Attached files

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EX-31.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-1.htm
EX-32.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-3.htm
EX-31.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-3.htm
EX-32.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-2.htm
EX-32.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-1.htm
EX-31.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

[x]

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

 

 

For the quarterly period ended June 30, 2014

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: 000-54755

 

CĪON Investment Corporation

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

45-3058280

 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3 Park Avenue, 36th Floor
New York, New York

 

10016

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 418-4700

 

 

 

 

(Registrant’s telephone number, including area code)

 

 

 

 

 

 

 

 

 

Not applicable

 

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

             

 

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 (or for such shorter period that the registrant was required to file such reports), 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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [  ]

 

Accelerated Filer [  ]

Non-Accelerated Filer [x] (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 registrant’s common stock, $0.001 par value, outstanding as of August 11, 2014 was 36,981,292.

  

 


 

CĪON INVESTMENT CORPORATION

TABLE OF CONTENTS

FORM 10-Q

 

 

Page

 

PART I – FINANCIAL INFORMATION   

 

 

Item 1. Financial Statements

 

 

Consolidated Balance Sheets

1

 

Consolidated Statements of Operations

2

 

Consolidated Statements of Changes in Net Assets

3

 

Consolidated Statements of Cash Flows

4

 

Consolidated Schedule of Investments

5

 

Notes to Consolidated Financial Statements

9

 

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

37

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

57

 

Item 4. Controls and Procedures

58

 

PART II – OTHER INFORMATION

 

 

Item 1. Legal Proceedings

59

 

Item 1A. Risk Factors

59

 

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

59

 

Item 3. Defaults Upon Senior Securities

59

 

Item 4. Mine Safety Disclosures

59

 

Item 5. Other Information

59

 

Item 6. Exhibits

60

 

Signatures

62

  

 


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CĪON Investment Corporation

Consolidated Balance Sheets

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

Assets

 

Investments, at fair value (amortized cost of $244,969,933

 

 

 

 

 

 

    and $103,414,685, respectively)

$

247,287,810

 

$

104,518,913

 

Cash

 

1,782,912

 

 

449,912

 

Due from counterparty(1)

 

79,705,510

 

 

40,703,777

 

Reimbursement from IIG, net(2)

 

 -  

 

 

545,593

 

Due from IIG - other

 

86,073

 

 

 -  

 

Prepaid expenses

 

 -  

 

 

98,990

 

Interest receivable on investments

 

1,114,170

 

 

415,416

 

Receivable due on investments sold

 

1,365,718

 

 

535,513

 

Unrealized appreciation on total return swap(1)

 

1,571,894

 

 

1,548,617

 

Receivable due on total return swap(1)

 

4,568,689

 

 

1,801,665

 

Total assets

$

337,482,776

 

$

150,618,396

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

Liabilities

 

 

 

 

 

 

Payable for investments purchased

$

24,148,055

 

$

3,462,700

 

Shareholders' distributions payable(3)

 

 -  

 

 

895,704

 

Accounts payable and accrued expenses

 

776,992

 

 

608,938

 

Accrued management fees

 

1,303,206

 

 

 -  

 

Accrued administrative services expense

 

430,220

 

 

 -  

 

Due to IIG - offering expenses

 

 -  

 

 

550,000

 

Accrued recoupment of expense reimbursements from IIG(2)

 

599,626

 

 

 -  

 

Accrued capital gains incentive fee(4)

 

1,136,972

 

 

530,569

 

Total liabilities

 

28,395,071

 

 

6,047,911

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 4 and Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Common stock, $0.001 par value; 500,000,000 shares authorized;

 

 

 

 

 

 

    32,949,270 and 15,510,178 shares issued and outstanding, respectively

 

32,949

 

 

15,510

 

Capital in excess of par value

 

306,137,742

 

 

142,402,255

 

Accumulated distributions in excess of net investment income

 

(972,757)

 

 

(500,125)

 

Accumulated net unrealized appreciation on investments

 

2,317,877

 

 

1,104,228

 

Accumulated net unrealized appreciation on total return swap(1)

 

1,571,894

 

 

1,548,617

 

Total shareholders' equity

 

309,087,705

 

 

144,570,485

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

337,482,776

 

$

150,618,396

 

 

 

 

 

 

 

 

 

Net asset value per share of common stock at end of period

$

9.38

 

$

9.32

 

 

 

 

 

 

 

 

 

Shares of common stock outstanding

 

32,949,270

 

 

15,510,178

 

 

 

 

 

 

 

 

 

(1) See Note 7 for a discussion of the Company’s total return swap agreement.

 

(2) See Note 4 for a discussion of expense reimbursements from ICON Investment Group, LLC, or IIG, and recoupment of expense reimbursements.

 

(3) See Note 5 for a discussion of the sources of distributions paid by the Company.

 

(4) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

1


 

CĪON Investment Corporation

Consolidated Statements of Operations

(unaudited)

 

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

Investment income

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

3,634,027

 

$

245,494

 

$

5,834,808

 

$

313,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

1,303,206

 

 

120,781

 

 

2,212,013

 

 

165,523

Administrative services expense

 

430,220

 

 

307,636

 

 

845,615

 

 

571,191

Capital gains incentive fee(1)

 

219,747

 

 

57,705

 

 

745,073

 

 

174,728

Offering expense - IIG

 

 -  

 

 

 -  

 

 

591,475

 

 

 -  

General and administrative(2)

 

1,017,487

 

 

752,015

 

 

2,075,615

 

 

1,260,878

Total expenses

 

2,970,660

 

 

1,238,137

 

 

6,469,791

 

 

2,172,320

Expense reimbursement from IIG(3)

 

 -  

 

 

(1,147,536)

 

 

(1,048,858)

 

 

(1,966,909)

Recoupment of expense reimbursement from IIG(3)

 

599,626

 

 

 -  

 

 

599,626

 

 

 -  

Net operating expenses

 

3,570,286

 

 

90,601

 

 

6,020,559

 

 

205,411

Net investment income (loss)

 

63,741

 

 

154,893

 

 

(185,751)

 

 

108,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized and unrealized gains

 

 

 

 

 

 

 

 

 

 

 

Net realized gain on investments

 

210,391

 

 

10,438

 

 

384,105

 

 

14,971

Net change in unrealized appreciation on investments

 

602,756

 

 

190,731

 

 

1,213,649

 

 

315,013

Net realized gain on total return swap(4)

 

4,800,062

 

 

505,676

 

 

7,763,541

 

 

792,013

Net change in unrealized (depreciation) appreciation on total return swap(4)

 

(1,184,648)

 

 

(163,108)

 

 

23,277

 

 

87,568

Total net realized and unrealized gains

 

4,428,561

 

 

543,737

 

 

9,384,572

 

 

1,209,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

$

4,492,302

 

$

698,630

 

$

9,198,821

 

$

1,317,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information—basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in net assets per share resulting from operations

$

0.16

 

$

0.24

 

$

0.38

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

28,393,882

 

 

2,878,270

 

 

24,318,604

 

 

2,026,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.

(2)

See Note 9 for details of the Company's general and administrative expense. See Note 2 for details of the Company's organization costs and offering expenses included in general and administrative expense.

(3)

See Note 4 for a discussion of expense reimbursements from IIG and recoupment of expense reimbursements.

(4)

See Note 7 for a discussion of the Company’s total return swap agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

2


 

CĪON Investment Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)

 

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

Changes in net assets from operations:

 

 

 

 

 

 

Net investment (loss) income

$

(185,751)

 

$

108,209

 

Net realized gain on investments

 

384,105

 

 

14,971

 

Net change in unrealized appreciation on investments

 

1,213,649

 

 

315,013

 

Net realized gain on total return swap(1)

 

7,763,541

 

 

792,013

 

Net change in unrealized appreciation on total return swap(1)

 

23,277

 

 

87,568

 

 

Net increase in net assets resulting from operations

 

9,198,821

 

 

1,317,774

Shareholder distributions:(2)

 

 

 

 

 

 

Net realized gain on total return swap

 

 

 

 

 

 

            Net interest and other income from TRS portfolio

 

(5,686,805)

 

 

(335,925)

 

            Net gain on TRS loan sales

 

(2,076,736)

 

 

(265,555)

 

Net realized gain on investments

 

(384,105)

 

 

(15,015)

 

Other sources

 

(286,881)

 

 

(110,901)

 

 

Net decrease in net assets from shareholder distributions

 

(8,434,527)

 

 

(727,396)

Changes in net assets from capital share transactions:

 

 

 

 

 

 

Issuance of common stock, net of issuance costs of $15,432,857 and $3,038,387, respectively

 

158,669,249

 

 

30,527,165

 

Reinvestment of shareholder distributions

 

5,129,582

 

 

213,150

 

Repurchase of common stock

 

(45,905)

 

 

 -  

 

Amortization of deferred offering expenses

 

 -  

 

 

(495,890)

 

 

Net increase in net assets resulting from capital share transactions

 

163,752,926

 

 

30,244,425

 

 

 

 

 

 

 

 

Total increase in net assets

 

164,517,220

 

 

30,834,803

Net assets at beginning of period

 

144,570,485

 

 

4,487,115

Net assets at end of period

$

309,087,705

 

$

35,321,918

 

 

 

 

 

 

 

 

Net asset value per share of common stock at end of period

$

9.38

 

$

9.17

Shares of common stock outstanding at end of period

 

32,949,270

 

 

3,853,304

 

 

 

 

 

 

 

 

(1) See Note 7 for a discussion of the Company’s total return swap agreement.

 

 

 

 

 

(2) See Note 5 for a discussion of the sources of distributions paid by the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

3


 

CĪON Investment Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

 

Six Months Ended

June 30,

 

2014

 

2013

Operating activities:

 

 

 

 

 

Net increase in net assets resulting from operations

$

9,198,821

 

$

1,317,774

Adjustments to reconcile net increase in net assets resulting from

 

 

 

 

 

operations to net cash used in operating activities:

 

 

 

 

 

 

Net accretion of discount on investments

 

(123,739)

 

 

(7,011)

 

Proceeds from principal repayment of investments

 

5,543,499

 

 

642,548

 

Purchase of investments

 

(159,809,294)

 

 

(20,658,178)

 

Increase in short term investments, net

 

(27,011,997)

 

 

(6,826,208)

 

Proceeds from sale of investments

 

40,230,388

 

 

504,375

 

Net realized gain on investments

 

(384,105)

 

 

(14,971)

 

Net unrealized appreciation on investments

 

(1,213,649)

 

 

(315,013)

 

Net unrealized appreciation on total return swap(1)

 

(23,277)

 

 

(87,568)

 

Increase in due from counterparty

 

(39,001,733)

 

 

(9,567,714)

 

Decrease (increase) in reimbursement from IIG, net(2)

 

545,593

 

 

(965,347)

 

Increase in due from IIG - other

 

(86,073)

 

 

 -  

 

Decrease in prepaid expenses

 

98,990

 

 

96,134

 

Increase in interest receivable on investments

 

(698,754)

 

 

(71,250)

 

Increase in receivable due on investments sold

 

(830,205)

 

 

(25,000)

 

Increase in receivable due on total return swap(1)

 

(2,767,024)

 

 

(361,679)

 

Increase in payable for investments purchased

 

20,685,355

 

 

4,720,900

 

Increase in accounts payable and accrued expenses

 

168,054

 

 

491,838

 

Increase in accrued management fees

 

1,303,206

 

 

 -  

 

Increase in accrued administrative services expense

 

430,220

 

 

 -  

 

(Decrease) increase in due to IIG - offering expenses

 

(550,000)

 

 

1,000,000

 

Increase in accrued recoupment of expense reimbursements from IIG(2)

 

599,626

 

 

 -  

 

Increase in accrued capital gains incentive fee

 

606,403

 

 

 -  

Net cash used in operating activities

 

(153,089,695)

 

 

(30,126,370)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Gross proceeds from issuance of common stock

 

174,102,106

 

 

33,565,552

 

Commissions and dealer manager fees paid

 

(15,432,857)

 

 

(3,061,487)

 

Repurchase of common stock

 

(45,905)

 

 

 -  

 

Shareholder distributions paid(3)

 

(4,200,649)

 

 

(293,194)

 

Repayment of financing arrangement

 

 -  

 

 

(72,682)

Net cash provided by financing activities

 

154,422,695

 

 

30,138,189

 

 

 

 

 

 

 

 

 

Net increase in cash

 

1,333,000

 

 

11,819

Cash, beginning of period

 

449,912

 

 

 -  

Cash, end of period

$

1,782,912

 

$

11,819

 

 

 

 

 

 

 

 

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

Deferred offering expenses charged to shareholders' equity

$

 -  

 

$

495,890

 

Reinvestment of shareholder distributions

$

5,129,582

 

$

213,150

 

Shareholders' distributions payable

$

 -  

 

$

221,052

 

 

 

 

 

 

 

 

 

(1) See Note 7 for a discussion of the Company’s total return swap agreement.

(2) See Note 4 for a discussion of expense reimbursements from IIG and recoupment of expense reimbursements.

(3) See Note 5 for a discussion of the sources of distributions paid by the Company.

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


 

CĪON Investment Corporation

Consolidated Schedule of Investments

June 30, 2014

(unaudited)

 

Portfolio Company(a)

 

Index Rate(b)

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair

Value(c)

Senior Secured First Lien Term Loans - 24.8%

 

 

 

 

 

 

 

 

 

 

 

ABRA, Inc., L+600, 1.25% LIBOR Floor, 5/10/2018

 

3 Month LIBOR

 

Automotive

 

$

 8,427,849  

 

$

 8,369,671  

 

$

 8,427,848  

 

Accruent, LLC, L+450, 1.25% LIBOR Floor, 11/25/2019

 

3 Month LIBOR

 

High Tech Industries

 

 

 4,477,500  

 

 

 4,467,329  

 

 

 4,466,306  

 

Collision Holding Company, LLC, L+775, 1.25% LIBOR Floor, 5/10/2018

 

3 Month LIBOR

 

Automotive

 

 

 1,568,044  

 

 

 1,553,878  

 

 

 1,568,044  

 

Distribution International, Inc., L+650, 1.00% LIBOR Floor, 7/16/2019

 

3 Month LIBOR

 

Construction & Building

 

 

 2,475,000  

 

 

 2,457,835  

 

 

 2,481,188  

 

ECI Acquisition Holdings, Inc., L+625, 1.00% LIBOR Floor, 3/11/2019(d)

 

3 Month LIBOR

 

High Tech Industries

 

 

 8,255,310  

 

 

 8,207,406  

 

 

 8,214,033  

 

F+W Media, Inc., L+650, 1.25% LIBOR Floor, 6/30/2019

 

3 Month LIBOR

 

Media: Diversified & Production

 

 

 9,609,642  

 

 

 9,251,268  

 

 

 9,609,642  

 

ILC Industries, LLC, L+650, 1.50% LIBOR Floor, 7/11/2018

 

1 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

 4,259,911  

 

 

 4,273,872  

 

 

 4,270,561  

 

Infogroup Inc., L+600, 1.50% LIBOR Floor, 5/26/2018(e)

 

3 Month LIBOR

 

Media: Advertising, Printing & Publishing

 

 

 4,583,042  

 

 

 4,324,225  

 

 

 4,328,134  

 

SK Spice S.Á.R.L, L+825, 1.25% LIBOR Floor, 9/30/2018(f)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

 1,766,652  

 

 

 1,732,343  

 

 

 1,786,526  

 

Smile Brands Group, Inc., L+625, 1.25% LIBOR Floor, 8/16/2019(e)

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

 5,359,500  

 

 

 5,258,185  

 

 

 5,185,316  

 

Sprint Industrial Holdings, LLC, L+575, 1.25% LIBOR Floor, 5/14/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

 1,449,240  

 

 

 1,438,494  

 

 

 1,460,110  

 

Survey Sampling International, LLC, L+450, 1.00% LIBOR Floor, 12/12/2019

 

3 Month LIBOR

 

Services: Business

 

 

 3,229,688  

 

 

 3,199,843  

 

 

 3,213,539  

 

TOPPS Company, Inc., L+600, 1.25% LIBOR Floor, 10/2/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

 2,099,450  

 

 

 2,063,029  

 

 

 2,057,461  

 

Travel Leaders Group, LLC, L+600, 1.00% LIBOR Floor, 12/5/2018

 

3 Month LIBOR

 

Services: Consumer

 

 

 4,777,500  

 

 

 4,516,693  

 

 

 4,771,528  

 

Trimark USA, LLC, L+625, 1.00% LIBOR Floor, 5/11/2019

 

1 Month LIBOR

 

Beverage, Food & Tobacco

 

 

 4,987,500  

 

 

 4,940,264  

 

 

 4,999,969  

 

US Joiner Holding Company, L+600, 1.00% LIBOR Floor, 4/16/2020

 

3 Month LIBOR

 

Capital Equipment

 

 

 9,975,000  

 

 

 9,829,318  

 

 

 9,950,063  

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

 

 

 75,883,653  

 

 

 76,790,268  

Senior Secured Second Lien Term Loans - 32.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active Network, Inc., L+850, 1.00% LIBOR Floor, 11/15/2021

 

3 Month LIBOR

 

High Tech Industries

 

 

 2,647,347  

 

 

 2,634,897  

 

 

 2,657,274  

 

American Residential Services LLC, L+800, 1.00% LIBOR Floor, 12/31/2021(e)

 

3 Month LIBOR

 

Construction & Building

 

 

 3,700,000  

 

 

 3,663,000  

 

 

 3,663,000  

 

Camp International Holding Company, L+725, 1.00% LIBOR Floor, 11/30/2019

 

1 Month LIBOR

 

Services: Business

 

 

 2,029,000  

 

 

 2,029,000  

 

 

 2,074,653  

 

Chief Exploration & Development LLC, P+550, 2.00% Rate Floor, 5/16/2021

 

PRIME

 

Energy: Oil & Gas

 

 

 5,940,000  

 

 

 5,880,875  

 

 

 6,088,500  

 

Dialysis Newco, Inc., L+675, 1.00% LIBOR Floor, 10/22/2021

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

 7,200,000  

 

 

 7,171,491  

 

 

 7,254,000  

 

Drew Marine Group, Inc., L+700, 1.00% LIBOR Floor, 5/19/2021(f)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

 5,000,000  

 

 

 5,003,164  

 

 

 5,075,000  

 

Elements Behavioral Health, Inc., L+825, 1.00% LIBOR Floor, 2/11/2020

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

 5,000,000  

 

 

 4,952,624  

 

 

 4,950,000  

 

Emerald 3 Limited, L+700, 1.00% LIBOR Floor, 5/16/2022(e)(f)

 

3 Month LIBOR

 

Environmental Industries

 

 

 5,000,000  

 

 

 4,950,000  

 

 

 4,993,750  

 

GCA Services Group, Inc., L+800, 1.25% LIBOR Floor, 11/1/2020

 

3 Month LIBOR

 

Services: Consumer

 

 

 800,000  

 

 

 796,537  

 

 

 811,500  

 

Genex Holdings, Inc., L+775, 1.00% LIBOR Floor, 5/30/2022(e)

 

1 Month LIBOR

 

Services: Business

 

 

 7,910,000  

 

 

 7,868,400  

 

 

 7,994,044  

 

Global Tel*Link Corporation, L+775, 1.25% LIBOR Floor, 11/23/2020(e)

 

3 Month LIBOR

 

Services: Business

 

 

 5,500,000  

 

 

 5,480,022  

 

 

 5,481,658  

 

H.D. Vest, Inc., L+800, 1.25% LIBOR Floor, 6/18/2019

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

 854,000  

 

 

 845,119  

 

 

 845,460  

 

Institutional Shareholder Services Inc., L+750, 1.00% LIBOR Floor, 4/30/2022

 

3 Month LIBOR

 

Services: Business

 

 

 3,860,000  

 

 

 3,821,744  

 

 

 3,893,775  

 

Landslide Holdings, Inc., L+725, 1.00% LIBOR Floor, 2/25/2021

 

3 Month LIBOR

 

Services: Business

 

 

 7,330,121  

 

 

 7,342,178  

 

 

 7,372,892  

 

Learfield Communications, Inc., L+775, 1.00% LIBOR Floor, 10/9/2021

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

 1,417,333  

 

 

 1,403,881  

 

 

 1,446,565  

 

Mergermarket USA, Inc., L +650, 1.00% LIBOR Floor, 2/4/2022(f)

 

3 Month LIBOR

 

Services: Business

 

 

 2,000,000  

 

 

 1,990,011  

 

 

 1,983,760  

 

MSC.Software Corporation, L+750, 1.00% LIBOR Floor, 5/29/2021

 

3 Month LIBOR

 

High Tech Industries

 

 

 6,820,000  

 

 

 6,752,287  

 

 

 6,888,200  

 

Securus Technologies Holdings, Inc., L+775, 1.25% LIBOR Floor, 4/30/2021

 

3 Month LIBOR

 

Telecommunications

 

 

 3,500,000  

 

 

 3,464,558  

 

 

 3,543,750  

 

SI Organization, Inc., L+800, 1.00% LIBOR Floor, 5/23/2020(e)

 

3 Month LIBOR

 

Services: Business

 

 

 1,511,000  

 

 

 1,495,890  

 

 

 1,515,729  

 

SMG, L+825, 1.00% LIBOR Floor, 2/27/2021

 

3 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

 6,220,000  

 

 

 6,220,000  

 

 

 6,328,850  

 

TASC, Inc, 12.00%, 5/23/2021

 

None

 

Services: Business

 

 

 3,141,620  

 

 

 2,985,722  

 

 

 3,110,204  

 

Tectum Holdings, Inc., P+700, 2.00% Base Rate Floor, 3/12/2019

 

PRIME

 

Automotive

 

 

 4,650,000  

 

 

 4,627,170  

 

 

 4,638,375  

 

Telecommunications Management, LLC, L+800, 1.00% LIBOR Floor, 10/30/2020

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

 675,178  

 

 

 670,280  

 

 

 682,774  

 

Trimark USA, LLC, L+900, 1.00% LIBOR Floor, 8/12/2019

 

3 Month LIBOR

 

Beverage, Food & Tobacco

 

 

 5,000,000  

 

 

 4,904,871  

 

 

 5,050,000  

 

Winebow Holdings, Inc., L+750, 1.00% LIBOR Floor, 1/2/2022(e)

 

1 Month LIBOR

 

Beverage, Food & Tobacco

 

 

 1,724,489  

 

 

 1,711,555  

 

 

 1,728,800  

 

WP CPP Holdings, LLC, L+775, 1.00% LIBOR Floor, 4/30/2021

 

3 Month LIBOR

 

Aerospace & Defense

 

 

 1,435,000  

 

 

 1,428,489  

 

 

 1,452,041  

Total Senior Secured Second Lien Term Loans

 

 

 

 

 

 

 

 

 

 100,093,765  

 

 

 101,524,554  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5


 

CĪON Investment Corporation

Consolidated Schedule of Investments

June 30, 2014

(unaudited)

 

Portfolio Company(a)

 

Index Rate(b)

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair

Value(c)

Collateralized Securities - 9.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank AG Frankfurt CRAFT 2013-1A Class Credit Linked Note, L+925, 4/17/2020(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

2,000,000

 

 

2,038,862

 

 

2,035,000

 

Deutsche Bank AG Frankfurt CRAFT 2013-1X Class Credit Linked Note, L+925, 4/17/2020(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

610,000

 

 

620,443

 

 

620,675

 

Deutsche Bank AG Frankfurt CRAFT 2014-1 Class Credit Linked Note, L+965, 5/15/2019(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

5,400,000

 

 

5,400,000

 

 

5,400,000

 

Great Lakes CLO 2014-1, Ltd. Class E Notes, L+525, 4/15/2025(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

5,000,000

 

 

4,498,525

 

 

4,500,000

 

Ivy Hill Middle Market Credit Fund VII, Ltd. Class E Notes, L+565, 10/20/2025(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

2,000,000

 

 

1,855,959

 

 

1,900,000

 

Ivy Hill Middle Market Credit Fund VII, Ltd. Subordinated Notes, Residual, 10/20/2025(f)

 

N/A

 

Diversified Financials

 

 

2,000,000

 

 

1,899,972

 

 

1,863,600

 

JFIN CLO 2014, Ltd. Class E Notes, L+500, 4/20/2025(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

2,500,000

 

 

2,298,095

 

 

2,250,000

 

JPMorgan Chase Bank, N.A. Credit Link Note, L+1,225, 12/20/2021

 

3 Month LIBOR

 

Diversified Financials

 

 

5,000,000

 

 

5,000,000

 

 

5,029,500

 

NXT Capital CLO 2014-1, LLC, Class E Notes, L+550, 4/23/2026(f)

 

3 Month LIBOR

 

Diversified Financials

 

 

7,500,000

 

 

6,984,993

 

 

6,978,547

Total Collateralized Securities

 

 

 

 

 

 

 

 

 

30,596,849

 

 

30,577,322

Short Term Investments - 12.5%(g)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First American Treasury Obligations Fund, Class Z Shares(h)

 

 

 

 

 

 

 38,395,666  

 

 

 38,395,666  

 

 

38,395,666

Total Short Term Investments

 

 

 

 

 

 

 

 

 

 38,395,666  

 

 

38,395,666

TOTAL INVESTMENTS - 80.0%

 

 

 

 

 

 

 

 

$

 244,969,933  

 

$

247,287,810

OTHER ASSETS IN EXCESS OF LIABILITIES - 20.0%

 

 

 

 

 

 

 

 

 

 

 

$

61,799,895

NET ASSETS - 100%

 

 

 

 

 

 

 

 

 

 

 

$

309,087,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL RETURN SWAP - 0.5%

 

 

 

 

 

Notional

Amount

 

 

 

 

Unrealized Appreciation

 

Citibank TRS Facility (see Note 7)

 

 

 

 

 

$

 275,947,739  

 

 

 

 

$

 1,571,894  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, as amended, or the 1940 Act, except for investments specifically identified as non-qualifying per note (f) below. The Company does not control and is not an affiliate of any of the portfolio companies in its investment portfolio.

