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 September 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
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Accelerated filer
þ
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Non-accelerated filer
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Smaller reporting company
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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
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No
þ
The number
of shares of the registrants Common Stock, $.01 par value,
outstanding as of November 11,
2009 was 20,950,501.
PATRIOT CAPITAL FUNDING, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Patriot Capital Funding, Inc.
Consolidated Balance Sheets
(unaudited)
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September 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 $206,077,578 - 2009,
$269,577,008 - 2008)
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$
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190,913,655
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$
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240,486,620
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Affiliate investments (cost of $52,120,596 - 2009,
$53,129,533 - 2008)
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45,953,070
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51,457,082
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Control investments (cost of $47,032,697 - 2009, $43,192,484 -
2008)
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20,565,598
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30,427,046
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Total investments
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257,432,323
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322,370,748
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Cash and cash equivalents
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5,062,075
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6,449,454
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Restricted cash
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8,025,982
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22,155,073
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Interest receivable
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1,200,833
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1,390,285
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Other assets
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1,193,669
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1,897,086
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TOTAL ASSETS
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$
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272,914,882
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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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112,706,453
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$
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162,600,000
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Interest payable
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656,954
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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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3,620,996
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5,777,642
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TOTAL LIABILITIES
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116,984,403
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174,145,476
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COMMITMENTS AND CONTINGENCIES
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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 September 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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235,333,314
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234,385,063
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Accumulated net investment income (loss)
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5,097,676
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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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(33,722,252
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)
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(4,053,953
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Net realized loss on interest rate swaps
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(3,251,026
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)
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Net unrealized depreciation on interest rate swaps
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(3,097,384
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Net unrealized depreciation on investments
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(47,736,739
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)
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(43,653,892
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TOTAL STOCKHOLDERS EQUITY
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155,930,479
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180,117,170
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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272,914,882
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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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7.44
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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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Nine Months Ended
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September 30,
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September 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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5,991,449
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$
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6,477,906
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$
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18,430,839
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$
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21,909,910
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Affiliate investments
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1,476,296
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1,994,624
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4,215,461
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7,007,546
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Control investments
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332,501
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966,986
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1,282,578
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1,645,111
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Total interest and dividend income
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7,800,246
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9,439,516
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23,928,878
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30,562,567
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Fees:
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Non-control/non-affiliate investments
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86,334
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105,464
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334,151
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343,550
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Affiliate investments
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41,739
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282,518
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180,462
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358,966
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Control investments
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9,909
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72,487
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78,067
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113,737
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Total fee income
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137,982
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460,469
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592,680
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816,253
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Other investment income:
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Non-control/non-affiliate investments
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112,357
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17,833
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121,161
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300,076
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Affiliate investments
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307,245
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307,245
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Control investments
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4,357
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142,383
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Total other investment income
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112,357
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329,435
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121,161
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749,704
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Total Investment Income
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8,050,585
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10,229,420
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24,642,719
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32,128,524
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EXPENSES
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Compensation expense
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748,280
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834,779
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2,508,241
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3,440,278
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Interest expense
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2,404,776
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1,789,755
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6,768,583
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5,774,508
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Professional fees
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2,822,671
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340,388
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4,169,297
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1,011,119
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General and administrative expense
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926,591
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706,715
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2,427,985
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2,140,238
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Total Expenses
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6,902,318
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3,671,637
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15,874,106
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12,366,143
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Net Investment Income
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1,148,267
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6,557,783
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8,768,613
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19,762,381
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NET REALIZED GAIN (LOSS) AND NET UNREALIZED
APPRECIATION (DEPRECIATION)
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Net realized loss on investments non-control/non-affiliate
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(2,461,200
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)
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(2,500
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)
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(2,873,909
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)
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(86,267
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Net realized gain on investments affiliate
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458,405
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458,405
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Net realized loss on investments control
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(15,193,626
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)
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(26,794,390
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)
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(350,000
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)
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Net realized loss on interest rate swaps
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(3,251,026
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)
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(3,251,026
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)
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Net unrealized depreciation on investments
non-control/non-affiliate
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(990,698
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)
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(2,054,709
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)
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(5,948,006
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)
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(10,684,608
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)
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Net unrealized depreciation on investments affiliate
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(1,301,399
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)
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(2,808,033
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)
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(4,495,048
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)
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(8,470,041
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)
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Net unrealized appreciation (depreciation) on investments control
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15,079,424
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(2,285,030
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)
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6,360,207
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(1,212,632
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)
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Net unrealized appreciation (depreciation) on interest rate swaps
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2,235,647
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(182,011
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)
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3,097,384
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34,772
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Net Realized Gain (Loss) and Net Unrealized Appreciation
(Depreciation)
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(5,882,878
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)
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(6,873,878
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)
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(33,904,788
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)
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(20,310,371
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)
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NET LOSS
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$
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(4,734,611
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)
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$
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(316,095
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$
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(25,136,175
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)
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$
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(547,990
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)
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Loss per share, basic and diluted
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$
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(0.23
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)
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$
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(0.02
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)
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$
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(1.20
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)
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$
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(0.03
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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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20,702,485
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20,943,734
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20,682,167
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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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Nine Months Ended
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September 30,
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2009
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|
2008
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Operations:
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Net investment income
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$
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8,768,613
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$
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19,762,381
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Net realized gain (loss) on investments
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(29,668,299
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)
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22,138
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Net realized loss on interest rate swaps
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(3,251,026
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)
|
|
|
|
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Net unrealized depreciation on investments
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|
|
(4,082,847
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)
|
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(20,367,281
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)
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Net unrealized appreciation on interest rate swaps
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3,097,384
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|
|
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34,772
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Net decrease in net assets from operations
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(25,136,175
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)
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(547,990
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)
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Stockholder transactions:
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Distributions to stockholders from net investment income
|
|
|
|
|
|
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(19,762,381
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)
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Distributions in excess of net investment income
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|
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|
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(778,609
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)
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Net decrease in net assets from stockholder distributions
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|
|
|
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(20,540,990
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)
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Capital share transactions:
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Common stock listing fees
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|
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(23,585
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)
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Issuance of common stock under dividend reinvestment plan
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|
359,500
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535,062
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Stock option compensation
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|
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589,984
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|
|
|
568,891
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|
|
|
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Net increase in net assets from capital share transactions
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|
|
949,484
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|
|
|
1,080,368
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|
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|
|
|
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|
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Total decrease in net assets
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|
|
(24,186,691
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)
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|
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(20,008,612
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)
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Net assets at beginning of period
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180,117,170
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221,597,684
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Net assets at end of period
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$
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155,930,479
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$
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201,589,072
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Net asset value per common share
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$
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7.44
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$
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9.74
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Common shares outstanding at end of period
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20,950,501
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20,702,485
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|
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|
See Notes to Consolidated Financial Statements.
3
Patriot Capital Funding, Inc.
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
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|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,136,175
|
)
|
|
$
|
(547,990
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
491,794
|
|
|
|
439,159
|
|
Change in interest receivable
|
|
|
189,452
|
|
|
|
237,506
|
|
Realized (gain) loss on sale of investments
|
|
|
29,668,299
|
|
|
|
(22,138
|
)
|
Realized loss on sale of interest rate swaps
|
|
|
3,251,026
|
|
|
|
|
|
Unrealized depreciation on investments
|
|
|
4,082,847
|
|
|
|
20,367,281
|
|
Unrealized appreciation on interest rate swaps
|
|
|
(3,097,384
|
)
|
|
|
(34,772
|
)
|
Payment-in-kind interest and dividends
|
|
|
(3,459,359
|
)
|
|
|
(4,275,711
|
)
|
Stock-based compensation expense
|
|
|
589,984
|
|
|
|
568,891
|
|
Change in unearned income
|
|
|
(760,464
|
)
|
|
|
108,349
|
|
Change in interest payable
|
|
|
142,829
|
|
|
|
(334,317
|
)
|
Change in other assets
|
|
|
117,874
|
|
|
|
(262,351
|
)
|
Change in accounts payable, accrued expenses and other
|
|
|
(810,288
|
)
|
|
|
(1,865,883
|
)
|
|
|
|
Net cash provided by operating activities
|
|
|
5,270,435
|
|
|
|
14,378,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Funded investments
|
|
|
(10,273,464
|
)
|
|
|
(60,267,723
|
)
|
Principal repayments on investments
|
|
|
41,222,305
|
|
|
|
86,432,830
|
|
Proceeds from sale of investments
|
|
|
4,552,011
|
|
|
|
11,309,638
|
|
Purchases of furniture and equipment
|
|
|
|
|
|
|
(6,295
|
)
|
|
|
|
Net cash provided by investing activities
|
|
|
35,500,852
|
|
|
|
37,468,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
7,500,000
|
|
|
|
76,904,117
|
|
Repayments on borrowings
|
|
|
(57,393,547
|
)
|
|
|
(87,604,117
|
)
|
Payments on interest rate swaps
|
|
|
(1,500,000
|
)
|
|
|
|
|
Common stock listing fees
|
|
|
|
|
|
|
(23,585
|
)
|
Dividends paid
|
|
|
(4,894,210
|
)
|
|
|
(19,926,056
|
)
|
Deferred offering costs
|
|
|
|
|
|
|
(145,941
|
)
|
Deferred financing costs
|
|
|
|
|
|
|
(1,030,972
|
)
|
Decrease (increase) in restricted cash
|
|
|
14,129,091
|
|
|
|
(19,810,123
|
)
|
|
|
|
Net cash used for financing activities
|
|
|
(42,158,666
|
)
|
|
|
(51,636,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
|
|
|
(1,387,379
|
)
|
|
|
209,797
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT:
|
|
|
|
|
|
|
|
|
Beginning of Period
|
|
|
6,449,454
|
|
|
|
789,451
|
|
|
|
|
End of Period
|
|
$
|
5,062,075
|
|
|
$
|
999,248
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,230,570
|
|
|
$
|
6,108,825
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
|
$
|
|
|
|
$
|
5,734,567
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends reinvested in common stock
|
|
$
|
359,500
|
|
|
$
|
535,062
|
|
Dividends declared but not paid
|
|
|
|
|
|
|
6,894,520
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Patriot Capital Funding, Inc.
