Attached files
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EX-32.1 - EX-32.1 - FIDUS MEZZANINE CAPITAL LP | w83841exv32w1.htm |
EX-31.1 - EX-31.1 - FIDUS MEZZANINE CAPITAL LP | w83841exv31w1.htm |
EX-31.2 - EX-31.2 - FIDUS MEZZANINE CAPITAL LP | w83841exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 814-00862
Fidus Mezzanine Capital, L.P.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-8435835 (I.R.S. Employer Identification No.) |
1603 Orrington Avenue, Suite 820
Evanston, Illinois, 60201
(Address and zip code of principal executive offices)
Evanston, Illinois, 60201
(Address and zip code of principal executive offices)
(847) 859-3940
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
FIDUS MEZZANINE CAPITAL, L.P.
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FIDUS INVESTMENT CORPORATION
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Statements of Assets and Liabilities
Consolidated Statements of Assets and Liabilities
June 30, | ||||||||
2011 | December 31, | |||||||
(unaudited) | 2010 | |||||||
ASSETS | ||||||||
Investments, at fair value |
||||||||
Control investments (cost: $28,240,386 and $26,985,897, respectively) |
$ | 35,069,872 | $ | 29,419,402 | ||||
Affiliate investments (cost: $29,684,777 and $24,413,389, respectively) |
30,947,477 | 26,860,320 | ||||||
Non-control/non-affiliate investments (cost: $96,359,928 and $93,907,155, respectively) |
94,688,439 | 85,061,756 | ||||||
Total investments at fair value (cost: $154,285,091 and $145,306,441, respectively) |
160,705,788 | 141,341,478 | ||||||
Cash and cash equivalents |
19,130,050 | 1,757,139 | ||||||
Interest receivable |
2,467,612 | 1,141,357 | ||||||
Deferred financing costs (net of accumulated amortization of $952,457 and $812,118, respectively) |
2,693,731 | 2,795,257 | ||||||
Prepaid expenses and other assets |
282,696 | 341,558 | ||||||
Total assets |
$ | 185,279,877 | $ | 147,376,789 | ||||
LIABILITIES |
||||||||
SBA debentures |
$ | 96,750,000 | $ | 93,500,000 | ||||
Accrued interest payable |
1,690,960 | 1,638,862 | ||||||
Due to affiliates |
83,561 | 958 | ||||||
Accounts payable and other liabilities |
165,351 | 232,305 | ||||||
Total liabilities |
98,689,872 | 95,372,125 | ||||||
NET ASSETS |
||||||||
Partners capital |
86,590,005 | 52,004,664 | ||||||
Total net assets |
86,590,005 | 52,004,664 | ||||||
Total liabilities and net assets |
$ | 185,279,877 | $ | 147,376,789 | ||||
See Notes to Consolidated Financial Statements (unaudited).
2
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Statements of Operations (unaudited)
Consolidated Statements of Operations (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Investment Income: |
||||||||||||||||
Interest and fee income |
||||||||||||||||
Control investments |
$ | 853,890 | $ | 762,283 | $ | 1,673,388 | $ | 1,498,500 | ||||||||
Affiliate investments |
1,057,828 | 519,168 | 1,924,688 | 1,027,530 | ||||||||||||
Non-control/non-affiliate investments |
3,271,050 | 3,143,026 | 6,246,134 | 5,853,782 | ||||||||||||
Total interest and fee income |
5,182,768 | 4,424,477 | 9,844,210 | 8,379,812 | ||||||||||||
Dividend income |
||||||||||||||||
Control investments |
120,300 | 108,838 | 236,376 | 213,853 | ||||||||||||
Non-control/non-affiliate investments |
| 64,222 | | 208,148 | ||||||||||||
Total dividend income |
120,300 | 173,060 | 236,376 | 422,001 | ||||||||||||
Interest on idle funds and other income |
16,219 | 18,207 | 32,464 | 35,847 | ||||||||||||
Total investment income |
5,319,287 | 4,615,744 | 10,113,050 | 8,837,660 | ||||||||||||
Expenses: |
||||||||||||||||
Base management fee |
999,190 | 1,036,213 | 2,035,403 | 2,072,120 | ||||||||||||
Less: management fee offset |
(430,208 | ) | (10,000 | ) | (430,208 | ) | (290,000 | ) | ||||||||
Interest expense |
1,394,767 | 1,249,259 | 2,719,052 | 2,337,604 | ||||||||||||
Professional fees |
84,940 | 18,550 | 164,613 | 50,684 | ||||||||||||
Other general and administrative expenses |
68,704 | 351,882 | 92,066 | 371,962 | ||||||||||||
Total expenses |
2,117,393 | 2,645,904 | 4,580,926 | 4,542,370 | ||||||||||||
Net investment income |
3,201,894 | 1,969,840 | 5,532,124 | 4,295,290 | ||||||||||||
Net realized and unrealized gains (losses) on investments: |
||||||||||||||||
Realized loss on non-control/non-affiliate investments |
| | (7,935,430 | ) | (2,307 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) on
investments |
1,437,313 | (3,709,146 | ) | 10,385,661 | (9,453,306 | ) | ||||||||||
Net gain (loss) on investments |
1,437,313 | (3,709,146 | ) | 2,450,231 | (9,455,613 | ) | ||||||||||
Net increase (decrease) in net assets resulting
from operations |
$ | 4,639,207 | $ | (1,739,306 | ) | $ | 7,982,355 | $ | (5,160,323 | ) | ||||||
See Notes to Consolidated Financial Statements (unaudited).
3
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Statements of Changes in Net Assets (unaudited)
Consolidated Statements of Changes in Net Assets (unaudited)
Total | ||||||||||||
General | Limited | Net | ||||||||||
Partner | Partners | Assets | ||||||||||
Balances at December 31,
2009 |
$ | 4,504,972 | $ | 43,975,979 | $ | 48,480,951 | ||||||
Capital distributions |
(130,805 | ) | (1,369,195 | ) | (1,500,000 | ) | ||||||
Net investment income |
529,970 | 3,765,320 | 4,295,290 | |||||||||
Realized loss on investments |
(201 | ) | (2,106 | ) | (2,307 | ) | ||||||
Net change in unrealized
depreciation on investments |
(824,361 | ) | (8,628,945 | ) | (9,453,306 | ) | ||||||
Balances at June 30, 2010 |
$ | 4,079,575 | $ | 37,741,053 | $ | 41,820,628 | ||||||
Balances at December 31,
2010 |
$ | 5,111,894 | $ | 46,892,770 | $ | 52,004,664 | ||||||
Capital contributions |
612,534 | 27,490,452 | 28,102,986 | |||||||||
Capital distributions |
(130,805 | ) | (1,369,195 | ) | (1,500,000 | ) | ||||||
Net investment income |
572,054 | 4,960,070 | 5,532,124 | |||||||||
Realized loss on investments |
(691,997 | ) | (7,243,433 | ) | (7,935,430 | ) | ||||||
Net change in unrealized
appreciation on investments |
905,665 | 9,479,996 | 10,385,661 | |||||||||
Balances at June 30, 2011 |
$ | 6,379,345 | $ | 80,210.660 | $ | 86,590,005 | ||||||
See Notes to Consolidated Financial Statements (unaudited).
4
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Statements of Cash Flows (unaudited)
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 7,982,355 | $ | (5,160,323 | ) | |||
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash used in operating activities: |
||||||||
Net change in unrealized depreciation (appreciation) on investments |
(10,385,661 | ) | 9,453,306 | |||||
Realized loss on investments |
7,935,430 | 2,307 | ||||||
Interest and dividend income paid-in-kind |
(2,084,385 | ) | (2,216,454 | ) | ||||
Accretion of original issue discount |
(304,877 | ) | (348,292 | ) | ||||
Amortization of deferred financing costs |
180,339 | 170,578 | ||||||
Purchase of investments |
(19,591,858 | ) | (12,752,307 | ) | ||||
Principal payments received on debt securities |
5,035,791 | 1,050,000 | ||||||
Proceeds from loan origination fees |
31,250 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Interest receivable |
(1,326,255 | ) | (473,501 | ) | ||||
Prepaid expenses and other assets |
58,862 | (15,857 | ) | |||||
Accrued interest payable |
52,098 | 219,495 | ||||||
Due to affiliates |
82,605 | (182,251 | ) | |||||
Accounts payable and other liabilities |
(66,956 | ) | (32,004 | ) | ||||
Net cash used in operating activities |
(12,401,262 | ) | (10,285,303 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from SBA debentures |
3,250,000 | 12,500,000 | ||||||
Payment of deferred financing costs |
(78,813 | ) | (603,125 | ) | ||||
Capital contributions |
28,102,986 | | ||||||
Capital distributions |
(1,500,000 | ) | (1,500,000 | ) | ||||
Net cash provided by financing activities |
29,774,173 | 10,396,875 | ||||||
Net increase in cash and cash equivalents |
17,372,911 | 111,572 | ||||||
Cash and cash equivalents: |
||||||||
Beginning of year |
1,757,139 | 2,671,884 | ||||||
End of period |
$ | 19,130,050 | $ | 2,783,456 | ||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash payments for interest |
$ | 2,486,616 | $ | 1,947,531 | ||||
See Notes to Consolidated Financial Statements (unaudited).
