UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Quarterly Period Ended June 30, 2009
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number: 0-51459
PATRIOT CAPITAL FUNDING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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74-3068511
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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274 Riverside Avenue
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Westport, CT
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06880
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(Address of principal executive office)
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(Zip Code)
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(203) 429-2700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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
þ
No
o
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 during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
o
No
o
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.
(check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number
of shares of the registrants Common Stock, $.01 par value,
outstanding as of August 13,
2009 was 20,950,501.
PATRIOT CAPITAL FUNDING, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Patriot Capital Funding, Inc.
Consolidated Balance Sheets
(unaudited)
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June 30,
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December 31,
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2009
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2008
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ASSETS
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Investments at fair value:
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Non-control/non-affiliate investments (cost of $227,017,180 - 2009,
$269,577,008 - 2008)
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$
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212,853,296
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$
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240,486,620
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Affiliate investments (cost of $52,239,570 - 2009,
$53,129,533 - 2008)
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47,373,445
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51,457,082
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Control
investments (cost of $65,124,177 - 2009, $43,192,484 - 2008)
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23,702,496
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30,427,046
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Total investments
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283,929,237
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322,370,748
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Cash and cash equivalents
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8,149,781
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6,449,454
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Restricted cash
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7,828,784
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22,155,073
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Interest receivable
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1,151,347
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1,390,285
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Other assets
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1,481,020
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1,897,086
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TOTAL ASSETS
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$
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302,540,169
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$
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354,262,646
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LIABILITIES AND STOCKHOLDERS EQUITY
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LIABILITIES
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Borrowings
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$
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137,365,363
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$
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162,600,000
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Interest payable
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847,164
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514,125
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Dividends payable
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5,253,709
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Accounts payable, accrued expenses and other
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3,831,998
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5,777,642
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TOTAL LIABILITIES
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142,044,525
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174,145,476
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COMMITMENTS
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STOCKHOLDERS EQUITY
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Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued and outstanding
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Common stock, $.01 par value, 49,000,000 shares authorized; 20,950,501
and 20,827,334 shares issued and outstanding at June 30, 2009,
and December 31, 2008, respectively
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209,506
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208,274
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Paid-in capital
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235,163,868
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234,385,063
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Accumulated net investment income (loss)
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3,949,409
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(1,912,061
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)
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Distributions in excess of net investment income
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(1,758,877
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)
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Net realized loss on investments
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(16,067,426
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)
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(4,053,953
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)
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Net unrealized depreciation on interest rate swaps
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(2,235,647
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)
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(3,097,384
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)
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Net unrealized depreciation on investments
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(60,524,066
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)
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(43,653,892
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)
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TOTAL STOCKHOLDERS EQUITY
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160,495,644
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180,117,170
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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302,540,169
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$
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354,262,646
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NET ASSET VALUE PER COMMON SHARE
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$
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7.66
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$
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8.65
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See Notes to Consolidated Financial Statements.
1
Patriot Capital Funding, Inc.
Consolidated Statements of Operations
(unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2009
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2008
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2009
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2008
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INVESTMENT INCOME
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Interest and dividends:
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Non-control/non-affiliate investments
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$
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6,248,628
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$
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7,133,671
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$
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12,439,390
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$
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15,432,004
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Affiliate investments
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1,407,606
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2,498,499
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2,739,165
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5,012,922
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Control investments
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113,447
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499,659
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950,077
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678,125
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Total interest and dividend income
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7,769,681
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10,131,829
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16,128,632
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21,123,051
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Fees:
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Non-control/non-affiliate investments
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137,100
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69,389
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247,817
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238,086
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Affiliate investments
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116,835
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37,787
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138,723
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76,448
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Control investments
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33,613
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35,000
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68,158
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41,250
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Total fee income
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287,548
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142,176
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454,698
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355,784
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Other investment income:
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Non-control/non-affiliate investments
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242,388
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8,804
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282,243
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Control investments
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138,026
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138,026
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Total other investment income
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380,414
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8,804
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420,269
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Total Investment Income
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8,057,229
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10,654,419
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16,592,134
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21,899,104
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EXPENSES
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Compensation expense
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838,840
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1,107,324
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1,759,961
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2,605,499
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Interest expense
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2,777,370
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1,925,230
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4,363,807
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3,984,753
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Professional fees
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1,017,706
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408,204
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1,346,626
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670,731
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General and administrative expense
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920,700
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794,963
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1,501,394
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1,433,523
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Total Expenses
|
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5,554,616
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4,235,721
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8,971,788
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8,694,506
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Net Investment Income
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2,502,613
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6,418,698
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7,620,346
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13,204,598
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NET REALIZED GAIN (LOSS) AND NET UNREALIZED
APPRECIATION (DEPRECIATION)
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Net realized gain (loss) on investments non-control/non-affiliate
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|
(412,709
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)
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5,783
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(412,709
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)
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|
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(83,767
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)
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Net realized loss on investments control
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|
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|
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(350,000
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)
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(11,600,764
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)
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(350,000
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)
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Net unrealized depreciation on investments -
non-control/non-affiliate
|
|
|
(4,966,838
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)
|
|
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(2,218,615
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)
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(4,957,308
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)
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(8,629,899
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)
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Net unrealized depreciation on investments affiliate
|
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|
(1,682,348
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)
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|
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(3,070,018
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)
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(3,193,649
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)
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(5,662,008
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)
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Net unrealized appreciation (depreciation) on investments control
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(6,064,547
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)
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1,920,398
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(8,719,217
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)
|
|
|
1,072,398
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Net unrealized appreciation on interest rate swaps
|
|
|
678,888
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|
|
|
969,634
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861,737
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|
216,783
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Net Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
|
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|
(12,447,554
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)
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(2,742,818
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)
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|
(28,021,910
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)
|
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|
(13,436,493
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)
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NET INCOME (LOSS)
|
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$
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(9,944,941
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)
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$
|
3,675,880
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$
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(20,401,564
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)
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$
|
(231,895
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)
|
|
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Earnings (loss) per share, basic and diluted
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$
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(0.47
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)
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$
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0.18
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$
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(0.97
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)
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$
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(0.01
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)
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Weighted average shares outstanding, basic and diluted
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20,950,501
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20,693,337
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20,940,294
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|
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20,671,896
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|
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See Notes to Consolidated Financial Statements.
2
Patriot Capital Funding, Inc.
Consolidated Statements of Changes in Net Assets
(unaudited)
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Six Months Ended
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June 30,
|
|
|
2009
|
|
2008
|
Operations:
|
|
|
|
|
|
|
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Net investment income
|
|
$
|
7,620,346
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|
|
$
|
13,204,598
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|
Net realized loss on investments
|
|
|
(12,013,473
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)
|
|
|
(433,767
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)
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Net unrealized depreciation on investments
|
|
|
(16,870,174
|
)
|
|
|
(13,219,509
|
)
|
Net unrealized appreciation on interest rate swaps
|
|
|
861,737
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|
|
|
216,783
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|
|
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Net decrease in net assets from operations
|
|
|
(20,401,564
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)
|
|
|
(231,895
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)
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|
|
|
|
|
|
|
|
|
|
|
|
Stockholder transactions:
|
|
|
|
|
|
|
|
|
Distributions to stockholders from net investment income
|
|
|
|
|
|
|
(13,204,598
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(441,872
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)
|
|
|
|
Net decrease in net assets from stockholder distributions
|
|
|
|
|
|
|
(13,646,470
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
Common stock listing fees
|
|
|
|
|
|
|
(23,585
|
)
|
Issuance of common stock under dividend reinvestment plan
|
|
|
359,500
|
|
|
|
540,064
|
|
Stock option compensation
|
|
|
420,538
|
|
|
|
385,828
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
780,038
|
|
|
|
902,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in net assets
|
|
|
(19,621,526
|
)
|
|
|
(12,976,058
|
)
|
|
|
|
|
|
|
|
|
|
Net assets at beginning of period
|
|
|
180,117,170
|
|
|
|
221,597,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
160,495,644
|
|
|
$
|
208,621,626
|
|
|
|
|
Net asset value per common share
|
|
$
|
7.66
|
|
|
$
|
10.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
20,950,501
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|
|
|
20,702,485
|
|
|
|
|
See Notes to Consolidated Financial Statements.
3
Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2009
|
|
2008
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,401,564
|
)
|
|
$
|
(231,895
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
328,351
|
|
|
|
268,963
|
|
Change in interest receivable
|
|
|
238,938
|
|
|
|
401,391
|
|
Realized loss on sale of investments
|
|
|
12,013,473
|
|
|
|
433,767
|
|
Unrealized depreciation on investments
|
|
|
16,870,174
|
|
|
|
13,219,509
|
|
Unrealized appreciation on interest rate swaps
|
|
|
(861,737
|
)
|
|
|
(216,783
|
)
|
Payment-in-kind interest and dividends
|
|
|
(2,218,782
|
)
|
|
|
(2,899,860
|
)
|
Stock-based compensation expense
|
|
|
420,538
|
|
|
|
385,828
|
|
Change in unearned income
|
|
|
(443,572
|
)
|
|
|
(633,242
|
)
|
Change in interest payable
|
|
|
333,039
|
|
|
|
(353,126
|
)
|
Change in other assets
|
|
|
87,716
|
|
|
|
(17,370
|
)
|
Change in accounts payable, accrued expenses and other
|
|
|
(1,083,907
|
)
|
|
|
(1,713,757
|
)
|
|
|
|
Net cash provided by operating activities
|
|
|
5,282,667
|
|
|
|
8,643,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Funded investments
|
|
|
(10,273,464
|
)
|
|
|
(9,691,406
|
)
|
Principal repayments on investments
|
|
|
21,116,671
|
|
|
|
51,532,552
|
|
Proceeds from sale of investments
|
|
|
1,377,011
|
|
|
|
10,353,733
|
|
Purchases of furniture and equipment
|
|
|
|
|
|
|
(6,295
|
)
|
|
|
|
Net cash provided by investing activities
|
|
|
12,220,218
|
|
|
|
52,188,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
7,500,000
|
|
|
|
9,052,500
|
|
Repayments on borrowings
|
|
|
(32,734,637
|
)
|
|
|
(57,852,500
|
)
|
Common stock listing fees
|
|
|
|
|
|
|
(23,585
|
)
|
Dividends paid
|
|
|
(4,894,210
|
)
|
|
|
(13,089,236
|
)
|
Deferred offering costs
|
|
|
|
|
|
|
(98,860
|
)
|
Deferred financing costs
|
|
|
|
|
|
|
(1,030,972
|
)
|
Decrease in restricted cash
|
|
|
14,326,289
|
|
|
|
2,523,926
|
|
|
|
|
Net cash used for financing activities
|
|
|
(15,802,558
|
)
|
|
|
(60,518,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
|
1,700,327
|
|
|
|
313,282
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT:
|
|
|
|
|
|
|
|
|
Beginning of Period
|
|
|
6,449,454
|
|
|
|
789,451
|
|
|
|
|
End of Period
|
|
$
|
8,149,781
|
|
|
$
|
1,102,733
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,767,312
|
|
|
$
|
4,337,879
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
|
$
|
|
|
|
$
|
5,159,567
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends reinvested in common stock
|
|
$
|
359,500
|
|
|
$
|
540,064
|
|
Dividends declared but not paid
|
|
|
|
|
|
|
6,831,820
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
June 30, 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC (5)
(Machinery)
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit
(5.3%, Due 2/12) (3)
|
|
$
|
4,000,000
|
|
|
$
|
3,955,707
|
|
|
$
|
3,955,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(6.0%, Due 2/12) (3)
|
|
|
8,085,938
|
|
|
|
8,019,598
|
|
|
|
411,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(22.0%, Due 8/12) (2)
|
|
|
7,731,663
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note
(8.0%, Due 2/13) (2)
|
|
|
157,683
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(1,250,000 units) (4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encore Legal Solutions, Inc.
(Printing & Publishing)
|
|
Legal document management services
|
|
Junior Secured Term Loan A
(11.0%, Due 12/10) (2) (3)
|
|
|
4,082,915
|
|
|
|
4,020,456
|
|
|
|
3,081,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan B
(14.0%, Due 12/10) (2) (3)
|
|
|
7,644,318
|
|
|
|
7,390,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(20,000
shares)(4)
|
|
|
|
|
|
|
5,159,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC
(Machinery)
|
|
Designer and manufacturer of packaging
equipment
|
|
Senior Subordinated Debt
(16.5%, Due 5/13) (2) (3)
|
|
|
3,572,977
|
|
|
|
3,553,859
|
|
|
|
3,541,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest - Class
A
(2,800,000 units) (4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
2,984,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L.A. Spas, Inc.
(Chemicals, Plastics &
Rubber)
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit
(8.8%, Due 12/09) (3)
|
|
|
1,175,000
|
|
|
|
1,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan
(8.8%, Due 12/09) (3)
Charge-off of cost
of impaired loan (7)
|
|
|
4,165,430
|
|
|
|
4,092,364
(3,693,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(17.5%, Due 1/10) (2) (3)
Charge-off of cost
of impaired loan (7)
|
|
|
8,132,897
|
|
|
|
7,907,534
(7,907,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(1,125,000
shares) (4)
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants
(13,828 warrants) (4)
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nupla Corporation
(Home & Office Furnishings,
Housewares & Durable
Consumer Products)
|
|
Manufacturer and marketer of professional
high-grade fiberglass-handled striking
and digging tools
|
|
Revolving Line of Credit
(9.3%, Due 9/12) (3)
|
|
|
1,093,276
|
|
|
|
1,081,546
|
|
|
|
1,081,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(10.0%, Due 9/12) (3)
|
|
|
5,139,064
|
|
|
|
5,105,570
|
|
|
|
5,105,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 3/13) (2) (3)
|
|
|
3,162,122
|
|
|
|
3,142,795
|
|
|
|
1,105,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class A
(475
shares) (2)
|
|
|
|
|
|
|
564,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class B
(1,045 shares) (2)
|
|
|
|
|
|
|
1,131,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(1,140,584
shares) (4)
|
|
|
|
|
|
|
80,100
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
Sidumpr Trailer Company,
Inc.
(Automobile)
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit
(7.3%, Due 1/11) (3)
|
|
|
950,000
|
|
|
|
934,432
|
|
|
|
934,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(7.3%, Due 1/11) (3)
|
|
|
2,047,500
|
|
|
|
2,036,677
|
|
|
|
1,500,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(8.8%, Due 1/11) (3)
|
|
|
2,320,625
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(16.5%, Due 7/11) (2) (3)
|
|
|
2,578,751
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
(7.3%, Due 7/11)
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(49,635.5
shares) (2)
|
|
|
|
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(64,050 shares)
(4)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control investments (represents 8.4% of total investments at fair value)
|
|
|
|
|
|
$
|
65,124,177
|
|
|
$
|
23,702,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated
(Textiles & Leather)
|
|
Supplier of spiritwear and campus apparel
|
|
Revolving Line of Credit
(9.0%, Due 9/13) (3)
|
|
$
|
800,000
|
|
|
$
|
777,090
|
|
|
$
|
777,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(9.5%, Due 9/13) (3)
|
|
|
4,491,748
|
|
|
|
4,445,473
|
|
|
|
4,445,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(10.0%, Due 9/13) (3)
|
|
|
4,937,557
|
|
|
|
4,885,834
|
|
|
|
4,885,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(18.5%, Due 3/14) (2) (3)
|
|
|
6,775,232
|
|
|
|
6,714,635
|
|
|
|
6,714,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(1,000,000
shares) (4)
|
|
|
|
|
|
|
1,080,000
|
|
|
|
699,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(10,000 shares)
(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
(Textiles & Leather)
|
|
Manufacturer and distributor of specialty
pet products
|
|
Revolving Line of Credit
(11.3%, Due 1/12) (3)
|
|
|
1,500,000
|
|
|
|
1,488,972
|
|
|
|
1,488,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(11.3%, Due 1/12) (3)
|
|
|
3,863,606
|
|
|
|
3,828,779
|
|
|
|
3,828,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(12.0%, Due 1/12) (3)
|
|
|
455,000
|
|
|
|
450,967
|
|
|
|
450,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(18.0%, Due 3/12) (2) (3)
|
|
|
4,583,209
|
|
|
|
4,552,975
|
|
|
|
4,320,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest - Class
A (730.02 units) (4)
|
|
|
|
|
|
|
730,020
|
|
|
|
167,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest -
Common
(199,795.08 units)
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC (5)
(Diversified/Conglomerate
Service)
|
|
Provider of tuition management services
|
|
Membership Interest - Class
B
(1,218 units) (4)
|
|
|
|
|
|
|
1,280,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest - Class
D
(1 unit) (4)
|
|
|
|
|
|
|
290,333
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
Sport Helmets Holdings, LLC
(5)
(Personal & Nondurable
Consumer Products)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A
(5.0%, Due 12/13) (3)
|
|
|
4,087,500
|
|
|
|
4,040,710
|
|
|
|
3,759,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(5.5%, Due 12/13) (3)
|
|
|
7,462,500
|
|
|
|
7,370,660
|
|
|
|
6,856,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series A
(15.0%, Due 6/14)
(2) (3)
|
|
|
7,105,981
|
|
|
|
7,012,295
|
|
|
|
6,399,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series B
(15.0%, Due 6/14)
(2)
|
|
|
1,290,324
|
|
|
|
1,290,324
|
|
|
|
1,179,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(20,000
shares)(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,399,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments (represents 16.7% of total investments at fair value)
|
|
|
|
|
|
$
|
52,239,570
|
|
|
$
|
47,373,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc.
(Ecological)
|
|
Distributor of specialty chemicals and
contract application services
|
|
Revolving Line of Credit
(10.3%, Due 7/11) (3)
|
|
$
|
1,800,000
|
|
|
$
|
1,787,120
|
|
|
$
|
1,787,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(10.3%, Due 6/11) (3)
|
|
|
7,678,125
|
|
|
|
7,642,739
|
|
|
|
7,642,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(5,000 shares)
(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
158,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fasteners
International, LLC
(Machinery)
|
|
Distributor of fasteners and related
hardware
for use in aerospace,
electronics and defense industries
|
|
Senior Secured Term Loan
(4.4%, Due 11/12) (3)
|
|
|
5,358,000
|
|
|
|
5,287,888
|
|
|
|
5,208,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(14.0%, Due 5/13) (2) (3)
|
|
|
5,359,740
|
|
|
|
5,303,580
|
|
|
|
5,303,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
(32,000 shares) (2)
|
|
|
|
|
|
|
234,924
|
|
|
|
435,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Defense Group, Inc.
(Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock
(4,000 shares)
(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
123,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance
Agency, Inc. (6)
(Insurance)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan
(12.8%, Due 2/13) (2) (3)
|
|
|
5,012,842
|
|
|
|
5,012,842
|
|
|
|
4,699,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borga, Inc.
(Mining, Steel, Iron &
Nonprecious Metals)
|
|
Manufacturer of pre-fabricated metal
building systems
|
|
Revolving Line of Credit
(8.0%, Due 5/10) (3)
|
|
|
800,000
|
|
|
|
796,199
|
|
|
|
796,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(11.5%, Due 5/10) (3)
|
|
|
1,623,728
|
|
|
|
1,611,597
|
|
|
|
1,611,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(19.0%, Due 5/10) (2) (3)
|
|
|
8,281,883
|
|
|
|
8,255,274
|
|
|
|
2,141,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants
(33,750 warrants) (4)
|
|
|
|
|
|
|
16,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC (5)
(Personal & Nondurable
Consumer Products)
|
|
Provider of proprietary branded
professional skincare and cosmetic
products to physicians and spa
communities
|
|
Junior Secured Term Loan B
(9.8%, Due 11/11) (3)
|
|
|
9,971,555
|
|
|
|
9,884,257
|
|
|
|
9,884,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.5%, Due 11/12) (3)
|
|
|
6,250,000
|
|
|
|
6,197,779
|
|
|
|
6,260,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(7,500 shares)
(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
536,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options in Mineral Fusion
Natural Brands, LLC
(11,662
options) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
CS Operating, LLC (5)
(Buildings & Real Estate)
|
|
Provider of maintenance, repair and
replacement of HVAC, electrical,
plumbing, and foundation repair
|
|
Revolving Line of Credit
(8.0%, Due 1/13) (3)
|
|
|
200,000
|
|
|
|
195,448
|
|
|
|
195,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(6.8%, Due 7/12) (3)
|
|
|
1,642,564
|
|
|
|
1,624,813
|
|
|
|
1,624,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.5%, Due 1/13) (2) (3)
|
|
|
2,699,741
|
|
|
|
2,672,682
|
|
|
|
2,672,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copernicus Group
(Healthcare, Education &
Childcare)
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit
(8.8%, Due 10/13) (3)
|
|
|
150,000
|
|
|
|
132,771
|
|
|
|
132,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(8.8%, Due 10/13) (3)
|
|
|
7,631,250
|
|
|
|
7,523,944
|
|
|
|
7,523,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.0%, Due 4/14) (3)
|
|
|
12,356,810
|
|
|
|
12,188,822
|
|
|
|
11,307,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock - Series A
(1,000,000) (4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
799,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperhead Chemical Company,
Inc.
