Annual Statements Open main menu

PENNANTPARK INVESTMENT CORP - Quarter Report: 2007 December (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

FOR THE QUARTER ENDED DECEMBER 31, 2007

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO            

COMMISSION FILE NUMBER: 814-00736

 

 

PENNANTPARK INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   20-8250744

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

590 Madison Avenue, 15th Floor

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212)-905-1000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨.    Accelerated filer  ¨.    Non-accelerated filer  x.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of February 7, 2008 was 21,068,772.

 

 

 


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

   1

Statement of Assets and Liabilities as of December 31, 2007 and September 30, 2007

   1

Statement of Operations for the three months ended December 31, 2007

   2

Statement of Changes in Net Assets for the three months ended December 31, 2007 and for the period January 11, 2007 (inception) through September 30, 2007

   3

Statement of Cash Flows for the three months ended December 31, 2007

   4

Schedule of Investments as of December 31, 2007 and September 30, 2007

   5

Notes to Financial Statements

   13

Report of Independent Registered Public Accounting Firm

   20

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

   21

Forward-Looking Statements

   21

Overview

   21

Investments

   21

Revenues

   22

Expenses

   22

Portfolio and Investment Activity

   23

Critical Accounting Policies

   23

Results of Operations

   25

Liquidity and Capital Resources

   25

Contractual Obligations

   26

Off-Balance Sheet Arrangements

   26

Distributions

   26

Item 3. Quantitative And Qualitative Disclosures About Market Risk

   27

Item 4. Controls and Procedures

   27
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

   28

Item 1A. Risk Factors

   28

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

   28

Item 3. Defaults Upon Senior Securities

   28

Item 4. Submission of Matters to a Vote of Security Holders

   28

Item 5. Other Information

   28

Item 6. Exhibits

   29

SIGNATURES

   30


Table of Contents

PART I—FINANCIAL INFORMATION

We are filing this Report in compliance with Rule 13a-13 promulgated by the SEC. In this Report, “PennantPark Investment”, “we”, “our” and “us” refer to PennantPark Investment Corporation unless the context otherwise requires.


Table of Contents
Item 1. Financial Statements

PENNANTPARK INVESTMENT CORPORATION

STATEMENTS OF ASSETS AND LIABILITIES

 

     December 31,
2007
(Unaudited)
    September 30,
2007
 

Assets

    

Investments, at fair value (cost—$382,162,705 and $314,881,870 respectively)1

   $ 342,190,612     $ 291,016,608  

Cash equivalents (cost—$81,788,219 and $258,016,351 respectively)

     81,780,690       257,959,635  

Interest receivable

     4,263,953       4,517,850  

Prepaid expenses and other assets

     1,443,726       1,513,583  
                

Total assets

     429,678,981       555,007,676  
                

Liabilities

    

Payable for cash equivalents purchased

     79,406,889       252,759,931  

Payable for investments purchased

     —         16,583,921  

Unfunded investments

     3,091,264       3,989,948  

Credit facility payable

     91,500,000       10,000,000  

Interest payable

     769,889       170,989  

Accrued other expenses

     689,631       1,109,793  
                

Total liabilities

     175,457,673       284,614,582  
                

Net Assets

    

Common stock, par value $.001 per share, 100,000,000 shares authorized and 21,068,772 shares issued and outstanding

     21,069       21,069  

Paid-in capital in excess of par

     294,586,604       294,586,604  

Distributions in excess of net investment income

     (100,020 )     (196,769 )

Accumulated net realized loss

     (306,723 )     (95,832 )

Net unrealized depreciation on investments and cash equivalents

     (39,979,622 )     (23,921,978 )
                

Total net assets

   $ 254,221,308     $ 270,393,094  
                

Total liabilities and net assets

   $ 429,678,981     $ 555,007,676  
                

Net asset value per share

   $ 12.07     $ 12.83  
                

 

1

None of our portfolio companies is controlled by, or affiliated with, PennantPark Investment Corporation as defined by the Investment Company Act of 1940, as amended (the “1940 Act”).

SEE NOTES TO FINANCIAL STATEMENTS

 

1


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

STATEMENT OF OPERATIONS

(UNAUDITED)

 

     Three
months ended
December 31, 2007
 

Investment Income:

  

Interest

   $ 8,983,636  

Other

     19,972  
        

Total Investment income

     9,003,608  
        

Expenses:

  

Base management fee

     1,640,365  

Performance-based incentive fee (see note 3)

     447,382  

Interest and other credit facility expenses

     1,097,107  

Administrative services expenses

     663,690  

Professional fees

     294,840  

Directors’ fees

     155,758  

Insurance

     90,790  

Other general and administrative expenses

     86,844  
        

Expenses before base management fee waiver

     4,476,776  
        

Base management fee waiver

     (205,047 )
        

Net expenses

     4,271,729  
        

Net investment income

     4,731,879  
        

Realized and unrealized loss on investments and cash equivalents:

  

Net realized loss on investments and cash equivalents

     (210,891 )

Change in net unrealized depreciation on investments and cash equivalents

     (16,057,644 )
        

Net realized and unrealized loss from investments and cash equivalents

     (16,268,535 )
        

Net decrease in net assets resulting from operations

   $ (11,536,656 )
        

Earnings per common share (see note 6)

   $ (0.54 )
        

SEE NOTES TO FINANCIAL STATEMENTS

 

2


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

STATEMENT OF CHANGES IN NET ASSETS

(UNAUDITED)

 

     Three
months ended
December 31, 2007
    Period from
January 11,
2007

(inception)
through
September 30,
2007
 

Decrease in net assets from operations:

    

Net investment income

   $ 4,731,879     $ 7,304,496  

Net realized loss on investments and cash equivalents

     (210,891 )     (81,769 )

Net change in unrealized depreciation on investments and cash equivalents

     (16,057,644 )     (23,921,978 )
                

Net decrease in net assets resulting from operations

     (11,536,656 )     (16,699,251 )
                

Dividends and distributions to Stockholders:

    

Dividends from net investment income

     (4,635,130 )     (7,545,458 )

Return of capital

     —         (28,356 )
                

Total dividends and distributions

     (4,635,130 )     (7,573,814 )
                

Capital share transactions:

    

Issuance of shares of common stock

     —         315,375,000  

Offering costs related to public share offerings

     —         (21,309,375 )

Reinvestment of dividends

     —         600,534  
                

Net increase in net assets resulting from capital share transactions

     —         294,666,159  

Total (decrease) increase in net assets

     (16,171,786 )     270,393,094  

Net Assets:

    

Beginning of Period

     270,393,094       —    
                

End of Period

   $ 254,221,308     $ 270,393,094  
                

Capital Share Activity:

    

Shares issued from subscriptions

     —         21,025,000  

Shares issued from reinvestment of dividend

     —         43,772  
                

Total increase in capital shares

     —         21,068,772  
                

SEE NOTES TO FINANCIAL STATEMENTS

 

3


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     Three
months ended
December 31, 2007
 

Cash flows from operating activities:

  

Net decrease in net assets resulting from operations

   $ (11,536,656 )

Adjustments to reconcile net decrease in net assets resulting from operations to net cash used by operating activities:

  

Change in net unrealized depreciation on investments and cash equivalents

     16,057,644  

Net realized loss on investments and cash equivalents

     210,891  

Net accretion of discount and amortization of premium

     (229,966 )

Purchase of investments

     (70,955,314 )

Payment-in-kind interest

     (586,297 )

Proceeds from disposition of investments

     4,329,037  

Decrease in interest receivable

     253,897  

Increase in interest payable on credit facility

     598,901  

Decrease in prepaid expenses and other assets

     69,857  

Decrease in payables for cash equivalents purchased

     (173,353,042 )

Decrease in payables for investments purchased

     (16,583,921 )

Decrease in unfunded investments

     (898,684 )

Decrease in accrued expenses

     (420,162 )
        

Net cash used by operating activities

     (253,043,815 )
        

Cash flows from financing activities:

  

Dividends and distributions to stockholders

     (4,635,130 )

Borrowings under credit facility (see note 12)

     140,500,000  

Repayments under credit facility (see note 12)

     (59,000,000 )
        

Net cash provided by financing activities

     76,864,870  
        

Net decrease in cash and cash equivalents

     (176,178,945 )

Cash and cash equivalents, beginning of period

     257,959,635  
        

Cash and cash equivalents, end of period

   $ 81,780,690  
        

Supplemental disclosure of cash flow information:

  

Interest paid during the three months ended December 31, 2007

   $ 276,176  
        

Non-cash financing activities consisting of the reinvestment of dividends

   $ —    
        

SEE NOTES TO FINANCIAL STATEMENTS

 

4


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2007

(UNAUDITED)

 

Issuer name(1)

   Maturity   

Industry

   Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)

Subordinated Debt / Corporate Notes – 28.8%

                   

ADVANSTAR, INC.

