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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - PENNANTPARK INVESTMENT CORPd476926dex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

FOR THE QUARTER ENDED DECEMBER 31, 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 February 6, 2013 was 66,401,248.

 

 

 


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2012

TABLE OF CONTENTS

 

PART I. CONSOLIDATED FINANCIAL INFORMATION   

Item 1. Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of December  31, 2012 (unaudited) and September 30, 2012

     2   

Consolidated Statements of Operations for the three months ended December  31, 2012 and 2011 (unaudited)

     3   

Consolidated Statements of Changes in Net Assets for the three months ended December  31, 2012 and 2011 (unaudited)

     4   

Consolidated Statements of Cash Flows for the three months ended December  31, 2012 and 2011 (unaudited)

     5   

Consolidated Schedules of Investments as of December 31, 2012 (unaudited) and September 30, 2012

     6   

Notes to Consolidated Financial Statements (unaudited)

     16   

Report of Independent Registered Public Accounting Firm

     30   

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

     31   

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

     45   

Item 3. Defaults Upon Senior Securities

     45   

Item 4. Reserved

     45   

Item 5. Other Information

     45   

Item 6. Exhibits

     46   

SIGNATURES

     47   


Table of Contents

PART I—CONSOLIDATED FINANCIAL INFORMATION

We are filing this Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, “we,” “our” or “us” refer to PennantPark Investment Corporation and its consolidated subsidiaries unless the context suggests otherwise. “PennantPark Investment” refers to only PennantPark Investment Corporation; “SBIC LP” and “SBIC II” or, collectively, “our SBIC Funds,” refers to our wholly owned, consolidated small business investment companies, or SBIC, subsidiaries, PennantPark SBIC LP and PennantPark SBIC II LP ; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC. References to our portfolio or investments include investments we make through our SBIC Funds and other consolidated subsidiaries. “SBA” refers to the Small Business Administration. “Credit Facility” refers to our multi-currency, senior secured revolving credit facility. “BDC” refers to a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act.


Table of Contents
Item 1. Financial Statements

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

     December 31, 2012
(unaudited)
    September 30, 2012  

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments, at fair value
(cost—$902,897,172 and $871,867,953, respectively)

   $ 931,419,104      $ 871,892,745   

Non-controlled, affiliated investments, at fair value
(cost—$105,925,644 and $72,576,858, respectively)

     93,671,686        80,955,257   

Controlled, affiliated investments, at fair value
(cost—$63,680,393 and $64,167,051, respectively)

     39,316,805        37,631,708   
  

 

 

   

 

 

 

Total of investments, at fair value (cost—$1,072,503,209 and $1,008,611,862, respectively)

     1,064,407,595        990,479,710   

Cash equivalents (See Note 8)

     31,291,517        7,559,453   

Interest receivable

     10,815,263        14,928,862   

Prepaid expenses and other assets

     5,635,205        5,999,506   
  

 

 

   

 

 

 

Total assets

     1,112,149,580        1,018,967,531   
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     18,579,935        15,824,061   

Payable for investments purchased

     1,357,840          

Unfunded investments

     26,801,667        26,935,270   

Credit Facility payable (cost—$211,500,000 and $145,000,000, respectively)
(See Notes 5 and 10)

     211,500,000        144,452,500   

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

     2,451,109        854,725   

Management fee payable (See Note 3)

     5,128,611        4,791,913   

Performance-based incentive fee payable (See Note 3)

     4,545,254        4,206,989   

Accrued other expenses

     3,282,743        2,185,026   
  

 

 

   

 

 

 

Total liabilities

     423,647,159        349,250,484   
  

 

 

   

 

 

 

Net assets

    

Common stock, 66,356,911 and 65,514,503 shares issued and outstanding, respectively.
Par value $0.001 per share and 100,000,000 shares authorized.

     66,356        65,514   

Paid-in capital in excess of par value

     753,528,106        744,704,825   

Undistributed net investment income

     2,405,478        2,804,397   

Accumulated net realized loss on investments

     (59,401,905     (60,273,037

Net unrealized depreciation on investments

     (8,095,614     (18,132,152

Net unrealized depreciation on Credit Facility

            547,500   
  

 

 

   

 

 

 

Total net assets

   $ 688,502,421      $ 669,717,047   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,112,149,580      $ 1,018,967,531   
  

 

 

   

 

 

 

Net asset value per share

   $ 10.38      $ 10.22   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three months ended December 31,  
     2012     2011  

Investment income:

    

From non-controlled, non-affiliated investments:

    

Interest

   $ 25,768,617      $ 24,020,424   

Other income and dividends

     4,366,274        1,870,514   

From non-controlled, affiliated investments:

    

Interest

     1,392,503        572,931   

Other income

     227,800          

From controlled, affiliated investments:

    

Interest

     1,202,707        374,889   
  

 

 

   

 

 

 

Total investment income

     32,957,901        26,838,758   
  

 

 

   

 

 

 

Expenses:

    

Base management fee (See Note 3)

     5,128,611        4,043,281   

Performance-based incentive fee (See Note 3)

     4,545,254        3,749,128   

Interest and expenses on Credit Facility and SBA debentures (See Note 10)

     3,094,865        2,375,123   

Administrative services expenses (See Note 3)

     1,172,322        797,353   

Other general and administrative expenses

     760,532        842,345   
  

 

 

   

 

 

 

Expenses before excise taxes

     14,701,584        11,807,230   

Excise tax

     75,301        35,000   
  

 

 

   

 

 

 

Total expenses

     14,776,885        11,842,230   
  

 

 

   

 

 

 

Net investment income

     18,181,016        14,996,528   
  

 

 

   

 

 

 

Realized and unrealized gain (loss) on investments and Credit Facility:

    

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

     871,132        (8,029,555

Net change in unrealized appreciation (depreciation) on:

    

Non-controlled, non-affiliated investments

     6,062,321        8,064,782   

Non-controlled and controlled, affiliated investments (See Note 6)

     3,974,217        1,961,644   

Credit Facility (appreciation) (See Notes 5 and 10)

     (547,500     (1,147,875 )
  

 

 

   

 

 

 

Net change in unrealized appreciation

     9,489,038        8,878,551   
  

 

 

   

 

 

 

Net realized and unrealized gain from investments and Credit Facility

     10,360,170        848,996   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 28,541,186      $ 15,845,524   
  

 

 

   

 

 

 

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

   $ 0.44      $ 0.34   
  

 

 

   

 

 

 

Net investment income per common share

   $ 0.28      $ 0.33   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Three Months Ended December 31,  
     2012     2011  

Net increase in net assets from operations:

    

Net investment income

   $ 18,181,016      $ 14,996,528   

Net realized gain (loss) on investments

     871,132        (8,029,555 )

Net change in unrealized appreciation on investments

     10,036,538        10,026,426   

Net change in unrealized appreciation on Credit Facility

     (547,500     (1,147,875 )
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     28,541,186        15,845,524   
  

 

 

   

 

 

 

Distribution to stockholders:

    

Distribution

     (18,579,935     (12,793,138 )

Capital transactions:

    

Public offering

     7,574,000          

Offering costs

     (265,090       

Reinvestment of dividends

     1,515,213          
  

 

 

   

 

 

 