(Chemicals, Plastics &
Rubber)
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt
(21.0%, Due 1/13) (2) (3)
|
|
|
3,806,647
|
|
|
|
3,781,610
|
|
|
|
3,781,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc. (6)
(Printing & Publishing)
|
|
Direct marketer of checks and other
financial products and services
|
|
Senior Secured Term Loan
(3.3%, Due 12/13) (3)
|
|
|
1,838,011
|
|
|
|
1,614,297
|
|
|
|
1,424,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(6.6%, Due 12/14) (3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1,150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dover Saddlery, Inc.
(Retail Stores)
|
|
Equestrian products catalog retailer
|
|
Common Stock
(30,974 shares)
(4)
|
|
|
|
|
|
|
148,200
|
|
|
|
52,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employbridge Holding Company
(5) (6)
(Personal, Food &
Miscellaneous Services)
|
|
A provider of specialized staffing
services
|
|
Junior Secured Term Loan
(9.3%, Due 10/13) (3)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
(Electronics)
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A
(5.0%, Due 3/11) (3)
|
|
|
2,468,323
|
|
|
|
2,455,202
|
|
|
|
2,357,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(5.2%, Due 3/12) (3)
|
|
|
4,212,792
|
|
|
|
4,172,027
|
|
|
|
4,005,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(5.7%, Due 3/12) (3)
|
|
|
2,598,352
|
|
|
|
2,565,670
|
|
|
|
2,462,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
(15.0%, Due 3/12) (3)
|
|
|
6,170,807
|
|
|
|
6,122,761
|
|
|
|
6,122,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class A
(2,475 shares) (4)
|
|
|
|
|
|
|
2,475
|
|
|
|
346,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class B
(25
shares) (2)
|
|
|
|
|
|
|
291,667
|
|
|
|
297,022
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
Fairchild Industrial
Products, Co.
(Electronics)
|
|
Manufacturer of industrial controls and
power transmission products
|
|
Senior Secured Term Loan A
(3.6%, Due 7/10) (3)
|
|
|
1,386,330
|
|
|
|
1,379,347
|
|
|
|
1,379,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(5.4%, Due 1/11) (3)
|
|
|
4,351,250
|
|
|
|
4,329,951
|
|
|
|
4,329,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.8%, Due 7/11) (3)
|
|
|
5,460,000
|
|
|
|
5,426,216
|
|
|
|
5,426,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock - Class A
(378.4 shares) (2)
|
|
|
|
|
|
|
366,297
|
|
|
|
372,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class B
(27.5
shares) (4)
|
|
|
|
|
|
|
121,598
|
|
|
|
289,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hudson Products Holdings,
Inc. (6)
(Mining, Steel, Iron &
Nonprecious Metals)
|
|
Manufactures and designs air-cooled heat
exchanger equipment
|
|
Senior Secured Term Loan
(8.0%, Due 8/15) (3)
|
|
|
7,443,750
|
|
|
|
7,241,237
|
|
|
|
6,773,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Products, LLC
(Machinery)
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan
(6.4%, Due 9/12) (3)
|
|
|
8,856,250
|
|
|
|
8,808,494
|
|
|
|
8,808,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 9/12) (3)
|
|
|
5,547,993
|
|
|
|
5,521,880
|
|
|
|
5,521,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Label Corp Holdings, Inc. (6)
(Printing & Publishing)
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan
(8.0%, Due 8/14) (3)
|
|
|
6,451,250
|
|
|
|
6,167,519
|
|
|
|
5,669,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp.
(Healthcare, Education &
Childcare)
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A
(4.6%, Due 11/12) (3)
|
|
|
3,710,276
|
|
|
|
3,674,985
|
|
|
|
3,569,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.5%, Due 5/13) (3)
|
|
|
4,565,000
|
|
|
|
4,523,264
|
|
|
|
4,523,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(125,000
units) (4)
|
|
|
|
|
|
|
125,000
|
|
|
|
184,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mac & Massey Holdings, LLC
(Grocery)
|
|
Broker and distributor of ingredients to
manufacturers of food products
|
|
Senior Subordinated Debt
(15.8%, Due 2/13) (2) (3)
|
|
|
8,183,478
|
|
|
|
8,158,201
|
|
|
|
8,158,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(250 shares) (4)
|
|
|
|
|
|
|
235,128
|
|
|
|
382,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwestern Management
Services, LLC
(Healthcare, Education &
Childcare)
|
|
Provider of dental services
|
|
Revolving Line of Credit
(7.8%, Due 12/12) (3)
|
|
|
125,000
|
|
|
|
117,625
|
|
|
|
117,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(6.3%, Due 12/12) (3)
|
|
|
5,197,531
|
|
|
|
5,156,736
|
|
|
|
5,156,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(6.8%, Due 12/12) (3)
|
|
|
1,231,250
|
|
|
|
1,221,357
|
|
|
|
1,221,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(17.0%, Due 6/13) (2) (3)
|
|
|
2,882,406
|
|
|
|
2,861,301
|
|
|
|
2,861,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(500 shares) (4)
|
|
|
|
|
|
|
500,000
|
|
|
|
465,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prince Mineral Company, Inc.
(Metals & Minerals)
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan
(6.1%, Due 12/12) (3)
|
|
|
11,225,000
|
|
|
|
11,095,875
|
|
|
|
10,752,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.0%, Due 7/13) (2) (3)
|
|
|
12,094,987
|
|
|
|
11,993,822
|
|
|
|
11,993,822
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
Quartermaster, Inc.
(Retail Stores)
|
|
Retailer of uniforms and tactical
equipment to
law enforcement and security
professionals
|
|
Revolving Line of Credit
(6.5%, Due 12/10) (3)
|
|
|
3,000,000
|
|
|
|
2,985,955
|
|
|
|
2,985,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(5.7%, Due 12/10) (3)
|
|
|
2,514,750
|
|
|
|
2,495,985
|
|
|
|
2,495,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(7.0%, Due 12/10) (3)
|
|
|
2,531,250
|
|
|
|
2,518,505
|
|
|
|
2,518,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
|
|
|
3,451,292
|
|
|
|
3,431,302
|
|
|
|
3,431,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-O-M Corporation
(Automobile)
|
|
Manufacturer of doors, ramps and bulk
heads for
fire trucks and food
transportation
|
|
Senior Secured Term Loan A
(3.1%, Due 2/13) (3)
|
|
|
6,040,000
|
|
|
|
5,993,933
|
|
|
|
5,696,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.6%, Due 5/13) (3)
|
|
|
8,336,250
|
|
|
|
8,255,898
|
|
|
|
7,845,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 8/13) (3)
|
|
|
7,153,842
|
|
|
|
7,073,185
|
|
|
|
7,073,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/non-affiliate investments (represents 74.9% of total investments at fair value)
|
|
|
|
|
|
$
|
227,017,180
|
|
|
$
|
212,853,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
344,380,927
|
|
|
$
|
283,929,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the 1940 Act), as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the
company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.
|
|
(2)
|
|
Amount includes payment-in-kind (PIK) interest or dividends.
|
|
(3)
|
|
Pledged as collateral under the Companys Amended Securitization Facility. See Note 6 to Consolidated Financial Statements.
|
|
(4)
|
|
Non-income producing.
|
|
(5)
|
|
Some of the investments listed are issued by an affiliate of the listed portfolio company.
|
|
(6)
|
|
Syndicated investment which has been originated by another financial institution and broadly distributed.
|
|
(7)
|
|
All or a portion of the loan is considered permanently impaired and, accordingly, the charge-off of the principal balance has been recorded as a realized loss for financial reporting purposes.
|
See Notes to Consolidated Financial Statements
10
PATRIOT CAPITAL FUNDING, INC.
Consolidated Schedule of Investments
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encore Legal Solutions, Inc.
(Printing & Publishing)
|
|
Legal document management services
|
|
Junior Secured Term Loan A
(6.2%, Due 12/10) (2) (3)
|
|
$
|
4,020,456
|
|
|
$
|
4,007,366
|
|
|
$
|
3,537,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan B
(9.2%, Due 12/10) (2) (3)
|
|
|
7,390,687
|
|
|
|
7,355,975
|
|
|
|
6,492,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(30,000
shares)(4)
|
|
|
|
|
|
|
5,159,567
|
|
|
|
326,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC
(Machinery)
|
|
Designer and manufacturer of packaging
equipment
|
|
Senior Subordinated Debt
(16.5%, Due 5/13) (2) (3)
|
|
|
3,492,760
|
|
|
|
3,471,147
|
|
|
|
3,540,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest Class A
(2,800,000 units) (4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
3,876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nupla Corporation
(Home & Office Furnishings,
Housewares & Durable Consumer
Products)
|
|
Manufacturer and marketer of professional
high-grade
fiberglass-handled striking
and digging tools
|
|
Revolving Line of Credit
(7.3%, Due 9/12) (3)
|
|
|
870,000
|
|
|
|
856,425
|
|
|
|
856,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(8.0%, Due 9/12) (3)
|
|
|
5,354,688
|
|
|
|
5,315,741
|
|
|
|
5,166,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 3/13) (2) (3)
|
|
|
3,123,084
|
|
|
|
3,102,059
|
|
|
|
2,192,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class A
(475
shares) (2)
|
|
|
|
|
|
|
550,584
|
|
|
|
15,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class B
(1,045 shares) (2)
|
|
|
|
|
|
|
1,101,001
|
|
|
|
1,101,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(1,140,584
shares) (4)
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sidumpr Trailer Company, Inc.
(Automobile)
|
|
Manufacturer of side dump trailers
|
|
Revolving Line of Credit
(7.3%, Due 1/11) (3)
|
|
|
950,000
|
|
|
|
934,432
|
|
|
|
934,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(7.3%, Due 1/11) (3)
|
|
|
2,047,500
|
|
|
|
2,036,677
|
|
|
|
2,036,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(8.8%, Due 1/11) (3)
|
|
|
2,320,625
|
|
|
|
2,301,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(16.5%, Due 7/11) (2) (3)
|
|
|
2,406,374
|
|
|
|
2,253,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
(7.3%, Due 7/11)
|
|
|
1,700,000
|
|
|
|
1,700,000
|
|
|
|
348,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(49,635.5
shares) (2)
|
|
|
|
|
|
|
165,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(64,050 shares)
(4)
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control investments (represents 9.4% of total investments at fair value)
|
|
|
|
|
|
|
|
$
|
43,192,484
|
|
|
$
|
30,427,046
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated
(Textiles & Leather)
|
|
Supplier of spiritwear and campus apparel
|
|
Senior Secured Term Loan A
(8.0%, Due 9/13) (3)
|
|
|
5,328,125
|
|
|
|
5,273,766
|
|
|
|
5,273,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(8.5%, Due 9/13) (3)
|
|
|
5,486,250
|
|
|
|
5,429,567
|
|
|
|
5,429,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.8%, Due 3/14) (2) (3)
|
|
|
6,591,375
|
|
|
|
6,524,347
|
|
|
|
6,524,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock (1,000,000
shares) (4)
|
|
|
|
|
|
|
1,029,722
|
|
|
|
849,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (10,000 shares)
(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
(Textiles & Leather)
|
|
Manufacturer and distributor of specialty
pet products
|
|
Revolving Line of Credit
(5.0%, Due 1/12) (3)
|
|
|
1,000,000
|
|
|
|
986,840
|
|
|
|
986,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(5.1%, Due 1/12) (3)
|
|
|
4,996,875
|
|
|
|
4,950,978
|
|
|
|
4,951,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(12.0%, Due 1/12) (3)
|
|
|
465,000
|
|
|
|
460,265
|
|
|
|
460,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(15.0%, Due 3/12) (2) (3)
|
|
|
4,207,806
|
|
|
|
4,172,076
|
|
|
|
4,172,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest Class
A
(730.02 units) (4)
|
|
|
|
|
|
|
730,020
|
|
|
|
721,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
Common (199,795.08 units)
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart, LLC (5)
(Diversified/Conglomerate Service)
|
|
Provider of tuition management services
|
|
Membership Interest Class
B
(1,218 units) (4)
|
|
|
|
|
|
|
1,280,403
|
|
|
|
311,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest Class
D (1 unit) (4)
|
|
|
|
|
|
|
290,333
|
|
|
|
312,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sport Helmets Holdings, LLC (5)
(Personal & Nondurable Consumer Products)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A
(5.9%, Due 12/13) (3)
|
|
|
4,500,000
|
|
|
|
4,445,614
|
|
|
|
4,282,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(6.4%, Due 12/13) (3)
|
|
|
7,500,000
|
|
|
|
7,400,148
|
|
|
|
7,128,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series A (15.0%, Due 6/14)
(2) (3)
|
|
|
7,000,000
|
|
|
|
6,896,866
|
|
|
|
6,896,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series B (15.0%, Due 6/14)
(2)
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
1,258,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (20,000
shares)(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,899,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments (represents 16.0% of total investments at fair value)
|
|
|
|
|
|
|
|
$
|
53,129,533
|
|
|
$
|
51,457,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
Non-control/non-affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADAPCO, Inc.
(Ecological)
|
|
Distributor of specialty chemicals and
contract application services
|
|
Senior Secured Term Loan A
(11.5%, Due 6/11) (3)
|
|
$
|
8,103,125
|
|
|
$
|
8,056,102
|
|
|
$
|
8,056,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (5,000 shares)
(4)
|
|
|
|
|
|
|
500,000
|
|
|
|
108,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fasteners International, LLC
(Machinery)
|
|
Distributor of fasteners and related
hardware for use in
aerospace,
electronics and defense industries
|
|
Senior Secured Term Loan
(4.1%, Due 11/12) (3)
|
|
|
5,528,000
|
|
|
|
5,446,932
|
|
|
|
5,208,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(14.0%, Due 5/13) (2) (3)
|
|
|
5,306,249
|
|
|
|
5,242,761
|
|
|
|
5,242,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
(32,500 shares) (2)
|
|
|
|
|
|
|
273,397
|
|
|
|
503,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Defense Group, Inc.
(Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock (4,000 shares)
(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
173,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance Agency, Inc. (6)
(Insurance)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan
(7.7%, Due 2/13) (3)
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
4,048,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aylward Enterprises, LLC (5)
(Machinery)
|
|
Manufacturer of packaging equipment
|
|
Revolving Line of Credit
(10.0%, Due 2/12) (3)
|
|
$
|
3,700,000
|
|
|
$
|
3,647,158
|
|
|
$
|
3,647,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(11.6%, Due 2/12) (3)
|
|
|
8,085,938
|
|
|
|
7,999,958
|
|
|
|
3,572,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(22.0%, Due 8/12) (2)
|
|
|
7,328,591
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note
(8.0%, Due 2/13) (2)
|
|
|
151,527
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(1,250,000 units) (4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borga, Inc.
(Mining, Steel, Iron & Nonprecious Metals)
|
|
Manufacturer of pre-fabricated metal
building systems
|
|
Revolving Line of Credit
(4.9%, Due 5/10) (3)
|
|
|
800,000
|
|
|
|
793,950
|
|
|
|
793,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(5.4%, Due 5/09) (3)
|
|
|
328,116
|
|
|
|
325,903
|
|
|
|
325,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(8.4%, Due 5/10) (3)
|
|
|
1,635,341
|
|
|
|
1,617,095
|
|
|
|
1,617,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(16.0%, Due 5/10) (2) (3)
|
|
|
8,117,266
|
|
|
|
8,074,916
|
|
|
|
8,074,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants
(33,750 warrants) (4)
|
|
|
|
|
|
|
14,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caleel + Hayden, LLC (5)
(Personal & Nondurable Consumer Products)
|
|
Provider of proprietary branded
professional skincare and
cosmetic
products to physicians and spa
communities
|
|
Junior Secured Term Loan B
(4.7%, Due 11/11) (3)
|
|
|
10,771,562
|
|
|
|
10,668,072
|
|
|
|
10,668,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.5%, Due 11/12) (3)
|
|
|
6,250,000
|
|
|
|
6,190,008
|
|
|
|
6,252,608
|
|
|
|
|
|
|
Common Stock (7,500 shares)
(4)
|
|
|
|
|
|
|
750,000
|
|
|
|
862,100
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDW Corporation (6)
(Electronics)
|
|
Direct marketer of computer and
peripheral equipment
|
|
Senior Secured Term Loan
(6.7%, Due 10/14)
|
|
|
2,000,000
|
|
|
|
1,780,924
|
|
|
|
920,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Operating, LLC (5)
(Buildings & Real Estate)
|
|
Provider of maintenance, repair and
replacement of
HVAC, electrical,
plumbing, and foundation repair
|
|
Revolving Line of Credit
(6.8%, Due 1/13) (3)
|
|
|
200,000
|
|
|
|
194,564
|
|
|
|
194,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(6.6%, Due 7/12) (3)
|
|
|
1,855,064
|
|
|
|
1,832,122
|
|
|
|
1,832,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.5%, Due 1/13) (2) (3)
|
|
|
2,616,863
|
|
|
|
2,586,496
|
|
|
|
2,586,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copernicus Group
(Healthcare, Education & Childcare)
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit
(8.8%, Due 10/13) (3)
|
|
|
150,000
|
|
|
|
130,753
|
|
|
|
130,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(9.0%, Due 10/13) (3)
|
|
|
8,043,750
|
|
|
|
7,917,470
|
|
|
|
7,917,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.0%, Due 4/14) (3)
|
|
|
12,112,000
|
|
|
|
11,926,408
|
|
|
|
11,926,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Series A
(1,000,000 shares) (4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,033,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperhead Chemical Company, Inc.
(Chemicals, Plastics & Rubber)
|
|
Manufacturer of bulk pharmaceuticals
|
|
Senior Subordinated Debt
(21.0%, Due 1/13) (2) (3)
|
|
|
3,693,195
|
|
|
|
3,664,655
|
|
|
|
3,664,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc. (6)
(Printing & Publishing)
|
|
Direct marketer of checks and other
financial products and
services
|
|
Senior Secured Term Loan
(4.2%, Due 12/13) (3)
|
|
|
1,847,386
|
|
|
|
1,603,118
|
|
|
|
1,330,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(7.5%, Due 12/14) (3)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
880,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dover Saddlery, Inc.
(Retail Stores)
|
|
Equestrian products catalog retailer
|
|
Common Stock (30,974
shares) (4)
|
|
|
|
|
|
|
148,200
|
|
|
|
41,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employbridge Holding Company (5) (6)
(Personal, Food & Miscellaneous Services)
|
|
A provider of specialized staffing
services
|
|
Junior Secured Term Loan
(10.4%, Due 10/13) (3)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
(Electronics)
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A
(6.6%, Due 3/11) (3)
|
|
|
3,278,998
|
|
|
|
3,258,757
|
|
|
|
3,072,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(6.9%, Due 3/12) (3)
|
|
|
4,499,911
|
|
|
|
4,452,650
|
|
|
|
4,196,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(7.4%, Due 3/12) (3)
|
|
|
2,775,439
|
|
|
|
2,737,602
|
|
|
|
2,579,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
(15.0%, Due 3/12) (3)
|
|
|
6,557,997
|
|
|
|
6,501,063
|
|
|
|
6,501,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class A
(2,475 shares) (4)
|
|
|
|
|
|
|
2,475
|
|
|
|
269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class B
(25
shares) (2)
|
|
|
|
|
|
|
279,222
|
|
|
|
281,900
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairchild Industrial Products, Co.