5
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated
Schedule of Investments June 30, 2011 (unaudited)
Portfolio Company / Type of | Rate(4) | Principal | Percent of Net | |||||||||||||||||||||||
Investment(1)(2)(3) | Industry | Cash/PIK | Maturity | Amount | Cost | Fair Value | Assets | |||||||||||||||||||
Control Investments(5) |
||||||||||||||||||||||||||
Connect-Air International, Inc. |
Specialty Distribution | |||||||||||||||||||||||||
Subordinated Note |
12.5%/3.0 | % | 9/6/2013 | $ | 4,380,297 | $ | 4,380,297 | $ | 4,380,297 | |||||||||||||||||
Preferred Interest(6) |
0.0%/10.0 | % | 9/3/2014 | 4,879,401 | 4,879,401 | |||||||||||||||||||||
Sub Total |
9,259,698 | 9,259,698 | 11 | % | ||||||||||||||||||||||
Worldwide Express Operations, LLC |
Transportation Services | |||||||||||||||||||||||||
Subordinated Note |
11.0%/3.0 | % | 2/1/2014 | 8,553,298 | 8,553,298 | 8,553,298 | ||||||||||||||||||||
Subordinated Note |
0.0%/14.0 | % | 2/1/2014 | 10,450,276 | 10,157,000 | 10,450,276 | ||||||||||||||||||||
Warrant (213,381 units)(7) |
| 5,699,200 | ||||||||||||||||||||||||
Common Units (51,946 units)(7) |
270,390 | 1,107,400 | ||||||||||||||||||||||||
Sub Total |
18,980,688 | 25,810,174 | 30 | % | ||||||||||||||||||||||
Total Control Investments |
28,240,386 | 35,069,872 | 41 | % | ||||||||||||||||||||||
Affiliate Investments(5) |
||||||||||||||||||||||||||
Avrio Technology Group, LLC |
Electronic Control | |||||||||||||||||||||||||
Subordinated Note |
Supplier | 13.0%/3.0 | % | 10/15/2015 | 8,246,197 | 8,246,197 | 8,246,197 | |||||||||||||||||||
Common Units (1,000 units)(7) |
1,000,000 | 1,000,000 | ||||||||||||||||||||||||
Sub Total |
9,246,197 | 9,246,197 | 11 | % | ||||||||||||||||||||||
Medsurant Holdings, LLC |
Healthcare Services | |||||||||||||||||||||||||
Senior Secured Loan |
14.0%/0.0 | % | 4/12/2016 | 4.250,000 | 3,190,675 | 3,190,675 | ||||||||||||||||||||
Preferred Units (40,750 units)(7) |
500,000 | 500,000 | ||||||||||||||||||||||||
Warrant (110,050 units)(7) |
1,100,500 | 1,100,500 | ||||||||||||||||||||||||
Sub Total |
4,791,175 | 4,791,175 | 5 | % | ||||||||||||||||||||||
Paramount Building Solutions, LLC |
Retail Cleaning | |||||||||||||||||||||||||
Subordinated Note |
12.0%/4.0 | % | 2/15/2014 | 6,114,584 | 6,114,584 | 6,114,584 | ||||||||||||||||||||
Common Units (107,143 units)(7) |
1,500,000 | 3,050,800 | ||||||||||||||||||||||||
Sub Total |
7,614,584 | 9,165,384 | 11 | % | ||||||||||||||||||||||
Westminster Cracker Company, Inc. |
Specialty Cracker | |||||||||||||||||||||||||
Subordinated Note |
Manufacturer | 14.0%/4.0 | % | 11/17/2014 | 6,932,821 | 6,932,821 | 6,932,821 | |||||||||||||||||||
Common Units (1,100,000 units) |
1,100,000 | 811,900 | ||||||||||||||||||||||||
Sub Total |
8,032,821 | 7,744,721 | 9 | % | ||||||||||||||||||||||
Total Affiliate Investments |
29,684,777 | 30,947,477 | 36 | % | ||||||||||||||||||||||
Non-Control/Non-Affiliate
Investments(5) |
||||||||||||||||||||||||||
Brook & Whittle Limited |
Specialty Printing | |||||||||||||||||||||||||
Subordinated Note |
12.0%/4.8 | % | 2/9/2014 | 6,166,848 | 6,166,848 | 6,166,848 | ||||||||||||||||||||
Subordinated Note |
12.0%/2.0 | % | 2/9/2014 | 2,097,792 | 1,943,661 | 2,097,792 | ||||||||||||||||||||
Warrant (1,011 shares) |
285,000 | 630,700 | ||||||||||||||||||||||||
Common Shares (148 shares) |
110,374 | 110,374 | ||||||||||||||||||||||||
Sub Total |
8,505,883 | 9,005,714 | 10 | % | ||||||||||||||||||||||
Caldwell & Gregory, LLC |
Laundry Services | |||||||||||||||||||||||||
Subordinated Note |
12.5%/1.5 | % | 4/23/2015 | 3,439,814 | 3,439,814 | 3,439,814 | ||||||||||||||||||||
Preferred Units (11,628 units)(7) |
1,162,786 | 1,432,098 | ||||||||||||||||||||||||
Common Units (4,464 units)(7) |
4,464 | 258,600 | ||||||||||||||||||||||||
Sub Total |
4,607,064 | 5,130,512 | 6 | % |
6
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated
Schedule of Investments (unaudited) (Continued)
June 30, 2011
June 30, 2011
Portfolio Company / Type of | Rate(4) | Principal | Percent of Net | |||||||||||||||||||||||||
Investment(1)(2)(3) | Industry | Cash/PIK | Maturity | Amount | Cost | Fair Value | Assets | |||||||||||||||||||||
Casino Signs & Graphics, LLC |
Niche Manufacturing | |||||||||||||||||||||||||||
Senior Secured Loan |
2.0%/0.0 | % | 12/31/2016 | $ | 4,500,000 | $ | 4,500,000 | $ | 359,637 | 0 | % | |||||||||||||||||
Fairchild Industrial Products Company |
Industrial Products | |||||||||||||||||||||||||||
Subordinated Note |
12.0%/0.0 | % | 7/24/2014 | 650,000 | 650,000 | 650,000 | ||||||||||||||||||||||
Subordinated Note |
13.0%/3.0 | % | 7/24/2014 | 8,500,000 | 8,500,000 | 8,500,000 | ||||||||||||||||||||||
Sub Total |
9,150,000 | 9,150,000 | 11 | % | ||||||||||||||||||||||||
Goodrich Quality Theaters, Inc. |
Movie Theaters | |||||||||||||||||||||||||||
Subordinated Note |
12.8%/0.0 | % | 3/31/2015 | 12,500,000 | 11,933,172 | 12,500,000 | ||||||||||||||||||||||
Warrant (71 shares) |
750,000 | 2,002,200 | ||||||||||||||||||||||||||
Sub Total |
12,683,172 | 14,502,200 | 17 | % | ||||||||||||||||||||||||
Innovative Product Achievements, LLC |
Healthcare Products | |||||||||||||||||||||||||||
Subordinated Note |
13.0%/2.5 | % | 12/21/2016 | 6,253,906 | 6,222,797 | 6,222,797 | 7 | % | ||||||||||||||||||||
Interactive Technology Solutions, LLC |
Government IT Services | |||||||||||||||||||||||||||
Subordinated Note |
12.0%/3.0 | % | 12/31/2015 | 5,103,617 | 5,103,617 | 5,103,617 | ||||||||||||||||||||||
Common Units (499 units) |
500,000 | 366,100 | ||||||||||||||||||||||||||
Sub Total |
5,603,617 | 5,469,717 | 6 | % | ||||||||||||||||||||||||
Jan-Pro Holdings, LLC |
Commercial Cleaning | |||||||||||||||||||||||||||
Subordinated Note |
12.5%/2.5 | % | 3/18/2015 | 7,386,391 | 7,432,556 | 7,432,556 | ||||||||||||||||||||||
Preferred Equity (750,000 shares) |
750,000 | 608,600 | ||||||||||||||||||||||||||
Sub Total |
8,182,556 | 8,041,156 | 9 | % | ||||||||||||||||||||||||
K2 Industrial Services, Inc. |
Industrial Cleaning & | |||||||||||||||||||||||||||
Subordinated Note |
Coatings | 14.0%/1.5 | % | 2/27/2014 | 8,000,000 | 8,000,000 | 8,240,000 | 10 | % | |||||||||||||||||||
Nobles Manufacturing, Inc. |
Aerospace & Defense | |||||||||||||||||||||||||||
Subordinated Note |
Manufacturing | 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 | 1,300,000 | ||||||||||||||||||||||||||
Sub Total |
8,125,000 | 8,125,000 | 9 | % | ||||||||||||||||||||||||
Simplex Manufacturing Co. |
Aerospace & Defense | |||||||||||||||||||||||||||
Senior Secured Loan |
Manufacturing | 13.0%/0.0 | % | 10/31/2013 | 4,550,000 | 4,244,154 | 4,262,200 | |||||||||||||||||||||
Warrant (24 shares) |
710,000 | 187,700 | ||||||||||||||||||||||||||
Sub Total |
4,954,154 | 4,449,900 | 5 | % | ||||||||||||||||||||||||
TBG Anesthesia Management, LLC |
Healthcare Services | |||||||||||||||||||||||||||
Senior Secured Loan |
13.5%/0.0 | % | 11/10/2014 | 11,000,000 | 10,813,354 | 11,000,000 | ||||||||||||||||||||||
Warrant (263 shares) |
276,070 | 317,600 | ||||||||||||||||||||||||||
Sub Total |
11,089,424 | 11,317,600 | 13 | % | ||||||||||||||||||||||||
Tulsa Inspection Resources, Inc. |
Oil & Gas Services | |||||||||||||||||||||||||||
Subordinated Note |
14.0%/0.0 | % | 3/12/2014 | 4,000,000 | 3,894,355 | 3,832,300 | ||||||||||||||||||||||
Subordinated Note |
17.5%/0.0 | % | 3/12/2014 | 648,471 | 648,471 | 648,471 | ||||||||||||||||||||||
Warrant (6 shares) |
193,435 | 193,435 | ||||||||||||||||||||||||||
Sub Total |
4,736,261 | 4,674,206 | 6 | % | ||||||||||||||||||||||||
Total Non-Control/Non-Affiliate
Investments |
96,359,928 | 94,688,439 | 109 | % | ||||||||||||||||||||||||
Total Investments |
$ | 154,285,091 | $ | 160,705,788 | 186 | % | ||||||||||||||||||||||
(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. | |
(7) | Investment is held by a wholly-owned subsidiary of the Fund. |
See Notes to Consolidated Financial Statements (unaudited).