Consolidated Schedule of Investments
September 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
|
|
|
|
1,301,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(22.0%, Due 8/12) (2)
|
|
|
7,731,663
|
|
|
|
6,747,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Member Note
(8.0%, Due 2/13) (2)
|
|
|
160,909
|
|
|
|
148,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(1,250,000 units) (4)
|
|
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fischbein, LLC
(Machinery)
|
|
Designer and manufacturer of packaging
equipment
|
|
Senior Subordinated Debt
(18.5%, Due 5/13) (2) (3)
|
|
|
3,626,635
|
|
|
|
3,608,764
|
|
|
|
3,608,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest - Class
A
(2,800,000 units) (4)
|
|
|
|
|
|
|
2,800,000
|
|
|
|
2,738,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1,082,468
|
|
|
|
1,082,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(10.0%, Due 9/12) (3)
|
|
|
5,139,064
|
|
|
|
5,108,295
|
|
|
|
5,108,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 3/13) (2) (3)
|
|
|
3,162,122
|
|
|
|
3,142,795
|
|
|
|
386,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1,449,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 8.0% of total investments at fair value)
|
|
$
|
47,032,697
|
|
|
$
|
20,565,598
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boxercraft Incorporated
(Textiles & Leather)
|
|
Supplier of spiritwear and campus apparel
|
|
Revolving Line of Credit
(9.0%, Due 9/13) (3)
|
|
$
|
800,000
|
|
|
$
|
778,452
|
|
|
$
|
778,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(9.5%, Due 9/13) (3)
|
|
|
4,320,135
|
|
|
|
4,277,785
|
|
|
|
4,277,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(10.0%, Due 9/13) (3)
|
|
|
4,923,823
|
|
|
|
4,874,659
|
|
|
|
4,874,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(18.5%, Due 3/14) (2) (3)
|
|
|
6,888,400
|
|
|
|
6,831,019
|
|
|
|
6,831,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(1,000,000 shares) (4)
|
|
|
|
|
|
|
1,105,556
|
|
|
|
760,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(10,000 shares)
(4)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KTPS Holdings, LLC
(Textiles & Leather)
|
|
Manufacturer and distributor of specialty
pet products
|
|
Revolving Line of Credit
(10.5%, Due 1/12) (3)
|
|
|
1,500,000
|
|
|
|
1,490,039
|
|
|
|
1,490,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(10.5%, Due 1/12) (3)
|
|
|
3,696,940
|
|
|
|
3,667,226
|
|
|
|
3,667,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(12.0%, Due 1/12) (3)
|
|
|
450,000
|
|
|
|
446,327
|
|
|
|
446,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(18.0%, Due 3/12) (2) (3)
|
|
|
4,653,485
|
|
|
|
4,626,001
|
|
|
|
4,346,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest - Class
A
(730.02 units) (4)
|
|
|
|
|
|
|
730,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sport Helmets Holdings, LLC (5)
(Personal & Nondurable Consumer
Products)
|
|
Manufacturer of protective headgear
|
|
Senior Secured Term Loan A
(4.3%, Due 12/13) (3)
|
|
|
4,031,250
|
|
|
|
3,988,310
|
|
|
|
3,493,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.9%, Due 12/13) (3)
|
|
|
7,443,750
|
|
|
|
7,356,056
|
|
|
|
6,442,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series A
(15.0%, Due 6/14)
(2) (3)
|
|
|
7,160,461
|
|
|
|
7,071,499
|
|
|
|
6,026,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt -
Series B
(15.0%, Due 6/14)
(2)
|
|
|
1,306,811
|
|
|
|
1,306,811
|
|
|
|
1,116,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(20,000 shares)(4)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
1,401,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments (represents 17.8% of total investments at fair value)
|
|
$
|
52,120,596
|
|
|
$
|
45,953,070
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Revolving Line of Credit
(10.3%, Due 7/11) (3)
|
|
$
|
800,000
|
|
|
$
|
788,688
|
|
|
$
|
788,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(10.3%, Due 6/11) (3)
|
|
|
7,465,625
|
|
|
|
7,436,141
|
|
|
|
7,436,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(5,000 shares) (4)
|
|
|
|
|
|
|
500,000
|
|
|
|
187,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fasteners International, LLC
(Machinery)
|
|
Distributor of fasteners and related
hardware for use in aerospace,
electronics and defense industries
|
|
Senior Secured Term Loan
(4.0%, Due 11/12) (3)
|
|
|
5,273,000
|
|
|
|
5,208,351
|
|
|
|
5,004,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(14.0%, Due 5/13) (2) (3)
|
|
|
5,387,135
|
|
|
|
5,334,639
|
|
|
|
5,267,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
(32,000 shares) (2)
|
|
|
|
|
|
|
240,737
|
|
|
|
391,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Defense Group, Inc.
(Aerospace & Defense)
|
|
Diversified defense company
|
|
Common Stock
(27,968 shares)(4)
|
|
|
|
|
|
|
463,168
|
|
|
|
145,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead General Insurance Agency, Inc. (6)
(Insurance)
|
|
Insurance agency and program specialist
|
|
Junior Secured Term Loan
(12.8%, Due 2/13) (2) (3)
|
|
|
5,052,366
|
|
|
|
5,052,366
|
|
|
|
3,826,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
797,323
|
|
|
|
797,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(11.5%, Due 5/10) (3)
|
|
|
1,617,921
|
|
|
|
1,608,969
|
|
|
|
1,608,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(19.0%, Due 5/10) (2) (3)
|
|
|
8,366,831
|
|
|
|
8,348,093
|
|
|
|
2,155,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrants
(33,750 warrants) (4)
|
|
|
|
|
|
|
17,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
9,946,551
|
|
|
|
9,867,666
|
|
|
|
9,867,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.5%, Due 11/12) (3)
|
|
|
6,250,000
|
|
|
|
6,201,664
|
|
|
|
6,264,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(7,500 shares) (4)
|
|
|
|
|
|
|
750,000
|
|
|
|
689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options in Mineral Fusion
Natural Brands, LLC (11,662 options) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Operating, LLC (5)
(Buildings & Real Estate)
|
|
Provider of maintenance, repair and
replacement of HVAC, electrical,
plumbing, and foundation repair
|
|
Revolving Line of Credit
(10.5%, Due 1/13) (3)
|
|
|
200,000
|
|
|
|
195,890
|
|
|
|
195,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(9.5%, Due 7/12) (3)
|
|
|
1,517,564
|
|
|
|
1,502,240
|
|
|
|
1,502,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(16.5%, Due 1/13) (2) (3)
|
|
|
2,742,862
|
|
|
|
2,717,458
|
|
|
|
2,717,458
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copernicus Group
(Healthcare, Education & Childcare)
|
|
Provider of clinical trial review services
|
|
Revolving Line of Credit
(11.5%, Due 10/13) (3)
|
|
|
150,000
|
|
|
|
133,780
|
|
|
|
133,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(11.5%, Due 10/13) (3)
|
|
|
7,425,000
|
|
|
|
7,327,081
|
|
|
|
7,327,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(18.0%, Due 4/14) (3)
|
|
|
12,546,282
|
|
|
|
12,387,096
|
|
|
|
10,855,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock - Series A
(1,000,000) (4)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
558,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Direct, Inc. (6)
(Printing & Publishing)
|
|
Direct marketer of checks and other
financial products and services
|
|
Senior Secured Term Loan
(3.0%, Due 12/13) (3)
|
|
|
1,782,598
|
|
|
|
1,569,445
|
|
|
|
1,381,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(6.3%, 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
|
|
|
|
67,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXL Acquisition Corp.
(Electronics)
|
|
Manufacturer of lab testing supplies
|
|
Senior Secured Term Loan A
(3.9%, Due 3/11) (3)
|
|
|
2,159,783
|
|
|
|
2,149,712
|
|
|
|
1,992,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.2%, Due 3/12) (3)
|
|
|
4,202,073
|
|
|
|
4,164,654
|
|
|
|
3,858,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(4.7%, Due 3/12) (3)
|
|
|
2,591,740
|
|
|
|
2,561,719
|
|
|
|
2,373,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan D
(15.0%, Due 3/12) (3)
|
|
|
6,170,807
|
|
|
|
6,127,206
|
|
|
|
6,127,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class A
(2,475 shares) (4)
|
|
|
|
|
|
|
2,475
|
|
|
|
402,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class B
(25
shares) (2)
|
|
|
|
|
|
|
297,993
|
|
|
|
304,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairchild Industrial Products, Co.
(Electronics)
|
|
Manufacturer of industrial controls and
power transmission products
|
|
Preferred Stock - Class A
(378.4 shares) (2)
|
|
|
|
|
|
|
372,765
|
|
|
|
379,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class B
(27.5 shares) (4)
|
|
|
|
|
|
|
121,598
|
|
|
|
260,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
7,425,000
|
|
|
|
7,229,085
|
|
|
|
6,125,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Products, LLC
(Machinery)
|
|
Distributor of janitorial supplies
|
|
Junior Secured Term Loan
(6.3%, Due 9/12) (3)
|
|
|
8,837,500
|
|
|
|
8,792,956
|
|
|
|
8,525,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 9/12) (3)
|
|
|
5,547,993
|
|
|
|
5,523,924
|
|
|
|
5,523,924
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Label Corp Holdings, Inc. (6)
(Printing & Publishing)
|
|
Manufacturer of prime labels
|
|
Senior Secured Term Loan
(7.9%, Due 8/14) (3)
|
|
|
5,836,416
|
|
|
|
5,590,057
|
|
|
|
5,019,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHC Holdings Corp.
(Healthcare, Education & Childcare)
|
|
Provider of home healthcare services
|
|
Senior Secured Term Loan A
(4.3%, Due 11/12) (3)
|
|
|
3,276,942
|
|
|
|
3,245,173
|
|
|
|
2,898,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.5%, Due 5/13) (3)
|
|
|
4,565,000
|
|
|
|
4,525,929
|
|
|
|
4,525,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest
(125,000 units) (4)
|
|
|
|
|
|
|
125,000
|
|
|
|
182,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
8,303,730
|
|
|
|
8,280,201
|
|
|
|
8,280,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(250 shares) (4)
|
|
|
|
|
|
|
235,128
|
|
|
|
469,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwestern Management Services, LLC
(Healthcare, Education & Childcare)
|
|
Provider of dental services
|
|
Revolving Line of Credit
(5.8%, Due 12/12) (3)
|
|
|
125,000
|
|
|
|
118,159
|
|
|
|
118,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(4.3%, Due 12/12) (3)
|
|
|
5,049,874
|
|
|
|
5,012,776
|
|
|
|
4,696,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.8%, Due 12/12) (3)
|
|
|
1,228,125
|
|
|
|
1,218,838
|
|
|
|
1,142,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured Term Loan
(15.0%, Due 6/13) (2) (3)
|
|
|
2,904,561
|
|
|
|
2,884,791
|
|
|
|
2,785,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(500 shares) (4)
|
|
|
|
|
|
|
500,000
|
|
|
|
450,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prince Mineral Company, Inc.
(Metals & Minerals)
|
|
Manufacturer of pigments
|
|
Junior Secured Term Loan
(5.5%, Due 12/12) (3)
|
|
|
11,200,000
|
|
|
|
11,078,557
|
|
|
|
11,078,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(14.0%, Due 7/13) (2) (3)
|
|
|
12,126,568
|
|
|
|
12,032,680
|
|
|
|
12,032,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quartermaster, Inc.