   11/30/2015    OTHER MEDIA    11.84 %*   L+700    $ 15,030,273    $ 15,030,273    $ 14,654,516

AFFINION GROUP HOLDINGS, INC.

   03/01/2012    CONSUMER PRODUCTS    11.68 %*   L+625      18,500,000      18,128,846      17,035,411

INTERDYNAMICS HOLDINGS, INC.

   05/20/2012    AUTO SECTOR    13.75 %   —        20,000,000      19,464,060      20,000,000

PERFORMANCE HOLDINGS, INC.

   07/02/2014    LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT    14.25 %*   —        3,974,292      3,735,200      3,974,292

REALOGY CORP.(5)

   04/15/2015    BUILDINGS & REAL ESTATE    12.38 %   —        28,000,000      26,171,601      17,640,000
                               

Total Subordinated Debt / Corporate Notes

                85,504,565      82,529,980      73,304,219
                               

Second Lien Secured Debt – 44.7%

                   

BRAND ENERGY & INFRASTRUCTURE SERVICES, INC.

   02/07/2015    ENERGY / UTILITIES    11.10 %   L+600      11,600,000      11,244,938      10,672,000

BRAND ENERGY & INFRASTRUCTURE SERVICES, INC.

   02/07/2015    ENERGY / UTILITIES    12.00 %   L+700      12,000,000      11,645,602      11,460,000

GENERICS INTERNATIONAL (U.S.), INC.

   05/19/2015    HEALTHCARE, EDUCATION & CHILDCARE    12.33 %   L+750      12,000,000      11,941,028      11,940,000

PERFORMANCE, INC.

   07/02/2013    LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT    10.66 %   L+575      8,750,000      8,750,000      8,570,625

QUESTEX MEDIA GROUP, INC.

   11/04/2014    OTHER MEDIA    11.63 %   L+650      10,000,000      10,000,000      9,750,000

SAINT ACQUISITION CORP.(5)

   05/15/2015    TRANSPORTATION    12.62 %   L+775      10,000,000      9,937,031      5,162,500

SAINT ACQUISITION CORP.(5)

   05/15/2017    TRANSPORTATION    12.50 %   —        19,000,000      16,290,019      9,808,750

SHERIDAN HOLDINGS, INC.

   06/15/2015    HEALTHCARE, EDUCATION & CHILDCARE    10.97 %*   L+575      12,500,000      11,765,679      11,640,625

SPECIALIZED TECHNOLOGY RESOURCES, INC.

   12/15/2014    CHEMICAL, PLASTICS & RUBBER    11.85 %*   L+700      22,500,000      22,484,193      22,275,000

TRANSFIRST HOLDINGS, INC.

   06/15/2015    BUSINESS SERVICES    10.83 %*   L+600      13,000,000      12,889,791      12,220,000
                               

Total Second Lien Secured Debt

                131,350,000      126,948,281      113,499,500
                               

SEE NOTES TO FINANCIAL STATEMENTS

 

5


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2007

(UNAUDITED)

 

Issuer name(1)

   Maturity    Industry    Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Shares    Cost    Value(2)

COMMON EQUITY** – 2.6%

                   

VSS-AHC HOLDINGS, L.L.C.

   —      OTHER MEDIA    —       —        3,000    $ 3,000,000    $ 3,170,325

PERFORMANCE HOLDINGS, INC.

   —      LEISURE, AMUSEMENT,
MOTION PICTURES,
ENTERTAINMENT
   —       —        37,500      3,750,000      3,434,606
                               

Total Common Equity

                40,500      6,750,000      6,604,931
                               

First Lien Secured Debt – 58.5%

                   
                          Par          

BERRY PLASTICS GROUP, INC.

   04/03/2015    CONTAINERS,
PACKAGING & GLASS
   7.16 %   L+200    $ 7,443,750      7,443,750      6,943,366

BRAND ENERGY & INFRASTRUCTURE SERVICES, INC.

   02/07/2014    ENERGY / UTILITIES    7.14 %   L+225      1,985,000      1,985,000      1,872,516

BURLINGTON COAT FACTORY WAREHOUSE CORP.

   05/28/2013    RETAIL STORE    7.32 %   L+225      7,896,473      7,887,934      6,931,350

CHARTER COMMUNICATIONS OPERATING, L.L.C.

   03/06/2014    CABLE TELEVISION    6.99 %   L+200      15,000,000      14,993,023      14,001,930

COHR HOLDINGS, INC.

   01/31/2013    HEALTHCARE,
EDUCATION &
CHILDCARE
   7.58 %   L+250      2,977,500      2,977,500      2,084,250

GATEHOUSE MEDIA OPERATING, INC.

   08/28/2014    MEDIA    7.12 %   L+200      7,000,000      7,000,000      5,957,000

GENERAL NUTRITION CENTERS, INC.

   09/16/2013    RETAIL STORE    7.26 %   L+225      6,451,250      6,455,120      5,889,991

GREATWIDE LOGISTICS SERVICES, INC.

   12/19/2013    CARGO TRANSPORT    8.33 %   L+350      6,930,000      6,930,000      5,725,913

HANLEY-WOOD, L.L.C.

   03/08/2014    OTHER MEDIA    7.48 %   L+225      8,955,000      8,955,000      7,141,613

HAWKER BEECHCRAFT, INC.

   03/28/2014    AEROSPACE &
DEFENSE
   6.78 %   L+200      1,986,170      1,986,170      1,884,379

HEALTH MANAGEMENT ASSOCIATES, INC.

   02/28/2014    HEALTHCARE,
EDUCATION &
CHILDCARE
   6.58 %   L+175      9,925,000      9,925,000      9,241,277

HUGHES NETWORK SYSTEMS, L.L.C.

   04/15/2014    TELECOMMUNICATIONS    7.56 %   L+250      5,000,000      5,000,000      4,425,000

SEE NOTES TO FINANCIAL STATEMENTS

 

6


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2007

(UNAUDITED)

 

Issuer name(1)

   Maturity   

Industry

   Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)
First Lien Secured Debt – (Continued)                    

JACUZZI BRANDS CORP.

   02/07/2014    HOME & OFFICE FURNISHINGS, HOUSEWARES, & DURABLE CONSUMER PRODUCTS    7.12 %   L+225    $ 9,963,514    $ 9,963,514    $ 8,678,220

LEVLAD, L.L.C.

   03/08/2014    CONSUMER PRODUCTS    7.18 %   L+225      4,842,920      4,842,920      3,819,853

LONGVIEW POWER, L.L.C.

   02/28/2014    UTILITIES    7.18 %   L+225      2,516,000      2,516,000      2,418,505

LONGVIEW POWER, L.L.C. (4)

   02/28/2014    UTILITIES    —       —        484,000      484,000      465,245

MACH GEN, L.L.C.

   02/22/2014    UTILITIES    6.98 %   L+200      3,963,750      3,962,534      3,741,780

MATTRESS HOLDING CORP.

   01/18/2014    HOME & OFFICE FURNISHINGS, HOUSEWARES, & DURABLE CONSUMER PRODUCTS    7.40 %   L+225      3,980,025      3,980,025      3,383,021

MITCHELL INTERNATIONAL, INC.

