10-Q 1 d294928d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED DECEMBER 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 814-00736

 

 

PENNANTPARK INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   20-8250744

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

590 Madison Avenue, 15th Floor

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212)-905-1000

(Registrant’s Telephone Number, Including Area Code)

 

 

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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

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  ¨    No  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of February 8, 2012 was 54,856,873.

 

 

 


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

 

PART I. CONSOLIDATED FINANCIAL INFORMATION   

Item 1. Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of December  31, 2011 (unaudited) and September 30, 2011

     2   

Consolidated Statements of Operations for the three months ended December  31, 2011 and 2010 (unaudited)

     3   

Consolidated Statements of Changes in Net Assets for the three months ended December  31, 2011 and 2010 (unaudited)

     4   

Consolidated Statements of Cash Flows for the three months ended December  31, 2011 and 2010 (unaudited)

     5   

Consolidated Schedules of Investments as of December 31, 2011 (unaudited) and September 30, 2011

     6   

Notes to Consolidated Financial Statements (unaudited)

     14   

Report of Independent Registered Public Accounting Firm

     26   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3. Quantitative And Qualitative Disclosures About Market Risk

     37   

Item 4. Controls and Procedures

     37   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     38   

Item 1A. Risk Factors

     38   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     38   

Item 3. Defaults Upon Senior Securities

     38   

Item 4. Reserved

     38   

Item 5. Other Information

     38   

Item 6. Exhibits

     39   

SIGNATURES

     40   


Table of Contents

PART I—CONSOLIDATED FINANCIAL INFORMATION

We are filing this Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, “we,” “our” or “us” refer to PennantPark Investment Corporation and its consolidated subsidiaries unless the context suggests otherwise. “PennantPark Investment” refers to only PennantPark Investment Corporation; “SBIC LP” and “our SBIC” refer to our wholly owned, consolidated small business investment company, or SBIC, subsidiary, PennantPark SBIC LP and its general partner PennantPark SBIC GP, LLC, or SBIC GP; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC. References to our portfolio or investments include investments we make through our SBIC and other consolidated subsidiaries.


Table of Contents
Item 1. Financial Statements

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

     December 31,
2011
(unaudited)
    September 30,
2011
 

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments, at fair value
(cost—$790,319,893 and $816,078,311, respectively)

   $ 755,681,743      $ 773,375,381   

Non-controlled, affiliated investments, at fair value
(cost—$37,362,359 and $36,744,425, respectively)

     43,252,714        40,673,133   

Controlled, affiliated investments, at fair value
(cost—$11,500,100 and $13,500,100, respectively)

     11,500,000        13,500,001   
  

 

 

   

 

 

 

Total Investments, at fair value (cost—$839,182,352 and $866,322,836, respectively)

     810,434,457        827,548,515   

Cash equivalents (See Note 8)

     42,075,768        71,604,519   

Interest receivable

     7,820,922        10,878,236   

Receivable for investments sold

     1,579,959        13,118,967   

Prepaid expenses and other assets

     5,532,413        5,587,977   
  

 

 

   

 

 

 

Total assets

     867,443,519        928,738,214   
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     12,793,138        12,336,241   

Payable for investments purchased

     387,672        18,572,499   

Unfunded investments

     36,346,599        37,132,151   

Credit facility payable (cost—$192,000,000 and $240,900,000, respectively) (See Notes 5 and 10)

     191,040,000        238,792,125   

SBA debentures payable (cost—$150,000,000 and $150,000,000, respectively) (See Notes 5 and 10)

     150,000,000        150,000,000   

Interest payable on credit facility and SBA debentures

     1,866,437        687,362   

Management fee payable (See Note 3)

     4,043,281        4,008,054   

Performance-based incentive fee payable (See Note 3)

     3,748,996        3,773,829   

Accrued other expenses

     1,507,814        778,757   
  

 

 

   

 

 

 

Total liabilities

     401,733,937        466,081,018   
  

 

 

   

 

 

 

Net Assets

    

Common stock, 45,689,781 shares are issued and outstanding.
Par value $0.001 per share and 100,000,000 shares authorized.

     45,690        45,690   

Paid-in capital in excess of par value

     540,603,020        540,603,020   

Undistributed net investment income

     10,530,244        8,326,854   

Accumulated net realized loss on investments

     (57,681,477 )     (49,651,922 )

Net unrealized depreciation on investments

     (28,747,895     (38,774,321

Net unrealized depreciation on credit facility

     960,000        2,107,875   
  

 

 

   

 

 

 

Total net assets

   $ 465,709,582      $ 462,657,196   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 867,443,519      $ 928,738,214   
  

 

 

   

 

 

 

Net asset value per share

   $ 10.19      $ 10.13   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
December 31,
 
     2011     2010  

Investment income:

    

From non-controlled, non-affiliated investments:

    

Interest

   $ 24,020,424      $ 18,559,165   

Other

     1,870,514        846,584   

From non-controlled, affiliated investments:

    

Interest

     572,931        363,432   

From controlled, affiliated investments:

    

Interest

     374,889        210,000   
  

 

 

   

 

 

 

Total investment income

     26,838,758        19,979,181   
  

 

 

   

 

 

 

Expenses:

    

Base management fee (See Note 3)

     4,043,281        3,498,594   

Performance-based incentive fee (See Note 3)

     3,749,128        2,792,994   

Interest and expenses on the credit facility and SBA debentures (See Note 10)

     2,375,123        1,135,427   

Administrative services expenses (See Note 3)

     797,353        579,055   

Other general and administrative expenses

     842,345        683,359   
  

 

 

   

 

 

 

Expenses before excise tax

     11,807,230        8,689,429   

Excise tax

     35,000        118,967   
  

 

 

   

 

 

 

Total expenses

     11,842,230        8,808,396   
  

 

 

   

 

 

 

Net investment income

     14,996,528        11,170,785   
  

 

 

   

 

 

 

Realized and unrealized gain (loss) on investments and credit facility:

    

Net realized (loss) gain on non-controlled, non-affiliated investments

     (8,029,555     2,293,362   

Net change in unrealized appreciation (depreciation) on:

    

Non-controlled, non-affiliated investments

     8,064,782        18,752,873   

Non-controlled, affiliated investments

     1,961,644        (90,172

Credit facility unrealized (appreciation) (See Notes 5 and 10)

     (1,147,875     (6,604,625 )
  

 

 

   

 

 

 

Net change in unrealized appreciation

     8,878,551        12,058,076   
  

 

 

   

 

 

 

Net realized and unrealized gain from investments and credit facility

     848,996        14,351,438   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 15,845,524      $ 25,522,223   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share (See Note 7)

   $ 0.34      $ 0.71   
  

 

 

   

 

 

 

Net investment income per common share

   $ 0.33      $ 0.31   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Three Months Ended
December 31,
 
     2011     2010  

Net increase in net assets from operations:

    

Net investment income

   $ 14,996,528      $ 11,170,785   

Net realized (loss) gain on investments

     (8,029,555     2,293,362   

Net change in unrealized appreciation on investments

     10,026,426        18,662,701   

Net change in unrealized appreciation on credit facility

     (1,147,875     (6,604,625
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     15,845,524        25,522,223   
  

 

 

   

 

 

 

Distributions to stockholders:

    

Distributions from net investment income

     (12,793,138     (9,418,227

Capital Shares Transactions:

    

Reinvestment of dividends

     —          711,743   
  

 

 

   

 

 

 

Total increase in net assets

     3,052,386        16,815,739   
  

 

 

   

 

 

 

Net Assets:

    

Beginning of period

     462,657,196        386,575,223   
  

 

 

   

 

 

 

End of period

   $ 465,709,582      $ 403,390,962   
  

 

 

   

 

 

 

Undistributed net investment income, at period end

   $ 10,530,244      $ 3,672,171   
  

 

 

   

 

 

 

Capital Share Activity:

    

Shares issued from reinvestment of dividends

     —          65,178   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
December 31,
 
     2011     2010  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 15,845,524      $ 25,522,223   

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:

    

Net change in unrealized appreciation on investments

     (10,026,426     (18,662,701

Net change in unrealized appreciation on credit facility

     1,147,875        6,604,625   

Net realized loss (gain) on investments

     8,029,555        (2,293,362

Net accretion of discount and amortization of premium

     (4,098,587     (1,214,474

Purchase of investments

     (43,003,570     (99,940,829

Payment-in-kind interest

     (3,067,138     (2,968,067

Proceeds from dispositions of investments

     69,280,225        85,535,428   

Decrease in interest receivable

     3,057,314        5,457,094   

Decrease in receivables for investments sold

     11,539,008        30,254,774   

Decrease in prepaid expenses and other assets

     55,564        255,290   

(Decrease) in payables for investments purchased

     (18,184,827     (52,785,000

(Decrease) in unfunded investments

     (785,552     (3,623,003 )

Increase in interest payable on credit facility and SBA debentures

     1,179,075        52,175   

Increase in management fee payable

     35,227        211,778   

(Decrease) Increase in performance-based incentive fee payable

     (24,834     553,983   

Increase (Decrease) in accrued other expenses

     729,057        (221,836
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     31,707,490        (27,261,902
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Distributions paid to stockholders, net of dividends reinvested

     (12,336,241     (8,689,537

Borrowings under SBA debentures (See Note 10)

     —          15,500,000   

Capitalized borrowing costs

     —          (1,040,875

Borrowings under credit facility (See Note 10)

     295,300,000        136,000,000   

Repayments under credit facility (See Note 10)

     (344,200,000     (113,300,000
  

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (61,236,241     28,469,588   
  

 

 

   

 

 

 

Net (decrease) increase in cash equivalents

     (29,528,751     1,207,686   

Cash equivalents, beginning of period

     71,604,519        1,814,451   
  

 

 

   

 

 

 

Cash equivalents, end of period

   $ 42,075,768      $ 3,022,137   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information and non-cash financing activity
(See Note 5):

    

Interest paid

   $ 966,095      $ 931,687   
  

 

 

   

 

 

 

Dividends reinvested

   $ —        $ 711,743   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2011

(Unaudited)

 

Issuer Name

  Maturity  

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)
 

 

Investments in Non-Controlled, Non-Affiliated Portfolio Companies—162.3% (1),(2) 

  

   

First Lien Secured Debt—53.1%

         

American Surgical Holdings, Inc.

  03/23/2015   Healthcare, Education and Childcare     14.00     L+1,000  (8)      19,500,000      $ 18,998,379      $ 19,500,000   

Brand Energy and Infrastructure Services, Inc.

  02/07/2014   Energy / Utilities     3.81     L+325        2,000,000        1,642,486        1,670,000   

CEVA Group PLC (5),(10)

  10/01/2016   Logistics     11.63     —          7,500,000        7,335,158        7,443,750   

CEVA Group PLC (5),(10)

  04/01/2018   Logistics     11.50 %     —          1,000,000        989,168        902,500   

Chester Downs and Marina, LLC

  07/29/2016   Hotels, Motels, Inns and Gaming     12.38     L+988  (8)     11,191,220        10,879,048        11,209,876   

Columbus International, Inc. (5),(10)

  11/20/2014   Communications     11.50     —          10,000,000        10,000,000        10,525,000   

Good Sam Enterprises, LLC (5)
(f/k/a Affinity Group Holdings Inc.)

