Preliminary Results

Prodesse Investment Limited 22 March 2006 Prodesse Investment Limited Preliminary Results for the period from 22 February 2005 to 31 December 2005 About Prodesse Investment Limited ('Prodesse' or the 'Company') Prodesse 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. Prodesse releases results on a quarterly basis, with the results for the quarter to 31 December released on 1 February 2006. Please refer to that and previous quarterly announcements for operational highlights and management commentary on the results of the Company. The financial information set out in this announcement does not constitute the Company's statutory accounts for the period from 22 February 2005 to 31 December 2005. The financial information for period from 22 February 2005 to 31 December 2005 is derived from the financial statements delivered to the UK Listing Authority and The Channel Islands Stock Exchange. The Auditors reported on those accounts, their report was unqualified and did not contain a statement under section 65(3) of The Companies (Guernsey) Law, 1994. This preliminary announcement was approved by the directors of the Company on 20 March 2006. Income Statement for the period from 22 February 2005 to 31 December 2005 22 February 2005* to Note 31 December 2005 US $'000 Income Interest income 71,933 Interest expense (53,722) ------------- Net interest income 18,211 Realised loss on sale of available for sale investments 4 (21,651) -------------- Expenses Management, custodian and administration fees (3,898) Other operating expenses (472) -------------- Total expenses (4,370) -------------- -------------- Net operating loss for the period (7,810) -------------- Loss per Ordinary Share: Basic - Loss per Ordinary Share 3 (0.28) Weighted Average Ordinary Shares outstanding Basic 3 28,323,517 *Commencement of operations 08 April 2005. All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Statement of Changes in Shareholders' Equity for the period from 22 February 2005 to 31 December 2005* Capital Revaluation Reserve - reserve - Realised Unrealised loss on loss on Cash Capital Distri- Accumu- available available flow Share redemption Share butable lated for sale for sale hedge Note capital reserve premium reserve profits investments investments reserve Total US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 --------------------------------------------------------------------------------------------- At 22 February - - - - - - - - - 2005* --------------------------------------------------------------------------------------------- Available for sale investments: - Unrealised loss on revaluation taken to equity 4 - - - - - - (13,940) - (13,940) Net loss for the period - - - - (7,810) - - - (7,810) Transfer of net realised losses to capital reserve 8 - - - - 21,651 (21,651) - - - Cash flow hedge reserve - Loss 6 - - - - - - - (20) (20) taken to equity --------------------------------------------------------------------------------------------- Total recognised income and expenses for the period - - - - 13,841 (21,651) (13,940) (20) (21,770) Dividend paid 2 - - - - (10,868) - - - (10,868) Issuance of shares 8 286 285,814 286,100 Offering costs 8 - - (15,640) - - - - - (15,640) Transfer from share premium account 8 - - (220,174) 220,174 - - - - - Buyback of shares 8 (9) 9 - (5,874) - - - - (5,874) --------------------------------------------------------------------------------------------- At 31 December 2005 8 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948 --------------------------------------------------------------------------------------------- *Commencement of operations 08 April 2005 Balance Sheet as at 31 December 2005 Note 31 December 2005 US $'000 Non-current assets Available for sale investments 4 1,405,413 -------------- 1,405,413 -------------- Current assets Accrued income receivable 6,229 Receivable for principal paydowns 10,195 Prepaid expenses 35 Cash and cash equivalents 5 -------------- 16,464 -------------- -------------- Total assets 1,421,877 -------------- Equity attributable to equity shareholders Ordinary share capital 8 277 Capital redemption reserve 8 9 Share premium 8 50,000 Distributable reserve 8 214,300 Accumulated income 8 2,973 Capital reserve - Realised loss on available for sale investments 8 (21,651) Revaluation reserve 8 (13,940) Cash flow hedge reserve 8 (20) -------------- Total equity 231,948 -------------- Current liabilities Securities purchased payable 163,391 Reverse repurchase agreements 7 1,022,067 Accrued interest expense 3,509 Accrued expenses payable 942 Hedging instrument 6 20 -------------- Total liabilities 1,189,929 -------------- -------------- Total