(Retail Stores)
|
|
Retailer of uniforms and tactical
equipment to law enforcement and security
professionals
|
|
Revolving Line of Credit
(5.9%, Due 12/10) (3)
|
|
|
3,000,000
|
|
|
|
2,988,297
|
|
|
|
2,988,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan A
(5.7%, Due 12/10) (3)
|
|
|
2,271,000
|
|
|
|
2,256,498
|
|
|
|
2,256,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(7.0%, Due 12/10) (3)
|
|
|
2,525,000
|
|
|
|
2,514,665
|
|
|
|
2,514,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan C
(15.0%, Due 12/11) (2) (3)
|
|
|
3,477,752
|
|
|
|
3,459,794
|
|
|
|
3,459,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-O-M Corporation
(Automobile)
|
|
Manufacturer of doors, ramps and bulk
heads for fire trucks and food
transportation
|
|
Senior Secured Term Loan A
(3.0%, Due 2/13) (3)
|
|
|
5,470,000
|
|
|
|
5,699,316
|
|
|
|
5,189,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan B
(4.5%, Due 5/13) (3)
|
|
|
8,314,875
|
|
|
|
8,238,981
|
|
|
|
7,500,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Debt
(15.0%, Due 8/13) (3)
|
|
|
7,208,688
|
|
|
|
7,131,815
|
|
|
|
7,131,815
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company(1)
|
|
|
|
|
|
|
|
|
|
|
(Industry)
|
|
Company Description
|
|
Investment
|
|
Principal
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/non-affiliate investments (represents 74.2% of total investments at fair value)
|
|
$
|
206,077,578
|
|
|
$
|
190,913,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
$
|
305,230,871
|
|
|
$
|
257,432,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 7 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
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 7 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 or Patriot Capital) 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 September 30, 2009, $112.7 million was 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 September 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 entered into an Agreement and Plan of
Merger with Prospect Capital Corporation on August 3, 2009 (see Note 3. Proposed Merger). There
can be no assurance that the proposed merger will be consummated. The financial statements do not
include any adjustments that might result from these uncertainties.
Note 3. Proposed Merger
On August 3, 2009, the Company and Prospect Capital Corporation (Prospect Capital) entered into
an Agreement and Plan of Merger, (the Merger Agreement), pursuant to which the Company will merge
with and into Prospect Capital, with Prospect Capital continuing as the surviving company (the
Merger). In accordance with the terms and conditions of the Merger Agreement, if the
17
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(s) 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 into which these options are exercisable. Further, in
connection with the Merger, each share of the Companys restricted stock then outstanding will vest
and all restrictions with respect to such shares of restricted stock will lapse. In addition, (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 into which it is convertible 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 and (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 Amended Securitization Facility.
As of September 30, 2009, there was approximately $112.7 million outstanding under the Amended
Securitization Facility. Further, as a condition to Prospect Capital 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 September 30, 2009 would have been $9.4 million. If the Merger is approved by
the Companys shareholders, immediately prior to the Merger, the Company will pay a dividend in the
amount of its cumulative distributable income for RIC purposes, which will be payable 10% in cash
and 90% in common stock (see Note 16. Subsequent Events).
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 the Company breaches its obligations in any material respect regarding any
alternative business combination proposals; or if the Companys 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 and/or up to $250,000 to reimburse
certain expenses and make certain other payments.
On October 26, 2009, the Company filed a definitive proxy statement calling for a special meeting
of shareholders to be held on November 18, 2009 to vote on the proposed merger with Prospect
Capital. The Companys shareholders at the close of business on October 21, 2009 will be eligible
to vote at the special meeting on the proposed merger. If approved the Merger should occur shortly
after the shareholder vote but is subject to certain additional conditions including, among others,
accuracy of the representations and warranties of the other party and compliance by the other party
with its obligations under the Merger Agreement.
Note 4. 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 7. 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
Effective January 1, 2009, the Company adopted guidance included in FASB Accounting Standards
Codification (ASC) Topic 815, Derivatives and Hedging, (which substantially incorporated the
superseded Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about
Derivative Instruments and Hedging Activities). The guidance 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. The Companys adoption of the guidance has not impacted the results
of operations or
financial condition; however, derivative instruments and hedging activities disclosure has been
expanded, as disclosed in Note 13. Hedging Activities.
18
Effective January 1, 2009, the Company
adopted the guidance in ASC Topic 260, Earnings Per Share, (substantially incorporating FSP
EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities), with respect to participating securities. The guidance 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) under the two-class method. Under the guidance, unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the computation of
earnings-per-share pursuant to the two-class method. The guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. All prior period EPS data must be adjusted
retrospectively. There is no effect in periods where there are net losses, as the unvested restricted
shares do not participate in net losses and thus are not considered in determining basic EPS. Upon adoption, with
respect to participating securities, the inclusion of unvested restricted stock issued under
the Companys employee restricted stock plan implemented in
August 2008, did not have an effect on the Companys calculation of
earnings per share for the three month and the nine month periods
ended September 30, 2008.
In October 2008 and April 2009, the FASB issued supplemental guidance on determining fair value
when markets are not active, when volume and activity levels have decreased significantly or when
transactions are not orderly. Since adopting the principles of fair value included in ASC Topic
820, Fair Value Measurements and Disclosures 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 the supplemental guidance.
Therefore, the Companys adoption of these items has not had any effect on its financial position
or results of operations (see Note 5. Investments).
Effective April 1, 2009, the Company adopted the provisions of ASC Topic 855, Subsequent Events,
(incorporating SFAS No. 165, Subsequent Events). Such guidance establishes 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.
Effective July 1, 2009, the Company adopted FASBs Accounting Standards Update 2009-01 which
established ASC Topic 105, Generally Accepted Accounting Principles (incorporating SFAS No. 168,
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles,) which establishes the FASB Accounting Standards Codification as the source of GAAP to
be applied to companies.
In August 2009, the FASB issued Accounting Standards Update ASU 2009-05, Measuring Liabilities at
Fair Value, to amend FASB Accounting Standards Codification ASC 820, Fair Value Measurements and
Disclosures, to clarify how entities should estimate the fair value of liabilities. ASC 820, as
amended, includes clarifying guidance for circumstances in which a quoted price in an active market
is not available, the effect of the existence of liability transfer restrictions, and the effect of
quoted prices for the identical liability, including when the identical liability is traded as an
asset. The amended guidance in ASC 820 on measuring liabilities at fair value is effective for the
first interim or annual reporting period beginning after August 28, 2009, with earlier application
permitted. The Company does not believe that the adoption of the amended guidance in ASC 820 will
have a significant effect on its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update ASU 2009-13, Multiple-Deliverable
Revenue Arrangements a consensus of the FASB Emerging Issues Task Force, to amend certain
guidance in FASB Accounting Standards Codification ASC 605, Revenue Recognition, 25,
Multiple-Element Arrangements. The amended guidance in ASC 605-25 (1) modifies the separation
criteria by eliminating the criterion that requires objective and reliable evidence of fair value
for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and
instead requires that arrangement consideration be allocated, at the inception of the arrangement,
to all deliverables based on their relative selling price. The amended guidance in ASC 605-25 is
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early application and retrospective application
permitted. The Company expects to prospectively apply the amended guidance in ASC 605-25 beginning
January 1, 2010. The Company does not believe that the adoption of the amendments to ASC 605-25
will have a significant effect on its consolidated financial statements.
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
19
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 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. If the Merger is approved by the Companys shareholders, immediately prior to the Merger,
the Company will pay a final dividend in an amount equal to all of its undistributed net ordinary
income and capital gains through the closing date of the Merger. It is currently estimated that
the amount of the final dividend will be $0.38 per share assuming that the merger closes on
December 2, 2009. The actual amount of the final dividend may be more or less than the estimated
amount and will be determined immediately prior to the closing of the merger. In accordance with a
recent IRS revenue procedure, the dividend will be payable up to 10% in cash and at least 90% in
newly issued shares of the Companys common stock.
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. See Note 3. for a discussion of the final dividend the Company has declared to be paid
immediately prior to the merger. 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).
Consideration of Subsequent Events.
The Company evaluated events and transactions occurring after September 30, 2009 through November
12, 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 16. Subsequent Events for
non-recognizable events or transactions identified for disclosure).
Note 5. Investments
As described below (see Note 6. Fair Value Measurements), the Company accounts for its portfolio
investments at fair value as defined by ASC Topic 820. At September 30, 2009 and December 31,
2008, investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Investments in debt securities
|
|
$
|
289,057,140
|
|
|
$
|
248,042,057
|
|
|
$
|
344,683,219
|
|
|
$
|
308,079,975
|
|
Investments in equity securities
|
|
|
16,173,731
|
|
|
|
9,390,266
|
|
|
|
21,215,806
|
|
|
|
14,290,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,230,871
|
|
|
$
|
257,432,323
|
|
|
$
|
365,899,025
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 and December 31, 2008, $99.4 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
20
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 September 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 September 30, 2009, the Company realized a loss of $17.7 million on
investments principally from the sale of three investments, one of which was from a syndicated
loan. During the nine months ended September 30, 2009, the Company realized a net loss of $29.7
million on investments primarily from the sale of four investments, two of which were from
syndicated loans. During the three months ended September 30, 2008, the Company realized a net
gain of $456,000 principally from the sale of one equity investment. During the nine months ended
September 30, 2008, the Company realized a net gain of $22,000, which related to the sale of one
debt investment and the sale of one equity investment, offset by the cancellation of warrants which
the Company had previously written down to zero. During the three and nine months ended September
30, 2009 the Company recorded unrealized appreciation (depreciation) of $12.8 million and $(4.1)
million, respectively, and during the three and nine months ended September 30, 2008, the Company
recorded unrealized depreciation of $7.1 million and $20.4 million, respectively.
The composition of the Companys investments as of September 30, 2009 and December 31, 2008 at cost
and fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Senior Secured Debt
|
|
$
|
151,762,717
|
|
|
|
49.7
|
%
|
|
$
|
125,895,068
|
|
|
|
48.9
|
%
|
|
$
|
171,889,470
|
|
|
|
47.0
|
%
|
|
$
|
156,638,667
|
|
|
|
48.6
|
%
|
Junior Secured Debt
|
|
|
49,636,976
|
|
|
|
16.3
|
|
|
|
46,846,973
|
|
|
|
18.2
|
|
|
|
64,232,689
|
|
|
|
17.5
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
Subordinated Debt
|
|
|
87,657,447
|
|
|
|
28.7
|
|
|
|
75,300,016
|
|
|
|
29.3
|
|
|
|
108,561,060
|
|
|
|
29.7
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
Warrants / Equity
|
|
|
16,173,731
|
|
|
|
5.3
|
|
|
|
9,390,266
|
|
|
|
3.6
|
|
|
|
21,215,806
|
|
|
|
5.8
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,230,871
|
|
|
|
100.0
|
%
|
|
$
|
257,432,323
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents percentage of total portfolio.