   03/28/2014    BUSINESS SERVICES    6.84 %   L+200      3,970,000      3,970,000      3,662,325

NATIONAL BEDDING CO., L.L.C.

   08/31/2011    HOME & OFFICE FURNISHINGS, HOUSEWARES, & DURABLE CONSUMER PRODUCTS    8.01 %   L+200      6,947,500      6,953,725      6,264,331

PENTON MEDIA, INC.

   02/01/2013    OTHER MEDIA    7.23 %   L+225      4,962,500      4,962,500      4,478,656

PHILOSOPHY, INC.

   03/16/2014    CONSUMER PRODUCTS    6.98 %   L+200      1,485,867      1,485,867      1,292,704

QUESTEX MEDIA GROUP, INC.

   05/04/2014    OTHER MEDIA    8.03 %   L+300      4,961,667      4,961,667      4,788,008

READERS DIGEST ASSOCIATION, INC.

   03/02/2014    PRINTING & PUBLISHING    7.36 %   L+200      995,003      995,003      898,819

REXNORD , L.L.C.

   07/19/2013    MANUFACTURING/ BASIC INDUSTRIES    7.40 %   L+225      4,937,500      4,937,500      4,783,203

SITEL, L.L.C.

   01/30/2014    BUSINESS SERVICES    7.29 %   L+250      2,867,302      2,867,302      2,559,067

UNIVISION COMMUNICATIONS INC.

   09/29/2014    BROADCASTING & ENTERTAINMENT    7.21 %   L+225      14,496,644      14,496,644      13,197,991

UNIVISION COMMUNICATIONS INC.(4)

   09/29/2014    BROADCASTING & ENTERTAINMENT    —       —        503,356      503,356      458,264

VALASSIS COMMUNICATIONS, INC.

   03/02/2014    PRINTING & PUBLISHING    6.58 %   L+175      6,713,768      6,713,768      6,310,942

SEE NOTES TO FINANCIAL STATEMENTS

 

7


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2007

(UNAUDITED)

 

Issuer name(1)

   Maturity   

Industry

   Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)  
First Lien Secured Debt – (Continued)                    

VALASSIS COMMUNICATIONS, INC.(4)

   03/02/2014    PRINTING & PUBLISHING    —       —      $ 2,103,908    $ 2,103,908    $ 1,977,674  

WESTERN REFINING, INC.

   05/30/2014    OIL & GAS    6.60 %   L+175      3,695,714      3,695,714      3,504,769  
                                 

Total First Lien Secured Debt

                165,941,081      165,934,444      148,781,962  
                                 

TOTAL INVESTMENTS – 134.6%

                 $ 382,162,705    $ 342,190,612  
                             

Cash Equivalents – 32.2%

                   

U.S. TREASURY BILL

   03/27/2008       3.14 %   —      $ 80,000,000    $ 79,406,889    $ 79,399,360  

MONEY MARKET – MUTUAL FUNDS

         —       —        2,381,330      2,381,330      2,381,330  
                                 

Total Cash Equivalents

              $ 82,381,330    $ 81,788,219    $ 81,780,690  
                                 

Total Investments and Cash Equivalents

                 $ 463,950,924    $ 423,971,302  
                             

Liabilities in Excess of Other Assets – (66.8%)

                      (169,749,994 )
                         

Net Assets – 100.0%

                    $ 254,221,308  
                         

 

(1) We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be deemed to be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
(2) Valued based on our accounting policy (see note 2 to our financial statements).
(3) Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offer Rate (LIBOR, or, “L”).
(4) Represents purchases of securities with delayed draws. These securities do not have a basis point spread above index.
(5) Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
* Coupon payable in cash or payment in kind.
** Non-income producing.

SEE NOTES TO FINANCIAL STATEMENTS

 

8


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2007

 

Issuer name(1)

   Maturity   

Industry

   Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)

Subordinated Debt / Corporate Notes – 21.2%

                   

ADVANSTAR, INC.

   11/30/2015    OTHER MEDIA    12.20 %*   L+700    $ 14,580,690    $ 14,580,690    $ 14,580,690

AFFINION GROUP HOLDINGS, INC.

   03/01/2012    CONSUMER PRODUCTS    11.68 %*   L+625      18,500,000      18,106,103      17,760,000

PERFORMANCE HOLDINGS, INC.

   07/02/2014    LEISURE, AMUSEMENT, MOTION PICTURES & ENTERTAINMENT    14.25 %*   —        3,837,578      3,592,573      3,837,578

REALOGY CORP.(5)

   04/15/2015    BUILDINGS & REAL ESTATE    12.38 %   —        28,000,000      26,117,780      21,140,000
                               

Total Subordinated Debt / Corporate Notes

                64,918,268      62,397,146      57,318,268
                               

Second Lien Secured Debt – 25.0%

                   

PERFORMANCE, INC.

   07/02/2014    LEISURE, AMUSEMENT, MOTION PICTURES & ENTERTAINMENT    11.11 %   L+575      8,750,000      8,750,000      8,750,000

QUESTEX MEDIA GROUP, INC.

   11/04/2014    OTHER MEDIA    12.08 %   L+650      10,000,000      10,000,000      9,800,000

SAINT ACQUISITION CORP.(5)

   05/15/2015    TRANSPORTATION    13.31 %   L+775      10,000,000      9,932,321      6,800,000

SAINT ACQUISITION CORP.(5)

   05/15/2017    TRANSPORTATION    12.50 %   —        19,000,000      16,198,167      12,730,000

SPECIALIZED TECHNOLOGY RESOURCES, INC.

   12/15/2014    CHEMICAL, PLASTICS & RUBBER    12.13 %   L+700      17,500,000      17,493,750      17,237,500

TRANSFIRST HOLDINGS, INC.

   06/15/2015    BUSINESS SERVICES    11.30 %*   L+600      13,000,000      12,886,250      12,431,250
                               

Total Second Lien Secured Debt

                78,250,000      75,260,488      67,748,750
                               
                           Shares          

COMMON EQUITY**2.6%

                   

VSS-AHC HOLDINGS, L.L.C.

   —      OTHER MEDIA    —       —        3,000      3,000,000      3,269,685

PERFORMANCE HOLDINGS, INC.

   —      LEISURE, AMUSEMENT, MOTION PICTURES & ENTERTAINMENT    —       —        37,500      3,750,000      3,750,000
                               

Total Common Equity

                40,500      6,750,000      7,019,685
                               

SEE NOTES TO FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2007

 

Issuer name(1)

   Maturity    Industry    Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)

First Lien Secured Debt – 58.8%

                   

BERRY PLASTICS GROUP, INC.

   04/03/2015    CONTAINERS,
PACKAGING & GLASS
   7.34 %   L+200    $ 7,462,500    $ 7,462,500    $ 7,274,602

BURLINGTON COAT FACTORY WAREHOUSE CORP.

   05/28/2013    RETAIL STORE    7.76 %   L+225      7,896,473      7,887,537      7,571,975

CHARTER COMMUNICATIONS OPERATING, L.L.C.

   03/06/2014    CABLE TELEVISION    7.13 %   L+200      15,000,000      14,992,740      14,468,310

COHR HOLDINGS, INC.

   01/31/2013    HEALTH CARE,
EDUCATION &
CHILDCARE
   8.04 %   L+250      2,985,000      2,985,000      2,388,000

FR BRAND ACQUISITION CORP.

   02/07/2014    ENERGY / UTILITIES    7.53 %   L+225      1,990,000      1,990,000      1,887,183

GATEHOUSE MEDIA OPERATING, INC.

   08/28/2014    MEDIA    7.47 %   L+200      7,000,000      7,000,000      6,405,000

GENERAL NUTRITION CENTERS, INC.

   09/16/2013    RETAIL STORE    7.61 %   L+225      6,483,750      6,487,788      6,147,405

GREATWIDE LOGISTICS SERVICES, INC.

   12/19/2013    CARGO TRANSPORT    8.70 %   L+350      6,947,500      6,947,500      6,079,062

HANLEY-WOOD, L.L.C.