Net increase from capital transactions

     8,824,123          
  

 

 

   

 

 

 

Net increase in net assets

     18,785,374        3,052,386   
  

 

 

   

 

 

 

Net assets:

    

Beginning of period

     669,717,047        462,657,196   
  

 

 

   

 

 

 

End of period

   $ 688,502,421      $ 465,709,582   
  

 

 

   

 

 

 

Undistributed net investment income, at end of period

   $ 2,405,478      $ 10,530,244   
  

 

 

   

 

 

 

Capital share activity:

    

Shares issued from public offering

     700,000          
  

 

 

   

 

 

 

Shares issued from reinvestment of dividends

     142,408          
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended December 31,  
     2012     2011  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 28,541,186      $ 15,845,524   

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

    

Net change in net unrealized (appreciation) on investments

     (10,036,538     (10,026,426 )

Net change in unrealized appreciation on Credit Facility

     547,500        1,147,875   

Net realized (gain) loss on investments

     (871,132 )     8,029,555   

Net accretion of discount and amortization of premium

     (1,451,536     (4,098,587 )

Purchases of investments

     (168,396,168     (43,003,570 )

Payment-in-kind

     (4,138,861     (3,067,138 )

Proceeds from dispositions of investments

     110,832,747        69,280,225   

Decrease in receivables for investments sold

            10,660,804   

Decrease in interest receivable

     4,113,599        3,057,314   

Decrease in prepaid expenses and other assets

     364,301        933,768   

Increase (decrease) in payables for investments purchased

     1,357,840        (18,184,827 )

Decrease in unfunded investments

            (785,552

Increase in interest payable on Credit Facility and SBA debentures

     1,596,384        1,179,075   

Increase in management fees payable

     336,698        35,227   

Increase (decrease) in performance-based incentive fees payable

     338,265        (24,834

Increase in accrued other expenses

     1,097,717        729,057   
  

 

 

   

 

 

 

Net cash (used for) provided by operating activities

     (35,767,998     31,707,490   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Public offerings

     7,574,000          

Offering costs

     (265,090       

Distributions paid, net of dividends reinvested

     (14,308,848     (12,336,241 )

Borrowings under Credit Facility (See Note 10)

     376,300,000        295,300,000   

Repayments under Credit Facility (See Note 10)

     (309,800,000     (344,200,000 )
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     59,500,062        (61,236,241 )
  

 

 

   

 

 

 

Net increase (decrease) in cash equivalents

     23,732,064        (29,528,751 )

Cash equivalents, beginning of period

     7,559,453        71,604,519   
  

 

 

   

 

 

 

Cash equivalents, end of period

   $ 31,291,517      $ 42,075,768   
  

 

 

   

 

 

 

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

    

Interest paid

   $ 1,378,858      $ 966,095   
  

 

 

   

 

 

 

Dividend reinvested

   $ 1,515,213      $   
  

 

 

   

 

 

 

Conversion and non-cash exchanges

   $ 41,353,789      $   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 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—135.3% (1),(2)

  

     

First Lien Secured Debt—43.6%

            

Aircell Business Aviation Services LLC

   06/21/2017    Communications      11.25 %     L+975  (8)     14,812,500       $ 14,268,960       $ 14,886,563   

CEVA Group PLC (5),(10)

   10/01/2016    Cargo Transport      11.63 %     —          7,500,000         7,362,597         7,706,250   

CEVA Group PLC (5),(10)

   04/01/2018    Cargo Transport      11.50     —          1,000,000         990,426         835,000   

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

   11/20/2014    Communications      11.50 %     —          10,000,000         10,000,000         11,100,000   

Good Sam Enterprises, LLC (5)

   12/01/2016    Consumer Products      11.50     —          12,000,000         11,805,148         12,840,000   

Hanley-Wood, L.L.C.

   01/13/2017    Other Media      8.00 %     L+650  (8)       1,748,481         1,748,481         1,748,481   

IDQ Holdings, Inc. (5)

   04/01/2017    Auto Sector      11.50 %     —          11,500,000         11,297,475         12,391,250   

Infusystems Holdings, Inc.

   11/30/2016    Healthcare,
Education and
Childcare
     13.90     P+625  (8)      11,600,000         11,600,000         11,628,250   

Instant Web, Inc.

   08/07/2014    Printing and
Publishing
     14.50 %     L+950  (8)     24,115,645         23,864,998         23,633,332   

Interactive Health Solutions, Inc.

   10/04/2016    Healthcare,
Education and
Childcare
     11.50 %     L+950  (8)     18,406,250         18,051,726         18,443,063   

Jacuzzi Brands Corp.

   02/07/2014    Home and Office
Furnishings,
Housewares and
Durable Consumer
Products
     2.56 %     L+225        9,580,405         9,580,405         6,430,847   

K2 Pure Solutions NoCal, L.P.

   09/10/2015    Chemicals, Plastics
and Rubber
     10.00     P+675  (8)     18,947,387         18,266,234         18,757,913   

Kadmon Pharmaceuticals, LLC

   04/30/2013    Healthcare,
Education and
Childcare
     15.00 %     L+1,300  (8)     4,931,494         5,060,413         5,227,384   

Learning Care Group, Inc.

   04/27/2016    Education      12.00     —          26,052,632         25,668,999         26,052,632   

Penton Media, Inc.

   08/01/2014    Other Media     

 

5.00

(PIK 1.00


%)

    L+400  (8)      37,774,372         34,457,793         33,209,982   

Pre-Paid Legal Services, Inc., Tranche B

   12/30/2016    Personal, Food and
Miscellaneous
Services
     11.00 %     L+950  (8)     40,000,000         39,125,698         40,400,000   

Prince Mineral Holding Corp. (5)

   12/15/2019    Mining, Steel, Iron
and Non-Precious
Metals
     11.50     —          14,250,000         14,083,839         14,748,750   

Tekelec Global Inc.

   01/29/2018    Telecommunications      13.50 %     L+1,200  (8)     10,625,000         10,347,723         10,837,500   

Worley Claims Services, LLC

   07/06/2017    Insurance      12.50     L+1,100  (8)      14,796,000         14,796,000         14,722,020   

Z Wireless

   12/21/2016    Retail     

 

12.50

(PIK 1.50


%) 

    L+1,225        14,400,000         14,112,442         14,400,000   
               

 

 

    

 

 

 

Total First Lien Secured Debt

                  296,489,357         299,999,217   
               

 

 

    

 

 

 

Second Lien Secured Debt—27.6%

                  

American Gilsonite Company (5)

   09/01/2017    Diversified Natural
Resources, Precious
Metals and Minerals
     11.50     —          25,400,000         25,400,000         26,162,000   

Brand Energy and Infrastructure Services, Inc.

   10/23/2019    Energy / Utilities      11.00 %     L+975  (8)      23,750,000         23,282,130         23,275,000   

Eureka Hunter Pipeline, LLC

   08/16/2018    Energy / Utilities      12.50 %     —          45,000,000         44,564,415         45,450,000   

Greatwide Logistics Services, L.L.C.

   03/01/2014    Cargo Transport     

 

11.00

(PIK 11.00


%)

    L+700  (8)      3,184,219         3,184,222         1,751,320   

Jacobs Entertainment, Inc.

