10-Q 1 d386855d10q.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 JUNE 30, 2012

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 August 8, 2012 was 56,514,503.

 

 

 


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

TABLE OF CONTENTS

 

PART I. CONSOLIDATED FINANCIAL INFORMATION   

Item 1. Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of June 30, 2012 (unaudited) and September  30, 2011

     2   

Consolidated Statements of Operations for the three and nine months ended June  30, 2012 and 2011 (unaudited)

     3   

Consolidated Statements of Changes in Net Assets for the nine months ended June  30, 2012 and 2011 (unaudited)

     4   

Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011 (unaudited)

     5   

Consolidated Schedules of Investments as of June 30, 2012 (unaudited) and September 30, 2011

     6   

Notes to Consolidated Financial Statements (unaudited)

     15   

Report of Independent Registered Public Accounting Firm

     29   

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

     30   

Item 3. Quantitative And Qualitative Disclosures About Market Risk

     42   

Item 4. Controls and Procedures

     42   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     43   

Item 1A. Risk Factors

     43   

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

     43   

Item 3. Defaults Upon Senior Securities

     43   

Item 4. Reserved

     43   

Item 5. Other Information

     43   

Item 6. Exhibits

     44   

SIGNATURES

     45   


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” refers to PennantPark Investment Corporation and its consolidated subsidiaries unless the context suggests otherwise. “PennantPark Investment” refers to only PennantPark Investment Corporation; “SBIC LP” or “our SBIC” refers 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 all our consolidated subsidiaries. References to “our Subsidiaries”, refers to our SBIC and the Taxable Subsidiaries (as defined in Note 1 to the Consolidated Financial Statements).


Table of Contents
Item 1. Consolidated Financial Statements

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

     June 30,  2012
(unaudited)
    September 30, 2011  

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments, at fair value
(cost—$907,304,090 and $816,078,311, respectively)

   $ 878,560,096      $ 773,375,381   

Non-controlled, affiliated investments, at fair value
(cost—$29,048,560 and $36,744,425, respectively)

     36,046,802        40,673,133   

Controlled, affiliated investments, at fair value
(cost—$14,500,100 and $13,500,100, respectively)

     14,500,000        13,500,001   
  

 

 

   

 

 

 

Total Investments, at fair value (cost—$950,852,750 and $866,322,836, respectively)

     929,106,898        827,548,515   

Cash equivalents (See Note 8)

     9,316,015        71,604,519   

Interest receivable

     11,365,159        10,878,236   

Receivable for investments sold

     36,984,788        13,118,967   

Prepaid expenses and other assets

     5,386,858        5,587,977   
  

 

 

   

 

 

 

Total assets

     992,159,718        928,738,214   
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     15,782,855        12,336,241   

Payable for investments purchased

     30,000,000        18,572,499   

Unfunded investments

     26,935,270        37,132,151   

Credit facility payable (cost—$185,100,000 and $240,900,000, respectively)
(See Notes 5 and 10)

     184,179,000        238,792,125   

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

     150,000,000        150,000,000   

Interest payable on credit facility and SBA debentures

     2,331,295        687,362   

Management fee payable (See Note 3)

     4,492,660        4,008,054   

Performance-based incentive fee payable (See Note 3)

     3,892,683        3,773,829   

Accrued other expenses

     1,884,446        778,757   
  

 

 

   

 

 

 

Total liabilities

     419,498,209        466,081,018   
  

 

 

   

 

 

 

Net assets

    

Common stock, 56,367,339 and 45,689,781 shares issued and outstanding, respectively.
Par value $0.001 per share and 100,000,000 shares authorized.

     56,367        45,690   

Paid-in capital in excess of par value

     649,247,207        540,603,020   

Undistributed net investment income

     4,339,635        8,326,854   

Accumulated net realized loss on investments

     (60,156,848 )     (49,651,922

Net unrealized depreciation on investments

     (21,745,852     (38,774,321

Net unrealized appreciation on credit facility

     921,000        2,107,875   
  

 

 

   

 

 

 

Total net assets

   $ 572,661,509      $ 462,657,196   
  

 

 

   

 

 

 

Total liabilities and net assets

   $     992,159,718      $     928,738,214   
  

 

 

   

 

 

 

Net asset value per share

   $ 10.16      $ 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 June 30,     Nine months ended June 30,  
     2012     2011     2012     2011  

Investment income:

        

From non-controlled, non-affiliated investments:

        

Interest

   $ 25,860,359      $ 21,046,388      $ 74,190,105      $ 60,441,750   

Other

     2,628,858        1,157,228        5,584,060        3,237,675   

From non-controlled, affiliated investments:

        

Interest

     458,901        389,709        1,581,426        1,134,363   

From controlled, affiliated investments:

        

Interest

     437,500        315,000        1,230,444        785,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     29,385,618        22,908,325        82,586,035        65,598,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Base management fee (See Note 3)

     4,493,917        3,803,994        12,715,349        10,891,930   

Performance-based incentive fee (See Note 3)

     3,892,819        3,256,341        10,016,789        9,387,769   

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

     3,206,771        1,329,441        8,318,513        3,551,391   

Administrative services expenses (See Note 3)