7
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Schedule of Investments
December 31, 2010
December 31, 2010
Portfolio Company / Type of | Rate(4) | Principal | Percent of Net | |||||||||||||||||||||||||
Investment(1)(2)(3) | Industry | Cash/PIK | Maturity | Amount | Cost | Fair Value | Assets | |||||||||||||||||||||
Control Investments(5) |
||||||||||||||||||||||||||||
Connect-Air International, Inc. |
Specialty Distribution | |||||||||||||||||||||||||||
Subordinated Note |
12.5%/3.0 | % | 9/6/2013 | $ | 4,314,967 | $ | 4,314,967 | $ | 4,314,967 | |||||||||||||||||||
Preferred Interest(6) |
0.0%/10.0 | % | 9/3/2014 | 4,643,025 | 4,643,026 | |||||||||||||||||||||||
Sub Total |
8,957,993 | 8,957,993 | 17 | % | ||||||||||||||||||||||||
Worldwide Express Operations, LLC |
Transportation Services | |||||||||||||||||||||||||||
Subordinated Note |
0.0%/14.0 | % | 2/1/2014 | 8,348,609 | 8,348,609 | 8,348,609 | ||||||||||||||||||||||
Subordinated Note |
0.0%/14.0 | % | 2/1/2014 | 9,757,158 | 9,408,905 | 9,757,159 | ||||||||||||||||||||||
Warrant (213,381 units)(7) |
| 2,022,010 | ||||||||||||||||||||||||||
Common Units (51,946 units)(7) |
270,390 | 333,631 | ||||||||||||||||||||||||||
Sub Total |
18,027,905 | 20,461,409 | 39 | % | ||||||||||||||||||||||||
Total Control Investments |
26,985,897 | 29,419,402 | 57 | % | ||||||||||||||||||||||||
Affiliate Investments(5) |
||||||||||||||||||||||||||||
Avrio Technology Group, LLC |
Electronic Control | |||||||||||||||||||||||||||
Subordinated Note |
Supplier | 13.0%/3.0 | % | 10/15/2015 | 8,124,876 | 8,124,876 | 8,124,876 | |||||||||||||||||||||
Common Units (1,000 units)(7) |
1,000,000 | 1,000,000 | ||||||||||||||||||||||||||
Sub Total |
9,124,876 | 9,124,876 | 18 | % | ||||||||||||||||||||||||
Paramount Building Solutions, LLC |
Retail Cleaning | |||||||||||||||||||||||||||
Subordinated Note |
12.0%/4.0 | % | 2/15/2014 | 5,993,043 | 5,993,043 | 6,052,975 | ||||||||||||||||||||||
Common Units (107,143 units)(7) |
1,500,000 | 3,887,000 | ||||||||||||||||||||||||||
Sub Total |
7,493,043 | 9,939,975 | 19 | % | ||||||||||||||||||||||||
Westminster Cracker Company, Inc. |
Specialty Cracker | |||||||||||||||||||||||||||
Subordinated Note |
Manufacturer | 14.0%/4.0 | % | 11/17/2014 | 6,795,470 | 6,795,470 | 6,795,470 | |||||||||||||||||||||
Common Units (1,000,000 units) |
1,000,000 | 1,000,000 | ||||||||||||||||||||||||||
Sub Total |
7,795,470 | 7,795,470 | 15 | % | ||||||||||||||||||||||||
Total Affiliate Investments |
24,413,389 | 26,860,320 | 52 | % | ||||||||||||||||||||||||
Non-Control/Non-Affiliate
Investments(5) |
||||||||||||||||||||||||||||
Brook & Whittle Limited |
Specialty Printing | |||||||||||||||||||||||||||
Subordinated Note |
12.0%/4.8 | % | 2/9/2014 | 6,020,894 | 6,020,894 | 6,020,894 | ||||||||||||||||||||||
Subordinated Note |
12.0%/2.0 | % | 2/9/2014 | 2,076,936 | 1,894,690 | 2,076,938 | ||||||||||||||||||||||
Warrant (1,011 shares) |
285,000 | 384,700 | ||||||||||||||||||||||||||
Sub Total |
8,200,583 | 8,482,532 | 16 | % | ||||||||||||||||||||||||
Caldwell & Gregory, LLC |
Laundry Services | |||||||||||||||||||||||||||
Subordinated Note |
12.5%/1.5 | % | 4/23/2015 | 8,059,822 | 8,059,822 | 8,059,822 | ||||||||||||||||||||||
Preferred Units (11,628 units)(7) |
1,162,786 | 1,376,490 | ||||||||||||||||||||||||||
Common Units (4,464 units)(7) |
4,464 | 219,400 | ||||||||||||||||||||||||||
Sub Total |
9,227,072 | 9,655,712 | 19 | % | ||||||||||||||||||||||||
Casino Signs & Graphics, LLC |
Niche Manufacturing | |||||||||||||||||||||||||||
Senior Secured Loan |
2.0%/0.0 | % | 12/31/2016 | 4,500,000 | 4,500,000 | 1,163,828 | 2 | % | ||||||||||||||||||||
Fairchild Industrial Products Company |
Industrial Products | |||||||||||||||||||||||||||
Subordinated Note |
13.0%/0.0 | % | 7/24/2014 | 650,000 | 650,000 | 650,000 | ||||||||||||||||||||||
Subordinated Note |
13.0%/4.0 | % | 7/24/2014 | 8,500,000 | 8,500,000 | 8,500,000 | ||||||||||||||||||||||
Sub Total |
9,150,000 | 9,150,000 | 18 | % |
8
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FIDUS MEZZANINE CAPITAL, L.P.
Consolidated Schedule of Investments (Continued)
December 31, 2010
December 31, 2010
Portfolio Company / Type of | Rate(4) | Principal | Percent of Net | |||||||||||||||||||||||||
Investment(1)(2)(3) | Industry | Cash/PIK | Maturity | Amount | Cost | Fair Value | Assets | |||||||||||||||||||||
Goodrich Quality Theaters, Inc. |
Movie Theaters | |||||||||||||||||||||||||||
Subordinated Note |
12.8%/0.0 | % | 3/31/2015 | $ | 12,500,000 | $ | 11,859,958 | $ | 12,500,000 | |||||||||||||||||||
Warrant (71 shares) |
750,000 | 2,080,000 | ||||||||||||||||||||||||||
Sub Total |
12,609,958 | 14,580,000 | 28 | % | ||||||||||||||||||||||||
Interactive Technology Solutions, LLC |
Government IT Services | |||||||||||||||||||||||||||
Subordinated Note |
12.0%/3.0 | % | 12/31/2015 | 5,027,500 | 5,027,500 | 5,027,500 | ||||||||||||||||||||||
Common Units (499 units) |
500,000 | 500,000 | ||||||||||||||||||||||||||
Sub Total |
5,527,500 | 5,527,500 | 11 | % | ||||||||||||||||||||||||
Jan-Pro Holdings, LLC |
Commercial Cleaning | |||||||||||||||||||||||||||
Subordinated Note |
12.5%/2.5 | % | 3/18/2015 | 7,340,513 | 7,340,513 | 7,340,513 | ||||||||||||||||||||||
Preferred Equity (750,000 shares) |
750,000 | 663,000 | ||||||||||||||||||||||||||
Sub Total |
8,090,513 | 8,003,513 | 15 | % | ||||||||||||||||||||||||
K2 Industrial Services, Inc. |
Industrial Cleaning & | |||||||||||||||||||||||||||
Subordinated Note |
Coatings | 14.0%/1.5 | % | 2/27/2014 | 8,000,000 | 8,000,000 | 8,240,000 | 16 | % | |||||||||||||||||||
Pure Earth, Inc. |
Environmental Services | |||||||||||||||||||||||||||
Preferred Equity (6,300 shares)(8) |
10.0%/4.0 | % | 3/3/2013 | 6,104,575 | | |||||||||||||||||||||||
Preferred Equity (50,000 shares)(8) |
0.0%/15.0 | % | N/A | 516,913 | | |||||||||||||||||||||||
Warrant (767,375 shares) |
1,307,457 | | ||||||||||||||||||||||||||
Sub Total |
7,928,945 | | 0 | % | ||||||||||||||||||||||||
Simplex Manufacturing Co. |
Aerospace Manufacturing | |||||||||||||||||||||||||||
Senior Secured Loan(9) |
N/A | 1/13/2011 | | | | |||||||||||||||||||||||
Senior Secured Loan |
14.0%/0.0 | % | 10/31/2013 | 4,550,000 | 4,182,280 | 4,139,000 | ||||||||||||||||||||||
Warrant (24 shares) |
710,000 | 150,000 | ||||||||||||||||||||||||||
Sub Total |
4,892,280 | 4,289,000 | 8 | % | ||||||||||||||||||||||||
TBG Anesthesia Management, LLC |
Healthcare Services | |||||||||||||||||||||||||||
Senior Secured Loan |
13.5%/0.0 | % | 11/10/2014 | 11,000,000 | 10,786,012 | 11,000,000 | ||||||||||||||||||||||
Warrant (263 shares) |
276,070 | 456,200 | ||||||||||||||||||||||||||
Sub Total |
11,062,082 | 11,456,200 | 22 | % | ||||||||||||||||||||||||
Tulsa Inspection Resources, Inc. |
Oil & Gas Services | |||||||||||||||||||||||||||
Subordinated Note |
14.0%/0.0 | % | 3/12/2014 | 4,000,000 | 3,876,315 | 3,865,000 | ||||||||||||||||||||||
Subordinated Note |
17.5%/0.0 | % | 3/12/2014 | 648,471 | 648,471 | 648,471 | ||||||||||||||||||||||
Warrant (6 shares) |
193,435 | | ||||||||||||||||||||||||||
Sub Total |
4,718,221 | 4,513,471 | 9 | % | ||||||||||||||||||||||||
Total Non-Control/Non-Affiliate Investments |
93,907,155 | 85,061,756 | 164 | % | ||||||||||||||||||||||||
Total Investments |
$ | 145,306,441 | $ | 141,341,478 | 272 | % | ||||||||||||||||||||||
(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. | |
(7) | Investment is held by a wholly-owned subsidiary of the Fund. | |
(8) | Investment was on non-accrual status at December 31, 2010. | |
(9) | The entire commitment was unfunded at December 31, 2010. As such, no interest is being earned on this investment. |
See Notes to Consolidated Financial Statements (unaudited).
