible Notes through and including the maturity date. In connection with the issuance of the Senior Convertible Notes, we incurred $27,032 of fees which are being amortized over the terms of the notes in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $20,254 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities as of June 30, 2013. During the years ended June 30, 2013, June 30, 2012 and June 30, 2011, we recorded $45,878, $22,197 and $9,090 of interest costs and amortization of financing costs on the Senior Convertible Notes as interest expense. Note 6. Senior Unsecured Notes On May 1, 2012, we issued $100,000 in aggregate principal amount of 6.95% senior unsecured notes due 2022 for proceeds net of offering expenses of $97,000 (the "2022 Notes"). Interest on the 2022 Notes is paid quarterly in arrears on August 15, November 15, February 15 and May 15, at a rate of 6.95% per year, commencing on August 15, 2012. The 2022 Notes mature on November 15, 2022. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding. On March 15, 2013, we issued $250,000 in aggregate principal amount of 5.875% senior unsecured notes due 2023 (the "2023 Notes") for net proceeds following underwriting and other expenses of approximately $245,885. Interest on the 2023 Notes is paid semi-annually. The 2023 Notes mature on March 15, 2023. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding. In connection with the issuance of the 2022 Notes and 2023 Notes (collectively the "Senior Unsecured Notes"), we incurred $7,480 of fees which are being amortized over the term of the notes in 182 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 6. Senior Unsecured Notes (Continued) accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $7,114 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities. During the years ended June 30, 2013 and June 30, 2012, we recorded $11,672 and $1,178 of interest costs and amortization of financing costs on the Senior Unsecured Notes as interest expense, respectively. Note 7. Prospect Capital InterNotes® On February 16, 2012, we entered into a Selling Agent Agreement (the "Selling Agent Agreement") with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes® (the "InterNotes® Offering"), which was subsequently increased to $1,000,000. Additional agents appointed by us from time to time in connection with the InterNotes Offering may become parties to the Selling Agent Agreement. These notes are direct unsecured senior obligations and will rank equally with all of our unsecured senior indebtedness outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance. During the year ended June 30, 2013, we issued $343,139 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $334,243. These notes were issued with stated interest rates ranging from 3.28% to 6.63% with a weighted average rate of 5.59%. These notes mature between July 15, 2019 and June 15, 2043. 183 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 7. Prospect Capital InterNotes® (Continued) The bonds outstanding as of June 30, 2013 are: Principal Amount Date of Issuance March 1, 2012 - March 8, 2012 $ April 5, 2012 - April 26, 2012 June 14, 2012 June 28, 2012 July 6, 2012 - July 26, 2012 August 2, 2012 - August 23, 2012 September 7, 2012 - September 27, 2012 October 4, 2012 November 23, 2012 - November 29, 2012 November 29, 2012 November 23, 2012 - November 29, 2012 December 6, 2012 - December 28, 2012 December 6, 2012 December 13, 2012 - December 28, 2012 December 6, 2012 - December 28, 2012 January 4, 2013 - January 31, 2013 January 4, 2013 - January 31, 2013 January 4, 2013 - January 31, 2013 February 4, 2013 - February 28, 2013 February 4, 2013 - February 28, 2013 February 4, 2013 - February 28, 2013 March 4, 2013 - March 28, 2013 March 4, 2013 - March 28, 2013 March 4, 2013 - March 28, 2013 March 14, 2013 - March 28, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 April 4, 2013 - April 25, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 May 2, 2013 - May 31, 2013 June 6, 2013 - June 27, 2013 Interest Rate Range Weighted Average Interest Rate 5,465 8,516 2,657 4,000 20,928 6.90% - 7.00% 6.50% - 6.85% 6.95% 6.55% 6.20% - 6.45% 6.97 % 6.72 % 6.95 % 6.55 % 6.31 % Maturity Date March 15, 2022 April 15, 2022 June 15, 2022 June 15, 2019 July 15, 2019 17,545 6.05% - 6.15% 6.09 % August 15, 2019 29,406 7,172 5.85% - 6.00% 5.70% 5.92 % September 15, 2019 5.70 % October 19, 2019 13,754 1,979 5.00% - 5.13% 5.75% 5.09 % November 15, 2019 5.75 % November 15, 2032 16,437 6.50% - 6.63% 6.58 % November 15, 2042 9,339 1,127 4.50% - 4.86% 5.63% 4.73 % December 15, 2019 5.63 % December 15, 2032 3,702 5.00% - 5.13% 5.11 % December 15, 2030 22,966 6.00% - 6.38% 6.21 % December 15, 2042 4,427 4.00% - 4.375% 4.15 % January 15, 2020 2,388 4.50% - 4.875% 4.74 % January 15, 2031 9,338 5.50% - 5.875% 5.63 % January 15, 2043 2,619 664 4,623 3,832 4.00% 4.00 % February 15, 2031 4.50% 4.50 % February 15, 2031 5.50% 5.50 % February 15, 2043 4.00% 4.00 % March 15, 2020 984 4.125% - 4.50% 4.24 % March 15, 2031 4,308 1,225 29,528 264 5,164 12,280 42,482 10,000 7,548 33,641 9,905 5.50% 5.50 % March 15, 2043 L+3.00% 4.50% - 5.00% L+3.50% 4.63% - 5.50% 6.00% 5.00% 5.00% 5.75% 6.25% 5.00% - 5.25% 3.27 % 4.96 % 3.78 % 5.34 % 6.00 % 5.00 % 5.00 % 5.75 % 6.25 % 5.04 % March 15, 2023 April 15, 2020 April 15, 2023 April 15, 2031 April 15, 2043 May 15, 2020 May 15, 2028 May 15, 2031 May 15, 2043 June 15, 2020 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 June 6, 2013 - June 27, 2013 $ 5,000 1,707 6,857 363,777 5.00% 5.75% - 6.00% 6.25% - 6.50% 5.00 % 5.85 % 6.31 % June 15, 2028 June 15, 2031 June 15, 2043 184 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 7. Prospect Capital InterNotes® (Continued) In connection with the issuance of the Prospect Capital InterNotes®, we incurred $10,598 of fees which are being amortized over the term of the notes in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $10,248 remains to be amortized and is included within deferred financing costs on the consolidated statements of assets and liabilities. During the years ended June 30, 2013 and June 30, 2012, we recorded $9,707 and $276 of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense, respectively. Note 8. Financial Instruments Disclosed, But Not Carried, At Fair Value The fair values of our financial liabilities disclosed, but not carried, at fair value as of June 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows: Fair Value Hierarchy Credit facility payable(1) Senior convertible notes(2) Senior unsecured notes(2) Prospect Capital InterNotes®(3) Total $ Level 1 Level 3 — $ — 101,800 — Total 124,000 886,210 343,813 336,055 $ 101,800 $ 1,588,278 $ — $ 1,690,078 Level 2 124,000 $ — $ 886,210 — 242,013 — 336,055 — (1) The carrying value of our credit facility payable approximates the fair value. (2) We use available market quotes to estimate the fair value of the Senior Convertible Notes and Senior Unsecured Notes. (3) The fair value of our Prospect Capital InterNotes® is estimated by discounting remaining payments using estimated current market rates. The fair values of our financial liabilities disclosed, but not carried, at fair value as of June 30, 2012 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows: Credit facility payable(1) Senior convertible notes(2) Senior unsecured notes(2) Prospect Capital InterNotes ®(3) Total Fair Value Hierarchy Level 2 Total Level 1 $ Level 3 — $ 96,000 $ — $ 96,000 — 456,671 — 456,671 99,560 — — 20,280 20,280 — $ 99,560 $ 572,951 $ — $ 672,511 99,560 — (1) The carrying value of our credit facility payable approximates the fair value. (2) We use available market quotes to estimate the fair value of the Senior Convertible Notes and Senior Unsecured Notes. (3) The fair value of our Prospect Capital InterNotes® is estimated by discounting remaining payments using estimated current market rates. 185 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 9. Equity Offerings, Offering Expenses, and Distributions We issued 106,752,517 and 30,970,696 shares of our common stock during the years ended June 30, 2013 and June 30, 2012, respectively. The proceeds raised, the related underwriting fees, the offering expenses and the prices at which these shares were issued are as follows: Issuances of Common Stock During the year ended June 30, 2013: July 2, 2012 - July 12, 2012(1) 2,247,275 $ 26,040 $ July 16, 2012 21,000,000 $ 234,150 $ July 27, 2012 3,150,000 $ 35,123 $ September 13, 2012 - October 9, Number of Shares Issued Gross Proceeds Raised Underwriting Fees Offering Expenses Average Offering Price 8,010,357 $ 94,610 $ 35,000,000 $ 388,500 $ 5,021 $ 9,581 $ 4,141,547 $ 44,650 $ 467,928 $ 897,906 $ 260 $ 2,100 $ 315 $ 946 $ 4,550 $ — $ — $ — $ — $ 11.59 300 $ 11.15 — $ 11.15 638 $ 11.81 814 $ 11.10 — $ 10.73 — $ 10.67 — $ 10.78 10,248,051 $ 115,315 $ 1,153 $ — $ 11.25 17,230,253 $ 191,897 $ 1,788 $ — $ 11.14 4,359,200 $ 47,532 $ 399 $ 245 $ 10.90 2,952,489 $ 33,130 $ 14,518,207 $ 160,571 $ 12,000,000 $ 131,400 $ 1,500,000 $ 15,225 $ 331 $ — $ 1,560 $ 165 $ 184 $ 11.220 — $ 11.060 360 $ 10.950 165 $ 10.150 2012(2) November 7, 2012 December 13, 2012(3) December 28, 2012(3) December 31, 2012(3) January 7, 2013 - February 5, 2013(4) February 14, 2013 - May 3, 2013(5) May 14, 2013 - May 31, 2013 (6) During the year ended June 30, 2012: June 12, 2012 - June 29, 2012 (1) June 15, 2012(7) February 28, 2012 July 18, 2011 (1) On June 1, 2012, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 9,500,000 shares of our common stock. Through this program we issued 5,199,764 shares of our common stock at an average price of $11.38 per share, raising $59,170 of gross proceeds, from June 12, 2012 through July 12, 2012. (2) On September 10, 2012, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 9,750,000 shares of our common stock. Through this program we issued 8,010,357 shares of our common stock at an average price of $11.81 per share, raising $94,610 of gross proceeds, from September 13, 2012 through October 9, 2012. (3) On December 13, 2012, December 28, 2012 and December 31, 2012, we issued 467,928, 897,906 and 4,141,547 shares of our common stock, respectively, in conjunction with investments in controlled portfolio companies. (4) On December 21, 2012, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 17,500,000 shares of our common stock. Through this program we issued 10,248,051 shares of our common stock at an average price of $11.25 per share, raising $115,315 of gross proceeds. (5) On February 11, 2013, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 45,000,000 shares of our common stock. Through this 186 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 9. Equity Offerings, Offering Expenses, and Distributions (Continued) program we issued 17,230,253 shares of our common stock at an average price of $11.14 per share, raising $191,897 of gross proceeds. (5) On May 8, 2013, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 45,000,000 shares of our common stock. Through this program we issued 4,539,200 shares of our common stock at an average price of $10.90 per share, raising $47,532 of gross proceeds. (7) On June 15, 2012, we completed the acquisition of the businesses of First Tower. We acquired 80.1% of First Tower's businesses for $110,200 in cash and 14,518,207 unregistered shares of our common stock. Our shareholders' equity accounts at June 30, 2013 and June 30, 2012 reflect cumulative shares issued as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters and our dividend reinvestment plan. When our common stock is issued, the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us. On August 24, 2011, our Board of Directors approved a share repurchase plan under which we may repurchase up to $100,000 of our common stock at prices below our net asset value. We have not made any purchases of our common stock during the period from August 24, 2011 to June 30, 2013 pursuant to this plan. Prior to any repurchase we are required to notify shareholders of our intention to purchase our common stock. This notice lasts for six months after notice is given. The last notice was more than six months ago, therefore notice would be necessary before such repurchase could be effected. On October 29, 2012, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, as of June 30, 2013 we can issue up to $1,743,217 of additional debt and equity securities in the public market. On May 6, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • • $0.110125 per share for May 2013 to holders of record on May 31, 2013 with a payment date of June 20, 2013; $0.110150 per share for June 2013 to holders of record on June 28, 2013 with a payment date of July 18, 2013; $0.110175 per share for July 2013 to holders of record on July 31, 2013 with a payment date of August 22, 2013; and $0.110200 per share for August 2013 to holders of record on August 30, 2013 with a payment date of September 19, 2013. 187 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 9. Equity Offerings, Offering Expenses, and Distributions (Continued) On June 17, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • • $0.110225 per share for September 2013 to holders of record on September 30, 2013 with a payment date of October 24, 2013; $0.110250 per share for October 2013 to holders of record on October 31, 2013 with a payment date of November 21, 2013; $0.110275 per share for November 2013 to holders of record on November 29, 2013 with a payment date of December 19, 2013; and $0.110300 per share for December 2013 to holders of record on December 31, 2013 with a payment date of January 23, 2014. During the years ended June 30, 2013 and June 30, 2012, we issued 1,450,578 and 1,056,484 shares, respectively, of our common stock in connection with the dividend reinvestment plan. At June 30 2013, we have reserved 70,246,258 shares of our common stock for issuance upon conversion of the Senior Convertible Notes (See Note 5). Note 10. Other Investment Income Other investment income consists of structuring fees, overriding royalty interests, revenue receipts related to net profit interests, deal deposits, administrative agent fee, and other miscellaneous and sundry cash receipts. Income from such sources was $58,176, $36,493 and $19,930 for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. Income Source Structuring, advisory and amendment fees (Note 3) Overriding royalty interests Administrative agent fee Other Investment Income $ Note 11. Net Increase in Net Assets per Common Share June 30, 2013 $ For The Year Ended June 30, 2012 June 30, 2011 53,708 $ 4,122 346 58,176 $ 35,976 $ 224 293 36,493 $ 19,589 154 187 19,930 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, 2013, 2012 and 2011, respectively. June 30, 2013 For The Year Ended June 30, 2012 June 30, 2011 Net increase in net assets resulting from operations $ Weighted average common shares outstanding Net increase in net assets resulting from operations per common share 118,238 207,069,971 114,394,554 85,978,757 190,904 $ 220,856 $ $ 1.07 $ 1.67 $ 1.38 188 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 12. 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, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make. Prospect Capital Management's services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services the Investment Adviser receives a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our gross assets (including amounts borrowed). For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. The total base management fees earned by and paid to Prospect Capital Management for the years ended June 30, 2013, June 30, 2012 and June 30, 2011 were $69,800, $35,836 and $22,496, respectively. The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre- incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment in kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a "hurdle rate" of 1.75% per quarter (7.00% annualized). The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base management fee. We pay the Investment 189 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 12. Related Party Agreements and Transactions (Continued) Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows: • • • no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate; 100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate); and 20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate). These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter. The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in its portfolio. For the purpose of this calculation, an "investment" is defined as the total of all rights and claims which maybe asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. Income incentive fees totaling $81,231, $46,671 and $23,555 were earned for the years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. No capital gains incentive fees were earned for years ended June 30, 2013, June 30, 2012 and June 30, 2011, respectively. 190 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 12. Related Party Agreements and Transactions (Continued) 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 financial officer and chief compliance officer and his staff. For the years ended June 30, 2013, 2012 and 2011, the reimbursement was approximately $8,737, $6,848 and $4,979, 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 the Investment Adviser. The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Prospect Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of Prospect Administration's services under the Administration Agreement or otherwise as administrator for us. Managerial Assistance As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. As of June 30, 2013 and June 30, 2012, $1,291 and $165 of managerial assistance fees remain on the consolidated statements of assets and liabilities as a payable to the Administrator for reimbursement of its cost in providing such assistance. Note 13. Litigation From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise 191 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 13. Litigation (Continued) will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any such material litigation as of the date of this report. Note 14. Financial Highlights Per Share Data(1): Net asset value at beginning of period $ Net investment income Realized (loss) gain Net unrealized (depreciation) appreciation Net increase (decrease) in net assets as a result of public offering Net increase in net assets as a result of shares issued for Patriot acquisition Dividends to shareholders Year Ended June 30, 2013 Year Ended June 30, 2012 Year Ended June 30, 2011 Year Ended June 30, 2010 Year Ended June 30, 2009 10.83 $ 1.57 (0.13 ) 10.36 $ 1.63 0.32 10.30 $ 1.10 0.19 12.40 $ 1.13 (0.87 ) 14.55 1.87 (1.24 ) (0.37 ) (0.28 ) 0.09 0.07 0.48 0.13 0.04 (0.08 ) (0.85 ) (2.11 ) — — — 0.12 — (1.31 ) (1.24 ) (1.24 ) (1.70 ) (1.15 ) $ 10.72 $ 10.83 $ 10.36 $ 10.30 $ 12.40 $ 10.80 $ 11.39 $ 10.11 $ 9.65 $ 9.20 6.24 % 27.21 % 17.22 % 17.66 % (18.60 )% 10.91 % 18.03 % 12.54 % (6.82 )% (0.61 )% 247,836,965 139,633,870 107,606,690 69,086,862 42,943,084 207,069,971 114,394,554 85,978,757 59,429,222 31,559,905 Net asset value at end of period Per share market value at end of period Total return based on market value(2) Total return based on net asset value(2) Shares outstanding at end of period Average weighted shares outstanding for period Ratio / Supplemental Data: Net assets at end of period (in thousands) $ 2,656,494 $ 1,511,974 $ 1,114,357 $ 27.63 % 29.24 % 29.06 % Portfolio turnover rate Annualized ratio of 711,424 $ 21.61 % 532,596 4.99 % operating expenses to average net assets Annualized ratio of net investment income to average net assets 11.50 % 10.73 % 8.47 % 7.54 % 9.03 % 14.86 % 14.92 % 10.60 % 10.69 % 13.14 % (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. 192 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 15. Selected Quarterly Financial Data (Unaudited) Investment Income Net Investment Income Total Per Share (1) Total Per Share (1) Net Realized and Unrealized Gains (Losses) Net Increase (Decrease) in Net Assets from Operations Total Per Share(1) Total Per Share (1) 35,212 0.47 20,995 0.28 4,585 0.06 25,580 0.34 33,300 0.40 19,080 0.23 12,861 0.16 31,940 0.38 44,573 June 30, 2011 56,391 0.51 23,956 0.58 30,190 0.27 9,803 0.31 (3,232 ) 0.11 33,759 (0.03 ) 26,959 0.38 0.28 September 30, 2011 55,342 0.51 27,877 0.26 12,023 0.11 39,900 0.37 67,263 0.61 36,508 0.33 27,984 0.26 64,492 0.59 95,623 June 30, 2012 102,682 0.84 58,072 0.82 64,227 0.51 (7,863 ) 0.52 (27,924 ) (0.07 ) 50,209 (0.22 ) 36,303 0.44 0.29 September 30, 2012 123,636 0.76 74,027 0.46 (26,778 ) (0.17 ) 47,249 0.29 166,035 0.85 99,216 0.51 (52,727 ) (0.27 ) 46,489 0.24 120,195 June 30, 2013 166,470 0.53 59,585 0.68 92,096 0.26 (15,156 ) 0.38 (9,407 ) (0.07 ) 44,429 (0.04 ) 82,689 0.20 0.34 Quarter Ended September 30, 2010 December 31, 2010 March 31, 2011 December 31, 2011 March 31, 2012 December 31, 2012 March 31, 2013 (1) Per share amounts are calculated using weighted average shares during period. (2) As adjusted for increase in earnings from Patriot. Note 16. Subsequent Events During the period from July 1, 2013 to August 21, 2013, we issued $58,607 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $57,344. In addition, we sold $7,682 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $7,513 with expected closing on August 22, 2013. During the period from July 1, 2013 to August 21, 2013, we sold 9,818,907 shares of our common stock at an average price of $10.97 per share, and raised $107,725 of gross proceeds, under the ATM Program. Net proceeds were $106,822 after commissions to the broker-dealer on shares sold and offering costs. On July 1, 2013, Pre-Paid Legal Services, Inc. repaid the $5,000 loan receivable to us. On July 9, 2013, Southern Management Corporation repaid the $17,565 loan receivable to us. On July 12, 2013, we provided $11,000 of secured second lien financing to Water PIK, Inc., a leader in developing innovative personal and oral healthcare products. On July 23, 2013, we made a $2,000 investment in Carolina Beverage Group, LLC ("Carolina Beverage"), a contract beverage manufacturer.  On July 24, 2013, we sold our $2,000 investment in Carolina Beverage and realized a gain of $45 on this investment. 193 Table of Contents PROSPECT CAPITAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share and per share data) Note 16. Subsequent Events (Continued) On July 26, 2013, we made a $2,000 follow-on senior secured debt investment in Spartan Energy Services, LLC, a leading provider of thru tubing and flow control services to oil and gas companies. On July 26, 2013, we made a $20,000 follow-on secured second lien investment in Royal Adhesives & Sealants, LLC ("Royal"), a leading producer of proprietary, high-performance adhesives and sealants. On July 31, 2013, we made a $5,100 follow-on investment in Coverall North America, Inc., a leading franchiser of commercial cleaning businesses. On July 31, 2013, Royal repaid the $28,364 subordinated unsecured loan receivable to us. On July 31, 2013, Cargo Airport Services USA, LLC repaid the $43,399 loan receivable to us. On August 1, 2013, Medical Security Card Company, LLC repaid the $13,214 loan receivable to us. On August 2, 2013, we made an investment of $44,100 to purchase 90% of the subordinated notes in CIFC Funding 2013-III, Ltd. On August 2, 2013, we funded a recapitalization of CP Energy Services, Inc. ("CP Energy") with $81,273 of debt and $12,741 of equity financing. Through the recapitalization, we acquired a controlling interest in CP Energy for $73,009 in cash and 1,918,342 unregistered shares of our common stock. After the financing, we received repayment of the $18,991 loan previously outstanding. On August 12, 2013, we provided $80,000 in senior secured loans and a senior secured revolving loan facility, of which $70,000 was funded at closing, for the recapitalization of Matrixx Initiatives, Inc., owner of Zicam, a leading developer and marketer of OTC cold remedy products under the Zicam brand. On August 14, 2013, we announced the revised conversion rate on the 2018 Notes of 82.8631 shares of common stock per $1 principal amount of 2018 Notes, which is equivalent to a conversion price of approximately $12.07. On August 15, 2013, we announced an increase of $15,000 to our commitments to our credit facility. The commitments to the credit facility now stand at $567,500. On August 15, 2013, we made a $14,000 follow-on investment in Totes Isotoner Corporation, a leading designer, distributer and retailer of high quality, branded functional accessories. On August 21, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates: • • • $0.110325 per share for January 2014 to holders of record on January 31, 2014 with a payment date of February 20, 2014; $0.110350 per share for February 2014 to holders of record on February 28, 2014 with a payment date of March 20, 2014; and $0.110375 per share for March 2014 to holders of record on March 31, 2014 with a payment date of April 17, 2014. 194 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. As of June 30, 2013, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures. Report of Management on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 30, 2013. 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. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to assets of the Company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Management performed an assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2013 based upon criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, management determined that the Company's internal control over financial reporting was effective as of June 30, 2012 based on the criteria on Internal Control—Integrated Framework issued by COSO. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. Our management's assessment of the effectiveness of our internal control over financial reporting as of June 30, 2013 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which appears herein. 