Highland Distressed Opportunities, Inc. (the �Company�) (NYSE:
HCD) today announced its financial results for the quarter ended
March 31, 2009.
Highlights for the quarter ended March 31, 2009:
Stockholders� Equity (Net Assets): $54.6
million
Total Portfolio Market Value: $53.7
million
Net Asset Value per share: $3.08
Operating Results (in thousands):
Net decrease in stockholders� equity (net
assets) from operations: $5,912
Net investment income: $93
Net realized and unrealized losses on
investments: $6,005
Portfolio Investment Activity:
Cost of investments purchased during
period: $0.2 million
Proceeds from disposition of investments
during period: $13.2 million
Number of portfolio companies as of March
31, 2009: 19
Portfolio and Investment Activity
The following table summarizes the historical composition of our
investment portfolio, exclusive of cash and cash equivalents, as a
percentage of total investments.
�
Senior Loans �
Corporate
Notes and Bonds
�
Claims �
Equity Interests � March 31, 2009 38.0 %
33.4 % � % 28.6 % December 31, 2008 47.4 % 27.8 % 0.1 % 24.7 %
September 30, 2008 60.5 % 24.9 % 0.7 % 13.9 % June 30, 2008 68.1 %
27.0 % 0.2 % 4.7 % March 31, 2008 49.7 % 40.4 % 0.5 % 9.4 %
December 31, 2007 48.4 % 34.8 % 0.5 % 16.3 % September 30, 2007
50.3 % 34.4 % 1.2 % 14.1 % June 30, 2007 45.9 % 35.4 % 0.8 % 17.9 %
March 31, 2007 76.7 % 21.1 % 0.8 % 1.4 %
Bank debt typically accrues interest at variable rates
determined by reference to a base lending rate, such as LIBOR or
prime rate, and typically will have maturities of 3 to 5 years.
Corporate notes and bonds will typically accrue interest at fixed
rates and have stated maturities at origination that range from 5
to 10 years. At March 31, 2009, the weighted average yield of our
portfolio investments, exclusive of cash and cash equivalents, was
approximately 5.1%. At March 31, 2009, the weighted average yield
of our investments in senior loans and corporate notes and bonds
was approximately 5.4%. Yields are computed assuming a fully
settled portfolio; using interest rates as of the report date and
include amortization of senior loan discount points, original issue
discount and market premium or discount; weighted by their
respective costs when averaged.
As of March 31, 2009, approximately 95.9% of our portfolio
consisted of investments in 10 issuers. Additional information
regarding these specific investments has been outlined below. This
additional information is limited to publicly available
information, and does not address the creditworthiness or financial
viability of the issuer, or the future plans of the Company as it
relates to a specific investment. Furthermore, while the objective
of the Company is to invest primarily in financially-troubled or
distressed companies, the Company can and does invest in issuers
that are not financially-troubled or distressed at the time of
investment. The Company may have sold some, or all, of the
positions outlined below subsequent to March 31, 2009.
Argatroban Royalty Sub, LLC
Argatroban Royalty Sub, LLC, a
wholly-owned subsidiary of Encysive Pharmaceuticals, was
established to issue senior secured bonds backed by the royalty
cash stream from the sales of Argatroban, a branded pharmaceutical
marketed by GlaxoSmithKline plc. Argatroban is a synthetic direct
thrombin inhibitor indicated as an anticoagulant for prophylaxis or
treatment of thrombosis in patients with heparin-induced
thrombocytopenia, or HIT, which is a profound allergic reaction to
anticoagulation therapy with heparin. More information can be found
at www.argatroban.com.
Azithromycin Royalty Sub, LLC
Azithromycin Royalty Sub, LLC, a
wholly-owned subsidiary of InSite Vision Inc., was established to
issue senior secured bonds backed by the royalty cash stream from
the sales of azithromycin ophthalmic solution, a branded
pharmaceutical sold under the brand name AzaSite� and marketed by
Inspire Pharmaceuticals, Inc. The solution is used to treat
conjunctivitis. More information can be found at
www.azasite.com.
Baker & Taylor, Inc.
Baker & Taylor, Inc. (�B&T�) is
engaged in the distribution of books, music, video and game
products. In addition, unique information services built around the
B&T�s proprietary databases as well as specialized consulting
and outsourcing services are provided to customers. Customers
include retailers (including Internet retailers), public, academic
and school libraries and various departments of federal and local
governments. B&T distributes its products throughout the United
States and worldwide.