(b)

The 1 and 3 month London Interbank Offered Rate, or LIBOR, rates were 0.16% and 0.23%, respectively, as of June 30, 2014. The prime rate was 3.25% as of June 30, 2014. The applicable LIBOR rate as of June 30, 2014 for the loan listed may not be the applicable LIBOR rate, as the loan may have been priced or repriced based on a LIBOR rate prior to June 30, 2014.

(c)

Fair value determined by the Company’s board of directors (see Note 8).

(d)

The Company is committed to fund an additional $1,724,000 as of June 30, 2014 and August 11, 2014 (see Note 6 and Note 10).

(e)

Position or portion thereof unsettled as of June 30, 2014.

(f)

The investment is not a qualifying asset under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of that company’s total assets as defined under Section 55 of the 1940 Act. As of June 30, 2014, 87.3% of the Company’s total assets represented qualifying assets. In addition, as described in Note 7, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 79.4% of the Company’s total assets represented qualifying assets as of June 30, 2014.

(g)

Short term investments represent an investment in a fund that invests in highly liquid investments with original maturity dates of three months or less.

(h)

Effective yield as of June 30, 2014 is <0.01%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


 

CĪON Investment Corporation

Consolidated Schedule of Investments

December 31, 2013

 

Portfolio Company(a)

 

Index Rate(b)

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair

Value(c)

Senior Secured First Lien Term Loans - 42.7%

 

 

 

 

 

 

 

 

 

 

 

ABRA, Inc., L+600, 1.25% LIBOR Floor, 5/10/2018(d)

 

3 Month LIBOR

 

Automotive

 

$

5,980,924

 

$

5,921,292

 

$

5,921,115

 

Captive Resources Midco, LLC, L+550, 1.25% LIBOR Floor, 10/31/2018

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

987,500

 

 

972,809

 

 

987,500

 

CHI Overhead Doors, L+425, 1.25% LIBOR Floor, 3/18/2019

 

3 Month LIBOR

 

Construction & Building

 

 

936,944

 

 

932,772

 

 

938,701

 

Collision Holding Company, LLC, L+775, 1.25% LIBOR Floor, 5/10/2018

 

3 Month LIBOR

 

Automotive

 

 

1,568,127

 

 

1,552,492

 

 

1,552,445

 

Custom Ecology, Inc., L+550, 1.25% LIBOR Floor, 6/26/2019

 

3 Month LIBOR

 

Environmental Industries

 

 

1,900,450

 

 

1,882,554

 

 

1,909,952

 

Distribution International, Inc., L+650, 1.00% LIBOR Floor, 7/16/2019

 

3 Month LIBOR

 

Construction & Building

 

 

2,487,500

 

 

2,468,327

 

 

2,476,555

 

F+W Media, Inc., L+650, 1.25% LIBOR Floor, 6/30/2019

 

3 Month LIBOR

 

Media: Diversified & Production

 

 

1,990,000

 

 

1,839,629

 

 

1,920,350

 

Fender Musical Instruments Corp., L+450, 1.25% LIBOR Floor, 4/3/2019

 

6 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

447,500

 

 

443,456

 

 

455,193

 

H.D. Vest, Inc., L+450, 1.25% LIBOR Floor, 12/18/2018

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

597,438

 

 

593,254

 

 

594,450

 

ILC Industries, LLC, L+650, 1.50% LIBOR Floor, 7/11/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

4,456,187

 

 

4,471,616

 

 

4,467,327

 

Landslide Holdings, Inc., L+425, 1.00% LIBOR Floor, 8/9/2019

 

3 Month LIBOR

 

Services: Business

 

 

2,449,690

 

 

2,426,101

 

 

2,469,594

 

Merrill Corp., L+625, 1.00% LIBOR Floor, 3/8/2018

 

1 Month LIBOR

 

Services: Business

 

 

649,021

 

 

643,301

 

 

661,729

 

National Surgical Hospitals, Inc., L+450, 1.25% LIBOR Floor, 8/1/2019

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

3,491,250

 

 

3,456,338

 

 

3,526,163

 

Packaging Coordinators, Inc., L+425, 1.25% LIBOR Floor, 5/10/2020

 

6 Month LIBOR

 

Containers, Packaging & Glass

 

 

1,500,000

 

 

1,492,500

 

 

1,500,000

 

Plano Molding Co., Inc., L+425, 1.00% LIBOR Floor, 10/11/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

2,500,000

 

 

2,484,517

 

 

2,500,000

 

Prowler Acquisition Corp., L+475, 1.25% LIBOR Floor, 3/19/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

1,925,000

 

 

1,905,750

 

 

1,915,375

 

SK Spice S.Á.R.L, L+825, 1.25% LIBOR Floor, 9/30/2018(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

1,775,550

 

 

1,740,993

 

 

1,760,014

 

Smile Brands Group, Inc., L+625, 1.25% LIBOR Floor, 8/16/2019

 

12 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

4,987,500

 

 

4,892,609

 

 

4,931,391

 

Sprint Industrial Holdings, LLC, L+575, 1.25% LIBOR Floor, 5/14/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

1,194,000

 

 

1,182,670

 

 

1,208,925

 

Survey Sampling International, LLC, L+450, 1.00% LIBOR Floor, 12/12/2019

 

3 Month LIBOR

 

Services: Business

 

 

9,250,000

 

 

9,158,059

 

 

9,157,500

 

The TOPPS Company, Inc., L+600, 1.25% LIBOR Floor, 10/2/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

2,110,000

 

 

2,068,064

 

 

2,104,725

 

Travel Leaders Group, LLC, L+600, 1.00% LIBOR Floor, 12/5/2018

 

3 Month LIBOR

 

Services: Consumer

 

 

4,900,000

 

 

4,607,683

 

 

4,814,250

 

Wastequip, LLC, L+450, 1.00% LIBOR Floor, 8/9/2019

 

6 Month LIBOR

 

Capital Equipment

 

 

2,985,000

 

 

2,970,869

 

 

3,014,850

 

Westway Group, L+400, 1.00% LIBOR Floor, 2/27/2020

 

6 Month LIBOR

 

Services: Business

 

 

992,500

 

 

988,030

 

 

999,326

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

 

 

61,095,685

 

 

61,787,430

Senior Secured Second Lien Term Loans - 15.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Active Network, Inc., L+850, 1.00% LIBOR Floor, 11/15/2021

 

3 Month LIBOR

 

High Tech Industries

 

 

2,820,000

 

 

2,805,900

 

 

2,876,400

 

Camp International Holding Company, L+725, 1.00% LIBOR Floor, 11/30/2019

 

1 Month LIBOR

 

Services: Business

 

 

2,029,000

 

 

2,029,000

 

 

2,073,384

 

Centaur Gaming, L+750, 1.25% LIBOR Floor, 2/20/2020

 

6 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

500,000

 

 

495,297

 

 

515,000

 

Digital Insight Corporation, L+775, 1.00% LIBOR Floor, 10/16/2020

 

3 Month LIBOR

 

Services: Business

 

 

385,000

 

 

381,237

 

 

393,181

 

Drew Marine Group, Inc., L+700, 1.00% LIBOR Floor, 5/19/2021(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

5,000,000

 

 

5,003,467

 

 

5,037,500

 

GCA Services Group, Inc., L+800, 1.25% LIBOR Floor, 11/1/2020

 

6 Month LIBOR

 

Services: Consumer

 

 

800,000

 

 

796,341

 

 

813,876

 

H.D. Vest, Inc., L+800, 1.25% LIBOR Floor, 6/18/2019

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

854,000

 

 

844,079

 

 

845,460

 

Healogics, Inc., L+800, 1.25% LIBOR Floor, 2/5/2020

 

6 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

500,000

 

 

495,426

 

 

511,250

 

Learfield Communications, Inc., L+775, 1.00% LIBOR Floor, 10/9/2021

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

1,417,333

 

 

1,403,174

 

 

1,452,766

 

LTS Buyer, LLC, L+675, 1.25% LIBOR Floor, 4/12/2021

 

6 Month LIBOR

 

Telecommunications

 

 

500,000

 

 

495,233

 

 

505,835

 

Securus Technologies Holdings, Inc., L+775, 1.25% LIBOR Floor, 4/30/2021(f)

 

3 Month LIBOR

 

Telecommunications

 

 

3,500,000

 

 

3,461,450

 

 

3,467,205

 

SESAC Holdco II, LLC, L+875, 1.25% LIBOR Floor, 8/8/2019

 

1 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

1,500,000

 

 

1,522,110

 

 

1,537,500

 

Sprint Industrial Holdings, LLC, L+1,000, 1.25% LIBOR Floor, 11/14/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

500,000

 

 

490,421

 

 

505,000

 

Telecommunications Management, LLC, L+800, 1.00% LIBOR Floor, 10/30/2020

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

543,290

 

 

538,266

 

 

554,156

 

WP CPP Holdings, LLC, L+775, 1.00% LIBOR Floor, 4/30/2021

 

3 Month LIBOR

 

Aerospace & Defense

 

 

1,435,000

 

 

1,427,930

 

 

1,463,701

Total Senior Secured Second Lien Term Loans

 

 

 

 

 

 

 

 

 

22,189,331

 

 

22,552,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

7


 

CĪON Investment Corporation

Consolidated Schedule of Investments

December 31, 2013

 

Portfolio Company(a)

 

Index Rate(b)

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair

Value(c)

Collateralized Securities - 6.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ivy Hill Middle Market Credit Fund VII, Ltd. Class E Notes, L+565, 10/20/2025(e)

 

3 Month LIBOR

 

Diversified Financials

 

 

2,000,000

 

 

1,850,000

 

 

 1,850,000  

 

Ivy Hill Middle Market Credit Fund VII, Ltd. Subordinated Notes, Residual, 10/20/2025(e)

 

N/A

 

Diversified Financials

 

 

2,000,000

 

 

1,896,000

 

 

 1,945,600  

 

JPMorgan Chase Bank, N.A. Credit Link Note, L+1,225, 12/20/2021(e)

 

3 Month LIBOR

 

Diversified Financials

 

 

5,000,000

 

 

5,000,000

 

 

 5,000,000  

Total Collateralized Securities

 

 

 

 

 

 

 

 

 

8,746,000

 

 

 8,795,600  

Short Term Investments - 7.9%(g)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First American Treasury Obligations Fund, Class Z Shares(h)

 

 

 

 

 

 

11,383,669

 

 

11,383,669

 

 

 11,383,669  

Total Short Term Investments

 

 

 

 

 

 

 

 

 

11,383,669

 

 

 11,383,669  

TOTAL INVESTMENTS - 72.3%

 

 

 

 

 

 

 

 

$

103,414,685

 

$

 104,518,913  

OTHER ASSETS IN EXCESS OF LIABILITIES - 27.7%

 

 

 

 

 

 

 

 

 

 

 

$

 40,051,572  

NET ASSETS - 100%

 

 

 

 

 

 

 

 

 

 

 

$

 144,570,485  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL RETURN SWAP - 1.1%

 

 

 

 

 

Notional

Amount

 

 

 

 

Unrealized Appreciation

 

Citibank TRS Facility (see Note 7)

 

 

 

 

 

$

148,199,937

 

 

 

 

$

 1,548,617  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the 1940 Act, except for investments specifically identified as non-qualifying per note (e) below. The Company does not control and is not an affiliate of any of the portfolio companies in its investment portfolio.

(b)

The 1, 3, 6 and 12 month LIBOR rates were 0.17%, 0.25%, 0.35% and 0.58%, respectively, as of December 31, 2013. The applicable LIBOR rate as of December 31, 2013 for the loan listed may not be the applicable LIBOR rate, as the loan may have been priced or repriced based on a LIBOR rate prior to December 31, 2013.

(c)

Fair value determined by the Company’s board of directors (see Note 8).

(d)

The Company is committed to fund an additional $2,450,758 as of December 31, 2013 (see Note 6 and Note 10). The Company is committed to fund an additional $1,330,667 as of March 7, 2014.

(e)

The investment is not a qualifying asset under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of that company’s total assets as defined under Section 55 of the 1940 Act. As of December 31, 2013, 88.2% of the Company’s total assets represented qualifying assets. In addition, as described in Note 7, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 76.1% of the Company’s total assets represented qualifying assets as of December 31, 2013.

(f)

Position or portion thereof unsettled as of December 31, 2013.

(g)

Short term investments represent an investment in a fund that invests in highly liquid investments with original maturity dates of three months or less.

(h)

Effective yield as of December 31, 2013 is <0.01%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

8


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Note 1. Organization and Principal Business

 

CĪON Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on August 9, 2011. On December 17, 2012, the Company successfully raised gross proceeds from unaffiliated outside investors of at least $2,500,000, or the minimum offering requirement, and commenced operations. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the 1940 Act. The Company elected to be treated for federal income tax purposes as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.

The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. The Company’s portfolio is comprised primarily of investments in senior secured loans and, to a lesser extent, second lien loans, collateralized loan obligations and long-term subordinated loans, referred to as mezzanine loans, of private and thinly traded U.S. middle-market companies.

The Company is managed by CĪON Investment Management, LLC, or CIM, a registered investment adviser and an affiliate of the Company. CIM oversees the management of the Company’s activities and is responsible for making investment decisions for the Company’s investment portfolio. The Company and CIM have engaged Apollo Investment Management, L.P., or AIM, a subsidiary of Apollo Global Management, LLC, or, together with its subsidiaries, Apollo, a leading global alternative investment manager, to act as the Company’s investment sub-adviser.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of December 31, 2013 and for the year then ended included in the Company’s Annual Report on Form 10-K. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. The consolidated balance sheet and the consolidated schedule of investments as of December 31, 2013 are derived from the 2013 audited consolidated financial statements.

The Company evaluates subsequent events through the date that the consolidated financial statements are issued.

Certain reclassifications have been made to the accompanying consolidated financial statements in prior periods to conform to the current period presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less. The Company’s cash and cash equivalents are held principally at one financial institution and at times may exceed insured limits. The Company periodically evaluates the creditworthiness of this institution and has not experienced any losses on such deposits.

Short Term Investments

Short term investments include an investment in a U.S. Treasury Obligations Fund, which seeks to provide current income and daily liquidity by purchasing U.S. Treasury securities and repurchase agreements that are collateralized by such securities. The Company had $38,395,666 and $11,383,669 of such investments at June 30, 2014 and December 31, 2013, respectively, which are included in investments, at fair value on the accompanying consolidated balance sheets and on the consolidated schedule of investments.

Organization Costs and Offering Expenses

Organization costs include, among other things, the cost of organizing the Company as a Maryland corporation, including the cost of legal services and other fees pertaining to the organization of the Company. All organization costs have been funded by IIG and its affiliates, and there is no liability for these organization costs to the Company until IIG and its affiliates submit such costs for reimbursement. The Company will expense organization costs when incurred, if and when IIG and its affiliates submit such costs for reimbursement.

Offering expenses include, among other things, legal fees and other costs pertaining to the preparation of the Company’s registration statement in connection with the continuous public offering of the Company’s shares. Certain offering expenses have been funded by IIG and its

 

9


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

affiliates, and there is no liability for these offering expenses to the Company until IIG and its affiliates submit such costs for reimbursement. Upon meeting the minimum offering requirement on December 17, 2012, the Company incurred and capitalized offering expenses of $1,000,000 that were submitted for reimbursement by IIG (see Note 4). These expenses were fully amortized over a twelve month period as an adjustment to capital in excess of par value. The Company will expense any additional offering expenses incurred by IIG and its affiliates if and when IIG and its affiliates submit such costs for reimbursement.

The following table summarizes organization costs and offering expenses incurred by IIG and by the Company from January 31, 2012 (Inception) through June 30, 2014:

 

 

 

 

Organization Costs and Offering Expenses Incurred by IIG

Period

 

Organization Costs

 

Offering Expenses

 

Other Pre-Effective Costs(5)

 

Total

Year Ended

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012(1)

 

$

191,717

 

$

1,619,621

 

$

200,507

 

$

2,011,845

December 31, 2013

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

June 30, 2014

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

Total

 

 

191,717

 

 

1,619,621

 

 

200,507

 

 

2,011,845

Expenses submitted for reimbursement by IIG(2)

 

 

 -  

 

 

(1,591,475)

 

 

 -  

 

 

(1,591,475)

Total Unreimbursed Expenses Incurred by IIG

 

$

191,717

 

$

28,146

 

$

200,507

 

$

420,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organization Costs and Offering Expenses Incurred by the Company(3)

Period

 

Organization Costs

 

Offering Expenses

 

Other Pre-Effective Costs(5)

 

Total

Year Ended

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012(1)

 

$

 -  

 

$

29,652

 

$

 -  

 

$

29,652

December 31, 2013

 

 

 -  

 

 

1,786,978

 

 

 -  

 

 

1,786,978

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

 -  

 

 

539,720

 

 

 -  

 

 

539,720

June 30, 2014

 

 

 -  

 

 

448,869

 

 

 -  

 

 

448,869

Total

 

 

 -  

 

 

2,805,219

 

 

 -  

 

 

2,805,219

Expenses reimbursed by the Company(2)

 

 

 -  

 

 

1,591,475

 

 

 -  

 

 

1,591,475

Total Expenses Incurred by the Company

 

$

 -  

 

$

4,396,694

 

$

 -  

 

$

4,396,694

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses paid as of June 30, 2014

 

$

 -  

 

$

4,125,600

 

$

 -  

 

$

4,125,600

Expenses accrued as of June 30, 2014(4)

 

 

 -  

 

 

271,094

 

 

 -  

 

 

271,094

Total Expenses Incurred by the Company

 

$

 -  

 

$

4,396,694

 

$

 -  

 

$

4,396,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Organization costs and offering expenses were incurred from January 31, 2012 (Inception) through December 31, 2012.

(2)

Of this amount, $1,000,000 of expenses charged directly to equity were submitted for reimbursement by IIG on December 17, 2012, and $591,475 of expenses charged directly to general and administrative expense were submitted for reimbursement by IIG during the three months ended March 31, 2014.

(3)

Offering expenses incurred directly by the Company are included in general and administrative expense on the consolidated statements of operations.

(4)

Included in accounts payable and accrued expenses on the consolidated balance sheets.

(5)

Represent general and administrative expenses incurred by IIG related to the Company prior to December 17, 2012.

No material organization costs or offering expenses have been incurred by IIG or its affiliates subsequent to June 30, 2014.

 

10


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Income Taxes

The Company elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. To qualify and maintain qualification as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to shareholders, for each taxable year, at least 90% of the Company’s “investment company taxable income”, which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to satisfy the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its shareholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute at least 98.0% of net ordinary income, 98.2% of any capital gains, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes.

Book and tax differences relating to permanent differences are reclassified among the Company’s capital accounts, as appropriate. Additionally, the tax character of distributions is determined in accordance with income tax regulations that may differ from GAAP (see Note 5). During the three and six months ended June 30, 2014, the Company declared distributions of $5,120,083 and $8,434,527, respectively.

Uncertainty in Income Taxes

The Company evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold for the purposes of measuring and recognizing tax liabilities in the consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by the taxing authorities. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of and during the six months ended June 30, 2014 and 2013, the Company did not have any uncertain tax positions.

The Company is subject to examination by U.S. federal, New York State, New York City and Maryland income tax jurisdictions for 2012.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may materially differ from those estimates.

Valuation of Portfolio Investments

The fair value of the Company’s investments is determined quarterly in good faith by the Company’s board of directors pursuant to its consistently applied valuation procedures and valuation process. Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC 820, defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as observable inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s investments as of June 30, 2014, excluding short term investments,  consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investments. Except as described below, for each investment, CIM will attempt to obtain the most recent closing public market price. If no sales of such investment occurred on the determination date, such investment will be valued at the midpoint of the “bid” and the “ask” price at the close of business on such day. Portfolio securities that carry certain restrictions on sale will typically be consistently valued at a discount from the public market value of the security.

 

11


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The Company values its total return swap, or TRS, in accordance with the agreements between Flatiron Funding, LLC, or Flatiron, and Citibank, N.A., or Citibank, which collectively establish the TRS, or TRS Agreement. Pursuant to the TRS Agreement, the fair value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation primarily on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect a price that market participants may be willing to pay for an investment. These valuations are sent to the Company for review and testing. The Company reviews and approves the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of the quarterly valuation process. To the extent the Company has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuations will be discussed or challenged pursuant to the terms of the TRS Agreement. As a result of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that the total fair value of the TRS should be classified as Level 3 within the fair value hierarchy. If the Company owns identical investments in its investment portfolio and through the TRS, the Company utilizes the TRS pricing for consistency. For additional information on the TRS, see Note 7.

Notwithstanding the foregoing, if in the reasonable judgment of CIM, the price of any securities held by the Company and determined in the manner described above does not accurately reflect the fair value of such security, CIM will value such security at a price that reflects such security’s fair value and report such change in the valuation to the board of directors or its designee as soon as practicable.

Any securities or other assets that are not publicly traded or for which a market price is not otherwise readily available will be valued at a price that reflects its fair value. With respect to such investments, the investments will be reviewed and valued using one or more of the following types of analyses:

                     i.         Market comparable statistics and public trading multiples discounted for illiquidity, minority ownership and other factors for companies with similar characteristics.

                    ii.         Valuations implied by third-party investments in the applicable portfolio companies.

                  iii.         Discounted cash flow analysis, including a terminal value or exit multiple.

Determination of fair value involves subjective judgments and estimates. Accordingly, these notes to the Company’s consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the Company’s consolidated financial statements. Below is a description of factors that the Company’s board of directors may consider when valuing the Company’s equity and debt investments where a market price is not readily available:

·         the size and scope of a portfolio company and its specific strengths and weaknesses;

·         prevailing interest rates for like securities;

·         expected volatility in future interest rates;

·         leverage; 

·         call features, put features and other relevant terms of the debt;

·         the borrower’s ability to adequately service its debt;

·         the fair market value of the portfolio company in relation to the face amount of its outstanding debt;

·         the quality of collateral securing the Company’s debt investments;

·         multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in some cases, book value or liquidation value; and

·         other factors deemed applicable.

 

All of these factors may be subject to adjustment based upon the particular circumstances of a portfolio company or the Company’s actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners, or acquisition, recapitalization, and restructuring expenses or other related or non-recurring items. The choice of analyses and the weight assigned to such factors may vary across investments and may change within an investment if events occur that warrant such a change.

 

Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.

The Company periodically benchmarks the “bid” and “ask” prices it receives from the third-party pricing services against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However,

 

12


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 2 or Level 3 within the fair value hierarchy.