(Electronics)
|
|
Manufacturer of industrial controls and
power transmission products
|
|
Senior Secured Term Loan A
(5.8%, Due 7/10) (3)
|
|
|
1,690,402
|
|
|
|
1,678,459
|
|
|
|
1,652,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(7.7%, Due 1/11) (3)
|
|
|
4,477,500
|
|
|
|
4,448,975
|
|
|
|
4,379,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.8%, Due 7/11) (3)
|
|
|
5,460,000
|
|
|
|
5,418,066
|
|
|
|
5,418,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Class A
(378.4 shares) (2)
|
|
|
|
|
|
|
353,573
|
|
|
|
353,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Class B
(27.5
shares) (4)
|
|
|
|
|
|
|
121,598
|
|
|
|
410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hudson Products Holdings, Inc. (6)
(Mining, Steel, Iron & Nonprecious Metals)
|
|
Manufactures and designs air-cooled heat
exchanger
equipment
|
|
Senior Secured Term Loan
(8.0%, Due 8/15) (3)
|
|
|
7,481,250
|
|
|
|
7,265,876
|
|
|
|
6,433,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Products, LLC
(Machinery)
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan
(7.0%, Due 9/12) (3)
|
|
|
8,893,750
|
|
|
|
8,839,775
|
|
|
|
8,418,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 9/12) (3)
|
|
|
5,547,993
|
|
|
|
5,517,791
|
|
|
|
5,517,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keltner Enterprises, LLC (5)
(Oil & Gas)
|
|
Distributor of automotive oils, chemicals
and parts
|
|
Senior Subordinated Debt
(14.0%, Due 12/11) (3)
|
|
|
3,850,000
|
|
|
|
3,840,677
|
|
|
|
3,840,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Label Corp Holdings, Inc. (6)
(Printing & Publishing)
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan
(8.0%, Due 8/14) (3)
|
|
|
6,483,750
|
|
|
|
6,176,385
|
|
|
|
5,592,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L.A. Spas, Inc.
(Chemicals, Plastics & Rubber)
|
|
Manufacturer of above ground spas
|
|
Revolving Line of Credit
(8.8%, Due 12/09) (3)
|
|
|
1,000,000
|
|
|
|
990,794
|
|
|
|
990,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan
(8.8%, Due 12/09) (3)
|
|
|
4,165,430
|
|
|
|
4,092,364
|
|
|
|
4,092,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(17.5%, Due 1/10) (2) (3)
|
|
|
8,011,600
|
|
|
|
7,907,534
|
|
|
|
599,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (250,000
shares) (4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants
(13,828 warrants) (4)
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp.
(Healthcare, Education & Childcare)
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A
(4.5%, Due 11/12) (3)
|
|
|
4,100,403
|
|
|
|
4,057,774
|
|
|
|
3,927,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.5%, Due 5/13) (3)
|
|
|
4,565,000
|
|
|
|
4,517,936
|
|
|
|
4,517,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(1,25,000 units) (4)
|
|
|
|
|
|
|
125,000
|
|
|
|
159,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mac & Massey Holdings, LLC
(Grocery)
|
|
Broker and distributor of ingredients to
manufacturers of
food products
|
|
Senior Subordinated Debt
(16.5%, Due 2/13) (2) (3)
|
|
|
7,942,142
|
|
|
|
7,913,369
|
|
|
|
7,913,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (250 shares) (4)
|
|
|
|
|
|
|
242,820
|
|
|
|
365,200
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwestern Management Services, LLC
(Healthcare, Education & Childcare)
|
|
Provider of dental services
|
|
Senior Secured Term Loan A
(4.5%, Due 12/12) (3)
|
|
|
5,580,000
|
|
|
|
5,531,693
|
|
|
|
5,531,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(5.0%, Due 12/12) (3)
|
|
|
1,237,500
|
|
|
|
1,226,436
|
|
|
|
1,226,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(15.0%, Due 6/13) (2) (3)
|
|
|
2,839,310
|
|
|
|
2,815,535
|
|
|
|
2,815,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (500 shares) (4)
|
|
|
|
|
|
|
500,000
|
|
|
|
315,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prince Mineral Company, Inc.
(Metals & Minerals)
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan
(5.5%, Due 12/12) (3)
|
|
|
11,275,000
|
|
|
|
11,131,129
|
|
|
|
10,750,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.0%, Due 7/13) (2) (3)
|
|
|
12,034,071
|
|
|
|
11,918,351
|
|
|
|
11,703,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quartermaster, Inc.
(Retail Stores)
|
|
Retailer of uniforms and tactical
equipment to
law enforcement and security
professionals
|
|
Revolving Line of Credit
(6.7%, Due 12/10) (3)
|
|
|
1,750,000
|
|
|
|
1,731,275
|
|
|
|
1,731,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(6.8%, Due 12/10) (3)
|
|
|
3,225,250
|
|
|
|
3,197,369
|
|
|
|
3,197,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(8.1%, Due 12/10) (3)
|
|
|
2,543,750
|
|
|
|
2,526,377
|
|
|
|
2,526,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
|
|
|
3,399,818
|
|
|
|
3,375,763
|
|
|
|
3,375,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-O-M Corporation
(Automobile)
|
|
Manufacturer of doors, ramps and bulk
heads for
fire trucks and food
transportation
|
|
Senior Secured Term Loan A
(3.4%, Due 2/13) (3)
|
|
|
6,640,000
|
|
|
|
6,582,627
|
|
|
|
6,266,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.9%, Due 5/13) (3)
|
|
|
8,379,000
|
|
|
|
8,290,058
|
|
|
|
7,890,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 8/13) (3)
|
|
|
9,100,000
|
|
|
|
9,011,070
|
|
|
|
9,011,070
|
|
|
|
Total Non-control/non-affiliate investments (represents 74.6% of total investments at fair value)
|
|
$
|
269,577,008
|
|
|
$
|
240,486,620
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Affiliate investments are generally defined under the Investment Company Act of 1940, as amended (the 1940 Act), as companies in which the Company owns at least 5% but not more than 25% of the voting securities of the
company. Control investments are generally defined under the 1940 Act as companies in which the Company owns more than 25% of the voting securities of the company or has greater than 50% representation on its board.
|
|
(2)
|
|
Amount includes payment-in-kind (PIK) interest or dividends.
|
|
(3)
|
|
Pledged as collateral under the Companys Amended Securitization Facility. See Note 6 to Consolidated Financial Statements.
|
|
(4)
|
|
Non-income producing.
|
|
(5)
|
|
Some of the investments listed are issued by an affiliate of the listed portfolio company.
|
|
(6)
|
|
Syndicated investment which has been originated by another financial institution and broadly distributed.
|
See
Notes to Consolidated Financial Statements
16
Patriot Capital Funding, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Description of Business
Description
of Business
Patriot Capital Funding, Inc. (the Company) is a specialty finance company that provides
customized financing solutions to small- to mid-sized companies. The Company typically invests in
companies with annual revenues between $10 million and $100 million, and companies which operate in
diverse industry sectors. Investments usually take the form of senior secured loans, junior
secured loans and subordinated debt investments which may contain equity or equity-related
instruments. The Company also offers one-stop financing, which typically includes a revolving
credit line, one or more senior secured term loans and a subordinated
debt investment.
The Company has elected to be treated as a business development company under the Investment
Company Act of 1940, as amended (the 1940 Act). In addition, the Company has also previously
elected to be treated as a regulated investment company (RIC) under the Internal Revenue Code of
1986, as amended (the Code).
Note 2. Going Concern
The accompanying unaudited financial statements have been prepared in conformity with generally
accepted accounting principles in the United States of America, which contemplates continuation of
the Company as a going concern. However, on April 3, 2009, a termination event occurred under the
Companys second amended and restated securitization revolving credit facility (the Amended
Securitization Facility) with an entity affiliated with BMO Capital Markets Corp. and Branch
Banking and Trust Company due to the amount of the Companys advances outstanding under the Amended
Securitization Facility exceeding the maximum availability under the Amended Securitization
Facility for more than three consecutive business days. The maximum availability under the Amended
Securitization Facility is determined by, among other things, the fair market value of all eligible
loans serving as collateral under the Amended Securitization Facility. Because the fair market
value of certain eligible loans decreased at December 31, 2008, the Companys advances outstanding
under the facility exceeded the maximum availability under the Amended Securitization Facility.
This determination was made in connection with the delivery of a borrowing base report to the
facility lenders on March 31, 2009, which disclosed that the Company was under-collateralized by
approximately $9.8 million. As of such date, the Company had $157.6 million outstanding under the
Amended Securitization Facility. On June 30, 2009 and August 7, 2009, $137.4 million and $115.7
million, respectively, were outstanding under the Amended
Securitization Facility.
As a result of the occurrence of the termination event under the Amended Securitization Facility,
the Company can no longer request additional advances under the Amended Securitization Facility.
In addition, the interest rate payable under the Amended Securitization Facility increased from the
commercial paper rate plus 1.75% to the prime rate plus 3.75%. Also, the terms of the Amended
Securitization Facility require that all principal, interest and fees collected from the debt
investments secured by the Amended Securitization Facility must be used to pay down amounts
outstanding under the Amended Securitization Facility within 24 months following the date of the
termination event. The Amended Securitization Facility also permits the lenders, upon notice to
the Company, to accelerate amounts outstanding under the Amended Securitization Facility and
exercise other rights and remedies provided by the Amended Securitization Facility, including the
right to sell the collateral under the Amended Securitization Facility. As of the date hereof, the
Company has not received any such notice from the lenders. At June 30, 2009, the interest rate
under the Amended Securitization Facility was 7.0%.
These matters raise substantial doubt about the Companys ability to continue as a going concern.
In view of these matters, realization of certain of the assets in the accompanying balance sheet is
dependent upon the Companys ability to meet its financing requirements, raise additional capital,
and the success of its future operations. In addition, because substantially all of the Companys
debt investments are secured by the Companys Amended Securitization Facility, the Company cannot
provide any assurance that it will have sufficient cash and liquid assets to fund its operations
and dividend distributions to its stockholders. If the Company does not distribute at least a
certain percentage of its taxable income annually, it will suffer adverse tax consequences,
including possible loss of its status as a RIC. The Company is in discussions with the Amended
Securitization Facility lenders to seek relief from certain of the terms of the Amended
Securitization Facility, including the requirement under the Amended Securitization Facility that
the Company use all principal, interest and fees collected from the debt investments secured by the
Amended Securitization Facility to pay down amounts outstanding under the Amended Securitization
Facility within 24 months following the date of the termination event. However, based on
discussion to date, we are not optimistic that the lenders will agree to provide the Company any
relief from any terms of the Amended Securitization Facility. As a result, the Company is also
currently evaluating other financing and/or strategic alternatives, including possible sale of the
Company, debt or equity financing, disposition of assets, and other strategic transactions. There
can be no assurance that the actions presently being taken by the Company with respect to the
matters described above will be successful. The financial statements do not include any
adjustments that might result from these uncertainties.
17
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements reflect the consolidated accounts of the Company and its
special purpose financing subsidiary, Patriot Capital Funding, LLC I (see Note 6. Borrowings), with
all significant intercompany balances eliminated. The financial results of the Companys portfolio
investments are not consolidated in the Companys financial
statements.
Interim financial statements of the Company are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, certain
disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP
are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring
accruals, considered necessary for the fair presentation of financial statements for the interim
periods have been included. The results of operations for the current period are not necessarily
indicative of results that ultimately may be achieved for the year. The interim unaudited
financial statements and notes thereto should be read in conjunction with the December 31, 2008
financial statements and notes thereto included in the Companys
Form 10-K as filed with the SEC.
Recent
Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
Disclosures about Derivative Instruments and Hedging Activities, (SFAS No. 161). SFAS No. 161
requires specific disclosures regarding the location and amounts of derivative instruments in the
Companys financial statements; how derivative instruments and related hedged items are accounted
for; and how derivative instruments and related hedged items affect the Companys financial
position, financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. Because
SFAS No. 161 impacts the Companys disclosure and not its accounting treatment for derivative
instruments and related hedged items, the Companys adoption of SFAS No. 161 has not impacted the
results of operations or financial condition; however, derivative instruments and hedging
activities disclosure has been expanded, as disclosed in Note 12.
Hedging Activities.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF
03-6-1 addresses whether instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share (EPS). FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented was adjusted retrospectively (including interim financial
statements and selected financial data) to conform to the provisions of FSP EITF 03-6-1. Early
application was not permitted. On August 14, 2008 and March 3, 2009, the Companys Board of
Directors approved the issuance of 187,500 and 446,250 shares, respectively, of restricted stock to
the Companys executive officers and employees. The Company has determined that these shares of
restricted stock are participating securities prior to vesting
however for the three and six months ended June 30, 2009, such shares
were excluded from the computation of diluted earnings per share
because to include them would be anti-dilutive. For the three and six months ended
June 30, 2009, such shares were considered in the Companys
EPS computations.
In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 provides an
illustrative example of how to determine the fair value of a financial asset in an inactive market.
FSP 157-3 does not change the fair value measurement principles set forth in SFAS No. 157. Since
adopting SFAS 157 in January 2008, the Companys practices for determining the fair value of the
investments in its portfolio have been, and continue to be, consistent with the guidance provided
in the example in FSP 157-3. Therefore, the Companys adoption of FSP 157-3 did not affect its
practices for determining the fair value of the investments in its portfolio and did not have a
material effect on its financial position or results of
operations.
In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 emphasizes that even if there has been
a significant decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique and inputs used, the objective for the fair value measurement
is unchanged from what it would be if markets were operating at normal activity levels or
transactions were orderly; that is, to determine the current exit price. FSP 157-4 sets forth
additional factors that should be considered to determine whether there has been a significant
decrease in volume and level of activity when compared with normal market activity. The reporting
entity shall evaluate the significance and relevance of the factors to determine whether, based on
the weight of evidence, there has been a significant decrease in activity and volume. FSP 157-4
indicates that if an entity determines that either the volume or level of activity for an asset or
liability has significantly decreased (from normal conditions for that asset or liability) or price
quotations or observable inputs are not associated with orderly transactions, increased analysis
and management judgment will be required to estimate fair value. FSP 157-4 further notes that a
fair value measurement should include a risk adjustment to reflect the amount market participants
would demand because of the risk (uncertainty) in the cash
flows.
18
FSP 157-4 also requires a reporting entity to make additional disclosures in interim and annual
periods. FSP 157-4 is effective for interim periods ending after June 15, 2009, with early
application permitted for periods ending after March 15, 2009. Revisions resulting from a change
in valuation techniques or their application are accounted for as a change in accounting estimate.
The Company adopted FSP 157-4 as of January 1, 2009. However, since adopting SFAS No. 157 in
January 2008, the Companys practices for determining fair value and for disclosures about the fair
value of the investments in its portfolio have been, and continue to be, consistent with the
guidance provided in FSP 157-4. Therefore, the Companys adoption of FSP 157-4 has not had any
effect on its financial position or results of operations (See Note
4. Investments).
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (SFAS No. 165). SFAS No. 165 is
intended to establish general standards of accounting for, and disclosure of, events that occur
after the balance sheet date but before financial statements are issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15,
2009 and is required to be adopted prospectively. The Company adopted SFAS No. 165 effective for
the quarter ending June 30, 2009.
In June 2009, the FASB issued SFAS No. 168, FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, (SFAS No. 168). SFAS No. 168 establishes
the FASB Accounting Standards Codification as the source of GAAP to be applied to companies. SFAS
168 explicitly recognizes rules and interpretive releases of the SEC under authority of federal
securities laws as authoritative GAAP for SEC registrants. SFAS 168 will become effective for
interim or annual periods ending after September 15, 2009.
Interest,
Dividends, Fees, and Other Investment Income
Interest and dividend income is recognized as revenue when earned according to the terms of the
investment, and when in the opinion of management, it is collectible. Premiums paid and discounts
obtained, including discounts in the form of fees, are amortized into interest income over the
estimated life of the investment using the interest method. Fees consist principally of loan and
arrangement fees, annual administrative fees, unused fees, prepayment fees, amendment fees, equity
structuring fees and waiver fees. Equity structuring fees are recognized as earned, which is
generally when the investment transaction closes. Other investment income consists principally of
the recognition of unamortized deferred financing fees received from portfolio companies on the
repayment of their debt investment, the sale of the debt investment or a reduction of available
credit under the debt investment.
Federal
Income Taxes
The Company has elected to be treated as a RIC under the Code. The Companys RIC tax year was
initially filed on a July 31 basis. On February 11, 2008, the Company was granted permission by
the Internal Revenue Service to change its RIC tax year from July 31 to December 31, effective on
December 31, 2007. Accordingly, the Company has filed a short period tax return from August 1,
2007 through December 31, 2007, and will file on a calendar year basis for 2008 and thereafter.
The Companys policy has historically been to comply with the requirements of the Code that are
applicable to RICs and to distribute substantially all of its taxable income to its stockholders.
In light of the matters described in Note 2, it may not be possible for the Company to continue to
comply with these requirements. However, the Company intends to take all steps possible to
maintain its RIC tax status. Therefore, no federal income tax provision is included in the
accompanying financial statements. However, to the extent that the Company is not able to maintain
its RIC tax status, it may incur tax liability not currently provided for in the Companys balance
sheet.
The Company adopted Financial Accounting Standards Board
Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes at inception on February 15, 2007. FIN 48 provides guidance for how uncertain
tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements.
FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the
Company's tax returns to determine whether the tax positions are more-likely-than-not of being sustained
by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 was applied to all open
taxable years as of the effective date. The adoption of FIN 48 did not have an effect on the financial
position or results of operations of the Company as there was no liability for unrecognized tax benefits
and no change to the beginning capital of the Company. Management's determinations regarding FIN 48 may
be subject to review and adjustment at a later date based upon factors including, but not limited to, an
on-going analysis of tax laws, regulations and interpretations thereof.
Dividends
Paid
Distributions to stockholders are recorded on the declaration date. The Company is required to pay
out to its shareholders at least 90% of its net ordinary income and net realized short-term capital
gains in excess of net realized long-term capital losses for each taxable year in order to be
eligible for the tax benefits allowed to a RIC under Subchapter M of the Code. Historically it has
been the policy of the Company to pay out as a dividend all or substantially all of those amounts.
The amount to be paid out as a dividend has traditionally been determined by the Board of Directors
each quarter based on the annual estimate of the Companys taxable income by the management of the
Company. At its year-end the Company may pay a bonus distribution, in addition to the other
distributions, to ensure that it has paid out at least 90% of its net ordinary taxable income and
net realized short-term capital gains in excess of net realized long-term capital losses for the
year. The Board of Directors has determined to postpone taking any action with regard to dividends
until the matter described in Note 2 is resolved. Through December 31, 2008, the Company has made
all required distributions on its 2008 distributable income to
satisfy its RIC requirements.
Distributions which exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as distributions in excess of net
investment income and net realized capital gains, respectively. To the extent that they exceed net
investment income and net realized gains for tax purposes, they are reported as distributions of
paid-in capital (i.e., return of capital).
19
Consideration of Subsequent Events.
The Company evaluated events and transactions occurring after June 30, 2009 through August 10,
2009, the date these consolidated interim financial statements were issued, to identify subsequent
events which may need to be recognized or non-recognizable events which would need to be disclosed.
No recognizable events were identified. See Note 14. Subsequent Events for non-recognizable
events or transactions identified for disclosure.
Note 4. Investments
As described below (see Note 5. Fair Value Measurements), effective January 1, 2008, the Company
adopted
Statement of Financial Standards No. 157Fair Value Measurement
, (SFAS No. 157). At June
30, 2009 and December 31, 2008, investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Investments in debt securities
|
|
$
|
323,087,617
|
|
|
$
|
274,232,910
|
|
|
$
|
344,683,219
|
|
|
$
|
308,079,975
|
|
Investments in equity securities
|
|
|
21,293,310
|
|
|
|
9,696,327
|
|
|
|
21,215,806
|
|
|
|
14,290,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
$
|
283,929,237
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009 and December 31, 2008, $109.8 million and $123.5 million, respectively, of
the Companys portfolio investments at fair value were at fixed rates, which represented
approximately 39% and 38%, respectively, of the Companys total portfolio of investments at fair
value. The Company generally structures its subordinated debt at fixed rates, while most of its
senior secured and junior secured loans are at variable rates determined on the basis of a
benchmark LIBOR or prime rate. The Companys loans generally have stated maturities ranging from 4
to 7.5 years.