  12/01/2016   Consumer Products     11.50 %     —          12,000,000        11,768,156        11,760,000   

Hanley-Wood, L.L.C. (7)

  03/10/2014   Other Media     2.56     L+225        8,662,500        8,662,500        4,158,000   

Instant Web, Inc.

  08/07/2014   Printing and Publishing     14.50     L+950  (8)      24,562,500        24,186,384        25,299,375   

Interactive Health Solutions, Inc.

  10/04/2016   Healthcare, Education and Childcare     11.50     L+950  (8)      18,881,250        18,456,422        18,881,250   

Jacuzzi Brands Corp.

  02/07/2014   Home and Office Furnishings, Housewares and Durable Consumer Products     2.69     L+225        9,653,378        9,653,378        6,651,178   

K2 Pure Solutions NoCal, L.P.

  09/10/2015   Chemicals, Plastics and Rubber     10.00 %     P+675  (8)      18,952,500        18,048,747        18,383,925   

Kadmon Pharmaceuticals, LLC
(f/k/a Three River Pharmaceutical, L.L.C.)

  10/31/2012   Healthcare, Education and Childcare     15.00     L+1,500  (8)      5,000,000        4,949,320        5,075,000   

Learning Care Group, Inc.

  04/27/2016   Education     12.00 %     —          26,052,632        25,578,354        25,596,711   

Penton Media, Inc.

  08/01/2014   Other Media    

 

5.00

(PIK 1.00

(6) 

%) 

    L+400  (8)      37,778,803        32,661,268        23,045,070   

Pre-Paid Legal Services, Inc., Tranche A

  12/30/2016   Personal, Food and Miscellaneous Services     7.50     L+600  (8)      1,796,748        1,771,765        1,733,862   

Pre-Paid Legal Services, Inc., Tranche B

  12/30/2016   Personal, Food and Miscellaneous Services     11.00     L+950  (8)      35,000,000        34,016,141        33,950,000   

Questex Media Group LLC

  12/16/2012   Other Media     9.50     L+550  (8)      8,670        8,670        8,670   

Questex Media Group LLC (9)

  12/16/2012   Other Media     —          —          124,933        124,933        124,933   

VPSI, Inc. 

  12/23/2015   Personal Transportation     12.00     L+1,000  (8)      16,958,333        16,719,442        16,873,541   

Yonkers Racing Corp. (5) 

  07/15/2016   Hotels, Motels, Inns and Gaming     11.38     —          4,500,000        4,393,653        4,635,000   
           

 

 

   

 

 

 

Total First Lien Secured Debt

        $ 260,843,372      $ 247,427,641   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

DECEMBER 31, 2011

(Unaudited)

 

 

Issuer Name

  Maturity  

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)  

Second Lien Secured Debt—32.1%

         

Brand Energy and Infrastructure Services, Inc.

  02/07/2015   Energy/Utilities     6.49     L+600        13,600,000      $ 13,320,338      $ 11,152,000   

Brand Energy and Infrastructure Services, Inc.

  02/07/2015   Energy/Utilities     7.52     L+700        12,000,000        11,832,439        10,224,000   

DirectBuy Holdings, Inc. (5),(7)

  02/01/2017   Consumer Products     12.00 %     —          34,000,000        31,964,124        8,308,920   

Eureka Hunter Pipeline, LLC

  08/16/2018   Energy/Utilities    

(PIK

12.50

 2.75

% (6) 

%) 

    —          31,000,000        31,000,000        31,000,000   

Eureka Hunter Pipeline, LLC (9)

  08/16/2012   Energy/Utilities     —          —          19,000,000        18,525,000        18,525,000   

Greatwide Logistics Services, L.L.C.

  03/01/2014   Cargo Transport    

(PIK

11.00

 11.00

% (6) 

%) 

    L+700  (8)      2,860,869        2,860,872        2,782,195   

Questex Media Group LLC, Term Loan A

  12/15/2014   Other Media     9.50 %     L+650  (8)      2,963,341        2,963,341        2,702,567   

Questex Media Group LLC, Term Loan B

  12/15/2015   Other Media    

(PIK

11.50

 11.50

(6) 

%) 

    L+750  (8)      2,047,984        2,047,984        1,796,082   

RAM Energy Resources, Inc.

  09/13/2016   Oil and Gas     11.00     L+900  (8)      17,000,000        16,685,212        16,830,000   

Realogy Corp.

  10/15/2017   Buildings and Real Estate     13.50     —          10,000,000        10,000,000        9,987,500   

ROC Finance LLC and ROC Finance 1 Corp.

  09/01/2018   Hotels, Motels, Inns and Gaming     12.13     —          16,000,000        15,734,975        16,840,000   

Sheridan Holdings, Inc.

  06/15/2015   Healthcare, Education and Childcare     6.05 (6)       L+575        13,500,000        11,950,247        12,555,000   

TransFirst Holdings, Inc.

  06/15/2015   Financial Services     6.30 (6)       L+600        7,767,209        7,401,003        6,861,032   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

        $ 176,285,535      $ 149,564,296   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—66.2%

         

Affinion Group Holdings, Inc.

  11/15/2015   Consumer Products     11.63 %     —          35,552,000        34,012,908        29,508,160   

Diversitech Corporation

  01/29/2017   Manufacturing/Basic Industry    

(PIK

13.50

 2.00

(6) 

%) 

    —          11,000,000        10,795,649        11,000,000   

Escort, Inc.

  06/01/2016   Electronics    

(PIK

14.75

 2.75

% (6) 

%) 

    —          24,730,869        24,155,285        24,162,059   

JF Acquisition, LLC

  12/30/2017   Distribution    

(PIK

14.00

 2.00

% (6) 

%) 

    —          17,000,000        16,532,911        16,532,500   

Last Mile Funding, Corp. (3PD, Inc.)

  06/30/2016   Cargo Transport    

(PIK

14.50

 2.50

% (6) 

%) 

    —          44,740,417        43,712,995        43,621,907   

Learning Care Group (US) Inc.

  06/30/2016   Education    

(PIK

15.00

 15.00

(6) 

%) 

    —          4,909,506        4,256,457        4,467,650   

LTI Flexible Products, Inc.

  01/26/2017   Chemical, Plastic and Rubber    

(PIK

13.88

 1.88

(6) 

%) 

    —          34,098,837        33,311,575        34,780,814   

Mailsouth, Inc.

  06/15/2017   Printing and Publishing    

(PIK

14.50

 2.00

(6) 

%) 

    —          15,000,000        14,594,825        14,805,000   

MedQuist, Inc.

  10/14/2016   Business Services    

(PIK

13.00

 2.00

(6) 

%) 

    —          19,000,000        18,509,377        19,950,000   

PAS Technologies, Inc.

  05/12/2017   Aerospace and Defense    

(PIK

14.02

 2.02

(6) 

%) 

    —          17,123,218        16,746,057        16,541,029   

Prince Mineral Holdings Corp.

  12/03/2016  

Mining, Steel, Iron and

Non-Precious Metals

   

(PIK

13.50

 2.00

(6) 

%) 

    —          26,300,041        25,814,168        26,063,341   

Realogy Corp.

  04/15/2018   Buildings and Real Estate     11.00     —          10,000,000        9,180,496        5,700,000   

TRAK Acquisition Corp.

  12/29/2015   Business Services    

(PIK

15.00

 2.50

(6) 

%) 

    —          12,020,950        11,675,229        12,020,950   

UP Support Services Inc. (f/k/a UP Acquisition Sub, Inc.)

  02/08/2015   Oil and Gas    

(PIK

18.75

 18.75

(6) 

%) 

    —          27,507,761        27,378,663        22,006,209   

Veritext Corp.

  12/31/2015   Business Services    

(PIK

14.00

 3.00

(6) 

%) 

    —          16,200,000        15,869,716        16,200,000   

Veritext Corp. (9)

  12/31/2012   Business Services     —          —          10,800,000        10,530,000        10,800,000   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

        $ 317,076,311      $ 308,159,619   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

DECEMBER 31, 2011

(Unaudited)

 

Issuer Name

 

Maturity

 

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)  

 

Preferred Equity/Partnership Interests—1.7% (7)

         

AH Holdings, Inc.
(American Surgical Holdings, Inc.)

    Healthcare, Education and Childcare     6.00     —          211      $ 500,000      $ 524,053   

AHC Mezzanine, LLC (Advanstar, Inc.)

    Other Media     —          —          7505        318,896        —     

CI (IHS) Investment Holdings, LLC (Interactive Health Solutions)

    Healthcare, Education and Childcare     8.00     —          76,357        765,307        801,193   

CI (IHS) Investment Holdings, LLC (Interactive Health Solutions) (9)

    Healthcare, Education and Childcare     —          —          38,179        382,654        382,654   

PAS Tech Holdings, Inc., Series A-1
(PAS Technologies, Inc.)

    Aerospace and Defense     8.00     —          20,000        1,980,000        1,690,298   

TZ Holdings, L.P., Series A
(Trizetto Group, Inc.)

    Insurance     —          —          686        685,820        685,820   

TZ Holdings, L.P., Series B
(Trizetto Group, Inc.)

    Insurance     6.50     —          1,312        1,312,006        1,602,660   

Universal Pegasus International, Inc.
(f/k/a UP Holdings, Inc.)

    Oil and Gas     8.00     —          101,175        2,738,050        —     

Verde Parent Holdings, Inc. (VPSI, Inc)

    Personal Transportation     8.00     —          1,824,167        1,824,167        2,002,398   
           

 

 

   

 

 

 

Total Preferred Equity/Partnership Interests

        $ 10,506,900      $ 7,689,076   
           

 

 

   

 

 

 

Common Equity/Warrants/Partnership Interests—9.2%(7)

         

AH Holdings, Inc.
(American Surgical Holdings, Inc.) (Warrants)

  03/23/2021   Healthcare, Education and Childcare     —          —          753        —          —     

CEA Autumn Management, L.L.C.

    Broadcasting and Entertainment     —          —          1,333        3,000,000        —     

CI (IHS) Investment Holdings, LLC (Interactive Health Solutions)

    Healthcare, Education and Childcare     —          —          23,416        234,693        245,698   

CI (IHS) Investment Holdings, LLC (Interactive Health Solutions) (9)

    Healthcare, Education and Childcare     —          —          11,708        117,346        117,346   

CT Technologies Holdings, LLC (CT Technologies Intermediate Holdings, Inc.)

    Business Services     —          —          5,556        2,277,209        8,093,698   

DirectBuy Investors, L.P.

    Consumer Products     —          —          30,000        1,350,000        —     

Kadmon Corporation, LLC, Class A
(f/k/a Kadmon Holdings, LLC) (Kadmon Pharmaceuticals, LLC)

    Healthcare, Education and Childcare     —          —          1,079,920        1,236,832        8,514,153   

Kadmon Corporation, LLC, Class D
(f/k/a Kadmon Holdings, LLC) (Kadmon Pharmaceuticals, LLC)

    Healthcare, Education and Childcare     —          —          1,079,920        1,028,807        1,028,807   

Learning Care Group (US) Inc. (Warrants)

  04/27/2020   Education     —          —          1,267        779,920        —     

Magnum Hunter Resources Corporation (Eureka Hunter Pipeline LLC)

    Oil and Gas     —          —          1,221,932        3,239,999        6,586,213   

Magnum Hunter Resources Corporation (Warrants)
(Eureka Hunter Pipeline LLC)

  10/14/2013   Oil and Gas     —          —          122,193        105,697        114,039   

MidOcean PPL Holdings, Inc. (Pre-Paid LegalServices, Inc.)