195 Table of Contents Board of Directors and Shareholders Prospect Capital Corporation New York, New York Report of Independent Registered Public Accounting Firm We have audited Prospect Capital Corporation's internal control over financial reporting as of June 30, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Prospect Capital Corporation'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 "Item 9A, Report of Management on Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the company'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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's 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 company's 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 company's 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, Prospect Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of assets and liabilities of Prospect Capital Corporation as of June 30, 2013 and 2012, 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, 2013, and the financial highlights for each of the five years in the period ended June 30, 2013, and our report dated August 21, 2013 expressed an unqualified opinion thereon. /s/ BDO USA, LLP New York, New York August 21, 2013 196 Table of Contents Item 9B. Other Information None. We will file a definitive Proxy Statement for our 2013 Annual Meeting of Stockholders, or the 2013 Proxy Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2013 Proxy Statement that specifically address the items set forth herein are incorporated by reference. PART III Item 10. Directors, Executive Officers and Corporate Governance. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of the Company's common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). To the Company's knowledge, during the fiscal year ended June 30, 2013, the Company's officers, directors and greater than 10% stockholders had complied with all Section 16(a) filing requirements. The information required by Item 10 is hereby incorporated by reference from our 2013 Proxy Statement. Code of Ethics We and Prospect Capital Management 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 us, so long as such investments are made in accordance with the code's requirements. For information on how to obtain a copy of each code of ethics, see "Available Information" in Part I, Item 1 of this report. Item 11. Executive Compensation. The information required by Item 11 is hereby incorporated by reference from our 2013 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 12 is hereby incorporated by reference from our 2013 Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by Item 13 is hereby incorporated by reference from our 2013 Proxy Statement. Item 14. Principal Accounting Fees and Services. The information required by Item 14 is hereby incorporated by reference from our 2013 Proxy Statement. 197 Table of Contents Item 15 Exhibits, Financial Statement Schedules PART IV The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (according to the number assigned to them in Item 601 of Regulation S-K): 3.1 Articles of Amendment and Restatement(1) 3.2 Amended and Restated Bylaws(2) 4.1 Form of Share Certificate(3) 10.1 Investment Advisory Agreement between the Registrant and Prospect Capital Management LLC(3) 10.2 Administration Agreement between the Registrant and Prospect Administration LLC(3) 10.3 Dividend Reinvestment Plan(3) 10.4 License Agreement between the Registrant and Prospect Capital Management LLC(3) 10.5 Transfer Agency and Service Agreement(4) 10.6 Master Purchase and Sale and Contribution Agreement, dated as of March 19, 2012, by and among the Registrant, First Tower Corp., certain other entities related to the Registrant and certain shareholders of First Tower Corp.(5) 10.7 Fourth Amended and Restated Loan and Servicing Agreement, dated March 27, 2012, among Prospect Capital Funding LLC, the Registrant, the lenders from time to time party thereto, the managing agents from time to time party thereto, Key Equipment Finance Inc. and Royal Bank of Canada as Syndication Agents, U.S. Bank National Association as Calculation Agent, Paying Agent and Documentation Agent, Key Equipment Finance Inc. as Facility Agent, and Key Equipment Finance Inc. as Structuring Agent, Sole Lead Arranger and Sole Bookrunner(6) 10.8 Indenture dated as of December 21, 2010 relating to the 6.25% Senior Convertible Notes, by and between the Registrant and American Stock Transfer & Trust Company, as Trustee(7) 10.9 Form of 6.25% Senior Convertible Note due 2015(8) 10.10 10.11 10.12 10.13 10.14 10.15 10.16 Indenture dated as of February 18, 2011 relating to the 5.50% Senior Convertible Notes, by and between the Registrant and American Stock Transfer & Trust Company, as Trustee(9) Form of 5.50% Senior Convertible Note due 2016(10) Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee(11) First Supplemental Indenture dated as of March 1, 2012, to the Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee(11) Form of 7.00% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.13)(11) Second Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee(12) Form of 6.900% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.15) (12) 198 Table of Contents 10.17 Joinder Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Original Trustee, and U.S. Bank National Association, as Series Trustee (12) 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee(13) Third Supplemental Indenture dated as of April 5, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(14) Form of 6.850% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.19) (14) Fourth Supplemental Indenture dated as of April 12, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(15) Form of 6.700% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.21) (15) Indenture dated as of April 16, 2012 relating to the 5.375% Senior Convertible Notes, by and between the Registrant and American Stock Transfer & Trust Company, as Trustee(16) Form of 5.375% Senior Convertible Note due 2017(17) Fifth Supplemental Indenture dated as of April 26, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(18) Form of 6.500% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.25) (18) Supplemental Indenture dated as of May 1, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(19) Form of Global Note 6.95% Senior Note due 2022(20) Sixth Supplemental Indenture dated as of June 14, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(21) 10.30 Form of 6.950% Prospect Capital InterNote® due 2022 (included as part of Exhibit 10.29) (21) 199 Table of Contents 10.31 Seventh Supplemental Indenture dated as of June 28, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(22) 10.32 10.33 10.34 10.35 10.36 10.37 10.38 10.39 10.40 10.41 Form of 6.550% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.31) (22) Eighth Supplemental Indenture dated as of July 6, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(23) Form of 6.450% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.33) (23) Ninth Supplemental Indenture dated as of July 12, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(24) Form of 6.350% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.35) (24) Tenth Supplemental Indenture dated as of July 19, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(25) Form of 6.300% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.37) (25) Eleventh Supplemental Indenture dated as of July 26, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(26) Form of 6.200% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.39) (26) Twelfth Supplemental Indenture dated as of August 2, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(27) 10.42 Form of 6.150% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.41) (27) 200 Table of Contents 10.43 Thirteenth Supplemental Indenture dated as of August 9, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(28) 10.44 10.45 10.46 10.47 10.48 10.49 10.50 10.51 10.52 10.53 10.54 10.55 Form of 6.150% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.43) (28) Indenture dated as of August 14, 2012 relating to the 5.75% Senior Convertible Notes, by and between the Registrant and American Stock Transfer & Trust Company, as Trustee(29) Form of 5.75% Senior Convertible Note due 2018(30) Fourteenth Supplemental Indenture dated as of August 16, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(31) Form of 6.100% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.47) (31) Fifteenth Supplemental Indenture dated as of August 23, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(32) Form of 6.050% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.49) (32) Sixteenth Supplemental Indenture dated as of September 7, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(33) Form of 6.000% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.51) (33) Seventeenth Supplemental Indenture dated as of September 13, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(34) Form of 5.950% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.53) (34) Eighteenth Supplemental Indenture dated as of September 20, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(35) 201 Table of Contents 10.56 Form of 5.900% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.55) (35) 10.57 10.58 10.59 10.60 10.61 10.62 10.63 10.64 10.65 10.66 10.67 Nineteenth Supplemental Indenture dated as of September 27, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(36) Form of 5.850% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.57) (36) Twentieth Supplemental Indenture dated as of October 4, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(37) Form of 5.700% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.59) (37) Twenty-First Supplemental Indenture dated as of November 23, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(38) Form of 5.125% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.61) (38) Twenty-Second Supplemental Indenture dated as of November 23, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(38) Form of 6.625% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.63) (38) Twenty-Third Supplemental Indenture dated as of November 29, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(39) Form of 5.000% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.65) (39) Twenty-Fourth Supplemental Indenture dated as of November 29, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(39) 10.68 Form of 5.750% Prospect Capital InterNote® due 2032 (included as part of Exhibit 10.67) (39) 202 Table of Contents 10.69 Twenty-Fifth Supplemental Indenture dated as of November 29, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(39) 10.70 10.71 10.72 10.73 10.74 10.75 10.76 10.77 10.78 10.79 Form of 6.500% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.69) (39) Twenty-Sixth Supplemental Indenture dated as of December 6, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(40) Form of 4.875% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.71) (40) Twenty-Seventh Supplemental Indenture dated as of December 6, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(40) Form of 5.625% Prospect Capital InterNote® due 2032 (included as part of Exhibit 10.73) (40) Twenty-Eighth Supplemental Indenture dated as of December 6, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(40) Form of 6.375% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.75) (40) Twenty-Ninth Supplemental Indenture dated as of December 13, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(41) Form of 4.750% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.77) (41) Thirtieth Supplemental Indenture dated as of December 13, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(41) 10.80 Form of 5.250% Prospect Capital InterNote® due 2030 (included as part of Exhibit 10.79) (41) 203 Table of Contents 10.81 Thirty-First Supplemental Indenture dated as of December 13, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(41) 10.82 10.83 10.84 10.85 10.86 10.87 10.88 10.89 10.90 10.91 10.92 10.93 Form of 6.250% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.81) (41) Thirty-Second Supplemental Indenture dated as of December 20, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(42) Form of 4.625% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.83) (42) Thirty-Third Supplemental Indenture dated as of December 20, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(42) Form of 5.125% Prospect Capital InterNote® due 2030 (included as part of Exhibit 10.85) (42) Thirty-Fourth Supplemental Indenture dated as of December 20, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(42) Form of 6.125% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.87) (42) Indenture dated as of December 21, 2012, by and between the Registrant and American Stock Transfer & Trust Company, as Trustee(43) Form of Global Note 5.875% Convertible Senior Note Due 2019(44) Thirty-Fifth Supplemental Indenture dated as of December 28, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(45) Form of 4.500% Prospect Capital InterNote® due 2019 (included as part of Exhibit 10.91) (45) Thirty-Sixth Supplemental Indenture dated as of December 28, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(45) 204 Table of Contents 10.94 Form of 5.000% Prospect Capital InterNote® due 2030 (included as part of Exhibit 10.93) (45) 10.95 10.96 10.97 10.98 10.99 10.100 10.101 10.102 10.103 10.104 10.105 Thirty-Seventh Supplemental Indenture dated as of December 28, 2012, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(45) Form of 6.000% Prospect Capital InterNote® due 2042 (included as part of Exhibit 10.95) (45) Thirty-Eighth Supplemental Indenture dated as of January 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(46) Form of 4.375% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.97) (46) Thirty-Ninth Supplemental Indenture dated as of January 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(46) Form of 4.875% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.99) (46) Fortieth Supplemental Indenture dated as of January 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(46) Form of 5.875% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.101) (46) Forty-First Supplemental Indenture dated as of January 10, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(47) Form of 4.250% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.103) (47) Forty-Second Supplemental Indenture dated as of January 10, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(47) 205 Table of Contents 10.106 Form of 4.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.105) (47) 10.107 10.108 10.109 10.110 10.111 10.112 10.113 10.114 10.115 10.116 Forty-Third Supplemental Indenture dated as of January 10, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(47) Form of 5.750% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.107) (47) Forty-Fourth Supplemental Indenture dated as of January 17, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(48) Form of 4.125% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.109) (48) Forty-Fifth Supplemental Indenture dated as of January 17, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(48) Form of 4.625% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.111) (48) Forty-Sixth Supplemental Indenture dated as of January 17, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(48) Form of 5.625% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.113) (48) Custody Agreement, dated as of January 23, 2013 by and between the Registrant and U.S. Bank National Association(60) Forty-Seventh Supplemental Indenture dated as of January 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(49) 10.117 Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.116) (49) 206 Table of Contents 10.118 Forty-Eighth Supplemental Indenture dated as of January 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(49) 10.119 10.120 10.121 10.122 10.123 10.124 10.125 10.126 10.127 10.128 Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.118) (49) Forty-Ninth Supplemental Indenture dated as of January 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(49) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.120) (49) Fiftieth Supplemental Indenture dated as of January 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(50) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.122) (50) Fifty-First Supplemental Indenture dated as of January 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(50) Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.124) (50) Fifty-Second Supplemental Indenture dated as of January 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(50) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.126) (50) Fifty-Third Supplemental Indenture dated as of February 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(51) 207 Table of Contents 10.129 Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.128) (51) 10.130 10.131 10.132 10.133 10.134 10.135 10.136 10.137 10.138 Fifty-Fourth Supplemental Indenture dated as of February 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(51) Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.130) (51) Fifty-Fifth Supplemental Indenture dated as of February 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(51) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.132) (51) Fifty-Sixth Supplemental Indenture dated as of February 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(52) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.134) (52) Fifty-Seventh Supplemental Indenture dated as of February 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(52) Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.136) (52) Fifty-Eighth Supplemental Indenture dated as of February 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(52) 10.139 Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.138) (52) 208 Table of Contents 10.140 Fifty-Ninth Supplemental Indenture dated as of February 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(53) 10.141 10.142 10.143 10.144 10.145 10.146 10.147 10.148 10.149 10.150 Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.140) (53) Sixtieth Supplemental Indenture dated as of February 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(53) Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.142) (53) Sixty-First Supplemental Indenture dated as of February 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(53) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.144) (53) Sixty-Second Supplemental Indenture dated as of March 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(54) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.146) (54) Sixty-Third Supplemental Indenture dated as of March 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(54) Form of 4.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.148) (54) Sixty-Fourth Supplemental Indenture dated as of March 7, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(54) 209 Table of Contents 10.151 Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.150) (54) 10.152 10.153 10.154 10.155 10.156 10.157 10.158 10.159 10.160 Sixty-Fifth Supplemental Indenture dated as of March 14, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(55) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.152) (55) Sixty-Sixth Supplemental Indenture dated as of March 14, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(55) Form of 4.125% to 6.000% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.154)(55) Sixty-Seventh Supplemental Indenture dated as of March 14, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(55) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.156) (55) Sixty-Eighth Supplemental Indenture dated as of March 14, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(55) Form of Floating Prospect Capital InterNote® due 2023 (included as part of Exhibit 10.158) (55) Supplemental Indenture dated as of March 15, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(56) 10.161 Form of Global Note 5.875% Senior Note due 2023(57) 210 Table of Contents 10.162 Sixty-Ninth Supplemental Indenture dated as of March 21, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(58) 10.163 10.164 10.165 10.166 10.167 10.168 10.169 10.170 10.171 10.172 Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.162) (58) Seventieth Supplemental Indenture dated as of March 21, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(58) Form of 4.125% to 6.000% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.164)(58) Seventy-First Supplemental Indenture dated as of March 21, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(58) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.166) (58) Seventy-Second Supplemental Indenture dated as of March 21, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(58) Form of Floating Prospect Capital InterNote® due 2023 (included as part of Exhibit 10.168) (58) Seventy-Third Supplemental Indenture dated as of March 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(59) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.170) (59) Seventy-Fourth Supplemental Indenture dated as of March 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(59) 211 Table of Contents 10.173 Form of 4.125% to 6.000% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.172)(59) 10.174 10.175 10.176 10.177 10.178 10.179 10.180 10.181 10.182 Seventy-Fifth Supplemental Indenture dated as of March 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(59) Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.174) (59) Seventy-Sixth Supplemental Indenture dated as of March 28, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(59) Form of Floating Prospect Capital InterNote® due 2023 (included as part of Exhibit 10.176) (59) Seventy-Seventh Supplemental Indenture dated as of April 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(61) Form of 4.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.178) (61) Seventy-Eighth Supplemental Indenture dated as of April 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(61) Form of 4.625% to 6.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.180)(61) Seventy-Ninth Supplemental Indenture dated as of April 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(61) 10.183 Form of 5.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.182) (61) 212 Table of Contents 10.184 Eightieth Supplemental Indenture dated as of April 4, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(61) 10.185 10.186 10.187 10.188 10.189 10.190 10.191 10.192 10.193 10.194 Form of Floating Prospect Capital InterNote® due 2023 (included as part of Exhibit 10.184) (61) Eighty-First Supplemental Indenture dated as of April 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(62) Form of 4.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.186) (62) Eighty-Second Supplemental Indenture dated as of April 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(62) Form of 5.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.188) (62) Eighty-Third Supplemental Indenture dated as of April 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(62) Form of 6.000% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.190) (62) Eighty-Fourth Supplemental Indenture dated as of April 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(62) Form of Floating Prospect Capital InterNote® due 2023 (included as part of Exhibit 10.192) (62) Eighty-Fifth Supplemental Indenture dated as of April 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(63) 213 Table of Contents 10.195 Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.194) (63) 10.196 10.197 10.198 10.199 10.200 10.201 10.202 10.203 10.204 Eighty-Sixth Supplemental Indenture dated as of April 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(63) Form of 5.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.196) (63) Eighty-Seventh Supplemental Indenture dated as of April 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(63) Form of 6.000% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.198) (63) Eighty-Eighth Supplemental Indenture dated as of April 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(64) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.200) (64) Eighty-Ninth Supplemental Indenture dated as of April 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(64) Form of 5.