At June 30, 2009 and December 31, 2008, the Company had equity investments and warrant positions
designed to provide the Company with an opportunity for an enhanced internal rate of return. These
instruments generally do not produce a current return, but are held for potential investment
appreciation and capital gains.
During the three months ended June 30, 2009, the Company realized a loss of $413,000 on investments
principally from the sale of one syndicated loan. During the six months ended June 30, 2009, the
Company realized a net loss of $12.0 million on investments primarily due to the permanent
impairment of loans to one of our portfolio companies. During the three and six months ended June
30, 2008, the Company realized losses of $344,000 and $434,000, respectively, principally from the
cancellation of warrants in which the Company had previously recorded unrealized depreciation on
the entire warrant balance and the sale of portfolio investments. During the three and six months
ended June 30, 2009 the Company recorded unrealized depreciation of $12.8 million and $16.9
million, respectively, and during the three and six months ended June 30, 2008, the Company
recorded unrealized depreciation of $3.4 million and $13.2 million, respectively.
The composition of the Companys investments as of June 30, 2009 and December 31, 2008 at cost and
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Senior Secured Debt
|
|
$
|
163,009,989
|
|
|
|
47.3
|
%
|
|
$
|
137,712,207
|
|
|
|
48.5
|
%
|
|
$
|
171,889,470
|
|
|
|
47.0
|
%
|
|
$
|
156,638,667
|
|
|
|
48.6
|
%
|
Junior Secured Debt
|
|
|
63,930,467
|
|
|
|
18.6
|
|
|
|
50,861,771
|
|
|
|
17.9
|
|
|
|
64,232,689
|
|
|
|
17.5
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
Subordinated Debt
|
|
|
96,147,161
|
|
|
|
27.9
|
|
|
|
85,658,932
|
|
|
|
30.2
|
|
|
|
108,561,060
|
|
|
|
29.7
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
Warrants / Equity
|
|
|
21,293,310
|
|
|
|
6.2
|
|
|
|
9,696,327
|
|
|
|
3.4
|
|
|
|
21,215,806
|
|
|
|
5.8
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents percentage of total portfolio.
|
20
The composition of the Companys investment portfolio by industry sector, using Moodys
Industry Classifications as of June 30, 2009 and December 31, 2008 at cost and fair value was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Machinery
|
|
$
|
51,631,722
|
|
|
|
15.0
|
%
|
|
$
|
36,171,707
|
|
|
|
12.7
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
Health Care, Education & Childcare
|
|
|
39,025,805
|
|
|
|
11.3
|
|
|
|
37,864,405
|
|
|
|
13.3
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
Personal & Nondurable Consumer Products
|
|
|
38,546,025
|
|
|
|
11.2
|
|
|
|
36,274,356
|
|
|
|
12.8
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
Automobile
|
|
|
30,715,635
|
|
|
|
8.9
|
|
|
|
23,050,225
|
|
|
|
8.1
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
Textiles & Leather
|
|
|
28,954,845
|
|
|
|
8.4
|
|
|
|
27,780,125
|
|
|
|
9.8
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
Electronics
|
|
|
27,233,211
|
|
|
|
7.9
|
|
|
|
27,389,835
|
|
|
|
9.6
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
Printing & Publishing
|
|
|
26,352,526
|
|
|
|
7.6
|
|
|
|
11,324,964
|
|
|
|
4.0
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
Metals & Minerals
|
|
|
23,089,697
|
|
|
|
6.7
|
|
|
|
22,746,197
|
|
|
|
8.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
17,921,135
|
|
|
|
5.2
|
|
|
|
11,323,286
|
|
|
|
4.0
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
Retail Stores
|
|
|
11,579,947
|
|
|
|
3.4
|
|
|
|
11,484,713
|
|
|
|
4.1
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
Housewares & Durable Consumer Products
|
|
|
11,106,570
|
|
|
|
3.2
|
|
|
|
7,292,672
|
|
|
|
2.6
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
Ecological
|
|
|
9,929,859
|
|
|
|
2.9
|
|
|
|
9,588,359
|
|
|
|
3.4
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
Grocery
|
|
|
8,393,329
|
|
|
|
2.4
|
|
|
|
8,541,001
|
|
|
|
3.0
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
Chemicals, Plastic & Rubber
|
|
|
5,360,932
|
|
|
|
1.6
|
|
|
|
3,781,610
|
|
|
|
1.3
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
Insurance
|
|
|
5,012,842
|
|
|
|
1.5
|
|
|
|
4,699,639
|
|
|
|
1.6
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
Buildings & Real Estate
|
|
|
4,492,943
|
|
|
|
1.3
|
|
|
|
4,492,943
|
|
|
|
1.6
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
Personal, Food & Miscellaneous Services
|
|
|
3,000,000
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
123,200
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents percentage of total portfolio.
|
As required by the 1940 Act, the Company classifies its investments by level of control.
Control Investments are defined in the 1940 Act as investments in those companies that the
Company is deemed to Control. Generally, under the 1940 Act, the Company is deemed to Control
a company in which it has invested if it owns 25% or more of the voting securities of such company
or has greater than 50% representation on its board. Affiliate Investments are investments in
those companies that are Affiliated Companies of the Company, as defined in the 1940 Act. The
Company is deemed to be an Affiliate of a company in which it has invested if it owns 5% or more
but less than 25% of the voting securities of such company. Non-Control/Non-Affiliate
Investments are those investments that are neither Control Investments nor Affiliate Investments.
At June 30, 2009 and December 31, 2008, the Company owned greater than 5% but less than 25% of the
voting securities in four investments. At June 30, 2009 and December 31, 2008, the Company owned
25% or more of the voting securities in six and four investments, respectively.
Note 5. Fair Value Measurements
The Company accounts for its portfolio investments and interest rate swaps at fair value. As a
result, the Company adopted the provisions of SFAS No. 157 in the first quarter of 2008. SFAS No.
157 defines fair value, establishes a framework for measuring fair value, establishes a fair value
hierarchy based on the quality of inputs used to measure fair value and enhances disclosure
requirements for fair value measurements. SFAS No. 157 defines fair value as the price that would
be established to sell an asset or transfer a liability in an orderly transaction between market
participants in what would be the principal or most advantageous market for the asset or liability.
Where available, fair value is based on observable market prices or parameters or derived from
such prices or parameters. Where observable prices or inputs are not available, valuation
techniques are applied. These valuation techniques involve some level of management estimation and
judgment, the degree of which is dependent on the price transparency for the investments or market
and the investments complexity.
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized
based upon the level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by SFAS No. 157 and directly related to the amount of subjectivity
associated with the inputs to determining the fair value of these assets and liabilities, are as
follows:
Level 1 Unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data at the measurement date for substantially the full
term of the assets or liabilities.
Level 3 Unobservable inputs that reflect managements best estimate of what market participants
would use in pricing the asset or liability at the measurement date. Consideration is given to the
risk inherent in the valuation technique and the risk inherent in the inputs to the model.
21
The following table presents the financial instruments carried at fair value as of June 30, 2009,
by caption on the Consolidated Balance Sheet for each of the three levels of hierarchy established
by SFAS No. 157.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
Internal Models with
|
|
Internal Models with
|
|
Total Fair Value
|
|
|
Quoted Market Prices
|
|
Significant Observable
|
|
Significant Unobservable
|
|
Reported in
|
|
|
in Active Markets
|
|
Market Parameters
|
|
Market Parameters
|
|
Consolidated
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Balance Sheet
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliate investments
|
|
$
|
176,166
|
|
|
$
|
19,717,166
|
|
|
$
|
192,959,964
|
|
|
$
|
212,853,296
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
47,373,445
|
|
|
|
47,373,445
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
23,702,496
|
|
|
|
23,702,496
|
|
|
Total investments at fair value
|
|
$
|
176,166
|
|
|
$
|
19,717,166
|
|
|
$
|
264,035,905
|
|
|
$
|
283,929,237
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (1)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
|
|
|
|
|
(1)
|
|
Represents interest rate swaps in connection with the Companys Amended Securitization
Facility. The fair value of the interest rate swaps are included in the accounts payable, accrued
expenses and other line of the liabilities section of the Consolidated Balance Sheets. On July 9,
2009, the Company terminated all of its interest rate swap agreements and realized a loss of $3.3
million in connection with entering into an agreement, limited consent and amendment to the
Companys Amended Securitization Facility with the Lenders (see Note 14. Subsequent Events).
|
The following table provides a roll-forward in the changes in fair value from December 31,
2008 to June 30, 2009, for all investments for which the Company determines fair value using
unobservable (Level 3) factors. When a determination is made to classify a financial instrument
within Level 3 of the valuation hierarchy, the determination is based upon the fact that the
unobservable factors are the most significant to the overall fair value measurement. However,
Level 3 financial instruments also typically include, in addition to the unobservable or Level 3
components, observable components (that is, Level 1 and Level 2 components that are actively quoted
and can be validated to external sources). Accordingly, the appreciation (depreciation) in the
table below includes changes in fair value due in part to observable Level 1 and Level 2 factors
that are part of the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using unobservable inputs (Level 3)
|
|
|
Non-affiliate
|
|
Affiliate
|
|
Control
|
|
|
|
|
Investments
|
|
Investments
|
|
Investments
|
|
Total
|
|
Fair Value December 31, 2008
|
|
$
|
220,017,120
|
|
|
$
|
51,457,082
|
|
|
$
|
30,427,046
|
|
|
$
|
301,901,248
|
|
Total realized losses
|
|
|
|
|
|
|
|
|
|
|
(11,600,764
|
)
|
|
|
(11,600,764
|
)
|
Change in unrealized depreciation
|
|
|
(6,171,546
|
)
|
|
|
(3,193,648
|
)
|
|
|
(8,719,219
|
)
|
|
|
(18,084,413)
|
(1)
|
Purchases, issuances, settlements and other, net
|
|
|
(7,983,780
|
)
|
|
|
(889,989
|
)
|
|
|
693,603
|
|
|
|
(8,180,166
|
)
|
Transfers within Level 3
|
|
|
(12,901,830
|
)
|
|
|
|
|
|
|
12,901,830
|
|
|
|
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2009
|
|
$
|
192,959,964
|
|
|
$
|
47,373,445
|
|
|
$
|
23,702,496
|
|
|
$
|
264,035,905
|
|
|
|
|
|
|
|
(1)
|
|
Relates to assets held at June 30, 2009
|
The Company estimates the fair value of its Level 3 debt investments by first estimating the
enterprise value of the portfolio company which issued the debt investment and augments the
valuation techniques it uses to estimate the fair value of its debt investments where there is not
a readily available market value (Level 3). To estimate the enterprise value of a portfolio
company, the Company analyzed various factors, including the portfolio companies historical and
projected financial results. Typically, private companies are valued based on multiples of EBITDA
(Earning Before Interest, Taxes, Depreciation and Amortization), cash flow, net income, revenues
or, in limited instances, book value.
In estimating a multiple to use for valuation purposes, the Company looked to private merger and
acquisition statistics, discounted public trading multiples or industry practices. In some cases,
the valuation may be based on a combination of valuation methodologies, including but not limited
to, multiple based, discounted cash flow and liquidation analysis. If a portfolio company was
distressed, a liquidation analysis may have provided the best indication of enterprise value.
The Company uses a bond-yield model to value these investments based on the present value of
expected cash flows. The primary inputs into the model are market interest rates for debt with
similar characteristics and an adjustment for the portfolio companys credit risk. The credit risk
component of the valuation considers several factors including financial performance, business
outlook, debt priority and collateral position. During the three months ended June 30, 2009 and
2008, the Company recorded net unrealized depreciation of $12.7 million and $3.4 million,
respectively, on its investments. During the six months ended June 30, 2009 and 2008, the Company
recorded net unrealized depreciation of $16.9 million and $13.2 million, respectively, on its
investments. For the three and six months ended June 30, 2009, the Companys net unrealized
depreciation consists of the following: approximately $12.9 million and $17.5 million,
respectively, of unrealized depreciation resulted from a decline in cash flows of the Companys
portfolio companies; approximately $1.5 million and $0.7 million, respectively, of unrealized
depreciation which resulted from changes in market multiples and interest rates; offset by approximately $1.7 million and $1.3
million, respectively, of unrealized appreciation which resulted from quoted market prices on the
Companys syndicated loan portfolio. For the three and six months ended June 30, 2008, the
Companys net unrealized depreciation
22
consists of the following: approximately $0.2 million and
$1.4 million, respectively, which resulted from quoted market prices on the
Companys syndicated loan portfolio as a result of disruption in the financial credit markets for
broadly syndicated loans; approximately $3.6 million and $7.8 million, respectively, resulted from
a decline in cash flows of the Companys portfolio companies; and approximately $0.5 million of
unrealized appreciation and $4.0 million of unrealized depreciation, respectively, which resulted
from changes in market multiples and interest rates.
Note 6. Borrowings
On September 18, 2006, the Company, through a consolidated wholly-owned bankruptcy remote, special
purpose subsidiary, entered into an amended and restated securitization revolving credit facility
(the Securitization Facility) with an entity affiliated with BMO Capital Markets Corp. (formerly
known as Harris Nesbitt Corp.). The Securitization Facility allowed the special purpose subsidiary
to borrow up to $140 million through the issuance of notes to a multi-seller commercial paper
conduit administered by the affiliated entity. The Securitization Facility also required bank
liquidity commitments (Liquidity Facility) to provide liquidity support to the conduit. The
Liquidity Facility was provided by the lender that participated in the Securitization Facility for
a period of 364-days and was renewable annually thereafter at the option of the lender. On May 2,
2007, the Company amended its Securitization Facility to lower the interest rate payable on any
outstanding borrowings under the Securitization Facility from the commercial paper rate plus 1.35%
to the commercial paper rate plus 1.00% during the period of time the Company was permitted to make
draws under the Securitization Facility. The amendment also reduced or eliminated certain
restrictions pertaining to certain loan covenants. On August 31, 2007, the Company amended its
Securitization Facility to increase its borrowing capacity thereunder by $35 million. The
amendment also extended the commitment termination date from July 23, 2009 to July 22, 2010 and
reduced or eliminated certain restrictions pertaining to certain loan covenants. The
Securitization Facility provided for the payment by the Company to the lender of a monthly fee
equal to 0.25% per annum on the unused amount of the Securitization Facility.
On April 11, 2008, the Company entered into the Amended Securitization Facility with an entity
affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (the Lenders).
The Amended Securitization Facility amended and restated the Securitization Facility to, among
other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend
the maturity date from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an
additional 364-day period with the consent of the lenders thereto); (iii) increase the interest
rate payable under the facility from the commercial paper rate plus 1.00% to the commercial paper
rate plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up
to $50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25%
per annum to 0.30% per annum.
Similar to the Securitization Facility, the Amended Securitization Facility contains restrictions
pertaining to the geographic and industry concentrations of funded loans, maximum size of funded
loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum
equity requirements. These restrictions could have affected the amount of notes the Companys
special purpose subsidiary could issue from time to time. The Amended Securitization Facility also
contains certain requirements relating to portfolio performance, including required minimum
portfolio yield and limitations on delinquencies and charge-offs, violation of which could have
resulted in the early termination of the Amended Securitization Facility. The Amended
Securitization Facility also requires the maintenance of the Liquidity Facility. The Liquidity
Facility was provided by the Lenders that participate in the Securitization Facility for a period
of 364-days and was renewable annually thereafter at the option of the lenders. The Liquidity
Facility was scheduled to be renewed in April 2009. The Amended Securitization Facility is secured
by all of the loans held by the Companys special purpose subsidiary.
On April 3, 2009 a termination event occurred under the Amended Securitization Facility due to the
amount of the Companys advances outstanding under the facility exceeding the maximum availability
under the facility for more than three consecutive business days. The maximum availability under
the facility is determined by, among other things, the fair market value of all eligible loans
serving as collateral under the facility. Because the fair market value of certain eligible loans
decreased at December 31, 2008, the Companys advances outstanding under the facility exceeded the
maximum availability under the facility. This determination was made in connection with the
delivery of a borrowing base report to the facility lenders on March 31, 2009. As of such date,
the Company had $157.6 million outstanding under the facility. As a result of the occurrence of
the termination event under the facility, the Company can no longer make additional advances under
the facility. Also, the interest rate payable under the Amended Securitization Facility increased
from the commercial paper rate plus 1.75% to the prime rate plus 3.75%. In addition, the terms of
the facility require that all principal, interest and fees collected from the debt investments
secured by the facility must be used to pay down amounts outstanding under the facility within 24
months following the date of the termination event. The facility also permits the lenders, upon
notice to the Company, to accelerate amounts outstanding under the facility and exercise other
rights and remedies provided by the facility, including the right to sell the collateral under the
facility. The Company has not received any such notice from the lenders.
In connection with the origination and amendment of the Securitization Facility and the Amended
Securitization Facility, the Company incurred $2.4 million of fees which are being amortized over
the term of the facility.
23
At June 30, 2009 and December 31, 2008, $137.4 million and $162.6 million, respectively, of
borrowings were outstanding under the Amended Securitization Facility. At June 30, 2009, the
interest rate under the Amended Securitization Facility was 7.0%. Interest expense for the three
and six months ended June 30, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest charges
|
|
$
|
2,644,393
|
|
|
$
|
1,733,144
|
|
|
$
|
4,043,615
|
|
|
$
|
3,719,520
|
|
Amortization of debt issuance costs
|
|
|
131,729
|
|
|
|
131,728
|
|
|
|
263,456
|
|
|
|
190,632
|
|
Unused facility fees
|
|
|
1,248
|
|
|
|
60,358
|
|
|
|
56,736
|
|
|
|
74,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,777,370
|
|
|
$
|
1,925,230
|
|
|
$
|
4,363,807
|
|
|
$
|
3,984,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Stock Option Plan and Restricted Stock Plan
As of June 30, 2009, 3,644,677 shares of common stock are reserved for issuance upon exercise of
options to be granted under the Companys stock option plan and 2,065,045 shares of the Companys
common stock were reserved for issuance under the Companys employee restricted stock plan
(collectively, the Plans). On March 3, 2009, awards of 446,250 shares of restricted stock were
granted to the Companys executive officers with a fair value of $1.27 (the closing price of the
common stock at date of grant). The total fair value of $567,000 is being expensed over a four
year vesting period. As of June 30, 2009, 3,189,107 options were
outstanding, 2,721,457 of which
were exercisable and 633,750 shares of restricted stock were outstanding, none of which are vested.
The options have a weighted average remaining contractual life of 7.0 years, a weighted average
exercise price of $12.43, and an aggregate intrinsic value of $0. The restricted stock vests over
four years.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment, (SFAS 123R). The Company has elected the modified prospective
method of transition as permitted by SFAS 123R. Under this transition method, the Company is
required to record compensation expense for all awards granted after the date of adoption and for
the unvested portion of previously granted awards that were outstanding at the date of adoption.
The fair value of each stock option granted is estimated on the date of grant using the
Black-Scholes option pricing model. For shares granted in February 2008, this model used the
following assumptions: annual dividend rate of 11.8%, risk free interest rate of 3.0%, expected
volatility of 26%, and the expected life of the options of 6.5 years. The Company calculated its
expected term assumption using guidance provided by SEC Staff Accounting Bulletin 107 (SAB 107).
SAB 107 allows companies to use a simplified expected term calculation in instances where no
historical experience exists, provided that the companies meet specific criteria. Expected
volatility was based on the Companys historical volatility.
Assumptions used with respect to future grants may change as the Companys actual experience may be
different. The fair value of options granted in 2008 was approximately $0.47, using the
Black-Scholes option pricing model. The Company has adopted the policy of recognizing compensation
cost for awards with graded vesting on a straight-line basis over the requisite service period for
the entire award. For the three and six months ended June 30, 2009, the Company recorded
compensation expense related to stock awards of approximately $220,000 and $421,000, respectively,
and for the three and six months ended June 30, 2008, the Company recorded compensation expense
related to stock awards of approximately $204,000 and $386,000, respectively, which is included in
compensation expense in the consolidated statements of operations. The Company has not
historically recorded the tax benefits associated with the expensing of stock options since the
Company elected to be treated as a RIC under Subchapter M of the Internal Revenue Code and, as
such, the Company is not subject to federal income tax on the portion of taxable income and gains
distributed to stockholders, provided that at least 90% of its annual taxable income is
distributed. As of June 30, 2009, there was $247,000 of unrecognized compensation cost related to
unvested options which is expected to be recognized over 1.7 years. As of June 30, 2009, there was
$1.6 million of unrecognized compensation cost related to unvested restricted stock awards which is
expected to be recognized over 3.7 years.