Due to the uncertainty inherent in the valuation process, particularly for Level 2 and Level 3 investments, such fair value estimates may differ materially from the values that would have been used had an active market for the securities existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that the Company ultimately realizes on these investments to materially differ from the valuations currently assigned.  

Revenue Recognition

Securities transactions are accounted for on the trade date. The Company records interest and dividend income on an accrual basis beginning on the trade settlement date or the ex-dividend date, respectively, to the extent that the Company expects to collect such amounts. Loan origination fees, original issue discounts, and market discounts/premiums are recorded and such amounts are amortized as adjustments to interest income over the respective term of the loan using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income. The Company records prepayment premiums on loans and debt securities as interest income when it receives such amounts.

The Company may have investments in its investment portfolio that contain a paid-in-kind, or PIK, interest provision. Any PIK interest will be added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain RIC status, substantially all of this income must be paid out to shareholders in the form of distributions, even if the Company has not collected any cash.

Loans and debt securities, including those that are individually identified as being impaired under Accounting Standards Codification 310 - Receivables, or ASC 310, are generally placed on nonaccrual status immediately if, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the debt agreement, or when principal or interest is past due 90 days or more. Interest accrued but not collected at the date a loan or security is placed on nonaccrual status is reversed against interest income. Interest income is recognized on nonaccrual loans or debt securities only to the extent received in cash. How­ever, where there is doubt regarding the ultimate collectibility of principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the carrying value of the loan or debt security. Loans or securities are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

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

Gains or losses on the sale of investments are calculated by using the weighted-average method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the weighted-average amortized cost of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Derivative Instrument

The Company’s only derivative instrument is the TRS. The Company marks its derivative to market through net change in unrealized (depreciation) appreciation on total return swap in the consolidated statements of operations. For additional information on the TRS, see Note 7.

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory agreement the Company entered into with CIM, the incentive fee on capital gains earned on liquidated investments of the Company’s investment portfolio during operations is determined and payable in arrears as of the end of each calendar year. Such fee equals 20% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of 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 gains incentive fees. On a cumulative basis and to the extent that all realized capital losses and unrealized capital depreciation exceed realized capital gains as well as the aggregate realized net capital gains for which a fee has previously been paid, the Company would not be required to pay CIM a capital gains incentive fee. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

CIM has not taken any incentive fees with respect to the Company’s TRS to date. For purposes of computing the capital gains incentive fee, CIM will become entitled to a capital gains incentive fee only upon the termination or disposition of the TRS, at which point all net gains and losses of the underlying loans constituting the reference assets of the TRS will be realized. For purposes of computing the subordinated incentive fee on income, CIM is not entitled to a subordinated incentive fee on income with respect to the TRS. Any unrealized gains on the TRS are reflected in total assets on the Company’s consolidated balance sheets and included in the computation of the base management fee.

 

13


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

While the investment advisory agreement with CIM neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of the American Institute for Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company accrues capital gains incentive fees on unrealized gains. This accrual reflects the incentive fees that would be payable to CIM if the Company’s entire investment portfolio was liquidated at its fair value as of the balance sheet date even though CIM is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Net Increase in Net Assets per Share

Net increase in net assets per share is calculated based upon the daily weighted average number of shares of common stock outstanding during the reporting period.

Distributions

Distributions to shareholders are recorded as of the record date. The amount to be paid as a distribution is determined by the board of directors on a monthly basis. Net realized capital gains, if any, are distributed at least annually.

 

Note 3. Share Transactions

The following table summarizes transactions with respect to shares of the Company’s common stock during the six months ended June 30, 2014 and 2013:

 

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

 

 

 

Shares

 

Amount

 

Shares

 

Amount

Gross shares/proceeds from the offering

 

 

16,897,905

 

$

174,102,106

 

 

3,330,978

 

$

33,565,552

Reinvestment of distributions

 

 

546,068

 

 

5,129,582

 

 

21,988

 

 

213,150

Total gross shares/proceeds

 

 

17,443,973

 

 

179,231,688

 

 

3,352,966

 

 

33,778,702

Sales commissions and dealer manager fees

 

 

 -  

 

 

(15,432,857)

 

 

 -  

 

 

(3,038,387)

 

Net shares/proceeds from the offering

 

 

17,443,973

 

 

163,798,831

 

 

3,352,966

 

 

30,740,315

Share repurchase program

 

 

(4,881)

 

 

(45,905)

 

 

 -  

 

 

 -  

 

Net shares/proceeds from share transactions

 

 

17,439,092

 

$

163,752,926

 

 

3,352,966

 

$

30,740,315

 

During the six months ended June 30, 2014 and 2013, the Company sold 17,443,973 and 3,352,966 shares, respectively, at an average price per share of $10.27 and $10.07, respectively.

 

The proceeds from the reinvestment of shareholder distributions are included in the gross proceeds from the Company’s offering for purposes of determining the total amount of organization costs and offering expenses that can be paid by the Company (see Note 4).

 

As of June 30, 2014, the Company sold 32,949,270 shares of common stock for net proceeds of $336,318,008 at an average price per share of $10.21. The net proceeds include gross proceeds received from reinvested shareholder distributions of $6,672,596, for which the Company issued 708,948 shares of common stock, and gross proceeds paid for shares of common stock tendered for repurchase of $45,905, for which the Company repurchased 4,881 shares of common stock.

 

During the period from July 1, 2014 to August 11, 2014, the Company sold 4,032,022 shares of common stock for net proceeds of $41,495,280 at an average price per share of $10.29. The net proceeds include gross proceeds received from reinvested shareholder distributions of $1,327,420, for which the Company issued 141,157 shares of common stock, and gross proceeds paid for shares of common stock tendered for repurchase of $146,826, for which the Company repurchased 15,611 shares of common stock.

 

Since commencing its continuous public offering on July 2, 2012 and through August 11, 2014, the Company sold 36,981,292 shares of common stock for net proceeds of $377,813,288 at an average price per share of $10.22. The net proceeds include gross proceeds received from reinvested shareholder distributions of $8,000,016, for which the Company issued 850,105 shares of common stock, and gross proceeds paid for shares of common stock tendered for repurchase of $192,731, for which the Company repurchased 20,492 shares of common stock.

 

On December 28, 2012, January 31, 2013, March 14, 2013, May 15, 2013, August 15, 2013, and February 4, 2014, the Company’s board of directors increased the public offering price per share of common stock under the Company’s offering to $10.04, $10.13, $10.19, $10.24, $10.32 and $10.45 per share, respectively, to ensure that the associated offering price per share, net of sales commissions and dealer manager fees, equaled or exceeded the net asset value per share on each subsequent subscription closing date and distribution reinvestment date.

 

14


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

 

Share Repurchase Program

 

Beginning in the first quarter of 2014, the Company began offering, and on a quarterly basis thereafter it intends to continue offering, to repurchase shares on such terms as may be determined by the Company’s board of directors in its complete and absolute discretion unless, in the judgment of the independent directors of the Company’s board of directors, such repurchases would not be in the best interests of the Company’s shareholders or would violate applicable law.

 

The Company currently limits the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the issuance of shares pursuant to its second amended and restated distribution reinvestment plan. At the discretion of the Company’s board of directors, it may also use cash on hand, cash available from borrowings and cash from liquidation of investments as of the end of the applicable period to repurchase shares. In addition, the Company limits the number of shares to be repurchased in any calendar year to 15% of the weighted average number of shares outstanding in the prior calendar year, or 3.75% in each quarter, though the actual number of shares that it offers to repurchase may be less in light of the limitations noted above. The Company offers to repurchase such shares at a price equal to 90% of the offering price in effect on each date of repurchase.

 

Any periodic repurchase offers are subject in part to the Company’s available cash and compliance with the BDC and RIC qualification and diversification rules promulgated under the 1940 Act and the Code, respectively. While the Company conducts quarterly tender offers as described above, it is not required to do so and may suspend or terminate the share repurchase program at any time, upon 30 days’ notice.

 

The following table summarizes the share repurchases completed during the six months ended June 30, 2014:

 

Three Months Ended

 

 

Shares Repurchased

 

Percentage of Shares Tendered That Were Repurchased

 

Repurchase Price Per Share

 

Aggregate Consideration for Repurchased Shares

March 31, 2014

 

 

 -  

 

 -  

 

$

 -  

 

$

 -  

June 30, 2014

 

 

4,881

 

100%

 

 

 9.41  

 

 

45,905

Total

 

 

4,881

 

 

 

 

 

 

$

45,905

 

Note 4. Transactions with Related Parties

 

For the three and six months ended June 30, 2014 and 2013, fees and other expenses incurred by the Company related to CIM and its affiliates were as follows:

 

 

 

 

 

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

Entity

 

Capacity

 

Description

 

2014

 

2013

 

2014

 

2013

ICON Securities, LLC

 

Dealer manager

 

Dealer manager fees(1)

 

$

2,585,978

 

$

617,001

 

$

5,099,173

 

$

975,270

CIM

 

Investment adviser

 

Management fees(2)(3)

 

 

1,303,206

 

 

120,781

 

 

2,212,013

 

 

165,523

CIM

 

Investment adviser

 

Incentive fees(2)(3)

 

 

219,747

 

 

57,705

 

 

745,073

 

 

174,728

ICON Capital, LLC

 

Administrative services provider

 

Administrative services expense(2)(4)

 

 

430,220

 

 

307,636

 

 

845,615

 

 

571,191

IIG

 

Sponsor

 

Organization costs and offering expenses reimbursement(2)

 

 

 -  

 

 

 -  

 

 

591,475

 

 

 -  

IIG

 

Sponsor

 

Recoupment of expense support(2)

 

 

599,626

 

 

 -  

 

 

599,626

 

 

 -  

 

 

 

 

 

 

 

$

5,138,777

 

$

1,103,123

 

$

10,092,975

 

$

1,886,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amounts charged directly to equity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

Amounts charged directly to operations.

(3)

Except for the three months ended June 30, 2014, all expenses have been supported pursuant to the expense support and conditional reimbursement agreement.

(4)

For the three and six months ended June 30, 2013, all expenses have been supported pursuant to the expense support and conditional reimbursement agreement.

 

15


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The Company has entered into certain agreements with CIM’s affiliate, ICON Securities, LLC, formerly known as ICON Securities Corp., or ICON Securities, whereby the Company pays certain fees and reimbursements. ICON Securities is entitled to receive a 3% dealer manager fee from gross offering proceeds from the sale of the Company’s shares. The selling dealers are entitled to receive a sales commission of up to 7% of gross offering proceeds. Such costs are charged against capital in excess of par value when incurred. Since commencing its continuous public offering on July 2, 2012 and through August 11, 2014, the Company paid or accrued sales commissions of $22,023,266 to the selling dealers and dealer manager fees of $10,699,258 to ICON Securities.

 

The Company has entered into an investment advisory agreement with CIM. Pursuant to the investment advisory agreement, CIM is paid an annual base management fee equal to 2.0% of the average value of the Company’s gross assets, less cash and cash equivalents, and an incentive fee based on the Company’s performance, as described below. The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based on “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, measured quarterly and expressed as a rate of return on adjusted capital, as defined in the investment advisory agreement, equal to 1.875% per quarter, or an annualized rate of 7.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is described in Note 2. Refer to Note 7 for a discussion of CIM’s entitlement to receive incentive fees and accrual of the incentive fee on capital gains with respect to the TRS.

 

The Company accrues the capital gains incentive fee based on net realized gains and unrealized appreciation; however, under the terms of the investment advisory agreement, the fee payable to CIM is based on net realized gains and no such fee is payable with respect to unrealized appreciation unless and until such appreciation is actually realized. For the three and six months ended June 30, 2014, capital gains incentive fees of $11,347 and $398,003, respectively, were based on net unrealized appreciation and $208,400 and $347,070, respectively, were based on realized gains. For the three and six months ended June 30, 2013, capital gains incentive fees of $5,525 and $80,497, respectively, were based on net unrealized appreciation and $52,180 and $94,231, respectively, were based on realized gains.

 

At June 30, 2014, the Company’s liability for capital gain incentive fees was $1,136,972, of which $15,156 was payable. The remaining liability was comprised of capital gain incentive fees of $923,052 related to unrealized appreciation and $198,764 related to realized gains from the TRS. With respect to the TRS, CIM will become entitled to a capital gains incentive fee only upon the termination or disposition of the TRS, at which point all net gains and losses of the underlying loans constituting the reference assets of the TRS will be realized. See Note 2 and Note 7 for an additional discussion of CIM’s entitlement to receive incentive fees and accrual of the incentive fee on capital gains with respect to the TRS.

 

The Company entered into an administration agreement with CIM’s affiliate, ICON Capital, LLC, formerly known as ICON Capital Corp., or ICON Capital, pursuant to which ICON Capital furnishes the Company with administrative services including accounting, investor relations and other administrative services necessary to conduct its day-to-day operations. ICON Capital is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations, provided that such reimbursement will be for the lower of ICON Capital’s actual costs or the amount that the Company would be required to pay for comparable administrative services in the same geographic location. Such costs will be reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company will not reimburse ICON Capital for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a person with a controlling interest in ICON Capital.

 

                Under the terms of the investment advisory agreement, CIM and certain of its affiliates, which includes IIG, are entitled to receive reimbursement of up to 1.5% of the gross proceeds raised until all organization costs and offering expenses have been reimbursed. The Company’s payment of organization costs and offering expenses will not exceed 1.5% of the actual gross proceeds raised from the offering (without giving effect to any potential reimbursements from IIG and its affiliates). If the Company sells the maximum number of shares at its latest public offering price of $10.45 per share, the Company estimates that it may incur up to approximately $15,675,000 of expenses. Previously, the Company interpreted “raised” to mean all gross proceeds that the Company expected to raise through the completion of the offering of its shares, which could be as late as December 31, 2015, rather than actual gross proceeds raised through the date of reimbursement. Consistent with such application and since the Company believed it would raise at least $100 million through the completion of the offering of its shares, upon commencement of operations on December 17, 2012, the Company issued 111,111 shares of the Company’s common stock at $9.00 per share to IIG in lieu of payment of $1,000,000 for organization costs and offering expenses submitted for reimbursement. The transactions satisfied an independent obligation of IIG to invest $1,000,000 in the Company’s shares. Through that date, the Company had raised gross proceeds from unaffiliated outside investors of $2,639,439 and from affiliated investors of $2,000,000, which, applying 1.5% of actual proceeds raised through the date of reimbursement, would have resulted in CIM being entitled to $69,592.

 

With respect to any future reimbursements for organization costs and offering expenses, the Company will interpret the 1.5% limit based on actual gross proceeds raised at the time of such reimbursement.  In addition, the Company will not issue any of its shares or other securities for services or for property other than cash or securities except as a dividend or distribution to its security holders or in connection with a reorganization.  Consistent with this interpretation, on May 30, 2013, IIG paid the Company $1,000,000, plus interest accrued at a rate of 7% per year.

 

16


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

From inception through June 30, 2014, IIG and its affiliates incurred organization costs, offering expenses and other pre-effective costs of approximately $2,012,000. Of these costs, approximately $1,811,000 represented organization costs and offering expenses, of which $1,591,475 was submitted to the Company for reimbursement. The Company paid $450,000 in October 2013, $550,000 in March 2014 and $591,475 in May 2014.  No additional material organization costs, offering expenses or other pre-effective costs have been incurred by IIG or its affiliates subsequent to June 30, 2014. The decision to fund the Company’s organization costs, offering expenses and other pre-effective costs and the decision to seek reimbursement for such costs is solely at the discretion of IIG and its affiliates. As a result, the Company may or may not be requested to reimburse any remaining costs funded by IIG and its affiliates.

 

As of June 30, 2014, the Company raised gross proceeds of $336,318,008, of which it can pay up to $5,044,770 in organization costs and offering expenses (which represents 1.5% of the actual gross proceeds raised). Through June 30, 2014, the Company paid $4,125,600 of such costs and expenses, leaving an additional $919,170 that can be paid. As of August 11, 2014, the Company raised gross proceeds of $377,813,288, of which it can pay up to $5,667,199 in organization costs and offering expenses (which represents 1.5% of the actual gross proceeds raised). Through August 11, 2014, the Company paid $4,652,049 of such costs and expenses, leaving an additional $1,015,150 that can be paid.

 

On January 30, 2013, the Company entered into the expense support and conditional reimbursement agreement with IIG, whereby IIG agreed to reimburse the Company for expenses in an amount that is sufficient to: (1) ensure that no portion of the Company’s distributions to shareholders will be paid from its offering proceeds or borrowings, and/or (2) reduce the Company’s operating expenses until it has achieved economies of scale sufficient to ensure that it bears a reasonable level of expense in relation to its investment income. Pursuant to the expense support and conditional reimbursement agreement, the Company has a conditional obligation to reimburse IIG for any amounts funded by IIG under such agreement if, during any fiscal quarter occurring within three years of the date on which IIG funded such amount, the sum of the Company’s net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of investments in portfolio companies exceeds the distributions paid by the Company to its shareholders.

 

On December 13, 2013, the Company and IIG amended and restated the expense support and conditional reimbursement agreement to extend the termination date of such agreement from January 30, 2014 to January 30, 2015.

 

17


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The table below presents a summary of all expenses supported by IIG and the associated dates through which such expenses are eligible for reimbursement by the Company for each of the following three month periods.

 

Three Months Ended

 

Expense Support Received from IIG

 

Expense Support Reimbursed to IIG

 

Unreimbursed Expense Support

 

Ratio of Operating Expense to Average Net Assets for the Period(1)

 

Annualized Distribution Rate for the Period(3)

 

Eligible for Reimbursement through

December 31, 2012

 

$

116,706

 

$

116,706

 

$

 -  

 

0.93%

 

0.00%(2)

 

December 31, 2015

March 31, 2013

 

 

819,373

 

 

482,920

 

 

336,453

 

2.75%

 

7.00%

 

March 31, 2016

June 30, 2013

 

 

1,147,536

 

 

 -  

 

 

1,147,536

 

1.43%

 

7.00%

 

June 30, 2016

September 30, 2013

 

 

1,296,834

 

 

 -  

 

 

1,296,834

 

0.49%

 

7.00%

 

September 30, 2016

December 31, 2013

 

 

695,160

 

 

 -  

 

 

695,160

 

0.31%

 

7.00%

 

December 31, 2016

March 31, 2014

 

 

1,048,858

 

 

 -  

 

 

1,048,858

 

0.25%

 

7.00%

 

March 31, 2017

June 30, 2014

 

 

 -  

 

 

 -  

 

 

 -  

 

0.36%

 

7.00%

 

June 30, 2017

Total

 

$

5,124,467

 

$

599,626

 

$

4,524,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                 

(1)

Operating expenses include all expenses borne by the Company, except for organization costs and offering expenses, interest expense, base management fees, incentive fees, administrative services expenses and other general and administrative expenses owed to CIM and its affiliates.

(2)

The Company did not declare any distributions during the three months ended December 31, 2012.

(3)

Annualized Distribution Rate equals the annualized rate of distributions paid to shareholders based on the amount of the regular cash distributions paid immediately prior to the date the expense support payment obligation was incurred by CIM. Annualized Distribution Rate does not include special cash or stock distributions paid to shareholders.

 

Pursuant to the expense support and conditional reimbursement agreement, the Company will have a conditional obligation to reimburse IIG for any amounts funded by IIG under such agreement (i) if expense reimbursement amounts funded by IIG exceed operating expenses incurred during any fiscal quarter, (ii) if the sum of the Company’s net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to shareholders, and (iii) during any fiscal quarter occurring within three years of the date on which IIG funded such amount.

 

Reimbursement of such costs will be determined as appropriate to meet the objectives of the expense support and conditional reimbursement agreement. During the three months ended June 30, 2014, the Company recorded an obligation to repay $599,626 of expense reimbursements from IIG. The Company may or may not be requested to reimburse any remaining costs in the future.

 

As of June 30, 2014, the total net liability payable to CIM and its affiliates was $2,262,135, which related to fees earned by CIM primarily during the three months ended June 30, 2014 and expense support recoupment by IIG.  As of December 31, 2013, the net reimbursement due from IIG was $545,593.

 

The Company or IIG may terminate the expense support and conditional reimbursement agreement at any time. IIG has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that it bears a reasonable level of expenses in relation to its income. If the Company terminates the investment advisory agreement with CIM, the Company may be required to repay IIG all reimbursements funded by IIG within three years of the date of termination. The specific amount of expenses reimbursed by IIG, if any, will be determined at the end of each quarter. There can be no assurance that the expense support and conditional reimbursement agreement will remain in effect or that IIG will reimburse any portion of the Company’s expenses in future quarters.

 

The Company may fund its cash distributions to shareholders from any sources of funds available to the Company, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to it on account of preferred and common equity investments in portfolio companies and expense reimbursements from IIG, which are subject to recoupment. The Company has not established limits on the amount of funds it may use from available sources to make distributions. A substantial portion of the Company’s distributions have resulted, and future distributions may result, from expense reimbursements from IIG, which are subject to repayment by the Company within three years. The purpose of this arrangement is to avoid such distributions being characterized as a return of capital for tax purposes. Shareholders should understand that any such distributions are not based on the Company’s investment performance, and can only be sustained if the Company achieves positive investment performance in future periods and/or IIG continues to make such expense reimbursements. Shareholders should also understand that the Company’s future repayments will reduce the distributions that they would otherwise receive.  There can be no assurance that the Company will achieve such performance in order to sustain these distributions, or be able to pay distributions at all.  IIG has no obligation to provide expense reimbursements to the Company in future periods.

 

18


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

For the three and six months ended June 30, 2013 and the six months ended June 30, 2014, if expense reimbursements from IIG were not supported, some or all of the distributions may have been a return of capital for tax purposes.

 

Because CIM’s senior management team is comprised of substantially the same personnel as the senior management team of the Company’s affiliate, ICON Capital, which is the investment manager to certain equipment finance funds, or equipment funds, such members of senior management provide investment advisory and management services to the equipment funds in addition to the Company. In the event that CIM undertakes to provide investment advisory services to other clients in the future, it will strive to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objective and strategies so that the Company will not be disadvantaged in relation to any other client of the investment adviser or its senior management team. However, it is currently possible that some investment opportunities will be provided to the equipment funds or other clients of CIM rather than to the Company.

 

Indemnifications

 

The investment advisory agreement, the investment sub-advisory agreement, the administration agreement and the dealer manager agreement each provide certain indemnifications from the Company to the other relevant parties to such agreements.  The Company’s maximum exposure under these agreements is unknown. However, the Company has not experienced claims or losses pursuant to these agreements and believes the risk of loss related to such indemnifications to be remote.

 

Note 5. Distributions

 

The Company’s board of directors declared distributions for twenty four and twenty two record dates during the year ended December 31, 2013 and six months ended June 30, 2014, respectively. Declared distributions are paid monthly.

 

The following table presents cash distributions per share that were declared during the year ended December 31, 2013 and six months ended June 30, 2014:

 

 

 

  

Distributions

 

 

Three Months Ended

 

Per Share

 

Amount

 

 

Fiscal 2013

 

 

 

 

 

 

 

 

March 31, 2013 (six record dates)

 

$

0.1769

  

$

208,766

 

 

June 30, 2013 (six record dates)

 

 

0.1788

 

 

518,630

 

 

September 30, 2013 (six record dates)

 

 

0.1799

 

 

1,089,797

 

 

December 31, 2013 (six record dates)

 

 

0.1806

 

 

2,157,124

 

 

Fiscal 2014

 

 

 

 

 

 

 

 

March 31, 2014 (nine record dates)

 

$

0.1679

  

$

3,314,444

 

 

June 30, 2014 (thirteen record dates)

 

 

0.1829

 

 

5,120,083

 

 

Total distributions for the six months ended June 30, 2014

 

$

0.3508

 

$

8,434,527

 

 

On February 1, 2014, the Company changed from semi-monthly closings to weekly closings for the sale of the Company’s shares pursuant to its continuous public offering. As result, the Company’s board of directors authorizes and declares on a monthly basis a weekly distribution amount per share of common stock.

 

19


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

On June 13, 2014, the Company’s board of directors declared five weekly cash distributions of $0.014067 per share, which were paid on July 30, 2014 to shareholders of record on July 1, July 8, July 15, July 22, and July 29, 2014.  On July 15, 2014, the board of directors declared four weekly cash distributions of $0.014067 per share, payable on August 27, 2014 to shareholders of record on August 5, August 12, August 19, and August 26, 2014.