     1,046,991        583,215        2,652,647        1,812,932   

Other general and administrative expenses

     820,827        680,322        2,561,021        2,211,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before taxes and debt issuance costs

     13,461,325        9,653,313        36,264,319        27,855,371   
  

 

 

   

 

 

   

 

 

   

 

 

 

Excise tax (See Note 2)

     353,697        35,000        633,697        193,824   

Debt issuance costs (See Note 5)

     —          —          5,361,319        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     13,815,022        9,688,313        42,259,335        28,049,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     15,570,596        13,220,012        40,326,700        37,549,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Net realized gain (loss) on investments

     1,447,084        6,155,867        (10,504,926     8,735,680   

Net change in unrealized (depreciation) appreciation on:

        

Non-controlled, non-affiliated investments

     (16,576,404     (14,977,901     13,958,935        8,486,459   

Controlled and non-controlled, affiliated investments

     2,799,956        (1,474,634     3,069,531        (1,435,899

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

     178,500        (604,929     (1,186,875     (11,908,375
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized (depreciation) appreciation

     (13,597,948     (17,057,464     15,841,591        (4,857,815
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain from investments
and credit facility

     (12,150,864     (10,901,597     5,336,665        3,877,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 3,419,732      $ 2,318,415      $ 45,663,365      $ 41,427,625   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.06      $ 0.05      $ 0.88      $ 1.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share

   $ 0.28      $ 0.29      $ 0.78      $ 0.92   
  

 

 

   

 

 

   

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Nine Months Ended June 30,  
     2012     2011  

Net increase in net assets from operations:

    

Net investment income

   $ 40,326,700      $ 37,549,760   

Net realized (loss) gain on investments

     (10,504,926     8,735,680   

Net change in unrealized appreciation on investments

     17,028,466        7,050,560   

Net change in unrealized (appreciation) on credit facility

     (1,186,875     (11,908,375
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     45,663,365        41,427,625   
  

 

 

   

 

 

 

Distributions to stockholders:

    

Distributions from net investment income

     (44,313,916     (34,011,451

Capital share transactions:

    

Public offering

     109,192,500        114,080,000   

Offering costs relating to public offering

     (3,979,000     (5,743,800

Reinvestment of dividends

     3,441,364        2,611,494   
  

 

 

   

 

 

 

Total increase in net assets

     110,004,313        118,363,868   
  

 

 

   

 

 

 

Net assets:

    

Beginning of period

     462,657,196        386,575,223   

End of period

   $  572,661,509      $  504,939,091   
  

 

 

   

 

 

 

Undistributed net investment income, at period end

   $ 4,339,635      $ 5,532,780   
  

 

 

   

 

 

 

Capital share activity:

    

Public offering

     10,350,000        9,200,000   

Shares issued from reinvestment of dividends

     327,558        222,312   
  

 

 

   

 

 

 

Total shares issued

     10,677,558        9,422,312   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 45,663,365      $ 41,427,625   

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

    

Net change in unrealized appreciation on investments

     (17,028,466     (7,050,560

Net change in unrealized appreciation on credit facility

     1,186,875        11,908,375   

Net realized loss (gain) on investments

     10,504,926        (8,735,680

Net accretion of discount and amortization of premium

     (8,093,419     (5,325,234

Purchase of investments

     (243,803,748     (342,020,866

Payment-in-kind income

     (7,899,606     (7,500,291

Proceeds from dispositions of investments

     173,807,481        256,413,079   

(Increase) decrease in interest receivable

     (486,923     6,555,830   

(Increase) decrease in receivables for investments sold

     (23,865,806     30,254,774   

Decrease in prepaid expenses and other assets

     201,119        436,479   

Increase (decrease) in payables for investments purchased

     11,427,501        (10,104,730

(Decrease) in unfunded investments

     (19,242,446     (3,569,562

Increase in interest payable on credit facility and SBA debentures

     1,643,933        579,818   

Increase in management fee payable

     484,606        518,803   

Increase in performance-based incentive fee payable

     118,853        1,056,087   

Increase (decrease) in accrued other expenses

     1,105,689        (659,162
  

 

 

   

 

 

 

Net cash (used) by operating activities

     (74,276,066     (35,815,215
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Public offering

     109,192,500        114,080,000   

Offering costs related to public offering

     (3,979,000     (5,743,800

Distributions paid to stockholders, net of dividends reinvested

     (37,425,938     (28,494,345

Borrowings under SBA debentures (See Note 10)

     —          60,500,000   

Capitalized borrowing costs

     —          (2,132,125

Borrowings under credit facility (See Note 10)

     805,400,000        347,800,000   

Repayments under credit facility (See Note 10)

     (861,200,000     (423,200,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,987,562        62,809,730   
  

 

 

   

 

 

 

Net (decrease) increase in cash equivalents

     (62,288,504     26,994,515   

Cash equivalents, beginning of period

     71,604,519        1,814,451   
  

 

 

   

 

 

 

Cash equivalents, end of period

   $ 9,316,015      $ 28,808,966   
  

 

 

   

 

 

 

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

    

Interest paid

   $ 5,926,880      $ 2,476,198   
  

 

 

   

 

 

 

Income taxes paid

   $ 258,550      $ 123,824   
  

 

 

   

 

 

 

Dividends reinvested

   $ 3,441,364      $ 2,611,494   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2012

(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—153.4% (1),(2)

  

     

First Lien Secured Debt—48.1%

            

Aircell Business Aviation Services LLC

     06/21/2017       Communications      11.25     L+975  (7)      15,000,000       $ 14,401,545       $ 14,550,000   

American Surgical Holdings, Inc.

