XNAS:FDUS Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2012

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 814-00861

 

 

Fidus Investment Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   27-5017321

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1603 Orrington Avenue, Suite 820

Evanston, Illinois

  60201
(Address of Principal Executive Offices)   (Zip Code)

(847) 859-3940

(Registrant’s telephone number, including area code)

 

 

n/a

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 2, 2012, the Registrant had outstanding 9,427,021 shares of common stock, $0.001 par value.

 

 

 


Table of Contents

FIDUS INVESTMENT CORPORATION

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

 

     PART I — FINANCIAL INFORMATION       

Item 1.

  

Financial Statements.

     3   
  

Consolidated Statements of Assets and Liabilities — June 30, 2012 (unaudited) and December 31, 2011

     3   
  

Consolidated Statements of Operations — Three and Six Months Ended June 30, 2012 (unaudited) and 2011 (unaudited)

     4   
  

Consolidated Statements of Changes in Net Assets — Three and Six Months Ended June 30, 2012 (unaudited) and 2011 (unaudited)

     5   
  

Consolidated Statements of Cash Flows — Three and Six Months Ended June 30, 2012 (unaudited) and 2011 (unaudited)

     6   
  

Consolidated Schedule of Investments — June 30, 2012 (unaudited) and December 31, 2011

     7   
  

Notes to Consolidated Financial Statements (unaudited)

     13   

Item 2.

  

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

     25   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk.

     37   

Item 4.

  

Controls and Procedures.

     37   
   PART II — OTHER INFORMATION   

Item 1.

  

Legal Proceedings.

     38   

Item 1A.

  

Risk Factors.

     38   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     42   

Item 3.

  

Defaults Upon Senior Securities.

     42   

Item 4.

  

Mine Safety Disclosures.

     42   

Item 5.

  

Other Information.

     42   

Item 6.

  

Exhibits.

     43   

Signatures

     44   

Exhibit Index

     45   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Assets and Liabilities

 

     June  30,
2012
(unaudited)
    December 31,
2011
 
ASSETS     

Investments, at fair value

    

Control investments (cost: $20,420,177 and $19,916,617, respectively)

   $ 29,844,891      $ 28,598,962   

Affiliate investments (cost: $51,531,946 and $49,913,338, respectively)

     50,132,504        50,058,243   

Non-control/non-affiliate investments (cost: $149,151,373 and $122,709,976, respectively)

     154,077,960        126,088,167   
  

 

 

   

 

 

 

Total investments, at fair value (cost: $221,103,496 and $192,539,931, respectively)

     234,055,355        204,745,372   

Cash and cash equivalents

     27,630,427        39,058,516   

Interest receivable

     2,057,290        1,686,851   

Deferred financing costs (net of accumulated amortization of $1,346,073 and $1,134,767, respectively)

     3,094,240        2,687,233   

Prepaid expenses and other assets

     667,818        465,171   
  

 

 

   

 

 

 

Total assets

     267,505,130        248,643,143   
  

 

 

   

 

 

 
LIABILITIES     

SBA debentures

     121,250,000        104,000,000   

Accrued interest payable

     1,918,767        1,718,989   

Due to affiliates

     2,441,474        2,162,160   

Accounts payable and other liabilities

     293,671        279,849   
  

 

 

   

 

 

 

Total liabilities

     125,903,912        108,160,998   
  

 

 

   

 

 

 

Net assets

   $ 141,601,218      $ 140,482,145   
  

 

 

   

 

 

 
ANALYSIS OF NET ASSETS     

Common stock, $0.001 par value (100,000,000 shares authorized, 9,427,021 shares issued and outstanding)

   $ 9,427      $ 9,427   

Additional paid-in capital

     138,648,226        138,648,226   

Undistributed net investment income

     794,702        422,049   

Accumulated net realized loss on investments

     (481,937     (481,937

Accumulated net unrealized appreciation on investments

     2,630,800        1,884,380   
  

 

 

   

 

 

 

Total net assets

   $ 141,601,218      $ 140,482,145   
  

 

 

   

 

 

 

Net asset value per share

   $ 15.02      $ 14.90   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

3


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Operations (unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012      2011  

Investment income:

         

Interest and fee income

         

Control investments

   $ 729,586      $ 853,890      $ 1,449,614       $ 1,673,388   

Affiliate investments

     1,779,768        1,057,828        3,561,344         1,924,688   

Non-control/non-affiliate investments

     4,903,174        3,271,050        9,819,658         6,246,134   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest and fee income

     7,412,528        5,182,768        14,830,616         9,844,210   

Dividend income

         

Control investments

     —          120,300        —           236,376   

Affiliate investments

     30,454        —          60,858         —     

Non-control/non-affiliate investments

     151,426        —          271,928         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total dividend income

     181,880        120,300        332,786         236,376   

Interest on idle funds and other income

     34,130        16,219        61,617         32,464   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total investment income

     7,628,538        5,319,287        15,225,019         10,113,050   
  

 

 

   

 

 

   

 

 

    

 

 

 

Expenses:

         

Interest expense

     1,569,250        1,394,767        3,011,864         2,719,052   

Base management fee

     1,005,306        999,190        1,944,714         2,035,403   

Less: management fee offset

     —          (430,208     —           (430,208

Incentive fee

     1,045,933        —          1,923,416         —     

Administrative service expenses

     223,766        22,173        453,142         22,173   

Professional fees

     156,121        90,677        413,152         170,350   

Other general and administrative expenses

     285,454        82,759        501,817         106,121   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     4,285,830        2,159,358        8,248,105         4,622,891   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net investment income before income taxes

     3,342,708        3,159,929        6,976,914         5,490,159   

Income tax expense (benefit)

     (8,275     —          5,346         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net investment income

     3,350,983        3,159,929        6,971,568         5,490,159   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net realized and unrealized gains (losses) on investments:

         

Realized loss on non-control/non-affiliate investments

     —          —          —           (7,935,430

Net change in unrealized appreciation on investments

     848,374        1,437,313        746,420         10,385,661   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net gain on investments

     848,374        1,437,313        746,420         2,450,231   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 4,199,357      $ 4,597,242      $ 7,717,988       $ 7,940,390   
  

 

 

   

 

 

   

 

 

    

 

 

 

Per common share data:(1)

         

Net investment income per share-basic and diluted

   $ 0.36      $ 0.33      $ 0.74       $ 0.58   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in net assets resulting from operations per share-basic and diluted

   $ 0.45      $ 0.49      $ 0.82       $ 0.84   
  

 

 

   

 

 

   

 

 

    

 

 

 

Dividends paid per share

   $ 0.36        n/a      $ 0.70         n/a   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average number of shares outstanding — basic and diluted

     9,427,021        9,427,021        9,427,021         9,427,021   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) The weighted average shares outstanding for the three and six months ended June 30, 2011, are based on the assumption that the number of shares issued in the Formation Transactions and Offering (including the over-allotment) in June and July 2011 (9,427,021 shares of common stock) had been issued on January 1, 2011.

See Notes to Consolidated Financial Statements (unaudited).

 

4


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Changes in Net Assets (unaudited)

 

          Common Stock     Additional
Paid in
Capital
    Undistributed
Net Investment
Income
    Accumulated
Net Realized

Loss on
Investments
    Accumulated
Net Unrealized

Appreciation
on Investments
    Total
Net
Assets
 
    Partners’
Capital
    Number
of  Shares
    Par
Value
           

Balances at December 31, 2010

  $ 52,004,664        —        $ —        $ —        $ —        $ —        $ —        $ 52,004,664   

Capital contributions

    7,000,000        —          —          —          —          —          —          7,000,000   

Capital distributions

    (1,500,000                 (1,500,000

Net investment income through June 20, 2011

    5,077,597        —          —          —          —          —          —          5,077,597   

Realized loss on investments through June 20, 2011

    (7,935,430     —          —          —          —          —          —          (7,935,430

Net change in unrealized appreciation on investments through June 20, 2011

    10,385,661        —          —          —          —          —          —          10,385,661   

Formation transactions

    (65,032,492     4,056,521        4,057        65,028,435        —          —          —          —     

Public offering of common stock, net of expenses

    —          4,670,000        4,670        63,909,505        —          —          —          63,914,175   

Net investment income June 21 to June 30, 2011

    —          —          —          —          412,562        —          —          412,562   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

  $ —          8,726,521      $ 8,727      $ 128,937,940      $ 412,562      $ —        $ —        $ 129,359,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

  $ —          9,427,021      $ 9,427      $ 138,648,226      $ 422,049      $ (481,937   $ 1,884,380      $ 140,482,145   

Net increase in net assets resulting from operations

    —          —          —          —          6,971,568        —          746,420        7,717,988   

Dividends paid

    —          —          —          —          (6,598,915     —          —          (6,598,915
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

  $ —          9,427,021      $ 9,427      $ 138,648,226      $ 794,702      $ (481,937   $ 2,630,800      $ 141,601,218   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

5


Table of Contents

FIDUS INVESTMENT CORPORATION

Consolidated Statements of Cash Flows (unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

Cash Flows from Operating Activities

    

Net increase in net assets resulting from operations

   $ 7,717,988      $ 7,940,390   

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

    

