SARATOGA INVESTMENT CORP. - Quarter Report: 2007 May (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2007
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.
GSC Investment Corp.
(Exact name of Registrant as specified in its charter)
Maryland | 20-8700615 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
12 East 49th Street, Suite 3200
New York, New York 10017
(Address of principal executive offices)
(212) 884-6200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
New York, New York 10017
(Address of principal executive offices)
(212) 884-6200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange | ||
Title of each class | on which registered | |
Common Shares, par value
$0.0001 per share
|
The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: YES þ NO o
Indicate by check mark whether the registrant 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 o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
The number of outstanding common shares of the registrant as of July [11], 2007 was
[8,291,384].
TABLE OF CONTENTS
Page | ||||||
PART I. Financial Information | ||||||
Item 1. | ||||||
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1 | |||||
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2 | |||||
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3 | |||||
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5 | |||||
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6 | |||||
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7 | |||||
Item 2. | 17 | |||||
Item 3. | 25 | |||||
Item 4T. | 26 | |||||
PART II. OTHER INFORMATION | ||||||
Item 1. | 26 | |||||
Item 1A. | 26 | |||||
Item 2. | 27 | |||||
Item 3. | 27 | |||||
Item 4. | 27 | |||||
Item 5. | 27 | |||||
Item 6. | 27 | |||||
SIGNATURES | 29 |
i
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
GSC Investment Corp.
Consolidated Balance Sheets
Consolidated Balance Sheets
As of | ||||||||
May 31, 2007 | February 28, 2007 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Investments at fair value (amortized cost of $208,010,746 and $0, respectively) |
||||||||
Non-control/non-affiliate investments |
$ | 205,938,745 | $ | | ||||
Control investments |
2,583,634 | | ||||||
Affiliate investments |
239,168 | | ||||||
Total investments at fair value |
208,761,547 | | ||||||
Cash and cash equivalents |
2,265,303 | 1,030 | ||||||
Cash, securitization accounts |
3,590,672 | | ||||||
Interest receivable |
4,441,802 | | ||||||
Receivable from open trades |
410,586 | | ||||||
Due from manager |
673,662 | | ||||||
Other assets |
976,132 | |||||||
Deferred financing costs, net |
1,171,612 | | ||||||
Deferred offering costs |
| 808,617 | ||||||
Total assets |
$ | 222,291,316 | $ | 809,647 | ||||
LIABILITIES |
||||||||
Debt |
$ | 100,208,119 | $ | | ||||
Accounts payable and accrued expenses |
554,550 | 105,000 | ||||||
Interest and credit facility fees payable |
690,312 | | ||||||
Management and incentive fees payable |
719,856 | | ||||||
Dividend payable |
1,989,932 | | ||||||
Accrued offering cost |
266,883 | 760,000 | ||||||
Due to affiliate |
| 73,810 | ||||||
Total liabilities |
$ | 104,429,652 | $ | 938,810 | ||||
STOCKHOLDERS EQUITY (DEFICIT) |
||||||||
Common stock, par value $.0001 per share, 100,000,000 common shares
authorized, 8,291,384 and 66 2/3 common
shares issued and outstanding,
respectively |
829 | | ||||||
Capital in excess of par value |
114,311,250 | 1,000 | ||||||
Accumulated undistributed net investment income (loss) |
1,827,736 | (130,163 | ) | |||||
Accumulated net realized gain on sale of investments |
1,021,068 | | ||||||
Net unrealized appreciation on investments and derivatives |
700,781 | | ||||||
Total stockholders equity (deficit) |
117,861,664 | (129,163 | ) | |||||
Total liabilities and stockholders equity (deficit) |
$ | 222,291,316 | $ | 809,647 | ||||
NET ASSET VALUE PER SHARE |
$ | 14.21 | n/a | |||||
See accompanying notes to consolidated financial statements.
1
GSC Investment Corp.
Consolidated Statement of Operations
Consolidated Statement of Operations
For the three months | ||||
ended May 31, 2007 | ||||
(unaudited) | ||||
INVESTMENT INCOME |
||||
Interest from investments |
$ | 3,680,845 | ||
Interest from cash and cash equivalents |
21,051 | |||
Management fee income |
383,562 | |||
Other income |
16,603 | |||
Total investment income |
4,102,061 | |||
EXPENSES |
||||
Interest and credit facility expenses |
720,765 | |||
Professional fees |
542,616 | |||
Base management fees |
360,488 | |||
Incentive management fees |
359,368 | |||
Insurance |
118,041 | |||
Directors fee |
96,090 | |||
Administrative |
45,692 | |||
Cost of acquiring management contract |
144,000 | |||
Organizational expense |
22,868 | |||
Expenses before manager reimbursement |
2,409,928 | |||
Expense reimbursement |
(265,766 | ) | ||
Total expenses net of expense reimbursement |
2,144,162 | |||
NET INVESTMENT INCOME |
1,957,899 | |||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: |
||||
Net realized gain on sale of investments |
1,021,068 | |||
Net change in unrealized appreciation on investments |
750,801 | |||
Unrealized depreciation on derivatives |
(50,020 | ) | ||
Net gain (loss) on investments |
1,721,849 | |||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 3,679,748 | ||
BASIC AND DILUTED EARNINGS PER COMMON SHARE |
$ | 0.44 | ||
COMMON STOCK OUTSTANDINGBASIC AND DILUTED |
8,291,384 |
See accompanying notes to consolidated financial statements.
2
GSC Investment Corp.
Consolidated Schedule of Investments
May 31, 2007
(Unaudited)
Consolidated Schedule of Investments
May 31, 2007
(Unaudited)
Company | Industry | Investment | Principal | Cost | Fair Value | |||||||||||
Non-control/Non-affiliated investments 174.7% | ||||||||||||||||
ABP Corporation
|
Restaurants | Second lien term
loan 9.86%, 7/15/2010 |
$ | 5,940,000 | $ | 5,940,000 | $ | 5,940,000 | ||||||||
Advanced Lighting Technologies, Inc.
|
Electronics | Unsecured notes 11.00%, 3/31/2009 |
6,978,400 | 6,945,252 | 6,978,400 | |||||||||||
Ainsworth Lumber
|
Natural Resources | Unsecured notes 7.25%, 10/01/2012 |
100,000 | 74,308 | 77,813 | |||||||||||
Atlantis Plastics Films, Inc.
|
Packaging | First lien term
loan 9.35%, 9/22/2011 |
6,566,497 | 6,536,623 | 6,517,249 | |||||||||||
Bankruptcy Management Solutions, Inc.
|
Financial Services | Second lien term
loan 11.60%, 7/31/2013 |
1,990,000 | 2,009,476 | 2,024,825 | |||||||||||
CFF Acquisition LLC
|
Consumer Services | First lien term
loan 9.08%, 7/31/2013 |
4,896,000 | 4,896,000 | 4,896,000 | |||||||||||
Cortz, Inc.
|
Consumer Services | First lien term
loan 9.11%, 11/30/2010 |
1,506,292 | 1,506,292 | 1,506,292 | |||||||||||
Energy Alloys, LLC
|
Oil and Gas | Second lien term
loan 12.32%, 10/05/2012 |
6,200,000 | 6,200,000 | 6,200,000 | |||||||||||
EuroFresh Inc.
|
Agriculture | Unsecured notes 11.50%, 1/15/2013 |
5,000,000 | 4,884,450 | 5,062,500 | |||||||||||
Flavor and Fragrance Group Holdings, Inc.
|
Manufacturing | First lien term
loan 9.35%, 6/30/2010 |
720,443 | 720,443 | 720,443 | |||||||||||
First lien term
loan 9.85%, 6/30/2011 |
2,109,445 | 2,109,445 | 2,109,445 | |||||||||||||
First lien term
loan 12.35%, 12/31/2011 |
1,188,000 | 1,188,000 | 1,188,000 | |||||||||||||
4,017,888 | 4,017,888 | |||||||||||||||
GFSI Inc
|
Apparel | Senior secured
notes 11.50%, 6/01/2011 |
18,925,000 | 18,882,111 | 19,019,625 | |||||||||||
Grant U.S. Holdings LLP
|
Natural Resources | Second lien term
loan 11.86%, 9/20/2013 |
1,000,000 | 1,000,000 | 990,830 | |||||||||||
Group Dekko
|
Electronics | Second lien term
loan 11.57%, 1/20/2012 |
4,000,000 | 4,000,000 | 4,000,000 | |||||||||||
Hopkins Manufacturing Corporation
|
Consumer Products | Second lien term
loan 12.36%, 1/26/2012 |
3,250,000 | 3,244,985 | 3,244,800 | |||||||||||
IDI Acquisition Corp.