     03/23/2015       Healthcare, Education and Childcare      14.00     L+1,000  (7)      18,687,500         18,265,900         18,687,500   

Brand Energy and Infrastructure Services, Inc.

     02/07/2014       Energy / Utilities      3.73     L+325        2,000,000         1,716,357         1,878,334   

CEVA Group PLC (5),(9)

     10/01/2016       Cargo Transport      11.63     —          7,500,000         7,348,414         7,818,750   

CEVA Group PLC (5),(9)

     04/01/2018       Cargo Transport      11.50 %     —          1,000,000         989,777         915,000   

Columbus International, Inc. (5), (9)

     11/20/2014       Communications      11.50     —          10,000,000         10,000,000         10,650,400   

Good Sam Enterprises, LLC (5)

     12/01/2016       Consumer Products      11.50 %     —          12,000,000         11,786,053         12,495,000   

Hanley-Wood, L.L.C.

     01/13/2017       Other Media      8.00     L+650  (7)       1,757,311         1,757,311         1,757,311   

IDQ Holdings, Inc. (5)

     04/01/2017       Auto Sector      11.50     —          11,500,000         11,279,372         11,960,000   

Instant Web, Inc.

     08/07/2014       Printing and Publishing      14.50     L+950  (7)      24,115,645         23,798,411         23,946,835   

Interactive Health Solutions, Inc.

     10/04/2016       Healthcare, Education and Childcare      11.50     L+950  (7)      18,643,750         18,259,042         18,802,222   

Jacuzzi Brands Corp.

     02/07/2014       Home and Office Furnishings, Housewares and Durable Consumer Products      2.52     L+225        9,616,892         9,616,892         6,395,233   

K2 Pure Solutions NoCal, L.P.

     09/10/2015       Chemicals, Plastics and Rubber      10.00 %     P+675  (7)      18,952,500         18,149,848         18,810,356   

Kadmon Pharmaceuticals, LLC

     10/31/2012       Healthcare, Education and Childcare      15.00     L+1,300  (7)      4,931,494         4,953,816         5,061,143   

Learning Care Group, Inc.

     04/27/2016       Education      12.00 %     —          26,052,632         25,616,858         25,466,448   

Penton Media, Inc.

     08/01/2014       Other Media     

 

5.00

(PIK 1.00


%) 

    L+400  (7)      37,777,218         33,543,580         28,597,354   

Pre-Paid Legal Services, Inc., Tranche A

     12/30/2016       Personal, Food and Miscellaneous Services      7.50     L+600  (7)      1,634,146         1,612,687         1,601,464   

Pre-Paid Legal Services, Inc., Tranche B

     12/30/2016       Personal, Food and Miscellaneous Services      11.00     L+950  (7)      35,000,000         34,069,358         34,650,000   

Questex Media Group LLC (8)

     12/16/2012       Other Media      —          —          133,603         133,603         133,603   

Tekelec Global Inc. (First Out)

     01/29/2018       Telecommunications      9.00     L+750  (7)      2,890,000         2,849,033         2,890,000   

Tekelec Global Inc. (Second Out)

     01/29/2018       Telecommunications      13.50     L+1,200  (7)      10,625,000         10,329,504         10,848,125   

UP Support Services, Inc.

     02/08/2013       Oil and Gas     

 

10.25

(PIK 0.75


%) 

    L+1,000  (7)      14,352,239         12,025,984         11,153,423   

UP Support Services, Inc. (8)

     02/08/2013       Oil and Gas      —          —   (7)      1,916,666         1,628,213         1,489,482   

Yonkers Racing Corp. (5) 

     07/15/2016       Hotels, Motels, Inns and Gaming      11.38     —          4,500,000         4,398,815         4,781,250   
               

 

 

    

 

 

 

Total First Lien Secured Debt

            278,530,373         275,339,233   
               

 

 

    

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2012

(Unaudited)

 

Issuer Name

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

Second Lien Secured Debt—24.9%

                  

Brand Energy and Infrastructure Services, Inc.

     02/07/2015       Energy/Utilities      6.35     L+600        13,600,000       $ 13,355,243       $ 11,492,000   

Brand Energy and Infrastructure Services, Inc.

     02/07/2015       Energy/Utilities      7.40     L+700        12,000,000         11,851,697         10,500,000   

DirectBuy Holdings, Inc.(5), (6)

     02/01/2017       Consumer
Products
     12.00 %     —          34,000,000         31,964,124         6,970,000   

Eureka Hunter Pipeline, LLC

     08/16/2018       Energy/Utilities      12.50     —          50,000,000         49,539,442         50,500,000   

Greatwide Logistics Services, L.L.C.