Celtic Pharma Phinco B.V.
Celtic Pharmaceuticals Phinco B.V.
(�Celtic Pharma�) is a private investment fund with a mandate to
purchase a diversified portfolio of novel pharmaceutical products
in the later stages of development that have already demonstrated
initial proof of principle efficacy in human clinical trials.
Celtic Pharma has $250 million of equity commitments in addition to
raising $156 million of high-yield bonds. Celtic Pharma has
invested in nine drug programs since its 2004 inception. More
information can be found at www.celticpharma.com.
Comcorp Broadcasting, Inc.
Communications Corporation of America and
its wholly owned subsidiaries, including Comcorp Broadcasting,
Inc., (collectively, �CCA�) own and operate thirteen television
stations in Louisiana, Texas, and Indiana. CCA also provides
services to, but does not own, ten television stations under Joint
Sales Agreements, Commercial Inventory Arrangements, and/or Local
Marketing Agreements. Under these agreements CCA has the right to
sell the stations� available airtime. CCA�s revenue is primarily
derived from the sale of advertising airtime. In addition CCA
offers production services and receives a compensation fee under
network affiliation agreements. CCA, on June 7, 2006 (the Petition
Date), filed for protection against its creditors under Chapter 11
of the United States Bankruptcy Code after it was unable to meet
its ongoing debt obligations. CCA and its direct and indirect
subsidiaries, exited bankruptcy with an effective date of October
4, 2007 under reorganization plans filed with the United States
Bankruptcy Court in the Western District of Louisiana (Case No.
06-50410).
Fontainebleau Florida Hotel,
LLC
Fontainebleau Resorts, LLC
(�Fontainebleau�) is led by Chairman Jeffrey Soffer, who also
serves as Chief Executive Officer of Turnberry, Ltd., a creator of
luxury condominium and condominium-hotel developments, and
President and Chief Financial Officer Glenn Schaeffer, a former
Chief Executive Officer of Mandalay Resort Group. Fontainebleau
Miami Beach is a resort located in Miami Beach, Florida.
Fontainebleau plans to renovate and expand this property into a
22-acre destination resort. More information can be found at
www.bleaumiamibeach.com.
Genesys Ventures IA, LP
Genesys Ventures IA, LP, a limited
partnership with Genesys Capital Partners of Toronto, Ontario, was
established to hold the preferred equity of three late-stage
venture healthcare companies.
Lake at Las Vegas Joint Venture,
LLC
Lake at Las Vegas Joint Venture, LLC
(�LLV�) is a 3,592-acre resort and destination community and is one
of the larger master-planned communities in Las Vegas, NV. The
development is located approximately 17 miles from the Las Vegas
strip. On July 17, 2008, LLV filed to reorganize under Chapter 11
of the Bankruptcy Code, citing a combination of poor liquidity,
substantial debt service, extremely challenging real estate market
conditions and other legal and financial issues. More information
can be found at www.lakelasvegas.com, at www.kccllc.net/llv, or by
calling Kurtzman Carson Consultants LLC at 1-866-248-3389.
Molecular Insight Pharmaceuticals,
Inc.
Molecular Insight Pharmaceuticals is a
biopharmaceutical company specializing in the emerging field of
molecular medicine, applying innovations in the identification and
targeting of disease at the molecular level to improve patient
healthcare by addressing significant unmet needs. The company is
focused on discovering, developing and commercializing innovative
and targeted radiotherapeutics and molecular imaging
pharmaceuticals with initial applications in the areas of oncology
and cardiology.
Penhall Holding Company
Penhall Holding Company is the parent
company of Penhall International Corporation (�Penhall�), one of
the largest providers of concrete cutting, breaking and highway
grinding services in the United States. Penhall�s business model is
centered on utilizing a nationwide network of approximately 800
skilled operators and an extensive fleet of specialized
construction equipment to perform primarily non-residential and
infrastructure-related construction work. The company operates 41
locations in the United States and Canada, and has a customer base
that includes construction contractors, industrial companies,
manufacturers, government agencies and municipalities.