|
The composition of the Companys investment portfolio by industry sector, using Moodys
Industry Classifications as of September 30, 2009 and December 31, 2008 at cost and fair value was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Machinery
|
|
$
|
51,630,468
|
|
|
|
16.9
|
%
|
|
$
|
36,317,853
|
|
|
|
14.1
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
Personal & Nondurable Consumer Products
|
|
|
38,542,006
|
|
|
|
12.6
|
|
|
|
35,301,536
|
|
|
|
13.7
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
Health Care, Education & Childcare
|
|
|
38,478,623
|
|
|
|
12.6
|
|
|
|
35,673,123
|
|
|
|
13.9
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
Automobile
|
|
|
30,462,731
|
|
|
|
10.0
|
|
|
|
22,205,720
|
|
|
|
8.6
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
Textiles & Leather
|
|
|
28,827,184
|
|
|
|
9.4
|
|
|
|
27,472,364
|
|
|
|
10.7
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
Metals & Minerals
|
|
|
23,111,237
|
|
|
|
7.6
|
|
|
|
23,111,237
|
|
|
|
9.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
18,001,311
|
|
|
|
5.9
|
|
|
|
10,687,048
|
|
|
|
4.1
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
Electronics
|
|
|
15,798,122
|
|
|
|
5.2
|
|
|
|
15,698,746
|
|
|
|
6.1
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
Retail Stores
|
|
|
11,367,454
|
|
|
|
3.7
|
|
|
|
11,286,420
|
|
|
|
4.4
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
Housewares & Durable Consumer Products
|
|
|
11,110,217
|
|
|
|
3.6
|
|
|
|
6,577,119
|
|
|
|
2.5
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
Printing & Publishing
|
|
|
9,159,502
|
|
|
|
3.0
|
|
|
|
7,550,800
|
|
|
|
2.9
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
Ecological
|
|
|
8,724,829
|
|
|
|
2.9
|
|
|
|
8,412,229
|
|
|
|
3.3
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
Grocery
|
|
|
8,515,329
|
|
|
|
2.8
|
|
|
|
8,750,177
|
|
|
|
3.4
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
Insurance
|
|
|
5,052,366
|
|
|
|
1.7
|
|
|
|
3,826,463
|
|
|
|
1.5
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
Buildings & Real Estate
|
|
|
4,415,588
|
|
|
|
1.5
|
|
|
|
4,415,588
|
|
|
|
1.7
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
145,900
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
Chemicals, Plastic & Rubber
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
Personal, Food & Miscellaneous Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,230,871
|
|
|
|
100.0
|
%
|
|
$
|
257,432,323
|
|
|
|
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 September 30, 2009 and December 31, 2008,
21
the Company owned greater than 5% but less than 25% of
the voting securities in four investments. At September 30, 2009 and December 31, 2008, the
Company owned 25% or more of the voting securities in four investments.
Note 6. Fair Value Measurements
The Company accounts for its portfolio investments and interest rate swaps at fair value. ASC
Topic 820 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. Fair value is defined 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 in ASC Topic 820 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.
The following table presents the financial instruments carried at fair value as of September 30,
2009, by caption on the Consolidated Balance Sheet for each of the three levels of the fair value
hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
Internal Models
|
|
|
Internal Models
|
|
|
|
|
|
|
Quoted Market
|
|
|
with Significant
|
|
|
with Significant
|
|
|
Total Fair Value
|
|
|
|
Prices in Active
|
|
|
Observable Market
|
|
|
Unobservable Market
|
|
|
Reported in
|
|
|
|
Markets
|
|
|
Parameters
|
|
|
Parameters
|
|
|
Consolidated
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Balance Sheet
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliate investments
|
|
$
|
213,066
|
|
|
$
|
17,502,923
|
|
|
$
|
173,197,666
|
|
|
$
|
190,913,655
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
45,953,070
|
|
|
|
45,953,070
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
20,565,598
|
|
|
|
20,565,598
|
|
|
Total investments at fair value
|
|
$
|
213,066
|
|
|
$
|
17,502,923
|
|
|
$
|
239,716,334
|
|
|
$
|
257,432,323
|
|
|
|
|
The following table provides a roll-forward in the changes in fair value from December 31,
2008 to September 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
|
|
|
|
|
|
|
|
|
|
|
(26,700,640
|
)
|
|
|
(26,700,640
|
)
|
Change in unrealized depreciation
|
|
|
(8,579,846
|
)
|
|
|
(4,495,048
|
)
|
|
|
6,360,208
|
|
|
|
(6,714,686
|
)(1)
|
Purchases, issuances, settlements and other, net
|
|
|
(25,337,778
|
)
|
|
|
(1,008,964
|
)
|
|
|
(2,422,846
|
)
|
|
|
(28,769,588
|
)
|
Transfers within Level 3
|
|
|
(12,901,830
|
)
|
|
|
|
|
|
|
12,901,830
|
|
|
|
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
173,197,666
|
|
|
$
|
45,953,070
|
|
|
$
|
20,565,598
|
|
|
$
|
239,716,334
|
|
|
|
|
|
|
|
(1)
|
|
Relates to assets held at September 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
22
there is not
a readily available market value (Level 3). To estimate the enterprise value of a portfolio
company, the Company analyzes 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 looks 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 provide 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 September 30, 2009
and 2008, the Company recorded net unrealized appreciation (depreciation) of $12.8 million and
$(7.1) million, respectively, on its investments. During the nine months ended September 30, 2009
and 2008, the Company recorded net unrealized depreciation of $4.1 million and $20.4 million,
respectively, on its investments. For the three months ended September 30, 2009, the Companys net
unrealized appreciation consisted of the following: approximately $1.4 million of unrealized
appreciation which resulted from quoted market prices on the Companys syndicated loan portfolio;
approximately $13.6 million of unrealized appreciation primarily from the reversal of previously
recorded unrealized depreciation as a result of realizing a loss on sale of investments; partially
offset by approximately $2.2 million of unrealized depreciation which resulted from changes in
market multiples and interest rates. For the nine months ended September 30, 2009, the Companys
net unrealized depreciation consisted of the following: approximately $3.9 million of net
unrealized depreciation resulted from the following: approximately $16.0 million of unrealized
depreciation from a decline in cash flows of the Companys portfolio companies, offset by
approximately $12.1 million in unrealized appreciation due to the reversal of previously recorded
unrealized depreciation as a result of realizing a loss on sale of investments; approximately $2.8
million, respectively, of unrealized depreciation which resulted from changes in market multiples
and interest rates; offset by approximately $2.6 million, respectively, of unrealized appreciation
which resulted from quoted market prices on the Companys syndicated loan portfolio. For the nine
months ended September 30, 2008, the Companys net unrealized depreciation consisted of the
following: approximately $2.8 million, 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 $12.3 million, resulted from a decline in cash flows of the
Companys portfolio companies; and approximately $5.3 million of unrealized appreciation which
resulted from changes in market multiples and interest rates.
Note 7. 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
23
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.
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 $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 (i) in forbearance of the exercise of any rights under any
of the loans or debt instruments held in the Companys
investment portfolio or (ii) the cash interest
payments on these investments.
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.
At September 30, 2009 and December 31, 2008, $112.7 million and $162.6 million, respectively, of
borrowings were outstanding under the Amended Securitization Facility. At September 30, 2009, the
interest rate under the Amended Securitization Facility was 7.0%. Interest expense for the three
and nine months ended September 30, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest charges
|
|
$
|
2,273,048
|
|
|
$
|
1,579,647
|
|
|
$
|
6,316,663
|
|
|
$
|
5,299,168
|
|
Amortization of debt issuance costs
|
|
|
131,728
|
|
|
|
131,728
|
|
|
|
395,184
|
|
|
|
322,360
|
|
Unused facility fees
|
|
|
|
|
|
|
78,380
|
|
|
|
56,736
|
|
|
|
152,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,404,776
|
|
|
$
|
1,789,755
|
|
|
$
|
6,768,583
|
|
|
$
|
5,774,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Stock Option Plan and Restricted Stock Plan
As of September 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 September 30, 2009, 3,189,107 options were outstanding, 2,802,388 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 6.8 years, a weighted
average exercise price of $12.43, and an aggregate intrinsic value of $0. The restricted stock
vests over four years. The Companys stock option plan and employee restricted stock plan will be
terminated in the event the Merger described in Note 3 is consummated.
24
The Company accounts for share-based payments utilizing the modified prospective method of
transition as permitted under ASC Topic 718. 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 nine months ended September 30, 2009, the Company recorded
compensation expense related to stock awards of approximately $169,000 and $590,000, respectively,
and for the three and nine months ended September 30, 2008, the Company recorded compensation
expense related to stock awards of approximately $183,000 and $569,000, 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 September 30, 2009, there was $199,000 of unrecognized compensation cost
related to unvested options which is expected to be recognized over 1.4 years. As of September 30,
2009, there was $1.5 million of unrecognized compensation cost related to unvested restricted stock
awards which is expected to be recognized over 3.4 years.
Note 9. 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 nine months ended
September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
20,943,734
|
|
|
|
20,682,167
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
20,943,734
|
|
|
|
20,682,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and 187,500
shares in 2009 and 2008, respectively, 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 nine months ended
September 30, 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 declared since January 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
|
On October 28, 2009, the Company terminated its dividend reinvestment plan.
Note 10. Commitments and Contingencies
The balance of unused commitments to extend credit was $17.3 million and $23.8 million at September
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
25
requirements. Since April 3, 2009, the date of the termination event under the Amended Securitization Facility, the Company has
funded revolver draws under its outstanding commitments. The Company may not have the ability to
fund revolver draw requests in the future.
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. 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 7.
Borrowings).
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 September 30, 2009
are as follows: $62,000 remainder of 2009, $247,000 2010, $21,000 2011. Rent expense was
approximately $56,000 and $173,000 for the three and nine months ended September 30, 2009,
respectively, and was approximately $69,000 and $205,000 for the three and nine months ended
September 30, 2008, respectively. At September 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 11. Concentrations of Credit Risk
The Companys portfolio companies are primarily small- to mid-sized companies that operate in a
variety of industries.
At September 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 nine months ended September
30, 2009 and 2008, the Company did not record investment income from any portfolio company in
excess of 10% of total investment income.
Note 12. 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 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 nine months ended September 30, 2009 is as follows:
|
|
|
|
|
|
|
January 1, 2009
|
|
|
|
to
|
|
|
|
September 30, 2009
|
|
GAAP net investment income
|
|
$
|
8,769,000
|
|
Tax timing differences of:
|
|
|
|
|
Origination fees, net
|
|
|
(1,311,000
|
)
|
Permanent impairment on loans
|
|
|
(11,826,000
|
)
|
Stock
compensation expense, original issue discount, depreciation and
amortization, and other
|
|
|
1,953,000
|
|
|
|
|
|
Tax loss
|
|
$
|
(2,415,000
|
)
|
|
|
|
|
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 nine
months ended September 30, 2009, the Company did not have any required dividend distributions.
However, see Note 3. for a discussion of the dividend the Company has declared to be paid
immediately prior to the Merger.
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.
26
The tax cost basis of the Companys investments as of September 30, 2009 approximates the book
cost. There were no capital gain distributions in 2009 or 2008.
At September 30, 2009, the Company had a net capital loss
carryforward of $25.2 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,
$900,000 will expire in the Companys tax year ending
December 31, 2016, and $21.1 million will expire in the
Companys tax year ending December 31, 2017.
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,
disclosed above, with respect to its investments in L.A. Spas, Inc. As a result, the Company
estimates that distributable income for RIC purposes at September 30, 2009 would have been $9.4
million. If the Merger is approved by the Companys shareholders, immediately prior to the Merger,
the Company will pay a final dividend in an amount equal to all of its undistributed net ordinary
income and capital gains through the closing date of the Merger. It is currently estimated that
the amount of the final dividend will be $0.38 per share assuming that the merger closes on
December 2, 2009. The actual amount of the final dividend may be more or less than the estimated
amount and will be determined immediately prior to the closing of the merger. In accordance with a
recent IRS revenue procedure, the dividend will be payable up to 10% in cash and at least 90% in
newly issued shares of the Companys common stock.