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.202) (64) Ninetieth Supplemental Indenture dated as of April 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(64) 10.205 Form of 6.000% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.204) (64) 214 Table of Contents 10.206 Ninety-First Supplemental Indenture dated as of May 2, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(65) 10.207 10.208 10.209 10.210 10.211 10.212 10.213 10.214 10.215 10.216 Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.206) (65) Ninety-Second Supplemental Indenture dated as of May 2, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(65) Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.208) (65) Ninety-Third Supplemental Indenture dated as of May 2, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(65) Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.210) (65) Ninety-Fourth Supplemental Indenture dated as of May 9, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(66) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.212) (66) Ninety-Fifth Supplemental Indenture dated as of May 9, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(66) Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.214) (66) Ninety-Sixth Supplemental Indenture dated as of May 9, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(66) 215 Table of Contents 10.217 Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.216) (66) 10.218 10.219 10.220 10.221 10.222 10.223 10.224 10.225 10.226 Ninety-Seventh Supplemental Indenture dated as of May 23, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(67) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.218) (67) Ninety-Eighth Supplemental Indenture dated as of May 23, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(67) Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.220) (67) Ninety-Ninth Supplemental Indenture dated as of May 23, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(67) Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.222) (67) One Hundredth Supplemental Indenture dated as of May 23, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(67) Form of 5.000% to 7.000% Prospect Capital InterNote® due 2028 (included as part of Exhibit 10.224)(67) One Hundred-First Supplemental Indenture dated as of May 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(68) 10.227 Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.226) (68) 216 Table of Contents 10.228 One Hundred-Second Supplemental Indenture dated as of May 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(68) 10.229 10.230 10.231 10.232 10.233 10.234 10.235 10.236 10.237 10.238 Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.228) (68) One Hundred-Third Supplemental Indenture dated as of May 31, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(68) Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.230) (68) One Hundred-Fourth Supplemental Indenture dated as of June 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(69) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.232) (69) One Hundred-Fifth Supplemental Indenture dated as of June 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(69) Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.234) (69) One Hundred-Sixth Supplemental Indenture dated as of June 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(69) Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.236) (69) One Hundred-Seventh Supplemental Indenture dated as of June 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(69) 217 Table of Contents 10.239 Form of 5.000% to 7.000% Prospect Capital InterNote® due 2028 (included as part of Exhibit 10.238)(69) 10.240 10.241 10.242 10.243 10.244 10.245 10.246 10.247 10.248 One Hundred-Eighth Supplemental Indenture dated as of June 13, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(70) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.240) (70) One Hundred-Ninth Supplemental Indenture dated as of June 13, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(70) Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.242) (70) One Hundred-Tenth Supplemental Indenture dated as of June 13, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(70) Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.244) (70) One Hundred-Eleventh Supplemental Indenture dated as of June 20, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(71) Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.246) (71) One Hundred-Twelfth Supplemental Indenture dated as of June 20, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(71) 10.249 Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.248) (71) 218 Table of Contents 10.250 One Hundred-Thirteenth Supplemental Indenture dated as of June 20, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(71) 10.251 10.252 10.253 10.254 10.255 10.256 10.257 10.258 Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.250) (71) One Hundred-Fourteenth Supplemental Indenture dated as of June 27, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(72) Form of 5.250% Prospect Capital InterNote® due 2020 (included as part of Exhibit 10.252) (72) One Hundred-Fifteenth Supplemental Indenture dated as of June 27, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(72) Form of 6.000% Prospect Capital InterNote® due 2031 (included as part of Exhibit 10.254) (72) One Hundred-Sixteenth Supplemental Indenture dated as of June 27, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(72) Form of 6.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 10.256) (72) Custody Agreement, dated as of April 24, 2013 by and between the Registrant and Israel Discount Bank of New York Ltd.* 11 Computation of Per Share Earnings (included in the notes to the financial statements contained in this report) 12 Computation of Ratios (included in the notes to the financial statements contained in this report) 14 Code of Ethics* 21 Subsidiaries of the Registrant (included in the notes to the consolidated financial statements contained in this annual report) 22.1 Proxy Statement(73) 22.2 Published report regarding matters submitted to vote of security holders(74) 219 Table of Contents 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended* 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended* 32.1 Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)* 32.2 Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)* * Filed herewith. (1) Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on July 30, 2012. (2) Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on August 26, 2011. (3) (4) Incorporated by reference from Pre-Effective Amendment No. 2 to the Registrant's Registration Statement, filed on July 6, 2004. Incorporated by reference from Pre-Effective Amendment No. 3 to the Registrant's Registration Statement, filed on July 23, 2004. (5) Incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K filed on March 21, 2012. (6) Incorporated by reference to Exhibit 99.1 of the Registrant's Form 8-K filed on April 2, 2012. (7) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on December 21, 2010. (8) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 21, 2010. (9) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on February 18, 2011. (10) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on February 18, 2011. (11) Incorporated by reference from Post-Effective Amendment No. 1 to the Registrant's Registration Statement, filed on March 1, 2012. (12) Incorporated by reference from Post-Effective Amendment No. 2 to the Registrant's Registration Statement, filed on March 8, 2012. (13) Incorporated by reference from Post-Effective Amendment No. 3 to the Registrant's Registration Statement, filed on March 14, 2012. (14) Incorporated by reference from Post-Effective Amendment No. 5 to the Registrant's Registration Statement, filed on April 5, 2012. (15) Incorporated by reference from Post-Effective Amendment No. 6 to the Registrant's Registration Statement, filed on April 12, 2012. (16) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on April 16, 2012. (17) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on April 16, 2012. (18) Incorporated by reference from Post-Effective Amendment No. 8 to the Registrant's Registration Statement, filed on April 26, 2012. (19) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on May 7, 2012. (20) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on May 7, 2012. 220 Table of Contents (21) Incorporated by reference from Post-Effective Amendment No. 10 to the Registrant's Registration Statement, filed on June 14, 2012. (22) Incorporated by reference from Post-Effective Amendment No. 11 to the Registrant's Registration Statement, filed on June 28, 2012. (23) Incorporated by reference from Post-Effective Amendment No. 12 to the Registrant's Registration Statement, filed on July 6, 2012. (24) Incorporated by reference from Post-Effective Amendment No. 13 to the Registrant's Registration Statement, filed on July 12, 2012. (25) Incorporated by reference from Post-Effective Amendment No. 15 to the Registrant's Registration Statement, filed on July 19, 2012. (26) Incorporated by reference from Post-Effective Amendment No. 16 to the Registrant's Registration Statement, filed on July 26, 2012. (27) Incorporated by reference from Post-Effective Amendment No. 17 to the Registrant's Registration Statement, filed on August 2, 2012. (28) Incorporated by reference from Post-Effective Amendment No. 18 to the Registrant's Registration Statement, filed on August 9, 2012. (29) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on August 14, 2012. (30) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on August 14, 2012. (31) Incorporated by reference from Post-Effective Amendment No. 19 to the Registrant's Registration Statement, filed on August 16, 2012. (32) Incorporated by reference from Post-Effective Amendment No. 20 to the Registrant's Registration Statement, filed on August 23, 2012. (33) Incorporated by reference from Post-Effective Amendment No. 22 to the Registrant's Registration Statement, filed on September 7, 2012. (34) Incorporated by reference from Post-Effective Amendment No. 24 to the Registrant's Registration Statement, filed on September 13, 2012. (35) Incorporated by reference from Post-Effective Amendment No. 25 to the Registrant's Registration Statement, filed on September 20, 2012. (36) Incorporated by reference from Post-Effective Amendment No. 26 to the Registrant's Registration Statement, filed on September 27, 2012. (37) Incorporated by reference from Post-Effective Amendment No. 27 to the Registrant's Registration Statement, filed on October 4, 2012. (38) Incorporated by reference from Post-Effective Amendment No. 2 to the Registrant's Registration Statement, filed on November 23, 2012. (39) Incorporated by reference from Post-Effective Amendment No. 3 to the Registrant's Registration Statement, filed on November 29, 2012. (40) Incorporated by reference from Post-Effective Amendment No. 4 to the Registrant's Registration Statement, filed on December 6, 2012. (41) Incorporated by reference from Post-Effective Amendment No. 5 to the Registrant's Registration Statement, filed on December 13, 2012. 221 Table of Contents (42) Incorporated by reference from Post-Effective Amendment No. 6 to the Registrant's Registration Statement, filed on December 20, 2012. (43) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on December 21, 2012. (44) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on December 21, 2012. (45) Incorporated by reference from Post-Effective Amendment No. 8 to the Registrant's Registration Statement, filed on December 28, 2012. (46) Incorporated by reference from Post-Effective Amendment No. 9 to the Registrant's Registration Statement, filed on January 4, 2013. (47) Incorporated by reference from Post-Effective Amendment No. 10 to the Registrant's Registration Statement, filed on January 10, 2013. (48) Incorporated by reference from Post-Effective Amendment No. 11 to the Registrant's Registration Statement, filed on January 17, 2013. (49) Incorporated by reference from Post-Effective Amendment No. 12 to the Registrant's Registration Statement, filed on January 25, 2013. (50) Incorporated by reference from Post-Effective Amendment No. 13 to the Registrant's Registration Statement, filed on January 31, 2013. (51) Incorporated by reference from Post-Effective Amendment No. 14 to the Registrant's Registration Statement, filed on February 7, 2013. (52) Incorporated by reference from Post-Effective Amendment No. 16 to the Registrant's Registration Statement, filed on February 22, 2013. (53) Incorporated by reference from Post-Effective Amendment No. 17 to the Registrant's Registration Statement, filed on February 28, 2013. (54) Incorporated by reference from Post-Effective Amendment No. 18 to the Registrant's Registration Statement, filed on March 7, 2013. (55) Incorporated by reference from Post-Effective Amendment No. 19 to the Registrant's Registration Statement, filed on March 14, 2013. (56) Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on March 15, 2013. (57) Incorporated by reference to Exhibit 4.2 of the Registrant's Form 8-K filed on March 15, 2013. (58) Incorporated by reference from Post-Effective Amendment No. 21 to the Registrant's Registration Statement, filed on March 21, 2013. (59) Incorporated by reference from Post-Effective Amendment No. 22 to the Registrant's Registration Statement, filed on March 28, 2013. (60) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q filed on May 6, 2013. (61) Incorporated by reference from Post-Effective Amendment No. 23 to the Registrant's Registration Statement, filed on April 4, 2013. (62) Incorporated by reference from Post-Effective Amendment No. 24 to the Registrant's Registration Statement, filed on April 11, 2013. (63) Incorporated by reference from Post-Effective Amendment No. 25 to the Registrant's Registration Statement, filed on April 18, 2013. 222 Table of Contents (64) Incorporated by reference from Post-Effective Amendment No. 26 to the Registrant's Registration Statement, filed on April 25, 2013. (65) Incorporated by reference from Post-Effective Amendment No. 27 to the Registrant's Registration Statement, filed on May 2, 2013. (66) Incorporated by reference from Post-Effective Amendment No. 29 to the Registrant's Registration Statement, filed on May 9, 2013. (67) Incorporated by reference from Post-Effective Amendment No. 30 to the Registrant's Registration Statement, filed on May 23, 2013. (68) Incorporated by reference from Post-Effective Amendment No. 31 to the Registrant's Registration Statement, filed on May 31, 2013. (69) Incorporated by reference from Post-Effective Amendment No. 32 to the Registrant's Registration Statement, filed on June 6, 2013. (70) Incorporated by reference from Post-Effective Amendment No. 33 to the Registrant's Registration Statement, filed on June 13, 2013. (71) Incorporated by reference from Post-Effective Amendment No. 34 to the Registrant's Registration Statement, filed on June 20, 2013. (72) Incorporated by reference from Post-Effective Amendment No. 35 to the Registrant's Registration Statement, filed on June 27, 2013. (73) Incorporated by reference from the Registrant's Proxy Statement filed on September 10, 2012. (74) Incorporated by reference to Item 5.07 of the Registrant's Form 8-K filed on December 12, 2012. 223 Table of Contents SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized August 21, 2013. PROSPECT CAPITAL CORPORATION By: /s/ JOHN F. BARRY III John F. Barry III Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ JOHN F. BARRY III John F. Barry, III /s/ BRIAN H. OSWALD Brian H. Oswald /s/ M. GRIER ELIASEK M. Grier Eliasek /s/ ANDREW C. COOPER Andrew C. Cooper /s/ WILLIAM J. GREMP William J. Gremp /s/ EUGENE S. STARK Eugene S. Stark Chairman of the Board, Chief Executive Officer, Director August 21, 2013 Chief Financial Officer August 21, 2013 President, Chief Operations Officer, Director August 21, 2013 Director Director Director 224 August 21, 2013 August 21, 2013 August 21, 2013  Exhibit 10.258 CUSTODY AGREEMENT dated as of April 24, 2013 by and between PROSPECT CAPITAL CORPORATION (“Company”) and ISRAEL DISCOUNT BANK OF NEW YORK LTD. (“Custodian”) TABLE OF CONTENTS 1. DEFINITIONS 2. APPOINTMENT OF CUSTODIAN 3. DUTIES OF CUSTODIAN 4. REPORTING 5. DEPOSIT IN U.S. SECURITIES SYSTEMS 6. SECURITIES HELD OUTSIDE OF THE UNITED STATES 7. CERTAIN GENERAL TERMS 8. COMPENSATION OF CUSTODIAN 9. RESPONSIBILITY OF CUSTODIAN 10. SECURITY CODES 11. TAX LAW 12. EFFECTIVE PERIOD, TERMINATION 13. REPRESENTATIONS AND WARRANTIES 14. PARTIES IN INTEREST; NO THIRD PARTY BENEFIT 15. NOTICES 16. CHOICE OF LAW AND JURISDICTION 17. ENTIRE AGREEMENT; COUNTERPARTS 18. AMENDMENT; WAIVER 19. SUCCESSOR AND ASSIGNS 20. SEVERABILITY 21. REQUEST FOR INSTRUCTIONS 22. OTHER BUSINESS 23. REPRODUCTION OF DOCUMENTS 24. MISCELLANEOUS SCHEDULES SCHEDULE A – CERTIFICATE OF AUTHORIZED PERSONS SCHEDULE B – FEES i Page 1 6 6 14 15 16 18 20 20 24 24 24 25 26 26 27 27 28 28 28 29 29 29 29 This CUSTODY AGREEMENT (this “ Agreement ”) is dated as of April 24, 2013, and is by and between Prospect Capital Corporation (and any successor or permitted assign, the “ Company ”), a corporation organized under the laws of the State of Maryland, having its principal place of business at 10 East 40 Floor, New York, NY 10016, and Israel Discount Bank of New York Ltd. (and any successor or permitted assign acting as custodian hereunder, the “ Custodian ”), a New York State chartered bank having a place of business at 511 Fifth Avenue, New York, NY 10017. Street, 44 th th RECITALS WHEREAS, the Company is a closed-end management investment company that has registered as an investment company under the Investment Company Act of 1940, as amended (the “ 1940 Act ”); WHEREAS, the Company desires to retain Israel Discount Bank of New York Ltd. to act as custodian for the Company; and WHEREAS, the Company desires that the Company’s Securities (as defined below) and cash be held and administered by the Custodian pursuant to this Agreement in compliance with Section 17(f) of the 1940 Act. NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. DEFINITIONS 1.1 Defined Terms . In addition to terms expressly defined elsewhere herein, the following words shall have the following meanings as used in this Agreement: “ Account ” means the Cash Account and the Securities Account, collectively. “ Agreement ” means this Custody Agreement (as the same may be amended from time to time in accordance with the terms hereof). “ Asset File ” means, with respect to each Security for which documents are delivered to the Document Custodian, each of the Required Documents identified on the related Document Checklist. “ Authorized Person ” has the meaning set forth in Section 7.4. “ Business Day ” means a day on which the Custodian or the relevant sub-custodian, including a Foreign Sub-custodian, is open for business in the market or country in which a transaction is to take place. “ Cash Account ” means the segregated trust account to be established at the Custodian to which the Custodian shall deposit or credit and hold any cash or Proceeds received by it from time to time from or with respect to the Securities or the sale of the Securities of the Company, as applicable, which trust account shall be designated the “Prospect Capital Corporation Cash Proceeds Account.” “ Certificated Security ” shall have the meaning ascribed to such term in Section 8-102(4) of the UCC. “ Company ” has the meaning set forth in the first paragraph of this Agreement. “ Confidential Information ” means any databases, computer programs, screen formats, screen designs, report formats, interactive design techniques, and other similar or related information that may be furnished to the Company by the Custodian from time to time pursuant to this Agreement. “ Custodian ” has the meaning set forth in the first paragraph of this Agreement. “ Document Custodian ” means the Custodian when acting in the role of a document custodian hereunder. “ Document Checklist ” means a list delivered to the Document Custodian by the Company in connection with delivery of each Asset File to the Custodian that identifies (i) whether a Security is a Certificated Security or an Uncertificated Security, and (ii) the documents, instruments and certificates contained in the related Asset File. “ Eligible Investment ” means any investment that at the time of its acquisition is one or more of the following: (a) United States government and agency obligations; (b) commercial paper having a rating assigned to such commercial paper by Standard & Poor’s Rating Services or Moody’s Investor Service, Inc. (or, if neither such organization shall rate such commercial paper at such time, by any nationally recognized rating organization in the United States of America) equal to one of the two highest ratings assigned by such organization, it being understood that as of the date hereof such ratings by Standard & Poor’s Rating Services are “A1+” and “A1” and such ratings by Moody’s Investor Service, Inc. are “P1” and “P2”; (c) interest bearing deposits in United States dollars in United States or Canadian banks with an unrestricted surplus of at least U.S. $250,000,000, maturing within one year; and (d) money market funds (including funds of the bank serving as Custodian or its affiliates) or United States government securities funds designed to maintain a fixed share price and high liquidity. “ Eligible Securities Depository ” has the meaning set forth in Section (b)(1) of Rule 17f-7 under the 1940 Act. 2 “ Federal Reserve Bank Book-Entry System ” means a depository and securities transfer system operated by the Federal Reserve Bank of the United States on which are eligible to be held all United States Government direct obligation bills, notes and bonds. “ Financing Documents ” has the meaning set forth in Section 3.3(b)(ii). “ Foreign Intermediary ” means a Foreign Sub-custodian and Eligible Securities Depository. “ Foreign Sub-custodian ” means and includes (i) any branch of a “U.S. Bank,” as that term is defined in Rule 17f-5 under the 1940 Act, (ii) any “Eligible Foreign Custodian,” as that term is defined in Rule 17f-5 under the 1940 Act, having a contract with the Custodian in accordance with Section 6.6, which the Custodian has determined will provide reasonable care of assets of the Company based on the standards specified in Section 6.7 below. “ Foreign Securities ” means Securities for which the primary market is outside the United States. “ Participation ” means an interest in a Security that is acquired indirectly by way of a participation from a selling institution. “ Person ” means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization, or any government or agency or political subdivision thereof. “ Proceeds ” means, collectively, (i) the net cash proceeds to the Company of the initial public offering by the Company and any subsequent offering by the Company of any class of securities issued by the Company, (ii) all cash distributions, earnings, dividends, fees and other cash payments paid on the Securities (or, as applicable, Subsidiary Securities) by or on behalf of the issuer or obligor thereof, or applicable paying agent, (iii) the net cash proceeds of the sale or other disposition of the Securities pursuant to the terms of this Agreement and (iv) the net cash proceeds to the Company of any borrowing or other financing by the Company (and any Reinvestment Earnings from investment of any of the foregoing). “ Proper Instructions ” means instructions (including Trade Confirmations) received by the Custodian in form acceptable to it, from the Company, or any Person duly authorized by the Company, by any of the following means: (a) in writing signed by any two (2) Authorized Persons (and delivered by hand, by mail, by overnight courier or by telecopier); (b) by electronic mail from an Authorized Person; (c) in tested communication; 3 (d) in a communication utilizing access codes effected between electro mechanical or electronic devices; or (e) such other means as may be agreed upon from time to time by the Custodian and the party giving such instructions, including oral instructions. “ Reinvestment Earnings ” has the meaning set forth in Section 3.6(b). “ Required Documents ” means, for each Security as to which an Asset File is delivered to the Document Custodian: (a) the related Document Checklist; and (b) such documents identified in the Document Checklist that may include any Underlying Documents (but excluding any physical certificates evidencing ownership of a Certificated Security). “ Securities ” means, collectively, (i) the equity investments, including investments in partnership and limited liability companies, acquired by the Company and delivered to the Custodian by the Company from time to time during the term of, and pursuant to the terms of, this Agreement and (ii) all dividends in kind ( e.g. , non-cash dividends) from the investments described in clause (i). “ Securities Account ” means the segregated trust account to be established at the Custodian to which the Custodian shall deposit or credit and hold the Securities (other than Uncertificated Securities) received by it pursuant to this Agreement, which account shall be designated the “Prospect Capital Corporation Securities Account.” “ Securities Custodian ” means the Custodian when acting in the role of a securities custodian hereunder. “ Securities Depository ” means The Depository Trust Company and any other clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), which acts as a system for the central handling of securities where all securities of any particular class or series of an issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of the securities. “ Securities System ” means the Federal Reserve Book-Entry System, a clearing agency which acts as a Securities Depository, or another book entry system for the central handling of securities (including an Eligible Securities Depository). “ Street Delivery Custom ” means a custom of the United States securities market to deliver securities which are being sold to the buying broker for examination to determine that the securities are in proper form. 4 “ Street Name ” means the form of registration in which the securities are held by a broker who is delivering the securities to another broker for the purposes of sale, it being an accepted custom in the United States securities industry that a security in Street Name is in proper form for delivery to a buyer and that a security may be re-registered by a buyer in the ordinary course. “ Trade Confirmation ” means a confirmation to the Custodian from the Company of the Company’s acquisition of a Security setting forth applicable information with respect to such Security in any form as may be agreed to by, the Custodian and the Company from time to time. “ UCC ” shall have the meaning set forth in Section 3.3(a). “ Underlying Agreement ” means, with respect to any Security, the limited liability company agreement, subscription agreement or other document or documents evidencing the Company’s investment in the related issuer. “ Underlying Documents ” means, with respect to any Security for which the Company delivers an Asset File to the Custodian, the documents listed on the Document Checklist that may include the related Underlying Agreement together with any other offering memorandums, purchase agreements, security documents, other agreements, other ancillary documents, and instruments (including any Certificated Security) executed or delivered in connection with the Company’s investment in the issuer thereof, including a copy of the register evidencing registration of the membership or equity interest of the Company on the books and records of the applicable issuer. “ Uncertificated Security ” means a Security that is not represented by a physical certificate. 