 

The Company has adopted an “opt in” distribution reinvestment plan for shareholders. As a result, if the Company makes a distribution, shareholders will receive distributions in cash unless they specifically “opt in” to the second amended and restated distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock.

 

The Company may fund cash distributions to shareholders in the future from any sources of funds available, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from IIG. A substantial portion of the Company’s distributions have resulted, and future distributions may result, from expense reimbursements from IIG, which are subject to repayment by the Company. The Company has not established limits on the amount of funds it may use from available sources to make distributions.

 

The following table reflects the sources of cash distributions that the Company has declared on its shares of common stock during the six months ended June 30, 2014 and 2013:

 

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

Source of Distribution

 

Per Share

 

Amount

 

Percentage

 

Per Share

 

Amount

 

Percentage

Net realized gain on total return swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest and other income from TRS portfolio

 

$

0.2365

 

$

5,686,805

 

67.4%

 

$

0.1643

 

$

335,925

 

46.2%

Net gain on TRS loan sales

 

 

0.0863

 

 

2,076,736

 

24.6%

 

 

0.1299

 

 

265,555

 

36.5%

Net realized gain on investments

 

 

0.0161

 

 

384,105

 

4.6%

 

 

0.0073

 

 

15,015

 

2.1%

From other sources(1)

 

 

0.0119

 

 

286,881

 

3.4%

 

 

0.0542

 

 

110,901

 

15.2%

Total distributions

 

$

0.3508

 

$

8,434,527

 

100.0%

 

$

0.3557

 

$

727,396

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes adjustments made to net investment income to arrive at taxable income available for distributions.

 

It is the Company's policy to comply with all requirements of the Code applicable to RICs and to distribute substantially all of its taxable income to its shareholders. In addition, by distributing during each calendar year substantially all of its net investment income, net realized capital gains and certain other amounts, if any, the Company intends not to be subject to a federal excise tax. Accordingly, no federal income tax provision was required.  

 

Income and capital gain distributions are determined in accordance with the Code and federal tax regulations, which may differ from amounts determined in accordance with GAAP. These book/tax differences, which could be material, are primarily due to differing treatments of income and gains on various investments held by the Company. Permanent book/tax differences result in reclassifications to capital in excess of par value, accumulated undistributed net investment income, accumulated undistributed realized gain on investments, and accumulated undistributed realized gain on total return swap. During 2013, the Company did not have any reclassifications as a result of permanent book/tax differences.

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. The tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV. All distributions for 2013 are characterized as ordinary income distributions for federal income tax purposes.

 

The tax components of accumulated earnings for the current year will be determined at year end. As of December 31, 2013, the components of accumulated earnings on a tax basis were as follows:

 

 

 

December 31, 2013

 

 

Undistributed net investment income

$

80,044

 

 

Performance-based incentive fee on unrealized gains

 

(530,569)

 

 

Net unrealized appreciation on investments and total return swap

 

2,603,245

 

 

 

 $

2,152,720

 

 

 

 

 

 

 

           

 

20


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

As of June 30, 2014, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $4,540,010; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $630,712; the net unrealized appreciation was $3,909,297; the aggregate cost of securities for Federal income tax purposes was $171,334,411.

 

As of December 31, 2013, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,726,569; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $123,324; the net unrealized appreciation was $2,603,245; the aggregate cost of securities for Federal income tax purposes was $103,464,285.

 

Note 6. Investments

 

The composition of the Company’s investment portfolio as of June 30, 2014 and December 31, 2013 at amortized cost and fair value was as follows:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

Amortized

Cost(1)

 

Fair

Value

 

Percentage of

Investment

Portfolio

 

Amortized

Cost(1)

 

Fair

Value

 

Percentage of

Investment

Portfolio

Senior secured term loans - first lien

 

$

75,883,653

 

$

76,790,268

 

36.8%

 

$

61,095,685

 

$

61,787,430

 

66.4%

Senior secured term loans - second lien

 

 

100,093,765

 

 

101,524,554

 

48.6%

 

 

22,189,331

 

 

22,552,214

 

24.2%

Collateralized securities

 

 

30,596,849

 

 

30,577,322

 

14.6%

 

 

8,746,000

 

 

8,795,600

 

9.4%

Subtotal/total percentage

 

 

206,574,267

 

 

208,892,144

 

100.0%

 

 

92,031,016

 

 

93,135,244

 

100.0%

Short term investments(2)

 

 

38,395,666

 

 

38,395,666

 

 

 

 

11,383,669

 

 

11,383,669

 

 

Total investments

 

$

244,969,933

 

$

247,287,810

 

 

 

$

103,414,685

 

$

104,518,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on the Company’s investments.

(2)

Short term investments represent an investment in a fund that invests in highly liquid investments with original maturity dates of three months or less.

 

21


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The following tables show the composition of the Company’s investment portfolio by industry classification and geographic dispersion, and the percentage, by fair value, of the total investment portfolio assets in such industries and geographies as of June 30, 2014 and December 31, 2013:

 

 

 

June 30, 2014

 

December 31, 2013

Industry Classification

 

Investments at

Fair Value

 

Percentage of

Investment Portfolio

 

Investments at

Fair Value

 

Percentage of

Investment Portfolio

Services: Business

 

$

36,640,254

 

17.5%

 

$

15,754,714

 

16.9%

Diversified Financials

 

 

30,577,322

 

14.6%

 

 

8,795,600

 

9.4%

High Tech Industries

 

 

22,225,813

 

10.6%

 

 

2,876,400

 

3.1%

Healthcare & Pharmaceuticals

 

 

17,389,316

 

8.3%

 

 

8,968,804

 

9.6%

Automotive

 

 

14,634,267

 

7.0%

 

 

7,473,560

 

8.0%

Beverage, Food & Tobacco

 

 

11,778,769

 

5.6%

 

 

 -  

 

 -  

Capital Equipment

 

 

9,950,063

 

4.8%

 

 

3,014,850

 

3.2%

Media: Diversified & Production

 

 

9,609,642

 

4.6%

 

 

1,920,350

 

2.1%

Energy: Oil & Gas

 

 

7,548,610

 

3.7%

 

 

3,629,300

 

3.9%

Chemicals, Plastics & Rubber

 

 

6,861,526

 

3.3%

 

 

6,797,514

 

7.3%

Hotel, Gaming & Leisure

 

 

6,328,850

 

3.0%

 

 

515,000

 

0.6%

Consumer Goods: Non-Durable

 

 

6,328,022

 

3.0%

 

 

9,527,245

 

10.2%

Construction & Building

 

 

6,144,188

 

2.9%

 

 

3,415,256

 

3.7%

Services: Consumer

 

 

5,583,028

 

2.7%

 

 

5,628,126

 

6.0%

Environmental Industries

 

 

4,993,750

 

2.4%

 

 

1,909,952

 

2.1%

Media: Advertising, Printing & Publishing

 

 

4,328,134

 

2.2%

 

 

 -  

 

 -  

Telecommunications

 

 

3,543,750

 

1.7%

 

 

3,973,040

 

4.3%

Media: Broadcasting & Subscription

 

 

2,129,339

 

1.0%

 

 

3,544,422

 

3.8%

Aerospace & Defense

 

 

1,452,041

 

0.7%

 

 

1,463,701

 

1.6%

Banking, Finance, Insurance & Real Estate

 

 

845,460

 

0.4%

 

 

2,427,410

 

2.6%

Containers, Packaging & Glass

 

 

 -  

 

 -  

 

 

1,500,000

 

1.6%

Subtotal/total percentage

 

 

208,892,144

 

100.0%

 

 

93,135,244

 

100.0%

U.S. Treasury Securities

 

 

38,395,666

 

 

 

 

11,383,669

 

 

Total investments

 

$

247,287,810

 

 

 

$

104,518,913

 

 

 

 

 

June 30, 2014

 

December 31, 2013

Geographic Dispersion(1)

 

Investments at

Fair Value

 

Percentage of

Investment Portfolio

 

Investments at

Fair Value

 

Percentage of

Investment Portfolio

United States

 

$

183,461,343

 

87.8%

 

$

82,542,130

 

88.6%

Cayman Islands

 

 

10,513,600

 

5.0%

 

 

3,795,600

 

4.1%

Germany

 

 

8,055,675

 

3.9%

 

 

 -  

 

 -  

Netherlands

 

 

5,075,000

 

2.4%

 

 

5,037,500

 

5.4%

Switzerland

 

 

1,786,526

 

0.9%

 

 

1,760,014

 

1.9%

Subtotal/total percentage

 

 

208,892,144

 

100.0%

 

 

93,135,244

 

100.0%

U.S. Treasury Securities

 

 

38,395,666

 

 

 

 

11,383,669

 

 

Total investments

 

$

247,287,810

 

 

 

$

104,518,913

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The geographic dispersion is determined by the portfolio company's country of domicile.

As of June 30, 2014 and December 31, 2013, there were no delinquent or non-accrual debt investments.

The Company does not “control” and is not an “affiliate” of any of the Company’s portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company or issuer if the Company owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company or issuer if the Company owned 5% or more of its voting securities.

 

22


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The Company’s investment portfolio may contain senior secured investments that are in the form of lines of credit, unfunded delayed drawdown loan commitments, or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014 and December 31, 2013, the Company’s unfunded loan commitments amounted to $16,674,000 and $2,450,758, respectively. As of August 11, 2014, the Company’s unfunded loan commitments amounted to $48,341,000. For information on the companies to which the Company is committed to fund additional amounts as of June 30, 2014 and December 31, 2013, refer to the consolidated schedule of investments.

 

Note 7. Total Return Swap

 

On December 17, 2012, the Company, through its wholly-owned subsidiary, Flatiron, entered into a TRS with Citibank. Effective December 9, 2013, Flatiron and Citibank amended the TRS to, among other things, extend the termination or call date from December 17, 2013 to December 17, 2014, increase the maximum aggregate market value of the portfolio of loans subject to the TRS (determined at the time each such loan becomes subject to the TRS) from $150 million to $225 million, and increase the interest rate payable by Flatiron to Citibank with respect to each loan included in the TRS by increasing the spread over the floating rate index specified for each such loan from 1.25% to 1.35% per year. Flatiron and Citibank further amended the TRS to increase the maximum aggregate market value of the portfolio of loans subject to the TRS to $275 million effective February 18, 2014, to $325 million effective April 30, 2014, and to $375 million effective July 30, 2014.

 

A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS and interest payments in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS typically offers lower financing costs than are offered through more traditional borrowing arrangements.

 

The TRS with Citibank enables the Company, through its ownership of Flatiron, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Flatiron borrowing funds to acquire loans and incurring interest expense to a lender.

 

The obligations of Flatiron under the TRS are non-recourse to the Company and the Company’s exposure under the TRS is limited to the value of the Company’s investment in Flatiron, which generally will equal the value of cash collateral provided by Flatiron under the TRS. Pursuant to the terms of the TRS, Flatiron may select loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $375 million. Flatiron is required to initially cash collateralize a specified percentage of each loan (generally 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Under the terms of the TRS, Flatiron agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Flatiron are available to pay the debts of the Company.

 

Each individual loan must meet criteria described in the TRS Agreement, including a requirement that substantially all of the loans be rated by Moody’s and S&P, be part of a loan facility of at least $125 million and have at least two bid quotations from a nationally-recognized pricing service. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Flatiron receives from Citibank all interest and fees payable in respect of the loans included in the TRS. Flatiron pays to Citibank interest at a rate equal to, in respect of each loan included in the TRS, the floating rate index specified for such loan plus 1.35% per year. In addition, upon the termination or repayment of any loan subject to the TRS, Flatiron will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

 

Under the terms of the TRS, Flatiron may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Flatiron may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Flatiron. The amount of collateral required to be posted by Flatiron is determined primarily on the basis of the aggregate value of the underlying loans.

 

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank on behalf of Flatiron. The Company may, but is not obligated to, increase its investment in Flatiron for the purpose of funding any additional collateral or payment obligations for which Flatiron may become obligated during the term of the TRS. If the Company does not make any such additional investment in Flatiron and Flatiron fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Flatiron under the TRS. In the event of an early termination of the TRS, Flatiron would be required to pay an early termination fee.

 

23


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Citibank may terminate the TRS on or after December 17, 2014, or the call date. Flatiron may terminate the TRS at any time upon providing no more than 30 days prior notice to Citibank. Any termination prior to the call date will result in payment of an early termination fee to Citibank based on the maximum portfolio amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments that would be owed by Flatiron to Citibank for the period from the termination date through and including the call date. Such monthly payments will equal the product of 80% of the maximum portfolio amount, multiplied by 1.35% per year. The Company estimates the early termination fee would have been approximately $1,624,000 at June 30, 2014. Other than during the first 90 days and last 180 days of the term of the TRS, Flatiron may be required to pay a minimum usage fee in connection with the TRS. At June 30, 2014, Flatiron was not subject to a minimum usage fee.

 

The value of the TRS is based on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold such loan in the open market. As of June 30, 2014 and December 31, 2013, the fair value of the TRS was $1,571,894 and $1,548,617, respectively. The fair value of the TRS is reflected as unrealized appreciation on total return swap on the Company’s consolidated balance sheets. The change in value of the TRS is reflected in the Company’s consolidated statements of operations as net change in unrealized (depreciation) appreciation on total return swap. As of June 30, 2014 and December 31, 2013, Flatiron had selected 57 and 63 underlying loans with a total notional amount of $275,947,739 and $148,199,937, respectively. For the same periods, Flatiron posted $79,705,510 and $40,703,777 in cash collateral held by Citibank (of which only $74,663,041 and $39,285,408 was required to be posted), which is reflected in due from counterparty on the Company’s consolidated balance sheets.

 

Realized gains and losses on the TRS are composed of any gains or losses on loans underlying the TRS as well as net interest earned during the period. Receivable due on the TRS is composed of any amounts due from Citibank that consist of earned but not yet collected net interest and net gains on sales and principal repayments of underlying loans of the TRS. As of and for the three and six months ended June 30, 2014, the net receivable and net realized gain on the TRS consisted of the following:

 

 

 

 

 

Net Receivable(1)

 

Net Realized Gain(2)

 

 

 

 

 

As of

June 30, 2014

 

Three Months Ended

June 30, 2014

 

Six Months Ended

June 30, 2014

 

 

Interest and other income from TRS portfolio

 

$

4,087,317

 

$

4,349,324

 

$

7,423,291

 

 

Interest and other expense from TRS portfolio

 

 

(944,600)

 

 

(1,022,891)

 

 

(1,736,486)

 

 

Net gain on TRS loan sales

 

 

1,425,972

 

 

1,473,629

 

 

2,076,736

 

 

Total

 

$

4,568,689

 

$

4,800,062

 

$

7,763,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Net receivable is reflected in receivable due on total return swap on the Company's consolidated balance sheets.

 

(2)

Net realized gain is reflected in net realized gain on total return swap on the Company's consolidated statements of operations.

 

 

24


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

In connection with the TRS, Flatiron is required to comply with various covenants and reporting requirements as defined in the TRS Agreement. As of June 30, 2014, Flatiron was in compliance with all covenants and reporting requirements.

 

CIM has not taken any incentive fees with respect to the Company’s TRS to date. For purposes of computing the capital gains incentive fee, CIM will become entitled to a capital gains incentive fee only upon the termination or disposition of the TRS, at which point all net gains and losses of the underlying loans constituting the reference assets of the TRS will be realized. For purposes of computing the subordinated incentive fee on income, CIM is not entitled to a subordinated incentive fee on income with respect to the TRS. Any unrealized appreciation on the TRS is reflected in total assets on the Company’s consolidated balance sheets and included in the computation of the base management fee.

While the investment advisory agreement with CIM neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of the AICPA Technical Practice Aid for investment companies, the Company accrues capital gains incentive fees on unrealized gains. This accrual reflects the incentive fees that would be payable to CIM if the Company’s entire investment portfolio was liquidated at its fair value as of the balance sheet date even though CIM is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

 

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the total amount of cash collateral posted by Flatiron under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the Securities and Exchange Commission, or SEC.

 

Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

 

25


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The following is a summary of the underlying loans subject to the TRS as of June 30, 2014:

 

Underlying Loans(a)

 

Index Rate(b)

 

Industry

 

Notional

Amount

 

Fair

Value(c)

 

Unrealized

Appreciation /

(Depreciation)

Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

ABG Intermediate Holdings 2 LLC, L+450, 1.00% LIBOR Floor, 5/27/2021

 

Various

 

Retail

 

$

6,838,760

 

$

6,909,957

 

$

71,197

Active Network, Inc., L+450, 1.00% LIBOR Floor, 11/13/2020

 

3 Month LIBOR

 

High Tech Industries

 

 

1,250,802

 

 

1,250,023

 

 

(779)

American Residential Services, LLC, L+450, 1.00% LIBOR Floor, 6/30/2021(d)

 

3 Month LIBOR

 

Construction & Building

 

 

11,442,500

 

 

11,500,000

 

 

57,500

American Tire Distributors, Inc., L+475, 1.00% LIBOR Floor, 6/1/2018(d)

 

3 Month LIBOR

 

Automotive

 

 

6,813,917

 

 

6,833,041

 

 

19,124

Amneal Pharmaceuticals, LLC, L+475, 1.00% LIBOR Floor, 11/1/2019

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

3,330,925

 

 

3,378,601

 

 

47,676

Aquilex, LLC, L+400, 1.00% LIBOR Floor, 12/31/2020

 

1 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

4,962,563

 

 

4,950,125

 

 

(12,438)

Arc Document Solutions, Inc., L+525, 1.00% LIBOR Floor, 12/20/2018(e)

 

3 Month LIBOR

 

Services: Business

 

 

4,566,188

 

 

4,705,969

 

 

139,781

Azure Midstream Energy, LLC, L+550, 1.00% LIBOR Floor, 11/15/2018

 

1 Month LIBOR

 

Energy: Oil & Gas

 

 

4,270,705

 

 

4,303,077

 

 

32,372

BBTS Borrower, LP, L+650, 1.25% LIBOR Floor, 6/4/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

4,449,054

 

 

4,476,734

 

 

27,680

Bluestem Brands, Inc., L+650, 1.00% LIBOR Floor, 12/6/2018

 

3 Month LIBOR

 

Retail

 

 

3,998,138

 

 

4,009,227

 

 

11,089

BRG Sports, Inc., L+550, 1.00% LIBOR Floor, 4/15/2021

 

1 Month LIBOR

 

Consumer Goods: Durable

 

 

10,283,200

 

 

10,417,550

 

 

134,350

Caraustar Industries, Inc., L+625, 1.25% LIBOR Floor, 5/1/2019

 

3 Month LIBOR

 

Forest Products & Paper

 

 

921,623

 

 

939,003

 

 

17,380

Charming Charlie, LLC, L+800, 1.00% LIBOR Floor, 12/18/2019

 

3 Month LIBOR

 

Retail

 

 

8,779,574

 

 

8,901,628

 

 

122,054

CHI Overhead Doors, Inc., L+425, 1.25% LIBOR Floor, 3/18/2019

 

1 Month LIBOR

 

Construction & Building

 

 

5,967,401

 

 

5,977,367

 

 

9,966

Cyanco Intermediate Corp., L+450, 1.00% LIBOR Floor, 5/1/2020

 

1 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

959,599

 

 

965,205

 

 

5,606

Deluxe Entertainment Services Group, Inc., L+550, 1.00% LIBOR Floor, 2/28/2020(e)

 

6 Month LIBOR

 

Media: Diversified & Production

 

 

546,401

 

 

547,087

 

 

686

Emmis Operating Company, L+475, 1.00% LIBOR Floor, 6/10/2021

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

4,937,500

 

 

5,025,000

 

 

87,500

GTCR Valor Companies, Inc., L+500, 1.00% LIBOR Floor, 5/30/2021(e)

 

3 Month LIBOR

 

High Tech Industries

 

 

1,899,125

 

 

1,906,318

 

 

7,193

Hemisphere Media Holdings, LLC, L+500, 1.25% LIBOR Floor, 7/30/2020(d)(e)

 

1 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

7,317,946

 

 

7,392,680

 

 

74,734

Hyperion Finance S.à r.l., L+475, 1.00% LIBOR Floor, 10/17/2019(e)

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

4,410,338

 

 

4,488,694

 

 

78,356

Indra Holdings Corp., L+425, 1.00% LIBOR Floor, 5/1/2021

 

3 Month LIBOR

 

Retail

 

 

7,397,975

 

 

7,457,195

 

 

59,220

Insight Pharmaceuticals, LLC, L+500, 1.25% LIBOR Floor, 8/25/2016

 

2 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

5,819,510

 

 

5,821,961

 

 

2,451

inVentiv Health, Inc., L+625, 1.50% LIBOR Floor, 5/15/2018

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

2,508,750

 

 

2,495,825

 

 

(12,925)

inVentiv Health, Inc., L+600, 1.50% LIBOR Floor, 8/4/2016

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

7,341,585

 

 

7,390,591

 

 

49,006

LTCG Holdings Corp., L+500, 1.00% LIBOR Floor, 6/6/2020

 

1 Month LIBOR

 

Services: Business

 

 

8,288,350

 

 

8,413,300

 

 

124,950

LTI Flexible Products, Inc., L+450, 1.00% LIBOR Floor, 5/1/2021

 

3 Month LIBOR

 

Consumer Goods: Durable

 

 

10,447,500

 

 

10,486,875

 

 

39,375

Marine Acquisition Corp., L+425, 1.00% LIBOR Floor, 1/30/2021

 

3 Month LIBOR

 

Capital Equipment

 

 

7,910,250

 

 

8,019,563

 

 

109,313

Packaging Coordinators, Inc., L+425, 1.25% LIBOR Floor, 5/10/2020

 

3 Month LIBOR

 

Containers, Packaging & Glass

 

 

1,975,075

 

 

1,980,038

 

 

4,963

Peppermill Casinos, Inc., L+600, 1.25% LIBOR Floor, 11/9/2018

 

1 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

972,695

 

 

1,007,144

 

 

34,449

Photonis Technologies SAS, L+750, 1.00% LIBOR Floor, 9/18/2019(e)

 

3 Month LIBOR

 

Aerospace & Defense

 

 

8,765,425

 

 

8,875,916

 

 

110,491

Polyconcept Finance B.V., L+475, 1.25% LIBOR Floor, 6/28/2019(d)(e)

 

1 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

7,348,077

 

 

7,353,233

 

 

5,156

PSC Industrial Outsourcing, LP, L+450, 1.00% LIBOR Floor, 5/15/2020

 

1 Month LIBOR

 

Energy: Oil & Gas

 

 

13,978,800

 

 

14,049,400

 

 

70,600

Safe-Guard Products International, LLC, L+600, 1.25% LIBOR Floor, 12/21/2018

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

6,875,626

 

 

6,893,170

 

 

17,544

SI Organization, Inc., L+475, 1.00% LIBOR Floor, 11/23/2019(d)

 

3 Month LIBOR

 

Services: Business

 

 

6,838,002

 

 

6,857,494

 

 

19,492

SK Spice S.Á.R.L, L+825, 1.25% LIBOR Floor, 9/30/2018(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

8,351,689

 

 

8,418,927

 

 

67,238

Smile Brands Group, Inc., L+625, 1.25% LIBOR Floor, 8/16/2019

 

6 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

4,722,448

 

 

4,523,731

 

 

(198,717)

SRA International, L+525, 1.25% LIBOR Floor, 7/20/2018

 

3 Month LIBOR

 

High Tech Industries

 

 

2,219,764

 

 

2,265,210

 

 

45,446

Steward Health Care System, LLC, L+550, 1.25% LIBOR Floor, 4/10/2020

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

9,350,503

 

 

9,308,138

 

 

(42,365)

Sutherland Global Services, L+600, 1.25% LIBOR Floor, 3/6/2019(e)

 

6 Month LIBOR

 

Services: Business

 

 

1,864,234

 

 

1,876,868

 

 

12,634

TASC, Inc., L+550, 1.00% LIBOR Floor, 5/23/2020(d)

 

3 Month LIBOR

 

Services: Business

 

 

3,482,200

 

 

3,494,138

 

 

11,938

TOPPS Company, Inc., L+600, 1.25% LIBOR Floor, 10/2/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

2,342,310

 

 

2,285,634

 

 

(56,676)