9
Table of Contents
FIDUS MEZZANINE CAPITAL, L.P.
Notes to Consolidated Financial Statements (unaudited)
Note 1. Organization and Nature of Business
Fidus Mezzanine Capital, L.P. (the Fund), provides customized mezzanine 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 (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.
Fidus Investment Corporation, a Maryland corporation (FIC), was formed on February 14, 2011
for the purposes of (i) acquiring 100% of the limited partnership interests of the Fund and 100% of
the membership interests of the Funds general partner, Fidus Mezzanine Capital GP, LLC (FMCGP),
(ii) raising capital in an initial public offering which priced on June 20, 2011 and (iii)
thereafter operating as an externally managed, closed-end, non-diversified business development
company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). In
addition, for tax purposes, FIC 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).
On June 20, 2011, the following formation transactions (the Formation Transactions)
were consummated:
| FIC acquired 100% of the limited partnership interests in the Fund through a merger of a wholly-owned subsidiary of FIC with and into the Fund, in which the limited partnership interests were exchanged for 3,702,778 shares of common stock in FIC. The Fund became FICs wholly-owned subsidiary, retained its SBIC license, and continues to hold its existing investments and make new investments; and | ||
| FIC acquired 100% of the equity interests in FMCGP, the former general partner of the Fund, through the merger of FMCGP with and into Fidus Investment GP, LLC, a wholly-owned subsidiary of FIC in exchange for 353,743 shares of common stock in FIC. |
On June 20, 2011, FIC announced the pricing of its initial public offering (the
Offering) of 4,670,000 shares of its common stock at the offering price of $15.00 per share
resulting in net proceeds of $63,914,175, after deducting underwriting fees and transaction costs..
The Fund received a capital contribution from FIC of $21,102,986 during June 2011 from the proceeds of
the Offering. As of June 30, 2011, FIC had 8,726,521 shares of common stock outstanding.
The management agreement between the Fund and Fidus Capital, LLC (the Funds 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 Fund will pay a quarterly
base management fee to Fidus Investment Advisors, LLC (the Investment Advisor) under the
investment advisory agreement (the Investment Advisory Agreement) between FIC and the Investment
Advisor. 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 Fund
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 periods 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, 2010.
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: In accordance with Regulation S-X and the Audit and Accounting Guide for
Investment Companies issued by the American Institute of Certified Public Accountants (AICPA),
the Fund 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 Fund. As a
10
Table of Contents
result, the consolidated financial statements of the Fund include the accounts of the Fund and
its wholly-owned investment company subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Fair value of financial instruments: The Fund applies fair value to substantially all of
its financial instruments in accordance with ASC Topic 820 Fair Value Measurements and
Disclosures. ASC Topic 820 defines fair value, establishes a framework used to measure fair value
and requires disclosures for fair value measurements. The Fund believes that the carrying amounts
of its financial instruments, consisting of cash and cash equivalents, receivables, SBA debentures,
accounts payable and accrued liabilities approximate the fair values of such items due to their
short maturity or comparable interest rates. The Fund accounts for its portfolio investments at
fair value. See Note 4 to the consolidated financial statements.
Investment classification: The Fund 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 Fund 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 Fund 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 Fund 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 Fund places its cash
in financial institutions and, at times, such balances may be in excess of the Federal Deposit
Insurance Corporation insurance limits.
Deferred financing costs: Deferred financing costs include SBA debenture commitment and
leverage fees which 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 Funds revolving credit facility. These costs have been capitalized and are
amortized into interest expense over the term of the credit facility.
Revenue recognition: The Funds 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, as determined by
our board of directors through the application of the Funds 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 Fund 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. Distributions of earnings from portfolio companies are
evaluated to determine if the distribution is income or a return of capital.
The Fund has investments in our portfolio that contain a payment-in-kind interest or
dividends provision, which represents contractual interest or dividends that are added to the
principal balance and is recorded as income. The Fund stops accruing payment-in-kind interest when
it is determined that payment-in-kind interest is no longer collectible. To maintain RIC tax
treatment, substantially all of this income must be paid out to stockholders in the form of
distributions, even though the Fund has not yet collected the cash.
In connection with the Funds debt investments, the Fund will sometimes receive warrants or
other equity-related securities (Warrants). The Fund 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.
Prior to the Formation Transactions, and in accordance with the prior limited partnership
agreement, the Fund historically recorded transaction fees provided in
connection with the Funds investments as a direct offset to management fee expense. After
completion of the Formation Transactions, all transaction fees received in
connection with the Funds investments are recognized as income. Such fees typically include fees
for services, including structuring and advisory services, provided to portfolio companies. The
Fund 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
11
Table of Contents
received. Fee income from structuring and advisory services and prepayment penalties for the
three and six months ended June 30, 2011 totaled $140,417.
The Fund also typically receives upfront loan origination or closing fees in connection with
investments. After completion of the Formation Transactions, such upfront loan origination and closing fees are capitalized as unearned income
on our balance sheet and amortized as additional interest income over the life of the investment.
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
managements judgment. Non-accrual loans are restored to accrual status when past due principal,
interest or dividends are paid and, in managements judgment, are likely to remain current.
Income taxes: The Fund is taxed under the partnership provisions of the Internal
Revenue Code. Under these provisions of the Code, the partners are responsible for reporting their
share of the partnerships income or loss on their tax returns. Accordingly, the Fund is not
subject to income taxes.
The Fund has certain indirect wholly-owned 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 Funds
consolidated financial statements reflect the Funds investment in the portfolio companies owned by
the taxable subsidiaries. The purpose of the taxable subsidiaries is to permit the Fund to hold
equity investments in portfolio companies that are organized as limited liability companies
(LLCs) (or other forms of pass through entities) in order to comply with the source income
requirements contained in the RIC tax provisions. The taxable subsidiaries are not consolidated
with the Fund for income tax purposes and may generate either income from any tax distributions
received from the portfolio company or income tax expense as a result of their ownership of the
portfolio companies. 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 Funds 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 Funds 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, 2011 and December 31, 2010. The 2007 through 2010 tax years remain subject to
examination by U.S. federal and most state tax authorities.
Allocations and distributions of the Fund: Prior to the consummation of the Formation
Transactions, net profits and losses were generally allocated to the partners as follows: first,
100% to all partners in proportion to their respective commitments until the cumulative amount of
net profit allocated to the limited partners equals the preferred return, as defined in the
partnership agreement; second, 100% to the general partner until the general partner has been
allocated on a cumulative basis an amount of net profit equal to 20% of the cumulative amounts
previously allocated to all partners pursuant to (a) above; and thereafter, 80% to all partners in
proportion to their respective commitments, and 20% to the general partner.
In addition, prior to the consummation of the Formation Transactions, distributions from
the Fund were made in the following order and amounts: first, 100% to all partners in proportion to
their respective commitments until the limited partners have received distributions equal to their
funded capital contributions related to investments or partnership expenses, as of the date of
distribution; Second, 100% to all partners in proportion to their respective commitments until the
limited partners have received current or prior distributions equal to the preferred return, as
defined in the partnership agreement, as of the date of distribution; third, to the general partner
until the general partner has received current or prior distributions (including tax distributions
attributable to its carried interest, as defined in the partnership agreement) equal to 20% of the
cumulative distributions made to all partners pursuant to (2) above; and any remaining balance was
distributed 80% to all partners in proportion to their respective commitments, and 20% to the
general partner. The partnership agreement also included, among other things, provisions for
in-kind distributions, escrow of certain distributions and tax distributions. The Funds ability to
make distributions is limited by the SBIC Act. In the six months ended June 30, 2011 and 2010, the
Fund made distributions totaling $1,500,000 to its partners in each period.