|
Healthcare Services | Senior secured
notes 10.75%, 12/15/2011 |
3,800,000 | 3,542,087 | 3,572,000 | |||||||||||
Insight Pharmaceuticals LLC
|
Consumer Products | First lien term
loan 9.62%, 3/31/2011 |
1,096,711 | 1,091,406 | 1,091,227 | |||||||||||
First lien term
loan 9.99%, 3/31/2012 |
1,128,140 | 1,122,646 | 1,122,499 | |||||||||||||
2,214,052 | 2,213,726 | |||||||||||||||
Jason Incorporated
|
Manufacturing | Unsecured notes 13.00%, 11/01/2008 |
12,000,000 | 12,000,000 | 12,000,000 | |||||||||||
Unsecured notes 13.00%, 11/01/2008 |
3,400,000 | 3,400,000 | 3,400,000 | |||||||||||||
15,400,000 | 15,400,000 | |||||||||||||||
Legacy Cabinets, Inc.
|
Building Products | First lien term
loan 9.13%, 8/18/2012 |
1,885,750 | 1,857,369 | 1,878,678 | |||||||||||
Second lien term
loan 12.88%, 8/18/2013 |
2,400,000 | 2,350,959 | 2,391,000 | |||||||||||||
4,208,328 | 4,269,678 | |||||||||||||||
3
Company | Industry | Investment | Principal | Cost | Fair Value | |||||||||||
McMillin Companies LLC
|
Home Buildings | Senior secured
notes 9.53%, 4/30/2012 |
11,000,000 | 10,170,399 | 10,156,300 | |||||||||||
Miller Heiman Acquisition Corp.
|
Business Services | First lien term
loan 9.10%, 6/01/2012 |
1,796,789 | 1,796,789 | 1,796,789 | |||||||||||
NE Restaurant Co.
|
Restaurants | Unsecured notes 10.75%, 7/15/2008 |
16,930,000 | 16,897,695 | 16,940,581 | |||||||||||
Network Communications, Inc.
|
Publishing | Unsecured notes 10.75%, 12/01/2013 | 5,000,000 | 5,105,880 | 5,303,125 | |||||||||||
New World Restaurant Group, Inc.
|
Restaurants | Second lien term
loan 12.13%, 1/26/2012 |
9,500,000 | 9,539,816 | 9,618,750 | |||||||||||
PRACS Institute, LTD
|
Healthcare Services | Second lien term
loan 13.25%, 4/17/2013 |
3,000,000 | 3,000,000 | 3,000,000 | |||||||||||
Redwood Toxicology Laboratory, Inc.
|
Healthcare Services | First lien term
loan 9.32%, 2/27/2012 |
978,024 | 970,883 | 970,689 | |||||||||||
SILLC Holdings, LLC
|
Automotive | Second lien term
loan 12.11%, 5/24/2011 |
23,049,210 | 22,822,250 | 22,818,718 | |||||||||||
Sportcraft, LTD
|
Leisure Equipment | Second lien term
loan 13.10%, 3/31/2012 |
9,000,000 | 7,221,893 | 7,200,000 | |||||||||||
Stronghaven, Inc.
|
Packaging | Second lien term
loan 11.00%, 10/31/2010 |
6,500,000 | 6,500,000 | 6,500,000 | |||||||||||
Switch & Data Holdings, Inc.
|
Telecommunications | First lien term
loan 9.60%, 3/31/2011 |
4,208,940 | 4,205,493 | 4,198,417 | |||||||||||
Targus Group International, Inc.
|
Consumer Products | Second lien term
loan 12.86%, 5/22/2013 |
5,000,000 | 4,721,833 | 4,762,500 | |||||||||||
Terphane Holdings Corp.
|
Packaging | Senior secured
notes 12.50%, 6/15/2009 |
2,800,000 | 2,787,708 | 2,800,000 | |||||||||||
Senior secured
notes 12.50%, 6/15/2009 |
2,621,250 | 2,609,743 | 2,621,250 | |||||||||||||
Senior secured
notes 15.05%, 6/15/2009 |
500,000 | 497,684 | 500,000 | |||||||||||||
5,895,135 | 5,921,250 | |||||||||||||||
Transportation Aftermarket Enterprises, Inc.
|
Automotive | Second lien term
loan 12.60%, 6/30/2012 |
1,025,000 | 985,055 | 984,000 | |||||||||||
USS Mergerco, Inc.
|
Environmental | Second lien term
loan 9.60%, 6/29/2013 |
5,960,000 | 5,813,834 | 5,811,000 | |||||||||||
X-Rite, Incorporated
|
Electronics | Second lien term
loan 10.35%, 6/30/2013 |
4,000,000 | 4,039,137 | 4,025,000 | |||||||||||
Sub Total Non-control/Non-affiliated investments | 205,187,944 | 205,938,745 | ||||||||||||||
Control investments 2.2% |
||||||||||||||||
GSC CDO III, LLC
|
Financial Services | 100% membership interest | 2,583,634 | 2,583,634 | ||||||||||||
Affiliate investments 0.2% |
||||||||||||||||
GSC Partners CDO GP III, LP
|
Financial Services | 6.24% Partnership interest | 239,168 | 239,168 | ||||||||||||
TOTAL INVESTMENT ASSETS 177.1% | $ | 208,010,746 | $ | 208,761,547 | ||||||||||||
See accompanying notes to consolidated financial statements.
(a) | All of the Funds equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940. | |
(b) | Percentages are based on net assets of $117,861,664 as of May 31, 2007. |
4
GSC Investment Corp.
Consolidated Statements of Changes in Net Assets
Consolidated Statements of Changes in Net Assets
For the three months | ||||
ended May 31, 2007 | ||||
(Unaudited) | ||||
Operations: |
||||
Net operating income before investment gains and losses |
$ | 1,957,899 | ||
Net realized gain on sale of investments |
1,021,068 | |||
Net unrealized appreciation on investments |
750,801 | |||
Unrealized depreciation on derivatives |
(50,020 | ) | ||
Net increase in net assets resulting from operations |
3,679,748 | |||
Shareholder distributions: |
||||
Distributions declared |
(1,989,932 | ) | ||
Net decrease in net assets resulting from
shareholder distributions |
(1,989,932 | ) | ||
Capital share transactions: |
||||
Issuance of common stock, net |
116,301,011 | |||
Net increase in net assets resulting from capital
share transactions |
116,301,011 | |||
Total increase in net assets |
117,990,827 | |||
Net assets at beginning of period |
(129,163 | ) | ||
Net assets at end of period |
$ | 117,861,664 | ||
Net asset value per common share |
$ | 14.21 | ||
Common shares outstanding at end of period |
8,291,384 |
See accompanying notes to consolidated financial statements.