    Personal, Food and Miscellaneous Services     —          —          3,000        3,000,000        3,286,131   

MidOcean JF Holdings Corp. (JF Acquisition, LLC)

    Distribution     —          —          1,700        1,700,000        1,700,000   

PAS Tech Holdings, Inc. (PAS Technologies, Inc.)

    Aerospace and Defense     —          —          20,000        20,000        —     

QMG HoldCo, LLC, Class A (Questex Media Group, Inc.)

    Other Media     —          —          4,325        1,306,167        1,884,805   

QMG HoldCo, LLC, Class B (Questex Media Group, Inc.)

    Other Media     —          —          531        —          231,406   

TRAK Acquisition Corp. (Warrants)

  12/29/2019   Business Services     —          —          3,500        29,400        726,744   

Transportation 100 Holdco, L.L.C.
(Greatwide Logistics Services, L.L.C.) (11)

    Cargo Transport     —          —          137,923        2,111,588        461,877   

TZ Holdings, L.P. (Trizetto Group, Inc.)

    Insurance     —          —          2        9,843        1,419,533   

Universal Pegasus International, Inc. (f/k/a UP Holdings, Inc.)

    Oil and Gas     —          —          110,742        1,107        —     

Verde Parent Holdings, Inc. (VPSI, Inc.)

    Personal Transportation     —          —          9,167        9,167        10,061   

VText Holdings, Inc. (Veritext Corp.)

    Business Services     —          —          35,526        4,050,000        8,420,600   
           

 

 

   

 

 

 

Total Common Equity/Warrants/Partnership Interests

        $ 25,607,775      $ 42,841,111   
           

 

 

   

 

 

 

Investments in Non-Controlled, Non-Affiliated Portfolio Companies

  

    $ 790,319,893      $ 755,681,743   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

DECEMBER 31, 2011

(Unaudited)

 

Issuer Name

  Maturity  

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value (3)  

 

Investments in Non-Controlled, Affiliated Portfolio Companies—9.3% (1),(2)

  

First Lien Secured Debt—1.4%

  

EnviroSolutions, Inc. (9)

  07/29/2013   Environmental Services     —          —          6,666,666      $ 6,666,666      $ 6,666,666   

Second Lien Secured Debt—2.8%

  

EnviroSolutions, Inc.

  07/29/2014   Environmental Services     8.00     L+600  (8)      5,503,515        5,503,515        5,503,515   

Performance, Inc.

  01/16/2015   Leisure, Amusement Motion Pictures and Entertainment     7.25     L+625  (8)      8,000,000        8,000,000        7,380,000   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

  

  $ 13,503,515      $ 12,883,515   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—1.4%

  

Performance Holdings, Inc.

  07/16/2015   Leisure, Amusement,     15.00 (6)     —          7,030,091      $ 6,878,179      $ 6,678,586   
           

 

 

   

 

 

 
    Motion Pictures and Entertainment     (PIK 15.00 %)         

Common Equity/Partnership Interest—3.7% (7)

  

EnviroSolutions, Inc.

  —     Environmental Services     —          —          95,806        6,563,999        15,671,349   

NCP-Performance (Performance Holdings, Inc.)

  —     Leisure, Amusement, Motion Pictures and Entertainment     —          —          375,000        3,750,000        1,352,598   
           

 

 

   

 

 

 

Total Common Equity/Partnership Interest

  

  $ 10,313,999      $ 17,023,947   
           

 

 

   

 

 

 

Investments in Non-Controlled, Affiliated Portfolio Companies

  

  $ 37,362,359      $ 43,252,714   
           

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies—2.5% (1),(2)

  

First Lien Secured Debt—1.6%

  

SuttonPark Holdings, Inc.

  06/30/2020   Business Services    

 

14.00

(PIK 14.00

(6) 

%) 

    —          7,600,000        7,600,000        7,987,551   

Subordinated Debt/Corporate Notes—0.4%

  

SuttonPark Holdings, Inc.

  06/30/2020   Business Services    

 

14.00

(PIK 14.00

(6) 

%) 

    —          1,900,000        1,900,000        1,725,094   

Preferred Equity—0.5% (7)

  

SuttonPark Holdings, Inc.

  —     Business Services     14.00     —          2,000        2,000,000        1,787,355   

Common Equity—0.0% (7)

  

SuttonPark Holdings, Inc.

  —     Business Services     —          —          100        100        —     
           

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies

  

  $ 11,500,100      $ 11,500,000   
           

 

 

   

 

 

 

Total Investments—174.1%

  

      839,182,352        810,434,457   

Cash Equivalents—9.0%

  

    42,075,768        42,075,768        42,075,768   
           

 

 

   

 

 

 

Total Investments and Cash and Cash Equivalents—183.1%

  

  $ 881,258,120      $ 852,510,225   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(83.1%)

  

    (386,800,643

Net Assets—100.0%

  

  $ 465,709,582   
             

 

 

 

 

(1) The provisions of the Investment Company Act of 1940, as amended, or the 1940 Act, classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.
(2) The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.
(3) Valued based on our accounting policy (see Note 2 to our Consolidated Financial Statements).
(4) Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offered Rate, or LIBOR or “L,” or Prime Rate, or Prime or “P”.
(5) Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933, as amended, or the Securities Act. The security may be resold in transactions that are exempt from registration, usually to qualified institutional buyers.
(6) Coupon is payable in cash and/or through payment-in-kind, or PIK. The PIK percentage represents the payment in PIK at the date of the report and is subject to change.
(7) Non-income producing securities.
(8) Coupon is subject to a LIBOR or Prime rate floor.
(9) Represents the purchase of a security with delayed settlement (unfunded investment). This security does not have a basis point spread above an index.
(10) Non-U.S. company or principal place of business outside the United States.
(11) Investment is held through PNNT Transportation 100 Holdco, LLC, a consolidated subsidiary.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2011

 

Issuer Name

  Maturity   Industry   Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)  

 

Investments in Non-Controlled, Non-Affiliated Portfolio Companies—167.2%(1),(2)

  

   

First Lien Secured Debt—60.6%

         

American Surgical Holdings, Inc.

  03/23/2015   Healthcare,
Education and
Childcare
    14.00 %     L+1,000  (8)       20,300,000      $ 19,748,930      $ 20,300,000   

CEVA Group PLC (5)(10)

  10/01/2016   Logistics     11.63 %     —          7,500,000        7,328,729        7,331,250   

CEVA Group PLC (5)(10)

  04/01/2018   Logistics     11.50 %     —          1,000,000        988,872        920,000   

Chester Downs and Marina, LLC

  07/29/2016   Hotels, Motels, Inns
and Gaming
    12.38     L+988  (8)      11,358,254        11,024,166        11,310,924   

Columbus International, Inc.(5),(10)

  11/20/2014   Communications     11.50 %     —          10,000,000        10,000,000        9,800,000   

Covad Communications Group, Inc.(5)

  11/03/2015   Telecommunications     12.00     L+1,000  (8)      6,475,000        6,362,696        6,345,500   

Good Sam Enterprises, LLC (5)
(f/k/a Affinity Group Holdings Inc.)

  12/01/2016   Consumer Products     11.50     —          12,000,000        11,759,625        11,220,000   

Hanley-Wood, L.L.C.

  03/10/2014   Other Media     2.56 %     L+225        8,662,500        8,662,500        4,222,969   

Instant Web, Inc.

  08/07/2014   Printing and
Publishing
    14.50     L+950  (8)      24,625,000        24,227,464        25,683,875   

Interactive Health Solutions, Inc.

  10/04/2016   Healthcare,
Education and
Childcare
    11.50     L+950  (8)      19,000,000        18,572,500        18,572,500   

Jacuzzi Brands Corp.

  02/07/2014   Home and Office
Furnishings,
Housewares and
Durable Consumer
Products
    2.51     L+225        9,671,622        9,671,622        6,866,851   

K2 Pure Solutions NoCal, L.P.

  09/10/2015   Chemicals, Plastics
and Rubber
    10.00     P+675  (8)      18,952,500        18,002,959        18,004,875   

Kadmon Pharmaceuticals, LLC
(f/k/a Three Rivers Pharmaceutical, L.L.C.)

  10/22/2011   Healthcare,
Education and
Childcare
    15.00 %     L+1,300  (8)      29,066,987        27,940,332        30,811,006   

Learning Care Group, Inc.

  04/27/2016   Education     12.00 %     —          26,052,632        25,555,967        25,401,316   

Penton Media, Inc.

  08/01/2014   Other Media     5.00 % (6)      L+400  (8)      37,779,699        32,241,162        26,130,971   

Prepaid Legal Services, Inc., Tranche A

  12/30/2016   Personal, Food and
Miscellaneous
Services
    7.50 % (6)      L+600  (8)      2,000,000        1,970,966        1,900,000   

Prepaid Legal Services, Inc., Tranche B

  12/30/2016   Personal, Food and
Miscellaneous
Services
    11.00 % (6)      L+950  (8)      35,000,000        33,978,263        33,250,000   

Questex Media Group LLC

  12/16/2012   Other Media     10.50     L+550  (8)      26,721        26,721        26,721   

Questex Media Group LLC (9)

  12/16/2012   Other Media     —          —          240,485        240,485        240,485   

VPSI, Inc.

  12/23/2015   Personal
Transportation
    12.00 %     L+1,000  (8)      17,302,083        17,047,133        17,215,572   

Yonkers Racing Corp. (5)

  07/15/2016   Hotels, Motels, Inns
and Gaming
    11.38     —          4,500,000        4,391,231        4,590,000   
           

 

 

   

 

 

 

Total First Lien Secured Debt

        $ 289,742,323      $ 280,144,815   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2011

 

Issuer Name

  Maturity   Industry   Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)  

Second Lien Secured Debt—32.9%

         

Brand Energy and Infrastructure Services, Inc.

  02/07/2015   Energy/Utilities     6.30     L+600        13,600,000      $ 13,300,431      $ 11,832,000   

Brand Energy and Infrastructure Services, Inc.

  02/07/2015   Energy/Utilities     7.33     L+700        12,000,000        11,821,275        10,680,000   

DirectBuy Holdings, Inc.(5)

  02/01/2017   Consumer Products     12.00 %     —          34,000,000        31,944,865        10,710,000   

Eureka Hunter Pipeline, LLC

  08/16/2018   Energy / Utilities     12.50 % (6)      —          31,000,000        31,000,000        31,000,000   

Eureka Hunter Pipeline, LLC (9)

  08/15/2012   Energy / Utilities     —          —          19,000,000        18,525,000        18,525,000   

Greatwide Logistics Services, L.L.C.

  03/01/2014   Cargo Transport     11.00 % (6)      L+700  (8)      2,860,871        2,860,871        2,860,871   

Questex Media Group LLC, Term Loan A

  12/15/2014   Other Media     9.50 %     L+650  (8)      2,971,450        2,971,450        2,692,134   

Questex Media Group LLC, Term Loan B

  12/15/2015   Other Media     11.50 % (6)     L+750  (8)      1,990,370        1,990,370        1,737,593   

RAM Energy Resources, Inc.

  09/13/2016   Oil and Gas     11.00     L+900  (8)      17,000,000        16,672,749        16,830,000   

Realogy Corp.