Note 13. Hedging Activities
Since 2006, the Company, through its special purpose subsidiary, entered into eight interest rate
swap agreements. No new interest rate swap agreements were executed during the nine months ended
September 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 7. Borrowings). Payments on the terminated swap liability will be made at the rate of
$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. The Company did not designate
any of its interest rate swaps as hedges for financial accounting purposes. Each month these
interest rate swaps were settled for cash.
Note 14. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
8.65
|
|
|
$
|
10.73
|
|
Net investment income
|
|
|
.42
|
|
|
|
.95
|
|
Net realized loss on investments
|
|
|
(1.42
|
)
|
|
|
|
|
Net realized loss on interest rate swaps
|
|
|
(.16
|
)
|
|
|
|
|
Net change in unrealized depreciation
on investments
|
|
|
(.19
|
)
|
|
|
(.98
|
)
|
Effect of issuance of common stock
|
|
|
(.04
|
)
|
|
|
|
|
Distributions from net investment income
|
|
|
|
|
|
|
(.95
|
)
|
Distributions in excess of net investment income
|
|
|
|
|
|
|
(.04
|
)
|
Net change in unrealized swap appreciation
|
|
|
.15
|
|
|
|
|
|
Stock based compensation expense
|
|
|
.03
|
|
|
|
.03
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
7.44
|
|
|
$
|
9.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net asset value return (1)
|
|
|
(14.0
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
Per share market value, beginning of period
|
|
$
|
3.64
|
|
|
$
|
10.09
|
|
Per share market value, end of period
|
|
$
|
4.08
|
|
|
$
|
6.37
|
|
|
|
|
|
|
|
|
|
|
Total market value return (2)
|
|
|
12.1
|
%
|
|
|
(27.0
|
)%
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of period
|
|
|
20,950,501
|
|
|
|
20,702,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
155,930,000
|
|
|
$
|
201,589,000
|
|
Average net assets
|
|
|
168,702,000
|
|
|
|
211,657,000
|
|
Ratio of operating expenses to average
net assets (annualized)
|
|
|
12.5
|
%
|
|
|
7.8
|
%
|
Ratio of net investment income to average
net assets (annualized)
|
|
|
6.9
|
%
|
|
|
12.4
|
%
|
Average borrowings outstanding
|
|
$
|
137,389,000
|
|
|
$
|
138,173,000
|
|
Average amount of borrowings per
share
|
|
$
|
6.56
|
|
|
$
|
6.67
|
|
|
|
|
(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.
|
27
Note 15. Litigation
On or about August 6, 2009, Bruce Belodoff filed a putative 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. Finally the lawsuit alleges that
the proposed merger was designed to benefit certain of the Companys officers.
On or about August 11, 2009, Thomas Webster filed a putative class action lawsuit against the
Company, its directors and certain of its officers in the Superior Court of the State of
Connecticut. The lawsuit is essentially identical to the class action lawsuit filed by Bruce
Belodoff against the Company on or about August 6, 2009, which is described above, and was filed by
two of the same law firms that filed such lawsuit.
On or about August 13, 2009, Brian Killion filed a putative class action lawsuit against the
Company, its directors and certain of its officers in the Bridgeport 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 alleged breach of fiduciary duty.
All three complaints seek to enjoin consummation of the merger or, in the event that the Merger has
been consummated prior to the entry of a judgment, to rescind the transaction and/or award
rescissory damages. On October 9, 2009, the Company filed motions to strike the complaints in all
three lawsuits on the basis that the plaintiffs allegations failed to state any claims upon which
relief may be granted as a matter of law. On the same day, Prospect Capital filed a motion to
strike the lawsuit filed by Brian Killion. Pursuant to a stipulation
and order entered on November 9, 2009, the three pending actions all
will be consolidated before the Complex Litigation Docket of the
Superior Court in Stamford, Connecticut.
On
November 9, 2009, the Company, the other defendants and the
plaintiffs to the three pending actions entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement
of the actions. The proposed settlement of the actions remains
subject to negotiation of final documentation, confirmatory
discovery, and court approval. Pursuant to the MOU, the plaintiffs
have agreed that upon final approval of the settlement the actions
will be dismissed with prejudice against all of the defendants and
the Company acknowledged that it had previously made certain
disclosures in the proxy statement relating to the merger in response
to requests by the plaintiffs. In addition, the proposed settlement
provides that the Company will pay plaintiffs attorneys fees
and expenses, as awarded by the court, in an amount not to exceed
$250,000. Although the Company and the other defendants to the three
actions denied and continue to deny the substantive allegations made
in the actions, the Company agreed to settle the actions in order to
avoid costly litigation.
On October 21, 2009, Deutsche Bank AG
filed a complaint in the United States District Court, Southern District of New York, against the
Company alleging that the Company breached the terms of a trade confirmation between the Company
and Deutsche Bank AG by, among other things, failing and refusing to settle a trade with Deutsche
Bank relating to the loan that was the subject of the trade confirmation. Deutsche Bank further
alleged that the Company breached an implied covenant of good faith and fair dealing under the
trade confirmation. Deutsche Bank is seeking an award of damages as well as reasonable costs,
attorneys fees, disbursements and other proper charges and expenses as determined by the Court.
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, although the Company
believes that the amount of any judgment would not be material to the
Companys financial condition or
results of operations. The Company further believes that this claim is without merit and intends to
vigorously defend against it.
Note 16. Subsequent Events
On October 26, 2009, the Company filed a definitive proxy statement calling for a special meeting
of shareholders to be held on November 18, 2009 to vote on the proposed merger with Prospect
Capital. Patriot Capital shareholders at the close of business on October 21, 2009 will be
eligible to vote at the special meeting on the proposed merger.
On October 28, 2009, the board of directors declared a final dividend, contingent upon the
consummation of the Merger with Prospect Capital, with a record date of November 2, 2009.
According to this action by the board of directors, if the Merger is approved by the Companys
shareholders, immediately prior to the Merger, the Company will pay a final dividend in an amount
equal to all of its undistributed net ordinary income and capital gains through the closing date of
the Merger. It is currently estimated that the amount of the final dividend will be $0.38 per
share assuming that the merger closes on November 25, 2009. The actual amount of the final
dividend may be more or less than the estimated amount and will be determined immediately prior to
the closing of the merger. In accordance with a recent IRS revenue procedure, the dividend will be
payable up to 10% in cash and at least 90% in newly issued shares of the Companys common stock.
On November 3, 2009, the board of directors modified the previously declared final dividend by
determining that payment of the final dividend will not be contingent upon the closing of the
Merger with Prospect Capital. It is currently estimated that the amount of the final dividend will
be $0.38 per share assuming that the payment date is December 2, 2009. The actual amount of the
final dividend may be more or less than the estimated amount and will be determined immediately
prior to the date on which the final dividend is paid to the Companys shareholders. In accordance
with a recent IRS revenue procedure, the dividend will be payable up to 10% in cash and at least
90% in newly issued shares of the Companys common stock.
On November 9, 2009, the Company, the other defendants
and the plaintiffs to the three pending actions described
in Note 15. Litigation above entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement of the actions.
For a detailed discussion of the MOU, see Note 15. Litigation above.
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:
|
|
|
The likelihood that the proposed merger with Prospect Capital Corporation is completed and
the anticipated timing of the completion of the proposed merger;
|
|
|
|
|
Our future operating results and business prospects if the proposed merger is not completed;
|
|
|
|
|
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.
29
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 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 September 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.
On August 3, 2009, we and Prospect Capital Corporation entered into an Agreement and Plan of
Merger (the Merger Agreement), pursuant to which we will merge with and into Prospect Capital,
with Prospect Capital continuing as the surviving company (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 our common stock into which these options are exercisable. Further, in connection with
the Merger, each share of our restricted stock then outstanding will vest and all restrictions with
respect to such shares of restricted stock will lapse. In addition, (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 into which it is convertible 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 and (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 September 30, 2009, there was approximately
$112.7 million outstanding under the Amended Securitization 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 September 30, 2009 would have been $9.4
million. If the Merger is approved by the Companys shareholders, immediately prior to the Merger,
the Company will pay a final dividend in an amount equal to all of its undistributed net ordinary
income and capital gains through the closing date of the Merger. It is currently estimated that
the amount of the final dividend will be $0.38 per share assuming that the merger closes on
December 2, 2009. The actual amount of the final dividend may be more or less than the estimated
amount and will be determined immediately prior to the closing of the merger. In accordance with a
recent IRS revenue procedure, the dividend will be payable up to 10% in cash and at least 90% in
newly issued shares of the Companys common stock.
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
30
may be required to pay Prospect Capital a termination fee equal to $3.2 million
and/or $250,000 to reimburse certain expenses and make certain other payments.
On October 26, 2009, we filed a definitive proxy statement calling for a special meeting of
shareholders to be held on November 18, 2009 to vote on the proposed merger with Prospect Capital.
Our shareholders at the close of business on October 21, 2009 will be eligible to vote at the
special meeting on the proposed merger. Consummation of the Merger is expected occur shortly after
shareholder approval, if obtained, and is subject to certain additional conditions including, among
others, the accuracy of the representations and warranties of each party and compliance by each
party with its obligations under the Merger Agreement.
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 $257.4 million
and $322.4 million at September 30, 2009 and December 31, 2008, respectively.
Total portfolio investment activity as of and for the nine months ended September 30, 2009 and
the year ended December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
(41,222,305
|
)
|
|
|
(95,018,988
|
)
|
Increase in payment-in-kind interest/dividends
|
|
|
3,459,359
|
|
|
|
5,452,124
|
|
Sale of investments
|
|
|
(4,552,011
|
)
|
|
|
(15,267,401
|
)
|
Change in unearned revenue
|
|
|
760,464
|
|
|
|
129,458
|
|
Realized loss on investments
|
|
|
(29,574,549
|
)
|
|
|
|
|
Change in fair value of investments
|
|
|
(4,082,847
|
)
|
|
|
(39,992,921
|
)
|
|
|
|
|
|
|
|
Ending portfolio at fair value
|
|
$
|
257,432,323
|
|
|
$
|
322,370,748
|
|
|
|
|
|
|
|
|
As of September 30, 2009 and December 31, 2008, the composition of our portfolio at
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
13,263,235
|
|
|
|
5.1
|
%
|
|
$
|
10,266,191
|
|
|
|
3.2
|
%
|
Senior secured term loans
|
|
|
112,631,833
|
|
|
|
43.8
|
|
|
|
146,372,476
|
|
|
|
45.4
|
|
Junior secured term loans
|
|
|
46,846,973
|
|
|
|
18.2
|
|
|
|
58,076,196
|
|
|
|
18.0
|
|
Senior subordinated debt
|
|
|
75,300,016
|
|
|
|
29.3
|
|
|
|
93,365,112
|
|
|
|
29.0
|
|
Investments in equity securities
|
|
|
9,390,266
|
|
|
|
3.6
|
|
|
|
14,290,773
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
257,432,323
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009 and the year ended December 31, 2008,
the weighted average yield on all of our outstanding debt investments was approximately 11.1% and
12.1%, respectively. The weighted average balance of our debt investment portfolio during the nine
months ended September 30, 2009 was $287.8 million, down from $333.2 million during the
31
fourth quarter of 2008. Yields are computed using actual interest income earned for the year (annualized
for the nine months ended September 30, 2009), including amortization of loan fees and original
issue discount, divided by the weighted average fair value of debt investments. As of September
30, 2009 and December 31, 2008, $99.4 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 at variable rates.
