NAV & Second Quarter Earnings

Prodesse Investment Limited 03 November 2005 Prodesse Investment Limited 3 November 2005 Prodesse Investment Limited Results for the 3 month period to 30 September 2005 'We are happy to see the barbell approach to our portfolio of fixed-, floating- and adjustable-rate mortgage-backed securities is continuing to produce significant shareholder value for Prodesse investors even in the current challenging interest rate environment.' - Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse Financial Highlights: • Q3 Net income of US$5.1 million or US$0.18 per share • Q3 dividend of US$0.18 per share • Net Asset Value per share of US$9.03. After excluding effects of current quarter revenue items Net Asset Value per share is US$8.85 • Annualized return on average equity of 7.72% • Average reverse repos:equity leverage of 8.9:1 • Portfolio composition as at 30 September 2005: • 32% Fixed-rate mortgage-backed securities • 61% Adjustable-rate mortgage-backed securities • 7% LIBOR floating-rate collateralized mortgage obligations • Portfolio securities ratings as at 30 September 2005: • 100% implied AAA • Continual gradual portfolio repositioning to new interest rate environment • Reviewing further shareholder value enhancements including, but not limited to, a share repurchase of up to 14.99% Note: Net income and yields stated above do not include net unrealised losses on investments. Net unrealised losses are reflected in the equity in accordance with the accounting policies. Commenting on the results, Michael A.J. Farrell, said: 'This quarter has been a demanding one for all companies exposed to the US financial markets, as the Federal Reserve has continued to raise short term interest rates while long term rates have remained largely unchanged. Despite the flattening yield curve, Prodesse has managed to deliver on its objectives since its IPO in April 2005. As the portfolio is rebalanced into new interest rate environments, we expect our barbell approach to produce significant returns for Prodesse shareholders.' Enquiries Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) Limited Tel: 01481 740820 About Prodesse Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company. The Company's investment policy is to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost of repurchase agreements entered into to finance the acquisition of such residential mortgage-backed securities. Conference Call FIDAC, the Investment Manager of the Company, will host an earnings conference call on Friday, 4 November 2005 at 2:30 P.M. London time (9:30 A.M. New York time). All interested parties are welcome to participate on the live call. You can access the conference call by dialing +1-732-694-1588 (from outside of the U.S.) or +1-866-200-5830 (from within the U.S.) using the access code 599531. For those who are not available to listen to the live call, a replay will be available until 5:00 P.M. London time (12:200 noon New York time) on Tuesday, 8 November 2005 by dialing +1-732-694-1571 (from outside of the U.S.) or +1-866- 206-0173 (from within the U.S.); please reference access code 159950. Company performance Prodesse reported net income for the quarter ended 30 September 2005 of US$5.1 million (period ended 30 June 2005 : US$5.8 million) or US$0.18 net income per share (period ended 30 June 2005 : US$0.21). Net income and yields stated in this press release do not include net unrealised losses on investments. Net unrealised losses are reflected in the equity in accordance with the accounting policies. The Company delivered an annualized return on average equity (RoAE) of 7.72% for the quarter ended 30 September 2005 (period ended 30 June 2005 : 9.67%). 01 July 2005 to 08 April 2005 to 30 September 2005 30 June 2005 Reported Net Income US$5.1 million US$5.8 million Net Income per share US$0.18 US$0.21 Annualised RoAE 7.72% 9.67% The Company commenced operations on 8 April 2005 and for the period from commencement of operations through 30 September 2005, the annualized return on average equity was 8.71%. Portfolio Performance For the quarter ended 30 September 2005, the annualized yield on average earning assets was 4.23% (period ended 30 June 2005 : 4.01%) and the annualized cost of funds on the average repurchase balance was 3.57% (period ended 30 June 2005 : 2.67%), which equates to an interest rate spread of 66 basis points (period ended 30 June 2005 : 134 basis points). This is a 68 basis point decrease over the interest rate spread for the period ended 30 June 2005. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 23% for the quarter ended 30 September 2005 (period ended 30 June 2005 : 20%). Prepayment speeds on mortgage-backed securities, as reflected by the CPR vary according to the type of investment, changes in interest rates, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on the Company's mortgage-backed securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. 