5
GSC Investment Corp.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
For the three months | ||||
ended May 31, 2007 | ||||
(Unaudited) | ||||
Operating activities |
||||
Net increase in net assets from operations |
$ | 3,679,748 | ||
Adjustments to reconcile net increase in net assets from operations to
net cash from operating activities: |
||||
Net realized gain from investments |
(1,021,068 | ) | ||
Net unrealized appreciation on investments |
(750,801 | ) | ||
Net accretion of discount on securities |
(376,683 | ) | ||
Amortization of deferred financing costs |
30,452 | |||
Proceeds from sale and redemption of investments |
46,987,424 | |||
Purchase of investments |
(237,980,658 | ) | ||
Changes in operating assets and liabilities: |
||||
Cash, securitization accounts |
(3,590,672 | ) | ||
Deferred offering costs |
808,617 | |||
Interest receivable |
(4,441,802 | ) | ||
Due from manager |
(747,472 | ) | ||
Receivable from open trades |
(410,586 | ) | ||
Other assets |
(976,132 | ) | ||
Accrued deferred offering costs |
(493,117 | ) | ||
Accounts payable and accrued expenses |
449,550 | |||
Interest and credit facility fees payable |
690,312 | |||
Management and incentive fees payable |
719,856 | |||
Net cash used in operating activities |
(197,423,032 | ) | ||
Financing activities |
||||
Net proceeds from issuance of common stock |
100,681,250 | |||
Borrowings on debt |
114,708,119 | |||
Paydowns on debt |
(14,500,000 | ) | ||
Credit facility financing cost |
(1,202,064 | ) | ||
Net cash provided by financing activities |
199,687,305 | |||
CHANGE IN CASH AND CASH EQUIVALENTS |
2,264,273 | |||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
1,030 | |||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 2,265,303 | ||
Supplemental information: |
||||
Interest paid during the period |
$ | | ||
Dividends declared during the period |
$ | 1,989,932 | ||
Supplemental non-cash information |
||||
Issuance of common stock |
$ | 15,619,761 | ||
Purchase of investments |
$ | 15,619,761 |
See accompanying notes to consolidated financial statements.
6
GSC INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2007
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2007
(Unaudited)
1. Organization and Basis of Presentation
GSC Investment Corp. (the Company, we and us) is a non-diversified closed end management
investment company incorporated in Maryland that has elected to be treated and is regulated as a
business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). We
commenced operations on March 23, 2007 and completed our initial public offering (IPO) on March
28, 2007. The Company intends to file an election and to qualify to be treated for tax purposes as
a regulated investment company (RIC) under subchapter M of the Internal Revenue Code of 1986, as
amended (the Code) commencing with our first taxable year as a corporation. We expect to continue
to qualify and to elect to be treated for tax purposes as a RIC. Our investment objectives are to
generate both current income and capital appreciation through debt and equity investments by
primarily investing in private middle market companies and select high yield bonds.
We are externally managed and advised by our investment adviser, GSCP (NJ), L.P. (individually and
collectively with its affiliates, GSC Group or the Manager), pursuant to an investment advisory
and management agreement.
The accompanying consolidated financial statements have been prepared on the accrual basis of
accounting in conformity with U. S. generally accepted accounting principles and include the
accounts of the Company and its special purpose financing subsidiaries, GSC Investment Funding, LLC
and GSC Investment Funding II, LLC. The consolidated financial statements reflect all adjustments
and reclassifications which, in the opinion of management, are necessary for the fair presentation
of the results of the operations and financial condition for the periods presented. All
intercompany accounts and transactions have been eliminated in consolidation.
Interim consolidated financial statements are prepared in accordance with generally accepted
accounting principles (GAAP) for interim financial information and pursuant to the requirements
for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures
accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted.
In the opinion of management, all adjustments, consisting solely of normal recurring accruals,
necessary for the fair presentation of financial statements for the interim period have been
included. The current periods results of operations are not necessarily indicative of results that
ultimately may be achieved for the fiscal year ending February 29, 2008.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at
7
the date of the financial statements, and revenues and expenses during the period
reported. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and
cash equivalents are carried at cost which approximates fair value.
Cash, Securitization Accounts
Cash, securitization accounts includes amounts held in designated bank accounts representing
payments received on securitized investments or other reserved amounts associated with the
Companys securitization facilities. The Company is required to use a portion of these amounts to
pay interest expense, reduce borrowings, or pay other amounts in accordance with the related
securitization agreements.
Investment Classification and Valuation
Classification
The Company classifies it investments in accordance with the requirements of the 1940 Act. Under
the 1940, Control Investments are defined as investments in companies in which we own more than
25% of the voting securities or maintain greater than 50% of the board representation. Under the
1940 Act, Affiliated Investments are defined as those non-control investments in companies in
which we own between 5% and 25% of the voting securities. Under the 1940 Act, Non-affiliated
Investments are defined as investments that are neither Control Investments or Affiliated
Investments.
Valuation
Investments for which market quotations are readily available are valued at such market
quotations subject to any decision by our board of directors to make a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair
value as determined in good faith by our board of directors based on input from our Manager, our audit committee and, if our board or audit committee so request, a
third party independent valuation firm.
Determinations of fair value may involve subjective judgments and estimates. The types of factors
that may be considered in a fair value pricing include the nature and realizable value of any
collateral, the portfolio companys ability to make payments, the markets in which the portfolio
company does business, comparison to publicly traded companies, discounted cash flow and other
relevant factors. Because such valuations, and particularly valuations of private investments and
private companies, are inherently uncertain, they may fluctuate over short periods of time and may
be based on estimates. The determination of fair value by our board of directors may differ
materially from the values that would have been used if a ready market for these
investments existed. Our net asset value could be adversely affected if the determinations
regarding the fair value of our investments were materially higher or lower than the values that we
ultimately realize upon the disposal of such investments.
8
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
| Each investment is initially valued by the responsible investment professionals and preliminary valuation conclusions are documented and discussed with our senior management; | ||
| An independent valuation firm engaged by our board of directors reviews at least one quarter of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by an independent valuation firm at least annually; | ||
| The audit committee of our board of directors reviews each preliminary valuation and our investment adviser and independent valuation firm (if applicable) will respond and supplement the preliminary valuation to reflect any comments provided by the audit committee; and | ||
| Our board of directors discusses the valuations and determines the fair value of each investment in good faith based on the input of our investment adviser, independent valuation firm (if applicable) and audit committee. |
Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an
accrual basis to the extent that such amounts are expected to be collected. The Company stops
accruing interest on its investments when it is determined that interest is no longer collectible.
If any cash is received after it is determined that interest is no longer collectible, we will
treat the cash as payment on the principal balance until the entire principal balance has been
repaid, before any interest income is recognized. Discounts and premiums on securities purchased
are accreted/amortized over the life of the respective security using the effective yield method.
The amortized cost of investments represents the original cost adjusted for the accretion of
discounts and amortizations of premium on bonds.
Paid-in-Kind Interest
The Company includes in income certain amounts that is has not yet received in cash, such as
contractual paid-in-kind (PIK) interest, which represents contractually deferred interest added to
the loan balance that is generally due at the end of the loan term. We stop accruing PIK if we do
not expect the issuer to be able to pay all principal and interest due.
Organizational Expenses
Organizational expenses consist principally of professional fees incurred in connection with the
organization of the company and have been expensed as incurred.
Offering Costs
Offering costs consist principally of legal fees incurred by the Company related to the Companys
IPO that was completed on March 28, 2007. These offering costs were charged directly against
capital and are limited to $1 million. All offering costs in excess of $1 million will be paid by
the Manager. As of
9
May 31, 2007, the Company incurred approximately $1.4 million relating to
offering costs of which the Manager is responsible for approximately $0.4 million.
Deferred Financing Costs
Financing costs incurred in connection with each respective financing facility have been deferred
and are being amortized using the straight line method over the life of each respective facility.
Income Taxes
The Company intends to file an election and qualify to be treated for tax purposes as a RIC under
Subchapter M of the Code and, among other things, intends to make the requisite distributions to
its stockholders which will relieve the Company from federal income taxes. Therefore, no provision
has been recorded for federal income taxes.
In order to qualify as a RIC, among other factors, the Company is required to timely distribute to
its stockholders at least 90% of its investment company taxable income, as defined by the Code, for
each fiscal tax year. The Company will be subject to a nondeductible federal excise tax of 4% if we
do not distribute at least 98% of our investment company taxable income in any calendar year and
98% of our capital gain net income for each one-year period ending on October 31.
We have adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
In May 2007, the FASB issued Staff Position, FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1), which provides guidance on how an enterprise should
determine whether a tax position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective with the initial adoption of FIN 48. The
adoption of FIN 48 and FSP FIN 48-1 did not have a material impact on our consolidated financial
statements.
Dividends
Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out 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 generally distributed at
least annually, although we may decide to retain such capital gains for re-investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of our dividend
distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a
result, if our board of directors authorizes, and we declare, a cash dividend, then our
stockholders who have not
10
opted out of our dividend reinvestment plan will have their cash
dividends automatically reinvested in additional shares of our common stock, rather than receiving
the cash dividends.