   03/08/2014    OTHER MEDIA    7.60 %   L+225      9,000,000      9,000,000      7,845,003

HAWKER BEECHCRAFT, INC.

   03/28/2014    AEROSPACE &
DEFENSE
   7.21 %   L+200      1,990,780      1,990,780      1,930,226

HEALTH MANAGEMENT ASSOCIATES, INC.

   02/28/2014    HEALTH CARE,
EDUCATION &
CHILDCARE
   6.95 %   L+175      9,950,000      9,950,000      9,441,615

HUGHES NETWORK SYSTEMS, L.L.C.

   04/15/2014    TELECOMMUNICATIONS    8.06 %   L+250      5,000,000      5,000,000      4,625,000

JACUZZI BRANDS CORP.

   02/07/2014    HOME & OFFICE
FURNISHINGS, HOUSE
WARES & DURABLES
   7.44 %   L+225      9,963,514      9,963,514      8,947,235

LEVEL 3 FINANCING, INC.

   03/13/2014    TELECOMMUNICATIONS    7.61 %   L+225      2,000,000      2,000,000      1,939,642

LEVLAD, L.L.C.

   03/08/2014    CONSUMER PRODUCTS    7.58 %   L+225      4,842,920      4,842,920      3,357,757

LONGVIEW POWER, L.L.C.

   02/28/2014    UTILITIES    7.56 %   L+225      2,020,000      2,020,000      1,939,200

LONGVIEW POWER, L.L.C.(4)

   02/28/2014    UTILITIES    —       —        980,000      980,000      940,800

MACH GEN, L.L.C.

   02/22/2014    UTILITIES    7.34 %   L+200      3,972,813      3,971,545      3,845,683

SEE NOTES TO FINANCIAL STATEMENTS

 

10


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2007

 

Issuer name(1)

   Maturity    Industry    Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)

First Lien Secured Debt – (Continued)

                   

MATTRESS HOLDING CORP.

   01/18/2014    HOME & OFFICE
FURNISHINGS,
HOUSE WARES &
DURABLES
   7.61 %   L+225    $ 3,990,000    $ 3,990,000    $ 3,740,625

MCJUNKIN CORP.

   01/31/2014    OIL & GAS    7.45 %   L+225      982,525      982,525      965,331

MITCHELL INTERNATIONAL, INC.

   03/28/2014    BUSINESS
SERVICES
   7.20 %   L+200      3,980,000      3,980,000      3,835,725

NATIONAL BEDDING CO., L.L.C.

   08/31/2011    HOME & OFFICE
FURNISHINGS,
HOUSE WARES &
DURABLES
   7.43 %   L+200      6,965,000      6,971,653      6,668,988

PENTON MEDIA, INC.

   02/01/2013    OTHER MEDIA    7.59 %   L+225      4,975,000      4,975,000      4,716,922

PHILOSOPHY, INC.

   03/16/2014    CONSUMER
PRODUCTS
   7.36 %   L+200      1,493,333      1,493,333      1,344,000

PROQUEST CSA, L.L.C.

   02/09/2014    EDUCATION    8.20 %   L+300      955,833      955,833      936,716

QUESTEX MEDIA GROUP, INC.

   05/04/2014    OTHER MEDIA    8.56 %   L+300      4,974,167      4,974,167      4,839,742

READERS DIGEST ASSOCIATION, INC.

   03/02/2014    PRINTING &
PUBLISHING
   7.43 %   L+200      995,006      995,006      940,281

REXNORD , L.L.C.

   07/19/2013    MANUFACTURING/
BASIC
INDUSTRIES
   7.64 %   L+225      4,937,500      4,937,500      4,835,664

SITEL, L.L.C.

   01/30/2014    BUSINESS
SERVICES
   7.78 %   L+250      2,867,302      2,867,302      2,680,927

UNIVISION COMMUNICATIONS, INC.

   09/29/2014    BROADCASTING &
ENTERTAINMENT
   7.57 %   L+225      14,093,960      14,093,960      13,389,262

UNIVISION COMMUNICATIONS, INC. (4)

   09/29/2014    BROADCASTING &
ENTERTAINMENT
   —       —        906,040      906,040      860,738

VALASSIS COMMUNICATIONS, INC.

   03/02/2014    PRINTING &
PUBLISHING
   6.95 %   L+175      7,061,899      7,061,899      6,549,911

VALASSIS COMMUNICATIONS, INC. (4)

   03/02/2014    PRINTING &
PUBLISHING
   —       —        2,103,908      2,103,908      1,951,375

WESTERN REFINING, INC.

   05/30/2014    OIL & GAS    6.88 %   L+175      3,714,286      3,714,286      3,640,000
                               

Total First Lien Secured Debt

                170,481,009      170,474,236      158,929,905
                               

TOTAL INVESTMENTS – 107.6%

                 $ 314,881,870    $ 291,016,608
                           

SEE NOTES TO FINANCIAL STATEMENTS

 

11


Table of Contents

PENNANTPARK INVESTMENT COPRORATION

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2007

 

Issuer name(1)

   Maturity    Industry    Current
Coupon
    Basis
Point
Spread
Above
Index (3)
   Par    Cost    Value(2)  

Cash Equivalents – 95.4%

                   

U.S. TREASURY BILL

   12/27/2007       3.64 %   —      $ 255,000,000    $ 252,759,931    $ 252,703,215  

MONEY MARKET – MUTUAL FUNDS

         —       —        5,256,420      5,256,420      5,256,420  
                                 

Total Cash Equivalents – 95.4%

                260,256,420      258,016,351      257,959,635  
                                 

Total Investments and Cash Equivalents

              $ 573,946,197    $ 572,898,221    $ 548,976,243  
                                 

Liabilities in Excess of Other Assets – (103.0%)

                      (278,583,149 )
                         

Net Assets – 100.0%

                    $ 270,393,094  
                         

 

(1) We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be deemed to be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
(2) Valued based on our accounting policy (see note 2 to our financial statements).
(3) Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offer Rate (LIBOR, or, “L”).
(4) Represents purchases of securities with delayed draws. These securities do not have a basis point spread above index.
(5) Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
* Coupon payable in cash or payment in kind.
** Non-income producing.

SEE NOTES TO FINANCIAL STATEMENTS

 

12


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007

(UNAUDITED)

1. ORGANIZATION

PennantPark Investment Corporation (“PennantPark Investment” or “Company”) was organized as a Maryland corporation on January 11, 2007. PennantPark Investment’s objective is to generate both current income and capital appreciation through debt and equity investments. PennantPark Investment invests primarily in U.S. middle-market companies in the form of mezzanine debt, first lien secured debt and equity investments. Before the completion of its initial public offering on April 24, 2007, PennantPark Investment had limited operations other than the sale and issuance of 80,000 shares of common stock at a price of $15.00 per share to PennantPark Investment Advisers, LLC (the “Investment Adviser” or “PennantPark Investment Advisers”), resulting in net proceeds of $1.2 million, and the purchase of first lien secured debt.

On April 24, 2007 PennantPark Investment closed its Initial Public Offering and sold 20,000,000 shares of common stock at a price of $15.00 per share, resulting in net proceeds of $279.6 million. Also, on April 24, 2007 PennantPark Investment closed a private placement to officers, directors, the investment adviser and managers of the Investment Adviser, pursuant to Regulation D promulgated under the Securities Act of 1933, and issued an additional 320,000 shares of common stock at a price of $15.00 per share, resulting in net proceeds of $4.8 million. On May 21, 2007, the underwriters of the initial public offering exercised their over-allotment option under the Underwriting Agreement and elected to purchase 625,000 shares of common stock at a price of $15.00 per share, resulting in net proceeds of $8.8 million.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Actual results could differ from these estimates.

The financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X under the Exchange Act, we are providing a Statement of Changes in Net Assets in lieu of a Statement of Changes in Stockholders’ Equity.