01 July 2005 to 08 April 2005 to 30 September 30 June 2005 2005 Annualised yield on Average Earning Assets 4.23% 4.01% Annualised Cost of Funds on Average Repurchase Balance 3.57% 2.67% Interest Rate Spread (basis points) 66bp 134bp CPR 23% 20% As at 30 September 2005, all of the assets in the Company's portfolio were Fannie Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA' rating. 30 September 2005 At 30 June 2005 Fixed-rate mortgage-backed securities 32% 33% Adjustable-rate mortgage backed securities 61% 59% LIBOR floating-rate collateralized mortgage obligations 7% 8% Borrowings The average daily reverse repos:equity leverage of the Company was 8.9:1 during the quarter ended 30 September 2005 (for the period ended 30 June 2005 : 5.8:1). The leverage at 30 September 2005 was 9.4:1 (30 June 2005 : 8.1:1). 30 September 2005 30 June 2005 Average for Period 8.9:1 5.8:1 At Period End 9.4:1 8.1:1 Capital At 30 September 2005, the Company had a net asset value per share of US$9.03 (30 June 2005 : US$9.56). After excluding the effect of current period revenue items (net income for the quarter of US$5,130,653) (for the period 30 June 2005 : US$5,843,027) the reported net asset value per share is US$8.85 (30 June 2005 US$9.36). For or at the For or at the period ended period ended 01 July 2005 to 08 April 2005 to 30 September 2005 30 June 2005 NAV US$9.03 US$9.56 Net income for the period US$5,130,653 US$5,843,027 NAV ex. current period net income US$8.85 US$9.36 Dividend As previously announced, dividends declared for the quarter ended 30 September 2005 were US$0.18 per share payable on 2 December 2005 to holders on the register on 4 November 2005. Dividends are calculated and paid in US dollars. Shareholders resident in the UK wishing for the conversion of dividend payments into sterling should contact the Company's administrator. 01 July 2005 to 08 April 2005 to 30 September 2005 30 June 2005 Net Income per share US$0.18 US$0.21 Dividend per share US$0.18 US$0.20 Review to Improve Shareholder Returns The Company's investment strategy is to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost to finance their acquisition. In addition to overseeing the Company's investment activities, the Board of Directors is currently reviewing additional options to further enhance Shareholder Returns, which includes but is not limited to, the purchase of Company shares. The Company currently has authority to undertake a share purchase of up to 14.99% of the share capital of the Company and the Board of Directors has approved the use of on-market purchases of ordinary shares for cancellation at appropriate prices which will enhance Net Asset Value. Outlook 'We believe that the true performance of Prodesse's investment strategy will be recognized by the Company's investors from the dividend yield they receive over the long term,' said Wellington Denahan-Norris, chief investment officer for Prodesse's Investment Manager, FIDAC. 'We continue to employ all of the portfolio management tools available to us in order to maximize long-term financial performance and deliver shareholder value. In this phase of the interest rate cycle, our investment team is working to position the Company's portfolio for not only current market conditions, but for expected market conditions as well.' This press release includes statements that are, or may be deemed to be, ''forward-looking statements''. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'', ''will'' or ''should'' or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. All forward-looking statements address matters that involve risks and uncertainties, are only predictions, and you should not rely unduly on them. Accordingly, there are or will be important factors that could cause the Company's actual results to differ materially from those indicated in these statements. These factors include but are not limited to those described in the Company's prospectus under the heading ''Special Considerations and Risk Factors''. Any forward-looking statements in this press release reflect the Company's current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the Company's operations, results of operations, growth strategy and liquidity. These forward-looking statements speak only as of the date of this press release. Subject to any obligations under the Listing Rules, the Company undertakes no obligation publicly to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or FIDAC or individuals acting on behalf of the Company or FIDAC are expressly qualified in their entirety by this paragraph. Prospective investors should specifically consider the factors identified above which could cause actual results to differ before making any investment decision. Prodesse Investment Limited Balance Sheet (unaudited) at 30 September 2005 and 30 June 2005 30-Sep-05 30-Jun-05 --------------------------------------------------------------------------------------- US$ US$ ASSETS Current assets Available for sale investments 2,688,176,717 2,627,255,210 Receivables Accrued income receivable 11,644,460 10,559,381 Receivable for principal paydowns 13,448,335 25,092,795 