  10/15/2017   Buildings and Real Estate     13.50     —          10,000,000        10,000,000        9,760,000   

ROC Finance LLC and ROC Finance 1 Corp.

  09/01/2018   Hotels, Motels, Inns and
Gaming
    12.13     —          16,000,000        15,726,668        16,160,000   

Sheridan Holdings, Inc.

  06/15/2015   Healthcare, Education and
Childcare
    6.07 % (6)      L+575        13,500,000        11,856,253        12,521,250   

TransFirst Holdings, Inc.

  06/15/2015   Financial Services     6.24 % (6)      L+600        7,811,488        7,422,480        6,756,937   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

        $ 176,092,412      $ 152,065,785   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—65.0%

         

Affinion Group Holdings, Inc. (5)

  11/15/2015   Consumer Products     11.63 %     —          26,345,000        26,391,240        20,285,650   

Aquilex Holdings, LLC (5)

  12/15/2016   Diversified /
Conglomerate Services
    11.13 %     —          18,885,000        18,440,262        8,309,400   

Consolidated Foundries, Inc.

  04/17/2015   Aerospace and Defense     14.25 % (6)      —          8,109,468        7,997,216        8,109,468   

Diversitech Corporation

  01/29/2017   Manufacturing / Basic
Industry
    13.50 % (6)      —          11,000,000        10,783,491        10,780,000   

Escort, Inc.

  06/01/2016   Electronics     14.75 % (6)      —          24,560,142        23,964,150        24,314,541   

Last Mile Funding, Corp. (3PD, Inc.)

  06/30/2016   Cargo Transport     14.50 % (6)      —          44,456,391        43,380,579        43,344,981   

Learning Care Group (US) Inc.

  06/30/2016   Education     15.00 % (6)      —          4,566,982        3,891,689        4,133,119   

LTI Flexible Products, Inc.

  01/26/2017   Chemical, Plastic and
Rubber
    13.88 % (6)      —          33,937,985        33,119,280        33,768,295   

Mailsouth, Inc.

  06/15/2017   Printing and Publishing     14.50 % (6)      —          15,000,000        14,579,991        14,640,000   

MedQuist, Inc.

  10/14/2016   Business Services     13.00 % (6)     —          19,000,000        18,492,685        19,950,000   

PAS Technologies, Inc.

  05/12/2017   Aerospace and Defense     14.02 % (6)      —          16,785,000        16,400,403        16,600,365   

Prince Mineral Holdings Corp.

  12/03/2016   Mining, Steel, Iron and
Non-Precious Metals
    13.50 % (6)      —          26,169,195        25,667,843        25,645,811   

Realogy Corp.

  04/15/2018   Buildings and Real Estate     11.00     —          10,000,000        9,159,259        7,800,000   

TRAK Acquisition Corp.

  12/29/2015   Business Services     15.00 % (6)      —          12,020,950        11,683,548        11,984,887   

UP Support Services Inc.

  02/08/2015   Oil and Gas     19.00 % (6)      —          26,276,070        26,063,224        24,173,984   

Veritext Corp.

  12/31/2015   Business Services     14.00 % (6)     —          15,000,000        14,686,238        15,000,000   

Veritext Corp. (9)

  12/31/2012   Business Services     —          —          12,000,000        11,700,000        12,000,000   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

        $ 316,401,098      $ 300,840,501   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2011

 

Issuer Name

  Maturity   Industry   Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par/
Shares
    Cost     Fair Value  (3)  

 

Preferred Equity/Partnership Interests—1.7% (7)

         

AH Holdings, Inc. (American Surgical Holdings, Inc.)

    Healthcare, Education and
Childcare
    6.00     —          211      $ 500,000      $ 491,004   

AHC Mezzanine, LLC (Advanstar Inc.)

    Other Media     —          —          7505        318,896        —     

CFHC Holdings, Inc., Class A (Consolidated Foundries, Inc.)

    Aerospace and Defense     12.00     —          909        909,248        1,328,977   

PAS Tech Holdings, Inc., Series A-1 (PAS Technologies, Inc.)

    Aerospace and Defense     8.00     —          20,000        1,980,000        2,026,969   

TZ Holdings, L.P., Series A (Trizetto Group, Inc.)

    Insurance     —          —          686        685,820        685,820   

TZ Holdings, L.P., Series B (Trizetto Group, Inc.)

    Insurance     6.50     —          1,312        1,312,006        1,581,165   

Universal Pegasus International, Inc. (UP Support
Services, Inc.)

    Oil and Gas     8.00     —          101,175        2,738,050        —     

Verde Parent Holdings, Inc. (VPSI, Inc.)

    Personal Transportation     8.00     —          1,824,167        1,824,167        1,911,003   
           

 

 

   

 

 

 

Total Preferred Equity/Partnership Interests

        $ 10,268,187      $ 8,024,938   
           

 

 

   

 

 

 

Common Equity/Warrants/Partnership Interests—7.0%(7)

         

AH Holdings, Inc. (American Surgical Holdings, Inc.) (Warrants)

  03/23/2021   Healthcare, Education and
Childcare
    —          —          753        —          —     

CEA Autumn Management, L.L.C.

    Broadcasting and
Entertainment
    —          —          1,333        3,000,000        280,176   

CFHC Holdings, Inc. (Consolidated Foundries, Inc.)

    Aerospace and Defense     —          —          1,856        18,556        1,443,556   

CT Technologies Holdings, LLC (CT Technologies Intermediate Holdings, Inc.)

    Business Services     —          —          5,556        2,277,209        8,431,871   

DirectBuy Investors, L.P.

    Consumer Products     —          —          30,000        1,350,000        469,500   

Kadmon Corporation, LLC, Class A (f/k/a Kadmon Holdings, LLC) (Kadmon Pharmaceuticals, LLC)

    Healthcare, Education and
Childcare
    —          —          1,079,920        1,236,832        295,205   

Kadmon Corporation, LLC, Class D (f/k/a Kadmon Holdings, LLC) (Kadmon Pharmaceuticals, LLC)

    Healthcare, Education and
Childcare
    —          —          1,079,920        1,028,807        1,028,807   

Learning Care Group (US) Inc. (Warrants)

  04/27/2020   Education     —          —          1,267        779,920        112,064   

Magnum Hunter Resources Corporation

    Oil and Gas     —          —          1,221,932        3,239,999        4,044,595   

Magnum Hunter Resources Corporation (Warrants)

  10/14/2013   Oil and Gas     —          —          122,193        105,697        61,091   

MidOcean PPL Holdings, Inc. (Pre-Paid LegalServices, Inc.)

    Personal, Food and
Miscellaneous Services
    —          —          3,000        3,000,000        3,320,146   

PAS Tech Holdings, Inc. (PAS Technologies, Inc.)

    Aerospace and Defense     —          —          20,000        20,000        101,931   

QMG HoldCo, LLC, Class A (Questex Media Group, Inc.)

    Other Media     —          —          4,325        1,306,167        1,352,585   

QMG HoldCo, LLC, Class B (Questex Media Group, Inc.)

    Other Media     —          —          531        —          166,063   

TRAK Acquisition Corp. (Warrants)

  12/29/2019   Business Services     —          —          3,500        29,400        577,061   

Transportation 100 Holdco, L.L.C. (Greatwide Logistics
Services, L.L.C.)

    Cargo Transport     —          —          137,923        2,111,588        1,521,406   

TZ Holdings, L.P. (Trizetto Group, Inc.)

    Insurance     —          —          2        9,843        1,591,505   

Universal Pegasus International, Inc. (UP Support
Services, Inc.)

    Oil and Gas     —          —          110,742        1,107        —     

Verde Parent Holdings, Inc. (VPSI, Inc.)

    Personal Transportation     —          —          9,166        9,166        —     

VText Holdings, Inc. (Veritext Corp.)

    Business Services     —          —          35,526        4,050,000        7,501,780   
           

 

 

   

 

 

 

Total Common Equity/Warrants/Partnership Interests

          23,574,291        32,299,342   
           

 

 

   

 

 

 

Investments in Non-Controlled, Non-Affiliated Portfolio Companies

  

      $ 816,078,311      $ 773,375,381   
           

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2011

 

Issuer Name

  Maturity   Industry   Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par /
Shares
    Cost     Fair Value (3)  

 

Investments in Non-Controlled, Affiliated Portfolio Companies—8.8% (1),(2)

  

   

First Lien Secured Debt—1.4%

         

EnviroSolutions, Inc. (9)

  07/29/2013   Environmental Services       —          6,666,666      $ 6,666,666      $ 6,666,666   

Second Lien Secured Debt—2.9%

         

EnviroSolutions, Inc.

  07/29/2014   Environmental Services     8.00     L+600  (8)     5,870,416        5,870,416        5,870,416   

Performance, Inc.

  01/16/2015   Leisure, Amusement
Motion Pictures
and Entertainment
    7.25     L+625  (8)     8,000,000        8,000,000        7,336,000   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

          13,870,416        13,206,416   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—1.4%

         

Performance Holdings, Inc.

  07/16/2015   Leisure, Amusement,     15.00 % (6)     —          6,775,991        6,617,860        6,403,311   
           

 

 

   

 

 

 
    Motion Pictures and
Entertainment
         

Common Equity/Partnership Interest—3.1% (7)

         

EnviroSolutions, Inc.

    Environmental Services     —          —          37,382        2,710,036        5,641,925   

EnviroSolutions, Inc. (Warrants)

    Environmental Services     —          —          50,102        3,129,447        7,561,205   

NCP-Performance (Performance Holdings, Inc.)

    Leisure, Amusement,
Motion Pictures and
Entertainment
    —          —          375,000        3,750,000        1,193,610   
           

 

 

   

 

 

 

Total Common Equity/Partnership Interest

  

        9,589,483        14,396,740   
           

 

 

   

 

 

 

Investments in Non-Controlled, Affiliated Portfolio Companies

  

      $ 36,744,425      $ 40,673,133   
           

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies—2.9% (1),(2)

  

   

First Lien Secured Debt—2.1%

         

SuttonPark Holdings, Inc.

  06/30/2020   Business Services     14.00 % (6)      —          9,200,000        9,200,000        9,676,650   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—0.5%

         

SuttonPark Holdings, Inc.

  06/30/2020   Business Services     14.00 % (6)      —          2,300,000        2,300,000        2,085,357   
           

 

 

   

 

 

 

Preferred Equity—0.4% (7)

         

SuttonPark Holdings, Inc.

    Business Services     14.00 %     —          2,000        2,000,000        1,737.994   
           

 

 

   

 

 

 

Common Equity—0.0% (7)

         

SuttonPark Holdings, Inc.

    Business Services     —          —          100        100        —     
           

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies

  

        13,500,100        13,500,001   
           

 

 

   

 

 

 

Total Investments—178.9%

          866,322,836        827,548,515   
           

 

 

   

 

 

 

Cash Equivalents—15.5%

        71,604,519        71,604,519        71,604,519   
           

 

 

   

 

 

 

Total Investments and Cash and Cash Equivalents—194.3%

  

      $ 937,927,355      $ 899,153,034   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(94.3%)

  

          (436,495,838 )

Net Assets—100.0%

          $ 462,657,196   
             

 

 

 

 

(1) 

The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.

(2) 

The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.

(3) 

Valued based on our accounting policy (see Note 2 to our Consolidated Financial Statements).

(4) 

Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable LIBOR or Prime rate.