     03/01/2014       Cargo Transport     

 

11.00

(PIK 11.00


%) 

    L+700  (7)       3,018,217         3,018,220         2,565,487   

Paradigm Management Services, LLC

     07/31/2017       Healthcare,

Education and
Childcare

     12.50     L+1,000  (7)      20,512,821         20,000,066         20,512,821   

Questex Media Group LLC, Term Loan A

     12/15/2014       Other Media      9.50 %     L+650  (7)      2,760,774         2,760,775         2,578,564   

Questex Media Group LLC, Term Loan B

     12/15/2015       Other Media     

 

11.50

(PIK 11.50


%) 

    L+750  (7)      2,167,928         2,167,929         1,931,623   

Realogy Corp.

     10/15/2017       Buildings and Real

Estate

     13.50     —          10,000,000         10,000,000         10,241,670   

ROC Finance LLC and ROC Finance 1 Corp.

     09/01/2018       Hotels, Motels,

Inns and Gaming

     12.13     —         
16,000,000
  
     15,745,944         18,000,000   

TransFirst Holdings, Inc.

     06/15/2015       Financial Services      6.25     L+600        7,811,488         7,486,701         7,290,720   
               

 

 

    

 

 

 

Total Second Lien Secured Debt

            167,890,141         142,582,885   
               

 

 

    

 

 

 

Subordinated Debt/Corporate Notes—68.4%

  

               

Acentia, LLC

     10/02/2017       Electronics      13.75     —          19,000,000         18,544,720         19,000,000   

Affinion Group Holdings, Inc.

     11/15/2015       Consumer
Products
     11.63 %     —          35,552,000         34,106,151         28,086,080   

Diversitech Corporation

     01/29/2017       Manufacturing/
Basic Industry
     13.50     —          11,000,000         10,830,135         11,192,500   

Escort, Inc.

     06/01/2016       Electronics     

 

14.75

(PIK 2.75


%) 

    —          25,077,794         24,548,141         25,077,794   

Galls, LLC; Quartermaster Inc.

     03/31/2017       Distribution     

 

13.00

(PIK 2.00


%)

    —          21,688,819         21,275,627         21,688,819   

JF Acquisition, LLC

     06/30/2017       Distribution     

 

14.00

(PIK 2.00


%) 

    —          17,085,944         16,647,729         17,085,944   

Last Mile Funding, Corp.

     06/30/2016       Cargo Transport     

 

14.50

(PIK 2.50


%) 

    —          45,307,673         44,382,904         44,809,289   

Learning Care Group (US) Inc.

     06/30/2016       Education     

 

15.00

(PIK 15.00


%) 

    —          5,277,718         4,671,118         4,815,918   

LTI Flexible Products, Inc.

     01/11/2019       Chemical, Plastic

and Rubber

     12.50     —          30,000,000         30,000,000         30,000,000   

LTI Flexible Products, Inc.(8)

     01/11/2014       Chemical, Plastic

and Rubber

     —          —          5,000,000         4,825,000         4,825,000   

Mailsouth, Inc.

     06/15/2017       Printing and
Publishing
     14.50     —          15,000,000         14,621,864         15,000,000   

MedQuist, Inc.

     10/14/2016       Business Services      13.00     —          19,000,000         18,545,461         20,425,000   

PAS Technologies, Inc.

     05/12/2017       Aerospace and

Defense

    

 

15.02

(PIK 3.02


%) 

    —          17,123,218         16,770,310         17,123,218   

Prince Mineral Holdings Corp.

     12/03/2016       Mining, Steel, Iron

and Non-Precious

Metals

    

 

13.50

(PIK 2.00


%) 

    —          26,563,699         26,111,500         26,563,699   

Realogy Corp.

     04/15/2018       Buildings and Real

Estate

     11.00     —          10,000,000         9,224,503         8,000,000   

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2012

(Unaudited)

 

Issuer Name

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

Service Champ, Inc.

     10/02/2017       Auto Sector      12.50     —           24,000,000         23,477,796         24,000,000   

Service Champ, Inc. (8)

     10/02/2013       Auto Sector      —          —           16,000,000         15,640,000         16,000,000   

TRAK Acquisition Corp.

     12/29/2015       Business Services      15.00     —           12,020,950         11,696,732         12,020,950   

TrustHouse Services Holdings, LLC

     06/01/2019       Beverage, Food, and
Tobacco
    

 

14.25

(PIK 2.25

%

%) 

    —           14,750,000         14,498,833         14,750,000   

TrustHouse Services Holdings, LLC (8)

     06/01/2014       Beverage, Food, and
Tobacco
     —          —           4,000,000         3,920,000         4,000,000   

UP Support Services Inc. (6)

     02/08/2015       Oil and Gas      —          —           29,137,730         29,099,163         11,189,949   

Veritext Corp.

     12/31/2015       Business Services      13.00      —           16,200,000         15,899,760         16,200,000   
                

 

 

    

 

 

 

Total Subordinated Debt/Corporate Notes

             409,337,447         391,854,160   
                

 

 

    

 

 

 
Preferred Equity/Partnership Interests —1.4% (7)              

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

     —         Healthcare, Education

and Childcare

     6.00     —           211       $ 500,000       $ 672,102   

AHC Mezzanine, LLC

     —         Other Media      —          —           7,505         318,896         —     

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

     —         Healthcare, Education

and Childcare

     8.00     —           76,357         765,307         1,052,231   

CI (IHS) Investment Holdings, LLC (8)
(Interactive Health Solutions, Inc.)