The significant accounting policies consistently followed by PennantPark Investment are:

 

  (a) Security transactions are recorded on a trade-date basis. Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two broker/dealers if available, otherwise by a principal market maker or a primary market dealer. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Subordinated debt, first lien secured debt and other debt securities with maturities greater than 60 days generally are valued by an independent pricing service or at the bid prices from at least two broker/dealers (if available, otherwise by a principal market maker or a primary market dealer). We expect that there will not be readily available market values for many of the investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process. With respect to investments for which there is no readily available market value, valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private securities to peer companies that are public. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available or are readily available but are believed to be inaccurate, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

  (1) Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

  (2) Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

13


Table of Contents
  (3) Our board of directors also engages one or more independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but believed to be inaccurate. The independent valuation firm reviews management’s preliminary valuations in light of its own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker.

 

  (4) The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and that of the independent valuation firms and responds and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

  (5) The board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firms and the audit committee.

The factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.

 

(b) Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates value.

 

(c) We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

 

(d) We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual payment-in-kind, or “PIK,” interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on the ex-dividend date.

 

(e) Before May 1, 2007 PennantPark Investment was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”), and subject to corporate-level federal, state and local taxes. From May 1, 2007, PennantPark Investment has complied with the requirements of Subchapter M of the Code, and expects to be subject to tax as a regulated investment company, or “RIC”. As a corporation, PennantPark Investment accounted for income taxes using the asset liability method prescribed by FASB Statement No. 109, “Accounting for Income Taxes.” Under this method, income taxes were provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Federal, state and local taxes of $105,880 were accrued and included in PennantPark Investment’s statement of operations for the year ended September 30, 2007. These amounts were paid to the tax authorities in December 2007. Based upon PennantPark Investment’s qualification and election to be subject to tax as a RIC as of its next taxable year-end, we do not anticipate any material taxes in the future. The Company recognizes in its financial statements the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.

 

(f) Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any to be paid as a dividend is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually.

 

(g) In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, PennantPark Investment is in the process of reviewing SFAS 157 against its valuation policies to determine future applicability.

 

(h)

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value. This statement applies to all reporting entities, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election.

 

14


Table of Contents
 

This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this statement to have a significant effect on the Company’s financial position or its result of operations.

3. AGREEMENTS

PennantPark Investment has entered into an Investment Management Agreement with PennantPark Investment Advisers, LLC under which the Investment Adviser, subject to the overall supervision of PennantPark Investment’s board of directors, manages the day-to-day operations of and provides investment advisory services to, PennantPark Investment. For providing these services, the Investment Adviser receives a fee from PennantPark Investment, consisting of two components—a base management fee and an incentive fee (collectively, “Management Fees”).

The base management fee is calculated at an annual rate of 2.00% on PennantPark Investment’s gross assets (net of U.S. Treasury Bills (“adjusted gross assets”)) (see note 9). Although the base management fee is 2.00% of adjusted gross assets, the Investment Adviser has agreed to waive a portion of the base management fee such that the base management fee will equal 1.50% from the consummation of the initial public offering through September 30, 2007; 1.75% from October 1, 2007 through March 31, 2008; and 2.00% thereafter. For the period from the commencement of operations to the consummation of the initial public offering there were no Management Fees. For services rendered under the Investment Management Agreement during the period commencing from the closing of the initial public offering through and including the first six months of operations, the base management fee is payable monthly in arrears. For services rendered under the Investment Management Agreement after that time, the base management fee will be payable quarterly in arrears. For the first quarter of operations, the base management fee was calculated based on the initial value of adjusted gross assets. Subsequently, the base management fee is calculated based on the average value of adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base investment advisory fees for any partial month or quarter are appropriately pro rated. For the three months ended December 31, 2007, the Adviser received a base management fee of $1.4 million from the Company.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on PennantPark Investment’s Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, distribution income and any other income, including any other fees other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies accrued during the calendar quarter, minus PennantPark Investment’s operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with deferred interest feature (such as original issue discount, debt instruments with pay in kind interest and zero coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of PennantPark Investment’s net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). PennantPark Investment pays the Investment Adviser an incentive fee with respect to PennantPark Investment’s Pre-Incentive Fee Net Investment Income in each calendar quarter as follows:

(1) no incentive fee in any calendar quarter in which PennantPark Investment’s Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%; (2) 100% of PennantPark Investment’s Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and (3) 20% of the amount of PennantPark Investment’s Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date), commencing on December 31, 2007, and equals 20.0% of PennantPark Investment’s realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. However, the incentive fee determined as of December 31, 2007 will be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation from inception. For the three months ended December 31, 2007, the Adviser received an Incentive Fee of approximately $447,000 from the Company.

PennantPark Investment has also entered into an Administration Agreement with PennantPark Investment Administration, LLC (the “Administrator” or “PennantPark Investment Administration”) under which PennantPark Investment Administration provides administrative services for PennantPark Investment. For providing these services, facilities and personnel, PennantPark Investment reimburses the Administrator for PennantPark Investment’s allocable portion of overhead and other expenses incurred by the

 

15


Table of Contents

Administrator in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and PennantPark Investment’s allocable portion of the costs of the compensation and related expenses for its chief compliance officer, chief financial officer and their respective staffs. The Administrator also provides on PennantPark Investment’s behalf managerial assistance to portfolio companies to which PennantPark Investment is required to provide such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the statement of operations. For the three months ended December 31, 2007, the Investment Adviser was reimbursed approximately $594,000 from the Company, including expenses it incurred on behalf of the Administrator, for services described above.

4. ORGANIZATIONAL AND OFFERING EXPENSES

A portion of the net proceeds of the Company’s initial public offering was used for organizational, offering and other expenses. Organizational expenses were treated as expenses incurred. Offering costs of $21,309,375 were charged to net assets after the completion of the initial public offering on April 24, 2007.

5. NET ASSET VALUE PER SHARE

On December 31, 2007, PennantPark Investment’s total net assets and net asset value per share were $254,221,308 and $12.07, respectively.

6. EARNINGS PER SHARE

The following information sets forth the computation of basic and diluted per share net decrease in net assets resulting from operations:

 

     Three Months Ended
December 31,2007
 

Numerator for net decrease in net assets per share resulting from operations:

   $ (11,536,656 )

Denominator for basic and diluted weighted average shares:

     21,068,772  

Basic and diluted net decrease in net assets per share resulting from operations:

   $ (0.54 )

7. INVESTMENTS

Purchases and sales/repayments of long-term investments for the three months ended December 31, 2007 totaled $71.5 million and $4.4 million, respectively.

Investments and cash equivalents consisted of the following:

 

     December 31, 2007    September 30, 2007
     Cost    Fair Value    Cost    Fair Value

Cash equivalents

   $ 81,788,219    $ 81,780,690    $ 258,016,351    $ 257,959,635

First lien

     165,934,444      148,781,962      170,474,236      158,929,905

Second lien

     126,948,281      113,499,500      75,260,488      67,748,750

Subordinated debt/corporate notes

     82,529,980      73,304,219      62,397,146      57,318,268

Common stock

     6,750,000      6,604,931      6,750,000      7,019,685
                           

Total

   $ 463,950,924    $ 423,971,302    $ 572,898,221    $ 548,976,243
                           

The cost represents the original cost adjusted for the accretion of discounts and amortization of premiums on debt investments, if any.

 

16


Table of Contents

The table below describes investments by industry classification and enumerates the percentage, by market value, of the total portfolio assets (excluding cash equivalents) in such industries as of December 31, 2007 and September 30, 2007.