New Accounting Pronouncements
In September 2006, the FASB released Statement of Financial Accounting Standards No. 157 Fair
Value Measurements (FAS 157). FAS 157 establishes an authoritative definition of fair value,
sets out a framework for measuring fair value, and requires additional disclosures about fair-value
measurements. The application of FAS 157 is required for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. At this time, management is evaluating the
implications of FAS 157 and its impact on the financial statements has not yet been determined.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS 159), which provides companies
with an option to report selected financial assets and liabilities at fair value. The objective of
SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. SFAS 159 establishes
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities and to more
easily understand the effect of the companys choice to use fair value on its earnings. SFAS 159
also requires entities to display the fair value of the selected assets and liabilities on the face
of the balance sheet. SFAS 159 does not eliminate disclosure requirements of other accounting
standards, including fair value measurement disclosures in SFAS 157. This Statement is effective as
of the beginning of an entitys first fiscal year beginning after November 15, 2007. Early adoption
is permitted as of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the provisions of
Statement 157. At this time, the Company is evaluating the implications of SFAS No. 159, and its
impact in the consolidated financial statements has not yet been determined.
3. Investments
The composition of our investments as of May 31, 2007, at cost and fair value was as follows:
Fair Value | ||||||||||||
Investments at Fair | Percentage of Total | |||||||||||
Investments at Cost | Value | Portfolio | ||||||||||
First lien term loans |
$ | 28,001,389 | $ | 27,995,728 | 13.41 | % | ||||||
Second lien term loans |
89,389,238 | 89,511,423 | 42.88 | % | ||||||||
Senior secured notes |
38,489,732 | 38,669,175 | 18.52 | % | ||||||||
Unsecured notes |
49,307,585 | 49,762,419 | 23.84 | % | ||||||||
Equity/Limited partnership interest |
2,822,802 | 2,822,802 | 1.35 | % | ||||||||
Total |
$ | 208,010,746 | $ | 208,761,547 | 100.00 | % |
11
4. Agreements
On March 21, 2007, the Company entered into an investment advisory and management agreement (the
Management Agreement) with GSC Group. The initial term of the Management Agreement is two years,
with automatic, one-year renewals at the end of each year subject to certain approvals by our board
of directors and/or our stockholders. Pursuant to the Management Agreement, our investment adviser
implements our business strategy on a day-to-day basis and performs certain services for us,
subject to oversight by our board of directors. Our investment adviser is responsible for, among
other duties, determining investment criteria, sourcing, analyzing and executing investments
transactions, asset sales, financings and performing asset management duties. Under the Management
Agreement, we have agreed to pay our investment adviser a management fee for investment advisory
and management services consisting of two components a base management fee and an incentive fee.
On May 18, 2007, our board of directors approved an amendment to the Management Agreement providing
that the base management fee and incentive fee shall be computed with reference to the fiscal year
of the Company rather than the calendar year (in order to align the fee calculation dates with our
financial reporting cycle).
The base management fee is calculated based on the average value of our total assets (other than
cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two
most recently completed fiscal quarters, and appropriately adjusted for any share issuances or
repurchases during the applicable fiscal quarter. For the current
fiscal quarter, the base management fee was calculated based upon the
initial value of our total assets after giving effect to the initial
asset purchase from CDO Fund III without giving effect to subsequent
asset purchases made during the quarter. The base management fee was
prorated for the period from March 28, 2007 to May 31, 2007.
The incentive fee consists of the following two parts:
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income,
expressed as a rate of return on the value of the net assets at the end of the immediately
preceding quarter (including interest that is accrued but not yet received in cash), that exceeds a
1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter. Under
this provision, in any fiscal quarter, our investment adviser receives no incentive fee unless our
pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Amounts received as a
return of capital are not included in calculating this portion of the incentive fee. Since the
hurdle rate is based on net assets, a return of less than the hurdle rate on total assets may still
result in an incentive fee.
The second, payable at the end of each fiscal year equals 20% of our net realized capital gains, if
any, computed net of all realized capital losses and unrealized capital depreciation, in each case
on a cumulative basis, less the aggregate amount of capital gains incentive fees paid to the
investment adviser through such date.
For the three months ended May 31, 2007, we incurred $360,488,
in base management fees, $155,154 in
incentive fees related to pre-incentive fee net investment income and $204,214 incentive fees
related to net realized capital gains. As of May 31, 2007, $719,856 was unpaid and included in fees
due to Manager in the accompanying consolidated balance sheet.
12
On March 21, 2007, the Company entered into a separate administration agreement (the
Administration Agreement) with GSC Group, pursuant to which our administrator has agreed to
furnish us with the facilities and administrative services necessary to conduct our day-to-day
operations and provide managerial assistance on our behalf to those portfolio companies to which we
are required to provide such assistance. Our allocable portion is based on the proportion that our
total assets bears to the total assets administered by our administrator.
GSC Group has agreed not to bill the Company for any expenses under the Administration Agreement
until the Companys total assets exceeds $500 million. Therefore, for the three months ended May
31, 2007, we did not accrue or incur any administrative fees and there were no outstanding fees
payable to the administrator.
5. Borrowings
As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined
in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage
that we employ at any time depends on our assessment of the market and other factors at the time of
any proposed borrowing.
On April 11, 2007, we formed GSC Investment Funding LLC (GSC Funding), a wholly owned
consolidated subsidiary of the Company, through which we entered into a revolving securitized
credit facility (the Revolving Facility) with Deutsche Bank AG, as administrative agent, under
which we may borrow up to $100 million, which amount may be increased to $130 million subject to
certain conditions. The Revolving Facility is secured by collateral that we currently own and the
collateral acquired by us with the advances under the Revolving Facility. Under the Revolving
Facility, funds are borrowed from or through certain lenders at prevailing commercial paper rates
or, if the commercial paper market is at any time unavailable, at prevailing LIBOR rates, plus
0.70% payable monthly. As of May 31, 2007, there was $74.5 million outstanding under the Revolving
Facility and the Company continues to be in compliance with all of the limitations and requirements
of the Revolving Facility.
On May 1, 2007, we formed GSC Investment Funding II LLC (GSC Funding II), a wholly owned
consolidated subsidiary of the Company, through which we entered into a $25.7 million term
securitized credit facility (the Term Facility and, together with the Revolving Facility, the
Facilities) with Deutsche Bank AG, as administrative Agent, which was fully drawn at closing. The
Term Facility bears interest at prevailing commercial paper rates or, if the commercial paper
market is at any time unavailable, at prevailing LIBOR rates, plus 0.70%, payable quarterly. As of
May 31, 2007, there was $25.7 million outstanding under the Term Facility and the Company continues
to be in compliance with all of the limitations and requirements of the Term Facility.
Each of the Facilities contain limitations as to how borrowed funds may be used, such as
restrictions on geographic and industry concentrations, asset size, payment frequency and status,
average life, collateral interests and investment ratings. In addition, our financing relies on
Rule 3a-7 under the 1940 Act which prohibits us from, among other things, directing either of the
Facilities to acquire, or dispose of investments for the primary purpose of recognizing gains or
decreasing losses resulting from market
13
value changes, which our investment advisor may otherwise do absent such restrictions. We are also subject to regulatory restrictions on leverage which may
affect the amount of funding that we can obtain under the Facilities. The Facilities also includes
certain requirements relating to portfolio performance the violation of which could result in the
early amortization of the Facilities, limit further advances (in the case of the Revolving
Facility) and, in some cases, result in an event of default.
For the three months ended May 31, 2007, the interest expense accrued under the Revolving Facility
and the Term Facility was $557,126 and $133,187, respectively.
6. Interest Rate Cap Agreements
In April and May 2007, pursuant to the Revolving Facility agreement, the Company entered into two
interest rate cap agreements with notional amounts of $34 million and $6 million at costs of
$75,000 and $12,000, respectively, with Deutsche Bank AG. The agreements provide for a payment to
the Company in the event LIBOR exceeds 8%, mitigating our exposure to increases in LIBOR. The
interest rate cap agreements expire in February 2014.