Net change in unrealized appreciation on investments

     (746,420     (10,385,661

Realized loss on investments

     —          7,935,430   

Interest and dividend income paid-in-kind

     (2,269,572     (2,084,385

Accretion of original issue discount

     (548,425     (304,877

Accretion of origination fees

     (49,844     —     

Amortization of deferred financing costs

     211,306        180,339   

Purchase of investments

     (33,368,812     (19,591,858

Principal payments received on debt securities

     7,397,526        5,035,791   

Proceeds from loan origination fees

     275,564        31,250   

Changes in operating assets and liabilities:

    

Interest receivable

     (370,439     (1,326,255

Prepaid expenses and other assets

     (202,647     (290,222

Accrued interest payable

     199,778        52,098   

Due to affiliates

     279,314        91,683   

Accounts payable and other liabilities

     13,822        627,167   
  

 

 

   

 

 

 

Net cash used in operating activities

     (21,460,861     (12,089,110
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Proceeds from initial public offering, net of expenses

     —          63,914,175   

Proceeds received from SBA debentures

     17,250,000        3,250,000   

Payment of deferred financing costs

     (618,313     (78,813

Capital contributions

     —          7,000,000   

Capital distributions

     —          (1,500,000

Dividends paid to shareholders

     (6,598,915     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     10,032,772        72,585,362   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (11,428,089     60,496,252   

Cash and cash equivalents:

    

Beginning of period

     39,058,516        1,757,139   
  

 

 

   

 

 

 

End of period

   $ 27,630,427      $ 62,253,391   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash payments for interest

   $ 2,600,780      $ 2,486,616   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

6


Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

June 30, 2012 (unaudited)

 

Portfolio Company / Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Control Investments(5)

                    

Worldwide Express Operations, LLC

   Transportation
Services
                 

Subordinated Note

      11.0%/3.0%      2/1/2014       $ 8,813,159       $ 8,813,159       $ 8,813,159      

Subordinated Note

      10.0%/4.0%      2/1/2014         11,518,332         11,336,628         11,518,332      

Warrant (213,381 units)(7)

                 —           8,065,400      

Common Units (51,946 units)(7)

                 270,390         1,448,000      
              

 

 

    

 

 

    

Sub Total

                 20,420,177         29,844,891         21
              

 

 

    

 

 

    

 

 

 

Total Control Investments

                 20,420,177         29,844,891         21
              

 

 

    

 

 

    

 

 

 

Affiliate Investments(5)

                    

Avrio Technology Group, LLC

   Electronic
Control Supplier
                 

Subordinated Note

      9.0%/7.5%      10/15/2015         8,883,175         8,883,175         7,345,285      

Common Units (1,000 units)(7)

                 1,000,000         —        
              

 

 

    

 

 

    

Sub Total

                 9,883,175         7,345,285         5

Malabar International

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      12.5%/2.5%      5/21/2017         4,924,793         4,892,428         4,924,793      

Preferred Equity (1,494 shares)(6)

      6.0%/0.0%            1,986,516         2,637,900      
              

 

 

    

 

 

    

Sub Total

                 6,878,944         7,562,693         5

Medsurant Holdings, LLC

   Healthcare Services                  

Subordinated Note

      14.0%/0.0%      4/12/2016         7,250,000         5,840,681         7,250,000      

Preferred Units (60,977 units)(7)

                 698,804         793,400      

Warrant (222,224 units)(7)

                 2,182,466         2,871,600      
              

 

 

    

 

 

    

Sub Total

                 8,721,951         10,915,000         8

Paramount Building Solutions, LLC

   Retail Cleaning                  

Subordinated Note

      12.0%/4.0%      2/15/2014         6,367,931         6,367,931         6,367,931      

Common Units (107,143 units)(7)

                 1,500,000         631,600      
              

 

 

    

 

 

    

Sub Total

                 7,867,931         6,999,531         5

Trantech Radiator Products, Inc.

   Utility Equipment
Manufacturer
                 

Subordinated Note

      12.0%/1.8%      5/4/2017         9,105,401         9,065,163         9,105,401      

Common Shares (6,875 shares)

                 687,500         850,400      
              

 

 

    

 

 

    

Sub Total

                 9,752,663         9,955,801         7

Westminster Cracker Company, Inc.

   Specialty Cracker
Manufacturer
                 

Subordinated Note

      14.0%/4.0%      11/17/2014         7,219,085         7,219,085         6,999,994      

Common Units (1,208,197 units)

                 1,208,197         354,200      
              

 

 

    

 

 

    

Sub Total

                 8,427,282         7,354,194         5
              

 

 

    

 

 

    

 

 

 

Total Affiliate Investments

                 51,531,946         50,132,504         35
              

 

 

    

 

 

    

 

 

 

Non-Control/Non-Affiliate Investments(5)

                    

Acentia, LLC (f/k/a ITSolutions)

   IT Services                  

Common Units (499 units)

              500,000         500,000         322,600         0

ACFP Management, Inc.

   Restaurants                  

Subordinated Note

      12.0%/2.0%      6/29/2017         7,475,838         7,442,194         7,475,838         5

Brook & Whittle Limited

   Specialty Printing                  

Subordinated Note

      12.0%/4.8%      8/9/2016         6,469,456         6,469,456         6,469,456      

Subordinated Note

      12.0%/2.0%      8/9/2016         2,140,135         2,043,639         2,003,484      

Warrant (1,051 shares)

                 285,000         478,100      

Common Shares (148 shares)

                 110,374         67,300      
              

 

 

    

 

 

    

Sub Total

                 8,908,469         9,018,340         6

 

7


Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

June 30, 2012 (continued) (unaudited)

 

Portfolio Company / Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Brook Furniture Rental, Inc.

   Furniture Rental                  

Subordinated Note

      12.0%/1.5%      9/30/2016       $ 7,687,208       $ 7,240,462       $ 7,687,208      

Warrants (2.5%)

                 485,188         502,600      
              

 

 

    

 

 

    

Sub Total

                 7,725,650         8,189,808         6

Caldwell & Gregory, LLC

   Laundry Services                  

Subordinated Note

      12.5%/1.5%      4/23/2016         1,875,838         1,875,838         1,875,838      

Preferred Units (11,628 units)(7)

                 1,162,786         1,472,700      

Common Units (4,464 units)(7)

                 4,464         228,600      
              

 

 

    

 

 

    

Sub Total

                 3,043,088         3,577,138         3

Connect-Air International, Inc.

   Specialty
Distribution
                 

Subordinated Note

      12.5%/3.0%      12/31/2014         4,213,879         4,213,879         4,213,879      

Preferred Interest(6)

      0.0%/10.0%      12/31/2014            5,362,648         5,741,298      
              

 

 

    

 

 

    

Sub Total

                 9,576,527         9,955,177         7

Continental Anesthesia Management, LLC

   Healthcare Services                  

Senior Secured Loan

      13.5%/0.0%      11/10/2014         10,200,000         10,068,425         10,200,000      

Warrant (263 shares)

                 276,070         161,300      
              

 

 

    

 

 

    

Sub Total

                 10,344,495         10,361,300         7

Convergent Resources, Inc.

   Debt Collection
Services
                 

Subordinated Note

      13.0%/3.0%      12/27/2017         5,501,833         5,446,916         5,446,916         4

FutureTech Holding Company

   IT Services                  

Subordinated Note

      13.5%/5.5%      2/29/2016         7,657,981         7,589,855         7,589,855         5

Goodrich Quality Theaters, Inc.

   Movie Theaters                  

Subordinated Note

      12.8%/0.0%      3/31/2015         12,500,000         12,081,762         12,500,000      

Warrant (71 shares)

                 750,000         2,293,600      
              

 

 

    

 

 

    

Sub Total

                 12,831,762         14,793,600         10

Innovative Product Achievement, LLC

   Healthcare Products                  

Subordinated Note

      13.0%/2.5%      12/21/2016         6,334,073         6,308,635         6,334,073         4

Jacob Ash Holdings, Inc.

   Apparel Distribution                  

Subordinated Note

      13.0%/4.0%      8/11/2016         3,500,000         3,485,595         3,500,000      

Subordinated Note

      13.0%/0.0%      8/11/2016         1,750,000         1,715,587         1,750,000      

Preferred Equity (500 shares)(6)

      0.0%/15.0%      8/11/2016            539,026         567,500      

Warrant (129,630 shares)

                 67,408         67,408      
              

 

 

    

 

 

    

Sub Total

                 5,807,616         5,884,908         4

Jan-Pro Holdings, LLC

   Commercial
Cleaning
                 

Subordinated Note

      12.5%/3.5%      3/18/2017         7,479,909         7,479,909         7,479,909      

Preferred Equity (1,054,619 shares)

                 832,124         416,000      
              

 

 

    

 

 

    

Sub Total

                 8,312,033         7,895,909         6

K2 Industrial Services, Inc.

   Industrial Cleaning &
Coatings
                 

Subordinated Note

      11.8%/2.0%      5/23/2017         12,147,904         12,094,465         12,147,904      

Preferred Equity (1,200 shares)

                 1,200,000         1,024,200      
              

 

 

    

 

 

    

Sub Total

                 13,294,465         13,172,104         9

Lightning Diversion Systems, Inc.

   Aerospace & Defense
Manufacturing
                 

Revolving Loan ($1,000,000 commitment)

      12.0%/0.0%      6/17/2017         200,000         195,033         195,033      

Senior Secured Loan

      12.0%/0.0%      6/17/2017         7,412,742         7,375,924         7,375,924      

Common Units (600,000 units)

                 600,000         600,000      
              

 

 

    

 

 

    

Sub Total

                 8,170,957         8,170,957         6

 

8


Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

June 30, 2012 (continued) (unaudited)

 

Portfolio Company / Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Nobles Manufacturing, Inc.