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 represents the converged guidance of the FASB and the
International Accounting Standards Board (IASB) (together the Boards) on fair value
measurement. The collective efforts of the 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 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 U.S. 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. Early application by public entities is not permitted. The Fund is currently
assessing the impact of ASU 2011-04 on its future consolidated financial statements.
12
Table of Contents
Note 3. Portfolio Company Investments
The Funds 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 Fund also often
receives nominally priced equity warrants and/or makes direct equity investments. The Funds
warrants or equity investments may be in a holding company related to the portfolio company. In
addition, the Fund periodically makes equity investments in its portfolio companies through a
wholly-owned taxable subsidiary which owns the equity securities of the underlying operating
company. In both situations, the name of the operating company is reflected on the consolidated
schedule of investments.
As of June 30, 2011, the Fund had debt and equity investments in 19 portfolio companies with
an aggregate fair value of $160,705,788 and a weighted average effective yield on its debt
investments of 15.1%. At June 30, 2011, the Fund held equity ownership in 78.9% of its portfolio
companies and the average fully diluted equity ownership in those portfolio companies was 9.2%. As
of December 31, 2010, the Fund held debt and equity investments in 17 portfolio companies with an
aggregate fair value of $141,341,478 and a weighted average effective yield on its debt investments
of 15.0%. At December 31, 2010, the Fund held equity ownership in 82.4% of its portfolio companies
and the average fully diluted equity ownership in those portfolio companies was 8.8%. The weighted
average yields were computed using the effective interest rates for all debt investments at cost as
of June 30, 2011 and December 31, 2010, 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, 2011 and 2010
totaled $19,591,858 and $12,752,307, respectively. Repayments of portfolio investments for the six
months ended June 30, 2011 and 2010 totaled $5,035,791 and $1,050,000, respectively.
Investments by type with corresponding percentage of total portfolio investments
consisted of the following:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Cost: |
||||||||||||||||
Senior secured loans |
$ | 22,748,183 | 14.7 | % | $ | 19,468,293 | 13.4 | % | ||||||||
Subordinated notes |
115,144,488 | 74.7 | 104,864,032 | 72.2 | ||||||||||||
Equity |
13,077,415 | 8.5 | 17,452,154 | 12.0 | ||||||||||||
Warrants |
3,315,005 | 2.1 | 3,521,962 | 2.4 | ||||||||||||
Total |
$ | 154,285,091 | 100.0 | % | $ | 145,306,441 | 100.0 | % | ||||||||
Fair value: |
||||||||||||||||
Senior secured loans |
$ | 18,812,512 | 11.7 | % | $ | 16,302,829 | 11.6 | % | ||||||||
Subordinated notes |
116,336,668 | 72.4 | 106,323,193 | 75.2 | ||||||||||||
Equity |
15,425,273 | 9.6 | 13,622,546 | 9.6 | ||||||||||||
Warrants |
10,131,335 | 6.3 | 5,092,910 | 3.6 | ||||||||||||
Total |
$ | 160,705,788 | 100.0 | % | $ | 141,341,478 | 100.0 | % | ||||||||
All investments made by the Fund as of June 30, 2011 and December 31, 2010 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 companys business.
June 30, 2011 | December 31, 2010 | |||||||||||||||
Cost: |
||||||||||||||||
Midwest |
$ | 49,143,793 | 31.9 | % | $ | 40,796,916 | 28.1 | % | ||||||||
Southwest |
31,331,533 | 20.3 | 30,239,168 | 20.8 | ||||||||||||
Northeast |
22,142,321 | 14.3 | 29,452,499 | 20.3 | ||||||||||||
Southeast |
28,162,417 | 18.3 | 26,467,585 | 18.2 | ||||||||||||
West |
23,505,027 | 15.2 | 18,350,273 | 12.6 | ||||||||||||
Total |
$ | 154,285,091 | 100.0 | % | $ | 145,306,441 | 100.0 | % | ||||||||
Fair value: |
||||||||||||||||
Midwest |
$ | 51,430,997 | 32.0 | % | $ | 43,401,076 | 30.7 | % | ||||||||
Southwest |
39,649,764 | 24.7 | 34,914,855 | 24.7 | ||||||||||||
Northeast |
22,220,152 | 13.8 | 21,805,502 | 15.4 | ||||||||||||
Southeast |
28,544,465 | 17.8 | 26,809,225 | 19.0 | ||||||||||||
West |
18,860,410 | 11.7 | 14,410,820 | 10.2 | ||||||||||||
Total |
$ | 160,705,788 | 100.0 | % | $ | 141,341,478 | 100.0 | % | ||||||||
13
Table of Contents
At June 30, 2011, the Fund had one portfolio company investment that represented more
than 10% of the total investment portfolio. Such investment represented 16.1% of the fair value of
the portfolio and 12.3% of cost as of June 30, 2011. At December 31, 2010, the Fund had two
portfolio company investments that each represented more than 10% of the total investment
portfolio. Such investments represented 24.8% of the fair value of the portfolio and 21.1% of cost
as of December 31, 2010.
As of June 30, 2011, there were no investments on non-accrual status. As of December 31,
2010, there was one investment on non-accrual status which comprised 0.0% of the total portfolio on
a fair value basis, and 5.5% of the total portfolio on a cost basis. The investment on
non-accrual status at December 31, 2010 was written off in the first quarter of 2011.
Note 4. Fair Value Measurements
The Fund 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. Because the Funds portfolio investments generally do not have readily
ascertainable market values, the Fund values its portfolio investments at fair value, as determined
in good faith by the Board of Directors (Board), based on input of management and an independent
valuation firm, and under a valuation policy and a consistently applied valuation process.
Portfolio investments recorded at fair value in the consolidated financial statements are
classified based upon the level of judgment associated with the inputs used to measure their value,
as defined below:
Level 1 Investments whose values are based on unadjusted, quoted prices for identical
assets in an active market.
Level 2 Investments whose values are based on quoted prices for similar assets in
markets that are not active or model inputs that are observable, either directly or indirectly, for
substantially the full term of the investment.
Level 3 Investments whose values are based on inputs that are both unobservable and
significant to the overall fair value measurement. The inputs into the determination of fair value
are based upon the best information available and may require significant management judgment or
estimation.
An investments categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The Funds 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. Accordingly, the
degree of judgment exercised by the Fund in determining fair value is greatest for investments
classified as Level 3. As of June 30, 2011 and December 31, 2010, all of the Funds portfolio
company investments are classified as Level 3. The fair value of the Funds total portfolio
investments at June 30, 2011 and December 31, 2010 were $160,705,788 and $141,341,478,
respectively.
With respect to investments for which market quotations are not readily available, the Funds
board of directors 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 Funds investment advisor responsible for the portfolio investment; | ||
| preliminary valuation conclusions are then documented and discussed with the investment committee; | ||
| the board of directors also engages one or more independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available. The Fund 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. As of June 30, 2011, the Board consulted with the independent valuation firm in arriving at the Funds determination of fair value on eight of its portfolio company investments representing 53.3% of the total portfolio investments at fair value. As of December 31, 2010, the previous general partner consulted with the independent valuation firm in arriving at the Funds determination of fair value on 16 of its portfolio company investments representing 100.0% of the total portfolio investments at fair value.; | ||
| the audit committee of the board of directors reviews the preliminary valuations of the investment advisor and of the independent valuation firms and responds and supplements the valuation recommendations to reflect any comments; and | ||
| the board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of the investment advisor, the independent valuation firms and the audit committee. |
14
Table of Contents
In making the good faith determination of the value of portfolio investments, the Fund starts
with the cost basis of the security, which includes the amortized original issue discount and PIK
interest or dividends, 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 Fund performs
detailed valuations of its debt and equity investments on an individual basis, using market, income
and yield approaches as appropriate.
Under the market approach, the Fund 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 Fund derives a single estimate of enterprise value. In estimating
the enterprise value of a portfolio company, the Fund analyzes various factors consistent with
industry practice, including but not limited to original transaction multiples, the portfolio
companys 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. Typically, the enterprise value of private companies are
based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value.
Under the income approach, the Fund prepares and analyzes discounted cash flow models
based on projections of the future free cash flows (or earnings) of the portfolio company. In
determining the fair value under the income approach, the Fund considers various factors, including
but not limited to the portfolio companys 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.
Under the yield approach, the Fund uses discounted cash flow models to determine the
present value of the future cash flow streams of its debt investments, based on future interest and
principal payments as set forth in the associated loan agreements. In determining fair value under
the yield approach, the Fund also considers the following factors: applicable market yields and
leverage levels, credit quality, prepayment penalties, estimated remaining life, the nature and
realizable value of any collateral, the portfolio companys ability to make payments, 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 Fund estimates the remaining life of its debt
investments to generally be the legal maturity date of the instrument, as the Fund generally
intends to hold its loans to maturity. However, if the Fund 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.
For the Funds Control investments, the Fund determines the fair value of debt and equity
investments using a combination of market and income approaches. The valuation approaches for the
Funds Control investments estimate the value of the investment if it were to sell, or exit, the
investment, assuming the highest and best use of the investment by market participants. In
addition, these valuation approaches consider the value associated with the Funds ability to
influence the capital structure of the portfolio company, as well as the timing of a potential
exit.