Note 8. Share Data and Common Stock
The following table sets forth a reconciliation of weighted average shares outstanding for
computing basic and diluted income (loss) per common share for the three and six months ended June
30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
20,950,501
|
|
|
|
20,693,337
|
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
20,950,501
|
|
|
|
20,693,337
|
|
|
|
20,940,294
|
|
|
|
20,671,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The
dilutive effect of stock options and restricted stock is computed using the treasury stock method. Options on 3.2
million shares (2009 and 2008), and restricted stock of 633,750 shares (2009), were anti-dilutive
and therefore excluded from the computation of diluted loss per share.
In 2005, the Company established a dividend reinvestment plan, and during the three months ended
March 31, 2009 and the year ended December 31, 2008, issued 123,000 and 177,000 shares,
respectively, in connection with dividends paid. The following table reflects the Companys
dividends paid since March 31, 2008:
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
|
|
|
|
|
|
|
|
October 30, 2008
|
|
December 22, 2008
|
|
January 15, 2009
|
|
$0.25
|
July 30, 2008
|
|
September 12, 2008
|
|
October 15, 2008
|
|
$0.33
|
May 2, 2008
|
|
June 5, 2008
|
|
July 16, 2008
|
|
$0.33
|
February 27, 2008
|
|
March 14, 2008
|
|
April 16, 2008
|
|
$0.33
|
Note 9. Commitments and Contingencies
The balance of unused commitments to extend credit was $17.3 million and $23.8 million at June 30,
2009 and December 31, 2008, respectively. Commitments to extend credit consist principally of the
unused portions of commitments that obligate the Company to extend credit, such as contingent
investment draws, revolving credit arrangements or similar transactions. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee by the
counterparty. Since commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Since April 3, 2009, the date of the
termination event under the Amended Securitization Facility, the Company has funded revolver draws
under our outstanding commitments. The Company is currently in negotiation with the Lenders to
have eligible revolver draws funded by the Lenders going forward. Ineligible revolver draw
requests, those requests on loans outside of the Amended Securitization Facility, will not be
funded by the Lenders. The Company may not have the ability to fund the ineligible revolver draw
requests in the future or eligible revolver draw requests if the Lenders refuse to accommodate the
request.
In connection with borrowings under the Amended Securitization Facility, the Companys special
purpose subsidiary was required under certain circumstances to enter into interest rate swap
agreements or other interest rate hedging transactions. The Company had agreed to guarantee the
payment of certain swap breakage costs that may be payable by the Companys special purpose
subsidiary in connection with any such interest rate swap agreements or other interest rate hedging
transactions (see Note 6. Borrowings). On July 9, 2009, the Company terminated all eight interest
rate swap agreements, and realized a loss of $3.3 million, in connection with entering into an agreement, limited consent and amendment
to the Companys Amended Securitization Facility with the Lenders (see Note 14. Subsequent Events).
The Company leases its corporate offices and certain equipment under operating leases with terms
expiring in 2011. Future minimum lease payments due under operating leases at June 30, 2009 are as
follows: $121,000 remainder of 2009, $247,000 2010, $21,000 2011. Rent expense was
approximately $59,000 and $117,000 for the three and six months ended June 30, 2009, respectively,
and was approximately $68,000 and $136,000 for the three and six months ended June 30, 2008,
respectively. At June 30, 2009, the Company had an outstanding letter of credit in the amount of
$38,000 as security deposit for the lease of the Companys corporate offices.
Note 10. Concentrations of Credit Risk
The Companys portfolio companies are primarily small- to mid-sized companies that operate in a
variety of industries.
At June 30, 2009 and December 31, 2008, the Company did not have any investment in excess of 10% of
the total investment portfolio at fair value. Investment income, consisting of interest,
dividends, fees, and other investment income, can fluctuate dramatically upon repayment of an
investment or sale of an equity interest. Revenue recognition in any given period can be highly
concentrated among several portfolio companies. During the three and six months ended June 30,
2009 and 2008, the Company did not record investment income from any portfolio company in excess of
10% of total investment income.
25
Note 11. Income Taxes
Effective August 1, 2005, the Company elected to be treated as a RIC. Accordingly, the Companys
RIC tax year was initially filed on a July 31 basis. On February 11, 2008, the Company was granted
permission by the Internal Revenue Service to change its RIC tax year from July 31 to December 31,
effective on December 31, 2007. Accordingly, the Company has prepared a short period tax
return from August 1, 2007 through December 31, 2007, and will file on a calendar year basis for
2008 and thereafter. The Companys policy has historically been to comply with the requirements of
Subchapter M of the Code that are applicable to RICs and to distribute substantially all of its
taxable income to its shareholders. In light of the matters described in Note 2, it may not be
possible for the Company to continue to comply with these requirements. However, the Company
intends to take all steps possible to maintain its RIC tax status. Therefore, no federal, state or
local income tax provision is included in the accompanying financial statements. However, to the
extent that the Company is not able to maintain its RIC tax status, it may incur tax liability not
currently provided for in the Companys balance sheet.
Tax loss for the six months ended June 30, 2009 is as follows:
|
|
|
|
|
|
|
January 1, 2009
|
|
|
|
to
|
|
|
|
June 30, 2009
|
|
GAAP net investment income
|
|
$
|
7,620,000
|
|
Tax timing differences of:
|
|
|
|
|
Origination fees, net
|
|
|
(794,000
|
)
|
Permanent impairment on loans
|
|
|
(11,826,000
|
)
|
Stock compensation expense, original issue discount
and depreciation and amortization
|
|
|
1,464,000
|
|
|
|
|
|
Tax loss
|
|
$
|
(3,536,000
|
)
|
|
|
|
|
Distributable income (loss) differs from GAAP net investment income primarily due to: (1)
origination fees received in connection with investments in portfolio companies are treated as
taxable income upon receipt; (2) certain stock compensation expense is not currently deductible for
tax purposes (3) certain debt investments that generate original issue
discount; (4) depreciation and amortization; and (5) permanent impairment on loans. As a result of
the tax loss for the six months ended June 30, 2009, the Company did not have any required dividend
distributions.
Distributions which exceed tax distributable income (tax net investment income and realized gains,
if any) are reported as distributions of paid-in capital (i.e., return of capital). The taxability
of the distributions made during 2009 will be determined by the Companys tax earnings and profits
for its tax year ending December 31, 2009.
The tax cost basis of the Companys investments as of June 30, 2009 approximates the book cost.
There were no capital gain distributions in 2009 or 2008.
At June 30, 2009, the Company had a net capital loss carryforward of $4.1 million to offset net
capital gains, to the extent provided by federal tax law. Of the total capital loss carryforward,
$3.2 million will expire in the Companys tax year ending December 31, 2013, and $900,000 will
expire in the Companys tax year ending December 31, 2015.
Note 12. Hedging Activities
Since 2006, the Company, through its special purpose subsidiary, entered into eight interest rate
swap agreements. As of June 30, 2009, the Company included the
$(2.2) million fair value of these
interest rate swaps in the accounts payable, accrued expenses and other line of the liabilities
section of the Consolidated Balance Sheets. During the three and six months ended June 30, 2009,
the Company recorded $679,000 and $862,000, respectively of
unrealized appreciation on the fair
value on these interest rate swaps in the Consolidated Statement of Operations. The Company did
not designate any of its interest rate swaps as hedges for financial accounting purposes. Each
month these interest rate swaps are settled for cash.
No new interest rate swap agreements were executed during the six months ended June 30, 2009. On
July 9, 2009, the Company terminated all eight interest rate swap agreements, and realized a loss
of $3.3 million, in connection with entering into an agreement, limited consent and amendment to
the Companys Amended Securitization Facility with the Lenders (see Note 14. Subsequent Events).
26
The following table summarizes the Companys terminated interest rate swaps with Bank of Montreal
as the counterparty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
Unrealized
|
|
|
Date
|
|
|
Date
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Appreciation
|
|
|
Entered
|
|
|
Expiring
|
|
|
Rate
|
|
|
Notional
|
|
|
Cost
|
|
|
Value
|
|
|
(Depreciation)
|
|
|
03/06
|
|
|
|
01/11
|
|
|
5.04
|
%
|
|
$
|
9,937,058
|
|
|
$
|
|
|
|
$
|
(366,499
|
)
|
|
$
|
100,123
|
|
|
12/06
|
|
|
|
02/12
|
|
|
4.84
|
%
|
|
|
3,192,219
|
|
|
|
|
|
|
|
(283,220
|
)
|
|
|
54,957
|
|
|
08/07
|
|
|
|
04/12
|
|
|
5.17
|
%
|
|
|
3,938,246
|
|
|
|
|
|
|
|
(381,891
|
)
|
|
|
86,294
|
|
|
09/07
|
|
|
|
04/12
|
|
|
4.98
|
%
|
|
|
3,784,074
|
|
|
|
|
|
|
|
(339,268
|
)
|
|
|
79,834
|
|
|
12/07
|
|
|
|
01/11
|
|
|
4.28
|
%
|
|
|
485,449
|
|
|
|
|
|
|
|
(47,511
|
)
|
|
|
4,581
|
|
|
04/08
|
|
|
|
12/12
|
|
|
3.51
|
%
|
|
|
9,385,926
|
|
|
|
|
|
|
(387,814
|
)
|
|
|
218,434
|
|
|
05/08
|
|
|
|
09/10
|
|
|
3.32
|
%
|
|
|
664,775
|
|
|
|
|
|
|
|
(12,718
|
)
|
|
|
6,349
|
|
|
10/08
|
|
|
|
10/12
|
|
|
3.54
|
%
|
|
|
12,458,127
|
|
|
|
|
|
|
|
(416,726
|
)
|
|
|
128,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
43,845,874
|
|
|
$
|
|
|
|
$
|
(2,235,647
|
)
|
|
$
|
678,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
Net investment income
|
|
|
.37
|
|
|
|
.64
|
|
Net realized loss on investments
|
|
|
(.57
|
)
|
|
|
(.02
|
)
|
Net change in unrealized depreciation
on investments
|
|
|
(.81
|
)
|
|
|
(.64
|
)
|
Effect of issuance of common stock
|
|
|
(.04
|
)
|
|
|
|
|
Distributions from net investment income
|
|
|
|
|
|
|
(.64
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(.02
|
)
|
Net change in unrealized swap appreciation
|
|
|
.04
|
|
|
|
.01
|
|
Stock based compensation expense
|
|
|
.02
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
7.66
|
|
|
$
|
10.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net asset value return (1)
|
|
|
(11.5
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Per share market value, beginning of period
|
|
$
|
3.64
|
|
|
$
|
10.09
|
|
Per share market value, end of period
|
|
$
|
1.71
|
|
|
$
|
6.25
|
|
|
|
|
|
|
|
|
|
|
Total market value return (2)
|
|
|
(53.0
|
)%
|
|
|
(31.9
|
)%
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of period
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
160,496,000
|
|
|
$
|
208,622,000
|
|
Average net assets
|
|
|
173,572,000
|
|
|
|
214,404,000
|
|
Ratio of operating expenses to average
net assets (annualized)
|
|
|
10.3
|
%
|
|
|
8.1
|
%
|
Ratio of net investment income to average
net assets (annualized)
|
|
|
8.8
|
%
|
|
|
12.3
|
%
|
Average borrowings outstanding
|
|
$
|
146,350,000
|
|
|
$
|
146,170,000
|
|
Average amount of borrowings per
share
|
|
$
|
6.99
|
|
|
$
|
7.06
|
|
|
|
|
(1)
|
|
The total net asset value return (not annualized) reflects the change in net asset
value of a share of stock, plus dividends.
|
|
(2)
|
|
The total market value return (not annualized) reflects the change in the ending market
value per share plus dividends, divided by the beginning market value per share.
|
Note 14. Subsequent Events
The Company has evaluated subsequent events through August 10, 2009, which is the date the
financial statements were available to be issued.
On July 9, 2009, the Company entered into an agreement, limited consent and amendment (the
Agreement, Consent and Amendment) related to, among other things, the Amended Securitization
Facility with the Lenders and other related parties. In connection with the Agreement, Consent and
Amendment, the Lenders consented to the sale of the Encore Legal Solutions, Inc. and L.A. Spas,
Inc. term loans and equity interests and the Company agreed to terminate all eight outstanding swap
agreements and pay the counterparty to such swaps approximately $3.3 million. Payments on the
terminated swap liability will be made at the rate of
27
$500,000 per month for 6 months beginning in
July 2009 and $251,000 in January 2010. The Lenders agreed that the monthly payment of the swap
liability will be paid from the collection of principal, interest and fees collected from the debt
investments. In addition, the Company agreed with the Lenders that it will not accept equity
securities or other non-cash consideration in forbearance of the exercise of any rights under any
of the loans or debt instruments held in the Companys investment portfolio or the cash interest
payments on these investments.
On July 9, 2009, the Company received proceeds of $3.2 million in conjunction with the sale of its
junior secured term loans and equity interests in Encore Legal Solutions, Inc. In connection with
the sale, the Company realized a loss of approximately $13.4 million.
Such proceeds were used to reduce the principal on our outstanding borrowings under the Amended
Securitization Facility.
On July 9, 2009, the Company sold its senior and subordinated term loans and equity interests in
L.A. Spas, Inc. for a release of future liabilities against the Company relating to its investments
in this portfolio company. In connection with the sale, the Company recorded a loss of
approximately $1.6 million.
On July 23, 2009, the Company received gross proceeds of $3.8 million in connection with the full
repayment of the senior subordinated term loan to Copperhead Chemical Company, Inc. Such proceeds
were used to reduce the principal on our outstanding borrowings under the Amended Securitization
Facility.
On July 23, 2009, William E. Alvarez, Jr., Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an amendment to the employment agreement with the Company,
dated August 7, 2007. The amendment modifies the definition of Average Annual Bonus set forth in
Section 8 of the employment agreement for purposes of calculating the lump sum payment Mr. Alvarez
would receive if his employment is terminated for any reason except for cause (as defined in the
employment agreement). The amendment defines Average Annual Bonus to include his average bonus
for the term of the employment agreement plus the aggregate grant date fair value of restricted
stock awarded during the term of the employment agreement.
On
July 24, 2009, the Company received gross proceeds of $11.2 million in connection with the full
repayment of the senior and subordinated term loans to Fairchild Industrial Products, Co. Such
proceeds were used to reduce the principal on our outstanding borrowings under the Amended
Securitization Facility.
On July 31, 2009, the Company entered into a severance agreement with Clifford L. Wells, its Executive
Vice-President and Chief Compliance Officer. Pursuant to the terms of the severance agreement,
if Mr. Wellss employment is terminated by the Company without cause or by Mr. Wells for good
reason within 30 days before or within six months after a change of control transaction that occurs
between July 31, 2009 and January 31, 2010, then the Company will pay to Mr. Wells his monthly base
salary in monthly installments for six months following his termination of employment.
On August 3, 2009, the Company and Prospect Capital Corporation entered into an Agreement and Plan of Merger,
dated as of August 3, 2009 (the Merger Agreement), pursuant to which the Company will merge with and into
Prospect Capital, with Prospect Capital continuing as the surviving company in the merger (the Merger).
Subject to the terms and conditions of the Merger Agreement, if the
Merger is completed, each issued and outstanding share of the Companys common stock will be
converted into 0.3992 shares of Prospect Capitals common stock and any fractional shares resulting from the
application of the exchange ratio will be paid in cash. The exchange ratio will be adjusted for any dividend the
Company may declare prior to the closing of the Merger. If not exercised prior to completion of the Merger, outstanding Company stock options will vest and be cancelled in exchange for the payment in cash to the holder of these stock
options of $0.01 per share of the Companys common stock for
which these options are exercisable. Further, in connection with the
Merger, each
share of the Companys restricted stock then outstanding will
vest all restrictions with respect to such shares of restricted stock
will lapse (a) a number of shares of each holder of restricted stock
will be cancelled in exchange for
the cash value per share of Prospect Capitals common stock at the time of the consummation of the Merger in an
amount estimated to be sufficient to pay applicable taxes in connection with the vesting of such shares or (b)
the remaining number of shares of restricted stock will be converted in the Merger into shares of Prospect Capitals common stock on the same terms as all other shares of the
Companys common stock.
In
connection with the completion of the Merger, Prospect Capital will pay off the outstanding principal and accrued interest and
up to $1.35 million of related fees and expenses due under the Companys securitization revolving credit facility.
As of the date of the Merger Agreement, there was approximately $115.7 million outstanding under the facility.
Further, as a condition to Prospect agreeing to execute the Merger Agreement, the Company agreed to reverse, immediately prior to the Merger, the $11.8
million federal income tax ordinary loss deduction that it previously disclosed it would incur with respect to its
investments in L.A. Spas, Inc. As a result, the Company estimates that distributable income for RIC purposes at
June 30, 2009 would have been $8.3 million. Immediately prior to the merger, the Company expects to declare a dividend in the amount of its
cumulative distributable income for RIC purposes, which will be payable 10% in cash and 90% common stock.
Consummation of the Merger, which is currently anticipated to occur in the earlier part of the fourth quarter of 2009,
is subject to certain conditions, including, among others, the
approval of the Companys stockholders, accuracy of the
representations and warranties of the other party and compliance by the other party with its obligations under the
Merger Agreement.
The Merger Agreement also contains certain termination rights for the Company and Prospect Capital, as the case
may be, including: if the Merger has not been completed by December 15, 2009; if there is a breach by the other
party that is not or cannot be cured within 30 days notice of such breach and such breach would result in a failure
of the conditions to closing set forth in the Merger Agreement; if the Board of Directors of the Company fails to
recommend the Merger to its stockholders; if Patriot Capital Funding breaches its obligations in any material respect
regarding any alternative business combination proposals; or if Patriot Capital Funding stockholders have voted to
not approve the Merger. In addition, the Merger Agreement provides that, in connection with the termination of the
Merger Agreement under specified circumstances, the Company may be required to pay Prospect Capital a
termination fee equal to $3.2 million or to reimburse certain expenses and make certain other payments.
On August 4, 2009, Bruce Belodoff filed a class action lawsuit against the Company, its directors and certain of its
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the proposed merger between the
Company and Prospect Capital is the product of a flawed sales process and that the Companys directors and
officers breached their fiduciary duty by agreeing to a structure that was not designed to maximize the value of the
Companys shares. In addition, the lawsuit asserts that the Company aided and abetted its officers and directors
breach of fiduciary duty.
On August 5, 2009, Brian Killion filed a class action lawsuit against the Company, its directors and certain of its
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the consideration to be paid in the
proposed merger between the Company and Prospect Capital is unfair and is the result of an unfair
process. The lawsuit further alleges that the Companys directors and officers breached their fiduciary duty by agreeing to a
structure that is designed to deter higher offers from other bidders and for failing to obtain the highest and best price
for the Companys stockholders. In addition, the lawsuit asserts that the Company and Prospect Capital aided and
abetted the Companys officers and directors breach of fiduciary duty.
On August 11, 2009, Thomas Webster filed a class
action lawsuit against the Company, its directors and certain of its officers in the Superior Court of the
State of Connecticut. The lawsuit alleges that the proposed merger between the Company and Prospect
Capital is the product of a flawed sales process and that the Companys directors and officers breached
their fiduciary
duty by agreeing to a structure that was not designed to maximize the value of the Companys shares.
In addition, the lawsuit asserts that the Company aided and abetted its officers and directors breach of fiduciary duty.
At this time, the Company is unable to determine whether an
unfavorable outcome from this matter is probable or remote or to
estimate the amount or range of potential loss, if any. However, the Company believes
that these claims are without merit and intends to vigorously defend against them.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on
Form 10-Q.