Travel Leaders Group, LLC, L+600, 1.00% LIBOR Floor, 12/5/2018

 

3 Month LIBOR

 

Services: Consumer

 

 

1,925,625

 

 

1,947,563

 

 

21,938

Travelport, LLC, L+500, 1.25% LIBOR Floor, 6/26/2019(e)

 

3 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

1,577,417

 

 

1,627,770

 

 

50,353

VFH Parent, LLC, L+450, 1.25% LIBOR Floor, 11/8/2016

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

506,266

 

 

504,761

 

 

(1,505)

Vince, LLC, L+500, 1.00% LIBOR Floor, 11/27/2019(e)

 

Various

 

Consumer Goods: Non-Durable

 

 

2,195,736

 

 

2,212,076

 

 

16,340

Western Dental Services, Inc., L+500, 1.00% LIBOR Floor, 11/1/2018

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

6,161,917

 

 

6,184,751

 

 

22,834

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

239,113,988

 

 

240,628,558

 

 

1,514,570

 

26


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Underlying Loans(a)

 

Index Rate(b)

 

Industry

 

Notional

Amount

 

Fair

Value(c)

 

Unrealized

Appreciation /

(Depreciation)

Senior Secured Second Lien Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Arysta LifeScience SPC, LLC, L+700, 1.25% LIBOR Floor, 11/30/2020(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

1,160,540

 

 

1,188,565

 

 

28,025

Del Monte Foods, Inc., L+725, 1.00% LIBOR Floor, 7/26/2021

 

6 Month LIBOR

 

Beverage, Food & Tobacco

 

 

320,322

 

 

317,086

 

 

(3,236)

Deltek, Inc., L+875, 1.25% LIBOR Floor, 10/10/2019

 

3 Month LIBOR

 

Services: Business

 

 

1,619,640

 

 

1,666,675

 

 

47,035

Evergreen Skills Lux S.À.R.L., L+675, 1.00% LIBOR Floor, 4/28/2022(e)

 

6 Month LIBOR

 

High Tech Industries

 

 

7,151,625

 

 

7,141,536

 

 

(10,089)

Mergermarket USA, Inc., L+650, 1.00% LIBOR Floor, 2/4/2022(e)

 

3 Month LIBOR

 

Services: Business

 

 

6,965,000

 

 

6,943,160

 

 

(21,840)

Pelican Products, Inc., L+825, 1.00% LIBOR Floor, 4/11/2021

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

4,990,000

 

 

5,050,000

 

 

60,000

PFS Holding Corporation, L+725, 1.00% LIBOR Floor, 1/31/2022

 

1 Month LIBOR

 

Retail

 

 

7,104,300

 

 

6,925,800

 

 

(178,500)

Securus Technologies Holdings, Inc., L+775, 1.25% LIBOR Floor, 4/30/2021

 

3 Month LIBOR

 

Telecommunications

 

 

1,001,875

 

 

1,012,500

 

 

10,625

Sheridan Holdings, Inc., L+725, 1.00% LIBOR Floor, 12/20/2021

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

2,736,250

 

 

2,808,438

 

 

72,188

Telx Group, Inc., L+650, 1.00% LIBOR Floor, 4/9/2021

 

3 Month LIBOR

 

High Tech Industries

 

 

2,970,000

 

 

3,000,000

 

 

30,000

U.S. Renal Care, Inc., L+750, 1.00% LIBOR Floor, 1/3/2020

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

814,199

 

 

837,315

 

 

23,116

Total Senior Secured Second Lien Term Loans

 

 

 

 

 

 

36,833,751

 

 

36,891,075

 

 

57,324

Total

 

 

 

 

 

$

275,947,739

 

$

277,519,633

 

$

1,571,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the 1940 Act, except for investments specifically identified as non-qualifying per note (e) below. The Company does not control and is not an affiliate of any of the companies that are issuers of the underlying loans subject to the TRS.

(b)

The 1, 2, 3, and 6 month LIBOR rates were 0.16%%, 0.19%, 0.23%, and 0.33%, respectively, as of June 30, 2014. The prime rate was 3.25% as of June 30, 2014. The applicable LIBOR rate as of June 30, 2014 for the loan listed may not be the applicable LIBOR rate, as the loan may have been priced or repriced based on a LIBOR rate prior to June 30, 2014.

(c)

Fair value determined by the Company’s board of directors (see Note 8).

(d)

Position or portion thereof unsettled as of June 30, 2014.

(e)

The investment is not a qualifying asset under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of that company’s total assets as defined under Section 55 of the 1940 Act. As of June 30, 2014, 87.3% of the Company’s total assets represented qualifying assets. In addition, as described in this note, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the TRS as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 79.4% of the Company’s total assets represented qualifying assets as of June 30, 2014.

 

 

 

27


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The following is a summary of the underlying loans subject to the TRS as of December 31, 2013:

 

Underlying Loans(a)

 

Index Rate(b)

 

Industry

 

Notional

Amount

 

Fair

Value(c)

 

Unrealized

Appreciation /

(Depreciation)

Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

The Active Network, Inc., L+450, 1.00% LIBOR Floor, 11/13/2020

 

1 Month LIBOR

 

High Tech Industries

 

$

1,947,215

 

$

1,964,339

 

$

17,124

Amneal Pharmaceuticals, LLC, L+475, 1.00% LIBOR Floor, 11/1/2019

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

3,347,710

 

 

3,398,433

 

 

50,723

Aquilex, LLC, L+400, 1.00% LIBOR Floor, 12/31/2020(d)

 

1 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

4,987,500

 

 

5,012,500

 

 

25,000

ARG IH Corporation, L+400, 1.00% LIBOR Floor, 11/15/2020

 

1 Month LIBOR

 

Beverage, Food & Tobacco

 

 

2,394,000

 

 

2,410,512

 

 

16,512

Arc Document Solutions, Inc., L+525, 1.00% LIBOR Floor, 12/20/2018(d)(e)

 

1 Month LIBOR

 

Services: Business

 

 

4,870,600

 

 

4,932,725

 

 

62,125

Ascensus, Inc., L+400, 1.00% LIBOR Floor, 12/2/2019

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

4,975,000

 

 

5,018,750

 

 

43,750

ATI Holdings, Inc., L+400, 1.25% LIBOR Floor, 12/21/2019

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

490,050

 

 

495,931

 

 

5,881

Avaya, Inc., L+675, 1.25% LIBOR Floor, 3/31/2018

 

3 Month LIBOR

 

Telecommunications

 

 

1,993,401

 

 

2,014,431

 

 

21,030

Azure Midstream Energy, LLC, L+550, 1.00% LIBOR Floor, 11/15/2018

 

1 Month LIBOR

 

Energy: Oil & Gas

 

 

4,380,210

 

 

4,407,930

 

 

27,720

BBTS Borrower, LP, L+650, 1.25% LIBOR Floor, 6/4/2019

 

3 Month LIBOR

 

Energy: Oil & Gas

 

 

1,854,169

 

 

1,878,474

 

 

24,305

Bluestem Brands, Inc., L+650, 1.00% LIBOR Floor, 12/6/2018

 

1 Month LIBOR

 

Retail

 

 

1,832,600

 

 

1,832,600

 

 

 -  

Camp International Holding Company, L+375, 1.00% LIBOR Floor, 5/31/2019

 

1 Month LIBOR

 

Services: Business

 

 

1,220,000

 

 

1,230,163

 

 

10,163

Caraustar Industries, Inc., L+625, 1.25% LIBOR Floor, 5/1/2019

 

6 Month LIBOR

 

Forest Products & Paper

 

 

713,584

 

 

738,748

 

 

25,164

Charming Charlie, LLC, L+800, 1.00% LIBOR Floor, 12/18/2019(d)

 

3 Month LIBOR

 

Retail

 

 

4,289,675

 

 

4,333,225

 

 

43,550

Cyanco Intermediate Corp., L+450, 1.00% LIBOR Floor, 5/1/2020

 

1 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

1,254,383

 

 

1,265,813

 

 

11,430

Digital Insight Corporation, L+375, 1.00% LIBOR Floor, 10/16/2019

 

3 Month LIBOR

 

Services: Business

 

 

775,105

 

 

779,000

 

 

3,895

Global Tel*Link Corporation, L+375, 1.25% LIBOR Floor, 5/23/2020

 

3 Month LIBOR

 

Services: Business

 

 

2,940,113

 

 

2,915,814

 

 

(24,299)

Grande Communications Networks, LLC, L+350, 1.00% LIBOR Floor, 5/31/2020

 

3 Month LIBOR

 

Telecommunications

 

 

2,486,435

 

 

2,497,471

 

 

11,036

Hemisphere Media Holdings, LLC, L+500, 1.25% LIBOR Floor, 7/30/2020(e)

 

1 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

4,324,817

 

 

4,349,487

 

 

24,670

Herff Jones, Inc., L+450, 1.00% LIBOR Floor, 6/25/2019

 

1 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

1,973,732

 

 

2,054,268

 

 

80,536

Hyperion Finance S.à r.l., L+475, 1.00% LIBOR Floor, 10/17/2019(e)

 

2 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

4,432,500

 

 

4,471,875

 

 

39,375

Information Resources, Inc., L+375, 1.00% LIBOR Floor, 9/30/2020

 

3 Month LIBOR

 

Services: Business

 

 

892,269

 

 

900,492

 

 

8,223

Insight Pharmaceuticals, LLC, L+500, 1.25% LIBOR Floor, 8/25/2016

 

6 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

4,002,500

 

 

3,980,000

 

 

(22,500)

inVentiv Health, Inc., L+600, 1.50% LIBOR Floor, 8/4/2016

 

6 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

5,260,192

 

 

5,228,718

 

 

(31,474)

Learfield Communications, Inc., L+400, 1.00% LIBOR Floor, 10/9/2020

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

746,250

 

 

757,500

 

 

11,250

Lineage Logistics, LLC, L+350, 1.00% LIBOR Floor, 4/26/2019

 

1 Month LIBOR

 

Services: Business

 

 

2,501,589

 

 

2,504,769

 

 

3,180

Merrill Corp., L+625, 1.00% LIBOR Floor, 3/8/2018(d)

 

1 Month LIBOR

 

Services: Business

 

 

671,827

 

 

679,040

 

 

7,213

Mohegan Tribal Gaming Authority, L+450, 1.00% LIBOR Floor, 11/19/2019

 

2 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

1,643,400

 

 

1,683,871

 

 

40,471

OCI Beaumont, LLC, L+500, 1.25% LIBOR Floor, 8/20/2019 (B2 Term Loan)(e)

 

6 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

2,285,804

 

 

2,333,284

 

 

47,480

Opal Acquisition, Inc., L+400, 1.00% LIBOR Floor, 11/27/2020(d)

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

4,580,879

 

 

4,617,136

 

 

36,257

Packaging Coordinators, Inc., L+425, 1.25% LIBOR Floor, 5/10/2020

 

3 Month LIBOR

 

Containers, Packaging & Glass

 

 

1,985,025

 

 

1,995,000

 

 

9,975

Peppermill Casinos, Inc., L+600, 1.25% LIBOR Floor, 11/9/2018

 

1 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

977,637

 

 

1,012,275

 

 

34,638

Photonis Technologies SAS, L+750, 1.00% LIBOR Floor, 9/18/2019(e)

 

3 Month LIBOR

 

Aerospace & Defense

 

 

5,764,360

 

 

5,853,870

 

 

89,510

Polyconcept Finance B.V., L+475, 1.25% LIBOR Floor, 6/28/2019(e)

 

1 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

2,470,979

 

 

2,521,407

 

 

50,428

Safe-Guard Products International, LLC, L+600, 1.25% LIBOR Floor, 12/21/2018

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

2,222,426

 

 

2,266,102

 

 

43,676

Salix Pharmaceuticals, Ltd., L+325, 1.00% LIBOR Floor, 1/2/2020(d)(e)

 

1 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

2,815,850

 

 

2,857,423

 

 

41,573

SESAC Holdco II, LLC, L+400, 1.00% LIBOR Floor, 2/8/2019

 

1 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

490,050

 

 

496,856

 

 

6,806

SK Spice S.Á.R.L, L+825, 1.25% LIBOR Floor, 9/30/2018(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

2,972,550

 

 

2,966,316

 

 

(6,234)

SRA International, L+525, 1.25% LIBOR Floor, 7/20/2018

 

3 Month LIBOR

 

High Tech Industries

 

 

2,351,305

 

 

2,388,954

 

 

37,649

Steward Health Care System, LLC, L+550, 1.25% LIBOR Floor, 4/10/2020

 

12 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

3,436,500

 

 

3,478,147

 

 

41,647

Sutherland Global Services, L+600, 1.25% LIBOR Floor, 3/6/2019(e)

 

6 Month LIBOR

 

Services: Business

 

 

1,913,941

 

 

1,917,307

 

 

3,366

Tech Finance & Co. S.C.A., L+600, 1.25% LIBOR Floor, 7/11/2020(e)

 

3 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

1,942,906

 

 

1,994,750

 

 

51,844

Tervita, L+500, 1.25% LIBOR Floor, 5/15/2018(d)(e)

 

3 Month LIBOR

 

Environmental Industries

 

 

3,533,364

 

 

3,554,920

 

 

21,556

The TOPPS Company, Inc., L+600, 1.25% LIBOR Floor, 10/2/2018

 

3 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

2,007,500

 

 

1,995,000

 

 

(12,500)

Travel Leaders Group, LLC, P+500, 2.00% Base Rate Floor, 12/5/2018

 

Prime

 

Services: Consumer

 

 

1,975,000

 

 

1,965,000

 

 

(10,000)

Travelport, LLC, L+500, 1.25% LIBOR Floor, 6/26/2019(e)

 

3 Month LIBOR

 

Hotel, Gaming & Leisure

 

 

1,585,383

 

 

1,640,669

 

 

55,286

TriNet HR Corp., L+400, 1.00% LIBOR Floor, 8/20/2020

 

3 Month LIBOR

 

Services: Business

 

 

1,649,167

 

 

1,678,319

 

 

29,152

Vince, LLC, L+500, 1.00% LIBOR Floor, 11/27/2019(e)

 

1 Month LIBOR

 

Consumer Goods: Non-Durable

 

 

1,752,300

 

 

1,783,275

 

 

30,975

VFH Parent, LLC, L+450, 1.25% LIBOR Floor, 11/8/2019

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

2,597,561

 

 

2,624,622

 

 

27,061

W/S Packaging Group, Inc., L+400, 1.00% LIBOR Floor, 8/9/2019

 

4 Month LIBOR

 

Containers, Packaging & Glass

 

 

2,481,284

 

 

2,493,750

 

 

12,466

Washington Inventory Services, L+450, 1.25% LIBOR Floor, 12/20/2018

 

3 Month LIBOR

 

Retail

 

 

492,525

 

 

495,931

 

 

3,406

WP CPP Holdings, LLC, L+375, 1.00% LIBOR Floor, 12/28/2019

 

3 Month LIBOR

 

Aerospace & Defense

 

 

935,288

 

 

942,320

 

 

7,032

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

128,420,410

 

 

129,609,512

 

 

1,189,102

 

28


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Underlying Loans(a)

 

Index Rate(b)

 

Industry

 

Notional

Amount

 

Fair

Value(c)

 

Unrealized

Appreciation /

(Depreciation)

Senior Secured Second Lien Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Arysta LifeScience SPC, LLC, L+700, 1.25% LIBOR Floor, 11/30/2020(e)

 

3 Month LIBOR

 

Chemicals, Plastics & Rubber

 

 

1,160,540

 

 

1,190,029

 

 

29,489

Carestream Health, Inc., L+850, 1.00% LIBOR Floor, 12/7/2019(e)

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

980,000

 

 

1,017,500

 

 

37,500

Del Monte Foods, Inc., L+725, 1.00% LIBOR Floor, 7/26/2021(d)

 

6 Month LIBOR

 

Beverage, Food & Tobacco

 

 

2,257,200

 

 

2,299,950

 

 

42,750

Deltek, Inc., L+875, 1.25% LIBOR Floor, 10/10/2019

 

3 Month LIBOR

 

Services: Business

 

 

1,619,640

 

 

1,660,540

 

 

40,900

Ion Trading Technologies S.Á R.L., L+700, 1.25% LIBOR Floor, 5/22/2021(e)

 

3 Month LIBOR

 

Banking, Finance, Insurance & Real Estate

 

 

993,125

 

 

1,018,130

 

 

25,005

Performance Food Group, Inc., L+525, 1.00% LIBOR Floor, 11/14/2019

 

3 Month LIBOR

 

Beverage, Food & Tobacco

 

 

3,849,587

 

 

3,887,290

 

 

37,703

Securus Technologies Holdings, Inc., L+775, 1.25% LIBOR Floor, 4/30/2021

 

3 Month LIBOR

 

Telecommunications

 

 

1,002,075

 

 

990,830

 

 

(11,245)

Sheridan Holdings, Inc., L+725, 1.00% LIBOR Floor, 12/20/2021

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

2,736,250

 

 

2,750,000

 

 

13,750

TriNet HR Corp., L+775, 1.00% LIBOR Floor, 2/20/2021

 

2 Month LIBOR

 

Services: Business

 

 

2,465,510

 

 

2,512,500

 

 

46,990

U.S. Renal Care, Inc., L+750, 1.00% LIBOR Floor, 1/3/2020

 

3 Month LIBOR

 

Healthcare & Pharmaceuticals

 

 

676,200

 

 

696,900

 

 

20,700

TWCC Holding Corp., L+600, 1.00% LIBOR Floor, 6/26/2020

 

6 Month LIBOR

 

Media: Broadcasting & Subscription

 

 

2,039,400

 

 

2,115,373

 

 

75,973

Total Senior Secured Second Lien Term Loans

 

 

 

 

 

 

19,779,527

 

 

20,139,042

 

 

359,515

Total

 

 

 

 

 

$

148,199,937

 

$

149,748,554

 

$

1,548,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the 1940 Act, except for investments specifically identified as non-qualifying per note (e) below. The Company does not control and is not an affiliate of any of the companies that are issuers of the underlying loans subject to the TRS.

(b)

The 1, 2, 3, 4, 6 and 12 month LIBOR rates were 0.17%, 0.21%, 0.25%, 0.32%, 0.35% and 0.58%, respectively, as of December 31, 2013. The prime rate was 3.25% as of December 31, 2013. The applicable LIBOR rate as of December 31, 2013 for the loan listed may not be the applicable LIBOR rate, as the loan may have been priced or repriced based on a LIBOR rate prior to December 31, 2013.

(c)

Fair value determined by the Company’s board of directors (see Note 8).

(d)

Position or portion thereof unsettled as of December 31, 2013.

(e)

The investment is not a qualifying asset under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of that company’s total assets as defined under Section 55 of the 1940 Act. As of December 31, 2013, 88.2% of the Company’s total assets represented qualifying assets. In addition, as described in this note, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the TRS as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 76.1% of the Company’s total assets represented qualifying assets as of December 31, 2013.

 

29


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Note 8. Fair Value of Financial Instruments

 

The Company determines the fair value of all portfolio investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

ASC 820 establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

·      Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

·      Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

·      Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes that 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 the disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.

 

The following table presents fair value measurements of the Company’s portfolio investments and TRS as of June 30, 2014 and December 31, 2013, according to the fair value hierarchy:

 

 

 

June 30, 2014

Valuation Inputs

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Short Term

Investments

 

Total Return Swap

Level 1—Price quotations in active markets

 

$

 -  

 

$

 -  

 

$

 -  

 

$

38,395,666

 

$

 -  

Level 2—Significant other observable inputs

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

Level 3—Significant unobservable inputs

 

 

76,790,268

 

 

101,524,554

 

 

30,577,322

 

 

 -  

 

 

1,571,894

 

 

$

76,790,268

 

$

101,524,554

 

$

30,577,322

 

$

38,395,666

 

$

1,571,894

 

 

 

December 31, 2013

Valuation Inputs

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Short Term

Investments

 

Total Return Swap

Level 1—Price quotations in active markets

 

$

 -  

 

$

 -  

 

$

 -  

 

$

11,383,669

 

$

 -  

Level 2—Significant other observable inputs

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

Level 3—Significant unobservable inputs

 

 

61,787,430

 

 

22,552,214

 

 

8,795,600

 

 

 -  

 

 

1,548,617

 

 

$

61,787,430

 

$

22,552,214

 

$

8,795,600

 

$

11,383,669

 

$

1,548,617

 

30


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The Company’s investments as of June 30, 2014 and December 31, 2013, excluding short term investments, primarily consisted of debt securities that are traded on a private over-the-counter market for institutional investors. Except for investments specifically identified, the Company values its portfolio investments by using market comparables, discounted cash flow models and independent third-party pricing services, which provided prevailing bid and ask prices that were screened for validity by the pricing service from dealers on the determination date of the relevant period end. Four senior secured loans that were purchased near December 31, 2013, were valued using cost at acquisition, as the Company determined that the cost of the investments was the best indication of their current fair value.

 

The discounted cash flow model deemed appropriate by CIM is prepared for the applicable investments and reviewed by the Company’s valuation committee consisting of senior management. Such models are prepared at least quarterly or on an as needed basis. The model uses the estimated cash flow projections for the underlying investments and an appropriate discount rate is determined based on the latest financial information available for the borrower, prevailing market trends, comparable analysis and other inputs. The model, key assumptions, inputs, and results are reviewed by the Company’s valuation committee with final approval from the board of directors.

 

The Company periodically benchmarks the bid and ask prices received from the third-party pricing services against the actual prices at which it purchases and sells its investments. Based on the results of the benchmark analysis and the Company’s experience in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Company’s valuation committee and board of directors review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

 

Six and three of the Company’s collateralized security investments as of June 30, 2014 and December 31, 2013, respectively, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, each borrower’s ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt.

 

The Company values its TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the fair value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation primarily on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect a price that market participants may be willing to pay for an investment. These valuations are sent to the Company for review and testing. The Company reviews and approves the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of the quarterly valuation process. To the extent the Company has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuations will be discussed or challenged pursuant to the terms of the TRS Agreement. As a result of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that the total fair value of the TRS should be classified as Level 3 within the fair value hierarchy.

 

The Company did not have any transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the six months ended June 30, 2014 and 2013. The Company’s policy is to recognize transfers in and out as of the actual date of the event or change in circumstances that causes the transfer.

 

31


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

The following tables provide a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended

June 30, 2014

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Total Return

Swap

 

Total

Beginning balance, March 31, 2014

$

84,299,368

 

$

47,163,590

 

$

11,044,972

 

$

2,756,542

 

$

145,264,472

Investments purchased

16,136,212

 

57,147,031

 

19,529,222

 

 -  

 

92,812,465

Net realized gain

183,014

 

27,377

 

 -  

 

4,800,062

 

5,010,453

Net change in unrealized appreciation(1)

(98,450)

 

726,267

 

(25,061)

 

(1,184,648)

 

(581,892)

Accretion of discount

38,301

 

 

10,773

 

28,189

 

 

 -  

 

 

77,263

Sales and principal repayments

(23,768,177)

 

(3,550,484)

 

 -  

 

(4,800,062)

 

(32,118,723)

Ending balance, June 30, 2014

$

76,790,268

 

$

101,524,554

 

$

30,577,322

 

$

1,571,894

 

$

210,464,038

Change in unrealized gains or losses for the period included in changes in net assets for assets held at the end of the reporting period

$

139,156

 

$

765,508

 

$

(25,061)

 

$

124,308

 

$

1,003,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the amount of total gains/losses for the period included in the change in unrealized appreciation (depreciation) on investments and change in unrealized appreciation (depreciation) on total return swap still held at the reporting date.

 

 

 

Six Months Ended

June 30, 2014

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Total Return

Swap

 

Total

Beginning balance, December 31, 2013

$

61,787,430

 

$

22,552,214

 

$

8,795,600

 

$

1,548,617

 

$

94,683,861

Investments purchased

55,203,085

 

82,784,265

 

21,821,944

 

 -  

 

159,809,294

Net realized gain

327,356

 

56,749

 

 -  

 

7,763,541

 

8,147,646

Net change in unrealized appreciation(1)

214,870

 

1,067,906

 

(69,127)

 

23,277

 

1,236,926

Accretion of discount

79,605

 

 

15,229

 

28,905

 

 

 -  

 

 

123,739

Sales and principal repayments

(40,822,078)

 

(4,951,809)

 

 -  

 

(7,763,541)

 

(53,537,428)

Ending balance, June 30, 2014

$

76,790,268

 

$

101,524,554

 

$

30,577,322

 

$

1,571,894

 

$

210,464,038

Change in unrealized gains or losses for the period included in changes in net assets for assets held at the end of the reporting period

$

495,452

 

$

1,136,245

 

$

(69,127)

 

$

742,861

 

$

2,305,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the amount of total gains/losses for the period included in the change in unrealized appreciation (depreciation) on investments and change in unrealized appreciation (depreciation) on total return swap still held at the reporting date.