 

Industry Classification

   December 31,
2007
    September 30,
2007
 

Other Media

   13 %   15 %

Healthcare, Education & Childcare

   10     4  

Chemical, Plastics & Rubber

   7     6  

Energy/Utilities

   7     0  

Auto Sector

   6     0  

Consumer Products

   6     8  

Buildings and Real Estate

   5     7  

Business Services

   5     7  

Home and Office Furnishings, Housewares, & Durable Consumer Products

   5     7  

Leisure, Amusement, Motion Pictures, Entertainment

   5     6  

Broadcasting and Entertainment

   4     5  

Cable Television

   4     5  

Retail Store

   4     5  

Transportation

   4     7  

Printing and Publishing

   3     3  

Cargo Transport

   2     2  

Containers, Packaging and Glass

   2     2  

Media

   2     2  

Utilities

   2     2  

Manufacturing / Basic Industries

   1     2  

Oil and Gas

   1     2  

Telecommunications

   1     2  

Other

   1     1  
            

Total Investments

   100 %   100 %
            

8. CASH EQUIVALENTS

Pending investment in longer-term portfolio holdings, PennantPark Investment may invest temporarily in U.S. Treasury Bills (of varying maturities), repurchase agreements, money markets or repo-like treasury securities. These temporary investments with maturities of 90 days or less will be deemed cash equivalents and are included in the Schedule of Investments. At the end of each fiscal quarter, PennantPark Investment typically takes proactive steps to preserve investment flexibility for the next quarter, which is dependent upon the composition of its total assets at quarter end. PennantPark Investment may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out its positions on a net cash basis after quarter-end or by utilizing repurchase agreements or other balance sheet transactions as it deems appropriate for this purpose. These amounts are excluded from adjusted gross assets for purposes of computing management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are marked-to-market consistent with PennantPark Investment’s valuation policy.

9. REPURCHASE AGREEMENTS

PennantPark Investment may enter into repurchase agreements as part of its investment program. In these transactions, PennantPark Investment’s custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default of the obligor to repurchase, PennantPark Investment will have the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. There were no repurchase agreements outstanding at December 31, 2007.

 

17


Table of Contents

10. FINANCIAL HIGHLIGHTS

Per Share Data:

 

     Three months ended
December 31, 2007
    Period from January 11,
2007 (inception) through
September 30, 2007
 

Net asset value, beginning of period

   $ 12.83     $ 0.00  

Net investment income

     0.23       0.35  

Net realized and unrealized loss

     (0.77 )     (1.15 )
                

Net decrease in net assets resulting from operations

     (0.54 )     (0.80 )

Dividends and distributions to stockholders(1)

     (0.22 )     (0.36 )

Offering costs related to public offering

     —         (1.01 )

Issuance of common stock

     —         15.00  
                

Net asset value, end of period

   $ 12.07     $ 12.83  
                

Per share market value, end of period

   $ 10.02     $ 13.40  

Total return(2)*

     (23.58 )%     (8.29 )%

Shares outstanding at end of period

     21,068,772       21,068,772  

Ratio/Supplemental Data:

    

Ratio of operating expenses to average net assets**(3)

     4.79 %     3.76 %(4)

Ratio of credit facility related expenses to average net assets**

     1.65 %     1.50 %(4)
                

Total expenses to average net assets**(3)

     6.44 %     5.26 %(4)
                

Ratio of net investment income to average net assets**

     7.13 %     5.96 %(4)

Net assets at end of period

   $ 254,221,308     $ 270,393,094  

Average debt outstanding

   $ 59,038,043     $ 817,610 (4)

Average debt per share

   $ 2.80     $ 0.04 (4)

Portfolio turnover ratio**

     5.5 %     62.2 %

 

* Not annualized
** Annualized
(1) Dividends and distributions are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under accounting principles generally accepted in the United States of America, or GAAP
(2) Total return is based on the change in market price per share during the period and takes into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan.
(3) For the three months ended December 31, 2007, the ratio of operating expenses before management fee waiver to average net assets was 5.10%, and the ratio of total expenses before management fee waiver to average net assets was 6.75%. For the period from April 24, 2007 through September 30, 2007, the ratio of operating expenses before management fee waiver to average net assets was 4.28%, and the ratio of total expenses before management fee waiver to average net assets was 5.78%.
(4) Since inception of initial public offering on April 24, 2007.

11. CREDIT FACILITY

On June 25, 2007, PennantPark Investment entered into a Senior Secured Revolving Credit Agreement (the “Credit Agreement”) among PennantPark Investment, various lenders and SunTrust Bank, as administrative agent for the lenders. SunTrust Robinson Humphrey Capital Markets acted as the joint lead arranger and book-runner, and Bear Stearns Corporate Lending Inc. acted as joint lead arranger and syndication agent. As of December 31, there was $91.5 million in outstanding borrowings under the Credit Agreement, with an average interest rate of 5.90%.

Under the Credit Agreement, the lenders agreed to extend credit to PennantPark Investment in an initial aggregate principal or face amount not exceeding $300,000,000 at any one time outstanding. The Credit Agreement is a five-year revolving facility (with a stated maturity date of June 25, 2012) and is secured by substantially all of the assets in PennantPark Investment’s portfolio. Pricing is set at 100 basis points over LIBOR.

 

18


Table of Contents

The Credit Agreement contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintenance of a minimum stockholders’ equity of the greater of (i) 40% of the total assets of PennantPark Investment and its subsidiaries as at the last day of any fiscal quarter and (ii) the sum of (A) $120,000,000 plus (B) 25% of the net proceeds from the sale of equity interests in PennantPark Investment and its subsidiaries after the closing date of the Credit Agreement, (c) maintenance of a ratio of total assets (less total liabilities other than indebtedness) to total indebtedness, in each case of PennantPark Investment, of not less than 2.0:1.0, (d) maintenance of minimum liquidity standards, (e) limitations on the incurrence of additional indebtedness, (f) limitations on liens, (g) limitations on fundamental corporate changes, (h) limitations on investments (other than PennantPark Investment’s portfolio investments and certain other ordinary course investments), (i) limitations on payments and distributions (other than distributions to PennantPark Investment’s stockholders as contemplated to maintain Regulated Investment Company status), (j) limitations on transactions with affiliates, (k) limitations on engaging in business not contemplated by PennantPark Investment’s investment objectives, and (l) limitations on the creation or existence of agreements that prohibit liens on properties of PennantPark Investment and its subsidiaries. In addition to the asset coverage ratio described in clause (c) of the preceding sentence, borrowings under the Credit Agreement (and the incurrence of certain other permitted debt) will be subject to compliance with a borrowing base that will apply different advance rates to different types of assets in PennantPark Investment’s portfolio. See our Credit Agreement, Exhibit 10.5, to this Report (incorporated by reference), for the definitions of capitalized terms used by us relating to the Credit Agreement but not defined in this note. The Credit Agreement will be used to supplement our equity capital to make additional portfolio investments and for other general corporate purposes.

12. COMMITMENTS AND CONTINGENCIES

From time to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded debt investments described in the statement of assets and liabilities represent unfunded delayed draws on investments in first lien secured debt.

 

19


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

PennantPark Investment Corporation

We have reviewed the accompanying statement of assets and liabilities of PennantPark Investment Corporation (the “Company”), including the schedule of investments, as of December 31, 2007, and the related statements of operations, changes in net assets and cash flows for the three month period then ended. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of assets and liabilities of PennantPark Investment Corporation, including the schedule of investments, as of September 30, 2007, and the related consolidated statements of operations, changes in net assets and cash flows for the period from January 11, 2007 (inception) through September 30, 2007; and in our report dated December 12, 2007, we expressed an unqualified opinion on those consolidated financial statements.

LOGO

New York, New York

February 8, 2008

 

20


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

FORWARD-LOOKING STATEMENTS

This Report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our prospective portfolio companies;

 

   

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

 

   

the impact of investments that we expect to make;

 

   

our contractual arrangements and relationships with third parties;

 

   

the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

   

the ability of our prospective portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital;

 

   

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

 

   

the ability of our Investment Adviser to locate suitable investments for us and to monitor and administer our investments.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks” and similar expressions to identify forward-looking statements. Undue influence should not be placed on the forward looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in our preliminary prospectus entitled “Risk Factors” and elsewhere.

We have based the forward-looking statements included in this Report on information available to us on the date of this Report, 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 in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, Reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this report.