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      13.0%/3.0%      4/6/2016       $ 6,825,000       $ 6,825,000       $ 6,825,000      

Preferred Equity (1,300,000 shares)

                 1,300,000         1,928,600      

Common Equity (1,300,000 shares)

                 —           —        
              

 

 

    

 

 

    

Sub Total

                 8,125,000         8,753,600         6

Restoration Holdco, LLC

   Restoration &
Mitigation Services
                 

Senior Secured Loan

      13.0%/1.0%      8/11/2016         4,764,812         4,606,888         4,600,808      

Warrant (11 units)

                 141,701         39,700      
              

 

 

    

 

 

    

Sub Total

                 4,748,589         4,640,508         3

Simplex Manufacturing Co.

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      13.0%/0.0%      10/31/2013         4,550,000         4,372,104         4,550,000      

Warrant (24 shares)

                 710,000         991,700      
              

 

 

    

 

 

    

Sub Total

                 5,082,104         5,541,700         4

Tulsa Inspection Resources, Inc.

   Oil & Gas Services                  

Subordinated Note

      14.0%/0.0%      3/12/2014         4,000,000         3,933,154         4,000,000      

Subordinated Note

      17.5%/0.0%      3/12/2014         648,471         648,471         648,471      

Warrant (6 shares)

                 193,435         1,187,200      

Common Equity (1 share)

                 94,500         94,500      
              

 

 

    

 

 

    

Sub Total

                 4,869,560         5,930,171         4

United Biologics, LLC

   Healthcare Services                  

Senior Secured Loan

      12.0%/2.0%      3/5/2017         10,065,717         9,185,341         9,185,341      

Common Equity (88,968 units)(7)

                 1,000,000         1,000,000      

Warrant (78,148 units)

                 838,117         838,117      
              

 

 

    

 

 

    

Sub Total

                 11,023,458         11,023,458         8
              

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

                 149,151,373         154,077,960         109
              

 

 

    

 

 

    

 

 

 

Total Investments

               $ 221,103,496       $ 234,055,355         165
              

 

 

    

 

 

    

 

 

 

 

(1) All debt investments are income producing. Equity investments are non-income producing unless otherwise noted.
(2) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.
(3) Equity ownership may be held in shares or units of companies related to the portfolio companies.
(4) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any.
(5) See Note 2 — Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.
(6) Income producing. Maturity date, if any, represents mandatory redemption date.
(7) Investment is held by a wholly-owned subsidiary of the Company.

 

9


Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

December 31, 2011

 

Portfolio Company / Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Control Investments(5)

                    

Worldwide Express Operations, LLC

   Transportation
Services
                 

Subordinated Note

      11.0%/3.0%      2/1/2014       $ 8,683,141       $ 8,683,141       $ 8,683,141      

Subordinated Note

      0.0%/14.0%      2/1/2014         11,200,821         10,963,086         11,200,821      

Warrant (213,381 units)(7)

                 —           7,386,100      

Common Units (51,946 units)(7)

                 270,390         1,328,900      
              

 

 

    

 

 

    

Sub Total

                 19,916,617         28,598,962         20
              

 

 

    

 

 

    

 

 

 

Total Control Investments

                 19,916,617         28,598,962         20
              

 

 

    

 

 

    

 

 

 

Affiliate Investments(5)

                    

Avrio Technology Group, LLC

   Electronic
Control Supplier
                 

Subordinated Note

      9.0%/7.5%      10/15/2015         8,560,918         8,560,918         8,061,600      

Common Units (1,000 units)(7)

                 1,000,000         372,200      
              

 

 

    

 

 

    

Sub Total

                 9,560,918         8,433,800         6

Malabar International

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      12.5%/2.5%      5/21/2017         4,863,472         4,827,896         4,827,896      

Preferred Equity (1,494 shares)(6)

                 1,985,329         1,985,329      
              

 

 

    

 

 

    

Sub Total

                 6,813,225         6,813,225         5

Medsurant Holdings, LLC

   Healthcare Services                  

Subordinated Note

      14.0%/0.0%      4/12/2016         7,250,000         5,676,797         7,250,000      

Preferred Units (40,750 units)(7)

                 500,000         500,000      

Warrant (166,970 units)(7)

                 1,669,700         1,989,900      
              

 

 

    

 

 

    

Sub Total

                 7,846,497         9,739,900         7

Paramount Building Solutions, LLC

   Retail Cleaning                  

Subordinated Note

      12.0%/4.0%      2/15/2014         6,240,663         6,240,663         6,240,663      

Common Units (107,143 units)(7)

                 1,500,000         1,745,400      
              

 

 

    

 

 

    

Sub Total

                 7,740,663         7,986,063         6

Trantech Radiator Products, Inc.

   Utility Equipment
Manufacturer
                 

Subordinated Note

      12.0%/1.8%      5/4/2017         9,025,375         8,981,055         8,981,055      

Common Shares (6,875 shares)

                 687,500         687,500      
              

 

 

    

 

 

    

Sub Total

                 9,668,555         9,668,555         7

Westminster Cracker Company, Inc.

   Specialty Cracker
Manufacturer
                 

Subordinated Note

      14.0%/4.0%      11/17/2014         7,075,283         7,075,283         6,901,700      

Common Units (1,208,197 units)

                 1,208,197         515,000      
              

 

 

    

 

 

    

Sub Total

                 8,283,480         7,416,700         5
              

 

 

    

 

 

    

 

 

 

Total Affiliate Investments

                 49,913,338         50,058,243         36
              

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

December 31, 2011 (continued)

 

Portfolio Company / Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Non-Control/Non-Affiliate Investments(5)

                    

ACFP Acquisition Company, Inc.

   Restaurants                  

Subordinated Note

      12.0%/2.0%      6/29/2017       $ 7,400,822       $ 7,363,840       $ 7,363,840         5

Brook & Whittle Limited

   Specialty
Printing
                 

Subordinated Note

      12.0%/4.8%      8/9/2016         6,316,340         6,316,340         6,316,340      

Subordinated Note

      12.0%/2.0%      8/9/2016         2,118,858         1,993,369         2,038,896      

Warrant (1,051 shares)

                 285,000         550,200      

Common Shares (148 Shares)

                 110,374         77,500      
              

 

 

    

 

 

    

Sub Total

                 8,705,083         8,982,936         6

Brook Furniture Rental, Inc.

   Furniture
Rental
                 

Subordinated Note

      12.0%/1.5%      9/30/2016         7,629,171         7,131,385         7,131,385      

Warrants (2.5%)

                 485,188         485,188      
              

 

 

    

 

 

    

Sub Total

                 7,616,573         7,616,573         5

Caldwell & Gregory, LLC

   Laundry
Services
                 

Subordinated Note

      12.5%/1.5%      4/23/2016         3,465,874         3,465,874         3,465,874      

Preferred Units (11,628 units)(7)

                 1,162,786         1,424,485      

Common Units (4,464 units)(7)

                 4,464         166,700      
              

 

 

    

 

 

    

Sub Total

                 4,633,124         5,057,059         4

Connect-Air International, Inc.

   Specialty
Distribution
                 

Subordinated Note

      12.5%/3.0%      12/31/2014         4,213,879         4,213,879         4,213,879      

Preferred Interest(6)

      0.0%/10.0%      12/31/2014            5,131,979         5,131,979      
              

 

 

    

 

 

    

Sub Total

                 9,345,858         9,345,858         7

Goodrich Quality Theaters, Inc.

   Movie
Theaters
                 

Subordinated Note

      12.8%/0.0%      3/31/2015         12,500,000         12,007,236         12,500,000      

Warrant (71 shares)

                 750,000         2,080,300      
              

 

 

    

 

 

    

Sub Total

                 12,757,236         14,580,300         10

Innovative Product Achievement, LLC

   Healthcare
Products
                 

Subordinated Note

      13.0%/2.5%      12/21/2016         6,334,073         6,305,809         6,305,809         4

Interactive Technology Solutions, LLC

   Government
IT Services
                 

Subordinated Note

      12.0%/3.0%      12/31/2015         5,182,173         5,182,173         5,182,173      

Common Units (499 units)

                 500,000         371,000      
              

 

 

    

 

 

    

Sub Total

                 5,682,173         5,553,173         4

Jacob Ash Holdings, Inc.

   Apparel
Distribution
                 

Subordinated Note

      13.0%/4.0%      8/11/2016         3,555,421         3,539,273         3,539,273      

Subordinated Note

      13.0%/0.0%      8/11/2016         1,750,000         1,711,444         1,711,444      

Preferred Equity (500 shares)(6)

      0.0%/15.0%      8/11/2016            497,768         497,768      

Warrant (129,630 shares)

                 67,408         67,408      
              

 

 

    

 

 

    

Sub Total

                 5,815,893         5,815,893         4

 

11


Table of Contents

Fidus Investment Corporation

Consolidated Schedule of Investments

December 31, 2011 (continued)

 

Portfolio Company /Type of

Investment(1)(2)(3)

   Industry    Rate(4)
Cash/PIK
   Maturity      Principal
Amount
     Cost      Fair Value      Percent of
Net Assets
 

Jan-Pro Holdings, LLC

   Commercial
Cleaning
                 

Subordinated Note

      12.5%/3.5%      3/18/2017       $ 7,350,713       $ 7,350,713       $ 7,350,713      

Preferred Equity (1,054,619 shares)

                 832,124         420,200      
              

 

 

    

 

 

    

Sub Total

                 8,182,837         7,770,913         6

K2 Industrial Services, Inc.