 

32


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

 

 

Three Months Ended

June 30, 2013

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Total Return

Swap

 

Total

Beginning balance, March 31, 2013

$

5,702,500

 

$

2,543,125

 

$

 -  

 

$

263,071

 

$

8,508,696

Investments purchased

 

11,185,863

 

2,818,325

 

 -  

 

 -  

 

14,004,188

Net realized gain

10,438

 

 -  

 

 -  

 

505,676

 

516,114

Net change in unrealized appreciation(1)

 

144,971

 

45,760

 

 -  

 

(163,108)

 

27,623

Accretion of discount

 

1,710

 

 

3,150

 

 

 -  

 

 

 -  

 

 

4,860

Sales and principal repayments

(627,548)

 

 -  

 

 -  

 

(505,676)

 

(1,133,224)

Ending balance, June 30, 2013

$

16,417,934

 

$

5,410,360

 

$

 -  

 

$

99,963

 

$

21,928,257

Change in unrealized gains or losses for the period included in changes in net assets for assets held at the end of the reporting period

$

155,905

 

$

45,760

 

$

 -  

 

$

(106,881)

 

$

94,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the amount of total gains/losses for the period included in the change in unrealized appreciation (depreciation) on investments and change in unrealized appreciation (depreciation) on total return swap still held at the reporting date.

 

 

 

Six Months Ended

June 30, 2013

 

First Lien Senior

Secured Term Loans

 

Second Lien Senior

Secured Term Loans

 

Collateralized Securities

 

Total Return

Swap

 

Total

Beginning balance, December 31, 2012

$

1,980,044

 

$

 -  

 

$

 -  

 

$

12,395

 

$

1,992,439

Investments purchased

 

15,362,353

 

5,295,825

 

 -  

 

 -  

 

20,658,178

Net realized gain

14,971

 

 -  

 

 -  

 

792,013

 

806,984

Net change in unrealized appreciation(1)

 

204,156

 

110,857

 

 -  

 

87,568

 

402,581

Accretion of discount

 

3,333

 

 

3,678

 

 

 -  

 

 

 -  

 

 

7,011

Sales and principal repayments

(1,146,923)

 

 -  

 

 -  

 

(792,013)

 

(1,938,936)

Ending balance, June 30, 2013

$

16,417,934

 

$

5,410,360

 

$

 -  

 

$

99,963

 

$

21,928,257

Change in unrealized gains or losses for the period included in changes in net assets for assets held at the end of the reporting period

$

204,156

 

$

110,857

 

$

 -  

 

$

97,723

 

$

412,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the amount of total gains/losses for the period included in the change in unrealized appreciation (depreciation) on investments and change in unrealized appreciation (depreciation) on total return swap still held at the reporting date.

 

Significant Unobservable Inputs

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of investments as of June 30, 2014 and December 31, 2013 were as follows:

 

 

June 30, 2014

 

Fair Value

 

Valuation Technique

 

Unobservable

Inputs

 

Range

(Weighted Average)

Senior secured term loans - first lien

$

76,790,268

 

Discounted cash flow

 

Discount rates

 

5.0% - 10.5%

(7.5%)

Senior secured term loans - second lien

$

101,524,554

 

Discounted cash flow

 

Discount rates

 

6.8% - 12.2%

(8.6%)

Collateralized securities

$

30,577,322

 

Discounted cash flow

 

Discount rates

 

9.1% - 13.0%

(10.5%)

 

 

December 31, 2013

 

Fair Value

 

Valuation Technique

 

Unobservable

Inputs

 

Range

(Weighted Average)

Senior secured term loans - first lien

$

61,787,430

 

Discounted cash flow

 

Discount rates

 

4.8% - 9.7%

(6.7%)

Senior secured term loans - second lien

$

22,552,214

 

Discounted cash flow

 

Discount rates

 

7.5% - 11.8%

(8.8%)

Collateralized securities

$

8,795,600

 

Discounted cash flow

 

Discount rates

 

10.0% - 13.0%

(11.8%)

 

33


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

 

The significant unobservable inputs used in the fair value measurement of the Company’s senior secured first lien and second lien term loans, and collateralized securities are discount rates. A significant increase or decrease in discount rates would result in a significantly lower or higher fair value measurement, respectively.

 

Note 9. General and Administrative Expense

 

General and administrative expense consisted of the following items for the three and six months ended June 30, 2014 and 2013:

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2014

 

2013

 

2014

 

2013

Marketing expense

$

 209,362  

 

$

 96,759  

 

$

 297,122  

 

$

 183,399  

Professional fees expense

 

 179,299  

 

 

 285,736  

 

 

 466,306  

 

 

 526,305  

Transfer agent expense

 

 160,354  

 

 

 25,365  

 

 

 276,699  

 

 

 38,967  

Due diligence fees

 

 78,639  

 

 

 122,326  

 

 

 401,626  

 

 

 161,344  

Filing fees

 

 74,076  

 

 

 51,450  

 

 

 79,727  

 

 

 57,550  

Dues and subscriptions

 

 57,439  

 

 

 12,033  

 

 

 78,849  

 

 

 22,966  

Insurance expense

 

 53,411  

 

 

 52,901  

 

 

 105,269  

 

 

 105,802  

Director fees and expenses

 

 44,500  

 

 

 8,185  

 

 

 76,789  

 

 

 16,024  

Printing and mailing expense

 

 36,104  

 

 

 73,738  

 

 

 69,242  

 

 

 98,626  

Other expenses

 

 124,303  

 

 

 23,522  

 

 

 223,986  

 

 

 49,895  

Total general and administrative expense

$

 1,017,487  

 

$

 752,015  

 

$

 2,075,615  

 

$

 1,260,878  

 

Note 10. Commitments and Contingencies

 

The Company entered into certain contracts with other parties that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss related to such indemnifications to be remote.

 

As of June 30, 2014 and December 31, 2013, the Company’s unfunded loan commitments amounted to $16,674,000 and $2,450,758, respectively. As of August 11, 2014, the Company’s unfunded loan commitments amounted to $48,341,000. For information on the companies to which the Company is committed to fund additional amounts as of June 30, 2014 and December 31, 2013, refer to the consolidated schedule of investments.

 

34


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

Note 11. Financial Highlights

 

The following is a schedule of financial highlights as of and for the six months ended June 30, 2014 and 2013:

 

 

 

As of and for the

 

As of and for the

 

 

Six Months

 

Six Months

 

 

Ended

 

Ended

 

 

June 30, 2014

 

June 30, 2013

Per share data:(1)

 

 

 

Net asset value at beginning of period

$

9.32

 

$

8.97

Results of operations:

 

 

 

 

 

 

Net investment (loss) income(2)

 

(0.01)

 

 

0.05

 

Net realized gain and net change in unrealized appreciation on investments

 

0.07

 

 

0.16

 

Net realized gain and net change in unrealized appreciation on total return swap

 

0.32

 

 

0.44

Net increase in net assets resulting from operations

 

0.38

 

 

0.65

Shareholder distributions:

 

 

 

 

 

 

Distributions from net realized gains

 

(0.34)

 

 

(0.06)

 

Distributions from other sources

 

(0.01)

 

 

(0.30)

Net decrease in net assets from shareholder distributions

 

(0.35)

 

 

(0.36)

Capital share transactions:

 

 

 

 

 

 

Issuance of common stock above net asset value(3)

 

0.03

 

 

0.15

 

Amortization of deferred offering expenses

 

0.00

 

 

(0.24)

Net increase (decrease) in net assets resulting from capital share transactions

 

0.03

 

 

(0.09)

Net asset value at end of period

$

9.38

 

$

9.17

Shares of common stock outstanding at end of period

 

32,949,270

 

 

3,853,304

Total investment return-net asset value(4)

 

4.45%

 

 

6.05%

Net assets at beginning of period

$

144,570,485

 

$

4,487,115

Net assets at end of period

$

309,087,705

 

$

35,321,918

Average net assets

$

226,620,761

 

$

19,904,517

 

 

 

 

 

 

 

Ratio/Supplemental data:

 

 

 

 

 

Ratio of net investment (loss) income to average net assets(5)

 

(0.08%)

 

 

0.54%

Ratio of net operating expenses to average net assets

 

2.66%

 

 

1.03%

Ratio of gross operating expenses to average net assets(6)

 

0.65%

 

 

3.22%

Ratio of total expenses (before expense reimbursements and recoupments) to average net assets

 

2.85%

 

 

10.91%

Ratio of expense reimbursements from IIG and expense recoupments to average net assets

 

0.20%

 

 

9.88%

Portfolio turnover rate(7)

 

31.04%

 

 

11.95%

Asset coverage ratio(8)

 

2.58

 

 

2.29

 

 

 

 

 

 

 

  

 

35


CĪON Investment Corporation

Notes to Consolidated Financial Statements 

June 30, 2014

(unaudited)

 

(1)

The per share data for the six months ended June 30, 2014 and 2013 was derived by using the weighted average shares of common stock outstanding during each period.

(2)

Net investment (loss) income per share includes the expense reimbursement from IIG of $0.04 and $0.97 per share for the six months ended June 30, 2014 and 2013, respectively, and expense recoupments of $0.02 per share for the six months ended June 30, 2014.

(3)

The continuous issuance of shares of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date.

(4)

Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s common stock at the beginning and end of the period, including distributions paid or payable during the period. Total investment return-net asset value is based on (i) the beginning period net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) the value of distributions payable, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company's distribution reinvestment plan and second amended and restated distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan and second amended and restated distribution reinvestment plan are issued at 95% (from January 1, 2013 through September 30, 2013) and 90% (from October 1, 2013 through June 30, 2014) of the then public offering price on the date of purchase, respectively. The total investment return-net asset value does not consider the effect of the sales load from the sale of the Company’s common stock. The total investment return-net asset value includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. Total returns covering less than a full period are not annualized.

(5)

Excluding the expense reimbursements from IIG and the recoupment of expense reimbursements during the period, the ratio of net investment loss to average net assets would have been (0.28%) and (9.34%) for the six months ended June 30, 2014 and 2013, respectively.

(6)

Operating expenses include all expenses borne by the Company, except for organization costs and offering expenses, base management fees, incentive fees, administrative services expenses and other general and administrative expenses owed to CIM and its affiliates, and interest expense.

(7)

Portfolio turnover rate is calculated using the lesser of year-to-date sales or purchases over the average of the invested assets at fair value, excluding short term investments, and is not annualized.

(8)

Asset coverage ratio is equal to (i) the sum of (a) net assets at the end of the period and (b) total senior securities outstanding at the end of the period, divided by (ii) total senior securities outstanding at the end of the period. For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding TRS notional amount at the end of the period, less the total amount of cash collateral posted by Flatiron under the TRS, as a senior security for the life of the TRS.

 

36


 

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

 

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” or similar terms include CĪON Investment Corporation and its consolidated subsidiaries.

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition to historical information, the following discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties.

 

Forward-Looking Statements

 

Some of the statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to:

 

 

our future operating results;

 

our business prospects and the prospects of our portfolio companies;

 

the impact of the investments that we expect to make;

 

the ability of our portfolio companies to achieve their objectives;

 

our current and expected financings and investments;

 

the adequacy of our cash resources, financing sources and working capital;

 

the use of borrowed money to finance a portion of our investments;

 

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

 

our contractual arrangements and relationships with third parties;

 

the actual and potential conflicts of interest with CIM and Apollo and their respective affiliates;

 

the ability of CIM and AIM to locate suitable investments for us and the ability of CIM to monitor and administer our investments;

 

the ability of CIM and AIM and their respective affiliates to attract and retain highly talented professionals;

 

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

 

our ability to source favorable private investments;

 

our tax status;

 

the effect of changes to tax legislation and our tax position;

 

the tax status of the companies in which we invest; and

 

the timing and amount of distributions and dividends from the companies in which we invest.

 

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Other factors that could cause actual results to differ materially include:

 

 

changes in the economy;

 

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

 

future changes in laws or regulations and conditions in our operating areas.

  

 

37


 

                 We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to review any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Overview

 

We were incorporated under the general corporation laws of the State of Maryland on August 9, 2011 and commenced operations on December 17, 2012 upon raising proceeds of $2,500,000 from persons not affiliated with us, CIM or Apollo. We are an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. We elected to be treated for federal income tax purposes as a RIC, as defined under Subchapter M of the Code.

 

Our investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. We anticipate that our portfolio will be comprised primarily of investments in senior secured loans and, to a lesser extent, second lien loans, collateralized loan obligations and long-term subordinated loans, referred to as mezzanine loans, of private and thinly traded U.S. middle-market companies. In connection with our debt investments, we may receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities. However, such investments are not expected to comprise a significant portion of our portfolio.

 

We are managed by CIM, our affiliate and a registered investment adviser. CIM oversees the management of our activities and is responsible for making investment decisions for our portfolio. We and CIM have engaged AIM to act as our investment sub-adviser.

 

We seek to meet our investment objective by utilizing the experienced management teams of both CIM and AIM, which includes their access to the relationships and human capital of Apollo, IIG and ICON Capital, in sourcing, evaluating and structuring transactions. We focus primarily on the senior secured debt of private and thinly traded U.S. middle-market companies, which we define as companies that generally possess annual EBITDA of $50 million or less, with experienced management teams, significant free cash flow, strong competitive positions and potential for growth.

 

Revenue

 

We primarily generate revenue in the form of interest income on the debt securities that we hold and capital gains on debt or other equity interests that we acquire in portfolio companies. The majority of our senior debt investments bear interest at a floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued, but unpaid, interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized when earned.

 

Operating Expenses

 

Our primary operating expenses are the payment of advisory fees and other expenses under the investment advisory and administration agreements. Our investment advisory fee compensates CIM for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. CIM is responsible for compensating AIM for its services pursuant to the investment sub-advisory agreement. We bear all other expenses of our operations and transactions, including, without limitation:

·         corporate expenses relating to borrowings and costs associated with the offering of our common stock, subject to limitations included in the administration agreement;

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

·         investment advisory fees;

·         fees payable to third parties relating to, or associated with, making, monitoring and disposing of investments and valuing investments and enforcing our contractual rights, including fees and expenses associated with performing due diligence reviews of prospective investments;

·         transfer agent and custodial fees;

·         fees and expenses associated with our marketing efforts;

·         interest payable on debt, if any, incurred to finance our investments;

·         federal and state registration fees;

·         federal, state and local taxes;

 

38


 

·         independent directors’ fees and expenses;

·         costs of proxy statements, tender offer materials, shareholders’ reports and notices;

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

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

·         fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002;

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

·         brokerage commissions for our investments; and

·         all other expenses incurred by CIM, AIM or us in connection with administering our business, including expenses incurred by CIM or AIM in performing its obligations, and the reimbursement of the compensation of our chief financial officer and chief compliance officer and their respective staffs paid by CIM, to the extent that they are not a person with a controlling interest in CIM or any of its affiliates, in each case subject to the limitations included in the investment advisory and administration agreements, as applicable.

 

Portfolio Investment Activity for the Three Months Ended June 30, 2014 and 2013

 

The following table summarizes our investment activity, excluding short term investments, for the three months ended June 30, 2014 and 2013:

 

 

 

 

Three Months Ended June 30,

 

 

 

2014

 

2013

Net Investment Activity

 

Investment Portfolio

 

Total Return Swap

 

Total

 

Investment Portfolio

 

Total Return Swap

 

Total

Purchases and drawdowns

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loans - first lien

 

$

16,136,212

 

$

151,011,079

 

$

167,147,291

 

$

11,185,863

 

$

45,827,010

 

$

57,012,873

 

Senior secured term loans - second lien

 

 

57,147,031

 

 

15,111,625

 

 

72,258,656

 

 

2,818,325

 

 

7,179,785

 

 

9,998,110

 

Collateralized securities

 

 

19,529,222

 

 

 -  

 

 

19,529,222

 

 

 -  

 

 

 -  

 

 

 -  

 

Subordinated unsecured term loans

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

1,425,428

 

 

1,425,428

Sales and principal repayments

 

 

(27,318,661)

 

 

(121,905,999)

 

 

(149,224,660)

 

 

(627,548)

 

 

(30,960,587)

 

 

(31,588,135)

Net portfolio activity

 

$

65,493,804

 

$

44,216,705

 

$

109,710,509

 

$

13,376,640

 

$

23,471,636

 

$

36,848,276

 

39


 

The following table summarizes the composition of our investment portfolio at amortized cost and fair value and our underlying TRS loans portfolio at notional amount and fair value as of June 30, 2014 and December 31, 2013:

 

 

 

June 30, 2014

 

 

Investment Portfolio

 

Total Return Swap

 

Total

 

 

Investments Amortized

Cost(1)

 

Investments Fair

Value

 

Percentage of

Investment

Portfolio

 

Notional Amount of Underlying TRS Loans

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Amortized Cost/

Notional Amount

 

Fair Value

 

Percentage

Senior secured term loans - first lien

 

$

75,883,653

 

$

76,790,268

 

36.8%

 

$

239,113,988

 

$

240,628,558

 

86.7%

 

$

314,997,641

 

$

317,418,826

 

65.3%

Senior secured term loans - second lien

 

 

100,093,765

 

 

101,524,554

 

48.6%

 

 

36,833,751

 

 

36,891,075

 

13.3%

 

 

136,927,516

 

 

138,415,629

 

28.4%

Collateralized securities

 

 

30,596,849

 

 

30,577,322

 

14.6%

 

 

 -  

 

 

 -  

 

 -  

 

 

30,596,849

 

 

30,577,322

 

6.3%

Subtotal/total percentage

 

 

206,574,267

 

 

208,892,144

 

100.0%

 

 

275,947,739

 

 

277,519,633

 

100.0%

 

 

482,522,006

 

 

486,411,777

 

100.0%

Short term investments(2)

 

 

38,395,666

 

 

38,395,666

 

 

 

 

 -  

 

 

 -  

 

 

 

 

38,395,666

 

 

38,395,666

 

 

Total investments

 

$

244,969,933

 

$

247,287,810

 

 

 

$

275,947,739

 

$

277,519,633

 

 

 

$

520,917,672

 

$

524,807,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of portfolio companies

 

 

 

 

47

 

 

 

 

 

 

 

56

 

 

 

 

 

 

 

93(3)

Average annual EBITDA of portfolio companies

 

 

$60.7 million

 

 

 

 

 

$85.8 million

 

 

 

 

 

$76.0 million

Median annual EBITDA of portfolio companies

 

 

$49.6 million

 

 

 

 

 

$65.0 million

 

 

 

 

 

$62.0 million

Purchased at a weighted average price of par

 

 

 

 

98.22%

 

 

 

 

 

 

 

99.47%

 

 

 

 

 

 

 

98.93%

Gross annual portfolio yield based upon the purchase price(4)

 

8.31%

 

 

 

 

 

 

 

6.75%(5)

 

 

 

 

 

 

 

7.42%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments.

(2)

Short term investments represent an investment in a fund that invests in highly liquid investments with original maturity dates of three months or less.

(3)

The sum of investment portfolio and TRS portfolio companies does not equal the total number of portfolio companies. This is due to ten portfolio companies being in both the investment and TRS portfolios.

(4)

The portfolio yield does not represent an actual investment return to shareholders.

(5)

The portfolio yield for underlying TRS loans is determined without giving consideration to leverage.

 

 

 

December 31, 2013

 

 

Investment Portfolio

 

Total Return Swap

 

Total

 

 

Investments Amortized

Cost(1)

 

Investments Fair

Value

 

Percentage of

Investment

Portfolio

 

Notional Amount of Underlying TRS Loans

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Amortized Cost/

Notional Amount(1)

 

Fair Value

 

Percentage

Senior secured term loans - first lien

 

$

61,095,685

 

$

61,787,430

 

66.4%

 

$

128,420,410

 

$

129,609,512

 

86.6%

 

$

189,516,095

 

$

191,396,942

 

78.8%

Senior secured term loans - second lien

 

 

22,189,331

 

 

22,552,214

 

24.2%

 

 

19,779,527

 

 

20,139,042

 

13.4%

 

 

41,968,858

 

 

42,691,256

 

17.6%

Collateralized securities

 

 

8,746,000

 

 

8,795,600

 

9.4%

 

 

 -  

 

 

 -  

 

 -  

 

 

8,746,000

 

 

8,795,600

 

3.6%

Subtotal/total percentage

 

 

92,031,016

 

 

93,135,244

 

100.0%

 

 

148,199,937

 

 

149,748,554

 

100.0%

 

 

240,230,953

 

 

242,883,798

 

100.0%

Short term investments(2)

 

 

11,383,669

 

 

11,383,669

 

 

 

 

 -  

 

 

 -  

 

 

 

 

11,383,669

 

 

11,383,669

 

 

Total investments

 

$

103,414,685

 

$

104,518,913

 

 

 

$

148,199,937

 

$

149,748,554

 

 

 

$

251,614,622

 

$

254,267,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of portfolio companies

 

 

 

 

39

 

 

 

 

 

 

 

62

 

 

 

 

 

 

 

91(3)

Average annual EBITDA of portfolio companies

 

 

$50.8 million

 

 

 

 

 

$157.0 million

 

 

 

 

 

$120.2 million

Median annual EBITDA of portfolio companies

 

 

$47.7 million

 

 

 

 

 

$102.7 million

 

 

 

 

 

$72.9 million

Purchased at a weighted average price of par

 

 

 

 

98.57%

 

 

 

 

 

 

 

99.09%

 

 

 

 

 

 

 

98.89%

Gross annual portfolio yield based upon the purchase price(4)

 

7.86%

 

 

 

 

 

 

 

6.71%(5)

 

 

 

 

 

 

 

7.15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments.

(2)

Short term investments represent an investment in a fund that invests in highly liquid investments with original maturity dates of three months or less.

(3)

The sum of investment portfolio and TRS portfolio companies does not equal the total number of portfolio companies. This is due to ten portfolio companies being in both the investment and TRS portfolios.

(4)

The portfolio yield does not represent an actual investment return to shareholders.

(5)

The portfolio yield for underlying TRS loans is determined without giving consideration to leverage.