   10/29/2019    Hotels, Motels,

Inns and Gaming

     13.00     L+1,175  (8)      38,950,000         38,187,667         38,171,000   

Linc USA GP and Linc Energy Finance (USA), Inc (5)

   10/31/2017    Oil and Gas      12.50     —          11,875,000         11,462,542         11,756,250   

Paradigm Management Services, LLC

   07/31/2017    Healthcare,

Education and

Childcare

     12.50 %     L+1,100  (8)      20,512,821         20,078,694         20,512,821   

Questex Media Group LLC, Term Loan A

   12/15/2014    Other Media      9.50     L+650  (8)      2,744,557         2,744,557         2,579,883   

Questex Media Group LLC, Term Loan B

   12/15/2015    Other Media     

 

11.50

(PIK 11.50


%) 

    L+850  (8)      2,297,037         2,297,037         2,067,333   

ROC Finance LLC and ROC Finance 1 Corp.

   09/01/2018    Hotels, Motels,

Inns and Gaming

     12.13 %     —          16,000,000         15,765,416         18,480,000   
               

 

 

    

 

 

 

Total Second Lien Secured Debt

                  186,966,680         190,205,607   
               

 

 

    

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

Issuer Name

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

Subordinated Debt/Corporate Notes—50.9%

             

Acentia, LLC

   10/02/2017    Electronics      13.75     —           19,000,000       $ 18,565,089       $ 18,970,545   

Affinion Group Holdings, Inc.

   11/15/2015    Consumer Products      11.63     —           35,552,000         34,243,502         22,931,040   

Alegeus Technologies, LLC

   02/15/2019    Financial Services      12.00     —           8,930,000         8,760,960         9,023,409   

Convergint Technologies LLC

   03/26/2018    Electronics     

 

12.00

(PIK 1.00


%) 

    —           23,337,073.         22,887,488         23,510,830   

Escort, Inc.

   06/01/2016    Electronics     

 

14.75

(PIK 2.75


%) 

    —           25,431,515         24,957,852         25,431,515   

Galls, LLC; Quartermaster Inc.

   03/31/2017    Distribution     

 

13.00

(PIK 2.00


%) 

    —           21,906,249         21,525,345         21,906,249   

JF Acquisition, LLC

   06/30/2017    Distribution     

 

14.00

(PIK 2.00


%) 

    —           17,257,231         16,849,863         17,429,803   

Last Mile Funding Corp.

   06/30/2016    Cargo Transport     

 

14.50

(PIK 2.50


%) 

    —           45,888,454         45,027,785         45,888,454   

Learning Care Group (US) Inc.

   06/30/2016    Education     

 

15.00

(PIK 15.00


%) 

    —           5,673,547         5,120,749         5,233,847   

LTI Flexible Products, Inc.

   01/19/2019    Chemical, Plastic and
Rubber
     12.50     —           30,000,000         30,000,000         30,000,000   

LTI Flexible Products, Inc.(9)

   01/11/2014    Chemical, Plastic and
Rubber
     —          —           5,000,000         4,825,000         5,000,000   

Mailsouth, Inc.

   06/15/2017    Printing
and Publishing
     14.50     —           15,000,000         14,647,038         15,000,000   

PAS Technologies, Inc.

   05/12/2017    Aerospace
and Defense
    

 

15.02

(PIK 3.02


%) 

    —           17,577,649         17,248,456         16,347,214   

TRAK Acquisition Corp.

   12/29/2015    Business Services      15.00 % (7)      —           12,020,950         11,702,105         12,020,950   

TrustHouse Services Group, Inc.

   06/03/2019    Beverage, Food, and

Tobacco

    

 

14.25

(PIK 2.25


%) 

    —           14,947,163         14,703,631         14,947,163   

TrustHouse Services Group, Inc. (9)

   06/02/2014    Beverage, Food, and

Tobacco

     —          —           4,000,000         3,920,000         4,000,000   

Veritext Corp.

   12/31/2015    Business Services      13.00     —           16,200,000         15,934,353         16,200,000   

Vestcom International, Inc.

   06/27/2019    Printing and
Publishing
     12.00 %     —           46,511,091         45,582,215         46,511,091   
                

 

 

    

 

 

 

Total Subordinated Debt/Corporate Notes

                   356,501,431         350,352,110   
                

 

 

    

 

 

 

Preferred Equity/Partnership Interests —1.7% (6)

                   

AH Holdings, Inc.

   —      Healthcare, Education

and Childcare

     6.00 %     —           211         500,000         649,174   

AHC Mezzanine, LLC

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

Alegeus Technologies Holdings Corp., Series A
(Alegeus Technologies, LLC)

   —      Financial Services      —          —           949         949,050         1,077,842   

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

   —      Healthcare, Education

and Childcare

     8.00 %     —           76,357         765,307         1,036,350   

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

   —      Healthcare, Education

and Childcare

     —          —           38,179         382,654         518,175   

Convergint Technologies Holdings, LLC

   —      Electronics      8.00     —           2,375         2,375,000         2,333,216   

CT Technologies Holdings, LLC

   —      Business Services      9.00     —           326,215         326,215         326,215   

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

   —      Other Media      8.00 %     —           3,591         24,177         27,054   

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

   —      Aerospace and

Defense

     8.00 %     —           20,000         1,980,000         297,063   

TrustHouse Services Holdings, LLC

   —      Beverage, Food,

and Tobacco

     12.00 %     —           1,099         984,344         1,138,903   

TZ Holdings, L.P., Series A

   —      Insurance      —          —           686         685,820         685,820   

TZ Holdings, L.P., Series B

   —      Insurance      6.50 %     —           1,312         1,312,006         1,688,174   

Verde Parent Holdings, Inc.

   —      Personal

Transportation

     8.00 %     —           1,824,167         1,824,167         1,694,025   
                

 

 

    

 

 

 

Total Preferred Equity/Partnership Interests

                   12,427,636         11,472,011   
                

 

 

    

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

Issuer Name

   Maturity    Industry    Current
Coupon
     Basis  Point
Spread
Above
Index (4)
     Par/
Shares
     Cost      Fair Value  (3)  
Common Equity/Warrants/Partnership Interests—11.5%(6)               

Acentia, LLC, Class A Units (12)

   —      Electronics      —           —           1,998       $ 2,000,000       $ 1,447,194   

AH Holdings, Inc. (Warrants)

   03/23/2021    Healthcare, Education

and Childcare

     —           —           753         —           1,999,384   

Alegeus Technologies Holding Corp., Class A,
(Alegeus Technologies, LLC)

   —      Financial Services      —           —           1         950         1,079   

Autumn Games, LLC

   —      Broadcasting and

Entertainment

     —           —           1,333,330         3,000,000         —     

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

   —      Distribution      —           —           1,505,000         1,505,000         1,716,728   

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

   —      Healthcare, Education

and Childcare

     —           —           23,416         234,693         317,829   

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

   —      Healthcare, Education

and Childcare

     —           —           11,708         117,346         158,915   

Convergint Technologies Holdings, LLC

   —      Electronics      —           —           2,375         —           110,420   

CT Technologies Holdings, LLC

   —      Business Services      —           —           5,556         1,904,036         6,735,771   

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

   —      Other Media      —           —           348,912         2,443,050         2,628,634   