(5) 

Security is exempt from registration under Rule 144A promulgated under the Securities Act. The security may be resold in transactions that are exempt from registration, usually to qualified institutional buyers.

(6) 

Coupon is payable in cash and/or through PIK.

(7) 

Non-income producing securities.

(8) 

Coupon is subject to a LIBOR or Prime rate floor.

(9) 

Represents the purchase of a security with delayed settlement (unfunded investment). This security does not have a basis point spread above an index.

(10) 

Non-U.S. company or principal place of business outside the United States.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011

(Unaudited)

1. ORGANIZATION

PennantPark Investment Corporation was organized as a Maryland corporation on January 11, 2007. PennantPark Investment is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a business development company, or BDC, under the 1940 Act. PennantPark Investment’s objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle-market companies in the form of senior secured loans, mezzanine debt and equity investments.

On April 24, 2007, we closed our initial public offering and our common stock trades on the NASDAQ Global Select Market under the symbol “PNNT.” We completed our initial public offering of common stock in 2007 and issued 21.0 million shares raising $294.1 million in net proceeds. Since our initial public offering, we have sold 24.3 million shares of common stock through follow-on public offerings, resulting in net proceeds of $242.5 million.

We are externally managed by PennantPark Investment Advisers, LLC, or the Investment Adviser or PennantPark Investment Advisers. PennantPark Investment Administration, LLC, or the Administrator or PennantPark Investment Administration, provides the administrative services necessary for us to operate.

SBIC LP and its general partner, SBIC GP, were organized in Delaware as a limited partnership and a limited liability company, respectively, in May, 2010 and began operations on June 11, 2010. SBIC LP received a license from the Small Business Administration, or SBA, to operate as an SBIC effective July 30, 2010 under Section 301(c) of the Small Business Investment Act of 1958, or the 1958 Act. Both SBIC LP and SBIC GP, or the Subsidiaries, are consolidated wholly owned subsidiaries of PennantPark Investment. The SBIC LP’s objective is to generate both current income and capital appreciation through debt and equity investments. SBIC LP, generally, invests with us in SBA eligible businesses that meet the investment criteria used by PennantPark Investment.

PennantPark Investment, through the Investment Adviser, manages day-to-day operations of and provides investment advisory services to SBIC LP under a separate investment management agreement. PennantPark Investment, through the Administrator, also provides similar services to SBIC LP and our controlled affiliate SuttonPark Holdings, Inc. and its subsidiaries, or SPH, under separate administration agreements. See Note 3 to the Consolidated Financial Statements.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amount of PennantPark Investment’s and its Subsidiaries’ assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reported period. Actual results could differ from these estimates. We have reclassified certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to the Accounting Standards Codification, or ASC, serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the Consolidated Financial Statements are issued.

Our Consolidated Financial Statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, we are providing a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders’ Equity.

Our significant accounting policies consistently applied are as follows:

(a) Investment Valuations

Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two broker/dealers if available, otherwise by a principal market maker or a primary market dealer. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Investments of sufficient credit quality purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.

 

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Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

We expect that there will not be readily available market values for many of our investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy, described herein, and a consistently applied valuation process. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the differences may be material. See Note 5 to the Consolidated Financial Statements.

With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

  (1) Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

  (2) Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

  (3) Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment. The independent valuation firms review management’s preliminary valuations in light of their own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker;

 

  (4) The audit committee of our board of directors reviews the preliminary valuations of the Investment Adviser and that of the independent valuation firms and responds and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

  (5) Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our Investment Adviser, the respective independent valuation firms and the audit committee.

(b) Security Transactions, Revenue Recognition, and Realized / Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment and our senior secured revolving credit agreement, or the Credit facility, values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount, market discount or premium and deferred financing costs are capitalized and we then accrete or amortize such amounts using the effective interest method as interest income or interest expense as it relates to our deferred financing costs. We record prepayment premiums on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when there is reasonable doubt that principal or interest will be collected. 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.

 

15


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

(c) Income Taxes

Since May 1, 2007, PennantPark Investment has complied with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code, and expects to be subject to tax as a regulated investment company, or RIC. As a result, PennantPark Investment accounts for income taxes using the asset liability method prescribed by ASC 740, Income Taxes. Under this method, income taxes were provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Based upon PennantPark Investment’s qualification and election to be subject to tax as a RIC, we do not anticipate paying any material level of federal income taxes in the future. Although we are not subject to tax as a RIC, we have elected to retain a portion of our calendar year income and recorded an excise tax of approximately $0.1 million for the three months ended December 31, 2011 and 2010.

PennantPark Investment recognizes in its Consolidated Financial Statements the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25 nor did we have any unrecognized tax benefits as of the periods presented herein. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our tax returns for each of our federal tax years from 2008 to date remain subject to examination by the Internal Revenue Service and the state department of revenue.

Book and tax basis differences relating to permanent book and tax differences are reclassified among PennantPark Investment’s capital accounts, as appropriate. Additionally, the tax character of distributions is determined in accordance with income tax regulations that may differ from GAAP.

We have formed and used certain taxable subsidiaries, or the Taxable Subsidiaries, to be taxed as a corporation for federal income tax purposes as listed on our Consolidated Schedule of Investments. These Taxable Subsidiaries allow us to hold portfolio companies organized as pass-through entities and still satisfy RIC requirements. We do not consolidate the taxable subsidiaries for income tax purposes but we do consolidate the results of these subsidiaries for financial reporting purposes.

(d) Dividends, Distributions, and Capital Transactions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a dividend is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually.

Capital transactions, in connection with our dividend reinvestment plan or through offerings of our common stock, are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.

(e) Consolidation

As permitted under Regulation S-X and as explained by ASC 946-810-45, PennantPark Investment will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we have consolidated the results of the Subsidiaries and Taxable Subsidiaries in our Consolidated Financial Statements.

(f) New Accounting Pronouncement

In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04. ASU 2011-04 amends ASC Topic 820, “Fair Value Measurements” , or ASC 820, by: (1) clarifying that certain concepts related to measuring the fair value apply only to non-financial assets; (2) allowing a reporting entity to measure the fair value of a net asset or net liability position in a manner consistent with how market participants would price the position; (3) providing a framework for selecting a premium or discount that may be applied in a fair value measurement; (4) providing that an instrument classified in a reporting entity’s shareholders’ equity may be fair valued based how a market participant would price the identical instrument; and (5) expanding the qualitative and quantitative fair value disclosure requirements. These amendments are effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The amendments of ASU 2011-04, when adopted, are not expected to have a material impact on our Consolidated Financial Statements and the company is currently evaluating the impact on its disclosures.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

3. AGREEMENTS

PennantPark Investment’s investment management agreement, or the Investment Management Agreement, with the Investment Adviser was re-approved by our board of directors, including a majority of our directors who are not interested persons of PennantPark Investment, in February 2012. Under the Investment Management Agreement the Investment Adviser, subject to the overall supervision of PennantPark Investment’s board of directors, manages the day-to-day operations of and provides investment advisory services to, PennantPark Investment. SBIC LP’s investment management agreement does not affect the management or incentive fees that we pay to the Investment Adviser on a consolidated basis. 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 “average adjusted gross assets” (net of U.S. Treasury Bills and/or temporary draws, if any, on the Credit Facility, as defined in Note 10). The base management fee is 2.00% and is payable quarterly in arrears. The base management fee is calculated based on the average adjusted 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. For the three months ended December 31, 2011 and 2010, the Investment Adviser earned a base management fee of $4.0 million and $3.5 million, respectively, from us.

The incentive fee has two parts, as follows:

One part 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, distribution 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 or other fees received from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and distribution 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 deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income 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 PennantPark Investment’s net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 100% 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 2.1875% in any calendar quarter (8.75% annualized), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are adjusted for any share issuances or repurchases during the current quarter. For the three months ended December 31, 2011 and 2010, the Investment Adviser earned an incentive fee of $3.7 million and $2.8 million, respectively, from us.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and equals 20.0% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The performance based incentive fee on capital gains due to our Investment Adviser as calculated under the Investment Management Agreement (as described in the preceding paragraph) for the three months ended December 31, 2011 resulted in no accrual.

In calculating the capital gains incentive fee accrual we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains related incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. There can be no assurance that such unrealized capital appreciation will be realized in the future.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

PennantPark Investment’s Administration Agreement with the Administrator was reapproved by our board of directors including a majority of our directors who are not interested persons of PennantPark Investment, in February 2012. Under the Administration Agreement PennantPark Investment Administration provides administrative services for PennantPark Investment. The Administrator provides similar services to SBIC LP under its administration agreement with PennantPark Investments. For providing these services, facilities and personnel, PennantPark Investment reimburses the Administrator for its allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and PennantPark Investment’s allocable portion of the costs of the compensation and related expenses for its chief compliance officer, chief financial officer and their respective staffs. The Administrator also offers, on PennantPark Investment’s behalf, managerial assistance to portfolio companies to which PennantPark Investment is required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statement of Operations. For the three months ended December 31, 2011 and 2010, the Investment Adviser and Administrator, collectively, were reimbursed $0.7 million and $0.6 million, respectively, from us, including expenses it incurred on behalf of the Administrator, for services described above.

PennantPark Investment entered into an administration agreement with its controlled affiliate, Sutton Park Holdings, or SPH. Under the administration agreement with SPH, or the SPH Administration Agreement, PennantPark Investment through the Administrator furnishes SPH with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Additionally, the Administrator performs or oversees the performance of SPH’s required administrative services, which include, among other things, maintaining financial records, preparing financial reports and filing of tax returns. Payments under the SPH Administration Agreement are equal to an amount based upon SPH’s allocable portion of the Administrator’s overhead in performing its obligations under the SPH Administration Agreement, including rent and allocable portion of the cost of compensation and related expenses of our chief financial officer and their respective staffs. For the three months ended December 31, 2011 and 2010, the PennantPark Investment was reimbursed $0.2 million and $0.1 million, respectively, for the services described above.

4. INVESTMENTS

Purchases of long-term investments, including PIK, for the three months ended December 31, 2011 and 2010 totaled $46.1 million and $102.9 million, respectively. Sales and repayments of long-term investments for the three months ended December 31, 2011 and 2010 totaled $69.3 million and $85.5 million, respectively.

Investments and cash equivalents consisted of the following:

 

     December 31, 2011      September 30, 2011  
     Cost      Fair Value      Cost      Fair Value  

First lien

   $ 275,110,038       $ 262,081,858       $ 305,608,989       $ 296,488,131   

Second lien

     189,789,050         162,447,811         189,962,828         165,272,201   

Subordinated debt / corporate notes

     325,854,490         316,563,299         325,318,958         309,329,169   

Preferred equity

     12,506,900         9,476,431         12,268,187         9,762,932   

Common equity

     35,921,874         59,865,058         33,163,874         46,696,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

     839,182,352         810,434,457         866,322,836         827,548,515   

Cash equivalents

     42,075,768         42,075,768         71,604,519         71,604,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments and cash equivalents

   $ 881,258,120       $ 852,510,225       $ 937,927,355       $ 899,153,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets (excluding cash equivalents) in such industries as of December 31, 2011 and September 30, 2011.