For the Funds Affiliate or Non-Control/Non-Affiliate equity investments, the Fund uses a
combination of market and income approaches as described above to determine the fair value.
For Affiliate or Non-Control/Non-Affiliate debt investments, the Fund generally uses the
yield approach to determine fair value, as long as it is appropriate. If there is deterioration in
credit quality or a debt investment is in workout status, the Fund may consider other factors 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.
Due to the inherent uncertainty in the valuation process, the Boards estimate of fair value
may differ materially from the values that would have been used had a ready market for the
securities existed. 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.
The Funds 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. Financial instruments
classified as Level 3 in the fair value hierarchy represent the Funds investments in portfolio
companies, see the consolidated schedules of investments for further description.
15
Table of Contents
The following table presents a reconciliation of activity for the Level 3 financial
instruments:
Senior | ||||||||||||||||||||
Secured | Subordinated | |||||||||||||||||||
Loans | Notes | Equity | Warrants | Total | ||||||||||||||||
Balance, December 31, 2009 |
$ | 14,801,858 | $ | 89,203,733 | $ | 17,690,221 | $ | 1,204,444 | $ | 122,900,256 | ||||||||||
Realized loss on investments |
| | (2,307 | ) | | (2,307 | ) | |||||||||||||
Net unrealized appreciation (depreciation) |
(1,792,239 | ) | 454,000 | (6,841,818 | ) | (1,273,249 | ) | (9,453,306 | ) | |||||||||||
Purchases of investment securities |
250,000 | 11,750,000 | 2,307 | 750,000 | 12,752,307 | |||||||||||||||
Repayments of investments received |
(200,000 | ) | (850,000 | ) | | | (1,050,000 | ) | ||||||||||||
Interest and dividend income paid-in-kind |
| 1,922,244 | 294,210 | | 2,216,454 | |||||||||||||||
Accretion of original issue discount |
83,534 | 136,963 | 127,795 | | 348,292 | |||||||||||||||
Balance, June 30, 2010 |
$ | 13,143,153 | $ | 102,616,940 | $ | 11,270,408 | $ | 681,195 | $ | 127,711,696 | ||||||||||
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 unrealized appreciation (depreciation) |
(770,207 | ) | (266,981 | ) | 6,177,467 | 5,245,382 | 10,385,661 | |||||||||||||
Purchases of investment securities |
3,399,500 | 13,075,000 | 2,016,858 | 1,100,500 | 19,591,858 | |||||||||||||||
Repayments of investments received |
(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 | ||||||||||
The total change in unrealized appreciation (depreciation) included in the consolidated
statements of operations attributable to Level 3 investments still held at June 30, 2011 and 2010,
was $2,456,717 and $(9,453,306), respectively.
Note 5. Related Party Transactions
Prior management agreement: Prior to the consummation of the Formation Transactions, the Fund
and Fidus Mezzanine Capital GP, LLC, the Funds general partner prior to the consummation of the
Formation Transactions, had entered into a management agreement with Fidus Capital, LLC 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 Funds 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 and were partially offset by the management fee offset
(transaction fees received in connection with the Funds investments) of $430,208 and $430,208,
respectively. Gross management fees under the previous management agreement for three and six
months ended June 30, 2010 totaled $1,036,213 and $2,072,120 and were partially offset by the
management fee offset of $10,000 and $290,000, respectively.
New partnership agreement: Fidus Investment GP,LLC, the Funds general partner following the
consummation of the Formation Transactions, entered into a new limited partnership agreement with
FIC, in its capacity as sole limited partner of the Fund, which allows for Fidus Investment
Advisors LLC to manage the day-to-day operating and investing activity of the Fund. For providing
these services, the Investment Advisor receives a base management 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. However, for services rendered prior to the Funds first
full quarter of operations, the base management fee is payable monthly in arrears. For services
rendered after such time, the base management fee is payable quarterly in arrears. Up to and
including the first full calendar quarter of the Funds operations, the base management fee is
calculated based on the initial value of the Funds total assets (other than cash or cash
equivalents but including asset with borrowed amounts) at the closing of the Formation
Transactions. The base management fee under the new agreement totaled $76,648 for the period June
21, 2011 through June 30, 2011.
During June 2011, the Fund received a capital contribution of $21,102,986 from FIC from the proceeds of the
Offering.
Note 6. Debt
Credit facility: In April 2009, the Fund obtained an $8,000,000 unsecured line of credit with
American Bank & Trust. In June 2010, the Fund amended its unsecured line of credit, decreasing the
committed amount to $5,000,000 and extending the term to June 3, 2011. In June, 2011, the Fund
amended the agreement to extend the term to September 3, 2011. 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
June 30, 2011 and December 31, 2010, respectively. For the three months ended June 30,
2011 and 2010, interest and fee amortization expense on the unsecured line of credit amounted
to $35,322 and $1,667, respectively. For the six months ended June 30, 2011 and 2010, interest and
fee amortization expense on the unsecured line of credit amounted to $39,572 and $11,667,
respectively.
SBA debentures: The Fund uses debenture leverage provided through the SBA to fund a
portion of its investment portfolio. The SBA made an initial commitment to issue $100,000,000 in
the form of debenture securities to the Fund on or before September 30, 2012, and during 2010 made
a commitment to issue an additional $30,000,000 on or before September 30, 2014. Unused commitments
at June 30, 2011
16
Table of Contents
and December 31, 2010 were $33,250,000 and $36,500,000, respectively. The SBA may limit the
amount that may be drawn each year under these commitments, and each issuance of leverage is
conditioned on the Funds full compliance, as determined by the SBA, with the terms and conditions
set forth in the SBIC Act.
As of June 30, 2011 and December 31, 2010, the Fund has issued SBA debentures which mature as
follows:
Pooling | Maturity | Fixed | June 30, | December 31, | ||||||||||||
Date(1) | Date | Interest Rate | 2011 | 2010 | ||||||||||||
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 | ||||||||||||
(2) |
(2 | ) | (2 | ) | 3,250,000 | | ||||||||||
$ | 96,750,000 | $ | 93,500,000 | |||||||||||||
(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 April 2011, the Fund issued $3,250,000 in SBA debentures which will pool in September 2011, at which time the current short-term interim interest rate will reset to a higher long-term fixed interest rate. |
Interest on SBA debentures is payable semi-annually on March 1 and September 1. For the three
months ended June 30, 2011 and 2010, interest and fee amortization expense on outstanding SBA
debentures amounted to $1,359,445 and $1,247,592, respectively. For the six months ended June 30,
2011 and 2010, interest and fee amortization expense on outstanding SBA debentures amounted to
$2,679,480 and $2,325,937, respectively. As of June 30, 2011 and December 31, 2010, accrued
interest payable totaled $1,690,960 and $1,638,862, respectively. The weighted average fixed
interest rate for all SBA debentures as of both June 30, 2011 and December 31, 2010 was 5.3%.
Deferred financing costs as of June 30, 2011 and December 31, 2010, are as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
SBA debenture commitment fees |
$ | 1,300,000 | $ | 1,300,000 | ||||
SBA debenture leverage fees |
2,346,188 | 2,267,375 | ||||||
Line of credit fees |
| 40,000 | ||||||
Subtotal |
3,646,188 | 3,607,375 | ||||||
Accumulated amortization |
(952,457 | ) | (812,118 | ) | ||||
Net deferred financing costs |
$ | 2,693,731 | $ | 2,795,257 | ||||
Note 7. Commitments and Contingencies
Commitments: As of June 30, 2011 the Fund had one outstanding conditional loan commitment to
a portfolio company for $4,500,000 which had not been funded and can only be drawn upon under
certain conditions. At December 31, 2010, the Fund had one outstanding revolver commitment to a
portfolio company for $500,000, all of which was unfunded. Such commitments involve elements of
credit risk in excess of the amounts recognized in the consolidated statements of assets and
liabilities.
Indemnifications: In the normal course of business, the Fund enters into contracts and
agreements that contain a variety of representations and warranties that provide indemnifications
under certain circumstances. The Funds maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not yet occurred. The
Fund expects the risk of future obligation under these indemnifications to be remote.
Legal proceedings: In the normal course of business, the Fund 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 Fund does not believe
these proceedings will have a material adverse effect on the Funds consolidated financial
statements.
17
Table of Contents
Note 8. Financial Highlights
The following is a schedule of financial highlights for the six months ended June 30, 2011 and
2010:
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Ratio to average net assets (annualized)(1): |
||||||||
Total expenses |
13.7 | % | 20.1 | % | ||||
Net investment income |
16.5 | % | 19.0 | % | ||||
Total return(2) |
11.9 | % | (11.4 | )% |
(1) | Average net assets used for annualized ratios, based on the average of the beginning and ending amounts of each quarter in the period | |
(2) | Total return based on the net increase (decrease) in net asset resulting from operations during the period divided by average net assets and is not annualized. |
These financial highlights may not be indicative of the future performance of the Fund.
18
Table of Contents
Item 2. Managements 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 Mezzanine Capital, L.P.s consolidated financial
statements and related notes appearing in our prospectus dated June 20, 2011, filed with the SEC on
June 22, 2011. 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.