   Industrial Cleaning &
Coatings
                 

Subordinated Note

      11.8%/2.0%      5/23/2017         12,026,000         11,967,141         11,967,141      

Preferred Equity (1,200 shares)

                 1,200,000         1,200,000      
              

 

 

    

 

 

    

Sub Total

                 13,167,141         13,167,141         9

Nobles Manufacturing, Inc.

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      13.0%/3.0%      4/6/2016         6,825,000         6,825,000         6,825,000      

Preferred Equity (1,300,000 shares)

                 1,300,000         2,428,300      

Common Equity (1,300,000 shares)

                 —           —        
              

 

 

    

 

 

    

Sub Total

                 8,125,000         9,253,300         7

Restoration Holdco, LLC

   Restoration &
Mitigation Services
                 

Senior Secured Note

      13.0%/0.0%      8/11/2016         4,400,000         4,241,962         4,241,962      

Warrant (9.5 units)

                 127,139         127,139      
              

 

 

    

 

 

    

Sub Total

                 4,369,101         4,369,101         3

Simplex Manufacturing Co.

   Aerospace & Defense
Manufacturing
                 

Subordinated Note

      13.0%/0.0%      10/31/2013         4,550,000         4,307,693         4,437,900      

Warrant (24 shares)

                 710,000         406,900      
              

 

 

    

 

 

    

Sub Total

                 5,017,693         4,844,800         3

TBG Anesthesia Management, LLC

   Healthcare Services                  

Senior Secured Loan

      13.5%/0.0%      11/10/2014         10,750,000         10,590,891         10,750,000      

Warrant (263 shares)

                 276,070         290,600      
              

 

 

    

 

 

    

Sub Total

                 10,866,961         11,040,600         8

Tulsa Inspection Resources, Inc.

   Oil & Gas Services                  

Subordinated Note

      14.0%/0.0%      3/12/2014         4,000,000         3,913,748         3,953,400      

Subordinated Note

      17.5%/0.0%      3/12/2014         648,471         648,471         648,471      

Warrant (6 shares)

                 193,435         419,000      
              

 

 

    

 

 

    

Sub Total

                 4,755,654         5,020,871         4
              

 

 

    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

                 122,709,976         126,088,167         90
              

 

 

    

 

 

    

 

 

 

Total Investments

               $ 192,539,931       $ 204,745,372         146
              

 

 

    

 

 

    

 

 

 

 

(1) All debt investments are income producing. Equity investments are non-income producing unless otherwise noted.
(2) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.
(3) Equity ownership may be held in shares or units of companies related to the portfolio companies.
(4) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any.
(5) See Note 2 — Significant Accounting Policies, Investment Classification for definitions of Control and Affiliate classifications.
(6) Income producing. Maturity date, if any, represents mandatory redemption date.
(7) Investment is held by a wholly-owned subsidiary of the Company.

See Notes to Consolidated Financial Statements (unaudited).

 

12


Table of Contents

FIDUS INVESTMENT CORPORATION

Notes to Consolidated Financial Statements (unaudited)

Note 1. Organization and Nature of Business

Fidus Investment Corporation, a Maryland corporation (“FIC,” and together with its subsidiaries, the “Company”), was formed on February 14, 2011 for the purposes of (i) acquiring 100% of the limited partnership interests of Fidus Mezzanine Capital, L.P. and its consolidated subsidiaries (collectively, the “Fund”) and 100% of the membership interests of the Fund’s general partner, Fidus Mezzanine Capital GP, LLC (“FMCGP”), (ii) raising capital in an initial public offering that was completed in June 2011 (the “Offering”) and (iii) thereafter operating as an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund has also elected to be regulated as a BDC under the 1940 Act. In addition, for federal income tax purposes, the Company intends to elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2011.

The Company provides customized debt and equity financing solutions to lower middle-market companies. The Fund commenced operations on May 1, 2007, and on October 22, 2007, was granted a license to operate as a Small Business Investment Company, also called an SBIC, under the authority of the United States Small Business Administration (“SBA”). The SBIC license allows the Fund to obtain leverage by issuing SBA-guaranteed debentures (“SBA debentures”), subject to the issuance of a leverage commitment by the SBA and other customary procedures. As an SBIC, the Fund is subject to a variety of regulations and oversight by the SBA under the Small Business Investment Act of 1958, as amended (the “SBIC Act”), concerning, among other things, the size and nature of the companies in which it may invest and the structure of those investments.

On June 20, 2011, FIC acquired 100% of the limited partnership interests in the Fund and 100% of the equity interests in FMCGP, in exchange for 4,056,521 shares of common stock in FIC (the “Formation Transactions”). The Fund became FIC’s wholly-owned subsidiary, retained its SBIC license, and continues to hold its existing investments and make new investments. The Offering consisted of the sale of 4,670,000 shares of the Company’s common stock at a price of $15.00 per share resulting in net proceeds of $63,853,186, after deducting underwriting fees and commissions totaling $4,532,010 and transaction costs associated with the offering totaling $1,664,804. The transaction costs were primarily for accounting, legal and other professional services and were recorded as a reduction to additional paid-in capital. On July 14, 2011, the Company’s underwriters purchased 700,500 shares of the Company’s common stock at the public offering price of $15.00 per share to cover over-allotments resulting in proceeds to the Company of $9,771,975, net of underwriting fees of $735,525. As of June 30, 2012, the Company had 9,427,021 shares of common stock outstanding.

The management agreement between the Fund and Fidus Capital, LLC (the Fund’s former investment advisor) was terminated in conjunction with the Formation Transactions. For all periods subsequent to the consummation of the Formation Transactions and the Offering, the Company pays a quarterly base management fee and an incentive fee to Fidus Investment Advisors, LLC (the “Investment Advisor”) under an investment advisory agreement (the “Investment Advisory Agreement”). The investment professionals of the Investment Advisor are the same as those of Fidus Capital, LLC.

Note 2. Significant Accounting Policies

Basis of presentation: The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), as established by the Financial Accounting Standards Board (“FASB”). These consolidated financial statements reflect the guidance in the Accounting Standards Codification (“ASC”), which is the single source of authoritative GAAP recognized by the FASB. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operation are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the period ended December 31, 2011.

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

Consolidation: The Company will generally not consolidate its investments in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. As a result, the consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries, including the Fund and Fidus Investment GP, LLC, the Fund’s general partner. All significant intercompany balances and transactions have been eliminated.

 

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Fair value of financial instruments: The Company applies fair value to substantially all of its financial instruments in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. The Company measures its portfolio investments at fair value (Level 3). The Company believes that the carrying amounts of other assets and liabilities approximate the fair values of such items due to their short maturity or comparable interest rates, including cash and cash equivalents (Level 1) and SBA debentures (Level 3). See Note 4 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.

Investment classification: The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies where the Company owns more than 25% of the voting securities of such company or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in those companies where the Company owns between 5% and 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.

Segments: In accordance with ASC Topic 280 — Segment Reporting, the Company has determined that it has a single reporting segment and operating unit structure.

Cash and cash equivalents: Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of acquisition. The Company places its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company does not believe it is exposed to any significant credit risk.

Deferred financing costs: Deferred financing costs include SBA debenture commitment and leverage fees that have been capitalized and are amortized on a straight-line basis into interest expense over the term of the debenture agreement (10 years). Deferred financing costs also include costs related to the Company’s previous revolving credit facility. These costs have been capitalized and are amortized into interest expense over the term of the credit facility.

Revenue recognition: The Company’s revenue recognition policies are as follows:

Investments and related investment income. Realized gains or losses on portfolio investments are calculated based upon the difference between the net proceeds from the disposition and the cost basis of the investment. Changes in the fair value of investments from the prior period, as determined by our board of directors (the “Board”) through the application of the Company’s valuation policy, are included as changes in unrealized appreciation or depreciation of investments in the consolidated statement of operations.

Interest, fee and dividend income. Interest and dividend income is recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest and dividend income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. Dividend income is recorded as dividends when declared or at the point an obligation exists for the portfolio company to make a distribution. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is income or a return of capital.

The Company has investments in its portfolio that contain a payment-in-kind income provision, which represents contractual interest or dividends that are added to the principal balance and recorded as income. The Company stops accruing payment-in-kind income when it is determined that payment-in-kind income is no longer collectible. To maintain RIC tax treatment, and to avoid corporate tax, substantially all of this income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected the cash.

In connection with the Company’s debt investments, the Company will sometimes receive warrants or other equity-related securities (“Warrants”). The Company determines the cost basis of Warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the Warrants is treated as original issue discount (“OID”), and accreted into interest income based on the effective interest method over the life of the debt security.

All transaction fees received in connection with the Company’s investments are recognized as income. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. The Company recognizes income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a loan or debt security, any prepayment penalties are recorded as fee income when received. Prior to the Formation

 

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Transactions, and in accordance with the prior limited partnership agreement, the Company historically recorded transaction fees provided in connection with the Company’s investments as a direct offset to management fee expense (See Note 5 to the consolidated financial statements). Fee income from structuring and advisory services, amendments and prepayment penalties for the three months ended June 30, 2012 and 2011 totaled $191,191 and $140,417, respectively. Fee income from structuring and advisory services, amendments and prepayment penalties for the six months ended June 30, 2012 and 2011 totaled $616,228 and $140,417, respectively.