 

Industry Classification

   December 31,
2011
    September 30,
2011
 

Business Services

     11     11

Energy / Utilities

     9        9   

Healthcare, Education and Childcare

     8        10   

Chemicals, Plastics and Rubber

     7        6   

Cargo Transport

     6        6   

Consumer Products

     6        5   

Oil and Gas

     6        5   

Personal, Food and Miscellaneous Services

     5        5   

Printing and Publishing

     5        5   

Education

     4        4   

Environmental Services

     4        3   

Hotels, Motels, Inns and Gaming

     4        4   

Other Media

     4        4   

Electronics

     3        3   

Mining, Steel, Iron and Non-Precious Metals

     3        3   

Aerospace and Defense

     2        4   

Buildings and Real Estate

     2        2   

Distribution

     2        —     

Leisure, Amusement, Motion Pictures, Entertainment

     2        2   

Personal Transportation

     2        2   

Communication

     1        1   

Manufacturing / Basic Industry

     1        1   

Other

     3        5   
  

 

 

   

 

 

 

Total

     100 %     100 %
  

 

 

   

 

 

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.

ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:

 

Level 1:   Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2:   Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3:   Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments and Credit Facility (See Note 10) are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable market-based transactions for the same or similar assets or other relevant observable market based inputs that may be used in pricing an asset.

Our investments are generally structured as debt and equity investments in the form of senior secured loans, mezzanine debt and equity co-investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions and performance multiples, among other factors. These nonpublic investments are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the reclassifications occur. During the three months ended December 31, 2011, our ability to observe valuation inputs has not resulted in a reclassification of assets from Level 3 to 2. There were no investments transferred between Level 1 and 2 during the three months ended December 31, 2011.

In addition to using the above inputs in cash equivalents, investments and Credit Facility valuations, we employ the valuation policy approved by our board of directors that is consistent with ASC 820 (See Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

At December 31, 2011 and September 30, 2011, our cash equivalents, investments and our Credit Facility were categorized as follows in the fair value hierarchy for ASC 820 purposes.

 

     Fair Value at December 31, 2011  

Description

   Fair Value      Level 1      Level 2      Level 3  

Loan and debt investments

   $ 741,092,968       $ —         $ 40,033,161       $ 701,059,807   

Equity investments

     69,341,489         6,586,213         114,038         62,641,238   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     810,434,457         6,586,213         40,147,199         763,701,045   

Cash equivalents

     42,075,768         42,075,768         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 852,510,225       $ 48,661,981       $ 40,147,199       $ 763,701,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Facility

   $ 191,040,000       $ —         $ —         $ 191,040,000   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value at September 30, 2011  

Description

   Fair Value      Level 1      Level 2      Level 3  

Loan and debt investments

   $ 771,089,501       $ —         $ 38,395,050       $ 732,694,451   

Equity investments

     56,459,014         4,044,595         61,091         52,353,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     827,548,515         4,044,595         38,456,141         785,047,779   

Cash equivalents

     71,604,519         71,604,519         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 899,153,034       $ 75,649,114       $ 38,456,141       $ 785,047,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Facility

   $ 238,792,125       $ —         $ —         $ 238,792,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

The following tables show a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the three months ended December 31, 2011 and 2010:

 

     For the three months ended December 31, 2011  

Description

   Loan and debt
investments
    Equity
investments
    Totals  

Beginning Balance, October 1, 2011

   $ 732,694,451      $ 52,353,328      $ 785,047,779   

Realized gains

     138,156        1,871,266        2,009,422   

Unrealized (depreciation) appreciation

     (12,316,045     7,291,199        (5,024,846

Purchases, PIK and net discount accretion

     38,620,573        3,924,515        42,545,088   

Sales / repayments

     (58,077,328     (2,799,070     (60,876,398

Transfers out of Level 3

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Ending Balance, December 31, 2011

   $ 701,059,807      $ 62,641,238      $ 763,701,045   
  

 

 

   

 

 

   

 

 

 
Net change in unrealized appreciation (depreciation) for the period reported within the net change in unrealized appreciation on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date    $ (9,350,312 )   $ 9,135,928      $ (214,384 )
  

 

 

   

 

 

   

 

 

 

 

     For the three months ended December 31, 2010  

Description

   Loan and debt
investments
    Equity
investments
     Totals  

Beginning Balance, October 1, 2010

   $ 615,236,138      $ 45,137,828       $ 660,373,966   

Realized gains

     2,293,343        —           2,293,343   

Unrealized appreciation

     13,507,841        1,860,352         15,368,193   

Purchases, PIK and net discount accretion

     100,385,797        3,737,573         104,123,370   

Sales / repayments

     (85,535,410 )     —           (85,535,410 )

Transfers in or out of Level 3

     (39,546,063 )     —           (39,546,063 )
  

 

 

   

 

 

    

 

 

 

Ending Balance, December 31, 2010

   $ 606,341,646      $ 50,735,753       $ 657,077,399   
  

 

 

   

 

 

    

 

 

 
Net change in unrealized appreciation (depreciation) for the period reported within the net change in unrealized depreciation on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date    $ 13,028,376      $ 1,860,352       $ 14,888,728   
  

 

 

   

 

 

    

 

 

 

The following tables show a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the three months ended December 31, 2011 and 2010. There were no temporary draws outstanding at December 31, 2011 and 2010.

 

Period Ended December 31, 2011       
Credit Facility    Carrying /
Fair Value
 

Beginning balance, October 1, 2011 (Cost – $240,900,000)

   $ 238,792,125   

Total unrealized appreciation included in earnings

     1,147,875   

Borrowings (1)

     242,200,000   

Repayments (1)

     (291,100,000

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending Balance, December 31, 2011 (Cost – $192,000,000)

   $ 191,040,000   
  

 

 

 

 

Period Ended December 31, 2010       
Credit Facility    Carrying /
Fair Value
 

Beginning balance, October 1, 2010 (Cost – $227,900,000)

   $  213,941,125   

Total unrealized appreciation included in earnings

     6,604,625   

Borrowings (1)

     95,400,000   

Repayments (1)

     (67,500,000

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending Balance, December 31, 2010 (Cost – $255,800,000)

   $ 248,445,750   
  

 

 

 

 

(1)       Excludes temporary draws.

  

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

We adopted ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Credit Facility. We elected to use the fair value option for the Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are recorded in the Consolidated Statement of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including the SBA debentures. For the three months ended December 31, 2011 and 2010, our Credit Facility had a net change in unrealized appreciation of $1.1 million and $6.6 million, respectively. On December 31, 2011 and September 30, 2011, net unrealized depreciation on our Credit Facility totaled $1.0 million and $2.1 million, respectively. We use a nationally recognized independent valuation services to measure the fair value of our Credit Facility in a manner consistent with the valuation process that the board of directors uses to value investments.

6. TRANSACTIONS WITH AFFILIATED COMPANIES

An affiliated company is a company in which we have ownership of 5% or more of the portfolio company’s voting securities. A controlled affiliate is a company in which we own 25% or more of a portfolio company’s voting securities. Advances to and distributions from affiliates are included in the Consolidated Statements of Cash Flow under purchases and sales. Transactions related to our investments with both controlled and non-controlled affiliates for the three months ended December 31, 2011 were as follows:

 

Name of Investment

   Fair Value at
September 30, 2011
     Advances to
Affiliates
     Distributions
 from  Affiliates 
    Income
Received
     Fair Value at
December 31, 2011
 

Controlled Affiliates

             

SuttonPark Holdings, Inc.

   $ 13,500,001       $  1,500,000      $ (3,500,000 )   $  379,166       $ 11,500,000   

Non-Controlled Affiliates

             

Performance Holdings, Inc.

     14,932,921         —           —          399,100         15,411,184   

Envirosolutions, Inc.

     25,740,212         336,342         (366,901     202,927         27,841,530   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Controlled and Non-Controlled Affiliates

   $ 54,173,134       $ 1,836,342       $ (3,866,901 )   $ 981,193       $ 54,752,714   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

7. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE

The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations.

 

Class and Year

   Three Months  Ended
December 31,
2011
     Three Months  Ended
December 31,
2010
 

Numerator for net increase in net assets resulting from operations

   $ 15,845,524       $ 25,522,223   

Denominator for basic and diluted weighted average shares

     45,689,781         36,218,991   

Basic and diluted net increase in net assets per share resulting from operations

   $ 0.34       $ 0.71   

8. CASH EQUIVALENTS

Cash equivalents represent cash pending investment in longer-term portfolio holdings. Our portfolio may consist of temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedules of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of its total assets at quarter end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, temporarily drawing down on the Credit Facility, or utilizing repurchase agreements or other balance sheet

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

transactions as are deemed appropriate for this purpose. These amounts are excluded from adjusted gross assets for purposes of computing the Investment Adviser’s management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of December 31, 2011 and September 30, 2011, cash equivalents consisted of $42.1 million and $71.6 million, including amounts in money market funds, respectively.

9. FINANCIAL HIGHLIGHTS

Our net assets and net asset value per share on December 31, 2011 and 2010 were $465.7 million and $403.4 million, respectively, and $10.19 and $11.14, respectively. Below are the financial highlights for the three months ended December 31, 2011 and 2010.

 

     Three Months  Ended
December 31, 2011
    Three Months  Ended
December 31, 2010
 

Per Share Data:

    

Net asset value, beginning of period

   $ 10.13      $ 10.69   

 

Net investment income ( 1)

  

 

 

 

0.33

 

  

 

 

 

 

0.31

 

  

Net change in realized and unrealized gain (1)

     0.01        0.40   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations (1)

     0.34        0.71   

Dividends to stockholders (1), (2)

     (0.28     (0.26
  

 

 

   

 

 

 

Net asset value, end of period

   $ 10.19      $ 11.14   
  

 

 

   

 

 

 

Per share market value, end of period

   $ 10.09      $ 12.25   

Total return * (3)

     16.19 %     17.91 %

Shares outstanding at end of period

     45,689,781        36,223,950   
  

 

 

   

 

 

 

Ratios ** / Supplemental Data:

    

Ratio of operating expenses to average net assets

     8.10 %     7.67

Ratio of Credit Facility and SBA debentures related expenses to average net assets

     2.03 %     1.14

Ratio of total expenses to average net assets

     10.13 %     8.81

Ratio of net investment income to average net assets

     12.83 %     11.17 %

Net assets at end of period

   $ 465,709,582      $ 403,390,962   
  

 

 

   

 

 

 

Average debt outstanding

   $ 360,666,304      $ 290,552,174   

Average debt per share

   $ 7.89      $ 8.02   

Portfolio turnover ratio

     21.46 %     49.80 %

 

* Not annualized for periods less than one year.
** Annualized for periods less than one year.
(1) Per share data are calculated based on the weighted average shares outstanding for the respective periods.
(2) Dividends and distributions are determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(3) Total return is based on the change in market price per share during the period and takes into account dividends and distributions, if any, reinvested in accordance with our dividend reinvestment plan.

10. CREDIT FACILITY AND SBA DEBENTURES

Credit Facility

On June 25, 2007, we entered into a senior secured revolving credit agreement, or the Credit Facility, among us, various lenders and SunTrust Bank, as administrative agent for the lenders. As of December 31, 2011 and September 30, 2011, there was $192.0 million and $240.9 million, respectively, in outstanding borrowings under the Credit Facility, with a weighted average interest rate at the time of 1.28% and 1.27% exclusive of the fee on undrawn commitments of 0.20%, respectively.