In May 2007, pursuant to the Term Facility agreement, the Company entered into an interest rate cap
agreement with a notional amount of $60.9 million at a cost of $44,000 with Deutsche Bank AG. The
agreements provide for a payment to the Company in the event LIBOR exceeds 8%, mitigating our
exposure to increases in LIBOR. The interest rate cap agreements expire in November 2013.
The total notional amount for all interest rate cap agreements is $100.9 million with a fair value
of $80,980 which is recorded in other assets on the Companys consolidated balance sheet at May 31,
2007. The Company records changes in the fair value of the interest rate cap agreements monthly
based on the current market valuation at month end as unrealized depreciation or appreciation on
derivative in the Companys consolidated statement of operations.
7. Stockholders Equity
On March 20, 2007, the Company issued 1,041,317 shares of common stock, priced at $15.00 per share,
to GSC Group, in exchange for the general partnership interest and a limited partnership interest
in GSC Partners CDO III, GP, LP, collectively valued at $15,619,761.
On March 28, 2007, the Company completed its IPO of 7,250,000 shares of common stock, priced at
$15.00 per share, before underwriting discounts and commissions. Total proceeds received from the
IPO, net of the underwriters discount and commissions, were approximately $101.6 million.
14
8. Earnings per share
The following information sets forth the computation of basic and diluted net increase in net
assets per share resulting from operations for the three months ended May 31, 2007:
Basic and diluted |
||||
Net increase in net assets resulting from operations |
$ | 3,679,748 | ||
Total common shares outstanding |
8,291,384 | |||
Earnings per common share-basic and diluted |
$ | 0.44 |
9. Dividend
On May 21, 2007, the Company declared a dividend, for the three months ended May 31, 2007, of $0.24
per share for a total of $1,989,932 to shareholders of record as of May 29, 2007 and payable on
June 6, 2007.
10. Financial Highlights
The following is a schedule of financial highlights for the three months ended May 31, 2007:
Per share data: |
||||
Net asset value at beginning of period |
$ | (0.02 | ) | |
Issuance of common stock, net |
14.03 | |||
Net investment income |
0.24 | |||
Net realized gains on investments |
0.12 | |||
Net unrealized appreciation on investments |
0.08 | |||
Net increase in stockholders equity |
0.44 | |||
Distributions declared from net investment income |
(0.24 | ) | ||
Distributions from net realized capital gains |
0.00 | |||
Total distributions to stockholders |
(0.24 | ) | ||
Net asset value at end of period |
$ | 14.21 | ||
Per share market value at end of period |
$ | 13.76 | ||
Total return based on market value (1) |
(6.67 | %) | ||
Total return based on net asset value (2) |
3.14 | % | ||
Shares outstanding at end of period |
8,291,761 |
15
Ratio/Supplemental data: |
||||
Net assets at end of period |
$ | 117,861,664 | ||
Ratio of net
investment income to average net assets (3) |
8.13 | % | ||
Ratio of
operating expenses to average net assets (3)(4) |
6.39 | % | ||
Ratio of incentive management fees to average net assets (3) |
1.73 | % | ||
Ratio of credit facility related expenses to average net assets (3) |
3.46 | % | ||
Ratio of total expenses to average net assets (3) (4) |
11.58 | % |
(1) | For the three months ended May 31, 2007, the total return based on market value equals the decrease in market value at May 31, 2007 of $13.76 per share over the IPO offering price per share at March 23, 2007 of $15.00, plus the declared dividend of $0.24 per share for stockholders of record on May 29, 2007, divided by the IPO offering price per share. Total return based on market value is not annualized. Past performance is no guarantee of future results. | |
(2) | For the three months ended May 31, 2007, the total return based on net asset value equals the change in net asset value during the period plus the declared dividend of $0.24 per share for stockholders of record on May 29, 2007, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued during the period. Total return based on net asset value is not annualized. Past performance is no guarantee of future results. | |
(3) | The ratios reflect an annualized amount. | |
(4) | For the three months ended May 31, 2007, incorporating the expense reimbursement arrangement, the ratio of operating expenses to average net assets is 5.11%, and the ratio of total expenses to average net assets is 10.30%. |
11. Related Party Transactions
On March 20, 2007, the Company issued 1,041,317 shares of common stock, priced at $15.00 per share,
to GSC Group, in exchange for the general partnership interest and a limited partnership interest
in GSC Partners CDO III, GP, LP, collectively valued at $15,619,761. Additionally, GSC Group
assigned its rights to act as collateral manager for GSC Partners CDO Fund III, Limited to the
Company. The Company paid GSC Group $144,000 to acquire the rights to
act as collateral manager.
12. Subsequent events
In June, 2007, we made 3 investments in an aggregate principal amount of $8.7 million of which $1.5
million were to a new portfolio company and $7.2 million to existing portfolio companies. Also, 3
investments in an aggregate principal amount of $17.7 million have been exited or redeemed.
16
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our financial statements and
related notes and other financial information appearing elsewhere in this quarterly report. In
addition to historical information, the following discussion and other parts of this quarterly
report contain forward-looking information that involves risks and uncertainties. Our actual
results could differ materially from those anticipated by such forward-looking information due to
the factors discussed in Item 1A of Part II hereof and Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2007.
The forward-looking statements are based on our beliefs, assumptions and expectations of our
future performance, taking into account all information currently available to us. These beliefs,
assumptions and expectations can change as a result of many possible events or factors, not all of
which are known to us or are within our control. If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those expressed in our
forward-looking statements.
The forward-looking statements contained in this quarterly report include statements as to:
| our future operating results; | ||
| our business prospects and the prospects of our portfolio companies; | ||
| the impact of investments that we expect to make; | ||
| our contractual arrangements and relationships with third parties; | ||
| the dependence of our future success on the general economy and its impact on the industries in which we invest; | ||
| the ability of our portfolio companies to achieve their objectives; | ||
| our expected financings and investments; |
17
| our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company; | ||
| the adequacy of our cash resources and working capital; | ||
| the timing of cash flows, if any, from the operations of our portfolio companies; and | ||
| the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments. |
You should not place undue reliance on these forward-looking statements. The forward-looking
statements made in this quarterly report relate only to events as of the date on which the
statements are made. We undertake no obligation to update any forward-looking statement to reflect
events or circumstances occurring after the date of this quarterly report.
Overview
GSC Investment Corp. is a newly-incorporated Maryland corporation that has elected to be
treated as a business development company (BDC) under the Investment Company Act of 1940 (the
1940 Act). Our investment objectives are to generate both current income and capital appreciation
through debt and equity investments by primarily investing in private middle market companies and
select high yield bonds. We intend to file an election to be treated as a regulated investment
company (RIC) under subchapter M of the Internal Revenue Code commencing with our first taxable
year as a corporation. We commenced operations on March 23, 2007 and completed our initial public
offering (IPO) on March 28, 2007. We are externally managed and advised by our investment
adviser, GSCP (NJ), L.P.
We used the net proceeds of our IPO to purchase approximately $100.7 million in aggregate
principal amount of debt investments from GSC Partners CDO Fund III, Limited (CDO Fund III) a CDO
managed by our investment adviser. We used borrowings under our Facilities (as defined below) to
purchase approximately $115.1 million in aggregate principal amount of debt investments in April and May
2007 from CDO Fund III and GSC Partners CDO Fund Limited (CDO Fund I), another CDO managed by
our investment adviser.
Our portfolio is comprised primarily of investments in first and second lien term loans and
mezzanine debt issued by private middle market companies and high yield bonds. We are seeking to
create a diversified portfolio by investing up to 5% of our total assets in each investment,
although the investment sizes may be more or less than the targeted range. These investments are
sourced through a network of relationships with commercial finance companies, commercial and
investment banks, and financial sponsors. The capital that we provide is generally used to fund
buyouts, acquisitions, growth, recapitalizations and other types of financings. First and second
lien loans are generally senior debt instruments that rank ahead of subordinated debt of the
portfolio company. These loans also have the benefit of security interests on the assets of the
portfolio company, which may rank ahead of, or be junior to, other security interests. Mezzanine
debt and high yield bonds are typically subordinated to leveraged loans and generally unsecured,
though a substantial amount of the high yield bonds that we currently own are secured.