     —         Healthcare, Education

and Childcare

     —          —           38,179         382,654         —     

HW Topco, Inc. (Hanley-Wood, LLC)

     —         Other Media      8.00     —           3,591         24,177         27,072   

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

     —         Aerospace and

Defense

     8.00     —           20,000         1,980,000         1,150,185   

TrustHouse Services Holdings, LLC

      Beverage, Food,

and Tobacco

     12.00     —           1,099         984,344         984,344   

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         1,645,184   

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

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

Verde Parent Holdings, Inc.

     —         Personal

Transportation

     8.00     —           1,824,167         1,824,167         2,061,364   
                

 

 

    

 

 

 

Total Preferred Equity/Partnership Interests

                   11,515,421         8,278,302   
                

 

 

    

 

 

 

Common Equity/Warrants/Partnership Interests—10.6%(7)

  

                

Acentia, LLC, Class A Units (12)

     —         Electronics      —          —           1,998         2,000,000         1,895,000   

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

     03/23/2021       Healthcare, Education

and Childcare

     —          —           753         —           2,222,581   

CEA Autumn Management, L.L.C.

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

CI (Galls) Prime Investment Holdings, LLC
(Galls, LLC; Quartermaster Inc.) (11)

     —         Distribution      —          —           1,505,000         1,505,000         1,525,615   

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

     —         Healthcare, Education

and Childcare

     —          —           23,416         234,693         322,699   

CI (IHS) Investment Holdings, LLC (8)
(Interactive Health Solutions, Inc.)

     —         Healthcare, Education

and Childcare

     —          —           11,708         117,346         —     

CT Technologies Holdings, LLC

     —         Business Services      —          —           5,556         2,277,209         6,514,483   

DirectBuy Investors, L.P.

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

HW Topco, Inc. (Hanley-Wood, LLC)

     —         Other Media      —          —           348,912         2,443,050         2,629,572   

Kadmon Holdings, LLC, Class A
(Kadmon Pharmaceuticals, LLC)

     —         Healthcare, Education

and Childcare

     —          —           1,079,920         1,236,832         11,173,971   

Kadmon Holdings, LLC, Class D
(Kadmon Pharmaceuticals, LLC)

     —         Healthcare, Education

and Childcare

     —          —           1,079,920         1,028,807         1,028,807   

 

8


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2012

(Unaudited)

 

Issuer Name

 

Maturity

  

Industry

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

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         5,107,676   

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

  10/14/2013    Oil and Gas     —          —          122,193        105,697         37,630   

MidOcean JF Holdings Corp.
(JF Acquisition, LLC)

  —      Distribution     —          —          1,700        1,700,000         1,570,528   

MidOcean PPL Holdings, Inc.
(Pre-Paid Legal Services, Inc.)

  —      Personal, Food and Miscellaneous Services     —          —          3,000        3,000,000         3,965,797   

New Service Champ Holdings, Inc.
(Service Champ, Inc.)

  —      Auto Sector     —          —          16,800        4,200,000         4,473,000   

Paradigm Acquisition Corp.
(Paradigm Management Services, LLC)

  —     

Healthcare, Education

and Childcare

    —          —          20,000        2,000,000         2,028,189   

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         2,237,306   

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

  —      Other Media     —          —          531        —           274,684   

Titan Private Holdings I, LLC – Class A
(Tekelec Global, Inc.)

  —      Telecommunications     —          —          2,276,847        2,274,883         3,793,724   

TRAK Acquisition Corp. (Warrants)

  12/29/2019    Business Services     —          —          3,500        29,400         1,169,979   

Transportation 100 Holdco, L.L.C. (10)
(Greatwide Logistics Services, L.L.C.)

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

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

  —      Insurance     —          —          2        9,843         1,327,410   

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

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

Verde Parent Holdings, Inc.

  —      Personal Transportation     —          —          9,167        9,167         9,222   

VText Holdings, Inc.
(Veritext Corp.)

  —      Business Services     —          —          35,526        4,050,000         7,197,643   
            

 

 

    

 

 

 

Total Common Equity/Warrants/Partnership Interests

               40,030,708         60,505,516   
            

 

 

    

 

 

 

Total Investments in Non-Controlled, Non-Affiliated
Portfolio Companies

          907,304,090         878,560,096   
            

 

 

    

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2012

(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—6.3% (1),(2)          

Second Lien Secured Debt—1.3%

  

     

Performance, Inc.

  01/16/2015    Leisure, Amusement Motion Pictures and Entertainment     7.25     L+625 (7)     8,000,000      $ 8,000,000      $ 7,552,000   
            

 

 

   

 

 

 

Total Second Lien Secured Debt

  

      8,000,000        7,552,000   
            

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—1.3%

  

     

Performance Holdings, Inc.