1.2 Construction . In this Agreement unless the contrary intention appears: (a) any reference to this Agreement or another agreement or instrument refers to such agreement or instrument as the same may be amended, modified or otherwise rewritten from time to time; (b) a reference to a statute, ordinance, code or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them; (c) any term defined in the singular form may be used in, and shall include, the plural with the same meaning, and vice versa; (d) a reference to a Person includes a reference to the Person’s executors, successors and permitted assigns; (e) an agreement, representation or warranty in favor of two or more Persons is for the benefit of them jointly and severally; 5 (f) an agreement, representation or warranty on the part of two or more Persons binds them jointly and severally; (g) a reference to the term “including” means “including, without limitation,” and (h) a reference to any accounting term is to be interpreted in accordance with generally accepted principles and practices in the United States, consistently applied, unless otherwise instructed by the Company. 1.3 Headings . Headings are inserted for convenience and do not affect the interpretation of this Agreement. 2. APPOINTMENT OF CUSTODIAN 2.1 Appointment and Acceptance . The Company hereby appoints the Custodian as custodian of all Securities and cash owned by the Company and delivered to the Custodian by the Company from time to time during the period of this Agreement, on the terms and conditions set forth in this Agreement (which shall include any addendum hereto which is hereby incorporated herein and made a part of this Agreement), and the Custodian hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement with respect to it, subject to and in accordance with the provisions hereof. All Required Documents and Securities in certificated form shall be maintained and held on behalf of the Company by the Custodian in its vaults in accordance with customary standards for such custody. 2.2 Instructions . The Company agrees that it shall from time to time provide, or cause to be provided, to the Custodian all necessary instructions and information, and shall respond promptly to all inquiries and requests of the Custodian, as may reasonably be necessary to enable the Custodian to perform its duties hereunder. 2.3 Company Responsible For Directions . The Company is solely responsible for directing the Custodian with respect to deposits to, withdrawals from and transfers to or from the Account. Without limiting the generality of the foregoing, the Custodian has no responsibility for the Company’s compliance with the 1940 Act, any restrictions, covenants, limitations or obligations to which the Company may be subject or for which it may have obligations to third-parties in respect of the Account, and the Custodian shall have no liability for the application of any funds made at the direction of the Company. The Company shall be solely responsible for properly instructing all applicable payors to make all appropriate payments to the Custodian for deposit to the Account, and for properly instructing the Custodian with respect to the allocation or application of all such deposits. 3. DUTIES OF CUSTODIAN 3.1 Segregation . All Securities and non-cash property held by the Custodian, as applicable, for the account of the Company (other than Securities maintained in a Securities Depository or Securities System) shall be physically segregated from other 6 Securities and non-cash property in the possession of the Custodian and shall be identified as subject to this Agreement. 3.2 Securities Custody Account . The Custodian shall open and maintain in its trust department a segregated trust account in the name of the Company, subject only to order of the Custodian, in which the Custodian shall enter and carry, subject to Section 3.3(b), all Securities (other than Uncertificated Securities) and other investment Uncertificated Securities of the Company which are delivered to it in accordance with this Agreement. For avoidance of doubt, the Custodian shall not be required to credit or deposit Uncertificated Securities in the Securities Account but shall instead maintain a register (in book-entry form or in such other form as it shall deem necessary or desirable) of such Uncertificated Securities, containing such information as the Company and the Custodian may reasonably agree; provided that, with respect to such Uncertificated Securities, all Required Documents shall be held in safekeeping by the Document Custodian, individually segregated from the securities and investments of any other person and marked so as to clearly identify them as the property of the Company in a manner consistent with Rule 17f-1 under the 1940 Act and as set forth in this Agreement. The Custodian shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such Securities and investments except pursuant to the direction of the Company under terms of the Agreement. 3.3 Delivery of Cash and Securities to Custodian . (a) The Company shall deliver, or cause to be delivered, to the Custodian all of the Company’s Securities, cash and other investment assets, including (a) all payments of income, payments of principal and capital distributions received by the Company with respect to such Securities, cash or other assets owned by the Company at any time during the period of this Agreement, and (b) all cash received by the Company for the issuance, at any time during such period, of securities or in connection with a borrowing by the Company, except as otherwise permitted by the 1940 Act. Required Documents shall be delivered to the Custodian in its role as, and at the address identified for, the Document Custodian; provided that physical certificates representing a Security shall be delivered to the Securities Custodian. Except to the extent otherwise expressly provided herein, delivery of Securities constituting Certificated Securities to the Custodian shall be in Street Name or the name of the Company or its nominee (or other good delivery form). The Custodian shall not be responsible for such Securities, cash or other assets until actually delivered to, and received by it. With respect to Securities (other than Uncertificated Securities and assets in the nature of “general intangibles” (as hereinafter defined)) held by the Custodian in its capacity as a “securities intermediary” (as defined in Section 8-102 of the Uniform Commercial Code as in effect in the State of New York (the “ UCC ”)), the Custodian shall be obligated to exercise due care in accordance with reasonable commercial standards in discharging its duties as a securities intermediary to obtain and maintain such Securities. A Security will be deemed 7 to be “delivered” to the Custodian when the Company delivers such Security in the following manner: (i) if such Security is a Certificated Security or an instrument (other than a Security held in a Securities System), then in physical certificated form in the name of the Company or its nominee, (ii) if such Security is an Uncertificated Security or in the form of uncertificated share(s) or other interest (other than a Security held in a Securities System), then delivery of confirmation statements which identify such shares or interests as being recorded in the name of the Company or its nominee, (iii) if such Security is held in a Securities System or maintained in one or more omnibus accounts at the Custodian, its agents or sub-custodians, then delivery of confirmation that such Security is held in the Securities System or maintained through one or more omnibus accounts in the name of the Custodian (or its nominee) who shall identify the same on its books and records as held for the account of the Company, or (iv) in such other good delivery form that may be agreed to by the Custodian from time to time. (b) (i) In connection with its acquisition of a Security constituting an Uncertificated Security, the Company shall deliver or cause to be delivered to the Custodian (in its roles as, and at the address identified for, the Custodian and Document Custodian) a properly completed Trade Confirmation containing such information in respect of such Security as the Custodian may reasonably require in order to enable the Custodian to perform its duties hereunder in respect of such Security and on which the Custodian may conclusively rely without further inquiry or investigation, in such form and format as the Custodian reasonably may require, and shall deliver to the Document Custodian (in its role as, and at the address identified for, the Document Custodian) the Required Documents, including the Document Checklist. (ii) Notwithstanding anything herein to the contrary, delivery of Securities acquired by the Company in the form of Uncertificated Securities or Participations or which are otherwise not evidenced by a “security” or “instrument” as defined in Section 8-102 and Section 9-102(a)(47) of the UCC), respectively, shall be made by delivery to the Document Custodian of (i) in the case of an Uncertificated Security, a copy of the register of the underlying issuer of such interest evidencing registration of such equity interest on the books and records of the applicable issuer to the name of the Company (or its nominee) or a copy (which may be a facsimile copy) of an assignment agreement in favor of the Company as assignee, as identified on the Document Checklist and (ii) in the case of a Participation, a copy of the related participation agreement or limited liability agreement identifying the Company as participant or owner of such interest. Any duty on the part of the Custodian with respect to the custody of such Securities shall be limited to the exercise of reasonable care by the Custodian in the physical custody of any such Required Documents delivered to it, and any related instrument, security, 8 participation agreement, assignment agreement and/or other agreements or documents, if any (collectively, “ Financing Documents ”), that may be delivered to it. Nothing herein shall require the Custodian to credit to the Securities Account or to treat as a financial asset (within the meaning of Section 8-102(a)(9) of the UCC) any Security that is not represented by a physical share certificate or an asset in the nature of a general intangible (as defined in Section 9-102(a)(42) of the UCC) or uncertificated security (within the meaning of Section 8-102(18) of the UCC) or to “maintain” a sufficient quantity thereof. (iii) The Custodian may assume the genuineness of any such Financing Document it may receive and the genuineness and due authority of any signatures appearing thereon, and shall be entitled to assume that each such Financing Document it may receive is what it purports to be. If an original “security” or “instrument” as defined in Section 8- 102 and Section 9-102(a)(47) of the UCC, respectively, is or shall be or become available with respect to any Security to be held by the Custodian under this Agreement, it shall be the sole responsibility of the Company to make or cause delivery thereof to the Document Custodian, and the Custodian shall not be under any obligation at any time to determine whether any such original security or instrument has been or is required to be issued or made available in respect of any Security or to compel or cause delivery thereof to the Custodian. (iv) Contemporaneously with the acquisition of any Security, the Company shall (A) take all actions necessary for the Company to acquire good title to such Security; and (B) take all actions as may be necessary (including appropriate payment notices and instructions to issuers, agents or other applicable paying agents) to cause (x) all payments in respect of the Security to be made to the Custodian and (y) all notices, solicitations and other communications in respect of such Security to be directed to the Company. The Custodian shall have no liability for any delay or failure on the part of the Company to provide necessary information to the Custodian, or for any inaccuracy therein or incompleteness thereof, or for any delay or failure on the part of the Company to give such effective payment instruction to the applicable issuer, its agents and other paying agents. With respect to each such Security, the Custodian shall be entitled to rely on any information and notices it may receive from time to time from the related issuer, agent, obligor or similar party with respect to the related Security, or from the Company, and shall be entitled to update its records (as it may deem necessary or appropriate) on the basis of such information or notices received, without any obligation on its part independently to verify, investigate or recalculate such information. 9 3.4 Release of Securities . (a) The Custodian shall release and deliver, or direct its agents or sub-custodian to release and deliver, as the case may be, Securities or Required Documents of the Company held by the Custodian, its agents or its sub-custodian from time to time upon receipt of Proper Instructions (which shall, among other things, specify the Securities or Required Documents to be released, with such delivery and other information as may be necessary to enable the Custodian to perform), which may be standing instructions (in form acceptable to the Custodian), in the following cases: (i) upon sale of such Securities by or on behalf of the Company, and such sale may, unless and except to the extent otherwise directed by Proper Instructions, be carried out by the Custodian: (A) in accordance with the customary or established practices and procedures in the jurisdiction or market where the transactions occur, including delivery to the purchaser thereof or to a dealer therefor (or an agent of such purchaser or dealer) against expectation of receiving later payment; or (B) in the case of a sale effected through a Securities System, in accordance with the rules governing the operations of the Securities System; (ii) upon the receipt of payment in connection with any repurchase agreement related to such Securities; (iii) to a depositary agent in connection with tender or other similar offers for such Securities; (iv) to the issuer thereof, or its agent, when such Securities are called, redeemed, retired or otherwise become payable (unless otherwise directed by Proper Instructions, the cash or other consideration is to be delivered to the Custodian, its agents or its sub-custodian); (v) to an issuer thereof, or its agent, for transfer into the name of the Custodian or of any nominee of the Custodian or into the name of any of its agents or sub-custodian or their nominees, or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; (vi) to brokers, clearing banks or other clearing agents for examination in accordance with the Street Delivery Custom; (vii) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such Securities, or pursuant to any deposit agreement (unless 10 otherwise directed by Proper Instructions, the new securities and cash, if any, are to be delivered to the Custodian, its agents or its sub-custodian); (viii) in the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities (unless otherwise directed by Proper Instructions, the new securities and cash, if any, are to be delivered to the Custodian, its agents or its sub-custodian); and/or (ix) for any other purpose, but only upon receipt of Proper Instructions and an officer’s certificate signed by an officer of the Company (which officer shall not have been any Authorized Person providing the Proper Instructions) stating (i) the specified securities to be delivered, (ii) the purpose for such delivery, (iii) that such purpose is a proper corporate purpose and (iv) naming the person or persons to whom delivery of such Securities shall be made, and attaching a certified copy of a resolution of the board of directors of the Company or an authorized committee thereof approving the delivery of such Proper Instructions. 3.5 Registration of Securities . Securities held by the Custodian, its agents or its sub-custodian (other than bearer securities, securities held in a Securities System or Securities that are Uncertificated Securities or Participations) shall be registered in the name of the Company or its nominee; or, at the option of the Custodian (if the Custodian determines it cannot hold such security in the name of the Company), in the name of the Custodian or in the name of any nominee of the Custodian, or in the name of its agents or its sub- custodian or their nominees; or, if directed by the Company by Proper Instruction, may be maintained in Street Name. The Custodian, its agents and its sub-custodian shall not be obliged to accept Securities on behalf of the Company under the terms of this Agreement unless such Securities are in Street Name or other good deliverable form. 3.6 Bank Accounts, and Management of Cash . (a) Proceeds and other cash received by the Custodian from time to time shall be deposited or credited to the Cash Account. All amounts deposited or credited to the Cash Account shall be subject to clearance and receipt of final payment by the Custodian. (b) Amounts held in the Cash Account from time to time may be invested in Eligible Investments pursuant to specific written Proper Instructions (which may be standing instructions) received by the Custodian from any two (2) Authorized Persons acting on behalf of the Company. Such investments shall be subject to availability and the Custodian’s then applicable transaction charges (which shall be at the Company’s expense). The Custodian shall have no liability for any loss incurred on any such investment. Absent receipt of such written instruction from the Company, the Custodian shall have no obligation to invest (or otherwise pay 11 interest on) amounts on deposit in the Cash Account. In no instance will the Custodian have any obligation to provide investment advice to the Company. Any earnings from such investment of amounts held in the Cash Account from time to time (collectively, “ Reinvestment Earnings ”) shall be redeposited in the Cash Account (and may be reinvested at the written direction of the Company). (c) In the event that the Company shall at any time request a withdrawal of amounts from the Cash Account, the Custodian shall be entitled to liquidate, and shall have no liability for any loss incurred as a result of the liquidation of, any investment of the funds credited to such account as needed to provide necessary liquidity. (d) The Company acknowledges that cash deposited or invested with any bank (including the bank acting as Custodian) may make a margin or generate banking income for which such bank shall not be required to account to the Company. 3.7 Foreign Exchange . (a) Upon the receipt of Proper Instructions, the Custodian, its agents or its sub-custodian may (but shall not be obligated to) enter into all types of contracts for foreign exchange on behalf of the Company, upon terms acceptable to the Custodian and the Company (in each case at the Company’s expense), including transactions entered into with the Custodian, its sub-custodian or any affiliates of the Custodian or the sub-custodian. The Custodian shall have no liability for any losses incurred in or resulting from the rates obtained in such foreign exchange transactions; and absent specific Proper Instructions, the Custodian shall not be deemed to have any duty to carry out any foreign exchange on behalf of the Company. The Custodian shall be entitled at all times to comply with any legal or regulatory requirements applicable to currency or foreign exchange transactions. (b) The Company acknowledges that the Custodian, any sub-custodian or any affiliates of the Custodian or any sub-custodian, involved in any such foreign exchange transactions may make a margin or generate banking income from foreign exchange transactions entered into pursuant to this Section for which they shall not be required to account to the Company. 3.8 Collection of Income . The Custodian, its agents or its sub-custodian shall use reasonable efforts to collect on a timely basis all income and other payments with respect to the Securities held hereunder to which the Company shall be entitled, to the extent consistent with usual custom in the securities custodian business in the United States. Such efforts shall include collection of interest income, dividends and other payments with respect to registered domestic securities if, on the record date with respect to the date of payment by the issuer, the Security is registered in the name of the Custodian or its nominee (or in the name of its agent or sub- custodian, or their nominees); and interest income, dividends and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, such Securities are held by the Custodian or its sub-custodian or agent; provided, however, that in the case of Securities held in Street Name, 12 the Custodian shall use commercially reasonable efforts only to timely collect income. In no event shall the Custodian’s agreement herein to collect income be construed to obligate the Custodian to commence, undertake or prosecute any legal proceedings. 3.9 Payment of Moneys . Upon receipt of Proper Instructions, which may be standing instructions, the Custodian shall pay out from the Cash Account (or remit to its agents or its sub-custodian, and direct them to pay out) moneys of the Company on deposit therein in the following cases: (a) upon the purchase of Securities for the Company pursuant to such Proper Instruction; and such purchase may, unless and except to the extent otherwise directed by Proper Instructions, be carried out by the Custodian: (i) in accordance with the customary or established practices and procedures in the jurisdiction or market where the transactions occur, including delivering money to the seller thereof or to a dealer therefor (or any agent for such seller or dealer) against expectation of receiving later delivery of such securities; or (ii) in the case of a purchase effected through a Securities System, in accordance with the rules governing the operation of such Securities System; (b) for the purchase or sale of foreign exchange or foreign exchange agreements for the account of the Company, including transactions executed with or through the Custodian, its agents or its sub-custodian, as contemplated by Section 3.8 above; (i) in payment of the price of securities of by the Company repurchased in open market purchases, tender offers or any other Company repurchase program; and (ii) for any other purpose directed by the Company, but only upon receipt of Proper Instructions specifying the amount of such payment, and naming the Person or Persons to whom such payment is to be made. 3.10 Proxies . The Custodian will, with respect to the Securities held hereunder, use reasonable efforts to cause to be promptly executed by the registered holder of such Securities proxies received by the Custodian from its agents or its sub-custodian or from issuers of the Securities being held for the Company, without indication of the manner in which such proxies are to be voted, and upon receipt of Proper Instructions shall promptly deliver to the applicable issuer such proxies relating to such Securities. In the absence of such Proper Instructions, or in the event that such Proper Instructions are not received in a timely fashion, except to the extent otherwise expressly provided herein, the Custodian shall be under no duty to act with regard to such proxies. Notwithstanding the above, neither Custodian nor any nominee of Custodian shall vote any of the Securities held hereunder by or for the account of the Company, except in accordance with Proper Instructions. 13 3.11 Communications Relating to Securities . The Custodian shall transmit promptly to the Company all written information (including proxies, proxy soliciting materials, notices, pendency of calls and maturities of Securities and expirations of rights in connection therewith) received by the Custodian, from its agents or its sub-custodian or from issuers of the Securities being held for the Company. The Custodian shall have no obligation or duty to exercise any right or power, or otherwise to preserve rights, in or under any Securities unless and except to the extent it has received timely Proper Instruction from the Company in accordance with the next sentence. The Custodian will not be liable for any untimely exercise of any right or power in connection with Securities at any time held by the Custodian, its agents or sub-custodian unless: (i) the Custodian has received Proper Instructions with regard to the exercise of any such right or power; and (ii) the Custodian, or its agents or sub-custodian are in actual possession of such Securities, in each case, at least three (3) Business Days prior to the date on which such right or power is to be exercised. It will be the responsibility of the Company to notify the Custodian of the Person to whom such communications must be forwarded under this Section. 