The information in this section contains forward-looking statements that involve risks and
uncertainties. Please see Risk Factors and Special Note Regarding Forward-Looking Statements
appearing in our prospectus dated June 20, 2011, filed with the SEC on June 22, 2011 for a
discussion of the uncertainties, risks and assumptions associated with these statements.
Business Overview
We provide customized mezzanine 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. We were formed in February 2007 and are licensed by the SBA as an SBIC. 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.
On June 20, 2011, FIC acquired all of the limited partnership interests of the Fund and
membership interests of Fidus Mezzanine Capital GP, LLC, its general partner, through the Formation
Transactions, resulting in the Fund becoming a wholly-owned SBIC subsidiary of FIC. Immediately
following the Formation Transactions, the Fund elected to be treated as a business development
company under the 1940 Act and our investment activities have been managed by Fidus Investment
Advisors, LLC (our Investment Advisor) and supervised by our board of directors, a majority of
whom are independent of us and our Investment Advisor.
Portfolio Composition, Investment Activity and Yield
During the six months ended June 30, 2011, we invested $19.6 million in three new and
three existing portfolio companies. The new investments consisted primarily of senior term loans
($3.1 million, or 16.5%), subordinated notes ($13.1 million, or 68.3%), warrants ($1.1 million, or
5.8%) and equity securities ($1.8 million, or 9.4%). During the six months ended June 30, 2011, we
received proceeds from repayments of principal of $5.0 million. During the year ended December 31,
2010, we invested $31.7 million in three new and five existing portfolio companies. The new
investments consisted primarily of subordinated notes ($25.4 million, or 80.4%), senior secured
loans ($4.0 million, or 12.5%), warrants ($0.8 million, or 2.4%) and equity securities ($1.5
million, or 4.7%). Additionally, we received proceeds from repayments of principal of $14.3 million
during the year ended December 31, 2010.
As of June 30, 2011, our investment portfolio totaled $160.7 million and consisted of 19
portfolio companies. As of June 30, 2011, our debt portfolio was entirely comprised of fixed rate
investments. Overall, the portfolio had a net unrealized appreciation of $6.4 million as of June
30, 2011. Our average portfolio company investment at amortized cost was $8.1 million as of June
30, 2011.
As of December 31, 2010, our investment portfolio totaled $141.3 million and consisted of
17 portfolio companies. As of December 31, 2010, our debt portfolio was entirely comprised of
fixed-rate investments. Overall, the portfolio had a net unrealized depreciation of $4.0 million as
of December 31, 2010. Our average portfolio company investment at amortized cost was $8.5 million
as of December 31, 2010.
The weighted average yield on debt investments at their cost basis at June 30, 2011 and
December 31, 2010 was 15.1% and 15.0%, 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 | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Cost |
||||||||
Senior secured loans |
14.7 | % | 13.4 | % | ||||
Subordinated notes |
74.7 | 72.2 | ||||||
Equity |
8.5 | 12.0 | ||||||
Warrants |
2.1 | 2.4 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
19
Table of Contents
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Fair Value |
||||||||
Senior secured loans |
11.7 | % | 11.6 | % | ||||
Subordinated notes |
72.4 | 75.2 | ||||||
Equity |
9.6 | 9.6 | ||||||
Warrants |
6.3 | 3.6 | ||||||
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 | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Cost |
||||||||
Midwest |
31.9 | % | 28.1 | % | ||||
Southwest |
20.3 | 20.8 | ||||||
Northeast |
14.3 | 20.3 | ||||||
Southeast |
18.3 | 18.2 | ||||||
West |
15.2 | 12.6 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
Fair value |
||||||||
Midwest |
32.0 | % | 30.7 | % | ||||
Southwest |
24.7 | 24.7 | ||||||
Northeast |
13.8 | 15.4 | ||||||
Southeast |
17.8 | 19.0 | ||||||
West |
11.7 | 10.2 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
20
Table of Contents
The following tables show the industry composition of our portfolio at cost and fair value:
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Cost |
||||||||
Transportation services |
12.4 | % | 12.4 | % | ||||
Movie theaters |
8.2 | 8.7 | ||||||
Healthcare services |
10.3 | 7.6 | ||||||
Niche manufacturing |
2.9 | 3.1 | ||||||
Retail cleaning |
4.9 | 5.1 | ||||||
Laundry services |
3.0 | 6.3 | ||||||
Industrial products |
5.9 | 6.3 | ||||||
Electronic components supplier |
6.0 | 6.3 | ||||||
Specialty distribution |
6.0 | 6.2 | ||||||
Printing services |
5.5 | 5.6 | ||||||
Industrial cleaning & coatings |
5.2 | 5.5 | ||||||
Commercial cleaning |
5.3 | 5.6 | ||||||
Specialty cracker manufacturer |
5.2 | 5.4 | ||||||
Government information technology services |
3.6 | 3.8 | ||||||
Oil & gas services |
3.1 | 3.2 | ||||||
Aerospace & defense manufacturing |
8.5 | 3.4 | ||||||
Healthcare products |
4.0 | | ||||||
Environmental services |
| 5.5 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Fair Value |
||||||||
Transportation services |
16.0 | % | 14.5 | % | ||||
Movie theaters |
9.0 | 10.3 | ||||||
Healthcare services |
10.0 | 8.1 | ||||||
Niche manufacturing |
0.2 | 0.8 | ||||||
Retail cleaning |
5.7 | 7.0 | ||||||
Laundry services |
3.2 | 6.8 | ||||||
Industrial products |
5.7 | 6.5 | ||||||
Electronic components supplier |
5.8 | 6.5 | ||||||
Specialty distribution |
5.8 | 6.4 | ||||||
Printing services |
5.6 | 6.0 | ||||||
Industrial cleaning & coatings |
5.1 | 5.8 | ||||||
Commercial cleaning |
5.0 | 5.7 | ||||||
Specialty cracker manufacturer |
4.8 | 5.5 | ||||||
Government information technology services |
3.4 | 3.9 | ||||||
Oil & gas services |
2.9 | 3.2 | ||||||
Aerospace & defense manufacturing |
7.9 | 3.0 | ||||||
Healthcare products |
3.9 | | ||||||
Environmental services |
| | ||||||
Total |
100.0 | % | 100.0 | % | ||||
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Portfolio Asset Quality
We utilize an internally developed investment rating system for our portfolio of
investments. Investment Rating 1 is used for investments that involve the least amount of risk in
our portfolio and the portfolio company is performing above expectations. Investment Rating 2 is
used for investments that are performing substantially within our expectations and the portfolio
companys risk factors are neutral or favorable. Each new portfolio investment enters our portfolio
with Investment Rating 2. Investment Rating 3 is used for investments performing below expectations
and require closer monitoring, but with respect to which we expect a full return of original
capital invested and collection of all interest. Investment Rating 4 is used for investments
performing materially below expectations, and have the potential for some loss of investment
return. Investment Rating 5 is used for investments performing substantially below our expectations
and where we expect a loss of principal.
The following table shows the distribution of our investments on the 1 to 5 investment
rating scale at fair value as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Investments at | Percent of | Investments at | Percent of | |||||||||||||
Investment Rating | Fair Value | Total Portfolio | Fair Value | Total Portfolio | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
1 |
$ | 26,555 | 16.5 | % | $ | 27,330 | 19.3 | % | ||||||||
2 |
118,001 | 73.5 | 97,739 | 69.2 | ||||||||||||
3 |
15,790 | 9.8 | 15,108 | 10.7 | ||||||||||||
4 |
| | | | ||||||||||||
5 |
360 | 0.2 | 1,164 | 0.8 | ||||||||||||
Totals |
$ | 160,706 | 100.0 | % | $ | 141,341 | 100.0 | % | ||||||||
Based upon our investment rating system, the weighted average rating of our portfolio as
of both June 30, 2011 and December 31, 2010 was 1.9. As of June 30, 2011, we had no investments on
non-accrual status. As of December 31, 2010, we had one investment on non-accrual which represented
0.0% of the total fair value of our portfolio and 5.5% of the total cost of our portfolio.
Results of Operations
Comparison of three months ended June 30, 2011 and June 30, 2010
Investment Income
For the three months ended June 30, 2011, total investment income was $5.3 million, an
increase of $0.7 million, or 15.2% over the $4.6 million of total investment income for the three
months ended June 30, 2010. The increase was attributable to a $0.8 million increase in interest
and fee income from investments. The increase in interest and fee income is primarily due to higher
average levels of outstanding debt investments during the three months ended June 30, 2011 compared
to the prior year period. Additionally, the Fund recorded $0.1 million in fee income during the
three months ended June 30, 2001 compared with zero in the respective prior year period.
Expenses
For the three months ended June 30, 2011, total expenses were $2.1 million, a decrease of
$0.5 million, or 20.0%, from the $2.6 million of total expenses for the three months ended June 30,
2010. The decrease in total expenses was primarily attributable to a decrease in the management fee
after offset and a decrease in other expenses partially offset by an increase in interest expense.
The management fee after offset decreased $0.5 million, or 44.6%, primarily due to an increase in
management fee offset resulting from higher new investment activity during the three months ended
June 30, 2011 than the comparable period in 2010. Other expenses decreased $0.3 million primarily
due to the write-off of accrued dividends receivable in the second quarter of 2010 related to an
investment placed on non-accrual. Interest expense increased $0.1 million as a result of higher
average balances of SBA debentures outstanding during the three months ended June 30, 2011 than the
comparable period in 2010.