Under our Credit Facility, the lenders agreed to extend credit to us in an aggregate principal or face amount not exceeding $315.0 million at any one time outstanding. The Credit Facility is a five-year revolving facility (with a stated maturity date of June 25, 2012) and pricing is set at 100 basis points over LIBOR. The Credit Facility contains customary affirmative and negative covenants, including the maintenance of a minimum stockholders’ equity, the maintenance of an asset coverage ratio not less than 200% of total assets (less total liabilities other than indebtedness) to total indebtedness, and restrictions on certain payments and issuance of debt.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing, excluding SBA Debentures, pursuant to exemptive relief from the Securities and Exchange Commission, or SEC. For a complete list of such covenants, see our report on Form 8-K, filed June 28, 2007 and on Form 10-Q, filed May 5, 2010. As of December 31, 2011, we were in compliance with our covenants relating to our Credit Facility.

SBA Debentures

SBIC LP is able to borrow funds from the Small Business Administration, or SBA, against regulatory capital (which approximates equity capital) that is paid-in and is subject to customary regulatory requirements. We had committed and funded SBIC LP with $75.0 million of equity capital, and had SBA debentures outstanding of $150.0 million. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150 million, which is up to twice its potential regulatory capital. SBIC LP has accessed the maximum borrowing with its $75.0 million in regulatory capital.

As of December 31, 2011, $150.0 million in debt commitments were fully drawn with a weighted average interest rate of 3.70% exclusive of the 3.43% in upfront fees (4.04% inclusive of the upfront fees). The SBA debentures upfront fees of 3.43% consist of a commitment fee of 1.00% and an issuance at a 2.43% discount to face. Both fees are amortized over the lives of the loans. Our fixed rate SBA debentures as of December 31, 2011 and September 30, 2011 are as follows:

 

Issuance Dates

   Maturity    All-in
Coupon
Rate (1)
    Principal
Balance
 

Fixed Rate SBA Debentures

           

September 22, 2010

   September 1, 2020      3.50   $ 500,000   

March 29, 2011

   March 1, 2021      4.46     44,500,000   

September 21, 2011

   September 1, 2021      3.38     105,000,000   
     

 

 

   

 

 

 
        3.70   $ 150,000,000   
     

 

 

   

 

 

 

 

(1)        Excluding 3.43% of upfront fees.

    

Under SBA regulations, SBIC LP is subject to regulatory requirements, including making investments in SBA eligible businesses, investing at least 25% of regulatory capital in eligible smaller businesses, as defined under the 1958 Act, placing certain limitations on the financing terms of investments, prohibiting investing in certain industries, requiring capitalization thresholds and being subject to periodic audits and examinations of its financial statements that are prepared on a basis of accounting other than U.S. GAAP (for example, fair value, as defined under ASC 820, is not required to be used for assets or liabilities for such compliance reporting). If our SBIC subsidiary fails to comply with applicable SBA regulations the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable and/or limit it from making new investments. These actions by the SBA would, in turn, negatively affect us because SBIC LP is wholly owned by us. As of December 31, 2011, SBIC LP was in compliance with our requirements relating to our SBA debentures.

On June 1, 2011, we received exemptive relief from the SEC allowing us to modify the asset coverage requirement to exclude the SBA debentures from the calculation. Accordingly, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 200%, which while providing increased investment flexibility, would also increase our exposure to risks associated with leverage.

Our net asset value may decline as a result of economic conditions in the United States. Our continued compliance with the covenants under our Credit Facility and SBA debentures depend on many factors, some of which are beyond our control. Material net asset devaluation could have a material adverse effect on our operations and could require us to reduce our borrowings under our Credit Facility and SBA debentures in order to comply with certain covenants including the ratio of total assets to total indebtedness.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

DECEMBER 31, 2011

(Unaudited)

 

11. COMMITMENTS AND CONTINGENCIES

From time to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded debt investments described in the Consolidated Statement of Assets and Liabilities represent unfunded delayed draws on investments.

12. SUBSEQUENT EVENTS

Subsequent to December 31, 2011, we completed a public offering of 10,350,000 shares of common stock, including the underwriters’ over-allotment option, at a public offering price of $10.55 per share, raising approximately $109,192,500 in gross proceeds.

We are currently in discussions with our existing lenders and others to amend and restate our existing $315.0 million senior secured revolving Credit Facility which is scheduled to mature in June of this year. We currently expect the amended and restated credit facility to be at least $350 million, priced at LIBOR +275 with an unused fee of 50 basis points, to have a four-year maturity, with a one-year term out period following its third year, to have the same security to the same extent as in place for our existing Credit Facility and to include customary covenants, including a minimum asset coverage and minimum equity covenant. The amended and restated credit facility is not fully committed and the size and terms of such credit facility remain subject to change. Further, no assurances can be given that we will successfully enter into such an amended and restated credit facility.

Subsequent to December 31, 2011, Standard and Poor’s Ratings Services and Fitch Ratings Services assigned us an investment grade rating of BBB-.

Since December 31, 2011, we have invested $73 million.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PennantPark Investment Corporation and Subsidiaries

We have reviewed the accompanying consolidated statement of assets and liabilities of PennantPark Investment Corporation and Subsidiaries (the “Company”), including the consolidated schedules of investments, as of December 31, 2011, and the consolidated statements of operations, changes in net assets, and cash flows for the three month periods ended December 31, 2011 and 2010. These interim consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of assets and liabilities of PennantPark Investment Corporation and Subsidiaries, including the consolidated schedule of investments, as of September 30, 2011; and in our report dated November 16, 2011, we expressed an unqualified opinion on that financial statement and schedule.

LOGO

New York, New York

February 8, 2012

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our prospective portfolio companies;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

   

the impact of a protracted decline in the liquidity of credit markets on our business;

 

   

the impact of investments that we expect to make;

 

   

the impact of fluctuations in interest rates on our business;

 

   

our contractual arrangements and relationships with third parties;

 

   

the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

   

the ability of our prospective portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital;

 

   

the timing of cash flows, if any, from the operations of our prospective portfolio companies; and

 

   

the ability of PennantPark Investment Advisers, LLC, or the Investment Adviser, to locate suitable investments for us and to monitor and administer our investments.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks,” “plans,” “estimates” and similar expressions to identify forward-looking statements. You should not place undue influence on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans and objectives will be achieved.

We have based the forward-looking statements included in this Report on information available to us on the date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or SEC, including reports on Form 10-Q/K and current reports on Form 8-K.

You should understand that under Sections 27A(b)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act.

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto contained elsewhere in this Report.

Overview

PennantPark Investment Corporation is a business development company, or BDC, whose objectives are to generate both current income and capital appreciation through debt and equity investments primarily in U.S. middle-market companies in the form of senior secured loans, mezzanine debt and equity investments.

 

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We believe the middle-market offers attractive risk-reward to investors due to the limited amount of capital available for such companies. We seek to create a diversified portfolio that includes senior secured loans, mezzanine debt and equity investments by investing approximately $10 to $50 million of capital, on average, in the securities of middle-market companies. We use the term “middle-market” to refer to companies with annual revenues between $50 million and $1 billion. We expect this investment size to vary proportionately with the size of our capital base. The companies in which we invest are typically highly leveraged, and, in most cases, are not rated by national rating agencies. If such companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under the Standard & Poor’s system) from the national rating agencies. In addition, we expect our debt investments to generally range in maturity from three to ten years.

Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. Turmoil in the credit markets has adversely affected each of these factors and has resulted in a broad-based reduction in the demand for, and valuation of, middle-market debt instruments. These conditions have presented us with and may continue to offer attractive investment opportunities, as we believe that there are many middle-market companies that need senior secured and mezzanine debt financing. We have used, and expect to continue to use, our senior secured revolving credit facility, or the Credit Facility, the SBA debentures, proceeds from the rotation of our portfolio, proceeds from public and private offerings of securities to finance our investment objectives.

Organization and Structure of PennantPark Investment Corporation

PennantPark Investment Corporation was organized under the Maryland General Corporation Law in January 2007. We are a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the Investment Company Act of 1940, as amended, or the 1940 Act. As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets”, including securities of U.S. private companies or thinly traded public companies, public companies with a market capitalization of less than $250 million, cash, cash equivalents, U.S. government securities and high quality debt investments that mature in one year or less. In addition, for tax purposes we intend to continue to be treated as a regulated investment company, or RIC, and qualify annually under the Internal Revenue Code of 1986, as amended, or the Code.

Our wholly owned subsidiary, SBIC LP was organized as a Delaware limited partnership in May 2010 and received a license from the Small Business Administration, or the SBA, to operate as a small business investment company, or SBIC, under Section 301(c) of the Small Business Investment Company Act of 1958, as amended, or the 1958 Act, in July 2010. SBIC LP’s objective is to generate both current income and capital appreciation through debt and equity investments. SBIC LP, generally, invests with us in SBA eligible businesses that meet the investment criteria used by PennantPark Investment.

Our investment activities are managed by the Investment Adviser. Under our investment management agreement with the Investment Adviser, or the Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross total assets as well as an incentive fee based on our investment performance. PennantPark Investment, through the Investment Adviser, provides similar services to SBIC LP under its investment management agreement. The SBIC LP investment management agreement does not affect the management and incentive fees on a consolidated basis. We have also entered into an administration agreement, or the Administration Agreement, with PennantPark Investment Administration LLC, or the Administrator. Under our Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs. PennantPark Investment, through the Administrator, provides similar services to SBIC LP under its administration agreement with us. Our board of directors, a majority of whom are independent of us and the Investment Adviser, supervise our activities.

Revenues

We generate revenue in the form of interest income on the debt securities we hold and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of senior secured loans or mezzanine debt, typically have a term of three to ten years and bear interest at a fixed or floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as income. We record prepayment premiums on loans and debt securities as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

 

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Expenses

Our primary operating expenses include the payment of management fees to our Investment Adviser, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt we accrue under our Credit Facility and SBA debentures. We bear all other direct or indirect costs and expenses of our operations and transactions, including:

 

   

the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

   

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

   

fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence and reviews of prospective investments or complimentary businesses;

 

   

expenses incurred by the Investment Adviser in performing due diligence and reviews of investments;

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

federal and state registration fees and any stock exchange listing fees;

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

brokerage commissions;

 

   

fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

 

   

direct costs such as printing, mailing, long distance telephone and staff;

 

   

fees and expenses associated with independent audits and outside legal costs;

 

   

costs associated with our reporting and compliance obligations under the 1940 Act, the 1958 Act and applicable federal and state securities laws; and

 

   

all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under our Administration Agreement that will be based upon our allocable portion of overhead, and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.

PORTFOLIO AND INVESTMENT ACTIVITY

As of December 31, 2011, our portfolio totaled $810.4 million and consisted of $262.1 million of senior secured loans, $162.4 million of second lien secured debt, $316.6 million of subordinated debt and $69.3 million of preferred and common equity investments. Our portfolio consisted of 63% fixed-rate and 37% variable-rate investments (including 29% with a London Interbank Offered Rate, or LIBOR, or prime floor). On December 31, 2011, we had two non-accrual debt investments, representing 1.5% of our overall portfolio on a fair value basis and 4.8% of our overall portfolio on a cost basis. Our overall portfolio consisted of 46 companies with an average investment size of $17.6 million, a weighted average yield on debt investments of 13.2%, and was invested 32% in senior secured loans, 20% in second lien secured debt, 39% in subordinated debt and 9% in preferred and common equity investments.