3.12 Records . The Custodian shall create and maintain complete and accurate records relating to its activities under this Agreement with respect to the Securities, cash or other property held for the Company under this Agreement, with particular attention to Section 31 of the 1940 Act, and Rules 31a-1 and 31a-2 thereunder. To the extent that the Custodian, in its sole opinion, is able to do so, the Custodian shall provide assistance to the Company (at the Company’s reasonable request made from time to time) by providing sub-certifications regarding certain of its services performed hereunder to the Company in connection with the Company’s certification requirements pursuant to the Sarbanes-Oxley Act of 2002, as amended. All such records shall be the property of the Company and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Company (including its independent public accountants) and employees and agents of the Securities and Exchange Commission, upon reasonable request and prior notice and at the Company’s expense. The Custodian shall, at the Company’s request, supply the Company with a tabulation of Securities owned by the Company and held by the Custodian and shall, when requested to do so by the Company and for such compensation as shall be agreed upon between the Company and the Custodian, include, to the extent applicable, the certificate numbers in such tabulations, to the extent such information is available to the Custodian. 4. REPORTING (a) The Custodian shall render to the Company a monthly report of (i) all deposits to and withdrawals from the Cash Account during the month, and the outstanding 14 balance (as of the last day of the preceding monthly report and as of the last day of the subject month), (ii) an itemized statement of the Securities held pursuant to this Agreement as of the end of each month, all transactions in the Securities during the month, as well as a list of all Securities transactions that remain unsettled at that time, and (iii) such other matters as the parties may agree from time to time. (b) For each Business Day, the Custodian shall render to the Company a daily report of (i) all deposits to and withdrawals from the Cash Account for such Business Day and the outstanding balance as of the end of such Business Day, and (ii) a report of settled trades of Securities for such Business Day. (c) The Custodian shall have no duty or obligation to undertake any market valuation of the Securities under any circumstance. (d) The Custodian shall provide the Company, promptly upon request, with such reports as are reasonably available to it and as the Company may reasonably request from time to time, concerning (i) the internal accounting controls, including procedures for safeguarding securities, which are employed by the Custodian or any Foreign Sub-custodian appointed pursuant to Section 6.1 and (ii) the financial strength of the Custodian or any Foreign Sub-custodian appointed pursuant to Section 6.1. 5. DEPOSIT IN U.S. SECURITIES SYSTEMS The Custodian may deposit and/or maintain Securities in a Securities System within the United States in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, including Rule 17f-4 under the 1940 Act, and subject to the following provisions: (a) The Custodian may keep domestic Securities in a U.S. Securities System; provided that such Securities are represented in an account of the Custodian in the U.S. Securities System which shall not include any assets of the Custodian other than assets held by it as a fiduciary, custodian or otherwise for customers; (b) The records of the Custodian with respect to Securities which are maintained in a U.S. Securities System shall identify by book-entry those Securities belonging to the Company; (c) The Custodian shall provide to the Company copies of all notices received from a U.S. Securities System of transfers of Securities for the account of the Company; and (d) Anything to the contrary in this Agreement notwithstanding, the Custodian shall not be liable to the Company for any direct loss, damage, cost, expense, liability or claim to the Company resulting from use of any U.S. Securities System (other than to the extent resulting from the gross negligence, misfeasance or misconduct 15 of the Custodian itself, or from failure of the Custodian to enforce effectively such rights as it may have against a U.S. Securities System). 6. SECURITIES HELD OUTSIDE OF THE UNITED STATES 6.1 Appointment of Foreign Sub-custodian . The Company hereby authorizes and instructs the Custodian in its sole discretion to employ one or more Foreign Sub-custodians to act as Eligible Securities Depositories or as sub-custodian to hold the Securities and other assets of the Company maintained outside the United States, subject to the Company’s approval in accordance with this Section. If the Custodian wishes to appoint a Foreign Sub-custodian to hold property of the Company subject to this Agreement, it will so notify the Company and provide it with information reasonably necessary to determine any such new Foreign Sub-custodian’s eligibility under Rule 17f-5 under the 1940 Act, including a copy of the proposed agreement with such Foreign Sub-custodian. The Company shall at the meeting of its board of directors next following receipt of such notice and information give a written approval or disapproval of the proposed action. 6.2 Assets to be Held . The Custodian shall limit the Securities and other assets maintained in the custody of the Foreign Sub- custodian to: (a) Foreign Securities and (b) cash and cash equivalents in such amounts as the Company (through Proper Instructions) may determine to be reasonably necessary to effect the Company’s transactions in such investments. 6.3 Omnibus Accounts . The Custodian may hold Foreign Securities and related Proceeds with one or more Foreign Sub- custodians or Eligible Securities Depositories in each case in a single account with such Sub-custodian or Securities Depository that is identified as belonging to the Custodian for the benefit of its customers; provided however, that the records of the Custodian with respect to Securities and related Proceeds which are property of the Company maintained in such account(s) shall identify by book- entry those Securities and other property as belonging to the Company 6.4 Reports Concerning Foreign Sub-custodian . The Custodian will supply to the Company, upon request from time to time, statements in respect of the Securities held by Foreign Sub-custodians or Eligible Securities Depositories, including an identification of the Foreign Sub-custodians and Eligible Securities Depositories having physical possession of the Foreign Securities. 6.5 Transactions in Foreign Custody Account . Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Securities received by a Foreign Intermediary for the account of the Company may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. 16 6.6 Foreign Sub-custodian . Each contract or agreement pursuant to which the Custodian employs a Foreign Sub-custodian shall include provisions that provide: (i) for indemnification or insurance arrangements (or any combination of the foregoing) such that the Company will be adequately protected against the risk of loss of assets held in accordance with such contract; (ii) that the Company’s assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Sub-custodian or its creditors (except a claim of payment for their safe custody or administration) or, in the case of cash deposits, liens or rights in favor of creditors of the Sub-custodian arising under bankruptcy, insolvency, or similar laws; (iii) that beneficial ownership for the Company’s assets will be freely transferable without the payment of money or value other than for safe custody or administration; (iv) that adequate records will be maintained identifying the assets as belonging to the Company or as being held by a third party for the benefit of the Company; (v) that the Company’s independent public accountants will be given access to those records or confirmation of the contents of those records; and (vi) that the Company will receive periodic reports with respect to the safekeeping of the Company’s assets, including notification of any transfer to or from a Company’s account or a third party account containing assets held for the benefit of the Company. Such contract may contain, in lieu of any or all of the provisions specified above, such other provisions that the Custodian determines will provide, in their entirety, the same or a greater level of care and protection for Company assets as the specified provisions, in their entirety. 6.7 Custodian’s Responsibility for Foreign Sub-custodian . (a) With respect to its responsibilities under this Section 6, the Custodian agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of property of the Company would exercise. The Custodian further agrees that the Foreign Securities will be subject to reasonable care, based on the standards applicable to the Custodian in the relevant market, if maintained with each Foreign Sub-custodian, after considering all factors relevant to the safekeeping of such assets, including: (i) the Foreign Sub-custodian’s practices, procedures, and internal controls, including the physical protections available for certificated securities (if applicable), the method of keeping custodial records, and the security and data protection practices; (ii) whether the Foreign Sub-custodian has the requisite financial strength to provide reasonable care for Company assets; (iii) the Foreign Sub-custodian’s general reputation and standing and, in the case of Eligible Securities Depository, the Eligible Securities Depository’s operating history and number of participants; and (iv) whether the Company will have jurisdiction over and be able to enforce judgments against the Foreign Sub-custodian, such as by virtue of the existence of any offices of the Foreign Sub-custodian in the United States or the Sub-custodian’s consent to service of process in the United States. (b) At the end of each calendar quarter or at such other times as the Company’s board of directors deems reasonable and appropriate based on the circumstances of the Company’s foreign custody arrangements, the Custodian shall provide written 17 reports notifying the board of directors of the Company as to of the placement of the Foreign Securities and cash of the Company with a particular Foreign Sub-custodian and of any material changes in the Company’s foreign custody arrangements. The Custodian shall promptly take such steps as may be required to withdraw assets of the Company from any Foreign Sub-custodian that has ceased to meet the requirements of Rule 17f-5 under the 1940 Act. (c) The Custodian shall establish a system to monitor the appropriateness of maintaining the Company’s assets with a particular Foreign Sub-custodian and the performance of the contract governing the Company’s arrangements with such Foreign Sub- custodian. To the extent the Custodian holds Foreign Securities and related Proceeds with one or more Eligible Securities Depositories, the Custodian shall provide the Company with an analysis of the custody risks associated with maintaining assets with such Eligible Securities Depository and shall monitor such custody risks on a continuing basis and promptly notify the Company of any material change in these risks. The Custodian agrees to exercise reasonable care, prudence and diligence in performing its obligations under this clause (c). If the Custodian determines that a custody arrangement with an Eligible Securities Depository no longer meets the requirements of this Section, the Company’s Foreign Securities must be withdrawn from such depository as soon as reasonably practicable. (d) The Custodian’s responsibility with respect to the selection or appointment of a Foreign Sub-custodian shall be limited to a duty to exercise reasonable care in the selection or retention of such Foreign Intermediaries in light of prevailing settlement and securities handling practices, procedures and controls in the relevant market. With respect to any costs, expenses, damages, liabilities, or claims (including attorneys’ and accountants’ fees) incurred as a result of the acts or the failure to act by any Foreign Sub-custodian, the Custodian shall take reasonable action to recover such costs, expenses, damages, liabilities, or claims from such Foreign Sub-custodian; provided that the Custodian’s sole liability in that regard shall be limited to amounts actually received by it from such Foreign Intermediaries (exclusive of related costs and expenses incurred by the Custodian). The Custodian shall have no responsibility for any act or omission (or the insolvency of) any Securities System (including an Eligible Securities Depository). In the event the Company incurs a loss due to the negligence, willful misconduct, or insolvency of a Securities System (including an Eligible Securities Depository), the Custodian shall make reasonable endeavors, in its discretion, to seek recovery from the Eligible Securities Depository. 7. CERTAIN GENERAL TERMS 7.1 No Duty to Examine Underlying Instruments . Nothing herein shall obligate the Custodian to review or examine the terms of any underlying limited liability company agreement, stock or share certificate, share registrar, instrument, subscription agreement, limited partnership agreement or other similar agreement or document evidencing or 18 governing any Security to determine the validity, sufficiency, marketability or enforceability of any Security (and shall have no responsibility for the genuineness or completeness thereof), or otherwise. 7.2 Resolution of Discrepancies . In the event of any discrepancy between the information set forth in any report provided by the Custodian to the Company and any information contained in the books or records of the Company, the Company shall promptly notify the Custodian thereof and the parties shall cooperate to diligently resolve the discrepancy. 7.3 Improper Instructions . Notwithstanding anything herein to the contrary, the Custodian shall not be obligated to take any action (or forebear from taking any action), which it reasonably determines to be contrary to the terms of this Agreement or applicable law. In no instance shall the Custodian be obligated to provide services on any day that is not a Business Day. 7.4 Proper Instructions . (a) The Company will give a notice to the Custodian, in form acceptable to the Custodian, specifying the names and specimen signatures of persons authorized to give Proper Instructions (collectively, “ Authorized Persons ” and each is an “ Authorized Person ”), which notice shall be signed by any two (2) Authorized Persons previously certified to the Custodian. The Custodian shall be entitled to rely upon the identity and authority of such persons until it receives written notice from any two (2) Authorized Persons of the Company to the contrary. The initial Authorized Persons are set forth on Schedule A attached hereto and made a part hereof (as such Schedule A may be modified from time to time by written notice from the Company to the Custodian); and the Company hereby represents and warrants that the true and accurate specimen signatures of such initial Authorized Persons are set forth on Schedule A . (b) The Custodian shall have no responsibility or liability to the Company (or any other person or entity), and shall be indemnified and held harmless by the Company, in the event that a subsequent written confirmation of an oral instruction fails to conform to the oral instructions received by the Custodian. The Custodian shall not have an obligation to act in accordance with purported instructions to the extent that they conflict with applicable law or regulations, local market practice or the Custodian’s operating policies and practices. The Custodian shall not be liable for any loss resulting from a delay while it obtains clarification of any Proper Instructions. 7.5 Actions Permitted Without Express Authority . The Custodian may, at its discretion, without express authority from the Company: (a) surrender Securities in temporary form for Securities in definitive form; (b) endorse for collection cheques, drafts and other negotiable instruments; and 19 (c) in general attend to all nondiscretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Company. 7.6 Evidence of Authority . The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate, instrument or paper reasonably believed by it to be genuine and to have been properly executed or otherwise given by or on behalf of the Company by any two (2) Authorized Persons. The Custodian may receive and accept a certificate signed by any two (2) Authorized Persons as conclusive evidence of: (a) the authority of any person to act in accordance with such certificate; or (b) any determination or action by the Company as described in such certificate, and such certificate may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary from any two (2) Authorized Persons of the Company. 7.7 Receipt of Communications . Any communication received by the Custodian on a day which is not a Business Day or after 3:30 p.m., Eastern time (or such other time as is agreed by the Company and the Custodian from time to time), on a Business Day will be deemed to have been received on the next Business Day (but in the case of communications so received after 3:30 p.m., Eastern time, on a Business Day the Custodian will use its best efforts to process such communications as soon as possible after receipt). 8. COMPENSATION OF CUSTODIAN 8.1 Fees . The Custodian shall be entitled to compensation for its services as set forth in Schedule B . 8.2 Expenses . The Company agrees to pay or reimburse to the Custodian upon its request from time to time all reasonable and documented out-of-pocket costs, disbursements, advances, and expenses (including reasonable and documented fees and expenses of external legal counsel) incurred, and any disbursements and advances made (including any Account overdraft resulting from any settlement or assumed settlement, provisional credit, chargeback, returned deposit item, reclaimed payment or claw-back, or the like), in connection with the transactions contemplated hereby or the administration of this Agreement or performance by the Custodian of its duties and services under this Agreement, from time to time (including costs and expenses of any action deemed necessary by the Custodian to collect any amounts owing to it under this Agreement). 9. RESPONSIBILITY OF CUSTODIAN 9.1 General Duties . The Custodian shall have no duties, obligations or responsibilities under this Agreement or with respect to the Securities or Proceeds except for such duties as are expressly and specifically set forth in this Agreement, and the 20 duties and obligations of the Custodian shall be determined solely by the express provisions of this Agreement. No implied duties, obligations or responsibilities shall be read into this Agreement against, or on the part of, the Custodian. 9.2 Instructions . (a) The Custodian shall be entitled to refrain from taking any action unless it has such instruction (in the form of Proper Instructions) from the Company as it reasonably deems necessary, and shall be entitled to require, upon notice to the Company, that Proper Instructions to it be in writing. The Custodian shall have no liability for any action (or forbearance from action) taken pursuant to the Proper Instruction of the Company. (b) Whenever the Custodian is entitled or required to receive or obtain any communications or information pursuant to or as contemplated by this Agreement, it shall be entitled to receive the same in writing, in form, content and medium reasonably acceptable to it and otherwise in accordance with any applicable terms of this Agreement; and whenever any report or other information is required to be produced or distributed by the Custodian it shall be in form, content and medium reasonably acceptable to it and the Company and otherwise in accordance with any applicable terms of this Agreement. 9.3 General Standards of Care . Notwithstanding any terms herein contained to the contrary, the acceptance by the Custodian of its appointment hereunder is expressly subject to the following terms, which shall govern and apply to each of the terms and provisions of this Agreement (whether or not so stated therein): (a) The Custodian may rely on (and shall be protected in acting or refraining from acting in reliance upon) any written notice, instruction, statement, certificate, request, waiver, consent, opinion, report, receipt or other paper or document furnished to it (including any of the foregoing provided to it by telecopier or electronic means), not only as to its due execution and validity, but also as to the truth and accuracy of any information therein contained, which it in good faith believes to be genuine and signed or presented by the proper person (which in the case of any instruction from or on behalf of the Company shall be any two (2) Authorized Persons); and the Custodian shall be entitled to presume the genuineness and due authority of any signature appearing thereon. The Custodian shall not be bound to make any independent investigation into the facts or matters stated in any such notice, instruction, statement, certificate, request, waiver, consent, opinion, report, receipt or other paper or document; provided, however, that, if the form thereof is specifically prescribed by the terms of this Agreement, the Custodian shall examine the same to determine whether it substantially conforms on its face to such requirements hereof. (b) Neither the Custodian nor any of its directors, officers or employees shall be liable to anyone for any error of judgment, or for any act done or step taken or 21 omitted to be taken by it (or any of its directors, officers of employees), or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection herewith, unless such action or inaction constitutes gross negligence, willful misconduct or bad faith on its part and in breach of the terms of this Agreement. The Custodian shall not be liable for any action taken by it in good faith and reasonably believed by it to be within powers conferred upon it, or taken by it pursuant to any direction or instruction by which it is governed hereunder, or omitted to be taken by it by reason of the lack of direction or instruction required hereby for such action. Except as otherwise expressly provided herein, the Custodian shall not be under any obligation at any time to ascertain whether the Company is in compliance with the 1940 Act, the regulations thereunder, or the Company’s investment objectives and policies then in effect. (c) In no event shall the Custodian be liable for any indirect, special or consequential damages (including lost profits) whether or not it has been advised of the likelihood of such damages. (d) The Custodian may consult with, and obtain advice from, legal counsel selected in good faith with respect to any question as to any of the provisions hereof or its duties hereunder, or any matter relating hereto, and the written opinion or advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by the Custodian in good faith in accordance with the opinion and directions of such counsel; the reasonable cost of such services shall be reimbursed pursuant to Section 8.2 above. (e) The Custodian shall not be deemed to have notice of any fact, claim or demand with respect hereto unless actually known by an employee working in its Corporate Trust Services group and charged with responsibility for administering this Agreement or unless received (and then only to the extent received) in writing by the Custodian at the applicable address(es) as set forth in Section 15 and specifically referencing this Agreement. (f) No provision of this Agreement shall require the Custodian to expend or risk its own funds, or to take any action (or forbear from action) hereunder which might in its judgment involve any expense or any financial or other liability unless it shall be furnished with acceptable indemnification. Nothing herein shall obligate the Custodian to commence, prosecute or defend legal proceedings in any instance, whether on behalf of the Company or on its own behalf or otherwise, with respect to any matter arising hereunder, or relating to this Agreement or the services contemplated hereby. (g) The permissive right of the Custodian to take any action hereunder shall not be construed as duty. (h) The Custodian may act or exercise its duties or powers hereunder through agents, subcustodians, or attorneys, and the Custodian shall not be liable or responsible 22 for the actions or omissions of any such agent, subcustodian or attorney (i) appointed with the Company’s prior written consent specifically acknowledging such limitation of liability and (ii) maintained with reasonable due care. (i) All indemnifications contained in this Agreement in favor of the Custodian shall survive the termination of this Agreement. 9.4 Indemnification; Custodian’s Lien . (a) The Company shall and does hereby indemnify and hold harmless each of the Custodian, and any Foreign Sub-custodian appointed pursuant to Section 6.1 above, for and from any and all costs and expenses (including reasonable attorney’s fees and expenses), and any and all losses, damages, claims and liabilities, that may arise, be brought against or incurred by the Custodian , and any advances or disbursements made by the Custodian (including in respect of any Account overdraft, returned deposit item, chargeback, provisional credit, settlement or assumed settlement, reclaimed payment, claw-back or the like), as a result of, relating to, or arising out of this Agreement, or the administration or performance of the Custodian’s duties hereunder, or the relationship between the Company (including, for the avoidance of doubt, any subsidiary) and the Custodian created hereby, other than such liabilities, losses, damages, claims, costs and expenses as are directly caused by the Custodian’s action or inaction constituting gross negligence, fraud or willful misconduct. (b) If the Company requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from the Custodian’s fees pursuant to this Agreement or from its or its nominee’s own gross negligent action, gross negligent failure to act, fraud or willful misconduct, or if the Company fails to compensate or pay the Custodian pursuant to Section 8.1 or Section 9.4 hereof, any cash at any time held for the account of the Company shall be security therefor and should the Company fail to repay the Custodian promptly (or, if specified, within the time frame provided herein), the Custodian shall be entitled to utilize available cash to the extent necessary to obtain reimbursement. 