At September 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 September 30, 2009 and December 31, 2008 at cost
and fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
|
Cost
|
|
|
% (1)
|
|
|
Fair Value
|
|
|
% (1)
|
|
Machinery
|
|
$
|
51,630,468
|
|
|
|
16.9
|
%
|
|
$
|
36,317,853
|
|
|
|
14.1
|
%
|
|
$
|
51,384,711
|
|
|
|
14.0
|
%
|
|
$
|
39,527,874
|
|
|
|
12.3
|
%
|
Personal & Nondurable Consumer Products
|
|
|
38,542,006
|
|
|
|
12.6
|
|
|
|
35,301,536
|
|
|
|
13.7
|
|
|
|
39,609,196
|
|
|
|
10.8
|
|
|
|
39,247,796
|
|
|
|
12.2
|
|
Health Care, Education & Childcare
|
|
|
38,478,623
|
|
|
|
12.6
|
|
|
|
35,673,123
|
|
|
|
13.9
|
|
|
|
39,749,005
|
|
|
|
10.9
|
|
|
|
39,501,102
|
|
|
|
12.2
|
|
Automobile
|
|
|
30,462,731
|
|
|
|
10.0
|
|
|
|
22,205,720
|
|
|
|
8.6
|
|
|
|
33,276,374
|
|
|
|
9.1
|
|
|
|
26,487,272
|
|
|
|
8.2
|
|
Textiles & Leather
|
|
|
28,827,184
|
|
|
|
9.4
|
|
|
|
27,472,364
|
|
|
|
10.7
|
|
|
|
29,557,681
|
|
|
|
8.1
|
|
|
|
29,368,566
|
|
|
|
9.1
|
|
Metals & Minerals
|
|
|
23,111,237
|
|
|
|
7.6
|
|
|
|
23,111,237
|
|
|
|
9.0
|
|
|
|
23,049,480
|
|
|
|
6.3
|
|
|
|
22,453,909
|
|
|
|
7.0
|
|
Mining, Steel, Iron & Nonprecious Metals
|
|
|
18,001,311
|
|
|
|
5.9
|
|
|
|
10,687,048
|
|
|
|
4.1
|
|
|
|
18,092,545
|
|
|
|
4.9
|
|
|
|
17,245,764
|
|
|
|
5.3
|
|
Electronics
|
|
|
15,798,122
|
|
|
|
5.2
|
|
|
|
15,698,746
|
|
|
|
6.1
|
|
|
|
31,033,364
|
|
|
|
8.5
|
|
|
|
30,033,495
|
|
|
|
9.3
|
|
Retail Stores
|
|
|
11,367,454
|
|
|
|
3.7
|
|
|
|
11,286,420
|
|
|
|
4.4
|
|
|
|
10,978,984
|
|
|
|
3.0
|
|
|
|
10,872,284
|
|
|
|
3.4
|
|
Housewares & Durable Consumer Products
|
|
|
11,110,217
|
|
|
|
3.6
|
|
|
|
6,577,119
|
|
|
|
2.5
|
|
|
|
11,005,810
|
|
|
|
3.0
|
|
|
|
9,333,052
|
|
|
|
2.9
|
|
Printing & Publishing
|
|
|
9,159,502
|
|
|
|
3.0
|
|
|
|
7,550,800
|
|
|
|
2.9
|
|
|
|
26,302,411
|
|
|
|
7.2
|
|
|
|
18,159,998
|
|
|
|
5.6
|
|
Ecological
|
|
|
8,724,829
|
|
|
|
2.9
|
|
|
|
8,412,229
|
|
|
|
3.3
|
|
|
|
8,556,102
|
|
|
|
2.3
|
|
|
|
8,164,902
|
|
|
|
2.5
|
|
Grocery
|
|
|
8,515,329
|
|
|
|
2.8
|
|
|
|
8,750,177
|
|
|
|
3.4
|
|
|
|
8,156,189
|
|
|
|
2.2
|
|
|
|
8,278,569
|
|
|
|
2.6
|
|
Insurance
|
|
|
5,052,366
|
|
|
|
1.7
|
|
|
|
3,826,463
|
|
|
|
1.5
|
|
|
|
5,000,000
|
|
|
|
1.4
|
|
|
|
4,048,200
|
|
|
|
1.3
|
|
Buildings & Real Estate
|
|
|
4,415,588
|
|
|
|
1.5
|
|
|
|
4,415,588
|
|
|
|
1.7
|
|
|
|
4,613,182
|
|
|
|
1.3
|
|
|
|
4,613,182
|
|
|
|
1.4
|
|
Diversified/Conglomerate Service
|
|
|
1,570,736
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
1,570,736
|
|
|
|
0.4
|
|
|
|
623,500
|
|
|
|
0.2
|
|
Aerospace & Defense
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
145,900
|
|
|
|
0.1
|
|
|
|
463,168
|
|
|
|
0.1
|
|
|
|
173,600
|
|
|
|
0.1
|
|
Chemicals, Plastic & Rubber
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,659,410
|
|
|
|
4.6
|
|
|
|
9,347,006
|
|
|
|
2.9
|
|
Oil & Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,677
|
|
|
|
1.1
|
|
|
|
3,840,677
|
|
|
|
1.2
|
|
Personal, Food & Miscellaneous Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
|
0.8
|
|
|
|
1,050,000
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,230,871
|
|
|
|
100.0
|
%
|
|
$
|
257,432,323
|
|
|
|
100.0
|
%
|
|
$
|
365,899,025
|
|
|
|
100.0
|
%
|
|
$
|
322,370,748
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents percentage of total portfolio.
|
At September 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 nine months ended September 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 September 30, 2009 and December 31, 2008:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Investments at
|
|
|
Percentage of
|
|
|
Investments at
|
|
|
Percentage of
|
|
Investment Rating
|
|
Fair Value
|
|
|
Total Portfolio
|
|
|
Fair Value
|
|
|
Total Portfolio
|
|
1
|
|
$
|
84,419,431
|
|
|
|
34.0
|
%
|
|
$
|
82,179,735
|
|
|
|
26.7
|
%
|
2
|
|
|
97,997,274
|
|
|
|
39.5
|
|
|
|
184,507,897
|
|
|
|
59.9
|
|
3
|
|
|
55,442,985
|
|
|
|
22.4
|
|
|
|
21,275,475
|
|
|
|
6.9
|
|
4
|
|
|
4,890,139
|
|
|
|
2.0
|
|
|
|
8,477,320
|
|
|
|
2.7
|
|
5
|
|
|
5,292,228
|
|
|
|
2.1
|
|
|
|
11,639,548
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
248,042,057
|
|
|
|
100.0
|
%
|
|
$
|
308,079,975
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 and December 31, 2008, we had loans and equity investments
from three 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 September 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 three months ended September 30, 2009 and 2008, was $8.1
million and $10.2 million, respectively. For the three months ended September 30, 2009, this
amount consisted of interest income of $5,000 from cash and cash equivalents, $7.8 million of
interest and dividend income from portfolio investments (which included $1.2 million in
payment-in-kind, or PIK interest, and dividends), $138,000 of fee income and $112,000 in other
investment income. For the three months ended September 30, 2008, this amount consisted of
interest income of $21,000 from cash and cash equivalents, $9.4 million of interest and dividend
income from portfolio investments (which included $1.3 million in payment-in-kind, or PIK interest,
and dividends), $460,000 in fee income and $329,000 in other investment income.
The decrease in our total investment income for the three months ended September 30, 2009 as
compared to the three months ended September 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 September 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 September 30, 2009, the weighted average fair value
balance outstanding of our interest-bearing investment portfolio was
approximately $263.2 million
as compared to approximately $313.8 million during the three months ended September 30, 2008. The
weighted average yield on our investments during the three months ended September 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.
33
Expenses for the three months ended September 30, 2009 and 2008, were $6.9 million and $3.7
million, respectively. Expenses increased for the three months ended September 30, 2009 as
compared to the three months ended September 30, 2008 by approximately $3.2 million, primarily as a
result of higher interest expense of $615,000, higher professional fees of $2.5 million and higher
general and administrative expenses of $220,000, partially offset by lower compensation expense
which decreased by $86,000. 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 under the Amended Securitization Facility 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
$119.6 million during the three months ended September 30, 2009, as compared to $122.4 million
during the three months ended September 30, 2008. The increase in professional fees 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, including the
proposed merger with Prospect Capital. 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, including the proposed merger with Prospect Capital.
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
September 30, 2009, we realized a loss of $17.7 million on investments principally from the sale of
three investments, one of which was from a syndicated loan. During the three months ended
September 30, 2008, we realized a net gain of $456,000 principally from the sale of one equity
investment.
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 September 30, 2009 and 2008, we recorded net unrealized appreciation
(depreciation) of $12.8 million and $(7.1) million, respectively, on our investments. For the
three months ended September 30, 2009, our net unrealized appreciation consisted of the following:
approximately $1.4 million of unrealized appreciation which resulted from quoted market prices on
our syndicated loan portfolio; approximately $13.6 million of unrealized appreciation primarily
from the reversal of previously recorded unrealized depreciation as a result of realizing a loss on
sale of investments; partially offset by approximately $2.2 million of unrealized depreciation
which resulted from changes in market multiples and interest rates. For the three months ended
September 30, 2008, our net unrealized depreciation consisted of the following: approximately $1.4
million 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 syndicated loans; approximately $4.5
million resulted from a decline in the financial performance of our portfolio companies; and
approximately $1.2 million of unrealized depreciation 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
September 30, 2009 and 2008, we recorded unrealized appreciation (depreciation)
of approximately $2.2 million and $(182,000), respectively, on our interest
rate swap agreements. The unrealized appreciation in the value of our interest
rate swap agreements in 2009 resulted from the reversal of previously recorded
unrealized depreciation resulting from the termination of all eight interest
rate swap agreements. The unrealized appreciation in 2008 resulted from the
volatility and corresponding fluctuation in variable interest rates during the
period. 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 recorded a
realized loss of approximately $3.3 million.
Net Income (Loss)
Net loss was $4.7 million for the quarter ended September 30, 2009 as compared to net loss of
$316,000 for the quarter ended September 30, 2008. The net loss for the three months ended
September 30, 2009 principally related to the recording of a realized loss in the amount of $17.7
million on sales of investments, recording a $3.3 million realized loss on the termination of our
interest rate swaps, partially offset by net unrealized appreciation of $12.8 million on our
investments.
34
Comparison for the nine months ended September 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 nine months ended September 30, 2009 and 2008, was $24.6
million and $32.1 million, respectively. For the nine months ended September 30, 2009, this amount
consisted of interest income of $36,000 from cash and cash equivalents, $23.9 million of interest
income from portfolio investments (which included $3.5 million in payment-in-kind, or PIK interest,
and dividends), $593,000 in fee income and $121,000 in other investment income. For the nine
months ended September 30, 2008, this amount consisted of interest income of $105,000 from cash and
cash equivalents, $30.5 million of interest income from portfolio investments (which included $4.3
million in payment-in-kind, or PIK, interest and dividends), $816,000 in fee income and $750,000 in
other investment income.