As of September 30, 2011, our portfolio totaled $827.5 million and consisted of $296.5 million of senior secured loans, $165.3 million of second lien secured debt, $309.3 million of subordinated debt and $56.4 million of preferred and common equity investments. Our portfolio consisted of 61% fixed-rate investments and 39% variable-rate investments (including 31% with a LIBOR or prime floor). Our overall portfolio consisted of 48 companies with an average investment size of $17.2 million, a weighted average yield on debt investments of 13.3%, and was invested 36% in senior secured loans, 20% in second lien secured debt, 37% in subordinated debt and 7% in preferred and common equity investments.

For the three months ended December 31, 2011, we invested $43.0 million in one new portfolio company and seven existing portfolio companies with a weighted average yield on debt investments of 16.4%. Sales and repayments of long-term investments for the three months ended December 31, 2011 totaled $69.3 million.

 

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For the three months ended December 31, 2010, we invested $99.9 million in six new portfolio companies and one existing portfolio company with a weighted average yield on debt investments of 15.0% (yield on debt investments, excluding value of attached equity, was 14.0%). Sales and repayments of long term investments for the three months ended December 31, 2010 totaled $85.5 million.

CRITICAL ACCOUNTING POLICIES

The discussion of our financial condition and results of operation is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our critical accounting policies in the notes to our Consolidated Financial Statements.

Valuation of Portfolio Investments

Our investments generally consist of illiquid securities including debt and equity investments. Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two broker/dealers if available, otherwise by a principal market maker or a primary market dealer. If our board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Investments of sufficient credit quality purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.

We expect that there may not be readily available market values for many of our investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy described in this Report and a consistently applied valuation process. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may differ from our valuation and the differences could be material.

With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

  (1) Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

  (2) Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

  (3) Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of an investment. The independent valuation firms review management’s preliminary valuations in light of its own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker;

 

  (4) The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and that of the independent valuation firms and responds and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

  (5) Our board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the independent valuation firms and the audit committee.

Fair value, as defined under Accounting Standards Codification, or ASC, 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.

 

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ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:

 

Level 1:   Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2:   Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3:   Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments and Credit Facility are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may differ from our valuation and those differences may be material.

The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data are available, such data may be the result of consensus pricing information or broker quotes which may include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes from brokers/dealers accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable market-based transactions for the same or similar assets or other relevant observable market based inputs that may be used in pricing an asset.

Our investments are generally structured as debt and equity investments in the form of senior secured loans, mezzanine debt and equity co-investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value of an investment from the original transaction price, adjustments are made to reflect the expected exit values. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance multiples and yields, among other factors. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the reclassifications occur. During the quarter ended December 31, 2011, our ability to observe valuation inputs has not resulted in a reclassification of assets from Level 3. There were no investments transferred between Level 1 and 2 during the same period.

In addition to using the above inputs in cash equivalents, investments and Credit Facility valuations, we employ the valuation policy approved by our board of directors that is consistent with ASC 820 (See Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which its investments are trading, in determining fair value.

The carrying value of our selected financial liabilities approximates fair value. We adopted ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Credit Facility. We elected to use the fair value option for the Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are recorded in the Consolidated Statement of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities including the SBA debentures. For the three months ended December 31, 2011 and 2010, our Credit Facility had a net change in unrealized appreciation of $1.1 million and $6.6 million, respectively. As of December 31, 2011 and September 30, 2011, net unrealized depreciation on our Credit Facility totaled $1.0 million and $2.1 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Credit Facility in a manner consistent with the valuation process that the board of directors uses to value investments.

 

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Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt investments if we determine that it is probable that we will not be able to collect such interest. Loan origination fees, original issue discount, market discount or premium and deferred financing costs on our debt are capitalized, and we then amortize such amounts as interest income or expense as applicable. We record contractual prepayment premiums on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. For us to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even though we have not collected any cash with respect to PIK securities.

Federal Income Taxes

We operate so as to qualify to maintain our election to be taxed as a RIC under Subchapter M of the Code and intend to continue to do so. To maintain RIC tax benefits, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements (as described below). We also must annually distribute dividends of at least 90% of the sum of our ordinary income and realized net short-term capital gains, if any, out of the assets legally available for distribution. Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we may distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our realized net capital gains for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. In addition, although we may distribute realized net capital gains (i.e., 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 have retained and may continue to retain such net capital gains or ordinary income to provide us with additional liquidity.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the three months ended December 31, 2011 and 2010, respectively.

Investment Income

Investment income for the three months ended December 31, 2011 was $26.8 million and was primarily attributable to $11.0 million from senior secured loans, $4.1 million from second lien secured debt investments and $11.7 million from subordinated debt investments. This compares to investment income for the three months ended December 31, 2010, which was $20.0 million, and was primarily attributable to $8.7 million from senior secured loans, $3.4 million from second lien secured debt investments and $7.9 million from subordinated debt investments. The increase in investment income compared with the same period in the prior year is due to the growth of our portfolio, rotation out of our lower yielding investments and other income associated with our investments.

 

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Expenses

Expenses for the three months ended December 31, 2011 totaled $11.8 million. Base management fees for the same period totaled $4.0 million, performance-based incentive fees totaled $3.7 million, Credit Facility and SBA debentures related interest and expenses totaled $2.4 million and general and administrative expenses totaled $1.7 million. This compares to expenses for the three months ended December 31, 2010, which totaled $8.8 million. Base management fees for the same period totaled $3.5 million, performance-based incentive fees totaled $2.8 million, Credit Facility and SBA debentures related expenses totaled $1.1 million, general and administrative expenses totaled $1.3 million and excise taxes totaled $0.1 million. The increase in expenses is due to the growth of the portfolio and net investment income as well as the higher cost of debt capital.

Net Investment Income

Net investment income totaled $15.0 million, or $0.33 per share, for the three months ended December 31, 2011, and $11.2 million, or $0.31 per share, for the three months ended December 31, 2010. The increase in per share net investment income over the periods was the result of the growth of our portfolio.

Net Realized Gains or Losses

Sales and repayments of long-term investments for the three months ended December 31, 2011 totaled $69.3 million and realized losses totaled $8.0 million due to sales of our debt investments. Sales and repayments of long-term investments totaled $85.5 million and net realized gains totaled $2.3 million for the three months ended December 31, 2010.

Unrealized Appreciation or Depreciation on Investments and Credit Facility

For the three months ended December 31, 2011 and 2010, we reported unrealized appreciation of $10.0 million and $18.7 million, respectively. The change from the prior year was the result of changes in the leveraged credit markets. On December 31, 2011 and September 30, 2011, net unrealized depreciation on investments totaled $28.7 million and $38.8 million, respectively.

For the three months ended December 31, 2011 and 2010, our Credit Facility value increased by $1.1 million and $6.6 million, respectively. The change from prior year was primarily the result of the Credit Facility approaching maturity. On December 31, 2011 and September 30, 2011, net unrealized depreciation on our Credit Facility totaled $1.0 million and $2.1 million, respectively.

Net Increase in Net Assets Resulting from Operations

Net increase in net assets resulting from operations totaled $15.8 million, or $0.34 per share, for the three months ended December 31, 2011. This compares to a net increase in net assets resulting from operations which totaled $25.5 million, or $0.71 per share, for the three months ended December 31, 2010. This decrease in net assets from operations is due to the continued growth in net investment income as a result of growing our portfolio, offset by the appreciation in the value of our Credit Facility as it approaches maturity and depreciation of our investments.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources are derived from our Credit Facility, SBA debentures and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our Credit Facility, the SBA debentures, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

We may raise additional equity or debt capital through both registered offerings off a shelf registration and private offerings of securities, by securitizing a portion of our investments, among other sources. Any future additional debt capital we incur, to the extent it is available under current credit market conditions, will be issued at a higher cost and on less favorable terms and conditions than our current Credit Facility. We continuously monitor conditions in the credit markets and seek opportunities to enhance our debt structure considering our Credit Facility matures in June 2012. We are in advanced discussions with lenders regarding a new Credit Facility to replace our existing Credit Facility, which matures in June 2012. Furthermore, our Credit Facility availability depends on various covenants and restrictions as discussed below. The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes. See “Recent Developments” for more information.

 

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On June 25, 2007, we entered into the Credit Facility, with various lenders and SunTrust Bank, as administrative agent for the lenders. As of December 31, 2011 and September 30, 2011, we had outstanding borrowings of $192.0 million and $240.9 million under the Credit Facility, with a weighted average interest rate of 1.28% and 1.27%, exclusive of the fee on undrawn commitment of 0.20%, and $123.0 million and $74.1 million of unused borrowing capacity, respectively.

Under our Credit Facility, the lenders agreed to extend us credit in an initial aggregate principal or face amount not exceeding $315.0 million outstanding at any one time. The Credit Facility is a revolving facility, with a stated maturity date of June 25, 2012, and is secured by substantially all of our investment portfolio assets, except for those assets of SBIC LP. Pricing of borrowings under our Credit Facility is set at 100 basis points over LIBOR.

Our Credit Facility contains affirmative and restrictive covenants, including maintenance of a minimum shareholders’ equity of the greater of (i) 40% of the total assets of PennantPark Investment and its subsidiaries as of the last day of any fiscal quarter and (ii) the sum of (A) $120,000,000 plus (B) 25% of the net proceeds from the sale of equity interests in us and our subsidiaries after the closing date of the Credit Facility and maintenance of a ratio of total assets (less total liabilities other than indebtedness) to total indebtedness, in each case of PennantPark Investment, of not less than 2.0:1.0 (excluding, in such computation, any exemptive relief granted by the SEC with respect to the indebtedness of any SBIC subsidiary). In addition to the asset coverage ratio described in the preceding sentence, borrowings under our Credit Facility (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that will apply different advance rates to different types of assets in PennantPark Investment’s portfolio. As of December 31, 2011, we were in compliance with the terms of our Credit Facility.

In accordance with the 1940 Act, with certain limited exceptions, the PennantPark Investment is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. As of December 31, 2011, we have excluded the SBA debentures from our asset coverage ratio pursuant to SEC exemptive relief.

For the three months ended December 31, 2011 and December 31, 2010, we did not sell any shares of common stock below the then current NAV per share. Any decision to sell shares below the then current net asset value per share of our common stock in one or more offerings is subject to shareholder approval and the determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests. Any sale or other issuance of shares of our common stock at a price below net asset value per share has resulted and will continue to result in an immediate dilution to our stockholder’s interest in our common stock and a reduction of our net asset value per share.

SBIC LP is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid-in and is subject to customary regulatory requirements. We have committed and funded SBIC LP with $75.0 million of equity capital, and had SBA debentures outstanding of $150.0 million. We had $41.1 million of cash in SBIC LP as of December 31, 2011. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP may borrow to a maximum of $150.0 million, which is up to twice its regulatory capital.

As of December 31, 2011, $150.0 million in debt commitments were fully drawn with a weighted average interest rate of 3.70% exclusive of the 3.43% in upfront fees (4.04% inclusive of the upfront fees). The SBA debentures upfront fees of 3.43% consist of a commitment fee of 1.00% and an issuance at a 2.43% discount to face. Both fees are amortized over the lives of the loans. Our fixed rate SBA debentures as of December 31, 2011 and September 30, 2011 are as follows:

 

Issuance Dates

   Maturity      All-in
Coupon
Rate (1)
    Principal
Balance
 

Fixed Rate SBA Debentures

             

September 22, 2010