9.5 Force Majeure . Without prejudice to the generality of the foregoing, the Custodian shall be without liability to the Company for any damage or loss resulting from or caused by events or circumstances beyond the Custodian’s reasonable control, including nationalization, expropriation, currency restrictions, the interruption, disruption or suspension of the normal procedures and practices of any securities market, power, mechanical, communications or other technological failures or interruptions, computer viruses or the like, fires, floods, earthquakes or other natural disasters, civil and military 23 disturbance, acts of war or terrorism, riots, revolution, acts of God, work stoppages, strikes, national disasters of any kind, or other similar events or acts; errors by the Company (including any Authorized Person) in its instructions to the Custodian; or changes in applicable law, regulation or orders. 10. SECURITY CODES If the Custodian issues to the Company security codes, passwords or test keys in order that it may verify that certain transmissions of information, including Proper Instructions, have been originated by the Company, the Company shall take all commercially reasonable steps to safeguard any security codes, passwords, test keys or other security devices which the Custodian shall make available. 11. TAX LAW 11.1 Domestic Tax Law . The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Company, or the Custodian as custodian of the Securities or the Proceeds, by the tax law of the United States or any state or political subdivision thereof. The Custodian shall be kept indemnified by and be without liability to the Company for such obligations including taxes (but excluding any income taxes assessable in respect of compensation paid to the Custodian pursuant to this Agreement), withholding, certification and reporting requirements, claims for exemption or refund, additions for late payment interest, penalties and other expenses (including legal expenses) that may be assessed against the Company, or the Custodian as custodian of the Securities or Proceeds. 11.2 Foreign Tax Law . It shall be the responsibility of the Company to notify the Custodian of the obligations imposed on the Company, or the Custodian as custodian of any Foreign Securities or related Proceeds, by the tax law of foreign ( i.e. , non-U.S.) jurisdictions, including responsibility for withholding and other taxes, assessments or other government charges, certifications and government reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to cooperate with the Company with respect to any claims for exemption or refund under the tax law of the jurisdictions for which the Company has provided such information. 12. EFFECTIVE PERIOD, TERMINATION 12.1 Effective Date . This Agreement shall become effective as of its due execution and delivery by each of the parties. This Agreement shall continue in full force and effect until terminated as hereinafter provided. This Agreement may be terminated by the Custodian or the Company pursuant to Section 12.2. 12.2 Termination . This Agreement shall terminate upon the earliest of (a) occurrence of the effective date of termination specified in any written notice of termination given by either party to the other not later than sixty (60) days prior to the effective date of termination specified therein, and (b) such other date of termination as may be mutually 24 agreed upon by the parties in writing. If a successor custodian shall have been appointed by the Company, the Custodian shall, upon receipt of a notice of acceptance by the successor custodian, on such specified date of termination (a) deliver directly to the successor custodian all Securities (other than Securities held in a Securities System) and cash then owned by the Fund and held by the Custodian as custodian, and (b) transfer any Securities held in a Securities System to an account of or for the benefit of the Fund at the successor custodian. In the event of the appointment of a successor custodian, it is agreed that all Securities held by the Custodian, any sub- custodian or nominee shall be delivered to the successor custodian; and the Custodian agrees to cooperate with the Company in the execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement. The Company may at any time immediately terminate this Agreement in the event of the appointment of a conservator or receiver for the Custodian by regulatory authorities or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Termination shall not affect any of the liabilities either party owes to the other arising under this Agreement prior to such termination. 12.3 Resignation . The Custodian may at any time resign under this Agreement by giving not less than sixty (60) days advance written notice thereof to the Company. The Company may at any time remove the Custodian under this Agreement by giving not less than sixty (60) days advance written notice thereof to the Custodian. 12.4 Successor . Prior to the effective date of termination of this Agreement, or the effective date of the resignation or removal of the Custodian, as the case may be, the Company shall give Proper Instruction to the Custodian designating a successor Custodian, if applicable. 12.5 Payment of Fees, etc . Upon termination of this Agreement or resignation or removal of the Custodian, the Company shall pay to the Custodian such compensation, and shall likewise reimburse the Custodian for its reasonable costs, expenses and disbursements, as may be due as of the date of such termination or resignation (or removal, as the case may be). All indemnifications in favor of the Custodian under this Agreement shall survive the termination of this Agreement, or any resignation or removal of the Custodian. 12.6 Final Report . In the event of any resignation or removal of the Custodian, the Custodian shall provide to the Company a complete final report or data file transfer of any Confidential Information as of the date of such resignation or removal. 13. REPRESENTATIONS AND WARRANTIES 13.1 Representations of the Company . The Company represents and warrants to the Custodian that: 25 (a) it has the power and authority to enter into and perform its obligations under this Agreement, and it has duly authorized, executed and delivered this Agreement so as to constitute its valid and binding obligation; and (b) in giving any instructions which purport to be “Proper Instructions” under this Agreement, the Company will act in accordance with the provisions of its articles of incorporation and bylaws and any applicable laws and regulations. 13.2 Representations of the Custodian . The Custodian hereby represents and warrants to the Company that: (a) it is qualified to act as a custodian pursuant to Section 26(a)(1) of the 1940 Act; (b) it has the power and authority to enter into and perform its obligations under this Agreement; (c) it has duly authorized, executed and delivered this Agreement so as to constitute its valid and binding obligations; and (d) it maintains business continuity policies and standards that include data file backup and recovery procedures that comply with all applicable regulatory requirements. 14. PARTIES IN INTEREST; NO THIRD PARTY BENEFIT This Agreement is not intended for, and shall not be construed to be intended for, the benefit of any third parties and may not be relied upon or enforced by any third parties (other than successors and permitted assigns pursuant to Section 19). 15. NOTICES Any Proper Instructions (to the extent given by hand, mail, courier or telecopier) shall be given to the following address (or such other address as either party may designate by written notice to the other party), and otherwise any notices, approvals and other communications hereunder shall be sufficient if made in writing and given to the parties at the following address (or such other address as either of them may subsequently designate by notice to the other), given by (i) hand, (ii) certified or registered mail, postage prepaid, (iii) recognized courier or delivery service, or (iv) confirmed telecopier or telex, with a duplicate sent on the same day by first class mail, postage prepaid: (a) if to the Company or any Subsidiary, to th Street, 44 Prospect Capital Corporation 10 East 40 Floor Attention: Prospect Accounting Fax No.: (212) 448-9652 Email: fax@prospectstreet.com th 26 pacct@prospectstreet.com pl@prospectstreet.com (b) if to the Custodian (other than in its role as Document Custodian), to Israel Discount Bank of New York Ltd. 511 Fifth Avenue New York, NY 10017 Ref: Prospect Capital Corporation Attention: Mary Ann Higgins Fax: 718-761-3433 Email: MHiggins@idbny.com (c) if to the Custodian solely in its role as Document Custodian, to Israel Discount Bank of New York Ltd. 511 Fifth Avenue New York, NY 10017 Ref: Prospect Capital Corporation Attn: Mary Ann Higgins Fax: 718-761-3433 Email: MHiggins@idbny.com 16. CHOICE OF LAW AND JURISDICTION This Agreement shall be construed, and the provisions thereof interpreted under and in accordance with and governed by the laws of the State of New York for all purposes (without regard to its choice of law provisions); except to the extent such laws are inconsistent with federal securities laws, including the 1940 Act, in which case such federal securities laws shall govern. 17. ENTIRE AGREEMENT; COUNTERPARTS 17.1 Complete Agreement . This Agreement constitutes the complete and exclusive agreement of the parties with regard to the matters addressed herein and supersedes and terminates, as of the date hereof, all prior agreements or understandings, oral or written, between the parties to this Agreement relating to such matters. 17.2 Counterparts . This Agreement may be executed in any number of counterparts and all counterparts taken together shall constitute one and the same instrument. 17.3 Facsimile Signatures . The exchange of copies of this Agreement and of signature pages by facsimile transmission or pdf shall constitute effective execution and delivery of this Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile or pdf shall be deemed to be their original signatures for all purposes. 27 18. AMENDMENT; WAIVER 18.1 Amendment . This Agreement may not be amended except by an express written instrument duly executed by each of the Company and the Custodian (and not by an email or series of emails); provided, that in the case of the Company, such amendment must be signed in blue ink by the Chief Executive Officer or President of the Company or their successors. 18.2 Waiver . In no instance shall any delay or failure to act be deemed to be or effective as a waiver of any right, power or term hereunder, unless and except to the extent such waiver is set forth in an express written instrument signed by the party against whom it is to be charged (and not by an email or series of emails); provided, that in the case of the Company, such waiver must be signed in blue ink by the Chief Executive Officer or President of the Company or their successors. 19. SUCCESSOR AND ASSIGNS 19.1 Successors Bound . The covenants and agreements set forth herein shall be binding upon and inure to the benefit of each of the parties and their respective successors and permitted assigns. Neither party shall be permitted to assign their rights under this Agreement without the written consent of the other party; provided, however, that the foregoing shall not limit the ability of the Custodian to delegate certain duties or services to or perform them through agents or attorneys appointed with due care as expressly provided in this Agreement. 19.2 Merger and Consolidation . Any corporation or association into which the Custodian may be merged or converted or with which it may be consolidated, or any corporation or association resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any corporation or association to which the Custodian transfers all or substantially all of its corporate trust business, shall be the successor of the Custodian hereunder, and shall succeed to all of the rights, powers and duties of the Custodian hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto. 20. SEVERABILITY The terms of this Agreement are hereby declared to be severable, such that if any term hereof is determined to be invalid or unenforceable, such determination shall not affect the remaining terms. Should any part of this Agreement be held invalid or unenforceable in any jurisdiction, the invalid or unenforceable portion or portions shall be removed (and no more) only in that jurisdiction, and the remainder shall be enforced as fully as possible (removing the minimum amount possible) in that jurisdiction. In lieu of such invalid or unenforceable provision, the parties hereto will negotiate in good faith to add automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such invalid or unenforceable provision as may be possible. 28 21. REQUEST FOR INSTRUCTIONS If, in performing its duties under this Agreement, the Custodian is required to decide between alternative courses of action, the Custodian may (but shall not be obliged to) request written instructions from the Company as to the course of action desired by it. If the Custodian does not receive such instructions within two (2) Business Days after it has requested them, the Custodian may, but shall be under no duty to, take or refrain from taking any such courses of action. The Custodian shall act in accordance with instructions received from the Company in response to such request after such two-Business Day period except to the extent it has already taken, or committed itself to take, action inconsistent with such instructions. 22. OTHER BUSINESS Nothing herein shall prevent the Custodian or any of its affiliates from engaging in other business, or from entering into any other transaction or financial or other relationship with, or receiving fees from or from rendering services of any kind to the Company or any other Person. Nothing contained in this Agreement shall constitute the Company and/or the Custodian (and/or any other Person) as members of any partnership, joint venture, association, syndicate, unincorporated business or similar assignment as a result of or by virtue of the engagement or relationship established by this Agreement. 23. REPRODUCTION OF DOCUMENTS This Agreement and all schedules, exhibits, attachments and amendment hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further production shall likewise be admissible in evidence. 24. MISCELLANEOUS The Company acknowledges receipt of the following notice: “ IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT . To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. For a non-individual person such as a business entity, a charity, a trust or other legal entity the Custodian will ask for documentation to verify its formation and existence as a legal entity. The Custodian may also ask to see financial statements, licenses, identification and authorization documents from individuals claiming authority to represent the entity or other relevant documentation.” 29 SCHEDULE A CERTIFICATE OF AUTHORIZED PERSONS The undersigned hereby certifies that he/she is the duly elected and acting Secretary of Prospect Capital Corporation (the “Client”), and further certifies that the following officers or employees of the Client have been duly authorized to deliver Instructions to the Custodian pursuant to the Agreement between the Client and Custodian, dated April 24, 2013, and that the signatures appearing opposite their names are true and correct: John F. Barry III Name M. Grier Eliasek Name Brian H. Oswald Name Name Name Name Name Name Chairman and CEO Title President and COO Title CFO, Secretary and Treasurer Title /s/ John F. Barry III Signature /s/ M. Grier Eliasek Signature /s/ Brian H. Oswald Signature Title Title Title Title Title Signature Signature Signature Signature Signature This certificate supersedes any certificate of Authorized Persons you may currently have on file. By: /s/ M. Grier Eliasek Name: M. Grier Eliasek Title: President and COO Date: April 24, 2013 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed and delivered by a duly authorized officer, intending the same to take effect as of the date first written above. Witness: PROSPECT CAPITAL CORPORATION /s/ Brian H. Oswald Name: Brian H. Oswald Title: CFO, Secretary and Treasurer Witness: /s/ Mary Ann Higgins Name: Mary Ann Higgins Title: Vice President /s/ M. Grier Eliasek By: Name: M. Grier Eliasek Title: President and COO ISRAEL DISCOUNT BANK OF NEW YORK LTD. /s/ Dominick Lombardi as Trustee By: Name: Title: Compensation for the role of custodian and all other administrative and reporting functions under the Custody Agreement. Fee to be paid quarterly in arrears. 0.05% per annum SCHEDULE B FEES CODE OF ETHICS FOR PROSPECT CAPITAL CORPORATION PROSPECT CAPITAL MANAGEMENT, LLC (Board Approved: August 20, 2013) Exhibit 14 Section I. Statement of General Fiduciary Principles This Code of Ethics (the “Code”) has been adopted by each of Prospect Capital Corporation and its consolidated subsidiaries (“PCC” or the “Corporation”), and Prospect Capital Management, LLC, the investment adviser (the “Adviser” or “PCM”) of the Corporation (together “Prospect”) , in compliance with Rule 17j-1 under the Investment Company Act of 1940 (the “1940 Act”) and Rule 204A-1 under the Investment Advisers Act of 1940 (the “Advisers Act”). The purpose of the Code is to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments, investment intentions and other non-public information of the Corporation may abuse their fiduciary duty to the Corporation, and otherwise to deal with the types of conflict of interest situations to which Rule 17j-1 and Rule 204A-1 are addressed. The Code is based on the principle that the directors and officers of the Corporation, and the managers, partners, officers and employees of the Adviser, who provide services to the Corporation, (i) owe a fiduciary duty to the Corporation to conduct their personal securities transactions in a manner that does not interfere with the Corporation’s transactions or otherwise take unfair advantage of their relationship with the Corporation, and (ii) owe a fiduciary duty of care, loyalty, honesty and good faith to act in the best interests of the Corporation and its shareholders. All Access Persons (as defined below) are expected to adhere to this general principle as well as to comply with all of the specific provisions of this Code that are applicable to them. Any Access Person who is affiliated with another entity that is a registered investment adviser is, in addition, expected to comply with the provisions of the code of ethics that has been adopted by such other investment adviser. Technical compliance with the Code will not automatically insulate any Access Person from scrutiny of transactions that show a pattern of compromise or abuse of the individual’s fiduciary duty to the Corporation. Accordingly, all Access Persons must seek to avoid any actual or potential conflicts between their personal interests and the interests of the Corporation and its shareholders. In sum, all Access Persons shall place the interests of the Corporation before their own personal interests. All Access Persons must read and retain this Code of Ethics. Section II Definitions (A) “Access Person” means any Supervised Person (as defined below) of the Adviser who has access to non-public information regarding the Corporation or any other clients’ purchase or sale of securities, or non-public information regarding the portfolio holdings of the Corporation or any other clients for which the Adviser serves as investment adviser, or whose investment adviser or principal underwriter controls (as defined below) the Adviser, is controlled by the Adviser, or is under common control with the Adviser, or Advisory Person (as defined below) of the Corporation or the Adviser. (B) An “Advisory Person” of the Corporation or the Adviser means: (i) any director, officer, general partner or employee of the Corporation or the Adviser, or any company in a control relationship to the Corporation or the Adviser, who in connection with his or her regular functions or duties makes, participates in, or obtains information regarding the purchase or sale of any Covered Security (as defined below) by the Corporation, or whose functions relate to the making of any recommendation with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Corporation or the Adviser, who obtains information concerning recommendations made to the Corporation with regard to the purchase or sale of any Covered Security by the Corporation. (C) “Beneficial Ownership” is interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the “1934 Act”). Under this Rule, a person is deemed to have beneficial ownership of a security if the person, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in such security. A “pecuniary interest” in a security means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. A person is presumed to have an “indirect pecuniary interest” in securities held by a member of his or her “Immediate Family” (although this presumption may be rebutted). For purposes of the Rule, “Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother- in-law, or sister-in-law, and shall include adoptive relationships. An indirect pecuniary interest also includes, among other things: • a general partner’s proportionate interest in the portfolio securities held by a general or limited partnership; • subject to certain exceptions specified in the Rule, a performance-related fee, other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment company, investment adviser, investment manager, trustee or person or entity performing a similar function; • a person’s right to dividends that is separated or separable from the underlying securities; • a person’s interest in securities held by certain trusts; and • a person’s right to acquire equity securities through the exercise or conversion of any derivative security, whether or not presently exercisable. The term “derivative security” means any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege at a price related to an equity security, or similar securities with a value derived from the value of an equity security. A person who is a shareholder of a corporation or similar entity is not deemed to have a pecuniary interest in portfolio securities held by the corporation or the entity if the shareholder is not a controlling shareholder of the corporation or the entity and does not have or share investment control over the corporation’s or the entity’s portfolio. (D) “Chief Compliance Officer” means the Chief Compliance Officer of the Corporation or the Adviser, as the context requires. (E) “Control” shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act. Under the 1940 Act, “control” means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with the company. A person is presumed to control a company if he or she owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of that company. (F) “Covered Security” means a security as defined in Section 2(a)(36) of the 1940 Act and Section 202(a)(18) of the Advisers Act, which includes: any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Covered Security also means any exchange traded fund. “Covered Security” does not include: (i) direct obligations of the Government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (iii) shares issued by money market funds; (iv) shares issued by open-end investment companies registered under the 1940 Act that are not Reportable Funds (as defined below); and (v) shares issued by unit investment trusts that are invested exclusively in one or more open-end investment companies registered under the 1940 Act, none of which are Reportable Funds. References to a Covered Security in this Code (e.g., a prohibition or requirement applicable to the purchase or sale of a Covered Security) shall be deemed to refer to and to include any warrant for, option in, or security immediately convertible into that Covered Security, and shall also include any instrument that has an investment return or value that is based, in whole or in part, on that Covered Security (collectively, “Derivatives”). Therefore, except as otherwise specifically provided by this Code: (i) any prohibition or requirement of this Code applicable to the purchase or sale of a Covered Security shall also be applicable to the purchase or sale of a Derivative relating to that Covered Security; and (ii) any prohibition or requirement of this Code applicable to the purchase or sale of a Derivative shall also be applicable to the purchase or sale of a Covered Security relating to that Derivative. (G) “Independent Director” means a director of the Corporation who is not an “interested person” of the Corporation within the meaning of Section 2(a)(19) of the 1940 Act. (H) “Initial Public Offering” means an offering of securities registered under the Securities Act of 1933 (the “1933 Act”), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the 1934 Act. (I) “Limited Offering” means an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) thereof or pursuant to Rule 504, Rule 505, or Rule 506 thereunder. (J) “Reportable Fund” means any investment company registered under the 1940 Act: (i) for which the Adviser serves as an investment adviser; or (ii) whose investment adviser or principal underwriter controls the Adviser, is controlled by the Adviser or is under common control with the Adviser. (K) “Security Held or to be Acquired” by the Corporation means: (i) any Covered Security which, within the most recent 15 days: (A) is or has been held by the Corporation; or (B) is being or has been considered by the Corporation or the Adviser for purchase by the Corporation; and (ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in Section II (F). (L) “Supervised Person” means any partner, officer, director (or other person occupying a similar status or performing similar functions) or employee of the Adviser, or other person who provides investment advice on behalf of the Adviser and is subject to the supervision and control of the Adviser. Section III Objective and General Prohibitions A. As set forth in this Code, all Supervised Persons must comply with applicable federal securities laws and regulations. Access Persons may not engage in any investment transaction under circumstances in which he or she benefits from or interferes with the purchase or sale of investments by the Corporation (or the Adviser on behalf of the Corporation). In addition, Access Persons may not use information concerning the investments or investment intentions of the Corporation, or such person’s ability to improperly influence such investment intentions, for personal gain or in a manner detrimental to the interests of the Corporation. Access Persons may not engage in conduct that is deceitful, fraudulent or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of investments by the Corporation. In this regard, Access Persons should recognize that Rule 17j-1 makes it unlawful for any affiliated person of the Corporation, or any affiliated person of an investment adviser for the Corporation, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Corporation to: (i) employ any device, scheme or artifice to defraud the Corporation; (ii) make any untrue statement of a material fact to the Corporation or omit to state to the Corporation a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (iii) engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Corporation; or (iv) engage in any manipulative practice with respect to the Corporation. Access Persons should also recognize that a violation of this Code, Rule 17j-1 or Rule 204A-1 may result in the imposition of: (1) sanctions as provided by Section VIII below; or (2) administrative, civil and, in certain cases, criminal fines, sanctions or penalties. No Access Person may trade any security without advance approval from an Approving Officer. B. For purposes of this Section III.B, (i) “Prospect” shall mean Prospect Capital Corporation, Prospect Capital Management, LLC, Prospect Administration, LLC, and any affiliate or portfolio company of any of the foregoing; (ii) “AP” shall mean any Access Person; and (iii) “relationship” shall mean, without limitation, any employment, consulting or other arrangement with Prospect. For a period ending on the later of (a) two years after the most recent circulation hereof to any AP, and (b) one year after termination of any AP’s relationship with Prospect, such AP shall not enter into discussions for a commercial relationship, nor consummate a commercial relationship, with (i) Prospect, or (ii) any person, entity or counterparty (x) with which Prospect has communicated, (y) as to which Prospect has considered issuing a term sheet or similar document, or (z) that Prospect has been in discussions with about a term sheet or similar document, in the case of each of (x), (y) or (z), at any time during the course of such AP’s relationship with Prospect. Notwithstanding any other provision, document or agreement, each AP agrees (a) to comply with duties of loyalty, full disclosure, fairness and honesty, and all common law duties imposed on APs; and (b) not to aid any competitor or potential competitor of Prospect engaged or seeking to engage in senior, first lien, second lien, subordinated or mezzanine lending or private equity (a) in the New York, New Jersey, Connecticut “Tri State” area, (b) east of the Mississippi River, (c) in the United States, or (d) in North America, or to do anything with any such competitor or potential competitor to the potential detriment of Prospect during the course of such AP’s relationship with Prospect and for one year thereafter. For a period ending on the later of (a) two years after the most recent circulation hereof to any AP, and (b) one year after termination of any AP’s relationship with Prospect, such AP shall not solicit any person or personnel associated with Prospect to work elsewhere, or compete with Prospect, or do anything that could or might potentially impair, in any way, any aspect of Prospect’s business or any aspect of PCM’s relationship with Prospect. Junior personnel and anyone with titles of associate and below must provide two weeks, and anyone with a title, position or level senior to associate must provide one month, notice before making a resignation or any other voluntary termination effective, and shall not take employment elsewhere during the notice period even if involuntarily terminated by Prospect. Notwithstanding any other provision, document or agreement, each AP agrees, as a condition of any offer of a relationship and of the continuation of any relationship, that the agreements set forth in this Section III.B are a contract between such AP and Prospect, enforceable as a contract ancillary to such AP’s relationship with Prospect, without which no such relationship would be permitted to exist. Each AP agrees to respect the confidentiality of all confidential or proprietary information obtained as a result of or in the course of such AP’s relationship with Prospect and not to use any such information for any purpose, except as directed by Prospect in writing. Each AP agrees not to use any such confidential or proprietary information to compete with or potentially harm Prospect, or in any other way, except as directed by Prospect in writing. Each AP of Prospect, and of any company Prospect invests in, is required to obey all standards of prudence and safety, and to comply at all times with all civil and criminal legal standards, including but not limited to all international, federal, state, local, SRO, and other duly constituted authority laws, regulations, procedures and protocols, and best practices, at all times, at work, at home, on vacation, domestically and internationally, and to do everything possible at all times to avoid any potential risk, harm or injury to the person or property of anyone or anything else, wherever situated. Accordingly, just as illustrative examples, it shall be a violation of the Compliance Manual of each of PCC and PCM to talk on a cell phone while driving, text message while driving, drive while under the influence of alcohol, drive above applicable speed limits, trespass, refuse to cooperate with an officer, ski or snowboard faster than is prudent, listen to an iPod while snowboarding, jaywalk, or fail to exercise due care on a golf course, at the beach, walking on the streets of New York City, making discriminatory or hurtful remarks, faces or gestures, etc. The above list is designed to be illustrative only and in no way exhaustive. Lapses of sound judgment are violations of the Compliance Manual of each of PCC and PCM. Annex A is an integral part of this Section III.B as fully as if set forth herein in haec verba . Section IV Prohibited Transactions Access Persons must comply with Section 9.4.2 of the Adviser’s Compliance Manual, which is excerpted below and may not purchase or sell any individual publicly traded security without advance approval from the CCO of PCM or the CCO of PCC. Mutual Funds are exempt from this prohibition. 9.4.2 Restricted Lists Upon notice that an employee of PCM is in possession of any material, non-public information regarding an issuer, or otherwise at his or her discretion, the Chief Compliance Officer of PCM will place the issuer on a “Restricted List” and circulate the list to employees. PCM officers, employees and their immediate family members are prohibited from personally, or on behalf of an advisory account, purchasing or selling securities of an issuer during any period the issuer is listed on the Restricted List. Issuers of which PCM employees are expected to have material, non-public information on a regular basis should generally be placed on the Restricted List. The Chief Compliance Officer of PCM shall take steps to immediately inform all employees of the issuers listed on the Restricted List. Personal Trading of PSEC shares No affiliate, director, member, officer or employee of PCC or PCM, or any other person who has access to non-public information pertaining to the operations, assets, investment activities or other material matters concerning the Corporation (“Access Persons”) and their immediate family members may trade in the Corporation’s shares (“PSEC Shares”): (i) under any circumstances, when in possession of material non-public information; (ii) without advance permission of one of the CCO of PCC or CCO of PCM (the “Approving Officers”); (iii) without providing a written confirm of any permitted trade under paragraph (ii) above immediately to the Approving Officers; and (iv) other than during the period beginning on the business day immediately following any earnings call held by or on behalf of PCC and ending on the later of (x) the four week anniversary of such date, or (y) one week before the end of the next fiscal quarter; provided, that such “trading window” shall be closed at any time any Approving Officer comes into possession of material non- public information. Notwithstanding the foregoing, an Access Person is not permitted to short PSEC Shares (or enter into any Derivative which has the economic effect of increasing in value when PSEC Shares decrease in value). Upon submitting prospective trades to the Approving Officers for pre-approval, the applicant will be informed of any restrictions or black-out periods due to 10Q or 10K filings or for any other reason that warrants suspension of trading by Access Persons in order to comply with applicable laws and regulations and the policies and procedures of PCC or PCM. Additionally, Access Persons may make transactions in PSEC Shares outside the trading window if they are made pursuant to a predetermined, non-discretionary trading plan, provided such plan has been reviewed and approved by the PCM CCO. In addition, the Adviser may grant stock or other forms of equity of the Corporation to an Access Person outside the trading window if it is made pursuant to a predetermined employee stock plan or vesting schedule, provided such grant has been reviewed and approved by the PCM CCO. (A) Advisory Persons of the Corporation or the Adviser must obtain approval from the Corporation or the Adviser, as the case may be, before directly or indirectly acquiring Beneficial Ownership in any securities in an Initial Public Offering or in a Limited Offering. Such approval must be obtained from the Chief Compliance Officer of the Corporation or the Adviser, as the case may be, unless he is the person seeking such approval, in which case it must be obtained from the President of the Corporation or of the Adviser. (B) No Access Person shall recommend any transaction in any Covered Securities by the Corporation without having disclosed to the Chief Compliance Officer of the Adviser and the Corporation, his or her interest, if any, in such Covered Security or the issuer thereof, including: the Access Person’s Beneficial Ownership of any Covered Securities of such issuer; any contemplated transaction by the Access Person in such Covered Securities; any position or other economic interest that the Access Person has with such issuer; and any present or proposed business relationship between such issuer and the Access Person (or a party in which the Access Person has a significant interest). (C) An Access Person must comply with the Adviser’s insider trading policies and procedures with respect to material non-public information. Please refer to the section entitled “Insider Trading Procedures” in the Adviser’s Compliance Manual. Section V Reports by Access Persons (A) Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form. All Access Persons shall within 10 days of the date on which they become Access Persons, and thereafter, within 15 days after the end of each calendar quarter, disclose the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares or principal amount, and the trade price of all Covered Securities in which they have a direct or indirect Beneficial Ownership as of a date no more than 15 days before the person became an Access Person, in the case of such person’s initial report, and no more than 15 days before such report is submitted, in the case of annual reports. The form of such report, entitled the Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form , is attached at the end of this document and has been approved by the Chief Compliance Officer of the Adviser. Each Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form must also disclose the name of any broker, dealer or bank with whom the Access Person maintains or maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person or as of the last day of the most recent quarter, as the case may be. Each Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form shall state the date it is being submitted. For purposes of this section, the term “Access Person” shall also include such person’s Immediate Family sharing the same household. A Quarterly Transaction and Compliance Annual Holdings Acknowledgement Form must contain the following information with respect to each reportable transaction: (1) Date and nature of the transaction (purchase, sale or any other type of acquisition or disposition); (2) Title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares or principal amount of each Covered Security involved, and the price of the Covered Security at which the transaction was effected; (3) Name of the broker, dealer or bank with or through whom the transaction was effected; and (4) The date the report is submitted by the Access Person. (B) Exceptions to Reporting Requirements. (1) Independent Directors Notwithstanding the reporting requirements set forth in this Section V, an Independent Director who would be required to make a report under this Section V solely by reason of being a director of the Corporation is not required to file a Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form upon becoming a director of the Corporation. Such an Independent Director remains exempt from filing such Quarterly Transaction and Annual Holdings Compliance Acknowledgement Forms unless such director knew or, in the ordinary course of fulfilling his or her official duties as a director of the Corporation, should have known that during the 15- day period immediately preceding or after the date of the transaction in a Covered Security by the director, such Covered Security is or was purchased or sold by the Corporation, or the Corporation or the Adviser considered purchasing or selling such Covered Security. (2) Access Persons An Access Person need not make any report under Section V with respect to transactions effected for, and Covered Securities held in, any account over which the Access Person has no direct or indirect influence or control. An Access Person of the Adviser need not submit a Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form if all of the information in the report would duplicate information held by the Adviser in its records that are required to be recorded pursuant to Rule 204-2(a)(13) under the Advisers Act, as amended, so long as the Adviser receives such information no later than 15 days after the end of the applicable calendar quarter. (C) Brokerage Accounts and Statements. Access Persons, except Independent Directors, shall: 1. within 15 days after the end of each calendar quarter, identify the name of the broker, dealer or bank with whom the Access Person established an account in which any securities were held during the quarter for the direct or indirect benefit of the Access Person and identify any new account(s) and the date the account(s) were established. This information shall be included on the appropriate Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form. 2. Instruct the brokers, dealers or banks with whom they maintain such an account to provide duplicate account statements to the Chief Compliance Officer of the Adviser. 3. On an annual basis, certify that they have complied with the requirements of (1) and (2) above as provided for in the Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form. (D) Form of Reports. A Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form may be attached to broker statements or other statements which provide a list of all personal Covered Securities holdings and transactions in the time period covered by the report and contain the information required in the Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form. (E) Responsibility to Report. It is the responsibility of each Access Person to take the initiative to comply with the requirements of this Section V. Any effort by the Corporation, or by the Adviser and its affiliates, to facilitate the reporting process does not change or alter that responsibility. (F) Where to File Reports. All Quarterly Transaction and Annual Holdings Compliance Acknowledgement Forms must be filed with the Chief Compliance Officer of the Adviser or his or her appointee. (G) Disclaimers. Any report required by this Section V may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect Beneficial Ownership in the Covered Security to which the report relates. Section VI Additional Prohibitions (A) Confidentiality. Until disclosed in a public report to shareholders or to the Securities and Exchange Commission in the normal course, it is the Adviser’s fiduciary duty to keep all information concerning the identity of security holdings and financial circumstances of the Corporation confidential. In addition, all information concerning the securities “being considered for purchase or sale” by the Corporation shall be kept confidential by all Access Persons and disclosed by them to other Access Persons only on a “need to know” basis or as otherwise permitted by law. It shall be the responsibility of the Chief Compliance Officer of the Adviser and the Corporation to report any inadequacy found in this regard to the directors of the Corporation. (B) Outside Business Activities and Directorships. Access Persons may not engage in any outside business activities that may give rise to actual, or the appearance of, conflicts of interest, interfere with the duties to the Corporation or the Adviser, or otherwise jeopardize the integrity or reputation of the Corporation or the Adviser. Similarly, no such outside business activities may be inconsistent with the interests of the Corporation or the Adviser. Access Persons may not use the Corporation’s or Adviser’s name or related trademarks for personal benefit (or for the benefit of a third party). All directorships of public or private companies held by Access Persons shall be reported to the Chief Compliance Officer of the Adviser and the Corporation. Section VII Certification (A) Initial, Quarterly and Annual Certification. It is the duty of each Access Person to read and understand the Code of Ethics and consult with the Chief Compliance Officer of the Adviser with respect to any portion of the Code that is not clearly understood. Access Persons who are directors, managers, officers or employees of the Corporation or the Adviser shall be required to certify initially, quarterly and annually that they have read this Code and that they understand it and recognize that they are subject to it and agree to comply with its terms. Furthermore, each time an amendment to the Code is made, Access Persons shall be required to submit a written acknowledgement that they have received, read and understood the amendments to the Code and agree to comply with its terms. On a quarterly and annual basis, Access Persons shall certify their understanding of the Code of Ethics and the Compliance Manuals by signing and submitting the Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form to the Chief Compliance Officer of the Adviser or such designee. The quarterly and annual form serves a two-fold purpose: the reporting of personal securities transactions and acknowledgement and the understanding of the Code of Ethics. (B) Board Review. No less frequently than annually, the Chief Compliance Officers of the Corporation and the Adviser must furnish to the Corporation’s board of directors, and the board must consider, a written report that: (A) describes any issues arising under this Code of Ethics or procedures since the last report to the board, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to material violations; and (B) certifies that the Corporation or the Adviser, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating the Code. Section VIII Sanctions Any violation of this Code shall be subject to the imposition of such sanctions by the Corporation or the Adviser as may be deemed appropriate under the circumstances to achieve the purposes of Rule 17j-1, Rule 204A-1 and this Code. The sanctions to be imposed shall be determined by the board of directors, including a majority of the Independent Directors, provided, however, that with respect to violations by persons who are directors, managers, officers or employees of the Adviser (or of a company that controls the Adviser), the sanctions to be imposed shall be determined by the Adviser (or the controlling person thereof). Sanctions may include, but are not limited to, suspension or termination of employment, a letter of censure and/or restitution of an amount equal to the difference between the price paid or received by the Corporation and the more advantageous price paid or received by the offending person with respect to any security transaction. Section IX Administration and Construction (A) The administration of this Code shall be the responsibility of the Chief Compliance Officer of the Adviser. (B) The duties of the Chief Compliance Officer of the Adviser are as follows: (1) Continuous maintenance of a current list of the names of all Access Persons with an appropriate description of their title or employment, including a notation of any directorships held by Access Persons who are officers or employees of the Adviser or of any company that controls the Adviser, and informing all Access Persons of their reporting obligations hereunder; (2) On an annual basis, providing all Access Persons a copy of this Code and informing such persons of their duties and obligations hereunder including any supplemental training that may be required from time to time; (3) Maintaining or supervising the maintenance of all records and reports required by this Code and reviewing Quarterly Transaction and Annual Holdings Compliance Acknowledgement Forms periodically; (4) Preparing listings of all transactions effected by Access Persons who are subject to the requirement to file Quarterly Transaction and Annual Holdings Compliance Acknowledgement Forms and reviewing such transactions against a listing of all transactions effected by the Corporation; (5) Issuance either personally or with the assistance of counsel as may be appropriate, of any interpretation of this Code that may appear inconsistent with the objectives of Rule 17j-1, Rule 204A-1 and this Code; (6) Conducting such inspections or investigations as shall reasonably be required to detect and report, with recommendations, any apparent violations of this Code to the board of directors of the Corporation; and (7) Submission of a written report to the board of directors of the Corporation, no less frequently than annually, that describes any issues arising under the Code since the last such report, including but not limited to the information described in Section VII (B). (C) The Chief Compliance Officer of the Adviser shall maintain or cause to be maintained in an easily accessible place at the principal place of business of the Corporation and the Adviser, the following records: 1. A copy of all codes of ethics adopted by the Corporation or the Adviser and its affiliates, as the case may be, pursuant to Rule 17j-1 and/or Rule 204A-1 that have been in effect at any time during the past five (5) years; 2. A record of each violation of such codes of ethics and of any action taken as a result of such violation for at least five (5) years after the end of the fiscal year in which the violation occurs; 3. A copy of each report made by an Access Person for at least two (2) years after the end of the fiscal year in which the report is made, and for an additional three (3) years in a place that need not be easily accessible; 4. A copy of each report made by the Chief Compliance Officer of the Adviser and/or the Corporation to the board of directors of the Corporation for two (2) years from the end of the fiscal year of the Corporation in which such report is made or issued and for an additional three (3) years in a place that need not be easily accessible; 5. A list of all persons who are, or within the past five (5) years have been, required to make reports pursuant to Rule 17j-1, Rule 204A-1 and this Code of Ethics, or who are or were responsible for reviewing such reports; 6. A copy of each report required by Section VII (B) for at least two (2) years after the end of the fiscal year in which it is made, and for an additional three (3) years in a place that need not be easily accessible; and 7. A record of any decision, and the reasons supporting the decision, to approve the acquisition by Advisory Persons of securities in an Initial Public Offering or Limited Offering for at least five (5) years after the end of the fiscal year in which the approval is granted. (D) This Code may not be amended or modified except in a written form that is specifically approved by majority vote of the Independent Directors. This Code of Ethics initially was adopted and approved by the Board of Directors of the Corporation, including