The decrease in our total investment income for the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008 was primarily attributable to a decrease in
the weighted average fair value balance outstanding of our interest-bearing investment portfolio
during the nine months ended September 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 nine months ended September 30, 2009, the weighted average fair value
balance outstanding of our interest-bearing investment portfolio was
approximately $287.8 million
as compared to approximately $338.0 million during the nine months ended September 30, 2008. The
weighted average yield on our investments during the nine months ended September 30, 2009 decreased
as a result of an increase in the amount 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 nine months ended September 30, 2009 and 2008, were $15.9 million and $12.4
million, respectively. Expenses increased for the nine months ended September 30, 2009 as compared
to the nine months ended September 30, 2008 by approximately $3.5 million, primarily as a result of
higher interest expense which increased by $994,000, higher professional fees of $3.2 million and
higher general and administrative expenses which increased by $288,000, offset by lower
compensation expense which decreased by $932,000. 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 under the Amended Securitization
Facility 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 $137.4 million during the nine months ended September 30, 2009, as compared to
$138.2 million during the nine months ended September 30, 2008. The increase in professional fees
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, including the proposed merger with Prospect Capital. 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 nine months ended
September 30, 2009, we realized a loss of $29.7 million due from the sale of four investments, two
of which were syndicated loans. During the nine months ended September 30, 2008, we realized a net
gain of $22,000 from the sale of one equity investment and one debt investment, offset by the
cancellation of warrants which we had previously written down to zero.
35
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
nine months ended September 30, 2009 and 2008, we recorded net unrealized depreciation of $4.1
million and $20.4 million, respectively, on our investments. For the nine months ended September
30, 2009, our net unrealized appreciation consisted of the following: approximately $3.9 million of
net unrealized depreciation resulted from the following: approximately $16.0 million of unrealized
depreciation from a decline in cash flows of our portfolio companies, offset by approximately $12.1
million in unrealized appreciation due to the reversal of previously recorded unrealized
depreciation as a result of realizing a loss on sale of investments; approximately $2.8 million,
respectively, of unrealized depreciation which resulted from changes in market multiples and
interest rates; offset by approximately $2.6 million, respectively, of unrealized appreciation
which resulted from quoted market prices on our syndicated loan portfolio. For the nine months
ended September 30, 2008, our net unrealized depreciation consists of the following: approximately
$2.8 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 $12.3 million resulted from a decline in the financial performance
of our portfolio companies; and approximately $5.3 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 nine months ended September 30,
2009 and 2008, we recorded unrealized appreciation of approximately $3.1
million and $35,000, respectively, on our interest rate swap agreements. The
unrealized appreciation in the value of our interest rate swap agreements in
2009 resulted from the reversal of previously recorded unrealized depreciation
resulting from the termination of all eight interest rate swap agreements. The
unrealized appreciation in 2008 resulted from the volatility and corresponding
fluctuation in variable interest rates during the period. 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 recorded a realized loss of
approximately $3.3 million.
Net Income (Loss)
Net loss was $25.1 million for the nine months ended September 30, 2009 as compared to net
loss of $548,000 for the nine months ended September 30, 2008. The $24.6 million increase in net
loss was primarily a result of an increase in realized losses of $32.9 million, a decrease in net
investment income of $11.0 million offset by a decrease in net unrealized depreciation of $19.3
million.
Financial Condition, Liquidity and Capital Resources
Cash, Cash Equivalents and Restricted Cash
At September 30, 2009 and December 31, 2008, we had $5.1 million and $6.4 million,
respectively, in cash and cash equivalents. In addition, at September 30, 2009 and December 31,
2008, we had $8.0 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 September 30, 2009, $112.7 million was outstanding under the Amended
Securitization Facility.
For the nine months ended September 30, 2009, net cash provided by operating activities
totaled $5.3 million, compared to net cash provided by operating activities of $14.4 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 $35.5 million and $37.5
million for the nine months ended September 30, 2009 and 2008, respectively. This change was
principally due to lower loan repayments and amortization of $45.2 million, and a decrease in
investment sales of $6.8 million, offset by a decrease in funded investments of $50.0 million.
Cash used for financing activities totaled $42.2 million and $51.6 million in the nine months ended
September 30, 2009 and 2008, respectively. This change was principally due to a net decrease of
$39.2 million in our net borrowings and a decrease of $15.0 million in dividends paid, both of
which were offset by a decrease in restricted cash in the amount of $33.9 million.
36
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 had 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. As a result, 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 September
30, 2009, this ratio was 238%. See Overview for a discussion of the proposed merger with
Prospect Capital.
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
37
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 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.
At September 30, 2009, $112.7 million was outstanding under the Amended Securitization
Facility. At September 30, 2009, the interest rate payable on amounts outstanding under the
Amended Securitization Facility was 7.0%.
Since 2006, we, 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 nine months ended September 30, 2009 and 2008, net unrealized
appreciation attributed to the swaps were approximately $3.1 million and $35,000, respectively. 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. Payments on the terminated swap liability
will be made at the rate of $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,
we agreed with the Lenders that we 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 our investment portfolio or the cash interest payments on these investments.
Regulated Investment Company Status and Dividends
Effective August 1, 2005, we 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. If the Merger
is approved by the Companys shareholders, immediately prior to the Merger, the Company will pay a
final dividend in an amount equal to all of its undistributed net ordinary income and capital gains
through the closing date of the Merger. It is currently estimated that the amount of the final
dividend will be $0.38 per share assuming that the merger closes on December 2, 2009. The actual
amount of the final dividend may be more or less than the estimated amount and will be determined
immediately prior to the closing of the merger. In accordance with a recent IRS revenue procedure,
the dividend will be payable up to 10% in cash and at least 90% in newly issued shares of the
Companys common stock.
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
38
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.
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.
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 ASC Topic 820, 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 September 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 September 30, 2009
39
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 47% 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 $7.2 million or 2.8% of our portfolio of investments
at fair value as of September 30, 2009 and $6.6 million or 2.0% of our portfolio of investments at
fair value as of December 31, 2008. The net increase in loan and equity balances as a result of
contracted PIK arrangements are separately identified on our statements of cash flows.
PIK related activity for the nine months ended September 30, 2009 was as follows:
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Nine Months Ended
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September 30, 2009
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Beginning PIK balance
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$
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6,605,194
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PIK interest and dividends earned during the period
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3,459,359
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PIK write-off
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(1,817,059
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)
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PIK receipts during the period
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(1,003,525
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)
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Ending PIK balance
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$
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7,243,969
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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 September 30, 2009 and December 31, 2008, we had loans and equity investments from
three 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
40
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 September 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 or eligible
revolver draw requests in the future 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 September 30,
2009, we did not have any outstanding swap agreements. 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, we 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 $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.
Contractual Obligations
As of September 30, 2009, we had $112.7 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.
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 $62,000; 2010 $247,000; 2011 $21,000.
Recent Developments
On October 26, 2009, the Company filed a definitive proxy statement calling for a special
meeting of shareholders to be held on November 18, 2009 to vote on the proposed merger with
Prospect Capital. Patriot Capital shareholders at the close of business on October 21, 2009 will
be eligible to vote at the special meeting on the proposed merger.
On October 28, 2009, the board of directors declared a final dividend, contingent upon the
consummation of the proposed merger with Prospect Capital, with a record date of November 2, 2009.
If the Merger is approved by our shareholders, immediately prior to the Merger, we will pay a final
dividend in an amount equal to all of its undistributed net ordinary income and capital gains
through the closing date of the Merger. It is currently estimated that the amount of the final
dividend will be $0.38 per share assuming that the merger closes on November 25, 2009. The actual
amount of the final dividend may be more or less than the estimated amount and will be determined
immediately prior to the closing of the merger. In accordance with a recent IRS revenue procedure,
the dividend will be payable up to 10% in cash and at least 90% in newly issued shares of our
common stock.
On November 3, 2009, the board of directors modified the previously declared final dividend by
determining that payment of the final dividend will not be contingent upon the closing of the
proposed merger with Prospect Capital. It is currently estimated that the amount of the final
dividend will be $0.38 per share assuming that the payment date is December 2, 2009. The actual
amount of the final dividend may be more or less than the estimated amount and will be determined
immediately prior to the date on which the final dividend is paid to our shareholders. In
accordance with a recent IRS revenue procedure, the dividend will be payable up to 10% in cash and
at least 90% in newly issued shares of our common stock.
On November 9, 2009, we,
the other defendants and the plaintiffs to the three pending actions described in
Item 1. Legal Proceedings of Part II. Other
Information of this quarterly report on Form 10-Q entered into a Memorandum of Understanding (MOU) with respect
to a proposed settlement of the actions. For a detailed discussion of the MOU, see Item 1. Legal Proceedings of Part II. Other
Information of this quarterly report on Form 10-Q .
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)
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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.
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(b)
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There have been no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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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 or about August 6, 2009, Bruce Belodoff filed a putative 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. Finally the lawsuit alleges that the proposed
merger was designed to benefit certain of the Companys officers.
On or about August 11, 2009, Thomas Webster filed a putative class action lawsuit against the
Company, its directors and certain of its officers in the Superior Court of the State of
Connecticut. The lawsuit is essentially identical to the class action lawsuit filed by Bruce
Belodoff against the Company on or about August 6, 2009, which is described above, and was filed by
two of the same law firms that filed such lawsuit.
On or about August 13, 2009, Brian Killion filed a putative class action lawsuit against the
Company, its directors and certain of its officers in the Bridgeport 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 alleged breach of fiduciary duty.
All three complaints seek to enjoin consummation of the merger or, in the event that the
Merger has been consummated prior to the entry of a judgment, to rescind the transaction and/or
award rescissory damages. On October 9, 2009, the Company filed motions to strike the complaints
in all three lawsuits on the basis that the plaintiffs allegations failed to state any claims upon
which relief may be granted as a matter of law. On the same day, Prospect Capital filed a motion to
strike the lawsuit filed by Brian Killion. Pursuant to a stipulation
and order entered on November 9, 2009, the three pending actions all
will be consolidated before the Complex Litigation Docket of the
Superior Court in Stamford, Connecticut.
On
November 9, 2009, the Company, the other defendants and the
plaintiffs to the three pending actions entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement
of the actions. The proposed settlement of the actions remains
subject to negotiation of final documentation, confirmatory
discovery, and court approval. Pursuant to the MOU, the plaintiffs
have agreed that upon final approval of the settlement the actions
will be dismissed with prejudice against all of the defendants and
the Company acknowledged that it had previously made certain
disclosures in the proxy statement relating to the merger in response
to requests by the plaintiffs. In addition, the proposed settlement
provides that the Company will pay plaintiffs attorneys fees
and expenses, as awarded by the court, in an amount not to exceed
$250,000. Although the Company and the other defendants to the three
actions denied and continue to deny the substantive allegations made
in the actions, the Company agreed to settle the actions in order to
avoid costly litigation.