  07/16/2015    Leisure, Amusement,     15.00     —          7,567,234        7,428,396        7,340,217   
            

 

 

   

 

 

 
     Motion Pictures and Entertainment     (PIK 15.00 %)         

Common Equity/Partnership Interest—3.7% (6)

              

EnviroSolutions, Inc.

  —      Environmental Services     —          —          123,418        9,870,164        19,143,137   

NCP-Performance (Performance Holdings, Inc.)

  —     

Leisure, Amusement,

Motion Pictures and Entertainment

    —          —          375,000        3,750,000        2,011,448   
            

 

 

   

 

 

 

Total Common Equity/Partnership Interest

  

      13,620,164        21,154,585   
            

 

 

   

 

 

 

Total Investments in Non-Controlled, Affiliated Portfolio Companies

  

      29,048,560        36,046,802   
            

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies—2.6% (1),(2)

  

     

First Lien Secured Debt—1.9%

  

     

SuttonPark Holdings, Inc.

  06/30/2020    Business Services     14.00     —          10,000,000        10,000,000        10,492,807   
            

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—0.4%

  

     

SuttonPark Holdings, Inc.

  06/30/2020    Business Services     14.00     —          2,500,000        2,500,000        2,276,581   
            

 

 

   

 

 

 

Preferred Equity—0.3%(6)

              

SuttonPark Holdings, Inc.

  —      Business Services     14.00 %     —          2,000        2,000,000        1,730,612   
            

 

 

   

 

 

 

Common Equity—0.0% (6)

              

SuttonPark Holdings, Inc.

  —      Business Services     —          —          100        100        —     
            

 

 

   

 

 

 

Total Investments in Controlled, Affiliated Portfolio Companies

  

      14,500,100        14,500,000   
            

 

 

   

 

 

 

Total Investments—162.3%

  

      950,852,750        929,106,898   

Cash Equivalents—1.6%

  

      9,316,015        9,316,015   
            

 

 

   

 

 

 

Total Investments and Cash Equivalents—163.9%

  

    $  960,168,765      $ 938,422,913   
            

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(63.9%)

  

        (365,761,404

Net Assets—100.0%

  

      $ 572,661,509   
              

 

 

 

 

(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).
(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) Non-income producing securities.
(7) Coupon is subject to a LIBOR or Prime rate floor.
(8) Represents the purchase of a security with delayed settlement (unfunded investment). This security does not have a basis point spread above an index.
(9) Non-U.S. company or principal place of business outside the United States.
(10) Investment is held through PNNT Transportation 100 Holdco, LLC, a consolidated subsidiary.
(11) Investment is held through PNNT CI (GALLS) Prime Investments Holdings, LLC, a consolidated subsidiary.
(12) Investment is held through PNNT Acentia, LLC, a consolidated subsidiary.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10


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

 

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)  

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.

     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

 

12


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   
           

 

 

   

 

 

 

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

 

 

   

 

 

 

Total Common Equity/Partnership Interest

  

        9,589,483        14,396,740   
           

 

 

   

 

 

 

Total 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        —     
           

 

 

   

 

 

 

Total 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   
           

 

 

   

 

 

 

Total Investments 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).

(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

 

14


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

(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 34.6 million shares of common stock through follow-on public offerings, resulting in net proceeds of $347.7 million. During the nine months ended June 30, 2012, we sold approximately 10.4 million shares in a follow-on public offering, resulting in net proceeds of $105.2 million, after estimated offering costs.

We are externally managed by PennantPark Investment Advisers. PennantPark Investment Administration provides the administrative services necessary for us to operate. 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.

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 in June 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 are consolidated wholly owned subsidiaries of PennantPark Investment. SBIC LP’s objective is to generate both current income and capital appreciation through debt and equity investments generally, investing with us in SBA eligible businesses that meet the investment criteria used by PennantPark Investment.

We have formed and expect to continue to form certain taxable subsidiaries, or the Taxable Subsidiaries, which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to hold portfolio companies organized as pass-through entities and satisfy the requirements of regulated investment companies, or RICs, under the Internal Revenue Code of 1986, as amended, or the Code.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of our 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 our 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 eliminated all intercompany balances and transactions, if any. 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, we have provided a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders’ Equity.

 

15


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2012

(Unaudited)

 

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, or 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.

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 difference may be material. See Note 5.

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 our Investment Adviser and those 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.

 

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(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 investments and our senior secured revolving credit facility, 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 penalties 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.

(c) Income Taxes

Since May 2007, PennantPark Investment has complied with the requirements of Subchapter M of the Code and expects to be subject to tax as a 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 are 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 $0.6 million and $0.2 million for the nine months ended June 30, 2012 and 2011, respectively.

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 since 2008 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 do not consolidate the Taxable Subsidiaries for income tax purposes, but we do consolidate the results of these Taxable Subsidiaries for financial reporting purposes.

 

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(d) Dividends, Distributions, and Capital Transactions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a dividend or distributions 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 in our Consolidated Financial Statements.

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% of our “average adjusted gross assets” (net of U.S. Treasury Bills and/or temporary draws, if any, on the Credit Facility). The base management fee 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 and nine months ended June 30, 2012, the Investment Adviser earned a base management fee of $4.5 million and $12.7 million, respectively, from us. For the three and nine months ended June 30, 2011, the Investment Adviser earned a base management fee of $3.8 million and $10.9 million, respectively, from us.