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

   —      Healthcare, Education

and Childcare

     —           —           1,079,920         1,236,832         11,859,821   

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

   —      Healthcare, Education

and Childcare

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

Learning Care Group (US) Inc. (Warrants)

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

Magnum Hunter Resources Corporation
(Eureka Hunter Pipeline, LLC)

   —      Oil and Gas      —           —           1,221,932         3,239,999         4,875,509   

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

   10/14/2013    Oil and Gas      —           —           122,193         105,697         8,572   

MidOcean JF Holdings Corp.
(JF Acquisition, LLC)

   —      Distribution      —           —           1,850         1,850,294         1,939,841   

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

   —      Personal, Food and
Miscellaneous
Services
     —           —           3,000         3,000,000         3,262,232   

Paradigm Acquisition Corp.
(Paradigm Management Services, LLC)

   —      Healthcare, Education

and Childcare

     —           —           20,000         2,000,000         2,236,480   

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

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

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

   —      Other Media      —           —           4,325         1,306,167         1,032,393   

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

   —      Other Media      —           —           531         —           126,752   

Realogy Holdings Corp.
(f/k/a Realogy Corp.)

   —      Buildings and Real
Estate
     —           —           417,054         10,929,118         17,499,586   

SPG Boyd Holdings Corp.
(LTI Flexible Products, Inc.)

   —      Chemical, Plastic

and Rubber

     —           —           300,000         3,000,000         3,466,167   

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

   —      Telecommunications      —           —           2,276,847         2,274,883         6,697,628   

TRAK Acquisition Corp. (Warrants)

   12/29/2019    Business Services      —           —           3,500         29,400         1,116,199   

Transportation 100 Holdco, L.L.C. (13)
(Greatwide Logistics Services, L.L.C.)

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

TZ Holdings, L.P.

   —      Insurance      —           —           2         9,567         129,673   

Verde Parent Holdings, Inc.

   —      Personal
Transportation
     —           —           9,166         9,166         —     

Vestcom Parent Holdings, Inc.
(Vestcom International, Inc.)

   —      Printing and
Publishing
     —           —           211,797         2,325,555         2,325,555   

VText Holdings, Inc. (Veritext Corp.)

   —      Business Services      —           —           35,526         4,050,000         6,668,990   
                 

 

 

    

 

 

 

Total Common Equity/Warrants/Partnership Interests

                    50,512,068         79,390,159   
                 

 

 

    

 

 

 

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

                    902,897,172         931,419,104   
                 

 

 

    

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

DECEMBER 31, 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—13.6% (1),(2)

  

   

Second Lien Secured Debt—1.1%

             

Performance, Inc.

  01/16/2015   Leisure, Amusement

Motion Pictures and

Entertainment

    7.25 %     L+625  (8)      8,000,000      $ 8,000,000      $ 7,780,000   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—8.5%

  

   

DirectBuy Holdings, Inc.

  11/05/2019   Consumer Products    

 

12.00

(PIK 12.00


%) 

    —          10,472,000        10,472,000        10,472,000   

Performance Holdings, Inc.

  07/16/2015   Leisure, Amusement,

Motion Pictures and

Entertainment

    15.00 %) (7)      —          7,567,234        7,442,664        7,567,234   

Service Champ, Inc.

  10/02/2017   Auto Sector     12.50     —          24,000,000        23,514,474        24,190,344   

Service Champ, Inc. (9)

  10/02/2013   Auto Sector     —          —          16,000,000        15,640,000        16,126,896   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

              57,069,138        58,356,474   
           

 

 

   

 

 

 

Common Equity/Partnership Interest—4.0% (6)

  

   

DirectBuy Holdings, Inc.

  —     Consumer Products     —          —          104,719        21,492,822        —     

DirectBuy Holdings, Inc. (Warrants)

  11/05/2022   Consumer Products     —          —          15,486        —          —     

EnviroSolutions, Inc.

  —     Environmental Services     —          —          137,450        11,413,684        19,971,112   

NCP-Performance
(Performance Holdings, Inc.)

  —     Leisure, Amusement,

Motion Pictures and

Entertainment

    —          —          375,000        3,750,000        2,779,601   

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

  —     Auto Sector     —          —          16,800        4,200,000        4,784,499   
           

 

 

   

 

 

 

Total Common Equity/Partnership Interest

              40,856,506        27,535,212   
           

 

 

   

 

 

 

Total Investments in Non-Controlled, Affiliated Portfolio Companies

  

    105,925,644        93,671,686   
           

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies—5.7% (1),(2)

  

   

First Lien Secured Debt—1.8%

             

SuttonPark Holdings, Inc.

  06/30/2020   Business Services     14.00 % (7)        10,400,000        10,400,000        10,767,224   

UP Support Services, Inc. (9)

  12/31/2015   Oil and Gas     —          —          1,916,666        1,749,448        1,916,666   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              12,149,448        12,683,890   
           

 

 

   

 

 

 

Second Lien Secured Debt—2.2%

             

UP Support Services, Inc.

  12/31/2015   Oil and Gas    

 

15.00

(PIK 15.00


%) 

    —          14,860,377        12,510,232        14,860,377   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—0.3%

             

SuttonPark Holdings, Inc.

  06/30/2020   Business Services     14.00 % (7)      —          2,600,000        2,600,000        2,248,176   
           

 

 

   

 

 

 

Preferred Equity—1.4%(6)

             

SuttonPark Holdings, Inc.

  —     Business Services     14.00     —          2,000        2,000,000        1,984,603   

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

  —     Oil and Gas     8.00     —          376,988        34,420,613        7,539,759   
           

 

 

   

 

 

 

Total Preferred Equity

              36,420,613        9,524,362   
           

 

 

   

 

 

 

Common Equity—0.0% (6)

             

SuttonPark Holdings, Inc.

  —     Business Services     —          —          100        100        —     
           

 

 

   

 

 

 

Total Investments in Controlled, Affiliated Portfolio Companies

  

    63,680,393        39,316,805   
           

 

 

   

 

 

 

Total Investments—154.6%

              1,072,503,209        1,064,407,595   

Cash Equivalents—4.5%

              31,291,517        31,291,517   
           

 

 

   

 

 

 

Total Investments and Cash Equivalents—159.1%

  

  $ 1,103,794,726      $ 1,095,699,112   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(59.1%)

  

      (407,196,691
             

 

 

 

Net Assets—100.0%

              $ 688,502,421   
             

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

 

(1) The provisions of the Investment Company Act of 1940, 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 (see Note 6).
(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 or “P”, rate.
(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, normally to qualified institutional buyers.
(6) Non-income producing securities.
(7) Coupon is payable in cash and/or in-kind or PIK.
(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 U.S.
(11) Investment is held through PNNT CI (Galls) Prime Investment Holdings, LLC, a consolidated subsidiary.
(12) Investment is held through PNNT Acentia LLC, a consolidated subsidiary.
(13) Investment is held through PNNT Transportation 100 Holdco, 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, 2012

 

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—130.3% (1),(2) 

  

First Lien Secured Debt—41.7%

  

Aircell Business Aviation Services LLC

    06/21/2017      Communications     11.25     L+975  (8)      14,906,250      $ 14,332,682      $ 14,906,250   

American Surgical Holdings, Inc.