OVERVIEW

PennantPark Investment was organized under the Maryland General Corporation Law in January 2007. We are an externally managed, closed-end, non-diversified investment company that has elected to be treated as a business development company under the 1940 Act. As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

Our investment activities are managed by PennantPark Investment Advisers and supervised by our board of directors, a majority of whom are independent of us and PennantPark Investment Advisers. Under our Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our adjusted gross assets as well as an incentive fee based on our investment performance. We have also entered into an Administration Agreement with PennantPark Investment Administration. Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs.

Investments

Our investment objectives are to generate both current income and capital appreciation through debt and equity investments primarily in U.S. middle-market private companies. We invest primarily in U.S. middle-market private companies in

 

21


Table of Contents

the form of mezzanine debt, senior secured loans and equity investments, such as preferred stock, common stock, warrants or options received in connection with our debt investments or through direct investments. From time to time, we may also invest in public companies whose securities are thinly traded. We consider our core assets, by value and investment focus, to consist of subordinated debt, second lien secured debt and, to a lesser extent, equity investments.

The companies in which we invest are typically highly leveraged, often as a result of leveraged buy-outs or other recapitalization transactions, and, in most cases, are not rated by national rating agencies. If such companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under the Standard & Poor’s system) from the national rating agencies.

We expect that our investments in mezzanine debt, senior secured loans and other investments will range between $10 million and $50 million per portfolio company. We expect this investment size to vary proportionately with the size of our capital base.

The level of our investment activity in our core assets depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. Although we have used, and will continue to use, the proceeds of our initial public offering and of our credit facility, we anticipate that it will take us up to two years from the date of our initial public offering to invest all of our assets in accordance with our investment objectives. Any distributions we make during such period may be substantially lower than the distributions that we expect to pay when our portfolio is fully invested.

While our primary focus is to generate current income and capital appreciation through debt and equity investments in private or thinly traded public middle-market U.S. companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in high-yield bonds, distressed debt, and other securities of public companies whose securities are not thinly traded and securities of middle-market companies located outside of the U.S. and private equity. We expect that these public companies generally will issue debt securities that are non-investment grade.

Revenues

We generate revenue in the form of interest income on the debt securities we hold and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of mezzanine debt or senior secured loans, typically have a term of three to ten years and bear interest at a fixed or floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments provide for deferred interest payments or payment-in-kind (PIK). The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recorded on the ex-dividend date.

Expenses

Our primary operating expenses include the payment of management fees to our Investment Adviser, our allocable portion of overhead under the Administration Agreement and other operating costs as detailed below. Our management fee compensates our investment adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt we accrue under our credit facility. We bear all other costs and expenses of our operations and transactions, including:

 

   

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

 

   

the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

   

fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence and reviews of prospective investments;

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

federal and state registration fees and any stock exchange listing fees;

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

brokerage commissions;

 

   

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

 

22


Table of Contents
   

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

 

   

fees and expenses associated with independent audits and outside legal costs;

 

   

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

 

   

all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead, and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief compliance officer, chief financial officer and their respective staffs.

PORTFOLIO AND INVESTMENT ACTIVITY

As of December 31, 2007, our portfolio consisted of $73.3 million of subordinated debt, $113.5 million of second lien secured debt, $6.6 million of equity investments and $148.8 million of senior secured loans. Our core assets totaled $193.4 million and consisted of investments in twelve different companies with an average investment size of $16.1 million per company and a weighted average yield of 12.8% on the debt investments. On December 31, 2007, our senior secured loan portfolio totaled $148.8 million and consisted of twenty-eight different companies (including two companies also in our core portfolio) with an average investment size of $5.3 million, and a weighted average yield of 7.2%. The overall portfolio had a weighted average yield on debt investments of 10.4%. Due to continued erosion in quoted prices of leveraged finance instruments, the portfolio had unrealized depreciation of $40.0 million. For the three months ended December 31, 2007, we invested 71.0 million across three new and two existing portfolio companies with an average yield of 12.9% on the debt investments. Sales and repayments of long term investments for the three months ended December 31, 2007 totaled $4.4 million. On December 31, 2007, our portfolio consisted of thirty-eight companies and was invested 21% in subordinated debt, 33% in second lien secured debt, 2% in equity investments and 44% in senior secured loans.

As of September 30, 2007, our portfolio consisted of $57.3 million of subordinated debt, $67.8 million of second lien secured debt, $7.0 million of equity investments and $158.9 million of senior secured loans. Our core assets totaled $132.1 million and consisted of investments in eight different companies with an average investment size of $16.5 million per company and a weighted average yield of 13.0% on the debt investments. On September 30, 2007, our senior secured loan portfolio totaled $158.9 million and consisted of thirty-one different companies (including one company also in our core portfolio) with an average investment size of $5.3 million, and a weighted average yield of 7.5%. The overall portfolio had a weighted average yield on debt investments of 10.1%. Due to erosion in quoted prices of leveraged finance instruments, the portfolio had unrealized depreciation of $23.9 million. On September 30, 2007, our portfolio consisted of thirty-eight companies and was invested 20% in subordinated debt, 23% in second lien secured debt, 2% in equity investments and 55% in senior secured loans.

We anticipate that our level of investment activity will vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for our types of investments. Depending on these factors and owing to the substantial due diligence and structuring involved in negotiated investments in illiquid securities, we anticipate that it may take up to two years from the date of our initial public offering to invest all of our assets in accordance with our investment objectives. We will consider selling senior secured loans and/or drawing on our credit facility for liquidity purposes.

CRITICAL ACCOUNTING POLICIES

Our discussion of our financial condition and results of operation is based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we describe our critical accounting policies in the notes to our financial statements.

Valuation of Portfolio Investments

As a business development company, we generally invest in illiquid securities including debt and equity investments of middle-market companies. All of our investments are recorded using broker/dealers quotes, or at fair value as determined in good faith by our board of directors. Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from an independent pricing service or at the bid prices obtained from at least two broker/dealers if available, otherwise by a principal market maker or a primary market dealer. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Debt and equity investments that are not publicly traded or whose market prices are not

 

23


Table of Contents

readily available are valued at fair value as determined in good faith by or under the direction of our board of directors. Such determination of fair values involves subjective judgments and estimates. Investments purchased within 60 days of maturity will be valued at cost plus accreted discount, or minus amortized premium, which approximates value. With respect to unquoted securities, our board of directors, together with our independent third party valuation firms, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, our board uses the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because there are not always readily available markets for many of the investments in our portfolio, we value certain of our portfolio investments at fair value as determined in good faith by our board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available or are readily available but believed not to reflect the fair value of an investment, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

   

Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

   

Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

   

Our board of directors also engages one or more independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but believed not to reflect the fair value of an investment. The independent valuation firm reviews management’s preliminary valuations and its own independent assessment;

 

   

The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and that of the independent valuation firms and responds and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

   

The board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the independent valuation firms and the audit committee.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, is recognized on the ex-dividend date.

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

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment in Kind Interest

We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. For the Company to maintain its status as a RIC, this income must be paid out to stockholders in the form of dividends, even though the Company has not collected any cash.

Federal Income Taxes

We operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and intend to continue to do so. Accordingly, we are not subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. To qualify as a RIC, we are required to distribute at least 90% of our investment company taxable income as defined by the Code.

 

24


Table of Contents

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

RESULTS OF OPERATIONS

The overall leveraged finance credit market experienced a substantial downturn during the second half of 2007 has resulted in unrealized depreciation on most of our existing assets, slowing of new investment activity and in an improved risk/reward environment for new investments. We did not experience any compromised liquidity during the recent turmoil in the global credit markets because of our ability to sell our senior secured loans and availability under our credit facility.

Set forth below are the results of operations for the three months ended December 31, 2007.

Investment Income

Investment income of $9.0 million for the three months ended December 31, 2007 was primarily attributable to $4.2 million of interest income from senior secured loans investments, which had stated interest rates between 6.6% and 8.3% and a weighted average yield of 7.2%. We recorded interest income of $2.8 million from our second lien secured debt investments, which had stated interest rates between 10.7% and 12.6% and a weighted average yield of 12.4%. We recorded interest income of $1.7 million from our subordinated debt investments, which had stated interest rates between 11.7% and 14.3% and a weighted average yield of 13.4%. The remaining investment income was primarily attributable to interest income from short-term investments and to accretion of discount and amortization of premium.