 

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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 our 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 applicable quarter. For the three and nine months ended June 30, 2012, the Investment Adviser earned an incentive fee of $3.9 million and $10.0 million, respectively, from us. For the three and nine months ended June 30, 2011, the Investment Adviser earned an incentive fee of $3.3 million and $9.4 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 above) for the three and nine months ended June 30, 2012 and June 30, 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’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 Investment. 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 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 and nine months ended June 30, 2012, the Investment Adviser and Administrator, collectively, were reimbursed $0.6 million and $3.0 million, respectively, from us, including expenses incurred by the Investment Adviser on behalf of the Administrator, for the services described above. For the three and nine months ended June 30, 2011, the Investment Adviser and Administrator, collectively, were reimbursed $0.3 million and $2.2 million, respectively, from us, including expenses incurred by the Investment Adviser on behalf of the Administrator, for the 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 his respective staffs. For the three and nine months ended June 30, 2012, PennantPark Investment was reimbursed $0.1 million and $0.6 million, respectively, for the services described above. For the three and nine months ended June 30, 2011, PennantPark Investment was reimbursed zero and $0.4 million, respectively, for the services described above.

4. INVESTMENTS

Purchases of long-term investments, including PIK, for the three and nine months ended June 30, 2012 totaled $91.7 million and $251.7 million, respectively. For the same period in the prior year, purchases of long-term investments including PIK totaled $147.8 million and $349.5 million, respectively. Sales and repayments of long-term investments for the three and nine months ended June 30, 2012 totaled $55.3 million and $173.8 million, respectively. For the same period in the prior year, sales and repayments of long-term investments totaled $119.3 million and $256.4 million, respectively. Investments and cash equivalents consisted of the following:

 

     June 30, 2012      September 30, 2011  
     Cost      Fair Value      Cost      Fair Value  

First lien

   $ 288,530,373       $ 285,832,040       $ 305,608,989       $ 296,488,131   

Second lien

     175,890,141         150,134,885         189,962,828         165,272,201   

Subordinated debt / corporate notes

     419,265,843         401,470,958         325,318,958         309,329,169   

Preferred equity

     13,515,421         10,008,914         12,268,187         9,762,932   

Common equity

     53,650,972         81,660,101         33,163,874         46,696,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     950,852,750         929,106,898         866,322,836         827,548,515   

Cash equivalents

     9,316,015         9,316,015         71,604,519         71,604,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 960,168,765       $ 938,422,913       $ 937,927,355       $ 899,153,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 June 30, 2012 and September 30, 2011.

 

Industry Classification

   June 30, 2012     September 30, 2011  

Healthcare, Education and Childcare

     9     10

Business Services

     8        11   

Energy / Utilities

     8        9   

Auto Sector

     6          

Cargo Transport

     6        6   

Chemicals, Plastics and Rubber

     6        6   

Consumer Products

     5        5   

Distribution

     5          

Electronics

     5        3   

Other Media

     4        4   

Personal, Food and Miscellaneous Services

     4        5   

Printing and Publishing

     4        5   

Communication

     3        1   

Education

     3        4   

Hotels, Motels, Inns and Gaming

     3        4   

Mining, Steel, Iron and Non-Precious Metals

     3        3   

Oil and Gas

     3        5   

Aerospace and Defense

     2        4   

Beverage, Food and Tobacco

     2          

Buildings and Real Estate

     2        2   

Environmental Services

     2        3   

Leisure, Amusement, Motion Pictures, Entertainment

     2        2   

Telecommunications

     2          

Other

     3        8   
  

 

 

   

 

 

 

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.

 

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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 our 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 be different than 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 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 a 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 brokers/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. Within our fair value hierarchy table, our investments are generally categorized as first lien, second lien, subordinated debt and preferred and common equity investments. 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.

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 nine months ended June 30, 2012, our ability to observe valuation inputs has resulted in no reclassification of assets from Level 3 to 2. There were no investments transferred between Levels 1 and 2 for the same period.

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

In accordance with ASU 2011-04 and as outlined in the table below, our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, have no corroborating evidence and may be the result of consensus pricing. We do not adjust the bids.

The remainder of our portfolio, including our long-term Credit Facility, is classified as Level 3 and was valued using a market comparable or an enterprise market value technique. 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, 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, the pricing indicated by the external event is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment.

 

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Asset Category

   Fair Value      Valuation Technique    Unobservable Input    Range of Input
(Weighted Average)

First lien, second lien,

subordinated debt/corporate notes

   $ 229,795,351       Market Comparable    Broker/Dealer bid quotes    1 – 5

First lien, second lien,

subordinated debt/corporate notes

   $ 568,905,751       Market Comparable    Market Yield    8.5% – 22.0% (13.5%)

Preferred and common equity

   $ 86,524,010       Enterprise Market Value    EBITDA multiple    5.0X – 15.5X (7.0X)

Long-Term Credit Facility

   $ 184,179,000       Market Comparable    Discount rate    3.7%

On June 30, 2012 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 June 30, 2012  