Results of Operations
Results comparisons are for the three months ended March 31,
2009 and March 31, 2008, and are as follows:
�
For the Three Months Ended
March 31
2009 �
2008 � Total investment income $ 1,381,158 $
7,892,740 Net expenses $ 1,288,199 $ 4,411,265 � Net investment
income $ 92,959 $ 3,481,475 � Net realized and unrealized
gain/(loss) on investments $ (6,005,375) $ (34,511,363) � Net
increase/(decrease) in stockholders� equity (net assets) resulting
from operations $ (5,912,416) $ (31,029,888)
Investment Income
We primarily generate investment income in the form of interest
on the debt securities that we own. We also may acquire
investments, which may pay cash or in-kind (�PIK�) distributions on
a recurring or otherwise negotiated basis. Investment income for
the three months ended March 31, 2009 was approximately $1.4
million, of which approximately $0 was attributable to invested
cash and cash equivalents and approximately $1.4 million was
attributable to portfolio investments. For the three months ended
March 31, 2009, of the approximately $1.4 million in investment
income from investments other than cash and cash equivalents,
approximately $0.4 million of PIK interest income was recorded. In
comparison, investment income for the three months ended March 31,
2008 was approximately $7.9 million, of which approximately $0.2
million was attributable to invested cash and cash equivalents and
approximately $7.7 million was attributable to portfolio
investments. Investment income was lower in 2009 compared to the
same period last year due to lower interest rates and a smaller
asset base.
Operating Expenses
Operating expenses for the three months ended March 31, 2009
were approximately $1.3 million. This amount consisted of advisory
fees of approximately $0.3 million, incentive fees of $0, interest
expense of approximately $0.3 million, and administrative fees,
accounting fees, professional fees, directors� fees, taxes and
other expenses of approximately $0.7 million for the three months
ended March 31, 2009. For the comparative three-month period a year
earlier, operating expenses were approximately $4.4 million.
Included in operating expenses were advisory fees of approximately
$1.5 million, incentive fees of approximately $0.9 million,
interest expense of approximately $1.4 million, and administrative
fees, accounting fees, professional fees, directors� fees, taxes
and other expenses of approximately $0.6 million for the three
months ended March 31, 2008.
Net Investment Income
The Company�s net investment income for the three months ended
March 31, 2009 was approximately $0.1 million, as compared to net
investment income of approximately $3.5 million for the three
months ended March 31, 2008. Although operating expenses were lower
in 2009, the decrease was smaller than the decrease in investment
income, resulting in lower net investment income.
Net Unrealized Appreciation/Depreciation on Investments
For the three months ended March 31, 2009, the Company�s
investments had net unrealized appreciation of approximately $4.3
million. This compares to net unrealized depreciation on the
Company�s investments of approximately $22.0 million for the three
months ended March 31, 2008.
Net Realized Gains/Losses
For the three months ended March 31, 2009, the Company had net
realized losses on investments of approximately $10.3 million
compared to net realized losses on investments of approximately
$12.5 million for the three months ended March 31, 2008.
Net Increase/Decrease in Stockholders� Equity (Net Assets) from
Operations
For the three months ended March 31, 2009, the Company had a net
decrease in stockholders� equity (net assets) resulting from
operations of approximately $5.9 million compared to a net decrease
in stockholders� equity (net assets) resulting from operations of
approximately $31.0 million for the three months ended March 31,
2008. For the three months ended March 31, 2009, the decrease in
stockholders� equity (net assets) resulting from operations was
primarily attributable to net realized loss on investments, as
discussed above.
Financial Condition, Liquidity and Capital Resources
In light of the broader unprecedented market dislocation that
began in 2007 and continued through 2008 and into 2009, we reduced
our leverage from approximately 20.4% at December 31, 2008 to
approximately 10.6% at March 31, 2009. Additionally, on December
19, 2008, the Board approved an agreement and plan of
reorganization pursuant to which the Company would transfer all of
it assets to Highland Credit Strategies Fund (�HCF�), a
non-diversified closed-end management investment company also
managed by the Investment Adviser, in exchange for shares of
HCF.
During the quarter ended March 31, 2009, liquidity and capital
resources were generated primarily from the sale of investments.
The liquidity generated during the quarter was used primarily to
reduce the amount outstanding on the credit facility and build our
cash balance. At quarter end, the Company had approximately $2.5
million of cash on hand and approximately $5.7 million in
receivables for investments sold and interest due from investments.
At March 31, 2009, the Company had $6.5 million in borrowings
outstanding. The Company does not anticipate drawing down any of
the residual $3.5 million under the credit facility in the second
quarter of 2009, and we are likely to fund our operations through
additional sales of investments, if warranted, and interest from
investments. During the second quarter, we intend to use excess
funds to primarily repay borrowings under our credit facility, make
strategic investments to meet our investment objectives and
strategies, and to fund our operating expenses.