 

40


 

The following table summarizes the composition of our investment portfolio and our underlying TRS loans portfolio by the type of interest rate as of June 30, 2014 and December 31, 2013, excluding short term investments of $38,395,666 and $11,383,669, respectively:

 

 

 

 

June 30, 2014

 

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Interest Rate Allocation

 

Investments Amortized

Cost

 

Investments Fair

Value

 

Percentage of

Investment

Portfolio

 

Notional Amount of Underlying TRS Loans

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Amortized Cost/

Notional Amount

 

Fair Value

 

Percentage

Floating interest rate investments

 

$

203,588,545

 

$

205,781,940

 

98.5%

 

$

275,947,739

 

$

277,519,633

 

100.0%

 

$

479,536,284

 

$

483,301,573

 

99.4%

Fixed interest rate investments

 

 

2,985,722

 

 

3,110,204

 

1.5%

 

 

 -    

 

 

 -    

 

 -    

 

 

2,985,722

 

 

3,110,204

 

0.6%

Total investments

 

$

206,574,267

 

$

208,892,144

 

100.0%

 

$

275,947,739

 

$

277,519,633

 

100.0%

 

$

482,522,006

 

$

486,411,777

 

100.0%

 

 

 

 

December 31, 2013

 

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Interest Rate Allocation

 

Investments Amortized

Cost

 

Investments Fair

Value

 

Percentage of

Investment

Portfolio

 

Notional Amount of Underlying TRS Loans

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Amortized Cost/

Notional Amount

 

Fair Value

 

Percentage

Floating interest rate investments

 

$

92,031,016

 

$

93,135,244

 

100.0%

 

$

148,199,937

 

$

149,748,554

 

100.0%

 

$

240,230,953

 

$

242,883,798

 

100.0%

Fixed interest rate investments

 

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 

 -  

 

 -  

Total investments

 

$

92,031,016

 

$

93,135,244

 

100.0%

 

$

148,199,937

 

$

149,748,554

 

100.0%

 

$

240,230,953

 

$

242,883,798

 

100.0%

 

41


 

The following table shows the composition of our investment portfolio and our underlying TRS loans portfolio by industry classification and the percentage, by fair value, of the total assets in such industries as of June 30, 2014 and December 31, 2013:

 

 

 

June 30, 2014

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Industry Classification

 

Investments Fair Value

 

Percentage of

Investment Portfolio

 

Fair Value of

Underlying

TRS Loans

 

Percentage of

Underlying

TRS Loans

 

Fair Value

 

Percentage

Services: Business

 

$

36,640,254

 

17.5%

 

$

33,957,604

 

12.3%

 

$

70,597,858

 

14.5%

Healthcare & Pharmaceuticals

 

 

17,389,316

 

8.3%

 

 

42,749,351

 

15.4%

 

 

60,138,667

 

12.4%

High Tech Industries

 

 

22,225,813

 

10.6%

 

 

15,563,087

 

5.6%

 

 

37,788,900

 

7.8%

Retail

 

 

 -  

 

-

 

 

34,203,807

 

12.3%

 

 

34,203,807

 

7.0%

Diversified Financials

 

 

30,577,322

 

14.6%

 

 

 -  

 

-

 

 

30,577,322

 

6.3%

Energy: Oil & Gas

 

 

7,548,610

 

3.7%

 

 

22,829,211

 

8.2%

 

 

30,377,821

 

6.2%

Chemicals, Plastics & Rubber

 

 

6,861,526

 

3.3%

 

 

20,572,822

 

7.4%

 

 

27,434,348

 

5.7%

Construction & Building

 

 

6,144,188

 

2.9%

 

 

17,477,367

 

6.3%

 

 

23,621,555

 

4.9%

Automotive

 

 

14,634,267

 

7.0%

 

 

6,833,041

 

2.5%

 

 

21,467,308

 

4.4%

Consumer Goods: Durable

 

 

 -  

 

-

 

 

20,904,425

 

7.5%

 

 

20,904,425

 

4.3%

Consumer Goods: Non-Durable

 

 

6,328,022

 

3.0%

 

 

11,850,943

 

4.3%

 

 

18,178,965

 

3.8%

Capital Equipment

 

 

9,950,063

 

4.8%

 

 

8,019,563

 

2.9%

 

 

17,969,626

 

3.7%

Media: Broadcasting & Subscription

 

 

2,129,339

 

1.0%

 

 

12,417,680

 

4.5%

 

 

14,547,019

 

3.0%

Banking, Finance, Insurance & Real Estate

 

 

845,460

 

0.4%

 

 

11,886,625

 

4.3%

 

 

12,732,085

 

2.6%

Beverage, Food & Tobacco

 

 

11,778,769

 

5.6%

 

 

317,086

 

0.1%

 

 

12,095,855

 

2.5%

Aerospace & Defense

 

 

1,452,041

 

0.7%

 

 

8,875,916

 

3.2%

 

 

10,327,957

 

2.1%

Media: Diversified & Production

 

 

9,609,642

 

4.6%

 

 

547,087

 

0.2%

 

 

10,156,729

 

2.1%

Hotel, Gaming & Leisure

 

 

6,328,850

 

3.0%

 

 

2,634,914

 

0.9%

 

 

8,963,764

 

1.8%

Services: Consumer

 

 

5,583,028

 

2.7%

 

 

1,947,563

 

0.7%

 

 

7,530,591

 

1.5%

Environmental Industries

 

 

4,993,750

 

2.4%

 

 

 -  

 

-

 

 

4,993,750

 

1.0%

Telecommunications

 

 

3,543,750

 

1.7%

 

 

1,012,500

 

0.4%

 

 

4,556,250

 

0.9%

Media: Advertising, Printing & Publishing

 

 

4,328,134

 

2.2%

 

 

 -  

 

-

 

 

4,328,134

 

0.9%

Containers, Packaging & Glass

 

 

 -  

 

-

 

 

1,980,038

 

0.7%

 

 

1,980,038

 

0.4%

Forest Products & Paper

 

 

 -  

 

-

 

 

939,003

 

0.3%

 

 

939,003

 

0.2%

Subtotal/total percentage

 

 

208,892,144

 

100.0%

 

 

277,519,633

 

100.0%

 

 

486,411,777

 

100.0%

U.S. Treasury Securities

 

 

38,395,666

 

 

 

 

 -  

 

 

 

 

38,395,666

 

 

Total investments

 

$

247,287,810

 

 

 

$

277,519,633

 

 

 

$

524,807,443

 

 

 

42


 

 

 

December 31, 2013

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Industry Classification

 

Investments Fair Value

 

Percentage of

Investment Portfolio

 

Fair Value of

Underlying

TRS Loans

 

Percentage of

Underlying

TRS Loans

 

Fair Value

 

Percentage

Healthcare & Pharmaceuticals

 

$

8,968,804

 

9.6%

 

$

28,520,188

 

19.0%

 

$

37,488,992

 

15.4%

Services: Business

 

 

15,754,714

 

16.9%

 

 

21,710,669

 

14.5%

 

 

37,465,383

 

15.4%

Chemicals, Plastics & Rubber

 

 

6,797,514

 

7.3%

 

 

12,767,942

 

8.5%

 

 

19,565,456

 

8.1%

Consumer Goods: Non-Durable

 

 

9,527,245

 

10.2%

 

 

8,353,950

 

5.7%

 

 

17,881,195

 

7.5%

Banking, Finance, Insurance & Real Estate

 

 

2,427,410

 

2.6%

 

 

15,399,479

 

10.3%

 

 

17,826,889

 

7.3%

Media: Broadcasting & Subscription

 

 

3,544,422

 

3.8%

 

 

9,713,966

 

6.5%

 

 

13,258,388

 

5.5%

Energy: Oil & Gas

 

 

3,629,300

 

3.9%

 

 

6,286,404

 

4.2%

 

 

9,915,704

 

4.1%

Telecommunications

 

 

3,973,040

 

4.3%

 

 

5,502,732

 

3.7%

 

 

9,475,772

 

3.9%

Diversified Financials

 

 

8,795,600

 

9.4%

 

 

 -  

 

 -  

 

 

8,795,600

 

3.6%

Beverage, Food & Tobacco

 

 

 -  

 

 -  

 

 

8,597,752

 

5.7%

 

 

8,597,752

 

3.5%

Aerospace & Defense

 

 

1,463,701

 

1.6%

 

 

6,796,190

 

4.5%

 

 

8,259,891

 

3.4%

Services: Consumer

 

 

5,628,126

 

6.0%

 

 

1,965,000

 

1.3%

 

 

7,593,126

 

3.1%

Automotive

 

 

7,473,560

 

8.0%

 

 

 -  

 

 -  

 

 

7,473,560

 

3.1%

High Tech Industries

 

 

2,876,400

 

3.1%

 

 

4,353,293

 

2.9%

 

 

7,229,693

 

3.0%

Retail

 

 

 -  

 

 -  

 

 

6,661,756

 

4.4%

 

 

6,661,756

 

2.7%

Containers, Packaging & Glass

 

 

1,500,000

 

1.6%

 

 

4,488,750

 

3.0%

 

 

5,988,750

 

2.5%

Environmental Industries

 

 

1,909,952

 

2.1%

 

 

3,554,920

 

2.4%

 

 

5,464,872

 

2.2%

Hotel, Gaming & Leisure

 

 

515,000

 

0.6%

 

 

4,336,815

 

2.9%

 

 

4,851,815

 

2.0%

Construction & Building

 

 

3,415,256

 

3.7%

 

 

 -  

 

 -  

 

 

3,415,256

 

1.4%

Capital Equipment

 

 

3,014,850

 

3.2%

 

 

 -  

 

 -  

 

 

3,014,850

 

1.2%

Media: Diversified & Production

 

 

1,920,350

 

2.1%

 

 

 -  

 

 -  

 

 

1,920,350

 

0.8%

Forest Products & Paper

 

 

 -  

 

 -  

 

 

738,748

 

0.5%

 

 

738,748

 

0.3%

Subtotal/total percentage

 

 

93,135,244

 

100.0%

 

 

149,748,554

 

100.0%

 

 

242,883,798

 

100.0%

U.S. Treasury Securities

 

 

11,383,669

 

 

 

 

 -  

 

 

 

 

11,383,669

 

 

Total investments

 

$

104,518,913

 

 

 

$

149,748,554

 

 

 

$

254,267,467

 

 

 

We do not “control” and are not an “affiliate” of any of our portfolio companies or any of the companies of the loans underlying the TRS, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company or issuer if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company or issuer if we owned 5% or more of its voting securities.

 

Our investment portfolio may contain senior secured investments that are in the form of lines of credit, unfunded delayed drawdown loan commitments, or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014 and December 31, 2013, our unfunded loan commitments amounted to $16,674,000 and $2,450,758, respectively. As of August 11, 2014, our unfunded loan commitments amounted to $48,341,000.

 

43


 

Investment Portfolio Asset Quality

 

CIM uses an investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio. These ratings are just one of several factors that CIM uses to monitor our portfolio, are not in and of themselves determinative of fair value or revenue recognition and are presented for indicative purposes. CIM grades the credit risk of all investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors.

 

The following is a description of the conditions associated with each investment rating used in this ratings system:

 

Investment Grade

Description

1

Indicates the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit.

2

Indicates a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing in accordance with our analysis of its business and the full return of principal and interest or dividend is expected.

3

Indicates that the risk to our ability to recoup the cost of such investment has increased since origination or acquisition, but full return of principal and interest or dividend is expected. A portfolio company with an investment grade of 3 requires closer monitoring.

4

Indicates that the risk to our ability to recoup the cost of such investment has increased significantly since origination or acquisition, including as a result of factors such as declining performance and noncompliance with debt covenants, and we expect some loss of interest, dividend or capital appreciation, but still expect an overall positive internal rate of return on the investment.

5

Indicates that the risk to our ability to recoup the cost of such investment has increased materially since origination or acquisition and the portfolio company likely has materially declining performance. Loss of interest or dividend and some loss of principal investment is expected, which would result in an overall negative internal rate of return on the investment.

For investments graded 3, 4, or 5, CIM enhances its level of scrutiny over the monitoring of such portfolio company.

 

44


 

The following table summarizes the composition of our investment portfolio and our underlying TRS loans portfolio based on the 1 to 5 investment rating scale at fair value as of June 30, 2014 and December 31, 2013, excluding short term investments of $38,395,666 and $11,383,669, respectively:

  

 

 

June 30, 2014

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Investment Rating

 

Investments

Fair Value

 

Percentage of

Investment Portfolio

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Fair Value

 

Percentage

1

 

$

 -  

 

 -  

 

$

 -  

 

 -  

 

$

 -  

 

 -  

2

 

 

208,892,144

 

100.0%

 

 

270,593,833

 

97.5%

 

 

479,485,977

 

98.6%

3

 

 

 -  

 

 -  

 

 

6,925,800

 

2.5%

 

 

6,925,800

 

1.4%

4

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 -  

5

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

$

208,892,144

 

100.0%

 

$

277,519,633

 

100.0%

 

$

486,411,777

 

100.0%

 

 

 

December 31, 2013

 

 

Investment Portfolio

 

Total Return Swap

 

Total

Investment Rating

 

Investments

Fair Value

 

Percentage of

Investment Portfolio

 

Fair Value of Underlying TRS Loans

 

Percentage of Underlying TRS Loans

 

Fair Value

 

Percentage

1

 

$

 -  

 

 -  

 

$

 -  

 

 -  

 

$

 -  

 

 -  

2

 

 

93,135,244

 

100.0%

 

 

149,748,554

 

100.0%

 

 

242,883,798

 

100.0%

3

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 -  

4

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 -  

5

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

 -  

 

 -  

 

 

$

93,135,244

 

100.0%

 

$

149,748,554

 

100.0%

 

$

242,883,798

 

100.0%

 

The amount of the investment portfolio and underlying TRS loans in each grading category may vary substantially from period to period resulting primarily from changes in the composition of each portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

 

Current Investment Portfolio

 

As of August 11, 2014, our investment portfolio, excluding our short term investments and TRS, consisted of interests in 50 portfolio companies (37% in first lien senior secured term loans, 51% in second lien senior secured term loans and 12% in collateralized securities) with a total fair value of $254,355,371 with an average and median portfolio company annual EBITDA of $88.3 million and $54.7 million, respectively, at initial investment. As of August 11, 2014, investments in our portfolio were purchased at a weighted average price of 98.33% of par value. Our estimated gross annual portfolio yield was 8.49% based upon the purchase price of our investments. The portfolio yield does not represent an actual investment return to shareholders.

 

As of August 11, 2014, our short term investments included an investment in a U.S. Treasury Obligations Fund of $38,538,525.

 

Further, as of August 11, 2014, through a TRS (described further in Note 7 of our consolidated financial statements), we obtained the economic benefit of owning investments in first lien senior secured and second lien senior secured floating-rate loans of 66 portfolio companies.

  

 

45


 

Results of Operations for the Three Months Ended June 30, 2014 and 2013

 

                Our results of operations for the three months ended June 30, 2014 and 2013 were as follows:

 

 

 

Three Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Investment income

$

3,634,027

 

$

245,494

 

 

Net operating expenses

 

3,570,286

 

 

90,601

 

 

Net investment income

63,741

 

 

154,893

 

 

Net realized gain on investments

210,391

 

 

10,438

 

 

Net change in unrealized appreciation on investments

602,756

 

 

190,731

 

 

Net realized gain on total return swap

4,800,062

 

 

505,676

 

 

Net change in unrealized appreciation on total return swap

(1,184,648)

 

 

(163,108)

 

 

Net increase in net assets resulting from operations

$

4,492,302

 

$

698,630

 

 

Investment Income

 

For the three months ended June 30, 2014 and 2013, we generated investment income of $3,634,027 and $245,494, respectively, consisting primarily of interest income on investments in senior secured loans of 52 and 22 portfolio companies held during each respective period. During the three months ended June 30, 2014 and 2013, our investment portfolio, excluding short term investments and the TRS, increased approximately $66,384,000 and $13,582,000, respectively, as we continued to deploy the net proceeds from our continuous offering. We expect our investment portfolio to continue to grow due to the anticipated increase in equity available to us for investment from our continuous offering. As a result, we believe that reported investment income for the three months ended June 30, 2014 and 2013 is not representative of our stabilized or future performance. Interest income earned by loans underlying the TRS is not included in investment income in the consolidated statements of operations, but rather it is recorded as part of net realized gain on total return swap.

 

Operating Expenses

 

The composition of our operating expenses for the three months ended June 30, 2014 and 2013 was as follows:

 

 

 

Three Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Management fees

$

1,303,206

 

$

120,781

 

 

Administrative services expense

 

430,220

 

 

307,636

 

 

Capital gains incentive fee

219,747

 

 

57,705

 

 

General and administrative

 

1,017,487

 

 

752,015

 

 

Total expenses

2,970,660

 

 

1,238,137

 

 

Expense reimbursement from IIG

 -  

 

 

(1,147,536)

 

 

Recoupment of expense reimbursement from IIG

 

599,626

 

 

 -  

 

 

Net operating expenses

$

3,570,286

 

$

90,601

 

 

46


 

The composition of our general and administrative expenses for the three months ended June 30, 2014 and 2013 was as follows:

 

 

 

Three Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Marketing expense

$

209,362

 

$

96,759

 

 

Professional fees expense

 

179,299

 

 

285,736

 

 

Transfer agent expense

 

160,354

 

 

25,365

 

 

Due diligence fees

 

78,639

 

 

122,326

 

 

Filing fees

 

74,076

 

 

51,450

 

 

Dues and subscriptions

 

57,439

 

 

12,033

 

 

Insurance expense

 

53,411

 

 

52,901

 

 

Director fees and expenses

 

44,500

 

 

8,185

 

 

Printing and mailing expense

 

36,104

 

 

73,738

 

 

Other expenses

 

124,303

 

 

23,522

 

 

Total general and administrative expense

$

1,017,487

 

$

752,015

 

 

Expense Reimbursement

 

Our affiliate, IIG, has agreed to reimburse us commencing with the quarter ended December 31, 2012 for certain expenses pursuant to the expense support and conditional reimbursement agreement. Refer to the discussion under “Related Party Transactions” below for further details about the expense support and conditional reimbursement agreement. Also, see Note 4 to our consolidated financial statements for additional disclosure regarding the expense reimbursements from IIG.

 

For the three months ended June 30, 2014, IIG recouped $599,626 of expense reimbursements made in connection with the expense support and conditional reimbursement agreement during the three months ended December 31, 2012 and March 31, 2013, compared to expense reimbursements from IIG of $1,147,536 for the three months ended June 30, 2013. All expense reimbursements from IIG for the three months ended June 30, 2013 are eligible to be reimbursed by us through June 30,  2016.

 

Reimbursement of such costs will be determined as appropriate to meet the objectives of the expense support and conditional reimbursement agreement. As a result, we may or may not be requested to reimburse any further costs by IIG.

 

The table below presents a summary of all expenses supported by IIG and the associated dates through which such expenses are eligible for reimbursement by us for the following three month periods.

Three Months Ended

 

Expense Support Received from IIG

 

Expense Support Reimbursed to IIG

 

Unreimbursed Expense Support

 

Ratio of Operating Expense to Average Net Assets for the Period(1)

 

Annualized Distribution Rate for the Period(3)

 

Eligible for Reimbursement through

December 31, 2012

 

$

116,706

 

$

116,706

 

$

 -  

 

0.93%

 

0.00%(2)

 

December 31, 2015

March 31, 2013

 

 

819,373

 

 

482,920

 

 

336,453

 

2.75%

 

7.00%

 

March 31, 2016

June 30, 2013

 

 

1,147,536

 

 

 -  

 

 

1,147,536

 

1.43%

 

7.00%

 

June 30, 2016

September 30, 2013

 

 

1,296,834

 

 

 -  

 

 

1,296,834

 

0.49%

 

7.00%

 

September 30, 2016

December 31, 2013

 

 

695,160

 

 

 -  

 

 

695,160

 

0.31%

 

7.00%

 

December 31, 2016

March 31, 2014

 

 

1,048,858

 

 

 -  

 

 

1,048,858

 

0.25%

 

7.00%

 

March 31, 2017

June 30, 2014

 

 

 -  

 

 

 -  

 

 

 -  

 

0.36%

 

7.00%

 

June 30, 2017

Total

 

$

5,124,467

 

$

599,626

 

$

4,524,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                 

(1)

Operating expenses include all expenses borne by us, except for organization costs and offering expenses, interest expense, base management fees, incentive fees, administrative services expenses and other general and administrative expenses owed to CIM and its affiliates.

(2)

We did not declare any distributions during the three months ended December 31, 2012.

(3)

Annualized Distribution Rate equals the annualized rate of distributions paid to shareholders based on the amount of the regular cash distributions paid immediately prior to the date the expense support payment obligation was incurred by CIM. Annualized Distribution Rate does not include special cash or stock distributions paid to shareholders.

 

47


 

Net Investment Income

 

Our net investment income totaled $63,741 and $154,893 for the three months ended June 30, 2014 and 2013, respectively. The decrease in net investment income during the second quarter of 2014, compared to the corresponding 2013 period, was primarily due to a decrease in expense support from IIG as we began to achieve economies of scale sufficient to bear a reasonable level of expense in relation to our investment income and realized gains.

 

Net Realized Gain on Investments

 

Our net realized gain on investments totaled $210,391 and $10,438 for the three months ended June 30, 2014 and 2013, respectively. During the second quarter of 2014, we received sale proceeds and principal repayments of $27,064,543 and $254,118, respectively, for gains of $210,391. For the corresponding 2013 period, we realized gains of $10,438 entirely on principal repayments of $627,548.

 

Net Change in Unrealized Appreciation on Investments

 

The net change in unrealized appreciation on our investments totaled $602,756 and $190,731 for the three months ended June 30, 2014 and 2013, respectively. This change was predominantly driven by primary investments, sourced with the assistance of AIM, made available to us at advantageous purchase prices, as well as the growth and increase in fair value of the investments in our investment portfolio.

 

Net Realized Gain on TRS

 

Our net realized gain on the TRS totaled $4,800,062 and $505,676 for the three months ended June 30, 2014 and 2013, respectively. The components of net realized gain on the TRS are summarized below for the three months ended June 30, 2014 and 2013:

 

 

 

 

Three Months Ended

June 30,

 

 

 

 

2014

 

 

2013

 

 

Interest and other income from TRS portfolio

 

$

4,349,324

 

 

$

355,656

 

 

Interest and other expense from TRS portfolio

 

 

(1,022,891)

 

 

 

(100,442)

 

 

Net gain on TRS loan sales

 

 

1,473,629

 

 

 

250,462

 

 

Total

 

$

4,800,062

 

 

$

505,676

 

 

Net Change in Unrealized Appreciation on TRS

 

                The net decrease in unrealized appreciation on the TRS totaled $1,184,648 and $163,108 for the three months ended June 30, 2014 and 2013, respectively. For both periods, the decrease was primarily the result of unrealized appreciation on loans underlying the TRS becoming realized gains upon the sale of such loans.

 

Net Increase in Net Assets Resulting from Operations

 

                For the three months ended June 30, 2014 and 2013, we recorded a net increase in net assets resulting from operations of $4,492,302 and $698,630, respectively.  

 

48


 

Results of Operations for the Six Months Ended June 30, 2014 and 2013

 

                Our results of operations for the six months ended June 30, 2014 and 2013 were as follows:

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Investment income

$

5,834,808

 

$

313,620

 

 

Net operating expenses

 

6,020,559

 

 

205,411

 

 

Net investment (loss) income

(185,751)

 

 

108,209

 

 

Net realized gain on investments

384,105

 

 

14,971

 

 

Net change in unrealized appreciation on investments

1,213,649

 

 

315,013

 

 

Net realized gain on total return swap

7,763,541

 

 

792,013

 

 

Net change in unrealized appreciation on total return swap

23,277

 

 

87,568

 

 

Net increase in net assets resulting from operations

$

9,198,821

 

$

1,317,774

 

 

Investment Income

 

For the six months ended June 30, 2014 and 2013, we generated investment income of $5,834,808 and $313,620, respectively, consisting primarily of interest income on investments in senior secured loans of 61 and 23 portfolio companies held during each respective period. During the six months ended June 30, 2014 and 2013, our investment portfolio, excluding short term investments and the TRS, increased approximately $115,757,000 and $19,848,000, respectively, as we continued to deploy the net proceeds from our continuous offering. We expect our investment portfolio to continue to grow due to the anticipated increase in equity available to us for investment from our continuous offering. As a result, we believe that reported investment income for the six months ended June 30, 2014 and 2013 is not representative of our stabilized or future performance. Interest income earned by loans underlying the TRS is not included in investment income in the consolidated statements of operations, but rather it is recorded as part of net realized gain on total return swap.

 

Operating Expenses

 

The composition of our operating expenses for the six months ended June 30, 2014 and 2013 was as follows:

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Management fees

$

2,212,013

 

$

165,523

 

 

Administrative services expense

 

845,615

 

 

571,191

 

 

Capital gains incentive fee

745,073

 

 

174,728

 

 

Offering expense - IIG

 

591,475

 

 

 -  

 

 

General and administrative

 

2,075,615

 

 

1,260,878

 

 

Total expenses

6,469,791

 

 

2,172,320

 

 

Expense reimbursement from IIG

(1,048,858)

 

 

(1,966,909)

 

 

Recoupment of expense reimbursement from IIG

 

599,626

 

 

 -  

 

 

Net operating expenses

$

6,020,559

 

$

205,411

 

 

49


 

The composition of our general and administrative expenses for the six months ended June 30, 2014 and 2013 was as follows:

 

 

 

Six Months Ended

June 30,

 

 

 

2014

 

2013

 

 

Professional fees expense

$

466,306

 

$

526,305

 

 

Due diligence fees

 

401,626

 

 

161,344

 

 

Marketing expense

 

297,122

 

 

183,399

 

 

Transfer agent expense

 

276,699

 

 

38,967

 

 

Insurance expense

 

105,269

 

 

105,802

 

 

Filing fees

 

79,727

 

 

57,550

 

 

Dues and subscriptions

 

78,849

 

 

22,966

 

 

Director fees and expenses

 

76,789

 

 

16,024

 

 

Printing and mailing expense

 

69,242

 

 

98,626

 

 

Other expenses

 

223,986

 

 

49,895

 

 

Total general and administrative expense

$

2,075,615

 

$

1,260,878

 

 

Expense Reimbursement

 

For the six months ended June 30, 2014, we received expense reimbursements from IIG of $1,048,858 and IIG recouped $599,626 of prior expense reimbursements made during the three months ended December 31, 2012 and March 31, 2013 in connection with the expense support and conditional reimbursement agreement.  For the six months ended June 30, 2013, we received expense reimbursements from IIG of $1,966,909.