Description

   Fair Value      Level 1      Level 2      Level 3  

Loan and debt investments

   $ 837,437,883       $       $ 38,736,480       $ 798,701,403   

Equity investments

     91,669,015         5,107,676         37,630         86,523,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     929,106,898         5,107,676         38,774,110         885,225,112   

Cash equivalents

     9,316,015         9,316,015                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 938,422,913       $ 14,423,691       $ 38,774,110       $ 885,225,112   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Facility

   $ 184,179,000       $       $       $ 184,179,000   
  

 

 

    

 

 

    

 

 

    

 

 

 
            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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 nine months ended June 30, 2012 and 2011:

 

     For the nine months ended June 30, 2012  

Description

   Loan and  debt
investments
    Equity
investments
    Totals  

Beginning Balance, September 30, 2011

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

Realized gains (losses)

     (2,334,276     1,871,266        (463,010

Unrealized appreciation

     (7,513,982     12,436,050        4,922,068   

Purchases, PIK and net discount accretion

     242,660,994        25,261,207        267,922,201   

Sales / repayments

     (166,805,784     (5,398,142     (172,203,926

Exchanges

                     

Transfers in or out of Level 3

                     
  

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2012

   $ 798,701,403      $ 86,523,709      $ 885,225,112   
  

 

 

   

 

 

   

 

 

 
Net change in unrealized appreciation 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    $ (6,124,283   $ 14,280,779      $ 8,156,496   
  

 

 

   

 

 

   

 

 

 

 

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     For the nine months ended June 30, 2011  

Description

   Loan and  debt
investments
    Equity
investments
    Totals  

Beginning Balance, September 30, 2010

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

Realized gains

     8,735,698        —          8,735,698   

Unrealized appreciation

     (7,996,465     11,229,930        3,233,465   

Purchases, PIK and net discount accretion

     349,129,365        5,664,360        354,793,725   

Sales / repayments

     (255,345,930     (1,067,166     (256,413,096

Transfers in or out of Level 3

     (28,646,063     —          (28,646,063 )
  

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2011

   $ 681,112,743        60,964,952        742,077,695   
  

 

 

   

 

 

   

 

 

 
Net change in unrealized appreciation 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    $ (1,066,913     11,234,463        10,167,550   
  

 

 

   

 

 

   

 

 

 

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 nine months ended June 30, 2012 and 2011.

 

Nine months ended June 30, 2012       
Credit Facility    Carrying /
Fair Value
 

Beginning balance, September 30, 2011 (Cost – $240,900,000)

   $ 238,792,125   

Total unrealized appreciation included in earnings

     1,186,875   

Borrowings (1)

     499,500,000   

Repayments (1)

     (556,200,000

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending Balance, June 30, 2012 (Cost – $184,200,000)

     183,279,000   

Temporary draw outstanding, at cost

     900,000   
  

 

 

 

Total Credit Facility, June 30, 2012 (Cost – $185,100,000)

   $ 184,179,000   
  

 

 

 

 

Nine months ended June 30, 2011       
Credit Facility    Carrying /
Fair Value
 

Beginning balance, September 30, 2010 (Cost – $227,900,000)

   $ 213,941,125   

Total unrealized appreciation included in earnings

     11,908,375   

Borrowings (1)

     187,900,000   

Repayments (1)

     (279,100,000

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending Balance, June 30, 2011 (Cost – $136,700,000)

     134,649,500   

Temporary draw outstanding, at cost

     21,000,000   
  

 

 

 

Total Credit Facility, June 30, 2011 (Cost – $157,700,000)

   $ 155,649,500   
  

 

 

 

(1)        Excludes temporary draws.

  

 

 

24


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2012

(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. Due to that election and in accordance with GAAP, we incurred non-recurring expenses of $5.4 million, which represents the upfront fees and expenses related to the Credit Facility. 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 and nine months ended June 30, 2012, our Credit Facility had a net change in unrealized depreciation (appreciation) of $0.2 million and $(1.2) million, respectively. For the three and nine months ended June 30, 2011, our Credit Facility had a net change in unrealized appreciation of $0.6 million and $11.9 million, respectively. On June 30, 2012 and September 30, 2011, net unrealized appreciation on our long-term Credit Facility totaled $0.9 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.

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 nine months ended June 30, 2012 were as follows:

 

Name of Investment

   Fair Value at
September 30, 2011
     Purchase of /
Advances  to

Affiliates
     Sales of  /
Distributions

from Affiliates
    Income
Received
     Fair Value at
June  30, 2012
     Capital Loss  

Controlled Affiliates

                

SuttonPark Holdings, Inc.

   $ 13,500,001       $ 4,500,000       $ (3,500,000   $ 1,609,611       $ 14,500,000           

Non-Controlled Affiliates

                

Envirosolutions, Inc.

     25,740,212         6,629,754         (8,458,481     303,014         19,143,137         (11,007

Performance Holdings, Inc.

     14,932,921                        807,728         16,903,665           
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Controlled and Non-Controlled Affiliates

   $ 54,173,134       $ 11,129,754       $ (11,958,481   $ 2,720,353       $ 50,546,802       $ (11,007
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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.

 

     Three months ended June 30,      Nine months ended June 30,  

Class and Year

   2012