Some of the statements in this quarterly report on Form 10-Q 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 ability to negotiate an arrangement with the lenders of our Amended
Securitization Facility for repayment terms that do not require us to use all
principal and interest collected from the debt investments secured by the
facility to pay down amounts outstanding thereunder;
|
|
|
|
|
Our ability to negotiate other financing and/or strategic alternatives,
including possible debt or equity financing, acquisition or disposition of
assets, and other strategic transactions;
|
|
|
|
|
Our ability to maintain our status as a RIC under the Code;
|
|
|
|
|
Our ability to continue as a going concern;
|
|
|
|
|
Our future operating results;
|
|
|
|
|
Our business prospects and the prospects of our portfolio companies;
|
|
|
|
|
The ability of our portfolio companies to achieve their objectives;
|
|
|
|
|
Our expected financings and investments;
|
|
|
|
|
Future changes in laws or regulations (including the interpretation of these
laws and regulations by regulatory authorities) and conditions in our operating
areas, particularly with respect to business development companies and RICs;
|
|
|
|
|
The adequacy of our cash resources and working capital; and
|
|
|
|
|
The timing of cash flows, if any, from the operations of our portfolio companies.
|
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
this quarterly report on Form 10-Q, our quarterly report on Form 10-Q for the quarter ended March
31, 2009 and in our 2008 annual report on Form 10-K.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on
information available to us on the date of this quarterly report on Form 10-Q, and we assume no
obligation to update any such forward-looking statements. Although we undertake no obligation to
revise or update any forward-looking statements, whether as a result of new information, future
events or otherwise, you are advised to consult any additional disclosures that we may make through
reports that we may file in the future with the SEC, including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a specialty finance company that provides customized financing solutions to small- to
mid-sized companies. Our ability to invest across a companys capital structure, from senior
secured loans to equity securities, allows us to offer a comprehensive suite of financing
solutions, including one-stop financing. In August 2005, we completed an initial public offering
of shares of our common stock and we elected to be treated as a business development company under
the 1940 Act in connection with our initial public offering. We have also elected to be treated as
a RIC under Subchapter M of the Code. Pursuant to this election, we generally will not have to pay
corporate-level taxes on any income or gains we distribute (actually or as a deemed dividend) to
our stockholders as dividends, provided that we satisfy certain requirements.
In light of the unprecedented instability in the financial markets and the severe slowdown in
the overall economy, we do not have adequate liquidity, including access to the debt and equity
capital markets, to operate our business in the manner in which we have
historically operated. As a result, our short-term business focus has shifted from making debt and
equity investments to preserving our liquidity position. In this regard, on April 3, 2009, a
termination event occurred under the Amended Securitization Facility due to
29
the amount of our
advances outstanding under the facility exceeding the maximum availability under the facility for
more than three consecutive business days. The maximum availability under the facility is
determined by, among other things, the fair market value of all eligible loans serving as
collateral under the facility. Because the fair market value of certain eligible loans decreased
at December 31, 2008, our advances outstanding under the facility exceeded the maximum availability
under the facility. This determination was made in connection with the delivery of a borrowing
base report to the facility lenders on March 31, 2009. As a result of the occurrence of the
termination event under the facility, we can no longer make additional advances under the facility.
Also, the interest rate payable under the Amended Securitization Facility increased from the
commercial paper rate plus 1.75% to the prime rate plus 3.75%. In addition, the terms of the
facility require that from April 3, 2009 all principal, interest and fees collected from the debt
investments secured by the facility must be used to pay down amounts outstanding under the facility
within 24 months following the date of the termination event. Substantially all of our debt
investments are secured under our Amended Securitization Facility. The facility also permits the
lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise other
rights and remedies provided by the facility, including the right to sell the collateral under the
facility. To date, we have not received any such notice from the lenders. At June 30, 2009, the
interest rate under the Amended Securitization Facility was 7.0%.
Moreover, our independent registered public accounting firm issued an opinion on our December
31, 2008 consolidated financial statements that states that the consolidated financial statements
were prepared assuming we will continue as a going concern and further states that the uncertainty
regarding the renewal of our liquidity facility raises substantial doubt about our ability to
continue as a going concern. At the time our independent registered public accounting firm issued
this opinion, we were negotiating the renewal of the liquidity facility, which matured on April 11,
2009, that supported our Amended Securitization Facility with certain liquidity banks. In the
event that the liquidity banks did not renew the liquidity facility, the terms of the Amended
Securitization Facility would require, among other things, that all principal and interest
collected from the debt investments secured by the facility be used to pay down amounts outstanding
under the facility by April 2011. Subsequent to the issuance of this opinion by our independent
registered public accounting firm, the liquidity banks determined not to renew the liquidity
facility supporting our Amended Securitization Facility.
We are in discussions with the Amended Securitization Facility lenders to seek relief from
certain terms of the facility, including the requirement under the facility that we use all
principal, interest and fees collected from the debt investments secured by the facility to pay
down amounts outstanding under the facility by April 3, 2011. However, based on discussions with
the Lenders to date, we are not optimistic that the lenders will agree to provide us any relief
from any terms of the facility. Moreover, even if we are successful in seeking relief from the
lenders of the facility, our ability to operate our business in the manner in which we have
historically operated will be constrained until our ability to access the debt and equity capital
markets improves. As a result, we are also currently evaluating other financing and/or strategic
alternatives, including possible sale of our company, debt or equity financing, disposition of
assets, and other strategic transactions.
For a discussion of a strategic transaction we entered into with
Prospect Capital Corporation on August 3, 2009, see Managements Discussion and Analysis and Results of Operations Recent Developments.
Portfolio Composition
Our primary business is lending to and investing in small- to mid-sized businesses through
investments in senior secured loans, junior secured loans, subordinated debt investments and
equity-based investments, including warrants. The fair value of our
portfolio was $283.9 million
and $322.4 million at June 30, 2009 and December 31, 2008, respectively.
Total portfolio investment activity as of and for the six months ended June 30, 2009 and the
year ended December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Beginning portfolio at fair value
|
|
$
|
322,370,748
|
|
|
$
|
384,725,753
|
|
Investments in debt securities
|
|
|
10,273,276
|
|
|
|
79,096,786
|
|
Investments in equity securities
|
|
|
188
|
|
|
|
3,245,937
|
|
Investment repayments
|
|
|
(21,116,671
|
)
|
|
|
(95,018,988
|
)
|
Increase in payment-in-kind interest/dividends
|
|
|
2,218,782
|
|
|
|
5,452,124
|
|
Sale of investments
|
|
|
(1,377,011
|
)
|
|
|
(15,267,401
|
)
|
Change in unearned revenue
|
|
|
443,572
|
|
|
|
(129,458
|
)
|
Realized loss on investments
|
|
|
(12,013,473
|
)
|
|
|
|
|
Change in fair value of investments
|
|
|
(16,870,174
|
)
|
|
|
(39,992,921
|
)
|
|
|
|
|
|
|
|
Ending portfolio at fair value
|
|
$
|
283,929,237
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
30
As of June 30, 2009 and December 31, 2008, the composition of our portfolio at fair
value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
Senior secured revolving lines of credit
|
|
$
|
14,252,865
|
|
|
|
5.0
|
%
|
|
$
|
10,266,191
|
|
|
|
3.2
|
%
|
Senior secured term loans
|
|
|
123,459,342
|
|
|
|
43.5
|
|
|
|
146,372,476
|
|
|
|
45.4
|
|
Junior secured term loans
|
|
|
50,861,771
|
|
|
|
17.9
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
Senior subordinated debt
|
|
|
85,658,932
|
|
|
|
30.2
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
Investments in equity securities
|
|
|
9,696,327
|
|
|
|
3.4
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009 and year ended December 31, 2008, the
weighted average yield on all of our outstanding debt investments was approximately 10.7% and
12.1%, respectively. The weighted average balance of our debt investment portfolio during the six
months ended June 30, 2009 was $300.3 million, down from $333.2 million during the fourth quarter
of 2008. Yields are computed using actual interest income earned for the year (annualized for the
six months ended June 30, 2009), including amortization of loan fees and original issue discount,
divided by the weighted average fair value of debt investments. As of June 30, 2009 and December
31, 2008, $109.8 million and $123.5 million, respectively, of our portfolio investments at fair
value were at fixed interest rates, which represented approximately 39% and 38%, respectively, of
our total portfolio of investments at fair value. We generally structure our subordinated debt
investments at fixed rates while many of our senior secured and junior secured loans are, and will
be, at variable rates.
At June 30, 2009 and December 31, 2008, our equity investments consisted of common and
preferred stock, LLC membership interests and warrants to acquire equity interests in certain of
our portfolio companies. Warrants to acquire equity interests allow us to participate in the
potential appreciation in the value of the portfolio company, while minimizing the amount of
upfront cost to us.
The composition of our investment portfolio by industry sector, using Moodys Industry
Classifications, excluding unearned income, as of June 30, 2009 and December 31, 2008 at cost and
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Machinery
|
|
$
|
51,631,722
|
|
|
|
15.0
|
%
|
|
$
|
36,171,707
|
|
|
|
12.7
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
Health Care, Education & Childcare
|
|
|
39,025,805
|
|
|
|
11.3
|
|
|
|
37,864,405
|
|
|
|
13.3
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
Personal & Nondurable Consumer Products
|
|
|
38,546,025
|
|
|
|
11.2
|
|
|
|
36,274,356
|
|
|
|
12.8
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
Automobile
|
|
|
30,715,635
|
|
|
|
8.9
|
|
|
|
23,050,225
|
|
|
|
8.1
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
Textiles & Leather
|
|
|
28,954,845
|
|
|
|
8.4
|
|
|
|
27,780,125
|
|
|
|
9.8
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
Electronics
|
|
|
27,233,211
|
|
|
|
7.9
|
|
|
|
27,389,835
|
|
|
|
9.6
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
Printing & Publishing
|
|
|
26,352,526
|
|
|
|
7.6
|
|
|
|
11,324,964
|
|
|
|
4.0
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
Metals & Minerals
|
|
|
23,089,697
|
|
|
|
6.7
|
|
|
|
22,746,197
|
|
|
|
8.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
17,921,135
|
|
|
|
5.2
|
|
|
|
11,323,286
|
|
|
|
4.0
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
Retail Stores
|
|
|
11,579,947
|
|
|
|
3.4
|
|
|
|
11,484,713
|
|
|
|
4.1
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
Housewares & Durable Consumer Products
|
|
|
11,106,570
|
|
|
|
3.2
|
|
|
|
7,292,672
|
|
|
|
2.6
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
Ecological
|
|
|
9,929,859
|
|
|
|
2.9
|
|
|
|
9,588,359
|
|
|
|
3.4
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
Grocery
|
|
|
8,393,329
|
|
|
|
2.4
|
|
|
|
8,541,001
|
|
|
|
3.0
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
Chemicals, Plastic & Rubber
|
|
|
5,360,932
|
|
|
|
1.6
|
|
|
|
3,781,610
|
|
|
|
1.3
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
Insurance
|
|
|
5,012,842
|
|
|
|
1.5
|
|
|
|
4,699,639
|
|
|
|
1.6
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
Buildings & Real Estate
|
|
|
4,492,943
|
|
|
|
1.3
|
|
|
|
4,492,943
|
|
|
|
1.6
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
Personal, Food & Miscellaneous Services
|
|
|
3,000,000
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
123,200
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
344,380,927
|
|
|
|
100.0
|
%
|
|
$
|
283,929,237
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents percentage of total portfolio.
|
31
At June 30, 2009 and December 31, 2008, we did not have any investment in excess of
10% of the total investment portfolio at fair value. Investment income, consisting of interest,
dividends and fees can fluctuate dramatically upon repayment of an investment or sale of an equity
interest. Revenue recognition in any given period can be highly concentrated among several
portfolio companies. During the three and six months ended June 30, 2009 and 2008, we did not
record investment income from any portfolio company in excess of 10% of total investment income.
Portfolio Asset Quality
We utilize a standard investment rating system for our entire portfolio of debt investments.
Investment Rating 1 is used for investments that exceed expectations and/or a capital gain is
expected. Investment Rating 2 is used for investments that are generally performing in accordance
with expectations. Investment Rating 3 is used for performing investments that require closer
monitoring. Investment Rating 4 is used for investments performing below expectations where a
higher risk of loss exists. Investment Rating 5 is used for investments performing significantly
below expectations where we expect a loss.
The following table shows the distribution of our debt investments on the 1 to 5 investment
rating scale at fair value as of June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
1
|
|
$
|
95,779,317
|
|
|
|
34.9
|
%
|
|
$
|
82,179,735
|
|
|
|
26.7
|
%
|
2
|
|
|
134,852,717
|
|
|
|
49.2
|
|
|
|
184,507,897
|
|
|
|
59.9
|
|
3
|
|
|
30,469,979
|
|
|
|
11.1
|
|
|
|
21,275,475
|
|
|
|
6.9
|
|
4
|
|
|
4,890,139
|
|
|
|
1.8
|
|
|
|
8,477,320
|
|
|
|
2.7
|
|
5
|
|
|
8,240,758
|
|
|
|
3.0
|
|
|
|
11,639,548
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
274,232,910
|
|
|
|
100.0
|
%
|
|
$
|
308,079,975
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2009 and December 31, 2008, we had loans and
equity investments from six and three,
respectively, of our portfolio companies on non-accrual status. See Critical Accounting Policies
Interest and Dividend Income Recognition for a discussion of when we place debt investments on
non-accrual status.
In the event that the United States economy continues in a prolonged recession, it is possible
that the financial results of small- to mid-sized companies, similar to those in which we invest,
could experience further deterioration, which could ultimately lead to difficulty in meeting debt
service requirements and an increase in defaults. We can provide no assurance that the performance
of certain of our portfolio companies will not be negatively impacted by these economic or other
conditions which could have a negative impact on our future results.
Results of Operations
The principal measure of our financial performance is net income (loss) which includes net
investment income, net realized gain (loss) and net unrealized appreciation (depreciation). Net
investment income is the difference between our income from interest, dividends, fees, and other
investment income and our operating expenses. Net realized gain (loss) on investments is the
difference between the proceeds received from dispositions of portfolio investments and their
stated cost. Net unrealized appreciation (depreciation) on interest rate swaps is the net change
in the fair value of our outstanding swap agreements. Net unrealized appreciation (depreciation)
on investments is the net change in the fair value of our investment portfolio.
Comparison for the three months ended June 30, 2009 and 2008
Total Investment Income
Total investment income includes interest and dividend income on our investments, fee income
and other investment income. Fee income consists principally of loan and arrangement fees, annual
administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and
waiver fees. Other investment income consists primarily of the accelerated recognition of deferred
32
financing fees received from our portfolio companies on the repayment of the outstanding
investment, the sale of the investment or reduction of available credit.
Total investment income for the three months ended June 30, 2009 and 2008, was $8.1 million
and $10.7 million, respectively. For the three months ended June 30, 2009, this amount consisted
of interest income of $12,000 from cash and cash equivalents, $7.8 million of interest and dividend
income from portfolio investments (which included $1.1 million in payment-in-kind or PIK interest
and dividends) and $288,000 of fee income. For the three months ended June 30, 2008, this amount
consisted of interest income of $30,000 from cash and cash equivalents, $10.1 million of interest
and dividend income from portfolio investments (which included $1.4 million in payment-in-kind or
PIK interest and dividends), $142,000 in fee income and $380,000 in other investment income.
The decrease in our total investment income for the three months ended June 30, 2009 as
compared to the three months ended June 30, 2008 was primarily attributable to a decrease in the
weighted average fair value balance outstanding of our interest-bearing investment portfolio during
the quarter ended June 30, 2009. The primary reason behind the decrease in total investment income
was a decrease in interest income due to the decrease in the weighted average fair value balance of
our investment portfolio, and a decrease in the weighted average yield of our investments. During
the three months ended June 30, 2009, the weighted average fair value balance outstanding of our
interest-bearing investment portfolio was approximately $292.4 million as compared to approximately
$337.3 million during the three months ended June 30, 2008. The weighted average yield on our
investments during the three months ended June 30, 2009 decreased as a result of an increase in the
number of loans on non-accrual status and an overall decrease in market interest rates.
Expenses
Expenses include compensation expense, interest on our outstanding indebtedness, professional
fees, and general and administrative expenses.
Expenses for the three months ended June 30, 2009 and 2008, were $5.6 million and $4.2
million, respectively. Expenses increased for the three months ended June 30, 2009 as compared to
the three months ended June 30, 2008 by approximately $1.4 million, primarily as a result of higher
interest expense of $852,000, higher professional fees of $610,000 and higher general and
administrative expenses of $126,000, partially offset by lower compensation expense which decreased
by $268,000. The lower compensation expense was principally attributable to the elimination of
bonus accruals given the impact of the current market and economic environment on our financial
performance, reduction of employee headcount during the fourth quarter of 2008 and the first
quarter of 2009, partially offset by an increase in base salary for three of our executive officers
during the first quarter of 2009. The increase in interest expense was attributable to an increase
in interest rates during the second quarter of 2009 as a result of the April 3, 2009 termination
event which occurred under the Amended Securitization Facility. Our weighted average borrowings
outstanding were approximately $141.5 million during the three months ended June 30, 2009, as
compared to $139.6 million during the three months ended June 30, 2008. Such borrowings were used
primarily to fund investments. The increase in professional fees expense is primarily due to
additional legal fees we incurred in 2009 relating to the termination event under the Amended
Securitization Facility and our evaluation of strategic alternatives for the company. The increase
in general and administrative expenses is primarily the result of additional costs incurred in
connection with the evaluation of strategic alternatives, including additional fees paid to our
directors in connection with board meetings relating to the termination event under the Amended
Securitization Facility and the evaluation of strategic alternatives for us.
Realized Gain (Loss) on Disposition of Investments
Net realized gain (loss) on investments is the difference between the proceeds received from
dispositions of portfolio investments and their stated cost. During the three months ended June
30, 2009, we realized a loss of $413,000 on investments principally from the sale of one syndicated
loan investment. During the three months ended June 30, 2008, we realized a loss of $344,000 on
investments principally from the cancellation of warrants in which we had previously recorded
unrealized depreciation on the entire warrant balance.
Net Change in Unrealized Appreciation or Depreciation on Investments
Net unrealized appreciation (depreciation) on investments is the net change in the fair value
of our investment portfolio during the reporting period, including the reversal of previously
recorded unrealized appreciation or depreciation when gains or losses are realized. During the
three months ended June 30, 2009 and 2008, we recorded net
unrealized depreciation of $12.7 million
and $3.4 million, respectively, on our investments. For the three months ended June 30, 2009, our net
unrealized depreciation consisted of the following: approximately
$12.9 million of unrealized
depreciation resulted from a decline in cash flows of our portfolio companies; approximately $1.5
million of unrealized depreciation which resulted from changes in market multiples and interest rates; offset by approximately $1.7
million of unrealized appreciation resulted from quoted market prices on our syndicated loan
portfolio. For the three months ended June 30, 2008, our net unrealized depreciation consisted of
the following: approximately $217,000 of unrealized depreciation resulted from the decrease in
quoted market prices on our syndicated loan portfolio as a result of the disruption in the credit
markets for broadly
33
syndicated loans; approximately $3.6 million resulted from a decline in the
financial performance of our portfolio companies; offset by approximately $452,000 of unrealized
appreciation which resulted from changes in market multiples and interest rates.
Net Unrealized Appreciation or Depreciation on Interest Rate Swaps
Net unrealized appreciation (depreciation) on interest rate swaps represents
the change in the value of the swap agreements. For the three months ended
June 30, 2009 and 2008, we recorded unrealized appreciation of approximately
$679,000 and $970,000, respectively, on our interest rate swap agreements. The
unrealized appreciation in the value of our interest rate swap agreements in
2009 and 2008 resulted from the volatility and corresponding fluctuation in
variable interest rates during the periods. On July 9, 2009, we terminated all
eight interest rate swap agreements in connection with entering into an
agreement, limited consent and amendment to the Companys Amended
Securitization Facility with the Lenders and incurred a liability of
approximately $3.3 million.
Net Income (Loss)
Net loss was $9.9 million for the quarter ended June 30, 2009 as compared to net income of
$3.7 million for the quarter ended June 30, 2008. The net loss for the three months ended June 30,
2009 principally related to net unrealized depreciation of $12.7 million on our investments.
Comparison for the six months ended June 30, 2009 and 2008
Total Investment Income
Total investment income includes interest and dividend income on our investments, fee income
and other investment income. Fee income consists principally of loan and arrangement fees, annual
administrative fees, unused fees, prepayment fees, amendment fees, equity structuring fees and
waiver fees. Other investment income consists primarily of the accelerated recognition of deferred
financing fees received from our portfolio companies on the repayment of the outstanding
investment, the sale of the investment, or reduction of available credit.