a majority of the Independent Directors, at a meeting on June 9, 2004. An amendment to this Code was approved and ratified effective as of February 1, 2005 by the Board of Directors of the Corporation, including a majority of the Independent Directors, at a meeting on February 10, 2005. A second set of amendments to this Code was approved and ratified effective as of September 1, 2006 by the Board of Directors, including a majority of the Independent Directors, at a meeting on September 6, 2006. The Code of Ethics was further reviewed, approved and ratified effective by the Board of Directors, including a majority of the Independent Directors, at a meeting on September 28, 2007 and again at a meeting on March 28, 2008. The Code of Ethics was further reviewed, approved and ratified effective by the Board of Directors, including a majority of the Independent Directors, at a meeting on September 28, 2007, March 28, 2008, June 17, 2009, June 15, 2010, August 24, 2011, August 21, 2012 and August 20, 2013. Quarterly Transaction and Annual Holdings Compliance Acknowledgement Form The following lists all transactions in Covered Securities in which I had any direct or indirect Beneficial Ownership interest, that were effected during the last calendar quarter and required to be reported by Section V (A) of the Code of Ethics. If this form is being submitted after the end of the fourth quarter, the following lists all Covered Securities in which I had any direct or indirect Beneficial Ownership interest during the calendar year. Please sign and date this report, and return it to the Chief Compliance Officer no later than the 15 the end of the quarter. Use the reverse side if additional space is needed. Brokerage statements can be attached in lieu of listing purchases/sales/new accounts; please indicate below if purchases/sales/changes were made. day of the month following th Trade Date Trade Date Trade Date Purchases and Acquisitions (*If no activity, write NONE *) # of Shares or Principal Amount Interest Rate and Maturity Date Name of Security Unit Price Total Price Broker, Dealer, or Bank Sales and Other Dispositions (*If no activity, write NONE *) # of Shares or Principal Amount Interest Rate and Maturity Date Name of Security Unit Price Total Price Broker, Dealer, or Bank New Accounts Established During the Quarter (*If no activity, write NONE *) # of Shares or Principal Amount Interest Rate and Maturity Date Name of Security Unit Price Total Price Broker, Dealer, or Bank I have read and understood, and understand, the policies and procedures set forth in the Compliance Manual of each of (i) Prospect Capital Corporation (“Prospect”) and (ii) Prospect Capital Management, LLC (“PCM”) as of the date set forth below, as well as the Prospect and PCM Code of Ethics, implemented pursuant to Rule 17j-1 and Rule 204A-1 of the Investment Advisors Act of 1940, and all amendments relating thereto, and I recognize that all such policies, procedures and codes (hereafter “Rules”) apply fully to me at all times and agree to comply in all respects with the policies, procedures and codes described therein for the duration of my employment or other business relationship with Prospect, PCM or any affiliate of either (and for as long as any of the Rules apply to me), and to report promptly any deviation, regardless of immateriality, therefrom that I become aware of. I hereby represent, covenant and agree that I have promptly, by a written instrument entitled “Notice of Violation” and signed by me, brought to the attention, of two or more of John Barry, Grier Eliasek, Brian Oswald, or Daria Becker (and only after exhausting these possibilities, Gene Stark), in writing each and every, any and all, instances of conduct, action, inaction or any other activity or circumstance by or involving any Prospect person, agent, representative, director, officer, employee, shareholder, consultant or affiliate, that is or could be, or is or could be in my judgment, unfair, unethical, immoral, a violation of the letter or spirit of the Prospect or PCM Compliance Manuals, or joint Code of Ethics, or of any other rule, regulation, law, code, best practice, or of any other standard of which I am aware, including but not limited to investment, disclosure and workplace best practices and procedures, including but not limited to anti-discrimination, whistleblower, and similar best practices, and represent, covenant and agree to notify agree to so notify, by a written instrument signed by me, Prospect immediately if I learn that this representation is or becomes inaccurate or believe or learn that any such acts, inactions or circumstances have occurred (or may be about to occur) since the commencement of my employment or other business relationship with Prospect, for as long into the future as I continue my business relationship with Prospect. Prepared for Quarter, 20 Date Submitted: Year ended December 31, 20 Print Name: Signature: Initial Acknowledgement Form I have read and understood the policies and procedures set forth in Prospect Capital Management’s Compliance Manual (and Prospect Capital Corporation’s Compliance Manual, if it applies to me), including the Code of Ethics compliant with Rule 17j-1 of the Investment Company Act and Rule 204A-1 of the Investment Advisors Act of 1940, and I recognize that they apply to me and agree to comply in all respects with the procedures described therein for the duration of my employment with Prospect Capital Management or any of its affiliates. Employee: Signature: Date: (PRINT NAME) Initial Acknowledgement Form I have read and understood the policies and procedures set forth in Prospect Capital Management’s Compliance Manual (and Prospect Capital Corporation’s Compliance Manual, if it applies to me), including the Code of Ethics compliant with Rule 17j-1 of the Investment Company Act and Rule 204A-1 of the Investment Advisors Act of 1940, and I recognize that they apply to me and agree to comply in all respects with the procedures described therein for the duration of my employment with Prospect Capital Management. Employee: Signature: Date: (PRINT NAME) Annual Acknowledgement Form I have read and understood the policies and procedures set forth in Prospect Capital Corporation’s Compliance Manual for the year ending (date will be typed in when distributed) , including the Code of Ethics compliant with Rule 17j-1 under the Investment Company Act and Rule 204A-1 under the Investment Advisors Act, and I recognize that they apply to me and agree to comply in all respects with the procedures described therein for the duration of my employment with Prospect Capital Management. Employee: Signature: Date: (PRINT NAME) 14 Annex A — Dispute Resolution Section III.B of this Code contains the entire agreement of PCC and any covered person with respect to the subject matter thereof and supersedes all prior negotiations, agreements and understandings with respect thereto, both written and oral, other than those addressing the same subject matter contained in the PSEC Compliance Manual, the Adviser’s Compliance Manual and any separate written agreement between any covered person and PCC or any of its affiliates, as applicable. Section III.B of this Code may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten or oral agreements between the parties. Any offer of employment and any other agreement of any kind between anyone and any of PCC, PCM, PA, or any affiliate of any, must be in the form of a formal written instrument (and not an email or series of emails) signed in blue ink by John F. Barry and the counterparty. Section III.B of this Code may not be modified or amended except by a formal written instrument (and not by an email or series of emails) signed by John F. Barry III as Authorized Signatory of PCC in blue ink and by the covered person. No term or provision of Section III.B of this Code may be waived except by a formal written instrument signed (and not by an email or series of emails) by the party against whom such waiver is sought; provided, that in the case of the PCC, such waiver must be signed by John F. Barry III as Authorized Signatory of PCC in blue ink. PCC’s failure to insist at any time upon strict compliance with Section III.B of this Code or any continued course of such conduct on its part will not constitute or be considered a waiver by PCC of any of its rights or privileges. A waiver or consent, express or implied, of or to any breach or default by any party in the performance by that party of its obligations with respect to Section III.B of this Code is not a waiver or consent of or to any other breach or default in the performance by that party of the same or any other obligations of that party. All provisions of Section III.B of this Code are severable, and the unenforceability or invalidity of any of the provisions of Section III.B of this Code shall not affect the validity or enforceability of the remaining provisions of Section III.B of this Code. Should any part of Section III.B of this Code be held unenforceable, the unenforceable portion or portions shall be removed (and no more), and the remaining portions of Section III.B of this Code shall be enforced as fully as possible (removing the minimum amount possible), and the parties shall thereafter negotiate in good faith a provision replacing the provision removed so as to best achieve the original intent of the parties. Each covered person agrees that injunctive relief shall be available to enforce his or her obligations described in Section III.B of this Code. Notwithstanding any provision of Section III.B of this Code or any other agreement or document, should any covered person or any affiliate (“you”), wish to assert any claim against PCC or any affiliate, you will provide PCC in writing at least 30 business days in advance of filing or serving any such claim a complete statement detailing the claim, the factual and legal grounds therefor, what PCC can and/or need do to cure, the amount of time available for such cure, and the reasons why such claim is not barred by this Code, and you will thereafter engage in in-person “executive to executive” mediation with PCC for at least 30 business days after providing to PCC such written statement and prior to filing any such claim anywhere else other than with PCC (should you decide to file any such claim anywhere else notwithstanding such filing being in violation of this Code), following these procedures: A. First, after you have provided PCC the written statement referenced above, you shall promptly meet with PCC in person, in a good faith attempt to resolve any dispute, and shall continue to mediate for at least 30 business days; and B. Second, if the dispute remains unresolved after 30 business days following the commencement of the mediation described above, or after such lesser time as agreed to by you and PCC, then you may submit such dispute (i) to nonbinding arbitration before an arbitrator or mediator chosen and agreed by the parties and, if such nonbinding arbitration or mediation fails, (ii) to binding arbitration (not to a court) pursuant to this agreement by delivering an arbitration notice to PCC (unless such claim is not permitted by this Code). Under no circumstances will you file any claim against PCC or any affiliate in any court or anywhere other than in arbitration in New York City, Borough of Manhattan (“New York City”). No part of this dispute resolution procedure shall be deemed to permit a claim not otherwise permitted. 15 Section III.B of this Code shall be governed by, and any claim by you or any affiliate against PCC shall be determined, in accordance with the internal laws of the State of New York for contracts made and to be enforced therein, without regard to principles of conflicts of laws requiring application of the law of any other jurisdiction. If you assert a claim and executive to executive mediation fails (after 30 business days of such mediation) and thereafter non-binding arbitration or mediation fails, should you then decide to proceed with your claim, you agree to submit any persisting claim (whether or not permitted by this Section III.B of this Code or this Annex A) including, but not limited to, any issue regarding arbitrability, not to a court but only to binding arbitration in New York City in accordance with the Commercial Arbitration Rules and the Expedited Procedures of the American Arbitration Association (“AAA”) then in effect (“the Rules”), except as modified herein. The arbitration shall be held and the award shall issue in New York City before three arbitrators, agreed to by the parties within 30 business days of receipt by PCC or you of a copy of the demand for arbitration, or in default thereof, appointed by the AAA in accordance with listing, ranking and striking provisions in the Rules. Any arbitrator appointed by the AAA shall be a retired judge or a practicing attorney with no less than 15 years of experience with large, complex, commercial cases and an experienced arbitrator. The parties hereby agree that there shall be no discovery (other than 50 or fewer written interrogatories) relating to or in the arbitration, and they agree not to seek any such discovery (before any arbitrator, court or other tribunal). In rendering the award, each arbitrator shall be required to apply the substantive law of the State of New York. The arbitral tribunal is not empowered to award damages in excess of out-of-pocket expenses, and each party hereby irrevocably waives and disclaims to the maximum extent enforceable under controlling law any right to recover before any court, arbitrator or other tribunal or forum special, punitive, compensatory, benefit of the bargain, expectancy, exemplary, incidental, direct, indirect, consequential, “lost profits”, similar or other damages including, but not limited to, multiples of damages or damages resulting from loss of profits, business impact or anticipated savings, and whether or not contemplated, foreseeable or noticed. The award of the arbitrators shall be in writing and shall briefly state the findings of fact and conclusions of law on which it is based. The award shall be final and binding upon the parties and shall be the sole and exclusive remedy between the parties regarding any claims, counterclaims, issues or accountings presented to the arbitrators. Judgment upon the award may be entered and enforced in any court having jurisdiction. The losing party shall pay the costs, fees and expenses of the arbitration including, but not limited to, the fees and expenses of the AAA and the arbitrators and the legal fees and expenses of the prevailing party, which shall be included in the final award (and both parties shall post before the arbitration commences adequate security for such fees and expenses equal to the greater of (i) $25,000 or (ii) such larger amount as the arbitrators shall direct), with an immediate default judgment to be entered against any party (a) failing to post such security at least 30 days before the scheduled date of the first hearing or (b) failing to pay the costs of arbitration, including filing fees, by the date due for any such payment. Any costs, fees and expenses (including attorneys fees and expenses) incident to enforcing the arbitral award shall be included in any judgment rendered thereon (including an estimate for post trial proceedings, appeals, collections, etc., the parties agreeing here that the loser shall pay all out-of-pocket and legal expenses of the winner until paid in full following all collections). Each party unconditionally and irrevocably agrees to submit to the exclusive jurisdiction of the state and federal courts located in New York City(the “New York Courts”) for the purpose of any proceedings to compel or in aid of arbitration, and to the non- exclusive jurisdiction of New York Courts for proceedings for the enforcement of any award or decision of the arbitrators. Each party hereto expressly consents and unconditionally submits to the jurisdiction of the AAA in New York City and, if applicable, on confirmation, appeal or otherwise consistently herewith, the New York Courts in any such proceeding (and agrees that registered mail shall suffice for service of process), and hereby waives any objection which such party may have based upon imperfect service (provided actual or constructive notice is received), lack of personal jurisdiction, improper venue or inconvenient forum, AND EACH PARTY HERETO EXPRESSLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO DISCOVERY (OTHER THAN 50 OR FEWER WRITTEN INTERROGATORIES) OR TRIAL BY JURY IN ANY SUCH PROCEEDING. In the event either party obtains an order compelling arbitration or denying a stay of arbitration (the “Arbitration Order”), the party compelled to arbitrate shall reimburse the party seeking enforcement of this arbitration agreement for all its reasonable expenses, attorneys fees and costs incurred in obtaining such relief, which expenses, fees and costs shall be determined forthwith upon entry of the Arbitration Order and payable within 30 16 days of such order, without awaiting, and independent of, the outcome of any arbitration proceedings, and failure to make such payment when due shall result in the immediate entry of a default judgment against the defaulting party with respect to the entire case. Notwithstanding anything else herein, to the fullest extent permitted by applicable law, PCC shall have the right to initiate a claim in court, or within 30 days following receipt by PCC of the first written statement of a claim as set forth in the first paragraph of this Annex A and in A. above to designate a New York Court to hear, resolve and determine any part of any dispute between the parties (but only claims, including claims for injunctive relief, submitted by PCC or any affiliate and not counterclaims, cross claims or claims submitted by others unless also submitted by PCC or any affiliate), to the fullest extent that such right to so designate a court pursuant to the terms of this arbitration agreement remains enforceable under controlling law, but PCC and you agree that if such right of PCC or any affiliate to so designate a court pursuant to the terms of this arbitration agreement no longer remains enforceable or is not enforceable under controlling law, then the unenforceable portions of this sentence shall be severed from this arbitration agreement (as with any other unenforceable portions of Section III.B of this Code), and the other enforceable procedures for resolving any claim between the parties set forth herein shall continue in full force and effect to the maximum extent enforceable under controlling law. EACH PARTY HERETO EXPRESSLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, (Y) ANY RIGHT TO DISCOVERY (OTHER THAN 50 OR FEWER WRITTEN INTERROGATORIES), WHETHER PURSUANT TO THE FEDERAL RULES OF CIVIL PROCEDURE, OR ANY OTHER RULE, REGULATION, OR CUSTOM (OF THE AAA OR OF ANY COURT) AND (Z) TRIAL BY JURY, IN EACH CASE WITH RESPECT TO ANY ASPECT OF ANY DISPUTE RELATING HERETO OR BETWEEN OR AMONG THE PARTIES HERETO, INCLUDING ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING IN CONNECTION WITH ANY ASPECT OF THIS SECTION III.B OF THIS CODE, ANY TRANSACTION RELATING THERETO, OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. Should you prevail on any claim, you agree that the damages are difficult to calculate and therefore agree to the maximum extent enforceable under controlling law that $10,000 shall be the liquidated damages ceiling on any claim by you against PCC or any affiliate, whether for out-of-pocket, special, punitive, compensatory, benefit of the bargain, expectancy, exemplary, incidental, direct, indirect, consequential, “lost profits” or similar or other damages including, but not limited to, multiples of damages or damages resulting from loss of profits, business impact or anticipated savings and whether or not contemplated, foreseeable or noticed, and you, in addition to agreeing not to assert any such claim, agree not to assert before any court, arbitrator, or other tribunal or forum any claim for damages in excess of such $10,000 amount. If you, in violation of this arbitration agreement, assert any claim against PCC or any affiliate anywhere, you agree that PCC’s or any affiliate’s liquidated damages for the assertion of any such claim shall be $25,000 in addition to PCC’s or any affiliate’s legal fees associated therewith and any other damages that PCC or any affiliate may show. To the extent the agreement herein to arbitrate does not enjoy the respect and enforcement the parties intend, or upon PCC’s or any affiliate’s initiation of a court proceeding or removal of any part of an arbitration to court, or on confirmation, appeal or otherwise consistently herewith, and without diminishing your obligation hereunder to arbitrate, each party hereto consents and agrees that the New York Courts shall have exclusive jurisdiction to hear and determine any claim or dispute between or among any of the parties hereto pertaining to any part of Section III.B of this Code or this Annex A, any investigation, litigation, or proceeding related to or arising out of any such matters, any course of conduct, course of dealing, statement (whether verbal or written) or action of any party to Section III.B of this Code and this Annex A and any of its affiliates, or otherwise, and the arbitrability of any claim (which shall initially be determined by the arbitrators), and you agree not to assert any such claim or any claim relating hereto (or to the subject matter hereof or anything related thereto) outside of arbitration, or upon appeal therefrom (or if arbitration is not enforced) to courts other than a New York Court, provided that the parties hereto acknowledge that any appeals from those courts may have to be heard by a court located outside of New York City, and provided further that enforcement of an arbitrator’s award may require a filing or a hearing in a court located outside of New York City. You expressly waive any objection which you may have to New York jurisdiction based upon lack of personal jurisdiction, improper venue or inconvenient forum. Service of any process, summons, notice or document by 17 registered mail addressed to you shall be effective service of process against you for any suit, action or proceeding brought in any forum and you shall not contest such service provided you have actual or constructive notice. Judgment upon an arbitrator’s award or any court’s award shall include payment of all costs, fees and expenses of the arbitration and any court proceeding, including all costs, fees and expenses (including legal fees and expenses) incident to enforcing the arbitrator’s and any court’s award and any and all appeals, collateral proceedings, collection proceedings, post judgment proceedings (and shall include an appropriate award for post-judgment proceedings), etc. 18 QuickLinks -- Click here to rapidly navigate through this document CERTIFICATION OF CHIEF EXECUTIVE OFFICER CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a) EXHIBIT 31.1 I, John F. Barry III, Chief Executive Officer and Chairman of the Board of Prospect Capital Corporation, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Prospect Capital Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over the financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's 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 registrant's internal control over financial reporting. Dated this 21 st Day of August 2013 /s/ JOHN F. BARRY III John F. Barry III Chief Executive Officer QuickLinks EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a) QuickLinks -- Click here to rapidly navigate through this document CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a) I, Brian H. Oswald, Chief Financial Officer and Treasurer of Prospect Capital Corporation, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Prospect Capital Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over the financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's 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 registrant's internal control over financial reporting. Dated this 21 st Day of August 2013 /s/ BRIAN H. OSWALD Brian H. Oswald Chief Financial Officer QuickLinks EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a) QuickLinks -- Click here to rapidly navigate through this document CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. 1350 In connection with the annual report on Form 10-K for the period ended June 30, 2013 (the "Report") of Prospect Capital Corporation (the "Registrant"), as filed with the Securities and Exchange Commission on the date hereof, I, John F. Barry III, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that: 1. 2. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ JOHN F. BARRY III Name: John F. Barry III Date: August 21, 2013 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Prospect Capital Corporation and will be retained by Prospect Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. QuickLinks EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. 1350 QuickLinks -- Click here to rapidly navigate through this document CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. 1350 In connection with the annual report on Form 10-K for the period ended June 30, 2013 (the "Report") of Prospect Capital Corporation (the "Registrant"), as filed with the Securities and Exchange Commission on the date hereof, I, Brian H. Oswald, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that: 1. 2. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ BRIAN H. OSWALD Name: Brian H. Oswald Date: August 21, 2013 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Prospect Capital Corporation and will be retained by Prospect Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. QuickLinks EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. 1350 

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