Substantially all of the debt investments held in our portfolio hold a non-investment grade rating
by Moodys Investors Service and/or Standard & Poors or, if not rated, would be rated below
investment grade if rated. High yield bonds rated below investment grade are commonly referred to
as junk bonds. We also anticipate making equity investments in private middle market companies.
For purposes of this quarterly report, we generally use the term middle market to refer to
companies with annual EBITDA of between $5 million and $50 million. EBITDA represents earnings
before net interest expense, income taxes, depreciation and amortization.
18
While our primary focus is to generate both current income and capital appreciation
through investments in debt and equity securities of private middle market companies and high-yield
bonds, we intend to invest up to 30% of our assets in opportunistic investments.
Opportunistic investments may include investments in distressed debt, debt and equity
securities of public companies, credit default swaps, emerging market debt, and structured finance
vehicles, including collateralized debt obligations (CDO) holding debt, equity or synthetic
securities. As part of this 30%, we may also invest in debt of private middle market companies
located outside the United States. Given our primary investment focus on first and second lien
loans and mezzanine debt in private companies and high yield bonds, we believe our opportunistic
investments will allow us to supplement our core investments with other investments that are within
our investment advisers expertise that we believe offer attractive yields and/or the potential for
capital appreciation.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we
have to invest at least 70% of our total assets in qualifying assets, including securities of
private U.S. operating companies or public U.S. companies whose securities are not listed on a
national securities exchange registered under the Exchange Act (i.e., New York Stock Exchange,
American Stock Exchange and The NASDAQ Global Market), cash, cash equivalents, U.S. government
securities and high-quality debt investments that mature in one year or less. In addition, we are
only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at
least 200% after such borrowing, with certain limited exceptions. The amount of our borrowing will
depend on our investment advisers assessment of market conditions and other factors.
Revenues
We generate revenue in the form of interest income and capital gains on the debt investments
that we hold and capital gains, if any, on equity interests that we may acquire in portfolio
companies. We expect our debt investments, whether in the form of first and second lien leveraged
loans, mezzanine debt or high yield bonds, to have terms of up to ten years, and to bear interest
at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or
semi-annually. In some cases our debt investments may provide for a portion of the interest payable
to be paid-in-kind. To the extent interest is paid-in-kind, it will be payable through the increase
of the principal amount of the obligation by the amount of interest due on the then-outstanding
aggregate principal amount of such obligation. The principal amount of the debt and any accrued
but unpaid interest will generally become 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. Any such fees will be generated in connection
with our investments and recognized as earned. We may also invest in equity securities, which may,
in some cases, include preferred securities that pay dividends on a current basis.
Additionally, pursuant to an agreement with our investment adviser entered into on October 17,
2006, prior to becoming a BDC, we acquired the right to act as investment adviser to CDO Fund III
and collect the management fees related thereto from March 20, 2007 until the liquidation of the CDO
Fund III assets. We paid our
investment adviser a fair market price of $144,000 for the right to act as investment advisor to CDO Fund III.
Expenses
Our primary operating expenses include the payment of investment advisory and management fees,
professional fees, insurance, fees paid to independent directors and overhead expenses, including,
at such time that we have $500 million in total assets, our allocable portion of our
administrators overhead under the administration agreement. Our allocable portion is based on the
proportion that our total assets bears to the total assets administered by our administrator. Our
investment advisory and management fees compensate our investment adviser for its work in
19
identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other
costs and expenses of our operations and transactions, including those relating to: organization;
calculating our net asset value (including the cost and expenses of any independent valuation
firm); expenses incurred by our investment adviser payable to third parties, including agents,
consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our
investments and performing due diligence on our prospective portfolio companies; interest payable
on debt, if any, incurred to finance our investments; offerings of our common stock and other
securities; investment advisory and management fees; administration fees; fees payable to third
parties, including agents, consultants or other advisers, relating to, or associated with,
evaluating and making investments; transfer agent and custodial fees; registration fees; listing
fees; taxes; independent directors fees and expenses; costs of preparing and filing reports or
other documents of the SEC; the costs of any reports, proxy statements or other notices to
stockholders, including printing costs; to the extent we are covered by any joint insurance
policies, our allocable portion of the insurance premiums for such policies; direct costs and
expenses of administration, including auditor and legal costs; and all other expenses incurred by
us or our administrator in connection with administering our business. For a period of 12 months
beginning March 23, 2007, we will be reimbursed by the manager for operating expenses to the extent
that our total annual operating expenses (other than investment advisory and management fees and
interest and credit facility expenses) exceed an amount equal to 1.55% of our net assets
attributable to common stock.
Pursuant to the investment advisory and management agreement, we pay our investment adviser a
fee for investment advisory and management services consisting of two components a base
management fee and an incentive fee.
The base management fee is calculated based on the average value of our total assets (other
than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the
two most recently completed fiscal quarters, and appropriately adjusted for any share issuances or
repurchases during the applicable fiscal quarter.
The incentive fee has two parts, as follows:
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment
income, expressed as a rate of return on the value of the net assets at the end of the immediately
preceding quarter (including interest that is accrued but not yet received in cash), that exceeds a
1.875% quarterly (7.5% annualized) hurdle rate measured as of the end of each fiscal quarter. Under
this provision, in any fiscal quarter, our investment adviser receives no incentive fee unless our
pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Amounts received as a
return of capital are not included in calculating this portion of the incentive fee. Since the
hurdle rate is based on net assets, a return of less than the hurdle rate on total assets may still
result in an incentive fee.
The second, payable at the end of each fiscal year, equals 20% of our net realized capital
gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in
each case on a cumulative basis, less the aggregate amount of capital gains incentive fees paid to
the investment adviser through such date.
On May 18, 2007, our board of directors approved a ministerial amendment to the investment
advisory and management agreement providing that the base management fee and incentive fee shall be
computed with reference to the fiscal year of the Company rather than the calendar year (in order
to align the fee calculation dates with our financial reporting cycle).
To the extent that any of our loans are denominated in a currency other than U.S. dollars, we
may enter into currency hedging contracts to reduce our exposure to fluctuations in currency
exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities,
which will be subject to compliance with applicable legal requirements, may include the use of
20
interest rate caps, futures, options and forward contracts. Costs incurred in entering into or
settling such contracts will be borne by us.
PORTFOLIO AND INVESTMENT ACTIVITY
As of May 31, 2007, our portfolio consisted of $208.9 million in aggregate principal amount of
investments. As of May 31, 2007, we invested in excess of 5% of total assets in 4 of our 41
investments, but in each case less than 10.3% of our total assets, and our five largest investments
represented approximately 36.5% of our total assets. We also anticipate making equity investments
in private middle market companies.
During the three months ended May 31, 2007, we made 99 investments in an aggregate principal
amount of 243.1 million of which $112.9 million were to new portfolio companies and $130.2 million
to existing portfolio companies. Also during the three months ended May 31, 2007, we had $34.2
million in exits and repayments resulting in net investments of $208.9 million for the period.
As of May 31, 2007, we had 41 investments in 34 portfolio companies with an average investment
size of $5.1 million and a weighted average life of 3.9 years. The overall portfolio composition
consisted of 13.4% first lien term loans, 42.9% second lien term loans, 18.5% senior secured notes,
23.8% unsecured notes, and 1.4% equity/limited partnership interests.
As
of May 31, 2007, the weighted average current coupon on our first lien term loans, second lien
term loans, senior secured notes and unsecured notes were 9.5%, 11.8%, 11.1% and 11.6%
respectively. At May 31, 2007, 45% or $95.0 million of our interest -bearing portfolio is fixed
rate debt with a weighted average current coupon of 11.3% and 55% or $113.9 million of our
interest-bearing portfolio is floating rate debt with a weighted average current spread of LIBOR
plus 5.6%.
The following table shows the portfolio composition by industry grouping at fair value as of
May 31, 2007.