    03/23/2015      Healthcare, Education and

Childcare

    14.00     L+1,000  (8)      17,811,828        17,441,366        17,811,828   

Brand Energy and Infrastructure Services, Inc.

    02/07/2014      Energy/Utilities     3.68     L+325        2,000,000        1,757,029        1,973,334   

CEVA Group PLC(5),(10)

    10/01/2016      Cargo Transport     11.63     —          7,500,000        7,355,237        7,687,500   

CEVA Group PLC(5),(10)

    04/01/2018      Cargo Transport     11.50 %     —          1,000,000        990,089        880,000   

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

    11/20/2014      Communications     11.50     —          10,000,000        10,000,000        11,100,000   

Good Sam Enterprises, LLC(5)

    12/01/2016      Consumer Products     11.50 %     —          12,000,000        11,795,443        12,720,000   

Hanley-Wood, L.L.C.

    01/13/2017      Other Media     8.00     L+650  (8)     1,752,896        1,752,896        1,752,896   

IDQ Holdings, Inc. (5)

    04/01/2017      Auto Sector     11.50     —          11,500,000        11,288,165        12,218,750   

Instant Web, Inc.

    08/07/2014      Printing and Publishing     14.50     L+950  (8)      24,115,645        23,829,738        23,802,142   

Interactive Health Solutions, Inc.

    10/04/2016      Healthcare, Education and

Childcare

    11.50     L+950  (8)      18,525,000        18,165,492        18,571,313   

Jacuzzi Brands Corp.

    02/07/2014      Home and Office Furnishings,

Housewares and Durable

Consumer Products

    2.28     L+225        9,598,649        9,598,649        6,371,103   

K2 Pure Solutions NoCal, L.P.

    09/10/2015      Chemicals, Plastics and

Rubber

    10.00 %     L+775  (8)      18,952,500        18,216,865        19,236,788   

Kadmon Pharmaceuticals, LLC

    10/31/2012      Healthcare, Education and

Childcare

    15.00     L+1,300  (8)      4,931,494        4,992,740        5,110,409   

Learning Care Group, Inc.

    04/27/2016      Education     12.00 %     —          26,052,632        25,640,832        25,857,237   

Penton Media, Inc.

    08/01/2014      Other Media    

 

5.00

(PIK 1.00


%) 

    L+400  (8)      37,775,294        33,971,917        30,503,550   

Pre-Paid Legal Services, Inc., Tranche A

    12/30/2016      Personal, Food and

Miscellaneous Services

    7.50     L+600  (8)      1,552,846        1,533,687        1,556,728   

Pre-Paid Legal Services, Inc., Tranche B

    12/30/2016      Personal, Food and
Miscellaneous Services
    11.00     L+950  (8)      35,000,000        34,118,800        35,350,000   

Questex Media Group LLC(9)

    12/16/2012      Other Media     1.36 %     —          133,603        133,603        133,603   

Tekelec Global Inc. (First Out)

    01/29/2018      Telecommunications     9.00     L+750  (8)      850,000        838,369        850,000   

Tekelec Global Inc. (Second Out)

    01/29/2018      Telecommunications     13.50     L+1,200  (8)      10,625,000        10,338,450        10,848,126   

Worley Claims Services, LLC

    07/06/2017      Insurance     12.50 %     L+1,100  (8)     14,934,000        14,934,000        14,859,330   

Yonkers Racing Corp.(5) 

    07/15/2016      Hotels, Motels, Inns and

Gaming

    11.38     —          4,500,000        4,401,515        4,860,000   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              277,427,564        278,960,887   
           

 

 

   

 

 

 

Second Lien Secured Debt—25.3%

             

American Gilsonite Company(5)

    09/01/2017      Diversified Natural Resources,

Precious Metals and Minerals

    11.50 %     —          25,400,000        25,400,000        26,098,500   

Brand Energy and Infrastructure Services, Inc.

    02/07/2015      Energy/Utilities     6.33     L+600        13,600,000        13,378,432        12,729,600   

Brand Energy and Infrastructure Services, Inc.

    02/07/2015      Energy/Utilities     7.36     L+700        12,000,000        11,866,485        11,232,000   

DirectBuy Holdings, Inc.(5), (6) 

    02/01/2017      Consumer Products     12.00 %     —          34,000,000        31,964,822        10,880,000   

Eureka Hunter Pipeline, LLC

    08/16/2018      Energy/Utilities     12.50     —          45,000,000        44,543,688        45,000,000   

Greatwide Logistics Services, L.L.C.

    03/01/2014      Cargo Transport    

 

11.00

(PIK 11.00


%) 

    L+700  (8)     3,184,219        3,184,222        2,292,640   

Paradigm Management Services, LLC

    07/31/2017      Healthcare, Education and

Childcare

    12.50     L+1,100  (8)      20,512,821        20,059,979        20,512,821   

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

SEPTEMBER 30, 2012

 

Issuer Name

 

Maturity

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

Questex Media Group LLC, Term Loan A

  12/15/2014   Other Media     9.50 %     L+650  (8)      2,752,666        $ 2,752,666        $ 2,584,753   

Questex Media Group LLC, Term Loan B

  12/15/2015   Other Media    

 

11.50

(PIK 11.50


%) 

    L+850  (8)      2,230,508        2,230,508        2,002,996   

Realogy Corp.

  10/15/2017   Buildings and Real

Estate

    13.50     —          10,000,000        10,000,000        10,062,500   

ROC Finance LLC and ROC Finance 1 Corp.

  09/01/2018   Hotels, Motels,

Inns and Gaming

    12.13     —          16,000,000        15,752,822        18,560,000   

TransFirst Holdings, Inc.

  06/15/2015   Financial Services     6.22     L+600        7,811,488        7,511,344        7,411,149   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

              188,644,968        169,366,959   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—52.4%

             

Acentia, LLC

  10/02/2017   Electronics     13.75     —         19,000,000        18,563,943        19,000,000   

Affinion Group Holdings, Inc.

  11/15/2015   Consumer Products     11.63 %     —         35,552,000        34,172,451        24,175,360   

Alegeus Technologies, LLC

  02/15/2019   Financial Services     12.00 %     —         8,930,000        8,754,461        8,930,000   

Convergint Technologies LLC

  03/26/2018   Electronics    

 

12.00

(PIK 1.00


%)

    —         23,277,586        22,812,086        22,812,034   

Diversitech Corporation

  01/29/2017   Manufacturing/

Basic Industry

    13.50 % (7)     —         11,000,000        10,836,901        11,275,000   

Escort, Inc.

  06/01/2016   Electronics    

 

14.75

(PIK 2.75


%) 

    —         25,254,035        24,751,548        25,254,035   

Galls, LLC; Quartermaster Inc.

  03/31/2017   Distribution    

 

13.00

(PIK 2.00


%)

    —         21,797,263        21,399,764        21,906,249   

JF Acquisition, LLC

  06/30/2017   Distribution    

 

14.00

(PIK 2.00


%) 

    —         17,171,374        16,748,220        17,377,430   

Last Mile Funding Corp.

  06/30/2016   Cargo Transport    

 

14.50

(PIK 2.50


%) 

    —         45,597,139        44,677,474        45,095,570   

Learning Care Group (US) Inc.