During the quarter ended March 31, 2009, the Company generated
approximately $11.6 million in cash flows from operations, of which
$9.0 million was used to repay borrowings under its credit
facility.
Off-Balance Sheet Arrangements
At March 31, 2009, we did not have any off-balance sheet
liabilities or other contractual obligations that are reasonably
likely to have a current or future material effect on our financial
condition, other than the investment advisory and management
agreement and the administration agreement described in our annual
report on Form 10-K.
Distributions
We have elected to be taxed as a regulated investment company
under Subchapter M of the Code. In order to maintain our status as
a regulated investment company, we are required to meet specified
source-of-income and asset diversification requirements and must
distribute annually at least 90% of our investment company taxable
income. Additionally, we must distribute at least 98% of our income
(both ordinary income and net capital gains) to avoid an excise
tax. We intend to make distributions to our stockholders of
substantially all of our net operating income on at least an annual
basis. We also intend to make distributions of net realized capital
gains, if any, at least annually.
We may not be able to achieve operating results that will allow
us to make distributions at a specific level or to increase the
amount of these distributions from time to time. In addition, we
may be limited in our ability to make distributions due to the
asset coverage test for borrowings when applicable to us as a
business development company under the Investment Company Act of
1940 and due to provisions in our credit facilities. If we do not
distribute a certain percentage of our income annually, we will
suffer adverse tax consequences, including possible loss of our
status as a regulated investment company. We cannot assure
stockholders that they will receive any distributions or
distributions at a particular level.
The Company has established an �opt out� dividend reinvestment
plan (the �Plan�) for its common stockholders. As a result, if the
Company declares a cash distribution in future periods, a
stockholder�s cash distribution will be automatically reinvested in
additional shares of the Company�s common stock unless the
stockholder specifically �opts out� of the Plan and elects to
receive cash distributions. For the year ended December 31, 2008,
distributions paid to stockholders totaled $0.7500 per share
($13,287,578). For the period ended December 31, 2007,
distributions paid to stockholders totaled $0.7875 per share
($13,915,795). No distributions were paid to stockholders during
the three months ended March 31, 2009. Tax characteristics of all
distributions will be reported to stockholders on Form 1099-DIV
after the end of the calendar year.
HIGHLAND DISTRESSED
OPPORTUNITIES, INC.
STATEMENT OF ASSETS AND
LIABILITIES
� �
As of March 31, 2009 As of
(unaudited) December 31, 2008 ($) ($)
Assets: Investments in: Unaffiliated issuers, at value (cost
$104,172,452 and $127,514,862, respectively) 29,020,167 45,530,147
Affiliated issuers, at value (cost $39,618,661 and $39,538,434,
respectively) 24,649,304 � 27,090,847 � Total investments, at value
(cost $143,791,113 and $167,053,296, respectively) 53,669,471
72,620,994 Cash and cash equivalents 2,488,838 � Foreign currency
(cost $10,519 and $10, respectively) 10,245 10 Receivable for:
Investments sold 3,741,270 12,106,871 Dividend and interest
1,992,008 2,337,202 Other assets 9,888 � 96,923 � Total assets
61,911,720 � 87,162,000 � �
Liabilities: Due to Custodian �
122,505 Notes payable 6,500,000 15,500,000 Net discount and
unrealized depreciation on unfunded transactions � 31,756 Payables
for: Investments purchased � 9,809,787 Investment advisory fee
339,336 627,965 Administration fee 59,384 109,894 Interest expense
78,622 112,469 Directors� fees 9,138 5,100 Accrued expenses and
other liabilities 281,228 � 286,096 � Total liabilities 7,267,708 �
26,605,572 �
Stockholders� equity (net assets)
54,644,012 �
60,556,428 � �
Composition of
stockholders� equity (net assets): Common Stock, par value
$.001 per share: 550,000,000 common stock authorized, 17,716,771
common stock outstanding 17,717 17,717 Paid-in capital 253,018,580
253,018,580 Undistributed net investment income 1,160,446 1,067,487
Accumulated net realized gain/(loss) on investments, total return
swaps and foreign currency transactions (109,430,815 ) (99,083,521
) Net unrealized appreciation/(depreciation) on investments,
unfunded transactions and translation of assets and liabilities
denominated in foreign currency (90,121,916 ) (94,463,835 )
Stockholders� equity (net assets) 54,644,012 �
60,556,428 � �
Net Asset Value Per Share (Net
Assets/Common Stock Outstanding) 3.08 �
3.42 � �
HIGHLAND DISTRESSED
OPPORTUNITIES, INC.