 

Refer to section, “Results of Operations for the Three Months Ended June 30, 2014 and 2013—Expense Reimbursement” above for further detail on our expense reimbursement with our affiliate, IIG.

  

Net Investment (Loss) Income

 

Our net investment (loss) income totaled ($185,751) and $108,209 for the six months ended June 30, 2014 and 2013, respectively. The net investment loss during the 2014 period, compared to the net investment income during the corresponding 2013 period, was primarily due to higher operating expenses due to our accelerated growth and a decrease in expense reimbursement from IIG, partially offset by an increase in investment income.

 

Net Realized Gain on Investments

 

Our net realized gain on investments totaled $384,105 and $14,971 for the six months ended June 30, 2014 and 2013, respectively. During the 2014 period, we received sale proceeds and principal repayments of $40,230,388 and $5,543,499, respectively, for gains of $384,105. For the corresponding 2013 period, we received sale proceeds and principal repayments of $504,375 and $642,548, respectively, for gains of $14,971.

 

Net Change in Unrealized Appreciation on Investments

 

The net change in unrealized appreciation on our investments totaled $1,213,649 and $315,013 for the six months ended June 30, 2014 and 2013, respectively. This change was predominantly driven by primary investments, sourced with the assistance of AIM, made available to us at advantageous purchase prices, as well as the growth and increase in fair value of the investments in our investment portfolio.

 

Net Realized Gain on TRS

 

Our net realized gain on the TRS totaled $7,763,541 and $792,013 for the six months ended June 30, 2014 and 2013, respectively. The components of net realized gain on the TRS are summarized below for the six months ended June 30, 2014 and 2013:

 

50


 

 

 

 

Six Months Ended

June 30,

 

 

 

 

2014

 

 

2013

 

 

Interest and other income from TRS portfolio

 

$

7,423,291

 

 

$

461,103

 

 

Interest and other expense from TRS portfolio

 

 

(1,736,486)

 

 

 

(125,276)

 

 

Net gain on TRS loan sales

 

 

2,076,736

 

 

 

456,186

 

 

Total

 

$

7,763,541

 

 

$

792,013

 

 

Net Change in Unrealized Appreciation on TRS

 

                The net change in unrealized appreciation on the TRS totaled $23,277 and $87,568 for the six months ended June 30, 2014 and 2013, respectively. This change was primarily due to the growth and increase in fair value of certain loans underlying the TRS, partially offset by unrealized appreciation on other loans underlying the TRS becoming realized gains upon the sale of such loans.

 

Net Increase in Net Assets Resulting from Operations

 

                For the six months ended June 30, 2014 and 2013, we recorded a net increase in net assets resulting from operations of $9,198,821 and $1,317,774, respectively.  

 

51


 

 Net Asset Value per Share, Annual Investment Return and Total Return Since Inception

 

Our net asset value per share was $9.38 and $9.32 on June 30, 2014 and December 31, 2013, respectively. After considering (i) the overall changes in net asset value per share, (ii) paid distributions of approximately $0.3508 per share during the six months ended June 30, 2014, and (iii) the assumed reinvestment of those distributions at 90% of the prevailing offering price per share, the total investment return was 4.45% for shareholders who held our shares over the entire six-month period ended June 30, 2014.

 

Initial shareholders who subscribed to the offering in December 2012 with an initial investment of $10,000 and an initial purchase price equal to $9.00 per share (public offering price net of sales load) have seen an annualized return of 10.49% and the value of their investment grow by 16.57% (see chart below). Initial shareholders who subscribed to the offering in December 2012 with an initial investment of $10,000 and an initial purchase price equal to $10.00 per share (the initial public offering price) have seen an annualized return of 3.17% and the value of their investment grow by 4.91%. Over the same time period the S&P/LSTA Leverage Loan Index, a primary measure of senior debt covering the U.S. leveraged loan market, which currently consists of approximately 1,000 credit facilities throughout numerous industries, had an annualized return of approximately 5.69% and a total return of approximately 8.88%.

 

 

The calculations for the Growth of $10,000 Initial Investment are based upon (i) an initial investment of $10,000 in our common stock at the beginning of the period, at a share price of $10.00 per share (including sales load) and $9.00 per share (excluding sales load), (ii) assumes reinvestment of monthly distributions in accordance with our second amended and restated distribution reinvestment plan, (iii) the sale of the entire investment position at the net asset value per share on the last day of the period, and (iv) the cash payment for distributions payable to shareholders, if any, on the last day of the period.

 

52


 

Financial Condition, Liquidity and Capital Resources

 

We generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous offering of shares of our common stock. We accept subscriptions on a continuous basis and, as of February 1, 2014, issue shares at weekly closings at prices that, after deducting selling commissions and dealer manager fees, are at or above our net asset value per share.

 

We will sell our shares on a continuous basis at our latest public offering price of $10.45 per share; however, to the extent that our net asset value increases, we will sell at a price necessary to ensure that shares are not sold at a price, after deduction of selling commissions and dealer manager fees, that is below net asset value. In the event of a material decline in our net asset value per share, which we consider to be a 2.5% decrease below our current net offering price, and subject to certain conditions, we will reduce our offering price accordingly. Therefore, persons who tender subscriptions for shares of our common stock in the offering must submit subscriptions for a certain dollar amount, rather than a number of shares of common stock and, as a result, may receive fractional shares of our common stock. In connection with each weekly closing on the sale of shares of our common stock, our board of directors has delegated to management the authority to conduct such closings so long as there is no change to our public offering price. In the event of a change to our public offering price in connection with any weekly closing, our board of directors will approve the change prior to management conducting such closing. In connection with each weekly closing, we will, in each case if necessary, update the information contained in our prospectus by filing a prospectus supplement with the SEC, and we will also post any updated information to our website.

 

As of June 30, 2014, we sold 32,949,270 shares of common stock for net proceeds of $336,318,008 at an average price per share of $10.21. The net proceeds include gross proceeds received from reinvested shareholder distributions of $6,672,596, for which we issued 708,948 shares of common stock, and gross proceeds paid for shares of common stock tendered for repurchase of $45,905, for which we repurchased 4,881 shares of common stock.

As of August 11, 2014, we sold 36,981,292 shares of common stock for net proceeds of $377,813,288 at an average price per share of $10.22. The net proceeds include gross proceeds received from reinvested shareholder distributions of $8,000,016, for which we issued 850,105 shares of common stock, and gross proceeds paid for shares of common stock tendered for repurchase of $192,731, for which we repurchased 20,492 shares of common stock. Since commencing our continuous public offering on July 2, 2012 and through August 11, 2014, sales commissions and dealer manager fees related to the sale of our common stock were $22,023,266 and $10,699,258, respectively.

On April 2, 2014, we completed our first tender offer in connection with our share repurchase program and repurchased 4,881 shares (representing 100% of the shares of common stock tendered for repurchase) at $9.41 per share for aggregate consideration totaling $45,905. On July 2, 2014, we completed our second tender offer and repurchased 15,611 shares (representing 100% of the shares of common stock tendered for repurchase) at $9.41 per share for aggregate consideration totaling $146,826.

 

The net proceeds from our continuous offering will be invested primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less prior to being invested in debt securities of private U.S. companies.

As of June 30, 2014 and December 31, 2013, we had $38,395,666 and $11,383,669 in short term investments, respectively, invested in a fund that primarily invests in U.S. government securities.

 

Total Return Swap

 

For a detailed discussion of our TRS, refer to Note 7 of our consolidated financial statements included in this report.

 

RIC Status and Distributions

For a detailed discussion of our RIC status and distributions, refer to Note 2 and Note 5, respectively, of our consolidated financial statements included in this report.

 

Recent Accounting Pronouncements

We do not believe any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material adverse effect on our consolidated financial statements.

Critical Accounting Policies

 

For a detailed discussion of our critical accounting policies, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2013.  We consider these accounting policies critical because they involve management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements.

 

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Related Party Transactions

 

We have entered into an agreement with CIM to provide us with investment advisory services. Payments for investment advisory services under the investment advisory agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets, excluding cash and cash equivalents, and (b) an incentive fee based on our performance, as described below. ICON Capital is, and to the extent requested to provide such services and such services are so provided, CIM and AIM and their respective affiliates may be, reimbursed for administrative expenses incurred on our behalf.

 

The incentive fee consists of two parts. The first part, which we refer to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, measured quarterly and expressed as a rate of return on adjusted capital, as defined in our investment advisory agreement, equal to 1.875% per quarter, or an annualized rate of 7.5%. The second part of the incentive fee, which we refer to as the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee is equal 20% of our realized capital gains on a cumulative basis from inception, calculated as of 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 gains incentive fees.  On a cumulative basis and to the extent that all realized capital losses and unrealized capital depreciation exceeds realized capital gains as well as the aggregate realized net capital gains for which a fee has previously been paid, we would not be required to pay CIM a capital gains incentive fee.

 

We and CIM have engaged AIM to act as our investment sub-adviser, as AIM possesses skills that we believe will aid us in achieving our investment objective. AIM only assists CIM with identifying investment opportunities and making investment recommendations for approval by CIM according to pre-established investment guidelines. On an annualized basis, AIM receives 50% of the fees payable to CIM under the investment advisory agreement with respect to each year, which fees are paid to AIM quarterly in arrears by CIM.

 

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ICON Capital provides us with accounting, investor relations and other administrative services. We entered into an administration agreement with ICON Capital pursuant to which ICON Capital furnishes us with administrative services necessary to conduct our day-to-day operations. ICON Capital is, and to the extent requested to provide such serives and such services are so provided, CIM and AIM and their respective affiliates may be, reimbursed for administrative expenses incurred on our behalf. Such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburse ICON Capital for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a person with a controlling interest in ICON Capital. For the three and six months ended June 30, 2014, we incurred administrative services expenses to ICON Capital of $430,220 and $845,615, respectively. For the three and six months ended June 30, 2013, we incurred administrative services expenses to ICON Capital of $307,636 and $571,191, respectively. The majority of such administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us and the remainder related to other reimbursable expenses. For the three and six months ended June 30, 2013, all administrative expenses were reimbursed by IIG in accordance with the expense support and conditional reimbursement agreement.

 

                Under the terms of the investment advisory agreement, CIM and certain of its affiliates, which includes IIG, are entitled to receive reimbursement of up to 1.5% of the gross proceeds raised until all organization costs and offering expenses have been reimbursed. Our payment of organization costs and offering expenses will not exceed 1.5% of the actual gross proceeds raised from our offering (without giving effect to any potential reimbursements from IIG and its affiliates). If we sell the maximum number of shares at $10.45 per share, we estimate that we may incur up to approximately $15,675,000 of expenses. Previously, we interpreted “raised” to mean all gross proceeds that we expected to raise through the completion of the offering of our shares, which could be as late as December 31, 2015, rather than actual gross proceeds raised through the date of reimbursement. Consistent with such application and since we believed we would raise at least $100 million through the completion of the offering of our shares, upon commencement of operations on December 17, 2012, we issued 111,111 shares of our common stock at $9.00 per share to IIG in lieu of payment of $1,000,000 for organization costs and offering expenses submitted for reimbursement. The transactions satisfied an independent obligation of IIG to invest $1,000,000 in our shares.  Through that date, we had raised gross proceeds from unaffiliated outside investors of $2,639,439 and from affiliated investors of $2,000,000, which, applying 1.5% of actual proceeds raised through the date of reimbursement, would have resulted in CIM being entitled to $69,592.

 

With respect to any future reimbursements for organization costs and offering expenses, we will interpret the 1.5% limit based on actual gross proceeds raised at the time of such reimbursement. In addition, we will not issue any of our shares or other securities for services or for property other than cash or securities except as a dividend or distribution to our security holders or in connection with a reorganization. Consistent with this interpretation, on May 30, 2013, IIG paid us $1,000,000, plus interest accrued at a rate of 7% per year.

 

From inception through June 30, 2014, IIG and its affiliates incurred organization costs, offering expenses and other pre-effective costs of approximately $2,012,000. Of these costs, approximately $1,811,000 represented organization costs and offering expenses, of which $1,591,475 was submitted to us for reimbursement. We paid $450,000 in October 2013, $550,000 in March 2014 and $591,475 in May 2014.  No additional material organization costs, offering expenses or other pre-effective costs have been incurred by IIG or its affiliates subsequent to June 30, 2014. The decision to fund our organization costs, offering expenses and other pre-effective costs and the decision to seek reimbursement for such costs is solely at the discretion of IIG and its affiliates. As a result, we may or may not be requested to reimburse any costs funded by IIG and its affiliates.

 

As of June 30, 2014, we raised gross proceeds of $336,318,008, of which we can pay up to $5,044,770 in organization costs and offering expenses (which represents 1.5% of the actual gross proceeds raised). Through June 30, 2014, we paid $4,125,600 of such costs and expenses, leaving an additional $919,170 that can be paid. As of August 11, 2014, we raised gross proceeds of $377,813,288, of which we can pay up to $5,667,199 in organization costs and offering expenses (which represents 1.5% of the actual gross proceeds raised). Through August 11, 2014, we paid $4,652,049 of such costs and expenses, leaving an additional $1,015,150 that can be paid.

 

                On January 30, 2013, we entered into the expense support and conditional reimbursement agreement with IIG, whereby IIG agreed to reimburse us for expenses in an amount that is sufficient to: (1) ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings, and/or (2) reduce our operating expenses until we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expense in relation to our investment income. Pursuant to the expense support and conditional reimbursement agreement, we have a conditional obligation to reimburse IIG for any amounts funded by IIG under such agreement if, during any fiscal quarter occurring within three years of the date on which IIG funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.

 

On December 13, 2013, we and IIG amended and restated the expense support and conditional reimbursement agreement to extend the termination date of such agreement from January 30, 2014 to January 30, 2015.

 

Pursuant to the expense support and conditional reimbursement agreement, we will have a conditional obligation to reimburse IIG for any amounts funded by IIG under such agreement (i) if expense reimbursement amounts funded by IIG exceed operating expenses incurred during any fiscal quarter, (ii) if the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders, and (iii) during any fiscal quarter occurring within three years of the date on which IIG funded such amount.

 

Reimbursement of such costs will be determined as appropriate to meet the objectives of the expense support and conditional reimbursement agreement. As a result, we may or may not be requested to reimburse any such costs funded by IIG. During the three months ended

 

55


 

June 30, 2014, we recorded an obligation to repay $599,626 of expense reimbursements from IIG. We may or may not be requested to reimburse any of these costs in the future. As of June 30, 2014, the total net liability to CIM and its affiliates was $2,262,135, which related to fees earned by CIM primarily during the three months ended June 30, 2014 and expense support recoupment by IIG. 

 

Refer to the table under “Results of Operations for the Three Months Ended June 30, 2014 and 2013—Expense Reimbursement” above for a summary of all expenses supported by IIG and the associated dates through which such expenses are eligible for reimbursement by us.

 

We or IIG may terminate the expense support and conditional reimbursement agreement at any time. IIG has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory agreement with CIM, we may be required to repay IIG all reimbursements funded by IIG within three years of the date of termination. The specific amount of expenses reimbursed by IIG, if any, will be determined at the end of each quarter. There can be no assurance that the expense support and conditional reimbursement agreement will remain in effect or that IIG will reimburse any portion of our expenses in future quarters.

 

If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services that we expect to receive pursuant to our investment advisory agreement, the investment sub-advisory agreement, the administration agreement and the dealer manager agreement. Any new investment advisory agreement would also be subject to approval by our shareholders.

 

Contractual Obligations

 

On December 17, 2012, Flatiron entered into a TRS with Citibank. Flatiron and Citibank amended the TRS, effective December 9, 2013, February 18, 2014, April 30, 2014, and July 30, 2014. See Note 7 to our consolidated financial statements for a more detailed description of the TRS.

 

Commitments and Contingencies and Off-Balance Sheet Arrangements

 

Commitments and Contingencies

 

We have entered into certain contracts with other parties that contain a variety of indemnifications. Our maximum exposure under these arrangements is unknown. However, we have not experienced claims or losses pursuant to these contracts and believe the risk of loss related to such indemnifications to be remote.

 

Our investment portfolio may contain debt investments that are in the form of lines of credit, unfunded delayed drawdown loan commitments, or revolving credit facilities, which requires us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014 and December 31, 2013, unfunded loan commitments amounted to $16,674,000 and $2,450,758, respectively. As of August 11, 2014, our unfunded loan commitments amounted to $48,341,000. For information on the companies to which we are committed to fund additional amounts as of June 30, 2014 and December 31, 2013, refer to the consolidated schedule of investments included in this report.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements.

 

56


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. As of June 30, 2014, 99.4% of our portfolio investments and underlying loans subject to the TRS paid variable interest rates, except for our short term investments, which are invested in U.S. Treasury securities and repurchase agreements and have fixed rates. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we hold variable rate investments, and to declines in the value of any fixed rate investments we may hold. To the extent that a majority of our investments may be in variable rate investments, an increase in interest rates could make it easier for us to meet or exceed our incentive fee preferred return, as defined in our investment advisory agreement, and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to CIM with respect to our pre-incentive fee net investment income.

 

Under the terms of the TRS with Citibank, we pay fees to Citibank at a floating rate based on LIBOR (and some cases prime rate) in exchange for the right to receive the economic benefit of a pool of loans. In addition, in the future we may seek to borrow funds in order to make additional investments. Our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we would be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we have debt outstanding, our cost of funds would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments. We expect that our long-term investments will be financed primarily with equity and long-term debt. Our interest rate risk management techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates could have a materially adverse effect on our business, financial condition and results of operations.

 

The following table shows the effect over a twelve month period of changes in interest rates on our net interest income, excluding short term investments, assuming no changes in our investment portfolio and TRS Agreement in effect as of June 30, 2014:

 

 

Change in Interest Rates

 

Increase (Decrease) in Net Interest Income(1)

 

Percentage Change in Net Interest Income

 

 

Down 21 basis points

 

$

520,705

1.7%

 

 

Current base interest rate

 

 

 -  

 -    

 

 

Up 100 basis points

 

 

(1,775,614)

(5.7%)

 

 

Up 200 basis points

 

 

211,198

0.7%

 

 

Up 300 basis points

 

 

2,296,504

7.4%

 

 

 

 

 

 

 

 

 

 

(1) Includes the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Pursuant to the TRS, we receive from Citibank all interest payable in respect of the loans subject to the TRS and pay to Citibank interest at a rate equal to the floating rate index specified for each loan (typically LIBOR of varying maturities) plus 1.35% per year on the full notional amount of the loans subject to the TRS. As of June 30, 2014, all of the loans subject to the TRS paid variable interest rates. This table assumes no change in defaults or prepayments by portfolio companies over the next twelve months.

 

                 

 

In addition, we may have risk regarding portfolio valuation as discussed in Note 2 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

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Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures 

In connection with the preparation of this Quarterly Report on Form 10-Q for the three months ended June 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Co-Chief Executive Officers and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) and Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended. Based on the foregoing evaluation, the Co-Chief Executive Officers and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

In designing and evaluating our disclosure controls and procedures, we recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Disclosure controls and procedures cannot detect or prevent all error and fraud. Some inherent limitations in disclosure controls and procedures include costs of implementation, faulty decision-making, simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all anticipated and unanticipated future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with established policies or procedures.

Evaluation of internal control over financial reporting

 

There have been no changes in our internal control over financial reporting during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies and other third parties. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon our financial condition or results of operations.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013.

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

Our registration statement on Form N-2, as amended, was declared effective by the SEC on July 2, 2012 (SEC File No. 333-178646). Our offering period commenced on July 2, 2012.

We did not engage in any unregistered sales of equity securities during the three months ended June 30, 2014.

The table below provides information concerning our repurchases of shares of our common stock during the three months ended June 30, 2014 pursuant to our share repurchase program.

 

Period

 

Total Number of Shares Purchased

 

  Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

 

  April 1 to April 30, 2014

 

4,881

 

$

9.405

 

4,881

 

 (1) 

 

  May 1 to May 31, 2014

 

 -    

 

  

 -    

 

 -    

 

 -    

 

  June 1 to June 30, 2014

 

 -    

 

  

 -    

 

 -    

 

 -    

 

        Total

 

4,881

 

$

9.405

 

4,881

 

 (1) 

 

  

 

 

 

  

 

 

 

 

 

(1)

A description of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

See Note 3 to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q for a more detailed discussion of the terms of our share repurchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

  

 

 

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Item 6. Exhibits

Exhibit
Number

 

Description of Document

3.1

 

Articles of Amendment and Restatement of the Articles of Incorporation of CĪON Investment Corporation (Incorporated by reference to Exhibit (A)(2) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

3.2

 

Second Articles of Amendment and Restatement of the Articles of Incorporation of CĪON Investment Corporation (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 27, 2012 (File No. 814-00941)).

3.3

 

Bylaws of CĪON Investment Corporation (Incorporated by reference to Exhibit (B) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

4.1

 

Form of Subscription Agreement (Incorporated by reference to Exhibit (D) to Post-Effective Amendment No. 7 to Registrant’s Registration Statement on Form N-2 filed with the SEC on April 28, 2014 (File No. 333-178646)). 

4.2

 

Second Amended and Restated Distribution Reinvestment Plan (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2013 (File No. 814-00941)).

10.1

 

Investment Advisory Agreement by and between CĪON Investment Corporation and CĪON Investment Management, LLC (Incorporated by reference to Exhibit (G)(1) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.2

 

 

Investment Sub-Advisory Agreement by and among CĪON Investment Management, LLC, CĪON Investment Corporation and Apollo Investment Management, L.P. (Incorporated by reference to Exhibit (G)(2) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.3

 

Administration Agreement by and between CĪON Investment Corporation and ICON Capital Corp. (Incorporated by reference to Exhibit (K)(2) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.4

 

Custody Agreement by and between CĪON Investment Corporation and U.S. Bank National Association (Incorporated by reference to Exhibit (J) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.5

 

Escrow Agreement by and among CĪON Investment Corporation, UMB Bank, N.A., and ICON Securities Corp. (Incorporated by reference to Exhibit (K)(1) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.6

 

Dealer Manager Agreement by and among CĪON Investment Corporation, CĪON Investment Management, LLC, and ICON Securities Corp. (Incorporated by reference to Exhibit (H)(1) to Pre-Effective Amendment No. 4 to Registrant’s Registration Statement on Form N-2 filed with the SEC on June 29, 2012 (File No. 333-178646)).

10.7

 

ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of December 17, 2012, by and between Flatiron Funding, LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2012).

10.8

 

Fourth Amended and Restated Confirmation Letter Agreement, dated as of July 30, 2014, by and between Flatiron Funding, LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2014).

10.9

 

Amended and Restated Expense Support and Conditional Reimbursement Agreement dated as of December 13, 2013, by and between CĪON Investment Corporation and ICON Investment Group, LLC (Incorporated by reference to Exhibit (K)(5) to Post-Effective Amendment No. 5 to Registrant’s Registration Statement on Form N-2 filed with the SEC on December 20, 2013 (File No. 333-178646)).

  

 

60


 

Exhibit
Number

 

Description of Document

 

 

 

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer.

31.3

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1

 

Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 13, 2014

CĪON Investment Corporation
(Registrant)

By:  /s/ Michael A. Reisner
        Michael A. Reisner
        Co-Chief Executive Officer and Co-President
       
(Principal Executive Officer)

By:  /s/ Mark Gatto
        Mark Gatto
        Co-Chief Executive Officer and Co-President
       
(Principal Executive Officer)

By:  /s/ Keith S. Franz
        Keith S. Franz
        Chief Financial Officer
       
(Principal Financial and Accounting Officer)

 

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