The Company also typically receives upfront loan origination or closing fees in connection with investments. Such upfront loan origination and closing fees are capitalized as unearned income offset against investments on our statement of assets and liabilities and amortized as additional interest income over the life of the investment. Upfront loan origination and closing fees received in the three months ended June 30, 2012 and 2011 totaled $107,064 and $31,250, respectively. Upfront loan origination and closing fees received in the six months ended June 30, 2012 and 2011 totaled $275,564 and $31,250, respectively.

Non-accrual. Loans or preferred equity securities are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, are likely to remain current.

Income taxes: The Company intends to elect and to qualify to be treated as a RIC under Subchapter M of the Code and, among other things, intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company is required to timely distribute to its stockholders at least 90.0% of “investment company taxable income”, as defined by the Code, each year. Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4.0% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to the later of the filing the final tax return related to the year in which the Company generated such taxable income or the 15th day of the 9th month following the close of such taxable year.

The Company has certain indirect wholly-owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which generally holds one of its portfolio investments listed on the consolidated schedule of investments. The Taxable Subsidiaries are consolidated for financial reporting purposes, such that the Company’s consolidated financial statements reflect the Company’s investment in the portfolio companies owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit the Company to hold equity investments in portfolio companies that are organized as limited liability companies (“LLCs”) (or other forms of pass through entities) while complying with the “source-of-income” requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal corporate income tax purposes, and each Taxable Subsidiary will be subject to U.S. federal corporate income tax on its taxable income. Any such income or expense is reflected in the consolidated statements of operations.

ASC Topic 740 — Accounting for Uncertainty in Income Taxes (“ASC Topic 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain income tax positions at June 30, 2012 and December 31, 2011. The 2008 through 2010 tax years remain subject to examination by U.S. federal and most state tax authorities.

Dividends: Dividends and distributions to common stockholders are recorded on the record date. The amount, if any, to be paid as a dividend, is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

The determination of the tax attributes for the Company’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Ordinary dividend distributions from a RIC do not qualify for the preferential tax rate (currently applicable through 2012) on qualified dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for dividends will generally include both ordinary income and capital gains but may also include qualified dividends or return of capital.

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the Company’s stockholders who have not “opted out” of the DRIP at least three days prior to the dividend payment date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of the

 

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Company’s common stock on a date determined by the Board. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs. See Note 9 to the consolidated financial statements regarding dividend declarations and distributions.

Earnings and net asset value per share: The earnings per share and weighted average shares outstanding calculations for the three and six months ended June 30, 2011, are based on the assumption that the number of shares issued in the Formation Transactions and the Offering (including the over-allotment) in June and July 2011 (9,427,021 shares of common stock) had been issued on January 1, 2011.

Recent accounting pronouncements: In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”) (“ASU 2011-04”). ASU 2011-04 represents the converged guidance of the FASB and the International Accounting Standards Board (“IASB”) (collectively, the “Standards Boards”) on fair value measurement. The collective efforts of the Standards Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Standards Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRSs. The amendments to the FASB Codification in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company adopted the amendments of ASU 2011-04 as of January 1, 2012. See Note 4 to the consolidated financial statements for the related disclosures. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements.

In November 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210) containing new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual and interim periods beginning on or after January 1, 2013. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company’s effective date is January 1, 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position.

Note 3. Portfolio Company Investments

The Company’s portfolio investments principally consist of secured and unsecured debt, equity warrants and direct equity investments in privately held companies. The debt investments may or may not be secured by either a first or second lien on the assets of the portfolio company. The debt investments generally bear interest at fixed rates, and generally mature between five and seven years from the original investment. In connection with a debt investment, the Company also often receives nominally priced equity warrants and/or makes direct equity investments. The Company’s warrants or equity investments may be in a holding company related to the portfolio company. In addition, the Company periodically makes equity investments in its portfolio companies through Taxable Subsidiaries. In both situations, the name of the operating company is reflected on the consolidated schedule of investments.

As of June 30, 2012, the Company had debt and equity investments in 27 portfolio companies with an aggregate fair value of $234,055,355 and a weighted average effective yield on its debt investments of 15.5%. At June 30, 2012, the Company held equity ownership in 88.9% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 8.9%. As of December 31, 2011, the Company had debt and equity investments in 23 portfolio companies with an aggregate fair value of $204,745,372 and a weighted average effective yield on its debt investments of 15.3%. At December 31, 2011, the Company held equity ownership in 91.3% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 9.0%. The weighted average yields were computed using the effective interest rates for all debt investments at cost as of June 30, 2012 and December 31, 2011, including accretion of original issue discount but excluding any debt investments on non-accrual status.

Purchases of debt and equity investments for the six months ended June 30, 2012 and 2011 totaled $33,368,812 and $19,591,858, respectively. Repayments of portfolio investments for the six months ended June 30, 2012 and 2011 totaled $7,397,526 and $5,035,791, respectively.

Investments by type with corresponding percentage of total portfolio investments consisted of the following:

 

     June 30, 2012     December 31, 2011  

Cost:

          

Senior secured loans

   $ 31,431,611         14.2   $ 14,832,853         7.7

Subordinated notes

     163,685,171         74.0        155,252,227         80.6   

Equity

     20,057,329         9.1        17,890,911         9.3   

Warrants

     5,929,385         2.7        4,563,940         2.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 221,103,496         100.0   $ 192,539,931         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Fair value:

          

Senior secured loans

   $ 31,557,106         13.5   $ 14,991,962         7.3

Subordinated notes

     164,822,726         70.4        157,098,414         76.7   

Equity

     20,178,798         8.6        18,852,261         9.3   

Warrants

     17,496,725         7.5        13,802,735         6.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 234,055,355         100.0   $ 204,745,372         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

All investments made by the Company as of June 30, 2012 and December 31, 2011 were made in portfolio companies located in the United States. The following tables show portfolio composition by geographic region at cost and fair value and as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

 

     June 30, 2012     December 31, 2011  

Cost:

          

Midwest

   $ 66,953,136         30.2   $ 66,462,930         34.5

Southwest

     44,181,126         20.0        32,412,934         16.8   

Northeast

     23,643,367         10.7        28,486,629         14.8   

Southeast

     47,895,384         21.7        36,154,165         18.8   

West

     38,430,483         17.4        29,023,273         15.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 221,103,496         100.0   $ 192,539,931         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair value:

          

Midwest

   $ 67,256,205         28.8   $ 68,460,815         33.4

Southwest

     53,798,051         23.0        41,605,896         20.3   

Northeast

     22,580,042         9.6        27,768,702         13.6   

Southeast

     48,275,530         20.6        36,166,177         17.7   

West

     42,145,527         18.0        30,743,782         15.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 234,055,355         100.0   $ 204,745,372         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2012, the Company had one portfolio company investment that represented more than 10% of the total investment portfolio. Such investment represented 12.8% of the fair value of the portfolio and 9.2% of cost as of June 30, 2012. At December 31, 2011, the Company had one portfolio company investment that represented more than 10% of the total investment portfolio. Such investment represented 14.0% of the fair value of the portfolio and 10.3% of cost as of December 31, 2011.

As of June 30, 2012 and December 31, 2011, there were no investments on non-accrual status.

Note 4. Fair Value Measurements

The Company has established and documented processes and methodologies for determining the fair values of portfolio company investments on a recurring basis in accordance with ASC Topic 820. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques are applied. Under ASC Topic 820, portfolio investments recorded at fair value in the consolidated financial statements are classified within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value, as defined below:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets as of the measurement date.

Level 2 — Inputs include quoted prices for similar assets in active markets, or that are quoted prices for identical or similar assets in markets that are not active and inputs that are observable, either directly or indirectly, for substantially the full term, if applicable, of the investment.

Level 3 — Inputs include those that are both unobservable and significant to the overall fair value measurement.

An investment’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s investment portfolio is comprised of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board, using Level 3 inputs. Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for investments classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the Board’s estimate of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and those

 

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differences may be material. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned.

With respect to investments for which market quotations are not readily available, the Company’s Board undertakes a multi-step valuation process each quarter, as described below:

 

   

the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Company’s Investment Advisor responsible for the portfolio investment;

 

   

preliminary valuation conclusions are then documented and discussed with the investment committee of the Company’s Investment Advisor;

 

   

the Board also engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of our investments for which market quotations are not readily available. The Company will consult with independent valuation firm(s) relative to each portfolio company at least once in every calendar year, and for new portfolio companies, at least once in the twelve-month period subsequent to the initial investment. The Board consulted with the independent valuation firm in arriving at the Company’s determination of fair value on nine of its portfolio company investments representing 45.4% of the total portfolio investments at fair value as of June 30, 2012. The Board consulted with the independent valuation firm in arriving at the Company’s determination of fair value on ten of its portfolio company investments representing 51.3% of the total portfolio investments at fair value as of December 31, 2011;

 

   

the audit committee of the Board reviews the preliminary valuations of the Investment Advisor and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and

 

   

the Board discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the Investment Advisor, the independent valuation firm(s) and the audit committee.

In making the good faith determination of the value of portfolio investments, the Company starts with the cost basis of the security, which includes the amortized OID and payment-in-kind income, if any. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values.

The Company performs detailed valuations of its debt and equity investments, using both the market and income approaches as appropriate. Under the market approach, the Company typically uses the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which the Company derives a single estimate of enterprise value. Under the income approach, the Company typically prepares and analyzes discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.