8,327,274 18,886,655 ------------- ------------- Cash and cash equivalents 12,122 5,999 Prepaid expenses 66,798 98,256 --------------- --------------- Total assets 2,713,348,432 2,646,246,120 --------------- --------------- EQUITY AND LIABILITIES Capital and reserves Share capital: 28,610,000 @ USD 0.01 286,100 286,100 Share premium 50,000,000 50,000,000 Distributable reserve 220,173,663 220,299,299 Accumulated profits 5,246,367 5,843,027 Capital Reserve-Realis ed gain on available for sale investments 5,313 - Revaluation reserve (17,384,448) (2,843,493) ------------- ------------- Total shareholders' equity 258,326,995 273,584,933 --------------- --------------- Current liabilities Securities purchased payable 11,560,141 162,120,786 Reverse repos 2,436,369,000 2,206,752,000 Accrued interest expense 5,551,769 2,759,461 Accrued expenses payable 1,540,527 1,028,940 ------------- ------------- Total liabilities 2,455,021,437 2,372,661,187 --------------- --------------- Total equity and --------------- --------------- liabilities 2,713,348,432 2,646,246,120 --------------- --------------- Net Assets 258,326,995 273,584,933 Net Asset Value per share 9.02926 9.56256 Prodesse Investment Limited Summary Income Statement (unaudited) from 01 July 2005 to 30 September 2005 and from the date of incorporation 22 February 2005 to 30 June 2005* 01 July 2005 08 April 2005 to 30 to 30 September June 2005 2005 --------------------------------------------------------------------------------------- US$ US$ Income Interest income 28,394,099 16,231,405 Interest expense (21,084,466) (9,330,907) Realised gain on sale of available for sale investments 5,313 - ------------ ------------ Total income 7,314,946 6,900,498 ------------ ------------ Expenses Management, Custodian and Administration fee 2,018,214 937,308 Other operating expenses 166,079 120,163 ------------ ------------ Total expenses 2,184,293 1,057,471 ------------ ------------ ------------ ------------ Net income for the period 5,130,653 5,843,027 ------------ ------------ Net income per share for the period 0.18 0.21 ------------ ------------ * commencement of operations 08 April 2005 Prodesse Investment Limited Statement of changes in shareholders' equity Capital Revaluation Reserve reserve - Realised - Unrealised gain (loss) gain (loss) on available on available Share Share Distributable for sale for sale Accumulated capital premium reserve investments investments profits Total US$ US$ US$ US$ US$ US$ US$ ------------------------------------------------------------------------------------------------------------- At 8 April 2005 - - - - - - - Issuance of 286,100 285,813,900 - - - - 286,100,000 shares Offering cost - (15,514,601) - - - - (15,514,601) Reclassification - (220,299,299) 220,299,299 - - - - of share premium Profit for the - - - - - 5,843,027 5,843,027 period Available for sale investments: Unrealised loss - - - - (2,843,493) - (2,843,493) on revaluation taken to equity Total recognised 286,100 50,000,000 220,299,299 - (2,843,493) 5,843,027 273,584,933 income and expenses At 30 June 2005 286,100 50,000,000 220,299,299 - (2,843,493) 5,843,027 273,584,933 Available for sale investments: Unrealised loss - - - - (14,540,955) - (14,540,955) on revaluation taken to equity Transfer of - - - 5,313 - (5,313) - realised gains to capital reserve - - - 5,313 (14,540,955) (5,313) (14,540,955) Offering cost - (125,636) - - - - (125,636) Transfer to - 125,636 (125,636) - - - - share premium account Profit for the - - - - - 5,130,653 5,130,653 period Total recognised - - (125,636) 5,313 (14,540,955) 5,125,340 (9,535,938) income and expenses Dividend paid - - - - - (5,722,000) (5,722,000) At 30 September 286,100 50,000,000 220,173,663 5,313 (17,384,448) 5,246,367 258,326,995 2005 Prodesse Investment Limited Cash Flow Statement (unaudited) from 01 July 2005 to 30 September 2005 01 July 2005 to 30 September 2005 US$ Net cash inflow from operating activities (Note 1) 5,853,758 Financing Offering Cost (125,635) Dividends paid (5,722,000) Net cash outflow from financing (5,847,635) --------------- Increase in cash and cash equivalents 6,123 Cash and cash equivalents, at beginning of period 5,999 --------------- Cash and cash equivalents, at end of period 12,122 --------------- Note 1 -------- Net income 5,130,653 Net amortisation of premium 2,655,987 Realised gain on revaluation of available for sale investments (5,313) Purchases of investments (453,612,318) Proceeds from sale of investment 5,666,667 Principal paydowns 214,429,874 Borrowings under reverse repurchase agreements 7,229,892,000 Repayments under reverse repurchase agreements (7,000,275,000) Receivables Accrued income receivable (1,364,146) Prepaid expenses 31,459 Liabilities Accrued interest expense 2,792,308 Accrued expenses payable 511,587 --------------- Net cash inflow from operating activities (Note 1) 5,853,758 --------------- Prodesse Investment Limited Footnotes to the quarterly report ended 30 September 2005 1. Organisation and Investment Objective Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company ('the Investment Manager'). The Company's share capital structure consists solely of Ordinary Shares. The Company has a listing on the London Stock Exchange and a listing on the Channel Islands Stock Exchange. The Company will have an indefinite life but Shareholders will have the opportunity to vote on its continuation at the Annual General Meeting to be held in 2010. The Company invests in a portfolio consisting primarily of AAA-rated mortgage-backed securities on a leveraged basis. The Company's investment strategy is to generate net income for distribution from the spread between the interest income from the portfolio and the cost of borrowing pursuant to reverse repurchase agreements used to finance the portfolio. The Investment Manager will seek to enhance returns through what it considers an appropriate amount of leverage. 2. Significant Accounting Policies The financial statements are prepared in accordance with the International Financial Reporting Standards issued by, or adopted by, the International Accounting Standards Board ('the IASB'), interpretations issued by the International Financial Reporting Standards committed, applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority. The preparation of financial statements in conformity with International Financial Reporting Standards requires the Company 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the Company. (a) Government Sponsored Enterprises: The Company invests in securities issued by the Federal Home Loan Mortgage Corporation ('Freddie Mac') and similar United States Government sponsored entities such as Federal National Mortgage Association ('Fannie Mae') and the Federal Home Loan Banks ('FHLB'). Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are not Companies by congressional appropriations and the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB are neither guaranteed nor insured by the United States Government. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage backed securities are backed by those respective agencies, the payment of principal and interest on the Ginnie Mae mortgage backed securities are backed by the full-faith-and-credit of the US Government. Although the Company generally intends to hold most of its securities until maturity, it may, from time to time, sell any of its mortgage backed securities as part of its overall management strategy. Accordingly the Company classifies all its mortgage backed securities as available for sale and these are reported at fair value. The Investment Manager uses internally generated pricing tools and matrices that take into account such factors as duration, convexity, interest rate levels and the experience of its portfolio managers. External information is then compared to internally generated tools to compare pricing reasonableness. (b) Security Transactions and Investment Income: Security transactions are recorded on trade date. Realised and unrealised gains and losses are calculated based on specific identified cost. Interest income is recorded as earned. Interest income and expense includes amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of effective interest method. Realised gain or loss on paydowns is reclassified from gains to income. (c) Reverse Repurchase Agreements: The Company enters into reverse repurchase agreements with qualified third party financial institutions to finance its investment in mortgage backed securities. The agreements are secured by the value of the Company's mortgage backed securities. A repurchase agreement involves the sale by the Company of securities that it holds with an agreement by the Company to repurchase the same securities at an agreed price and date. Such an agreement involves the risk that the value of the securities sold by the Company may decline in value below the price of the securities. Interest on the principal value of reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. When the Company enters into a reverse repurchase agreement, it establishes and maintains a segregated account with the lender containing securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the repurchase agreements. Accrued interest is recorded as a separate line item. Securities sold subject to repurchase agreement are retained in the financial statements as available for sale securities and the counter party liability is included in liabilities under repurchase agreements. (d) When-Issued/Delayed Delivery Securities: The Company may purchase or sell securities on a when-issued or delayed delivery basis, including 'TBA' securities. TBA securities are mortgage backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery. Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealized loss may be incurred. The Company did not transact in when-issued or delayed delivery securities during the period ended September 30, 2005. (e) Taxes: The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600. (f) Cash and cash equivalents: Cash includes amounts held in interest bearing overnight accounts. (g) Realised and unrealised gains and losses on investments: Unrealised gains or losses arising on the revaluation of investments are included in equity. Unrealised losses on Investment Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised in the income statement and the cost basis of the Mortgage-Backed Securities is adjusted. Realised gains or losses arising on the sale of investments are recognised in the income statement but will be transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company. (h) Set up costs: The preliminary expenses of the Company directly attributable to the equity transaction and costs associated with the establishment of the Company that would otherwise have been avoided are taken to the share premium account. 3. Investment Management, Accounting and Administration, and Custodian Fees Fixed Income Discount Advisory Company ('FIDAC'), a Delaware corporation, serves as the Investment Manager to the Company. Pursuant to the terms of the Investment Management Agreement, the Investment Manager is paid periodic fees, quarterly in arrears, at a rate equivalent to 0.2 per cent. per annum of the value of the gross assets of the Company. The Bank of New York serves as the Company's custodian and is paid a monthly accounting and administration fee, exclusive of out-of-pocket expenses. The Custodian is entitled to receive a fee at a rate equivalent to 1 basis point per annum on the value of the gross assets of the Company (plus transaction charges). RBSI Fund Services (Guernsey) Limited serves as the Company's administrator. The Administrator is entitled to a fee calculated on the value of the gross assets of the Company of 0.04 per cent, per annum on the first $400 million of value of gross assets, 0.0225 per cent. per annum on the next $1.6 billion of value of the gross assets and 0.01 per cent. per annum on any value of the gross assets in excess of $2 billion payable monthly in arrears (subject to a minimum annual fee of $250,000). 4. Risk Factors The market price of the Ordinary Shares and the income derived from them can fluctuate and there is no guarantee that the market price of Ordinary Shares in the Company will reflect fully their underlying Net Asset Value. All or substantially all of the Company's assets are denominated in US dollars. The Company accounts for its assets and determines the value of its Shares and of dividends thereon in US dollars. For investors resident outside the United States or whose functional currency is not the US dollar, fluctuations in the value of the US dollar may affect the value of their investment. The Directors do not hedge any foreign exchange risk. The Company is subject to risks associated with change in interest rates. An increase in the interest payments on the Company's financings relative to the interest earned on its mortgage-backed securities may adversely affect profitability. The Company enters into reverse repurchase agreements in order to increase the amount of capital available for investment. The use of leverage has the potential to magnify the gains or the loss on the Company's investments. The Company may invest in, or sell short, various interest rate derivative instruments and futures contracts. Should interest rates move unexpectedly, the Company may not achieve the anticipated benefits of the hedging instruments and may realise a loss. Further, the use of such derivative instruments involves the risk of imperfect correlation in movements in the price of the instruments, interest rates and the underlying hedged assets. The Company may transact in various financial instruments including futures contracts, swap contracts and options. With these financial instruments, the Company is exposed to market risk in excess of the amounts recorded in the statement of assets, liabilities and partners' capital. Further, the Company is exposed to credit risk from potential counterparty nonperformance. At the balance sheet date, credit risk is limited to amounts recorded in the balance sheet. 5. Reverse Repurchase Agreements At September 30, 2005 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately $73,091,070 (approximately 103% of such liability). The interest rates on the open reverse repurchase agreements at September 30, 2005 range from 3.66% to 3.97% and have maturity dates ranging from one day to one month. 6. Mortgage Backed Securities Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair Value ------------------------------------------------------------------------------------- (dollars in thousands) Adjustable rate 1,844,461,670 2,475 (10,481,608) 1,833,982,537 Fixed 861,099,495 1,780 (6,907,095) 854,194,180 rate ------------------------------------------------------------------------------------- Total 2,705,561,165 4,255 (17,388,703) 2,688,176,717 ===================================================================================== This information is provided by RNS The company news service from the London Stock Exchange

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