Total investment income for the six months ended June 30, 2009 and 2008, was $16.6 million and
$21.9 million, respectively. For the six months ended June 30, 2009, this amount consisted of
interest income of $31,000 from cash and cash equivalents, $16.1 million of interest income from
portfolio investments (which included $2.3 million in payment-in-kind or PIK interest and
dividends), $455,000 in fee income and $9,000 in other investment income. For the six months ended
June 30, 2008, this amount consisted of interest income of $84,000 from cash and cash equivalents,
$21.0 million of interest income from portfolio investments (which included $3.0 million in
payment-in-kind or PIK interest and dividends), $356,000 in fee income and $420,000 in other
investment income.
The decrease in our total investment income for the six months ended June 30, 2009 as compared
to the six months ended June 30, 2008 was primarily attributable to a decrease in the weighted
average fair value balance outstanding of our interest-bearing investment portfolio during the six
months ended June 30, 2009. The primary reason behind the decrease in total investment income was
a decrease in interest income due to the decrease in the weighted average fair value balance of our
investment portfolio, and a decrease in the weighted average yield of our investments. During the
six months ended June 30, 2009, the weighted average fair value balance outstanding of our
interest-bearing investment portfolio was approximately $300.3 million as compared to approximately
$350.3 million during the six months ended June 30, 2008. The weighted average yield on our
investments during the six months ended June 30, 2009 decreased as a result of an increase in the
number of loans on non-accrual status and an overall decrease in market interest rates.
Expenses
Expenses include compensation expense, interest on our outstanding indebtedness, professional
fees, and general and administrative expenses.
Expenses for the six months ended June 30, 2009 and 2008, were $9.0 million and $8.7 million,
respectively. Expenses increased for the six months ended June 30, 2009 as compared to the six
months ended June 30, 2008 by approximately $300,000, primarily as a
result of higher interest expense which increased by $379,000, higher professional fees of $676,000
and higher general and administrative expenses which increased by $68,000, offset by lower
compensation expense which decreased by $846,000. The lower compensation expense was principally
attributable to the elimination of bonus accruals given the impact of the current market and
economic environment on our financial performance, reduction of employee headcount during the
fourth quarter of 2008 and the first quarter of 2009, partially offset by an increase in base
salary for three of our executive officers during the first quarter of 2009. The increase in
interest expense was attributable to a increase in interest rates during the second quarter of 2009
as a result of the April 3, 2009 termination event which occurred under the Amended Securitization
Facility. Our weighted average borrowings outstanding
34
were approximately $146.4 million during the
six months ended June 30, 2009, as compared to $146.2 million during the six months ended June 30,
2008. Such borrowings were used primarily to fund investments. The increase in professional fees
expense is primarily due to additional legal fees we incurred in 2009 relating to the termination
event under the Amended Securitization Facility and our evaluation of strategic alternatives for
the company. The increase in general and administrative expenses is primarily the result of
additional costs incurred in connection with the evaluation of strategic alternatives, including
additional fees paid to our directors in connection with board meetings relating to the termination
event under the Amended Securitization Facility, offset by reduced travel, advertising and investor
relations expenses.
Realized Gain (Loss) on the Disposition of Investments
Net realized gain (loss) on investments is the difference between the proceeds received from
dispositions of portfolio investments and their stated cost. During the six months ended June 30,
2009, we realized a loss of $12.0 million due to the permanent impairment of loans to one of our
portfolio companies and the sale of one syndicated loan investment. During the six months ended
June 30, 2008 we realized a loss of $434,000 on investments from the sale of one portfolio debt
investment and from the cancellation of warrants in which we had previously recorded unrealized
depreciation on the entire warrant balance.
Net Change in Unrealized Appreciation or Depreciation on Investments
Net unrealized appreciation (depreciation) on investments is the net change in the fair value
of our investment portfolio during the reporting period, including the reversal of previously
recorded unrealized appreciation or depreciation when gains or losses are realized. During the six
months ended June 30, 2009 and 2008, we recorded net unrealized depreciation of $16.9 million and
$13.2 million, respectively, on our investments. For the six months ended June 30, 2009, our net
unrealized depreciation consisted of the following: approximately $17.5 million of unrealized
depreciation resulted from a decline in cash flows of our portfolio companies; approximately $0.7
million of unrealized depreciation which resulted from changes in market multiples and interest rates; offset by approximately $1.3
million of unrealized appreciation resulted from quoted market prices on our syndicated loan
portfolio. For the six months ended June 30, 2008, our net unrealized depreciation consists of the
following: approximately $1.4 million of unrealized depreciation resulted from the decrease in
quoted market prices on our syndicated loan portfolio as a result of disruption in the financial
credit markets for broadly
syndicated loans; approximately $7.8 million resulted from a decline in
the financial performance of our portfolio companies; and approximately $4.0 million resulted from
changes in market multiples and interest rates.
Unrealized Appreciation or Depreciation on Interest Rate Swaps
Net unrealized appreciation on interest rate swaps represents the change in the
fair value of our swap agreements. For the six months ended June 30, 2009 and
2008, we recorded unrealized appreciation of approximately $862,000 and
$217,000, respectively, on our interest rate swap agreements. The unrealized
appreciation in the value of our interest rate swap agreements in 2009 and 2008
resulted from the volatility and corresponding fluctuation in variable interest
rates during the periods. On July 9, 2009, we terminated all eight interest
rate swap agreements in connection with entering into an agreement, limited
consent and amendment to the Companys Amended Securitization Facility with the
Lenders and incurred a liability of approximately $3.3 million.
Net Income (Loss)
Net loss was $20.4 million for the six months ended June 30, 2009 as compared to net loss of
$232,000 for the six months ended June 30, 2008. The $20.2 million increase in net loss was
primarily a result of an increase in net unrealized depreciation of $3.7 million, an increase in
realized losses of $11.6 million, and a decrease in net investment income of $5.5 million.
Financial Condition, Liquidity and Capital Resources
Cash, Cash Equivalents and Restricted Cash
At June 30, 2009 and December 31, 2008, we had $8.1 million and $6.4 million, respectively, in
cash and cash equivalents. In addition, at June 30, 2009 and December 31, 2008, we had $7.8
million and $22.2 million, respectively, in restricted cash which we maintained in accordance with
the terms of our Amended Securitization Facility. A portion of the December 31, 2008 funds were
released or available to us on January 12, 2009. Due to the termination event under the Amended
Securitization Facility on April 3, 2009, a portion of the March 31, 2009 funds, which would have
been released to us on April 13, 2009, were instead used to reduce the outstanding borrowings under
our Amended Securitization Facility. As a result, any future funds that get released under the
Amended Securitization Facility will be used to reduce outstanding borrowings until fully repaid.
On June 30, 2009 and August 7, 2009, $137.4 million and $115.7 million, respectively, was
outstanding under the Amended Securitization Facility. On
August 7, 2009, we had $6.7 million in
cash and cash equivalents.
35
For the six months ended June 30, 2009, net cash provided by operating activities totaled $5.3
million, compared to net cash provided by operating activities of $8.6 million for the comparable
2008 period. This change was due primarily to an increase in net loss, an increase in net realized
losses on investments, an increase in interest payable, a decrease in unrealized depreciation on
investments, an increase in unrealized appreciation on swaps, and an increase in accounts payable,
accrued expenses and other. Those amounts were offset by a decrease in PIK interest and dividends.
Cash provided by investing activities totaled $12.2 million and $52.2 million for the six months
ended June 30, 2009 and 2008, respectively. This change was principally due to lower loan
repayments and amortization of $30.4 million, and a decrease in
investment sales of $9.0 million
during the first half of 2009. Cash used for financing activities totaled $15.8 million and $60.5
million in the six months ended June 30, 2009 and 2008, respectively. This change was principally
due to a net decrease of $23.6 million in our net borrowings and a decrease of $8.2 million in
dividends paid, both of which were offset by an increase in restricted cash in the amount of $11.8
million.
Liquidity and Capital Resources
We have historically relied on cash generated from our operations and debt and equity
financings to fund our business. We primarily used these funds to make investments in portfolio
companies in accordance with our investment objective, to pay our operating expenses and to make
cash distributions to the holders of our common stock. However, since mid-2007, global credit and
other financial markets have suffered substantial stress, volatility, illiquidity and disruption.
These forces reached unprecedented levels in late 2008, resulting in the bankruptcy or acquisition
of, or government assistance to, several major domestic and international financial institutions.
In particular, the financial services sector has been negatively impacted by significant write-offs
related to sub-prime mortgages and the re-pricing of credit risk. These events have significantly
diminished overall confidence in the debt and equity markets and caused increasing economic
uncertainty. This reduced confidence and uncertainty has severely hampered our ability to obtain
equity and debt financing.
As a result of this turmoil in the financial markets and our greatly diminished access to
equity and debt financing, we had previously taken a number of steps to help improve the
availability of liquidity, including:
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curtailing our investment originations;
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reducing our operating expenses;
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obtaining stockholder approval at our 2008 annual meeting of stockholders to sell shares
of our common stock below the then current net asset value per share in one or more
offerings for a period of one year which ended on June 17, 2009; and
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postponing any decisions relating to 2009 dividend requirements, if any, until we have a
better insight on our requirement and our ability to pay.
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However, in light of the termination event which occurred under the Amended Securitization
Facility on April 3, 2009, we can no longer make additional advances under the facility and must
use all principal, interest and fees collected from the debt investments secured by the facility to
pay down amounts outstanding under the facility by April 3, 2011. Because substantially all of our
debt investments are secured by our Amended Securitization Facility, we cannot provide any
assurance that we will have sufficient cash and liquid assets to fund our operations and dividend
distributions to our stockholders. We are in discussions with the facility lenders to seek relief
from certain of the terms of the facility, including the requirement under the facility that we use
all principal, interest and fees collected from the debt investments secured by the facility to pay
down amounts outstanding under the facility by April 3, 2011. However based on discussions to
date, we are not optimistic that the lenders will agree to provide us any relief from any of the
terms of the Amended Securitization Facility. Moreover, even if we are successful in seeking
relief from the lenders of the facility, our ability to operate our business in the manner in which
we have historically operated will be constrained until our ability to access the debt and equity
capital markets improves. In this regard, because our common stock has traded at a price
significantly below our current net asset value per share over the last several months and we are
limited in our ability to sell our common stock at a price below net asset value per share without
first obtaining stockholder approval (which approval we did not seek at our 2009 annual meeting of
stockholders), we may continue to be limited in our ability to raise equity capital. In addition,
as a business development company, we generally are required to meet a coverage ratio of total
assets less liabilities and indebtedness not represented by senior securities, to total senior
securities, which includes all of our borrowings and any preferred stock we may issue in the
future, of at least 200%. This requirement limits the amount that we may borrow. As of June 30,
2009, this ratio was 217%. As a result, we are also
currently evaluating other financing and/or strategic alternatives, including possible sale of our
company, debt or equity financing, disposition of assets, and other strategic transactions.
For a discussion of a strategic transaction we entered into with
Prospect Capital Corporation on August 3, 2009, see Managements Discussion and Analysis and Results of Operations Recent Developments.
36
Borrowings
Securitization Revolving Credit Facility.
On September 18, 2006, we, through a consolidated
wholly-owned bankruptcy remote, special purpose subsidiary, entered into an amended and restated
securitization revolving credit facility (the Securitization Facility) with an entity affiliated
with BMO Capital Markets Corp. (formerly known as Harris Nesbitt Corp.). The Securitization
Facility allowed the special purpose subsidiary to borrow up to $140 million through the issuance
of notes to a multi-seller commercial paper conduit administered by the affiliated entity. The
Securitization Facility also required bank liquidity commitments (the Liquidity Facility) to
provide liquidity support to the conduit. The Liquidity Facility was provided by the lender that
participated in the Securitization Facility for a period of 364-days and was renewable annually
thereafter at the option of the lender. On May 2, 2007, we amended the Securitization Facility to
lower the interest rate payable on any outstanding borrowings under the Securitization Facility
from the commercial paper rate plus 1.35% to the commercial paper rate plus 1.00% during the period
of time we were permitted to make draws under the Securitization Facility. The amendment also
reduced or eliminated certain restrictions pertaining to certain loan covenants. On August 31,
2007, we amended the Securitization Facility to increase our borrowing capacity thereunder by $35
million. The amendment also extended the commitment termination date from July 23, 2009 to July
22, 2010 and reduced or eliminated certain restrictions pertaining to certain loan covenants. The
Securitization Facility provided for the payment by us to the lender of a monthly fee equal to
0.25% per annum on the unused amount of the Securitization Facility.
On April 11, 2008, we entered into the Amended Securitization Facility with an entity
affiliated with BMO Capital Markets Corp. and Branch Banking and Trust Company (the Lenders).
The Amended Securitization Facility amended and restated the Securitization Facility to, among
other things: (i) increase the borrowing capacity from $175 million to $225 million; (ii) extend
the maturity date from July 22, 2010 to April 11, 2011 (unless extended prior to such date for an
additional 364-day period with the consent of the Lenders); (iii) increase the interest rate
payable under the facility from the commercial paper rate plus 1.00% to the commercial paper rate
plus 1.75% on up to $175 million of outstanding borrowings and the LIBOR rate plus 1.75% on up to
$50 million of outstanding borrowings; and (iv) increase the unused commitment fee from 0.25% per
annum to 0.30% per annum.
Similar to the Securitization Facility, the Amended Securitization Facility contains
restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size
of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans
and minimum equity requirements. The Amended Securitization Facility also contains certain
requirements relating to portfolio performance, including required minimum portfolio yield and
limitations on delinquencies and charge-offs, violation of which could have resulted in the early
termination of the Amended Securitization Facility. The Amended Securitization Facility also
requires the maintenance of the Liquidity Facility. The Liquidity Facility was provided by the
Lenders that participate in the Securitization Facility for a period of 364-days and was renewable
annually thereafter at the option of the lenders. The Liquidity Facility was scheduled to be
renewed in April 2009. The Amended Securitization Facility is secured by all of the loans held by
the Companys special purpose subsidiary.
On April 3, 2009, a termination event occurred under the Amended Securitization Facility due
to the amount of our advances outstanding under the facility exceeding the maximum availability
under the facility for more than three consecutive business days. The maximum availability under
the facility is determined by, among other things, the fair market value of all eligible loans
serving as collateral under the facility. Because the fair market value of certain eligible loans
decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum
availability under the facility. This determination was made in connection with the delivery of a
borrowing base report to the facility lenders on March 31, 2009. As of such date, we had $157.6
million outstanding under the facility. As a result of the occurrence of the termination event
under the facility, we can no longer make additional advances under the facility. Also, the
interest rate payable under the Amended Securitization Facility increased from the commercial paper
rate plus 1.75% to the prime rate plus 2%. In addition, the terms of the facility require that all
principal, interest and fees collected from the debt investments secured by the facility must be
used to pay down amounts outstanding under the facility within 24 months following the date of the
termination event. The facility also permits the Lenders, upon notice to us, to accelerate amounts
outstanding under the facility and exercise other rights and remedies provided by the facility,
including the right to sell the collateral under the facility. To date, we have not received any
such notice from the Lenders. Furthermore, we are in active discussions with the facility lenders
to seek relief from certain of the terms of the facility, including the requirement under the
facility that we use all principal, interest and fees collected from the debt investments secured
by the facility to pay down amounts outstanding under the facility within 24 months following the
date of the termination event. However, based on discussions to date, we are not optimistic that
the Lenders will agree to provide us any relief from any terms of the facility. As a result, we
are also currently evaluating other financing and/or strategic alternatives, including possible
sale of our company, debt or equity financing, disposition of assets, and other strategic
transactions. For a discussion of a strategic transaction we entered
into with Prospect Capital Corporation on August 3, 2009, see Managements Discussion and Analysis and Results of Operations Recent Developments.
At June 30, 2009, $137.4 million was outstanding under the Amended Securitization Facility.
At June 30, 2009, the interest rate payable on amounts outstanding under the Amended Securitization
Facility was 7.0%.
Since 2006, the Company, through our special purpose subsidiary, entered into eight interest
rate swap agreements. The swap agreements have a fixed rate range of 3.3% to 5.2% on an initial
notional amount of $53.6 million. The swap agreements generally expire up to five years from
issuance. The swaps were put into place to hedge against changes in variable interest payments on
a portion of our outstanding borrowings. For the six months ended June 30, 2009 and 2008, net
unrealized appreciation attributed to the
37
swaps were approximately $862,000 and $217,000,
respectively. While hedging activities may insulate us against adverse changes in interest rates,
they may also limit our ability to participate in the benefits of lower rates with respect to the
outstanding borrowings. On July 9, 2009, we terminated all eight interest rate swap agreements and
realized a loss of $3.3 million. See Recent Developments.
Regulated Investment Company Status and Dividends
Effective August 1, 2005, the Company elected to be treated as a RIC under Subchapter M of the
Code. As long as we qualify as a RIC, we will not be taxed on our investment company taxable
income or realized net capital gains, to the extent that such taxable income or gains are
distributed, or deemed to be distributed, to stockholders on a timely basis. In light of the
matters described above regarding the Amended Securitization Facility, we may not be able to
continue to qualify as a RIC. However, we intend to take all steps possible to maintain our RIC
tax status.
Taxable income generally differs from net income for financial reporting purposes due to
temporary and permanent differences in the recognition of income and expenses, and generally
excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid
by us in a year may differ from taxable income for that year as such dividends may include the
distribution of current year taxable income or the distribution of prior year taxable income
carried forward into and distributed in the current year. Distributions also may include returns
of capital.
To obtain and maintain RIC tax treatment, we must, among other things, distribute, with
respect to each taxable year, at least 90% of our investment company taxable income (i.e., our net
ordinary income and our realized net short-term capital gains in excess of realized net long-term
capital losses, if any). In order to avoid certain excise taxes imposed on RICs, we must
distribute, with respect to each calendar year, an amount at least equal to the sum of (1) 98% of
our ordinary income for the calendar year, (2) 98% of our capital gains in excess of capital losses
for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and
net capital gains for preceding years that were not distributed during such years. To the extent
our taxable earnings for a fiscal tax year falls below the total amount of our distributions for
that fiscal year, a portion of those distributions may be deemed a return of capital to our
stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a
specific level, if at all. As a result of the termination event that occurred under the Amended
Securitization Facility on April 3, 2009, we are required to dedicate a significant portion of our
operating cash flow to repay the principal amount outstanding under the Amended Securitization
Facility by April 2011. As a result, we may be required to severely limit or otherwise cease
making cash distributions to our stockholders. If we do not distribute at least a certain
percentage of our taxable income annually, we will suffer adverse tax consequences, including
possible loss of our status as a RIC. We cannot assure stockholders that they will receive any
distributions or distributions at a particular level. In addition, we may be limited in our
ability to make distributions due to the asset coverage test for borrowings applicable to us as a
business development company under the 1940 Act. As a result of our tax loss for the six months
ended June 30, 2009, the Company did not have any required dividend distributions.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues and expenses during the period
reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are
based on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results could differ from those estimates. Changes in our
estimates and assumptions could materially impact our results of operations and financial
condition.
Going Concern
A fundamental principle of the preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America is the assumption that an
entity will continue in existence as a going concern, which contemplates continuity of operations
and the realization of assets and settlement of liabilities occurring in the ordinary course of
business. This principle is applicable to all entities except for entities in liquidation or
entities for which liquidation appears imminent. In accordance with this requirement, our policy
is to prepare our consolidated financial statements on a going concern basis unless we intend to
liquidate or have no other alternative but to liquidate. As a result of the termination event that
occurred under the Amended
Securitization Facility, we can no longer make additional advances under the facility. In
addition, the terms of the facility require that all principal, interest and fees collected from
the debt investments secured by the facility must be used to pay down amounts outstanding under the
facility within 24 months following the date of the termination event. The facility also permits
the lenders, upon notice to us, to accelerate amounts outstanding under the facility and exercise
other rights and remedies provided by the facility, including the right to sell the collateral
under the facility. We have not received any such notice from the lenders. Furthermore, we are in
active discussions with the facility lenders to seek relief from certain of the terms of the
facility, including the requirement
38
under the facility that we use all principal, interest and fees
collected from the debt investments secured by the facility to pay down amounts outstanding under
the facility within 24 months following the date of the termination event. While we have prepared
our consolidated financial statements on a going concern basis, if we are unable to obtain relief
from certain terms of the facility, our ability to continue as a going concern may be severely
impacted. Therefore, we may not be able to realize our assets and settle our liabilities in the
ordinary course of business. Our consolidated financial statements included in this quarterly
report on Form 10-Q do not reflect any adjustments that might specifically result from the outcome
of this uncertainty.