On October 21, 2009, Deutsche Bank AG
filed a complaint in the United States District Court, Southern District of New York, against the
Company alleging that the Company breached the terms of a trade confirmation between the Company
and Deutsche Bank AG by, among other things, failing and refusing to settle a trade with Deutsche
Bank relating to the loan that was the subject of the trade confirmation. Deutsche Bank further
alleged that the Company breached an implied covenant of good faith and fair dealing under the
trade confirmation. Deutsche Bank is seeking an award of damages as well as reasonable costs,
attorneys fees, disbursements and other proper charges and expenses as determined by the Court.
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, although the Company
believes that the amount of any judgment would not be material to the
Companys financial condition or
results of operations. The Company further believes that this claim is without merit and intends to
vigorously defend against it.
Item 1A. Risk Factors
Except as noted below, there were no material changes from the risk factors previously
disclosed in our quarterly reports on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009 and our annual report on Form 10-K for the year ended December 31, 2008.
Patriot and Prospect have agreed to a fixed exchange ratio, and, as a result, the shares of
Prospect common stock to be issued in the merger may have a market value that is lower than
expected.
The exchange ratio of 0.3992 of a share of Prospect common stock for each share of Patriot
common stock was fixed on August 3, 2009, the time of the signing of the merger agreement, and is
not subject to adjustment based on changes in the trading price of Prospect or Patriot common stock
before the closing of the proposed merger. As a result, the market price of Prospects common
stock at the time of the merger may vary significantly from the price on the date the merger
agreement was signed or from the price on either the date of this document or the date of the
special meeting. These variances may arise due to, among other things:
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changes in the business, operations and prospects of Prospect or Patriot;
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the financial condition of current or prospective portfolio companies of Prospect or Patriot;
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interest rates, general market and economic conditions;
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market assessments of the likelihood that the proposed merger will be completed and the timing of the merger; and
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market perception of the future profitability of the combined company.
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43
These factors are generally beyond the control of Prospect and Patriot. It should be noted
that during the 12-month period ending September 30, 2009, the closing price per share of
Prospects common stock varied from a low of $6.29 to a high of $13.08. Historical trading prices
are not necessarily indicative of future performance.
The proposed merger is subject to the receipt of payoff letters from the Amended Securitization
Facility lenders that could delay completion of the proposed merger, cause abandonment of the
merger or have other negative effects on Patriot and Prospect.
Completion of the merger is subject to the receipt of payoff letters from the Amended
Securitization Facility lenders. A substantial delay in obtaining such payoff letters, the failure
to obtain such payoff letters or the imposition of unfavorable terms or conditions in connection
with the receipt of such payoff letters could have an adverse effect on the business, financial
condition or results of operations of Patriot and Prospect, or may cause the abandonment of the
merger. In this regard, the merger agreement obligates Prospect to pay off (i) all principal and
interest due under the Amended Securitization Facility, which amounted to $112.7 million as of
September 30, 2009, and (ii) up to $1.35 million (the Fee Cap) in other costs, fees and expenses
payable to the lenders under the terms of the Amended Securitization Facility. However,
immediately subsequent to Patriots entry into the merger agreement with Prospect, the agent for
the Amended Securitization Facility lenders notified Patriot that the Amended Securitization
Facility lenders have not consented to the Fee Cap included in the merger agreement nor do they
intend to release their liens on Patriots investments unless and until all costs, fees and
expenses payable to the lenders under the terms of the Amended Securitization Facility are paid in
full in cash. Although Patriot intends to work with the Amended Securitization Facility lenders to
resolve this issue, if (i) the Amended Securitization Facility lenders demand payment for costs,
fees and expenses that are substantially in excess of the Fee Cap amount, (ii) Patriot does not
have sufficient funds to pay such excess amount and (iii) the Amended Securitization Facility
lenders refuse to provide Patriot with the payoff letters required by the merger agreement, the
merger may be abandoned. If the merger is abandoned, Patriot may not have sufficient liquidity to
operate its business or pursue other strategic transactions and, as a result, would likely be
required to seek bankruptcy protection.
Patriot shareholders will experience a reduction in percentage ownership and voting power with
respect to their shares as a result of the merger.
Patriot shareholders will experience a substantial reduction in their respective percentage
ownership interests and effective voting power relative to their respective percentage ownership
interests in Patriot prior to the merger. If the merger is consummated, based on the number of
shares of Prospect common stock issued and outstanding on the date hereof, Patriot shareholders
will own approximately 13.6% of the combined entitys outstanding common stock. In addition, both
prior to and after completion of the merger, Prospect may issue additional shares of common stock
in public offerings, mergers and acquisitions or otherwise (including at prices below its current
net asset value), all of which would further reduce the percentage ownership of Prospect held by
former Patriot shareholders. In addition, the issuance or sale by Prospect of shares of its common
stock at a discount to net asset value poses a risk of dilution to stockholders. In particular,
stockholders who do not purchase additional shares at or below the discounted price in proportion
to their current ownership will experience an immediate decrease in net asset value per share (as
well as in the aggregate net asset value of their shares if they do not participate at all). These
stockholders will also experience a disproportionately greater decrease in their participation in
Prospects earnings and assets and their voting power than the increase Prospect experiences in its
assets, potential earning power and voting interests from such issuance or sale. Shareholders may
also experience a reduction in the market price of Prospects common stock.
Termination of the merger agreement could negatively impact Patriot.
If the merger agreement is terminated, there may be various consequences including:
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Patriots businesses may have been adversely impacted by the failure
to pursue other beneficial opportunities due to the focus of
management on the merger, without realizing any of the anticipated
benefits of completing the merger;
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the market price of Patriots common stock might decline to the extent
that the market price prior to termination reflects a market
assumption that the merger will be completed;
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Patriot may not be able to find a party willing to pay an equivalent
or more attractive price than the price Prospect has agreed to pay in
the merger; and
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Patriot may not have sufficient liquidity to operate its business or
pursue other strategic transactions and, as a result, would likely be
required to seek bankruptcy protection.
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Under certain circumstances, Patriot is obligated to pay Prospect a termination fee or other
amounts upon termination of the merger agreement.
44
No assurance can be given that the merger will be completed. The merger agreement provides
for the payment by Patriot of a break-up fee of $3.2 million or an expense reimbursement of up to
$250,000 if the merger is terminated by Patriot under certain circumstances. In addition, in
certain circumstances involving a sale of Patriot to a third party within one year of termination
of the merger agreement, Patriot may be required make an additional payment equal to the
termination fee when combined with any previously paid expense reimbursement. The obligation to
make that payment may adversely affect the ability of Patriot to engage in another transaction in
the event the merger is not completed and may have an adverse impact on the financial condition of
Patriot. See Description of the Merger Agreement Termination of the Merger Agreement -
Expenses; Termination Fees for a discussion of the circumstances that could result in the payment
of a termination fee.
The merger agreement severely limits Patriots ability to pursue alternatives to the merger.
The merger agreement contains no shop and other provisions that, subject to limited
exceptions, limit Patriots ability to discuss, facilitate or commit to competing third-party
proposals to acquire all or a significant part of Patriot. These provisions might discourage a
potential competing acquiror that might have an interest in acquiring all or a significant part of
Patriot from considering or proposing that acquisition even if it were prepared to pay
consideration with a higher per share market price than that proposed in the merger. Patriot can
consider and participate in discussions and negotiations with respect to an alternative proposal
only in very limited circumstances. Among other things, prior to Patriot entering into any
discussions with, or providing confidential information to, a third party in connection with an
alternative proposal, the third party must enter into a confidentiality agreement with Patriot,
must provide evidence of its commitment and ability to make a superior proposal for a sale or
business combination transaction with Patriot without material contingencies, must agree to pay
down in full the outstanding balance under the Amended Securitization Facility at closing of the
relevant alternative sale or business combination transaction, and must provide Patriot with funds
in an amount equal to the termination fee that would be payable upon the occurrence of certain
termination events, as discussed elsewhere in this document.
The merger is subject to closing conditions, including stockholder approval, that, if not satisfied
or waived, will result in the merger not being completed, which may result in material adverse
consequences to Patriots business and operations.
The merger is subject to closing conditions, including the approval of Patriots shareholders
that, if not satisfied, will prevent the merger from being completed. The closing condition that
Patriots shareholders adopt the merger agreement may not be waived under applicable law and must
be satisfied for the merger to be completed. Patriot currently expects that all directors and
executive officers of Patriot will vote their shares of Patriot common stock in favor of the
proposals presented at the special meeting. If Patriots shareholders do not adopt the merger
agreement and the merger is not completed, the resulting failure of the merger could have a
material adverse impact on Patriots business and operations. In addition to the required
approvals and consents from governmental entities and the approval of Patriots shareholders, the
merger is subject to a number of other conditions beyond Patriots control that may prevent, delay
or otherwise materially adversely affect its completion. Patriot cannot predict whether and when
these other conditions will be satisfied.
Certain executive officers and directors of Patriot have interests in the completion of the
proposed merger that may differ from or conflict with the interests of Patriot shareholders.
Certain of the executive officers and directors of Patriot have interests in the merger that
are different in certain respects from, and may conflict with, the interests of other Patriot
shareholders. Patriot executive officers are entitled to receive certain benefits upon completion
of the merger, including accelerated vesting and payout (in cash or merger consideration) of stock
options and restricted stock. In addition, pursuant to employment or severance agreements they
have with Patriot, assuming qualifying terminations of employment following completion of the
merger, certain of Patriots executive officers would receive severance payments and benefits.
Patriots executive officers may be entitled to receive aggregate payments of up to approximately
$2,453,613 for accelerated vesting and payout of stock options and restricted stock upon completion
of the merger. The maximum amounts that would be payable to Patriots named executive officers in
the aggregate under each of their current employment agreements or severance agreements assuming
that certain conditions regarding change of control and termination are met would be up to
approximately $11,704,415. Certain existing executive officers of Patriot may, however, become
paid employees of the merged company or its external investment adviser.
Including shares of restricted stock that will vest upon the merger, the directors and
executive officers of Patriot, hold approximately 15.83% of the beneficial and record ownership of
Patriots common stock as of October 16, 2009, and intend to vote their shares in favor of the
merger agreement and the transactions contemplated by the merger.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
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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
Not Applicable.
Item 5. Other Information
Not Applicable.
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):
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Exhibit
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Number
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Description of Document
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10.1*
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Agreement, Limited Consent and
Amendment No. 1 to Second Amended and Restated Loan Funding and
Servicing Agreement by and among the Patriot Capital Funding, Inc.,
Patriot Capital Funding LLC I, Fairway Finance Company, LLC, BMO
Capital Markets Corp., Branch Banking and Trust Company and Wells Fargo
Bank, National Association.
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31.1*
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
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31.2*
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
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32.1*
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
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32.2*
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
November 12, 2009.
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PATRIOT CAPITAL FUNDING, INC.
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By:
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/s/ Richard P. Buckanavage
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Richard P. Buckanavage
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Chief Executive Officer and President
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By:
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/s/ William E. Alvarez, Jr.
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William E. Alvarez, Jr.
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Executive Vice President, Chief
Financial Officer and
Secretary
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47
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