equity and liabilities 1,421,877 -------------- Net Assets 231,948 -------------- -------------- Net Asset Value per Ordinary Share 9 8.36 -------------- Cash Flow Statement for the period from 22 February 2005 to 31 December 2005 Note 22 February 2005* to 31 December 2005 US $'000 Net cash outflow from operating activities 10 (253,713) -------------- Cash flows from financing activities Dividends paid to shareholders (10,868) Net proceeds from offering 270,459 Own shares acquired (5,873) -------------- Net cash from financing activities 253,718 -------------- Net increase in cash and cash equivalents 5 Cash and cash equivalents at the beginning of the - period -------------- Cash and cash equivalents at the end of the period 5 -------------- *Commencement of operations 08 April 2005. Notes 1. Significant accounting policies The preliminary announcement is prepared on the basis of the accounting policies disclosed in the quarterly release for the period to 31 December 2005. Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company's full financial statements that comply with IFRSs were approved by the directors on 20 March 2006. 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. Business and Geographical Segments The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities, issued by companies operating and generating revenue in the United States, and therefore no segmental reporting is provided. 2. Dividends 22 February 2005* to 31 December 2005 US $'000 Amounts recognised as distributions to equity shareholders in the period: First interim dividend for the year ended the 31 December 2005 of 20 cents per share 5,722 Second interim dividend for the year ended 31 December 2005 of 5,146 18 cents per share ------------- 10,868 ------------- *Commencement of operations 08 April 2005. A third interim dividend of 10 cents per share, in respect of the final quarter of 2005, was declared on 01 February 2006 and was paid on 23 February 2006. 3. Earnings Per Share Basic earnings per share is calculated by dividing net profit available to Ordinary Shareholders by the weighted average number of ordinary shares outstanding during the period. 22 February 2005* to 31 31 December 2005 Number of shares ---------------- Weighted average number of Ordinary shares outstanding 28,323,517 ---------------- *Commencement of operations 08 April 2005. 4. Available for Sale Investments 31 December 2005 US $'000 Cost at 22 February 2005 - Purchases of investments 3,215,324 Proceeds from sale of investments (1,259,358) Realised loss on sale of investments (21,651) Principal paydowns (508,470) Net amortisation of premiums (6,492) ------------ Amortised cost at 31 December 2005 1,419,353 Unrealised loss on available for sale investments (13,940) ------------ Market value at 31 December 2005 1,405,413 ------------ Gross Gross Amortised Unrealised Unrealised Estimated At 31 December 2005 Cost Gain Loss Fair Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 882,032 3 (8,062) 873,973 Fixed rate 537,321 2 (5,883) 531,440 ------------------------------------------------------- Total 1,419,353 5 (13,945) 1,405,413 ------------------------------------------------------- As at 31 December 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. Fixed-rate mortgage-backed securities 38% Adjustable-rate mortgage-backed securities 43% Floating-rate mortgage-backed securities 19% As at 31 December 2005, investments totalling US$1.0 billion were pledged as security in respect of reverse repurchase agreements (see note 7). Mortgage-backed securities are created when mortgages and their attendant streams of interest and principal payments are pooled to serve as collateral for the issuance of securities to investors. Interests in mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, mortgage-backed securities typically provide irregular cash flows consisting of both interest and principal. An investment consideration of any mortgage-backed security is the structure of the payment of the cash flow streams from the underlying mortgages to the holders of the mortgage-backed securities. The cash flows can be simply passed from the mortgage holder to the investor or they can be structured in a number of different ways. The market values of the various structures will vary in different interest rate or prepayment environments, with the more derivative or complex structures (e.g., interest-only or principal-only securities) being more sensitive to movements in interest rates or rates of prepayment. Beyond the basic security of the mortgages and properties that underlie mortgage-backed securities, a critical attribute of mortgage-backed securities issued by the US Agencies is the credit enhancement that the US Agencies provide. The holder of mortgage-backed securities issued or guaranteed by the US Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae is the principal governmental (i.e., backed by the full credit of the US Government) guarantor of mortgage-backed securities. Fannie Mae and Freddie Mac are the principal US Government-related (i.e. not backed by the full credit of the US Government) guarantors. Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories of reference rates: (i) those based on US Treasury securities and (ii) those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilised reference rates include the one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile. Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'' respectively. 5. Current Assets and Current Liabilities The Directors consider that the carrying amount of other receivables approximates their fair value. Cash and cash equivalents comprise bank balances held by the Company. The carrying amount of these assets approximates their fair value. Other payables principally comprise amounts outstanding on purchases of investments awaiting settlement and ongoing costs. The Directors consider the carrying amount of other payables approximates to their fair value. 6. Hedging Instrument The Company uses interest rate swaps to manage its exposure to interest rate movements. When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ('LIBOR'). The Company's swaps are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings. During the period, the Company entered into a 5-year interest rate swap agreement of US$65 million notional amount in which the Company will pay a rate of 4.83% and receive one month LIBOR on a monthly basis. The fair value of the swap entered into at 31 December 2005 is estimated at US$19,500. This swap is designated and effective as a cashflow hedge and the fair value thereof has been deferred in equity. The swap did not settle during the period; therefore the Company did not pay or receive interest on the swap during the period. 7. Reverse Repurchase Agreements At December 31, 2005 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately US$30,662,010 (approximately 103% of such liability). The interest rates on the open reverse repurchase agreements at 31 December 2005 range from 4.28% to 4.35% and have maturity dates ranging from one day to one month. 8. Issued Capital and Reserves Ordinary Share Capital 31 December 2005 US $'000 Authorised ---------- ------------- 60,000,000 Ordinary Shares of US$0.01 each 600 ------------- Issued -------- ------------- 27,750,550 Ordinary Shares of US$0.01 each 277 ------------- Issue of shares --------------- The Company issued 2 Ordinary Shares of US$0.01 on incorporation on 22 February 2005 at par. Following the Initial Public Offering the Company issued 26,500,000 Ordinary Shares of US$0.01 each (including the previously issued Ordinary Shares) on 8 April 2005 and a further 2,110,000 Ordinary Shares of US$0.01 were issued on 9 May 2005 at a premium of US$9.99 per Ordinary Share. The issue costs associated with the Initial Public Offering amounted to US$15,640,237. Repurchase of shares -------------------- On 17 November 2005, the Company purchased for cancellation 70,000 of its Ordinary Shares at a price of US$7.531429 per share. On 18 November 2005, the Company purchased for cancellation 789,450 of its Ordinary Shares at a price of US$6.75 per share. The total cost of the Ordinary Shares purchased was US$5,873,559 has been charged against the distributable reserve, which has been set up for this purpose as described in the Prospectus (see below). As required by The Companies (Purchase of Own Shares) Ordinance, 1998, the nominal value of the Ordinary Shares purchased (US$8,594) has been credited to a capital redemption reserve. Authority to buyback 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. Share Premium Account 22 Febraury 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Premium arising on issue of equity shares 285,814 Expenses incurred on issue of equity shares (15,640) Reclassification of share premium (220,174) ------------ Balance at 31 December 2005 50,000 ------------ *Comencement of operations 08 April 2005. The Company applied to the Royal Court of Guernsey, immediately after the placing of the shares, to reduce its share premium account in order to provide a distributable reserve to repurchase its shares if and when it is considered beneficial to do so by the Directors. As such, the share premium account, after deduction of preliminary costs, was reduced by US$220,174,000 and a distributable reserve created for this amount. The balance