21
Portfolio composition by industry grouping at fair value as of May 31, 2007
May 31, 2007 | ||||||||
Investments at | Percentage of | |||||||
Fair Value | Total Portfolio | |||||||
Restaurants |
$ | 32,499,331 | 15.57 | % | ||||
Automotive |
23,802,718 | 11.40 | % | |||||
Manufacturing |
19,417,888 | 9.30 | % | |||||
Apparel |
19,019,625 | 9.11 | % | |||||
Packaging |
18,938,499 | 9.07 | % | |||||
Electronics |
15,003,400 | 7.18 | % | |||||
Consumer Products |
10,221,026 | 4.90 | % | |||||
Homebuilding |
10,156,300 | 4.87 | % | |||||
Healthcare Services |
7,542,689 | 3.61 | % | |||||
Leisure Equipment |
7,200,000 | 3.45 | % | |||||
Consumer Services |
6,402,292 | 3.07 | % | |||||
Oil and Gas |
6,200,000 | 2.97 | % | |||||
Environmental |
5,811,000 | 2.78 | % | |||||
Publishing |
5,303,125 | 2.54 | % | |||||
Agriculture |
5,062,500 | 2.43 | % | |||||
Financial Services |
4,847,627 | 2.32 | % | |||||
Building Products |
4,269,678 | 2.05 | % | |||||
Telecommunications |
4,198,417 | 2.01 | % | |||||
Business Services |
1,796,789 | 0.86 | % | |||||
Natural Resources |
1,068,643 | 0.51 | % | |||||
Total |
$ | 208,761,547 | 100.00 | % |
The following table shows the portfolio composition by geographic location at fair value as of
May 31, 2007. The geographic composition is determined by the location of the corporate
headquarters of the portfolio company.
Portfolio composition by geographic location at fair value as of May 31, 2007
May 31, 2007 | ||||||||
Investments at | Percentage of | |||||||
Fair Value | Total Portfolio | |||||||
Midwest |
$ | 55,158,116 | 26.42 | % | ||||
West |
42,860,353 | 20.53 | % | |||||
Mid Atlantic |
39,073,134 | 18.72 | % | |||||
Southeast |
35,988,470 | 17.24 | % | |||||
Northeast |
28,691,581 | 13.74 | % | |||||
International |
6,989,893 | 3.35 | % | |||||
Total |
$ | 208,761,547 | 100.00 | % | ||||
Operations
Investment Income
Total investment income for the three months ended May 31, 2007 consisted of approximately
$3.7 million in interest income from investments, $21,051 in interest income from cash and cash
equivalents, $383,562 in fees from managing CDO Fund III and $16,603 in other income. We will not
earn fees pertaining to the management of CDO Fund III in future quarters. No interest was
paid-in-kind.
22
Operating Expenses
Total operating expenses before manager reimbursement for the three months ended May 31, 2007
consisted of $720,765 in interest and credit facility expense, $542,616 in professional fees,
$360,488 in base management fees, $144,000 in costs associated with the acquisition of the
management contract, $118,041 in insurance expenses, $359,368 in incentive management fees, $96,090
in director fees, $45,692 in administrative expenses, and $22,868 in organizational expenses. Our
professional fees included $225,915 in expenses related to the initial valuation of our portfolio
and $110,000 related to the preparation of our first 10-K. We expect
portfolio valuation and public filing preparation expenses to be lower in
future quarters. The base management fee for the quarter was prorated
for the period from March 28th
through
May 31st
and was calculated based upon
the initial value of the Companys total assets after giving
effect to the initial assets
purchased from CDO Fund III, without giving effect to subsequent asset purchases during the
quarter. The base management fee would have been greater had it been calculated based on the average value of our total assets at the beginning and
end of the quarter, which will be the case in future quarters, and is not representative of the
base management fee we expect to incur in future quarters.
The Manager has agreed to reimburse the Company for operating expenses to the extent that the
total annual operating expenses (other than investment advisory and management fees and interest
and credit facility expense) exceeds an amount equal to 1.55% of our net assets attributable to our
common stock. For the three months ended May 31, 2007, we recorded $265,766 in expense reimbursement
from the Manager based upon our total estimated annual operating expenses.
Net Realized Gains/Losses on Sales of Investments
For the three months ended May 31, 2007, the Company had approximately $1.0 million of net
realized gains, approximately $982,725 of which was attributable to the repayment of the Strategic
Finance Company Senior Notes.
Net Unrealized Gains/Losses on Investments
For the three months ended May 31, 2007, the Companys investments had an increase in net
unrealized appreciation of $750,801, primarily due to a $197,245 gain on Network Communications,
Inc., a $178,051 gain on Eurofresh, Inc., a $137,514 gain on GFSI, Inc. and a $78,933 gain on New
World Restaurant Group.
Net Unrealized Gains/Losses on Derivatives
For the three months ended May 31, 2007, the Company recorded unrealized depreciation on
derivatives of $50,020 relating to a decline in value of the interest rate caps purchased pursuant
to the Facilities.
Changes in Net Asset Value from Operations
We recorded a $3.7 million net increase in net assets resulting from operations for the three
months ended May 31, 2007. Based on 8,291,384 common shares outstanding as of May 31, 2007, our
net per share increase in net assets resulting from operations was $0.44.
Financial condition, liquidity and capital resources
The Companys liquidity and capital resources have been generated primarily from the net
proceeds of its IPO, advances from the Revolving Facility and the Term Facility (each as
23
defined below), as well as cash flows from operations. On March 28, 2007, we completed our IPO and
issued 7,250,000 common shares and received net proceeds of $101.7 million.
On April 11, 2007, we entered into a revolving securitized credit facility (the Revolving
Facility) pursuant to which we may borrow up to $100 million, which amount may be increased to
$130 million subject to certain conditions. Advances under the Revolving Facility were used to
purchase $55.8 million in aggregate principal amount of debt investments from CDO Fund III. Future
advances under the Revolving Facility may be used to purchase additional investments as they become
available. The Revolving Facility is secured by collateral that we currently own and the collateral
acquired by us with advances thereunder. Under the Revolving Facility, funds are borrowed from or
through certain lenders at prevailing commercial paper rates or, if the commercial paper market is
at any time unavailable, at prevailing LIBOR rates, plus 0.70%, payable monthly.
On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the Term
Facility and, together with the Revolving Facility, the Facilities), which was fully drawn at
closing. The proceeds of term facility, together with additional
advances under our Revolving Facility,
were used to purchase $59.3 million in aggregate principal amount of debt investments from CDO Fund
I. The Term Facility bears interest at prevailing commercial paper rates or, if the commercial
paper market is at any time unavailable, at prevailing LIBOR rates, plus 0.70%, payable quarterly.
As of May 31, 2007, we have borrowed an aggregate of $100.2 million under the Facilities and
have $25.5 million of undrawn commitments remaining. As of May 31, 2007, our asset coverage ratio,
as defined in the 1940 Act, was 218%.
As of May 31, 2007 the fair value of investments and cash and cash equivalents, cash,
Facilities accounts, and outstanding borrowings under the Facilities were as follows:
Percent | ||||||||
Fair Value | Of Total | |||||||
Cash and cash equivalents |
$ | 2,265,303 | 1.1 | % | ||||
Cash, Facilities accounts |
3,590,672 | 1.7 | % | |||||
First lien term loans |
27,995,728 | 13.0 | % | |||||
Second lien term loans |
89,511,423 | 41.7 | % | |||||
Senior secured notes |
38,669,175 | 18.0 | % | |||||
Unsecured notes |
49,762,419 | 23.2 | % | |||||
Equity/Limited Partnership Interests |
2,822,802 | 1.3 | % | |||||
Total |
$ | 214,617,522 | 100.0 | % | ||||
Outstanding borrowings |
$ | 100,208,119 |
On May 21, 2007, our Board of Directors declared a dividend of $0.24 per share payable on June
6, 2007 to common stockholders of record on May 29, 2007. The dividend was for the stub fiscal
quarter beginning March 28, 2007 (the completion date of our IPO) and ending May 31, 2007.
Off-Balance Sheet Arrangements
None.
24
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our business activities contain elements of market risk. We consider our principal market
risks to be fluctuations in interest rates and the valuations of our investment portfolio.