The Company evaluates investments in portfolio companies using the most recent portfolio company financial statements and forecasts. The Company also consults with the portfolio company’s senior management to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development and other operational issues.

For the Company’s debt investments, including senior secured loans and subordinated notes, the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The Company’s discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated loan agreements. The Company prepares a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. The Company may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties; estimated remaining life; the nature and realizable value of any collateral; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. The Company estimates the remaining life of its debt investments to generally be the legal maturity date of the instrument, as the Company generally intends to hold its loans to maturity. However, if the Company has information available to it that the loan is expected to be repaid in the near term, it would use an estimated remaining life based on the expected repayment date.

 

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For the Company’s equity investments, including equity and warrants, the Company generally uses a market approach, including valuation methodologies consistent with industry practice, to estimate the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. Where applicable, the Company considers the Company’s ability to influence the capital structure of the portfolio company, as well as the timing of a potential exit.

The Company may also utilize an income approach when estimating the fair value of its equity securities, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach. The Company typically prepares and analyzes discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. The Company considers various factors, including but not limited to the portfolio company’s projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.

The Company’s debt and equity investments are subject to market risk. Market risk is the potential for changes in the value of investments due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.

The Company reviews the fair value hierarchy classifications on a quarterly basis. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. There were no transfers among Levels 1, 2, and 3 during the six months ended June 30, 2012 and 2011.

The following tables present a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 and 2012:

 

     Senior
Secured
Loans
    Subordinated
Notes
    Equity     Warrants     Total  

Balance, December 31, 2010

   $ 16,302,829      $ 106,323,193      $ 13,622,546      $ 5,092,910      $ 141,341,478   

Realized loss on investments

     —          —          (6,627,973     (1,307,457     (7,935,430

Net change in unrealized appreciation on investments

     (770,207     (266,981     6,177,467        5,245,382        10,385,661   

Purchase of investments

     3,399,500        13,075,000        2,016,858        1,100,500        19,591,858   

Principal payments received on debt securities

     (250,000     (4,785,791     —          —          (5,035,791

Interest and dividend income paid-in-kind

     —          1,848,010        236,375        —          2,084,385   

Loan origination fees received

     —          (31,250     —          —          (31,250

Accretion of original issue discount

     130,390        174,487        —          —          304,877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 18,812,512      $ 116,336,668      $ 15,425,273      $ 10,131,335      $ 160,705,788   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 14,991,962      $ 157,098,414      $ 18,852,261      $ 13,802,735      $ 204,745,372   

Net change in unrealized appreciation on investments

     (33,615     (708,630     (839,880     2,328,545        746,420   

Purchase of investments

     17,110,063        13,000,000        1,893,304        1,365,445        33,368,812   

Principal payments received on debt securities

     (550,000     (6,847,526     —          —          (7,397,526

Interest and dividend income paid-in-kind

     80,529        1,920,458        268,585        —          2,269,572   

Proceeds from loan origination fees

     (145,564     (130,000     —          —          (275,564

Accretion of loan origination fees

     11,258        37,400        1,186        —          49,844   

Accretion of original issue discount

     92,473        452,610        3,342        —          548,425   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 31,557,106      $ 164,822,726      $ 20,178,798      $ 17,496,725      $ 234,055,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The total change in unrealized appreciation included in the consolidated statements of operations attributable to Level 3 investments still held at June 30, 2012 and 2011, was $746,420 and $2,456,717, respectively.

 

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The following table presents quantitative information about the significant unobservable inputs of the Company’s Level 3 debt and equity investments as of June 30, 2012:

 

Quantitatve Information about Level 3 Fair Value Measurements
      Fair Value at
June 30, 2012
     Valuation Techniques    Unobservable Inputs   Range (weighted
average)

Debt investments:

          

Senior secured loans

   $ 31,557,106       Market comparable companies    EBITDA multiples   4.5x - 11.6x (7.0x)
      Discounted cash flow    Weighted average cost of capital   13.1% - 18.1% (15.3%)

Subordinated notes

     164,822,726       Market comparable companies    EBITDA multiples   5.0x - 9.0x (6.6x)
      Discounted cash flow    Weighted average cost of capital   13.4% - 25.5% (16.3%)

Equity investments:

          

Equity

   $ 20,178,798       Market comparable companies    EBITDA multiples   5.0x - 11.6x (6.6x)

Warrants

     17,496,725       Market comparable companies    EBITDA multiples   4.5x - 11.6x (7.6x)

The significant unobservable inputs used in the fair value measurement of the Company’s debt investments, including senior secured loans and subordinated notes, are weighted average cost of capital and EBITDA multiples. Significant increases (or decreases) in either of these inputs in isolation could have a significant impact on estimated fair values, with the fair value of a debt investment susceptible to change in inverse relation to a change in the discount rate. Often, a change in the assumption used for the EBITDA multiple is accompanied by an inversely related change in the weighted average cost of capital.

The significant unobservable inputs used in the fair value measurement of the Company’s equity investments, including equity and warrants, are EBITDA multiples. Significant increases (or decreases) in this input could result in a significantly higher (or lower) estimate of fair value.

Note 5. Related Party Transactions

Prior management agreement: Prior to the consummation of the Formation Transactions, the Fund had entered into a management agreement with Fidus Capital, LLC, our Investment Advisor’s predecessor, to manage the day-to-day operational and investment activities of the Fund. The Fund paid Fidus Capital, LLC, each fiscal quarter in advance, 0.5% of the sum of (i) the Fund’s Regulatory Capital (as defined in the SBIC Act), (ii) any Permitted Distribution as defined by the previous partnership agreement, and (iii) an assumed two tiers (two times) of outstanding SBA debenture leverage on the sum of clauses (i) and (ii) up to the maximum amount as determined by the SBA, currently $150.0 million. Under the previous agreement, gross management fees for the three and six months ended June 30, 2011 were $922,542 and $1,958,755, respectively, and were partially offset by the management fee offset (transaction fees received in connection with the Fund’s investments) of $430,208 and $430,208, respectively.

New management and incentive fee agreement: Concurrent with the Formation Transactions, the Company entered into the Investment Advisory Agreement with the Investment Advisor. Pursuant to the Investment Advisory Agreement and subject to the overall supervision of the Board, the Investment Advisor provides investment advisory services to the Company. For providing these services, the Investment Advisor receives a fee, consisting of two components — a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% based on the average value of total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears. Up to and including the first full calendar quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts) at the closing of the Formation Transactions. The base management fee under the Investment Advisory Agreement for the three and six months ended June 30, 2012 totaled $1,005,306 and $1,944,714, respectively. The base management fee under the Investment Advisory Agreement totaled $76,648 for the period June 21, 2011 through June 30, 2011.

The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee and any organizing and offering costs). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with payment-in-kind income, preferred stock with payment-in-kind dividends and zero-coupon securities), accrued income the Company has not yet received in cash. The Investment Advisor is not under any obligation to reimburse the Company for any part of the incentive fee it receives that was based on accrued interest that the Company never actually receives.

 

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Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter where the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses.

Pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.0% per quarter. If market interest rates rise, the Company may be able to invest funds in debt instruments that provide for a higher return, which would increase the Company’s pre-incentive fee net investment income and make it easier for the Investment Advisor to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. The Company’s pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts) used to calculate the 1.75% base management fee.

The Company pays the Investment Advisor an incentive fee with respect to pre-incentive fee net investment income in each calendar quarter as follows:

 

   

no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate of 2.0%;

 

   

100.0% of the Company’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 2.5% in any calendar quarter. This portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.5%) is referred to as the “catch-up” provision. The catch-up is meant to provide the Investment Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.5% in any calendar quarter; and

 

   

20.0% of the amount of the Company’s pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter.

The sum of the calculations above equals the income incentive fee. The income incentive fee is appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the calendar quarter. The income incentive fee for the three and six months ended June 30, 2012 totaled $876,258 and $1,774,132, respectively. The Investment Advisor waived the income incentive fee of $82,512 for the period June 21, 2011 through June 30, 2011 resulting in income incentive fees for the three and six months ended June 30, 2011 of $0.

The second part of the incentive fee is a capital gains incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of the net realized capital gains as of the end of the fiscal year. In determining the capital gains incentive fee payable to the Investment Advisor, the Company calculates the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since the Formation Transactions, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in the Company’s portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equal the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for the calculation of the capital gains incentive fee payable equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to the Company’s portfolio of investments. If this number is positive at the end of such year, then the capital gains incentive fee payable for such year equals 20.0% of such amount, less the aggregate amount of any capital gains incentive fees paid in all prior years. The Company will accrue the capital gains incentive fee if, on a cumulative basis, the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation) is positive. If, on a cumulative basis, the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation) decreases during a period, the Company will reverse any excess capital gains incentive fee previously accrued such that the amount of capital gains incentive fee accrued is no more than 20.0% of the sum of net realized gains/(losses) plus net unrealized appreciation/(depreciation). During the three and six months ended June 30, 2012, as a result of an increase in net unrealized appreciation, the Company recognized accrued capital gains incentive fees totaling $169,675 and $149,284, respectively. No accrued capital gains incentive fees were recognized during the three and six months ended June 30, 2011. The accrued capital gains incentive fee is recorded in the due to affiliates line in the consolidated statement of assets and liabilities.

 

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The sum of the income incentive fee and the capital gains incentive fee is the incentive fee and is reported in the consolidated statement of operations.

Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect for a period of two years from its effective date. It will remain in effect from year to year thereafter if approved annually by the Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the Company’s directors who are not “interested persons.” The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by the Investment Advisor and may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of the Company’s outstanding voting securities may also terminate the Investment Advisory Agreement without penalty.

Administration Agreement: Concurrent with the Formation Transactions, the Company also entered into an administration agreement (the “Administration Agreement”) with the Investment Advisor. Under the Administration Agreement, the Investment Advisor furnishes the Company with office facilities and equipment, provides it clerical, bookkeeping and record keeping services at such facilities and provides the Company with other administrative services necessary to conduct its day-to-day operations. The Company reimburses the Investment Advisor for the allocable portion of overhead expenses incurred in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its chief financial officer and chief compliance officer and their respective staffs. Under the Administration Agreement, the Investment Advisor also provides managerial assistance to those portfolio companies to which the Company is required to provide such assistance. Under the Administration Agreement, administrative expenses for services provided for the three and six months ended June 30, 2012 totaled $223,766 and $453,142, respectively. Accrued administrative expenses for services provided for the period June 21, 2011 through June 30, 2011 totaled $22,173.

Note 6. Debt

Credit facility: The Fund previously had a $5,000,000 unsecured line of credit with American Bank & Trust. On June 27, 2011, the Fund repaid the line of credit in full and terminated the agreement. Interest accrued monthly at an annual rate of 6%. There were no principal borrowings outstanding on the unsecured line of credit as of December 31, 2011. For the three and six months ended June 30, 2011, interest and fee amortization expense on the unsecured line of credit included in interest expense on the consolidated statement of operations amounted to $35,322 and $39,572, respectively.

SBA debentures: The Company uses debenture leverage provided through the SBA to fund a portion of its investment portfolio. The SBA has made commitments to issue $150,000,000 in the form of debenture securities to the Company on or before September 30, 2016. Unused commitments as of June 30, 2012 were $28,750,000. The SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full compliance, as determined by the SBA, with the terms and conditions set forth in the SBIC Act.

As of June 30, 2012 and December 31, 2011, the Company’s issued and outstanding SBA debentures mature as follows:

 

Pooling

Date(1)

   Maturity
Date
    Fixed
Interest  Rate
    June  30,
2012
     December  31,
2011
 

3/26/2008

     3/1/2018        6.188   $ 24,750,000       $ 24,750,000   

9/24/2008

     9/1/2018        6.442        11,950,000         11,950,000   

3/25/2009

     3/1/2019        5.337        19,750,000         19,750,000   

9/23/2009

     9/1/2019        4.950        10,000,000         10,000,000   

3/24/2010

     3/1/2020        4.825        13,000,000         13,000,000   

9/22/2010

     9/1/2020        3.932        12,500,000         12,500,000   

3/29/2011

     3/1/2021        4.801        1,550,000         1,550,000   

9/21/2011

     9/1/2021        3.594        3,250,000         3,250,000   

3/21/2012

     3/1/2022        3.483        3,250,000         3,250,000   

3/21/2012

     3/1/2022        3.051        19,000,000         4,000,000   

(2)

     (2     (2     2,250,000         —     
      

 

 

    

 

 

 
       $ 121,250,000       $ 104,000,000   
      

 

 

    

 

 

 

 

(1) The SBA has two scheduled pooling dates for debentures (in March and in September). Certain debentures drawn during the reporting periods may not be pooled until the subsequent pooling date.
(2) In June 2012, the Company issued $2,250,000 in SBA debentures which will pool in September 2012, at which time we expect the current short-term interest rate will reset to a higher long-term fixed rate.

 

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Interest on SBA debentures is payable semi-annually on March 1 and September 1. For the three months ended June 30, 2012 and 2011, interest and fee amortization expense on outstanding SBA debentures amounted to $1,569,250 and $1,359,445. For the six months ended June 30, 2012 and 2011, interest and fee amortization expense on outstanding SBA debentures amounted to $3,011,864 and $2,679,480 respectively. As of June 30, 2012 and December 31, 2011, accrued interest payable totaled $1,918,767 and $1,718,989, respectively. The weighted average fixed interest rate for all SBA debentures as of June 30, 2012 and December 31, 2011 was 4.8% and 5.1%, respectively.

Deferred financing costs as of June 30, 2012 and December 31, 2011, are as follows:

 

     June  30,
2012
    December  31,
2011
 

SBA debenture commitment fees

   $ 1,500,000      $ 1,300,000   

SBA debenture leverage fees

     2,940,313        2,522,000   
  

 

 

   

 

 

 

Subtotal

     4,440,313        3,822,000   

Accumulated amortization

     (1,346,073     (1,134,767
  

 

 

   

 

 

 

Net deferred financing costs

   $ 3,094,240      $ 2,687,233   
  

 

 

   

 

 

 

Note 7. Commitments and Contingencies

Commitments: As of June 30, 2012 the Company had one outstanding conditional revolving loan commitment to a portfolio company for $1,000,000 of which $800,000 was unfunded. As of December 31, 2011, the Company had no off-balance sheet arrangements or unfunded commitments.

Indemnifications: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide indemnifications under certain circumstances. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects the risk of future obligation under these indemnifications to be remote.

Legal proceedings: In the normal course of business, the Company may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not believe these proceedings will have a material adverse effect on the Company’s consolidated financial statements.

Note 8. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2012 and 2011:

 

     Six Months Ended June 30,  
     2012     2011(1)  

Per share data:

    

Net asset value at beginning of period

   $ 14.90      $ 13.33   

Net investment income

     0.74        0.58   

Net realized loss on investments

     —          (0.84

Net unrealized appreciation on investments

     0.08        1.10   
  

 

 

   

 

 

 

Total increase from investment operations

     0.82        0.84   

Capital contributions from partners prior to formation transactions

     —          0.74   

Capital distributions to partners prior to formation transactions

     —          (0.16

Dividends to stockholders

     (0.70     —     
  

 

 

   

 

 

 

Net asset value at end of period

   $ 15.02      $ 14.75   
  

 

 

   

 

 

 

Market value at end of period

   $ 15.17      $ 14.81   
  

 

 

   

 

 

 

Shares outstanding at end of period

     9,427,021        9,427,021   

Weighted average shares outstanding during the period

     9,427,021        9,427,021   

Ratios to average net assets (annualized):

    

Expenses other than incentive fee

     9.0     6.9

Incentive fee(2)

     2.7     —     
  

 

 

   

 

 

 

Total expenses

     11.7     6.9

Net investment income

     9.9     8.2

Total return(3)

     22.4     (1.3 %) 

Net assets at end of period

   $ 141,601,218      $ 129,359,229   

Average debt outstanding

   $ 114,750,000      $ 94,583,333   

Average debt per share

   $ 12.17      $ 10.03   

Portfolio turnover ratio (annualized)

     6.8     6.8

 

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(1) Per share data, shares outstanding and ratios to average net assets for the six months ended June 30, 2011 are presented as if the Offering (including the over-allotment) and Formation Transactions had occurred on January 1, 2011.
(2) The Investment Advisor voluntarily waived $82,512 of incentive fees for the period June 21, 2011 through June 30, 2011.
(3) The total return for the six months ended June 30, 2012 equals the change in the ending market value of the Company’s common stock plus dividends paid per share during the period, divided by the beginning common stock price and is not annualized. Total return for the six months ended June 30, 2011 equals the change in the ending market value of the Company’s common stock from the Offering price of $15.00 per share plus any dividends paid per share during the period, divided by the Offering price and is not annualized.

Note 9. Dividends and Distributions

The Company’s dividends and distributions are recorded on the record date. The following table summarizes the Company’s dividend declaration and distribution during the six months ended June 30, 2012.

 

Date Declared

  Record Date     Payment Date     Amount
Per Share
    Cash
Distribution
    DRIP Shares
Issued
    DRIP Shares
Value
 
2/10/2012     3/14/2012        3/28/2012      $ 0.34      $ 3,205,187        —        $ —     
4/30/2012     6/13/2012        6/27/2012        0.36        3,393,728        —          —     
     

 

 

   

 

 

     
      $ 0.70      $ 6,598,915       
     

 

 

   

 

 

     

For the six months ended June 30, 2012, $1,191,051 of the total $6,598,915 paid to stockholders represented DRIP participation. During this period, the Company satisfied the DRIP participation requirements with the purchase of 83,225 shares of common stock in the open market at an average price of $14.31 per share.

Note 10. Subsequent Events

On July 6, 2012, the Company issued an additional $5,500,000 in SBA debentures.

On July 10, 2012, the Company purchased $7,500,000 of subordinated notes and warrants of S.B. Restaurant Co., doing business as Elephant Bar Restaurants, a California-based owner and operator of full service, casual dining restaurants.

On July 24, 2012, the Company sold a portion of its senior secured loan and warrants of United Biologics, LLC for $3,291,324 at amortized cost.

On July 31, 2012, the Board declared a quarterly dividend of $0.38 per share payable on September 25, 2012 to stockholders of record as of September 11, 2012.

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Fidus Investment Corporation’s consolidated financial statements and related notes appearing in our annual report on Form 10-K for the year ended December 31, 2011, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 8, 2012. The information contained in this section should also be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Except as otherwise specified, references to “we,” “us,” and “our” refer to Fidus Mezzanine Capital, L.P. and its consolidated subsidiaries for periods prior to the Formation Transactions on June 20, 2011, and refer to Fidus Investment Corporation and its consolidated subsidiaries for periods after the Formation Transactions.