STATEMENT OF OPERATIONS
�
For the Quarters Ended March 31, 2009
(unaudited)
�
March 31, 2008
(unaudited)
($) ($) Investment Income: � � Unaffiliated
interest income 982,077 7,387,171 Affiliated interest income
399,081 464,884 Unaffiliated dividends (net of foreign taxes
withheld) � 40,685 � � Total investment income 1,381,158 �
7,892,740 � �
Expenses: � Investment advisory fees 339,336
1,484,400 Incentive fees � 870,369 Administration fees 59,384
259,770 Accounting service fees 38,303 37,288 Transfer agent fees
8,860 7,583 Legal fees 156,685 62,158 Audit and Tax fees 21,000
31,701 Directors� fees 8,972 6,915 Custody fees 6,539 11,073
Registration fees 23,699 6,041 Reports to stockholders 11,559 3,804
Franchise tax expense 4,316 14,918 Rating agency fees 37,952 20,749
Interest expense 261,928 1,434,603 Reorganization expense 69,705 �
Other expense 239,961 159,893 � � Net expenses 1,288,199 �
4,411,265 � Net investment income 92,959 � 3,481,475 � �
Net
Realized and Unrealized Gain/(Loss) on Investments: � Net
realized gain/(loss) on investments (10,347,294 ) (12,488,132 ) Net
realized gain/(loss) on foreign currency transactions � 33 Net
change in unrealized appreciation/(depreciation) on investments
4,310,660 (22,002,712 ) Net change in unrealized
appreciation/(depreciation) on unfunded transactions 31,756 (22,921
) Net change in unrealized appreciation/(depreciation) on
translation of assets and liabilities denominated in foreign
currency (497 ) 2,369 � Net realized and unrealized gain/(loss) on
investments (6,005,375 ) (34,511,363 ) Net decrease in
stockholders� equity (net assets) resulting from operations
(5,912,416 ) (31,029,888 ) �
About Highland Distressed Opportunities, Inc.
Highland Distressed Opportunities, Inc. (the �Company�, �we,�
�us� and �our�) is a non-diversified closed-end company that has
elected to be regulated as a business development company under the
Investment Company Act of 1940. The Company�s investment objective
is total return generated by both capital appreciation and current
income. We intend to invest primarily in financially-troubled or
distressed companies that are either middle-market companies or
unlisted companies by investing in senior secured debt, mezzanine
debt and unsecured debt, each of which may include an equity
component, and in equity investments. Generally, distressed
companies are those that (i) are facing financial or other
difficulties and (ii) are or have been operating under the
provisions of the U.S. Bankruptcy Code or other similar laws or, in
the near future, may become subject to such provisions or otherwise
be involved in a restructuring of their capital structure.
This press release may contain forward-looking statements
describing the Company�s future plans and objectives. These
forward-looking statements, as well as future oral and written
statements by the management of the Company, are subject to various
risks and uncertainties, which could cause actual results and
conditions to differ materially from those projected, including the
uncertainties associated with the timing of transaction closings,
changes in interest rates, availability of transactions, the future
operating results of our portfolio companies, changes in regional,
national, or international economic conditions and their impact on
the industries in which we invest, or changes in the conditions of
the industries in which we invest, and other factors enumerated in
our filings with the Securities and Exchange Commission
(�SEC�).
We may use words such as �anticipates,� �believes,� �expects,�
�intends,� �will,� �should,� �may,� �plans,� �could,� �estimates,�
�potential,� �continue,� �target,� or the negative of these terms
or other similar expressions to identify forward-looking
statements. Undue reliance should not be placed on such
forward-looking statements as such statements speak only as of the
date on which they are made. We do not undertake to update our
forward-looking statements, whether as a result of new information,
future events or otherwise, unless required by applicable law.
Persons considering an investment in the Company should consider
the investment objective, risks, and charges and expenses of the
Company carefully before investing. Such information and other
information about the Company will be available in our annual
report on Form 10-K, in our quarterly reports on Form 10-Q and
current reports on Form 8-K. Such materials are filed with the SEC
and copies are available on the SEC�s website, www.sec.gov.
Prospective investors should read such materials carefully before
investing.
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