Essential to our business is managing these risks. Accordingly, we have systems and procedures
designed to identify and analyze our risks, to establish appropriate policies and thresholds and to
continually monitor these risks and thresholds by means of administrative and information
technology systems and other policies and processes.
Interest Rate Risk
Interest rate risk is defined as the sensitivity of our current and future earnings to
interest rate volatility including relative changes in different
interest rates, variability of spread relationships, the difference in re-pricing
intervals between our assets and liabilities and the effect that interest rates may have on our
cash flows. Changes in the general level of interest rates can affect our net interest income,
which is the difference between the interest income earned on interest earning assets and our
interest expense incurred in connection with our interest bearing debt and liabilities. Changes in
interest rates can also affect, among other things, our ability to acquire loans and securities and
the value of our investment portfolio.
Our investment income is affected by fluctuations in various interest rates, including LIBOR
and the prime rate. We expect that a large portion of our future portfolio will be comprised of
floating rate investments that utilize LIBOR. Our interest expense is
affected by fluctuations in the commercial paper rate or, if the
commercial paper market is unavailable, LIBOR. As of May 31, 2007, we had $100.2 million of
borrowings outstanding at a floating rate tied to the prevailing commercial paper rate plus a
margin of 0.70%.
In April and May 2007, pursuant to the Facilities, the Company entered into three interest
rate cap agreements with notional amounts of $34 million, $6 million and $60.9 million. These
agreements provide for a payment to the Company in the event LIBOR exceeds 8%, mitigating our
exposure to increases in LIBOR.
We have analyzed the potential impact of changes in interest rates on interest income net of
interest expense. Assuming that our balance sheet as of May 31, 2007 were to remain constant and
no actions were taken to alter the existing interest rate sensitivity, a hypothetical change of 1%
in interest rates would cause a corresponding change of approximately $11,000 to net assets from
operations over a one year period.
Although management believes that this measure is indicative of our sensitivity to interest
rate changes, it does not adjust for potential changes in credit quality, size and composition of
the assets on the balance sheet and other business developments that could magnify or diminish our
sensitivity to interest rate changes. Accordingly no assurances can be given that actual results
would not materially differ from the potential outcome simulated by this estimate.
Portfolio Valuation
We carry our investments at fair value, as determined in good faith by our Board of Directors.
Investments for which market quotations are readily available are valued at such market
quotations. We value investments for which market quotations are not readily available at fair
value as determined in good faith by our board under our 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 ready market existed for
such investments, and the differences could be material. In addition, changes in the market
environment and other events that may occur over the life of the investments may cause the gains or
losses ultimately realized on these investments to be different than the valuations that are
25
assigned. The types of factors that we may take into account in fair value pricing of our
investments include, as relevant, the nature and realizable value of any collateral, third party
valuations, the portfolio companys 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, recent sales of or offers to buy comparable companies, and other relevant factors.
Item 4T. Controls and Procedures
Evaluation of Controls and Procedures.
The Companys management, under the supervision and with the participation of various members
of management, including our CEO and our CFO, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange
Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, our
CEO and CFO have concluded that our current disclosure controls and procedures are effective as of
the end of the period covered by this quarterly report.
Changes in Internal Controls.
There have been no changes in the Companys internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred
during the three months ended May 31, 2007 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
Neither we nor any of our subsidiaries are currently subject to any material legal
proceedings, nor, to our knowledge, are any material legal proceedings threatened against us or our
subsidiaries.
Item 1A. | Risk Factors |
There were no material changes from
the risk factors previously disclosed in Part I, Item 1A.
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended February 28, 2007 except
as follows:
The lack of liquidity in our investments and recent market volatility may adversely affect our
business.
We will generally make investments in private companies. Substantially all of these
investments will be subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. The illiquidity of our investments may make it difficult
for us to sell such investments if the need arises. In addition, if we are required to liquidate
all or a portion of our portfolio quickly, we may realize significantly less than the value at
which we have previously recorded our investments. In addition, we may face other restrictions on
our ability to liquidate an investment in a portfolio company to the extent that we or an
affiliated manager of GSC Group has material non-public information regarding such portfolio
company. Recent market volatility in the corporate debt markets may adversely affect our
investment portfolio in the event that, among other things, such volatility affects demand for loans to
middle market companies and other debt securities, reduces the market value of our investments (including
our illiquid investments), impairs our ability to sell such investments and impairs our ability to
borrow under the Facilities.
We may experience fluctuations in our quarterly results.
26
We could experience fluctuations in our quarterly operating results due to a number of
factors, including the interest rate payable on the debt investments we make, the default rate on
such investments, the level of our expenses, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, results for any period
should not be relied upon as being indicative of performance in future periods. Recent market
volatility in the corporate debt markets may adversely affect our investment portfolio in the
event that, among other things, such volatility affects demand for loans to middle market companies and
other debt securities, reduces the market value of our investments (including our illiquid investments), impairs our ability to sell such investments
and
impairs our ability to borrow under our Facilities.
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.
Item 6. | Exhibits |
Exhibit | ||||
Number | Description | |||
3.1
|
Articles of Incorporation of GSC Investment Corp. | |||
4.1
|
Registration Rights Agreement dated March 27, 2007 between GSC Investment Corp., GSC CDO III L.L.C., GSCP (NJ) L.P. and the other investors party thereto. | |||
10.1
|
Investment Advisory and Management Agreement dated March 21, 2007 between GSC Investment LLC and GSCP (NJ) L.P. | |||
10.2
|
Custodian Agreement dated March 21, 2007 between GSC Investment LLC and U.S Bank National Association. | |||
10.3
|
Administration Agreement dated March 21, 2007 between GSC Investment Corp. and GSCP (NJ) L.P. | |||
10.4
|
Trademark License Agreement dated March 21, 2007 between GSC Investment Corp. and GSCP (NJ) L.P. | |||
10.5
|
Portfolio Acquisition Agreement dated March 21, 2007 between GSC Investment Corp. and GSC Partners CDO Fund III, Limited. | |||
10.6
|
Notification of Fee Reimbursement dated March 21, 2007. | |||
10.7
|
Assignment and Assumption Agreement dated March 20, 2007 among GSCP (NJ), L.P. and GSC Investment LLC. | |||
10.8
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Richard T. Allorto, Jr., as Chief Financial Officer of GSC Investment LLC. |
27
10.9
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Peter K. Barker, as director of GSC Investment LLC. | |||
10.10
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Robert F. Cummings, Jr., as director of GSC Investment LLC. | |||
10.11
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and David L. Goret, as Vice President and Secretary of GSC Investment LLC. | |||
10.12
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Richard M. Hayden, as Chairman of the Board of Directors of GSC Investment LLC. | |||
10.13
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Thomas V. Inglesby, as Chief Executive Officer of GSC Investment LLC. | |||
10.14
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Steven M. Looney, as director of GSC Investment LLC. | |||
10.15
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Michael J. Monticciolo, as Chief Compliance Officer of GSC Investment LLC. | |||
10.16
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Charles S. Whitman III, as director of GSC Investment LLC. | |||
10.17
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and G. Cabell Williams, as director of GSC Investment LLC. | |||
10.18
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Daniel I. Castro, Jr., as member of the investment committee of GSCP (NJ), LP. | |||
10.19
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Robert F. Cummings, Jr., as member of the investment committee of GSCP (NJ), LP. | |||
10.20
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Richard M. Hayden, as member of the investment committee of GSCP (NJ), LP. | |||
10.21
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Thomas V. Inglesby, as member of the investment committee of GSCP (NJ), LP. | |||
10.22
|
Indemnification Agreement dated March 20, 2007 between GSC Investment LLC and Thomas J. Libassi, as member of the investment committee of GSCP (NJ), LP. | |||
31.1
|
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2
|
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GSC Investment Corp. |
||||
Date: July ____, 2007 | By | /s/ Thomas V. Inglesby | ||
Thomas V. Inglesby | ||||
Director and Chief Executive Officer, GSC Investment Corp. |
By | /s/ richard t. allorto, jr. | |||
Richard T. Allorto, Jr. | ||||
Chief Financial Officer, GSC Investment Corp. | ||||
29