Forward Looking Statements

Some of the statements in this quarterly report on Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

   

our inexperience operating a business development company;

 

   

our dependence on key personnel of our Investment Advisor and our executive officers;

 

   

our ability to maintain or develop referral relationships;

 

   

our ability to manage our business effectively;

 

   

our ability to receive a second SBIC license;

 

   

our use of leverage;

 

   

uncertain valuations of our portfolio investments, including, but not limited to, the fair value of investments;

 

   

competition for investment opportunities;

 

   

potential divergent interests of our Investment Advisor and our stockholders arising from our management and incentive fee structure;

 

   

actual and potential conflicts of interest with our Investment Advisor;

 

   

constraint on investment due to access to material nonpublic information;

 

   

other potential conflicts of interest;

 

   

SBA regulations affecting our wholly-owned SBIC subsidiary;

 

   

changes in interest rates;

 

   

the impact of a protracted decline in the liquidity of credit markets on our business and portfolio investments;

 

   

fluctuations in our quarterly operating results;

 

   

our ability to qualify and maintain our qualification as a RIC and as a business development company;

 

   

risks associated with the timing, form and amount of any dividends or distributions;

 

   

changes in laws or regulations applicable to us;

 

   

possible resignation of our Investment Advisor or Administrator;

 

   

the general economy and its impact on the industries in which we invest;

 

   

risks associated with investing in lower middle-market companies;

 

   

The ability of our investment advisor to identify, invest in and monitor companies that meet our investment criteria;

 

   

our ability to invest in qualifying assets; and

 

   

our ability to identify and timely close on investment opportunities.

        Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 8, 2012. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the 1933 Act.

 

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Organization

Fidus Investment Corporation was formed as a Maryland corporation on February 14, 2011. On June 20, 2011, Fidus Investment Corporation acquired all of the limited partnership interests of Fidus Mezzanine Capital, L.P. (the “Fund”) and membership interests of Fidus Mezzanine Capital GP, LLC, its general partner, through the Formation Transactions (as defined in Note 1 to the consolidated financial statements), resulting in the Fund becoming our wholly-owned SBIC subsidiary. Immediately following the Formation Transactions, we and the Fund elected to be treated as business development companies (“BDC”) under the 1940 Act and our investment activities have been managed by Fidus Investment Advisors, LLC (our “Investment Advisor”) and supervised by our Board, a majority of whom are independent of us.

In June 2011, we closed our initial public offering, issuing a total of 5,370,500 shares of common stock at a price of $15.00 per share resulting in net proceeds of $73.6 million, after deducting underwriting fees totaling $5.3 million and transaction costs associated with the offering totaling $1.7 million. Our shares are listed on The NASDAQ Global Select Market under the symbol “FDUS.”

The Fund is licensed by the United States Small Business Administration (“SBA”) as a Small Business Investment Company (“SBIC”) and we plan to continue to operate the Fund as an SBIC, subject to SBA approval, and to utilize the proceeds of the sale of SBA debentures to enhance returns to our stockholders. We have also made, and continue to make, investments directly through Fidus Investment Corporation. We believe that utilizing both entities as investment vehicles provides us with access to a broader array of investment opportunities. Given our access to lower cost capital through the SBA’s SBIC debenture program, we expect that the majority of our investments will continue to be made through the Fund. As of June 30, 2012, we had investments in 27 portfolio companies with an aggregate fair value of $234.1 million and cost of $221.1 million.

Business Overview

We provide customized debt and equity financing solutions to lower middle-market companies, which we define as U.S. based companies having revenues between $10.0 million and $150.0 million. Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments. Our investment strategy includes partnering with business owners, management teams and financial sponsors by providing customized financing for ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. We seek to maintain a diversified portfolio of investments in order to help mitigate the potential effects of adverse economic events related to particular companies, regions or industries.

Revenues: We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on equity investments. Our debt investments, whether in the form of mezzanine, senior secured or unitranche loans, typically have a term of three to seven years and bear interest at a fixed rate but may bear interest at a floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity may reflect the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, amendment, or structuring fees and fees for providing managerial assistance. Loan origination fees, original issue discount and market discount or premium, if any, are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans as fee income. Interest and dividend income is recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest and dividend income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is income or a return of capital.

We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the cost basis of the investment, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

Expenses: All investment professionals of our Investment Advisor and/or its affiliates, when and to the extent engaged in providing Investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by our Investment Advisor and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:

 

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organization;

 

   

calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

   

fees and expenses incurred by our Investment Advisor under the Investment Advisory Agreement or payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

 

   

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

 

   

offerings of our common stock and other securities;

 

   

investment advisory fees and management fees;

 

   

administration fees and expenses, if any, payable under the Administration Agreement (including payments under the Administration Agreement between us and our Investment Advisor based upon our allocable portion of our Investment Advisor’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, our chief financial officer, and their respective staffs);

 

   

transfer agent, dividend agent and custodial fees and expenses;

 

   

federal and state registration fees;

 

   

all costs of registration and listing our shares on any securities exchange;

 

   

U.S. federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

costs of preparing and filing reports or other documents required by the SEC or other regulators including printing costs;

 

   

costs of any reports, proxy statements or other notices to stockholders, including printing and mailing costs;

 

   

our allocable portion of any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

   

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;

 

   

proxy voting expenses; and

 

   

all other expenses reasonably incurred by us or our Investment Advisor in connection with administering our business.

Portfolio Composition, Investment Activity and Yield

During the six months ended June 30, 2012, we invested $33.4 million in four new and five existing portfolio companies. The additional investments consisted primarily of subordinated notes ($13.0 million, or 39.0%), senior secured loans ($17.1 million, or 51.2%), warrants ($1.4 million, or 4.1%) and equity securities ($1.9 million, or 5.7%). During the six months ended June 30, 2012 we received proceeds from repayments of principal of $7.4 million. During the year ended December 31, 2011, we invested $78.0 million in nine new and five existing portfolio companies. The new investments consisted primarily of subordinated notes ($64.2 million, or 82.4%), senior secured loans ($4.8 million, or 6.2%), warrants ($2.4 million, or 3.0%) and equity securities ($6.6 million, or 8.4%). During the year ended December 31, 2011 we received proceeds from repayments of principal of $23.3 million.

As of June 30, 2012, our investment portfolio totaled $234.1 million and consisted of 27 portfolio companies. As of June 30, 2012, our debt portfolio was comprised entirely of fixed rate investments. Overall, the portfolio had a net unrealized appreciation of $12.9 million as of June 30, 2012. Our average portfolio company investment at amortized cost was $8.2 million as of June 30, 2012.

As of December 31, 2011, our investment portfolio totaled $204.7 million and consisted of 23 portfolio companies. As of December 31, 2011, our debt portfolio was comprised entirely of fixed rate investments. Overall, the portfolio had a net unrealized appreciation of $12.2 million as of December 31, 2011. Our average portfolio company investment at amortized cost was $8.4 million as of December 31, 2011.

 

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The weighted average yield on debt investments at their cost basis at June 30, 2012 and December 31, 2011 was 15.5% and 15.3%, respectively. Yields are computed using interest rates as of the balance sheet date and include amortization of original issue discount. Yields do not include debt investments that were on non-accrual status as of the balance sheet date.

The following table shows the portfolio composition by investment type at cost and fair value as a percentage of total investments:

 

     As of
June 30, 2012
    As of
December 31, 2011
 

Cost

    

Senior secured loans

     14.2     7.7

Subordinated notes

     74.0        80.6   

Equity

     9.1        9.3   

Warrants

     2.7        2.4   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Fair Value

    

Senior secured loans

     13.5     7.3

Subordinated notes

     70.4        76.7   

Equity

     8.6        9.3   

Warrants

     7.5        6.7   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The following table shows the portfolio composition by geographic region at cost and fair value as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

     As of
June 30, 2012
    As of
December 31, 2011
 

Cost

    

Midwest

     30.3     34.5

Southwest

     20.0        16.8   

Northeast

     10.7        14.8   

Southeast

     21.7        18.8   

West

     17.4        15.1   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Fair Value

    

Midwest

     28.8     33.4

Southwest

     23.0        20.3   

Northeast

     9.6        13.6   

Southeast

     20.6        17.7   

West

     18.0        15.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

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The following tables show the detailed industry composition of our portfolio at cost and fair value as a percentage of total investments:

 

     As of
June 30, 2012
    As of
December 31, 2011
 

Cost

    

Healthcare services

     13.6     9.7

Transportation services

     9.2        10.3   

Aerospace & defense manufacturing

     12.8        10.4   

Movie theaters

     5.8        6.6   

Industrial cleaning & coatings

     6.0        6.8   

Utility equipment manufacturing

     4.4        5.0   

Specialty distribution

     4.3        4.9   

Printing services

     4.0        4.5   

Electronic components supplier

     4.5        5.0   

Commercial cleaning

     3.8        4.2   

Retail cleaning

     3.6        4.0   

Furniture rental

     3.5        4.0   

Specialty cracker manufacturer

     3.8        4.3   

Restaurants

     3.4        3.8   

Information technology services

     3.7        3.0   

Healthcare products

     2.9        3.3   

Apparel distribution

     2.6        3.0   

Debt collection services

     2.5        —     

Oil & gas services

     2.2        2.5   

Laundry services

     1.4        2.4   

Restoration & mitigation services

     2.1        2.3   
  

 

 

   

 

 

 

Total

     100.0 </