Valuation of Portfolio Investments
The most significant estimate inherent in the preparation of our financial statements is the
valuation of investments and the related amounts of unrealized appreciation and depreciation of
investments recorded.
Under SFAS No. 157, we principally utilize the market approach to estimate the fair value of
our investments where there is not a readily available market and we also utilize the income
approach to estimate the fair value of our debt investments. Under the market approach, we
estimate the enterprise value of the portfolio companies in which we invest. There is no one
methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise
value is best expressed as a range of fair values, from which we derive a single estimate of
enterprise value. To estimate the enterprise value of a portfolio company, we analyze various
factors, including the portfolio companys historical and projected financial results. We
generally require portfolio companies to provide annual audited and quarterly and monthly unaudited
financial statements, as well as annual projections for the upcoming fiscal year. Typically,
private companies are valued based on multiples of EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), cash flows, net income, revenues, or in limited cases, book value.
Under the income approach, we generally prepare and analyze discounted cash flow models based
on our projections of the future free cash flows of the business. We also use bond yield models to
determine the present value of the future cash flow streams of our debt investments. We review
various sources of transactional data, including private mergers and acquisitions involving debt
investments with similar characteristics, and assess the information in the valuation process.
The fair value of our investments at June 30, 2009, and December 31, 2008 was determined in
good faith by our board of directors. Duff & Phelps, LLC, an independent valuation firm (Duff &
Phelps), provided third party valuation consulting services to us which consisted of certain
mutually agreed upon limited procedures that we engaged them to perform. At June 30, 2009 and at
December 31, 2008, we asked Duff & Phelps to perform the limited procedures on investments in 8 and
12 portfolio companies, respectively, comprising approximately 25% and 38% of the total investments
at fair value, respectively. Upon completion of their limited procedures, Duff & Phelps concluded
that the fair value of those investments subjected to the limited procedures did not appear to be
unreasonable. Our Board of Directors is solely responsible for the valuation of our portfolio
investments at fair value as determined in good faith pursuant to our valuation policy and
consistently applied valuation process.
Fee Income Recognition
We receive a variety of fees in the ordinary course of our business, including arrangement
fees and loan fees. We account for our fee income by evaluating arrangements containing multiple
revenue-generating activities. In some arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable and there exists sufficient evidence of their fair values
to separately account for some or all of the deliverables (i.e., there are separate units of
accounting). In those arrangements states that the total consideration received for the
arrangement is allocated to each unit based upon each units relative fair value. In other
arrangements, some or all of the deliverables are not independently functional, or there is not
sufficient evidence of their fair values to account for them separately. In determining fair value
of various fee income we receive, we will first rely on data compiled through our investment and
syndication activities and secondly on independent third party data. The timing of revenue
recognition for a given unit of accounting depends on the nature of the deliverable(s) in that
accounting unit (and the corresponding revenue recognition model) and whether the general
conditions for revenue recognition have been met. Fee income for which fair value cannot be
reasonably ascertained is recognized using the interest method. In addition, we capitalize and
offset direct loan origination costs against the origination fees received and only defer the net
fee.
Payment-in-Kind or PIK Interest and Dividends
We include in income certain amounts that we have not yet received in cash, such as
contractual payment-in-kind or PIK interest or dividends, which represents either contractually
deferred interest added to the loan balance that is generally due at the end of the loan term or
contractually deferred dividends added to our equity investment in the portfolio company. We will
cease accruing PIK interest if we do not expect the portfolio company to be able to pay all
principal and interest due, and we will cease accruing PIK dividends if we do not expect the
portfolio company to be able to make PIK dividend payments in the future. In certain cases, a
portfolio company makes principal payments on its loan prior to making payments to reduce the PIK
loan balances and, therefore, the PIK portion of a portfolio companys loan can increase while the
total outstanding amount of the loan to that portfolio company may stay the same or decrease.
Accrued PIK interest and dividends represented $7.3 million or 2.6% of our portfolio of investments
at fair value as of June 30, 2009 and $6.6 million or 2.0% of our portfolio of investments at fair
value as of December 31, 2008. The net
39
increase in loan and equity balances as a result of
contracted PIK arrangements are separately identified on our statements of cash flows.
PIK related activity for the six months ended June 30, 2009 was as follows:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2009
|
|
Beginning PIK balance
|
|
$
|
6,605,194
|
|
PIK interest and dividends earned during the period
|
|
|
2,218,782
|
|
PIK write-off (1)
|
|
|
(1,110,041
|
)
|
PIK receipts during the period
|
|
|
(447,982
|
)
|
|
|
|
|
|
|
|
|
|
Ending PIK balance
|
|
$
|
7,265,953
|
|
|
|
|
|
|
|
|
(1)
|
|
Write-off is the result of the permanent impairment of loans to one of our portfolio
companies.
|
Interest and Dividend Income Recognition
Interest income is recorded on an accrual basis to the extent that such amounts are expected
to be collected. When a loan or debt security becomes 90 days or more past due, or if we otherwise
do not expect the debtor to be able to service its debt or other obligations, we will generally
place the loan or debt security on non-accrual status and cease recognizing interest income on that
loan or debt security until the borrower has demonstrated the ability and intent to pay contractual
amounts due. At June 30, 2009 and December 31, 2008, we had loans and equity investments from six and three,
respectively, of our portfolio companies on non-accrual status.
Dividend income on preferred equity securities is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Dividend income on equity securities is recorded
on the record date for private companies and the ex-dividend date for publicly traded companies.
Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financial needs of our portfolio companies. These instruments include
commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet. We attempt to limit our credit risk by conducting
extensive due diligence, negotiating appropriate financial covenants and obtaining collateral where
necessary. As of June 30, 2009, we had unused commitments to extend credit to our portfolio
companies of $17.3 million, which are not reflected on our balance sheet. Since April 3, 2009, the
date of the termination event under the Amended Securitization Facility, we have funded revolver
draws under our outstanding commitments. We are currently in negotiation with the Lenders to have
eligible revolver draws, which are requests on loans that secure the Amended Securitization
Facility, funded by the Lenders going forward. Ineligible revolver draw requests, those requests
on loans outside of the Amended Securitization Facility, will not be funded by the Lenders. We may
not have the ability to fund the ineligible revolver draw requests in the future or eligible
revolver draw requests if the Lenders refuse to accommodate this request.
In connection with the Amended Securitization Facility, our consolidated special purpose
subsidiary may be required under certain circumstances to enter into interest rate swap agreements
or other interest rate hedging transactions. We have agreed to guarantee the payment of certain
swap breakage costs that may be payable by our special purpose subsidiary in connection with any
such interest rate swap agreements or other interest rate hedging transactions. At June 30, 2009,
we had eight such agreements. On July 9, 2009, we terminated all eight interest rate swap
agreements and realized a loss of $3.3 million. See Recent Developments.
Contractual Obligations
As of June 30, 2009, we had $137.4 million outstanding under the Amended Securitization
Facility. On April 3, 2009, a termination event occurred under the Amended Securitization Facility
due to the amount of our advances outstanding under the facility exceeding the maximum availability
under the facility for more than three consecutive business days. The maximum availability under
the facility is determined by, among other things, the fair market value of all eligible loans
serving as collateral under the facility. Because the fair market value of certain eligible loans
decreased at December 31, 2008, our advances outstanding under the facility exceeded the maximum
availability under the facility. This determination was made in connection with the delivery of a
borrowing base report to the facility lenders on March 31, 2009. As a result of the occurrence of
the termination event under the facility, we can no longer make additional advances under the
facility. Also, the interest rate payable under the Amended Securitization Facility increased from
the commercial paper rate plus 1.75% to the prime rate plus 3.75%. In addition, the terms of the
facility require that all principal, interest and fees collected from the debt investments secured
by the facility must be used to pay
down amounts outstanding under the facility within 24 months following the date of the termination
event. The facility also permits the lenders, upon notice to us, to accelerate amounts outstanding
under the facility and exercise other rights and remedies provided by the facility, including the
right to sell the collateral under the facility. To date, we have not received any such notice
from the lenders.
40
Furthermore, we are in discussions with the facility lenders to seek relief from
certain of the terms of the facility, including the requirement under the facility that we use all
principal, interest and fees collected from the debt investments secured by the facility to pay
down amounts outstanding under the facility within 24 months following the date of the termination
event. However, based on discussion to date, we are not optimistic that the lenders will agree to
provide us any relief from any terms of the facility. As a result, we are also currently
evaluating other financing and/or strategic alternatives, including possible sale of our company,
debt or equity financing, disposition of assets, and other strategic transactions. At June 30,
2009, the interest rate under the Amended Securitization Facility was 7.0%.
On August 11, 2005, we entered into a lease agreement for office space expiring on January 15,
2011. Future minimum lease payments due under the office lease and for certain office equipment
are as follows: remainder of 2009 $121,000; 2010 $247,000; 2011 $21,000.
Recent Developments
On July 9, 2009, we entered into an agreement, limited consent and amendment (the Agreement,
Consent and Amendment) related to, among other things, the Amended Securitization Facility with
the Lenders and other related parties. In connection with the Agreement, Consent and Amendment,
the Lenders consented to the sale of the Encore Legal Solutions, Inc. and L.A. Spas, Inc. term
loans and equity interests and we agreed to terminate all eight outstanding swap agreements and pay
the counterparty to such swaps approximately $3.3 million. In addition, we agreed with the Lenders
that it will not accept equity securities or other non-cash consideration in forbearance of the
exercise of any rights under any of the loans or debt instruments held in the Companys investment
portfolio or the cash interest payments on these investments.
On July 9, 2009, we received proceeds of $3.2 million in conjunction with the sale of our
junior secured term loans in Encore Legal Solutions, Inc. In connection with the sale, we realized
a loss of approximately $13.4 million. Such proceeds were used to reduce the
principal on our outstanding borrowings under the Amended Securitization Facility.
On July 9, 2009, we sold our senior and subordinated term loans in L.A. Spas, Inc. for a
release of future liabilities against us relating to our investments in this portfolio company. In
connection with the sale, we recorded a loss of approximately $1.6 million.
On
July 23, 2009, we received gross proceeds of $3.8 million in connection with the full
repayment of our senior subordinated term loan to Copperhead Chemical Company, Inc. Such proceeds
were used to reduce the principal on our outstanding borrowings under the Amended Securitization
Facility.
On July 23, 2009, William E. Alvarez, Jr., Executive Vice President, Chief Financial Officer and
Secretary of the Company, entered into an amendment to the employment agreement with the Company,
dated August 7, 2007. The amendment modifies the definition of Average Annual Bonus set forth in
Section 8 of the employment agreement for purposes of calculating the lump sum payment Mr. Alvarez
would receive if his employment is terminated for any reason except for cause (as defined in the
employment agreement). The amendment defines Average Annual Bonus to include his average bonus
for the term of the employment agreement plus the aggregate grant date fair value of restricted
stock awarded during the term of the employment agreement.
On
July 24, 2009, we received gross proceeds of $11.2 million in connection with the full
repayment of our senior and subordinated term loans to Fairchild Industrial Products, Co. Such
proceeds were used to reduce the principal on our outstanding borrowings under the Amended
Securitization Facility.
On July 31, 2009, we entered into a severance agreement with
Clifford L. Wells, our Executive
Vice-President and Chief Compliance Officer. Pursuant to the terms of the severance agreement,
if Mr. Wellss employment is terminated by the Company without cause or by Mr. Wells for good
reason within 30 days before or within six months after a change of control transaction that occurs
between July 31, 2009 and January 31, 2010, then we will pay to Mr. Wells his monthly base
salary in monthly installments for six months following his termination of employment.
On August 3, 2009, we and Prospect Capital Corporation entered into an Agreement and Plan of Merger,
dated as of August 3, 2009 (the Merger Agreement), pursuant to which we will merge with and into Prospect
Capital, with Prospect Capital continuing as the surviving company in the merger (the Merger). Subject to the terms and conditions of the Merger Agreement, if the
Merger is completed, each issued and outstanding share of our common stock will be converted into
0.3992 shares of Prospect Capitals common stock and any fractional shares resulting from the application of the
exchange ratio will be paid in cash. The exchange ratio will be adjusted for any dividend we may declare prior to
the closing of the Merger. If not exercised prior to completion of the Merger, outstanding stock options will vest and be cancelled
in exchange for the payment in cash to the holder of these stock options of $0.01 per share of the our common stock
for which these options are exercisable. Further, in connection with
the Merger, each share of our restricted stock then outstanding will
vest all restrictions with respect to such shares of restricted sock
will lapse (a) a number of shares of each holder of restricted stock
will be cancelled in exchange for the cash value per share of Prospect Capitals common stock at the time
of the consummation of the Merger in an amount estimated to be sufficient to pay applicable taxes in connection
with the vesting of such shares or (b) the remaining number of shares
of restricted stock will be converted in the Merger into shares of Prospect Capitals common stock on
the same terms as all other shares of our common stock.
In connection
with the completion of the Merger, Prospect Capital will pay off the outstanding principal and accrued interest and up to
$1.35 million of related fees and expenses due under the Amended Securitization Facility. As of the date of
the Merger Agreement, there was approximately $115.7 million outstanding under the facility. Further, as a
condition to Prospect Capital agreeing to execute the Merger Agreement, we agreed to reverse, immediately prior to the Merger, the $11.8 million federal income tax
ordinary loss deduction that we previously disclosed we would incur with respect to our investments in L.A. Spas, Inc.
As a result, we estimate that distributable income for RIC purposes at June 30, 2009 would have been $8.3 million.
Immediately prior to the merger, we expect to declare a dividend in
the amount of our cumulative distributable income for RIC purposes,
which will be payable 10% in cash and 90% in common stock.
Consummation of the Merger, which is currently anticipated to occur in the earlier
part of the fourth quarter of 2009,
is subject to certain conditions, including, among others, the
approval of our stockholders, accuracy of the representations and
warranties of the other party and compliance by the other party with its obligations under the Merger Agreement.
The Merger Agreement also contains certain termination rights for us and Prospect Capital, as the case may be,
including: if the Merger has not been completed by December 15, 2009; if there is a breach by the other party that is
not or cannot be cured within 30 days notice of such breach and such breach would result in a failure of the
conditions to closing set forth in the Merger Agreement; if our Board of Directors fails to recommend the Merger to
our stockholders; if we breach our obligations in any material respect regarding any alternative business
combination proposals; or if our stockholders have voted to not approve the Merger. In addition, the Merger
Agreement provides that, in connection with the termination of the Merger Agreement under specified
circumstances, we may be required to pay Prospect Capital a termination fee equal to $3.2 million or to reimburse
certain expenses and make certain other payments.
On August 4, 2009, Bruce Belodoff filed a class action lawsuit against us, our directors and certain of our
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the proposed merger
between us and Prospect Capital is the product of a flawed sales process and that our directors
and officers breached their fiduciary duty by agreeing to a structure that was not designed to maximize the
value of our shares. In addition, the lawsuit asserts that we aided and abetted our officers and directors
breach of fiduciary duty.
On August 5, 2009, Brian Killion filed a class action lawsuit against us, our directors and certain of our
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the consideration to be
paid in the proposed merger between us and Prospect Capital is unfair and is the result of an
unfair process. The lawsuit further alleges that our directors and officers breached their fiduciary duty by agreeing
to a structure that is designed to deter higher offers from other bidders and for failing to obtain the highest and best
price for our stockholders. In addition, the lawsuit asserts that we and Prospect Capital aided and
abetted our officers and directors breach of fiduciary duty.
On August 11, 2009, Thomas
Webster filed a class action lawsuit against us, our directors and certain of our officers in the Superior Court of
the State of Connecticut. The lawsuit alleges that the proposed merger between us and Prospect Capital is the
product of a flawed sales process and that our directors and officers breached their fiduciary duty by
agreeing to a structure that was not designed to maximize the value of our shares. In addition, the lawsuit
asserts that we aided and abetted our officers and directors breach of fiduciary duty.
At this
time, we are unable to determine whether an
unfavorable outcome from this matter is probable or remote or to
estimate the amount or range of potential loss, if any. However, we believe that these claims are without merit and intend to vigorously defend against them.
41
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in quantitative and qualitative disclosures about market
risks since December 31, 2008.
Item 4. Controls and Procedures
(a)
|
|
As of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our current disclosure
controls and procedures are effective in facilitating timely decisions regarding required
disclosure of any material information relating to us that is required to be disclosed by us
in the reports we file or submit under the Securities Exchange Act of 1934.
|
|
(b)
|
|
There have been no changes in our internal control over financial reporting that occurred
during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
|
42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Although we may, from time to time, be involved in litigation arising out of our operations in the
normal course of business or otherwise, we are currently not a party to any pending material legal
proceedings other than those set forth below.
On August 4, 2009, Bruce Belodoff filed a class action lawsuit against us, our directors and certain of our
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the proposed merger
between us and Prospect Capital is the product of a flawed sales process and that our directors
and officers breached their fiduciary duty by agreeing to a structure that was not designed to maximize the
value of our shares. In addition, the lawsuit asserts that we aided and abetted our officers and directors
breach of fiduciary duty.
On August 5, 2009, Brian Killion filed a class action lawsuit against us, our directors and certain of our
officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the consideration to be
paid in the proposed merger between us and Prospect Capital is unfair and is the result of an
unfair process. The lawsuit further alleges that our directors and officers breached their fiduciary duty by agreeing
to a structure that is designed to deter higher offers from other bidders and for failing to obtain the highest and best
price for our stockholders. In addition, the lawsuit asserts that we and Prospect Capital aided and
abetted our officers and directors breach of fiduciary duty.
On August 11, 2009, Thomas Webster filed a class action lawsuit against us, our directors and certain
of our officers in the Superior Court of the State of Connecticut. The lawsuit alleges that the proposed
merger between us and Prospect Capital is the product of a flawed sales process and that our directors and
officers breached their fiduciary duty by agreeing to a structure that was not designed to maximize the
value of our shares. In addition, the lawsuit asserts that we aided and abetted our officers and directors
breach of fiduciary duty.
We believe that these claims are without merit and intend to vigorously defend against them.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in our quarterly
report on Form 10-Q for the quarter ended March 31, 2009 and our annual report on Form 10-K for the
year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
For a detailed discussion of a termination event that occurred under the Amended
Securitization Facility, please see Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview of this Form 10-Q and the Form 8-K that we filed
with the SEC on April 7, 2009.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Patriot Capital Funding, Inc. was held on June 17, 2009,
for the purpose of electing three directors and ratifying the appointment of the independent
registered accounting firm.
The nominees for directors for a three-year term as listed in our 2009 proxy statement were
elected by the following votes:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Withheld
|
Steven Drogin
|
|
|
17,718,141
|
|
|
|
1,311,480
|
|
Mel P. Melsheimer
|
|
|
18,138,313
|
|
|
|
891,308
|
|
Richard A. Sebastiao
|
|
|
17,729,785
|
|
|
|
1,299,836
|
|
The following directors are continuing their terms as directors:
Richard P. Buckanavage, two years remaining
Timothy W. Hassler, two years remaining
Dennis C. ODowd, one year remaining
The recommendation to ratify the selection of Grant Thornton LLP as the independent registered
accounting firm was approved by the following vote:
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
Totals
|
|
18,482,056
|
|
411,990
|
|
136,134
|
Item 5. Other Information
Not Applicable.
43
Item 6. Exhibits
Listed below are the exhibits which are filed as part of this report (according to the number
assigned to them in Item 601 of Regulation
S-K):
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S.
C. 1350).
|
|
|
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S.
C. 1350).
|
44
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 on
August 14, 2009.
|
|
|
|
|
PATRIOT CAPITAL FUNDING, INC.
|
|
|
By:
|
/s/ Richard P. Buckanavage
|
|
|
Richard P. Buckanavage
|
|
|
Chief Executive Officer and President
|
|
|
|
By:
|
/s/ William E. Alvarez, Jr.
|
|
|
William E. Alvarez, Jr.
|
|
|
Executive Vice President, Chief
Financial
Officer and Secretary
|
|
45
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