  06/30/2016   Education    

 

15.00

(PIK 15.00


%) 

    —         5,277,718        4,696,436        4,815,918   

LTI Flexible Products, Inc.

  01/19/2019   Chemical, Plastic and Rubber     12.50     —         30,000,000        30,000,000        30,000,000   

LTI Flexible Products, Inc.(9)

  01/11/2014   Chemical, Plastic and Rubber     —          —         5,000,000        4,825,000        5,000,000   

Mailsouth, Inc.

  06/15/2017   Printing and Publishing    

 

14.50

(PIK 2.00


%)

    —         15,000,000        14,632,413        15,210,000   

PAS Technologies, Inc.

  05/12/2017   Aerospace
and Defense
   

 

15.02

(PIK 3.02


%) 

    —         17,123,218        16,783,033        17,123,218   

Prince Mineral Holdings Corp.

  12/03/2016   Mining, Steel, Iron

and Non-Precious Metals

   

 

13.50

(PIK 2.00


%) 

    —         26,696,517        26,263,685        26,696,517   

Realogy Corp.

  04/15/2018   Buildings and Real Estate     11.00 %     —         10,000,000        9,247,298        9,400,000   

TRAK Acquisition Corp.

  12/29/2015   Business Services     15.00 % (7)      —         12,020,950        11,708,199        12,020,950   

TrustHouse Services Group, Inc.

  06/03/2019   Beverage, Food, and Tobacco    

 

14.25

(PIK 2.25


%) 

    —         14,778,578        14,527,411        14,778,578   

TrustHouse Services Group, Inc.(9) 

  06/02/2014   Beverage, Food, and Tobacco     —          —         4,000,000        3,920,000        4,000,000   

Veritext Corp.

  12/31/2015   Business Services     13.00     —         16,200,000        15,916,579        16,200,000   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

              355,236,902        351,070,859   
           

 

 

   

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

SEPTEMBER 30, 2012

 

 

Issuer Name

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

Preferred Equity/Partnership Interests— 1.7% (6)

         

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

  —     Healthcare, Education

and Childcare

    6.00     —          211      $ 500,000      $ 624,081   

AHC Mezzanine, LLC

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

Alegeus Technologies Holding Corp., Series A
(Alegeus Technologies, LLC)

  —     Financial Services     —          —          949        949,050        1,031,820   

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

  —     Healthcare, Education

and Childcare

    8.00     —          76,357        765,307        881,885   

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

  —     Healthcare, Education

and Childcare

    —          —          38,179        382,654        —     

Convergint Technologies Holdings, LLC

  —     Electronics     —          —          2,375        2,375,000        2,375,000   

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

  —     Other Media     8.00     —          3,591        24,177        27,916   

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

  —     Aerospace and Defense     8.00     —          20,000        1,980,000        823,710   

TrustHouse Services Holdings, LLC

    Beverage, Food, and Tobacco     12.00     —          1,099        984,344        1,111,742   

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        1,666,679   

Verde Parent Holdings, Inc.

  —     Personal Transportation     8.00     —          1,824,167        1,824,167        1,949,629   
           

 

 

   

 

 

 

Total Preferred Equity/Partnership Interests

          12,101,421        11,178,282   
           

 

 

   

 

 

 

Common Equity/Warrants/Partnership Interests— 9.2%(6)

         

Acentia, LLC, Class A Units (12) 

  —     Electronics     —          —          1,998        2,000,000        1,737,396   

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

  03/23/2021   Healthcare, Education

and Childcare

    —          —          753        —          2,063,780   

Alegeus Technologies Holding Corp., Class A
(Alegeus Technologies, LLC)

  —     Financial Services     —          —          1        950        1,033   

Autumn Games, LLC

  —     Broadcasting and

Entertainment

    —          —          1,333,330        3,000,000        —     

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

  —     Distribution     —          —          1,505,000        1,505,000        1,680,720   

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

  —     Healthcare, Education

and Childcare

    —          —          23,416        234,693        270,457   

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

  —     Healthcare, Education

and Childcare

    —          —          11,708        117,346        —     

Convergint Technologies Holdings, LLC
(Convergint Technologies) LLC

  —     Electronics     —          —          2,375        —          —     

CT Technologies Holdings, LLC

  —     Business Services     —          —          5,556        1,904,033        6,665,183   

DirectBuy Investors, L.P.

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

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

  —     Other Media     —          —          348,912        2,443,050        2,642,438   

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

SEPTEMBER 30, 2012

 

Issuer Name

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

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

   —      Healthcare, Education
and Childcare
     —          —          1,079,920       $ 1,236,832       $ 12,013,688   

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

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

Learning Care Group (US) Inc. (Warrants)

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

Magnum Hunter Resources Corporation
(Eureka Hunter Pipeline, LLC)

   —      Oil and Gas      —          —          1,221,932         3,239,999         5,425,378   

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

   10/14/2013    Oil and Gas      —          —          122,193         105,697         31,778   

MidOcean JF Holdings Corp.
(JF Acquisition, LLC)

   —      Distribution      —          —          1,700         1,700,000         1,641,575   

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

   —      Personal, Food and
Miscellaneous Services
     —          —          3,000         3,000,000         4,377,360   

Paradigm Acquisition Corp.
(Paradigm Management Services, LLC)

   —      Healthcare, Education

and Childcare

     —          —          20,000         2,000,000         2,124,491   

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         1,306,166         1,404,661   

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

   —      Other Media      —          —          531         —           172,457   

SPG Boyd Holdings Corp.
(LTI Flexible Products, Inc.)

   —      Chemical, Plastic

and Rubber

     —          —          300,000         3,000,000         3,000,000   

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

   —      Telecommunications      —          —          2,276,847         2,274,883         6,182,426   

TRAK Acquisition Corp. (Warrants)

   12/29/2019    Business Services      —          —          3,500         29,400         1,197,412   

Transportation 100 Holdco, L.L.C. (13)
(Greatwide Logistics Services, L.L.C.)

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

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

   —      Insurance      —          —          2         9,567         713,718   

Verde Parent Holdings, Inc.

   —      Personal
Transportation
     —          —          9,166         9,167         —     

VText Holdings, Inc.
(Veritext Corp.)

   —      Business Services      —          —          35,526         4,050,000         6,941,000   
               

 

 

    

 

 

 

Total Common Equity/Warrants/Partnership Interests

            38,457,098         61,315,758   
               

 

 

    

 

 

 

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

            871,867,953         871,892,745   
               

 

 

    

 

 

 

Investments in Non-Controlled, Affiliated Portfolio Companies— 12.0% (1),(2)

  

       

Second Lien Secured Debt— 1.1%

  

         

Performance, Inc.

   01/16/2015    Leisure, Amusement
Motion Pictures and
Entertainment
     7.25     L+625  (8)     8,000,000         8,000,000         7,672,000   
               

 

 

    

 

 

 

Subordinated Debt/Corporate Notes—7.1%

            

Performance Holdings, Inc.

   07/16/2015    Leisure, Amusement,

Motion Pictures and
Entertainment

     15.00 % (7)     —          7,567,234         7,435,314         7,453,725   

Service Champ, Inc.