Expenses

Net expenses totaled $4.3 million for the three months ended December 31, 2007. Of these totals, $1.1 million was attributable to credit facility related expenses, and $1.3 million to general and administrative expenses. Net base management fee totaled $1.4 million, and performance-based incentive fee totaled approximately $447,000 for the three months ended December 31, 2007.

Net Investment Income

Our net investment income totaled $4.7 million or $0.23 cents per share, for the three months ended December 31, 2007.

Net Realized Loss

Sales and paydowns of long-term investments totaled $4.4 million, and net realized losses totaled approximately $211,000 for the three months ended December 31, 2007.

Net Unrealized Depreciation on Investments and cash equivalents

For the three months ended December 31, 2007, the Company’s investments and cash equivalents had a net increase in depreciation of $16.1 million. On December 31, 2007, net unrealized depreciation on investments and cash equivalents totaled $40.0 million, primarily due to the continued downturn in the leveraged finance credit market during the second half of 2007.

Net Decrease in Net Assets From Operations

Net decrease in net assets resulting from operations totaled $11.5 million and $16.7 million, or $0.54 and $0.80 per share, for the three months ended December 31, 2007 and January 11, 2007 (inception) through September 30, 2007, respectively.

LIQUIDITY AND CAPITAL RESOURCES

On June 25, 2007, we entered into a Senior Secured Revolving Credit Agreement (the “Credit Agreement”) among us, various lenders and SunTrust Bank, as administrative agent for the lenders. SunTrust Robinson Humphrey Capital Markets acted as the joint lead arranger and book-runner, and Bear Stearns Corporate Lending Inc. acted as joint lead arranger and syndication agent. As of December 31, 2007, we had outstanding borrowings of $91.5 million under the Credit Agreement, with an annual interest rate of 5.90%.

Under the Credit Agreement, the lenders agreed to extend us credit in an initial aggregate principal or face amount not exceeding $300.0 million at any one time outstanding. The Credit Agreement is a five-year revolving facility (with a stated maturity date of June 25, 2012) and is secured by substantially all of our investment portfolio assets. Pricing is set at 100 basis points over LIBOR.

On December 31, 2007, we had $81.8 million in cash equivalents. During the three months ended December 31, 2007, we generated operating cash flows primarily from interest earned on debt investments, and our primary use of funds for operations during the same period consisted of investments in portfolio companies, payments of fees and other operating expenses incurred

 

25


Table of Contents

by the Company. Our operating activities resulted in a net use of cash of $253.0 million for the three months ended December 31, 2007, and our financing activities resulted in a net inflow of cash of $76.9 million for the same period, primarily from borrowings under our credit facility.

Contractual Obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowing under the multi-currency $300 million, five-year, revolving credit facility maturing in June 2012 is as follows:

 

     Payments due by period (millions)
     Total    Less than
1 year
   1-3
years
   3-5
years
   More than
5 years

Senior secured revolving credit facility (1)

   $ 91.5    —      —      $ 91.5    —  

 

(1) On December 31, 2007, $208.5 million remained unused under our senior secured revolving credit facility.

We have entered into certain contracts under which we have material future commitments. On April 17, 2007 we entered into an Investment Management Agreement with PennantPark Investment Advisers in accordance with the 1940 Act, effective as of the completion of our initial public offering. PennantPark Investment Advisers now serves as our investment adviser in accordance with the terms of the Investment Management Agreement. Payments under the Investment Management Agreement in each reporting period is equal to (1) a management fee equal to a percentage of the value of our gross assets and (2) an incentive fee based on our performance (see note 3 to our financial statements for more information).

Pursuant to an Administration Agreement, dated April 17, 2007, the PennantPark Investment Administration furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. If requested to provide managerial assistance to our portfolio companies, PennantPark Investment Administration will be paid an additional amount based on the services provided, which amount will not in any case exceed the amount we receive from the portfolio companies for such services. Payment under the Administration Agreement is based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief compliance officer, chief financial officer and their respective staff.

If any of our contractual obligations discussed above is terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.

Off-Balance Sheet Arrangements

We engage in no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Distributions

In order to qualify as a regulated investment company and to avoid corporate level tax on income, we are required, under Subchapter M of the Code, to distribute at least 90% of our ordinary income and net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute at least 98% of our income (both ordinary income and net capital gains) to avoid an excise tax.

During the three months ended December 31, 2007 we paid to stockholders distributions of $0.22 per share, for a total dividend of $4.6 million. Tax characteristics of all distributions will be reported to stockholders on Form 1099 after the end of the calendar year.

Of the amount distributed on December 31, 2007, approximately $506,000 was reinvested under our dividend reinvestment plan.

We intend to continue to distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our board of directors.

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

 

26


Table of Contents

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.

We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. In addition, we may be limited in our ability to make dividends and distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of RIC status. We cannot assure stockholders that they will receive any dividends and distributions at a particular level.

We did not experience any compromised liquidity during the recent turmoil in the global credit markets because of our ability to liquidate our portfolio of senior secured loans, which totaled $148.8 million as of December 31, 2007, and availability under our credit facility.

 

Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. During the period covered by this report, many of the loans in our portfolio had floating interest rates. These loans are usually based on a floating LIBOR rate and typically have durations of three months after which they reset to current market interest rates.

Assuming that the balance sheet as of the period covered by this report was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates may affect net income by more than 1% over a one-year horizon. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of declining interest rates, our cost of funds would decrease, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. During the period covered by this report, we did not engage in interest rate hedging activities.

 

Item 4. Controls and Procedures

As of the period covered by this report, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

27


Table of Contents

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

Neither our Investment Adviser, our Administrator or us is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or Administrator, may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, which could materially affect our business, financial condition or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Our annual report is posted on the SEC’s web site, www.sec.gov, and on our web-site, www.pennantpark.com. Additional risks and uncertainties not currently know to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

Item 5. Other Information

None.

 

28


Table of Contents
Item 6. Exhibits

Unless specifically indicated otherwise, the following exhibits are incorporated by reference to exhibits previously filed with the SEC:

 

  3.1    Articles of Incorporation (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-140092), filed on March 5, 2007).
  3.2    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Registrants Annual Report on Form 10-K, filed on December 13, 2007).
  4.1    Form of Share Certificate (Incorporated by reference to the Registrant’s Exhibit Filing as Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-140092), filed on April 5, 2007).
10.1    Form of Investment Management Agreement between the Registrant and PennantPark Investment Advisers, LLC (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-140092), filed on March 5, 2007).
10.2    Form of Custodian Agreement between the Registrant and LaSalle Bank National Association (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-140092), filed on March 5, 2007).
10.3    Form of Administration Agreement between the Registrant and various lenders (Incorporated by reference to the Registrant’s Form 8-K Exhibit 99-2 (File No. 814-00736)), filed on June 28, 2007).
10.4    Dividend Reinvestment Plan (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-140092), filed on March 5, 2007).
10.5    Senior Secured Revolving Credit Agreement between Registrant and various lenders (Incorporated by reference to the Report on Form 8-K. Exhibits 99.2 (File No. 814-00736), filed on June 28, 2007).
11    Computation of Per Share Earnings (included in the notes to the unaudited financial statements contained in this Report).
31.1 *    Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2 *    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1 *    Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
32.2 *    Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
99.1    Privacy Policy of the Registrant, filed December 13, 2007.

 

* Filed herewith.

 

29


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PENNANTPARK INVESTMENT CORPORATION
Date: February 8, 2008   By:  

/s/ Arthur H. Penn

    Arthur H. Penn
    Chief Executive Officer
Date: February 8, 2008   By:  

/s/ Aviv Efrat

    Aviv Efrat
   

Chief Financial Officer

(Principal Accounting and Financial Officer)

 

30