on the distributable reserve following the repurchase of Ordinary Shares as described above is shown below. Distributable Reserve 22 February 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Reclassification of share premium (as noted above) 220,174 Repurchase of shares (5,874) ------------- Balance at 31 December 2005 214,300 ------------- *Commencement of operations 08 April 2005. Accumulated Profits 22 February 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Net losses for the period (7,810) Realised losses transferred to non-distributable capital 21,651 reserve (see below) Dividends paid (10,868) ------------- Balance at 31 December 2005 2,973 ------------- *Commencement of operations 08 April 2005. Capital Reserve - Realised Loss on Available for Sale Investments 22 February 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Net losses on sale of available for sale investments transferred from accumulated profits (21,651) ------------- Balance at 31 December 2005 (21,651) ------------- *Commencement of operations 08 April 2005. Realised gains or losses arising on the sale of investments are initially recognised in the income statement as required under International Financial Reporting Standards but are transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company Revaluation Reserve - Unrealised Loss on Available for Sale Investments 22 February 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Unrealised losses on revaluation taken to equity (35,591) Transferred to income statement on sale of investments 21,651 ------------- Balance at 31 December 2005 (13,940) ------------- *Commencement of operations 08 April 2005. Cash Flow Hedge Reserve 22 February 2005* to 31 December 2005 US $'000 Balance at 22 February 2005 - Decrease in fair value of hedging instrument taken to (20) equity ------------- Balance at 31 December 2005 (20) ------------- *Commencement of operations 08 April 2005. 9. Net Asset Value The net asset value per Ordinary Share is based on net assets at the year end and on 27,750,550 Ordinary Shares, being the number of Ordinary Shares in issue at the year end. At 31 December 2005, the reported net asset value per Ordinary Share (before deducting the dividend declared for the quarter ended 31 December 2005) is US$8.36. At 31 December 2005, the Company had a net asset value per Ordinary Share of US$8.26, after including the effect of the dividend declared for the quarter of 31 December 2005 of US$2,775,055. 10. Cash Flows from Operating Activities 31 December 2005 US $'000 Net loss for the period (7,810) Net amortisation of premiums on available for sale investments 6,492 Realised loss on available for sale investments 21,651 ------------- 28,143 Purchases of investments (3,051,933) Proceeds from sale of investments 1,259,358 ------------- (1,792,575) Principal paydowns 498,275 Borrowings under reverse repurchase agreements 18,552,131 Repayments under reverse repurchase agreements (17,530,064) ------------- 1,520,342 Increase in receivables (6,264) Increase in payables 4,451 ------------- (1,813) ------------- Net cash outflow from operating activities (253,713) ------------- Purchases and sales of investments are considered to be operating activities of the Company, given its purpose, rather than investing activities. Cash and cash equivalents (which are presented as a single class on the face of the balance sheet) comprise cash at bank. 11. Events after the Balance Sheet date Subsequent to period-end, the Company purchased approximately US$891.0 million in mortgage-backed securities consisting of US$822.0 million of fixed-rate mortgage-backed securities and US$69.0 million of floating-rate mortgage-backed securities. The securities purchased subsequent to 31 December 2005 have a weighted average yield of 5.40%. The Company has entered into a total of four interest rate swap agreements totalling US$456 million notional amount in which the Company will pay a weighted average rate of 4.79% and receive 1 month LIBOR on a monthly basis. 12. Ten largest investments as at 31 December 2005 Summary details of the ten largest investments as at 31 December 2005 Pool Description Market Value % of portfolio Current coupon US$ '000 FNMA 2005-47 FG 112,126 7.98% 4.88% FHLMC 2904 CM 63,745 4.54% 5.00% FNMA 821113 55,729 3.97% 4.86% FHLMC 2005-123 FN 55,095 3.92% 4.81% FHLMC 1L0112 53,879 3.83% 5.03% FHLMC 2975 EA 49,892 3.55% 5.00% FNMA 2002-9 PC 47,521 3.38% 6.00% FNMA 821110 42,096 3.00% 4.98% FHLMC 3084 YB 35,726 2.54% 5.50% FNMA 2005-43 EC 35,294 2.51% 5.00% This information is provided by RNS The company news service from the London Stock Exchange

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