   10/02/2017    Auto Sector      12.50 %     —          24,000,000         23,495,700         24,000,000   

Service Champ, Inc. (9)

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

 

 

    

 

 

 

Total Subordinated Debt/Corporate Notes

  

         46,571,014         47,453,725   
               

 

 

    

 

 

 

Common Equity/Partnership Interest—3.8% (6)

                  

EnviroSolutions, Inc.

   —      Environmental
Services
     —          —          125,106         10,055,844         18,425,519   

NCP-Performance
(Performance Holdings, Inc.)

   —      Leisure, Amusement,

Motion Pictures and

Entertainment

     —          —          375,000         3,750,000         2,902,355   

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

   —      Auto Sector      —          —          16,800         4,200,000         4,501,658   
               

 

 

    

 

 

 

Total Common Equity/Partnership Interest

                  18,005,844         25,829,532   
               

 

 

    

 

 

 

Total Investments in Non-Controlled, Affiliated Portfolio Companies

  

         72,576,858         80,955,257   
               

 

 

    

 

 

 
                  

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS — (Continued)

SEPTEMBER 30, 2012

 

Issuer Name

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

Investments in Controlled, Affiliated Portfolio Companies—5.6% (1),(2)

             

First Lien Secured Debt—1.9%

             

SuttonPark Holdings, Inc.

   06/30/2020    Business Services      14.00 % (7)     —           10,800,000       $ 10,800,000       $ 10,800,000   

UP Support Services, Inc. (9)

   12/31/2015    Oil and Gas      —          —           743,187         668,632         743,187   

UP Support Services, Inc. (9)

   12/31/2015    Oil and Gas      —          —           1,173,479         1,068,059         1,173,479   
                

 

 

    

 

 

 

Total First Lien Secured Debt

  

     12,536,691         12,716,666   
                

 

 

    

 

 

 

Second Lien Secured Debt—2.1%

             

UP Support Services, Inc.

   12/31/2015    Oil and Gas     

 

15.00

(PIK 15.00

%

%)

    —           14,300,282         11,809,647         14,300,282   
                

 

 

    

 

 

 

Subordinated Debt/Corporate Notes—0.3%

                   

SuttonPark Holdings, Inc.

   06/30/2020    Business Services      14.00 % (7)      —           2,700,000         2,700,000         2,158,053   
                

 

 

    

 

 

 

Preferred Equity—1.3%(6)

                   

SuttonPark Holdings, Inc.

   —      Business Services      14.00 %     —           2,000         2,000,000         216,947   

Universal Pegasus International Holdings, Inc.

   —      Oil and Gas      8.00 %     —           411,988         35,120,613         8,239,760   
                

 

 

    

 

 

 

Total Preferred Equity

  

     37,120,613         8,456,707   
                

 

 

    

 

 

 

Common Equity— 0.0% (6)

                   

SuttonPark Holdings, Inc.

   —      Business Services      —          —           100         100         —     
                

 

 

    

 

 

 

Total Investments in Controlled, Affiliated Portfolio Companies

  

     64,167,051         37,631,708   
                

 

 

    

 

 

 

Total Investments—147.9%

  

     1,008,611,862         990,479,710   

Cash Equivalents—1.1%

  

     7,559,453         7,559,453   
                

 

 

    

 

 

 

Total Investments and Cash Equivalents—149.0%

  

   $ 1,016,171,315       $ 998,039,163   
                

 

 

    

 

 

 

Liabilities in Excess of Other Assets—(49.0%)

  

     (328,322,116 )
                   

 

 

 

Net Assets—100.0%

  

   $ 669,717,047   
                   

 

 

 

 

(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 “L”, or Prime or “P”, 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, normally to qualified institutional buyers.
(6) Non-income producing securities.
(7) Coupon is payable in cash and/or PIK.
(8) Coupon is subject to a LIBOR or Prime rate floor.
(9) Represents the purchase of a security with delayed settlement (unfunded investments). This security does not have a basis point spread above an index.
(10) Non-U.S. company or principal place of business outside the U.S.
(11) Investment is held through PNNT CI (Galls) Prime Investment Holdings, LLC, a consolidated subsidiary.
(12) Investment is held through PNNT Acentia LLC, a consolidated subsidiary.
(13) Investment is held through PNNT Transportation 100 Holdco, LLC, a consolidated subsidiary.

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

1. ORGANIZATION

PennantPark Investment Corporation was organized as a Maryland corporation in January 2007. PennantPark Investment is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC. 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, to a lesser extent, 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 44.3 million shares of common stock through follow-on public offerings, resulting in net proceeds of $448.8 million. On October 25, 2012, we sold an additional 700,000 shares of common stock at a public offering price of $10.82 per share generating gross proceeds of $7.6 million and net proceeds of $7.3 million after underwriting discounts and offering expenses payable by us from the underwriters’ partial exercise of the over-allotment option granted in connection with the offering.

We have entered into an investment management agreement, or the Investment Management Agreement, with the Investment Adviser, an external adviser that manages our day-to-day operations. We have also entered into an administration agreement, or the Administration Agreement, with the Administrator, which 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 each of our SBIC Funds under separate investment management agreements. PennantPark Investment, through the Administrator, also provides similar services to each of our SBIC Funds 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, PennantPark SBIC GP, LLC, were organized in Delaware as a limited partnership and a limited liability company, respectively, in May 2010 and began operations in June 2010. SBIC II and its general partner, PennantPark SBIC GP II, LLC, were organized in Delaware as a limited partnership and a limited liability company, respectively, in July 2012 and began operations in December 2012. SBIC LP received a license from the SBA to operate as an SBIC effective July 30, 2010 under Section 301(c) of the Small Business Investment Act of 1958, as amended, or the 1958 Act. Our SBIC Funds are consolidated wholly owned subsidiaries of PennantPark Investment. Our SBIC Funds’ objectives are 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 equity securities of portfolio companies organized as pass-through entities while continuing to 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 periods. Actual results could differ from these estimates. We may reclassify certain prior period amounts to conform to the current period presentation. 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-K/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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 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, 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 in this Report, and a consistently applied valuation process. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may 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 the 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.

(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 the fair values of our portfolio investments and our Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

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, or OID, 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 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

We have complied with the requirements of Subchapter M of the Code and expect to be subject to tax as a RIC. As a result, we account 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 basis 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 $0.1 million for both the three months ended December 31, 2012 and 2011.

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 2009 remain subject to examination by the Internal Revenue Service and the state department of revenue.

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

(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 our SBIC Funds and our Taxable Subsidiaries in our Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

3. AGREEMENTS

PennantPark Investment’s 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 2013. 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. Our SBIC Funds’ investment management agreements do 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 under any credit facility, repurchase agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for purposes of preserving investment flexibility for the next quarter, if any). 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 example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three months ended December 31, 2012 and 2011, the Investment Adviser earned a base management fee of $5.1 million and $4.0 million, respectively, from us.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, distribution income and any other income, including any other fees other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with deferred interest feature (such as OID, 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 relevant quarter. For the three months ended December 31, 2012 and 2011, the Investment Adviser earned a performance based incentive fee on net investment income, as calculated under the Investment Management Agreement, of $4.5 million and $3.7 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 from inception. For the three months ended December 31, 2012 and 2011, the Investment Adviser did not earn a performance based incentive fee on capital gains as calculated under the Investment Management Agreement.

Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital appreciation and depreciation on investments held at the end of each period. 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 or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 20% 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. For the three months ended December 31, 2012 and 2011, the Investment Adviser did not earn a performance based incentive fee on capital gains as calculated under GAAP.

 

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DECEMBER 31, 2012

(Unaudited)

 

The 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 2013. Under this agreement, the Administrator provides administrative services to us. The Administrator provides similar services to our SBIC Funds under each of their administration agreements 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 months ended December 31, 2012 and 2011, the Investment Adviser and Administrator, collectively, were reimbursed $0.5 million and $0.7 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for the services described above.

PennantPark Investment has entered into an administration agreement with its controlled affiliate 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 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 staff. For the three months ended December 31, 2012 and 2011, PennantPark Investment was reimbursed $0.1 million and $0.2 million, respectively, for the services described above.

4. INVESTMENTS

Purchases of long-term investments, including PIK, for the three months ended December 31, 2012 and 2011 totaled $172.5 million and $46.1 million, respectively. Sales and repayments of long-term investments for the three months ended December 31, 2012 and 2011 totaled $110.8 million and $69.3 million, respectively.

Investments and cash equivalents consisted of the following:

 

     December 31, 2012      September 30, 2012  
     Cost      Fair Value      Cost      Fair Value  

First lien

   $ 308,638,805       $ 312,683,107       $ 289,964,255       $ 291,677,553   

Second lien

     207,476,912         212,845,984         208,454,615         191,339,241   

Subordinated debt / corporate notes

     416,170,569         410,956,760         404,507,916         400,682,637   

Preferred equity

     48,848,249         20,996,373         49,222,034         19,634,989   

Common equity

     91,368,674         106,925,371         56,463,042         87,145,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,072,503,209         1,064,407,595         1,008,611,862         990,479,710   

Cash equivalents

     31,291,517         31,291,517         7,559,453         7,559,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 1,103,794,726       $ 1,095,699,112       $ 1,016,171,315       $ 998,039,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

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

 

Industry Classification

   December 31, 2012     September 30, 2012  

Printing and Publishing

     8     4

Electronics

     7        7   

Energy/Utilities

     7        7   

Healthcare, Education and Childcare

     7        8   

Business Services

     6        6   

Auto Sector

     5        6   

Cargo Transport

     5        6   

Chemical, Plastic and Rubber

     5        5   

Hotels, Motels, Inns and Gaming

     5        2   

Consumer Products

     4        5   

Distribution

     4        4   

Personal, Food and Miscellaneous Services

     4        4   

Oil and Gas

     4        3   

Other Media

     4        4   

Education

     3        3   

Diversified Natural Resources, Precious Metals and Minerals

     2        3   

Aerospace and Defense

     2        2   

Beverage, Food and Tobacco

     2        2   

Buildings and Real Estate

     2        2   

Communications

     2        3   

Environmental Services

     2        2   

Insurance

     2        2   

Leisure, Amusement, Motion Pictures, Entertainment

     2        2   

Telecommunications

     2        2   

Financial Services

     1        2   

Mining, Steel, Iron and Non-Precious Metals

     1        3   

Retail

     1          

Other

     1        1   
  

 

 

   

 

 

 

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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(Unaudited)

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments and Credit Facility are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may 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 disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable market-based transactions for the same or similar assets or other relevant observable market based inputs that may be used in pricing an asset.

Our investments are generally structured as debt and equity investments in the form of senior secured loans, mezzanine debt and equity co-investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. 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 three months ended December 31, 2012, our ability to observe valuation inputs resulted in one reclassification of assets between Level 3 to 2 with no other reclassification between levels. During the three months ended December 31, 2011, our ability to observe valuation inputs resulted in no reclassification of assets between levels.

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 Accounting Standards Update No. 2011-04 “Fair Value Measurement: Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” 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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(Unaudited)

 

Asset Category

   Fair Value at
December 31, 2012
     Valuation Technique    Unobservable Input    Range of Input
(Weighted  Average)

First lien, second lien,

subordinated debt/corporate notes

   $ 301,182,943       Market Comparable    Broker/Dealer bid quotes    1 – 4

First lien, second lien,

subordinated debt/corporate notes

     588,431,868       Market Comparable    Market Yield    8.4% – 18.9% (13.9%)

Preferred and common equity

     105,538,077       Enterprise Market Value    EBITDA multiple    5.0 – 15.9(8.8)
  

 

 

          

Total Level 3 investments

   $ 995,152,888            
  

 

 

          

Long-Term Credit Facility

   $ 211,500,000       Market Comparable    Discount rate    3.3%

Our cash equivalents, investments and Credit Facility were categorized as follows in the fair value hierarchy for ASC 820 purposes:

 

            Fair Value at December 31, 2012  

Description

   Fair Value      Level 1      Level 2      Level 3  

Loan and debt investments

   $ 936,485,851       $       $ 46,871,040       $ 889,614,811   

Equity investments

     127,921,744         22,375,095         8,572         105,538,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,064,407,595         22,375,095         46,879,612         995,152,888   

Cash equivalents

     31,291,517         31,291,517                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 1,095,699,112       $ 53,666,612       $ 46,879,612       $ 995,152,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Facility

   $ 211,500,000       $       $       $ 211,500,000   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value at September 30, 2012  

Description

   Fair Value      Level 1      Level 2      Level 3  

Loan and debt investments

   $ 883,669,431       $       $ 35,275,360       $ 848,424,071   

Equity investments

     106,780,279         5,425,378         31,778         101,323,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     990,449,710         5,425,378         35,307,138         949,747,194   

Cash equivalents

     7,559,453         7,559,453                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 998,009,163       $ 12,984,831       $ 35,307,138       $ 949,747,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Facility

   $ 144,452,500       $       $       $ 144,452,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DECEMBER 31, 2012

(Unaudited)

 

The following tables show a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3):

 

     Three months ended December 31, 2012  

Description

   Loan and  debt
investments
    Equity
investments
    Totals  

Beginning Balance, September 30, 2012

   $ 848,424,071      $ 101,323,123      $ 949,747,194   

Realized gains (losses)

     2,221,132        (1,350,000     871,132   

Unrealized (depreciation) appreciation

     24,742,287        (19,387,772     5,354,515   

Purchases, PIK, net discount accretion and non-cash exchanges

     168,081,857        25,652,726        193,734,583   

Sales and non-cash exchanges

     (141,014,536     (700,000     (141,714,536

Transfers out of Level 3

     (12,840,000            (12,840,000
  

 

 

   

 

 

   

 

 

 

Ending Balance, December 31, 2012

   $ 889,614,811      $ 105,538,077      $ 995,152,888   
  

 

 

   

 

 

   

 

 

 
Net change in unrealized appreciation (depreciation) 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    $ 24,636,464      $ (14,167,304   $ 10,469,160   
  

 

 

   

 

 

   

 

 

 

 

     Three months ended December 31, 2011  

Description

   Loan and  debt
investments
    Equity
investments
    Totals  

Beginning Balance, September 30, 2011

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

Realized gains

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

Unrealized (depreciation) appreciation

     (12,316,045     7,291,199