Net Investment Income
As a result of the $0.7 million increase in total investment income and the $0.6 million
decrease in total expenses, net investment income for the three months ended June 30, 2011 was $3.2
million, or $1.2 million higher than the comparable period in 2010.
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Net Increase in Net Assets Resulting From Operations
During the three months ended June 30, 2011, we recorded net unrealized appreciation on
investments of $1.4 million comprised of unrealized appreciation on investments in six portfolio
companies totaling $2.7 million and unrealized depreciation on investments in five portfolio
companies totaling $1.3 million. During the three months ended June 30, 2010, we recorded net
unrealized depreciation of $3.7 million. For the three months ended June 30, 2011 and 2010, the
total realized loss on investments was zero.
As a result of these events, our net increase in net assets resulting from operations
during the three months ended June 30, 2011, was $4.6 million, or an increase of $6.4 million
compared to a net decrease in net assets resulting from operations of $1.7 million during the three
months ended June 30, 2010.
Comparison of six months ended June 30, 2011 and June 30, 2010
Investment Income
For the six months ended June 30, 2011, total investment income was $10.1 million, an
increase of $1.3 million, or 14.4% over the $8.8 million of total investment income for the six
months ended June 30, 2010. The increase was attributable to a $1.5 million increase in interest
and fee income from investments, partially offset by a $0.2 million decrease in dividend income.
The increase in interest and fee income is primarily due to higher average levels of outstanding
debt investments in the six months ended June 30, 2011 compared to the prior year period.
Additionally, the Fund recorded $0.1 million in fee income during the six months ended June 30,
2001 compared with zero in the prior year. The decrease in dividend income is primarily
attributable to one equity investment in a portfolio company that was placed on non-accrual status
in 2010.
Expenses
For the six months ended June 30, 2011, total expenses were $4.6 million, an increase of
1.8%, over the $4.5 million of total expenses for the six months ended June 30, 2010. The net
increase in total expenses was primarily attributable to increased interest expense of $0.4 million
partially offset by a decrease in management fee after offset of $0.2 million and a decrease in
other expenses. Interest expense increased $0.4 million as a result of higher average balances of
SBA debentures outstanding during the six months ended June 30, 2011 than the comparable period in
2010. The management fee after management fee offset decreased $0.2 million, or 10.0%, primarily
due to an increase in management fee offset resulting from higher new investment activity during
the six months ended June 30, 2011 than the comparable period in 2010. Other expenses decreased
$0.3 million primarily due to the write-off of accrued dividends receivable in the second quarter
of 2010 related to an investment placed on non-accrual.
Net Investment Income
As a result of the $1.3 million increase in total investment income and a $0.1 million
decrease in total expenses, net investment income for the six months ended June 30, 2011 was $5.5
million, which was $1.2 million higher than the comparable period in 2010.
Net Increase in Net Assets Resulting From Operations
For the six months ended June 30, 2011, the total realized loss on investments was $7.9
million resulting from one non-control/non-affiliate investment. For the six months ended June 30,
2010, the total realized loss on investments was nominal.
During the six months ended June 30, 2011, we recorded net unrealized appreciation on
investments of $10.4 million comprised of net unrealized appreciation on investments in five
portfolio companies totaling $5.0 million and net unrealized depreciation on investments in seven
portfolio companies totaling $2.5 million. In addition, we recorded net unrealized depreciation
reclassification adjustments of $7.9 million related to a realized loss on the
non-control/non-affiliate investment noted above. For the six months ended June 30, 2010, we
recorded $9.5 million in unrealized depreciation.
As a result of these events, our net increase in net assets resulting from operations
during the six months ended June 30, 2011, was $8.0 million, or an increase of $13.1 million
compared to a net decrease in net assets resulting from operations of $5.2 million during the six
months ended June 30, 2010.
Liquidity and Capital Resources
Cash Flows
For the six months ended June 30, 2011, we experienced a net increase in cash and cash
equivalents in the amount of $17.4 million. During that period, we used $12.4 million in cash from
operating activities, primarily due to new investments in portfolio companies of $19.6 million,
partially offset by $5.0 million in portfolio company investment repayments. During the same
period, we generated $29.8 million from financing activities, consisting primarily of capital
contributions from partners prior to the Offering and Formation Transactions of $7.0
23
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million and from a capital contribution from the proceeds of FICs Offering totaling $21.1
million . Additionally, we received proceeds from SBA debentures of $3.3 million net of financing
costs. These increases were partially offset by capital distributions to partners of $1.5 million.
For the six months ended June 30, 2010, we experienced a net increase in cash and cash
equivalents in the amount of $0.1 million. During that period, we used $10.3 million in cash for
operating activities primarily to fund $12.8 million in new investments which were partially offset
by $1.1 million in repayments. During the same period, we generated $10.4 million from financing
activities consisting of $12.5 million in new SBA debenture borrowing partially offset by the
payment of $0.6 million in deferred financing costs and $1.5 million in capital distributions.
Capital Resources
As of June 30, 2011, we had $19.1 million in cash and cash equivalents, and our net assets
totaled $86.6 million. We intend to generate additional cash primarily from future borrowings as well as cash flows from operations, including income earned from
investments in our portfolio companies and, to a lesser extent, from the temporary investment of
cash in U.S. government securities and other high-quality debt investments that mature in one year
or less. Our primary use of funds will be investments in portfolio companies.
We anticipate that we will continue to fund our investment activities through additional SBA
debenture financing. We are a licensed SBIC, and have the ability to issue debentures guaranteed
by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules
applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA in
an amount up to twice its regulatory capital, which generally is the amount raised from private
investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by
the SBA issued by a single SBIC as of June 30, 2011 was $150.0 million. Debentures guaranteed by
the SBA have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a
spread and have a maturity of ten years with interest payable semi-annually. The principal amount
of the debentures is not required to be paid before maturity but may be pre-paid at any time. As of
June 30, 2011, Fidus Mezzanine Capital, L.P. had $96.8 million of outstanding indebtedness
guaranteed by the SBA, which had a weighted average interest rate of 5.3%. Based on its $75.0
million of regulatory capital as of June 30, 2011, Fidus Mezzanine Capital, L.P. has the current
capacity to issue up to an additional $53.2 million of debentures guaranteed by the SBA.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make certain estimates and assumptions
affecting amounts reported in the financial statements. We have identified investment valuation and
revenue recognition as our most critical accounting estimates. We continuously evaluate our
estimates, including those related to the matters described below. These estimates are based on the
information that is currently available to us and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results could differ materially from those estimates
under different assumptions or conditions. A discussion of our critical accounting policies
follows.
Valuation of Portfolio Investments
We conduct the valuation of our investments, pursuant to which our net asset value is
determined, at all times consistent with generally accepted accounting principles, or GAAP, and
the 1940 Act.
Our investments generally consist of illiquid securities including debt and equity
investments in lower middle-market companies. Investments for which market quotations are readily
available are valued at such market quotations. Because we expect that there will not be a readily
available market for substantially all of the investments in our portfolio, we value substantially
all of our portfolio investments at fair value as determined in good faith by our board of
directors using a documented valuation policy and consistently applied valuation process. Due to
the inherent uncertainty of determining the fair value of investments that do not have a readily
available market value, the fair value of our investments may differ significantly from the values
that would have been used had a readily available market value existed for such investments, and
the difference could be material.
With respect to investments for which market quotations are not readily available, our
board of directors undertakes a multi-step valuation process each quarter, as described below:
| our quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of our investment advisor responsible for the portfolio investment; | ||
| preliminary valuation conclusions are then documented and discussed with the investment committee; | ||
| our board of directors also engages one or more independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available. We 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 audit committee of our board of directors reviews the preliminary valuations of our investment advisor and of the independent |
24
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valuation firms and responds and supplements the valuation recommendations to reflect any comments; and | |||
| the board of directors discusses the valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our investment advisor, the independent valuation firms and the audit committee. |
In making the good faith determination of the value of portfolio investments, we start
with the cost basis of the security, which includes the amortized original issue discount and
payment-in-kind interest or dividends, 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. We
perform detailed valuations of our debt and equity investments on an individual basis, using
market, income and yield approaches as appropriate.
Under the market approach, we typically use 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 we derive a single estimate of enterprise value. In estimating the enterprise
value of a portfolio company, we analyze various factors consistent with industry practice,
including but not limited to original transaction multiples, the portfolio companys 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. Typically, the enterprise value of private companies are based on multiples of
EBITDA, cash flows, net income, revenues, or in limited cases, book value.
Under the income approach, we prepare and analyze discounted cash flow models based on
projections of the future free cash flows (or earnings) of the portfolio company. In determining
the fair value under the income approach, we consider various factors, including but not limited to
the portfolio companys 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.
Under the yield approach, we use discounted cash flow models to determine the present
value of the future cash flow streams of our debt investments, based on future interest and
principal payments as set forth in the associated loan agreements. In determining fair value under
the yield approach, we also consider the following factors: applicable market yields and leverage
levels, credit quality, prepayment penalties, the nature and realizable value of any collateral,
the portfolio companys ability to make payments and changes in the interest rate environment and
the credit markets that generally may affect the price at which similar investments may be made.
We classify our investments in accordance with the 1940 Act. See Note 2 to the
consolidated financial statements for definitions of Control, Affiliate and Non-Control
Non-Affiliate included elsewhere in this report. For our Control investments, we determine the
fair value of debt and equity investments using a combination of market and income approaches. The
valuation approaches for our Control investments estimate the value of the investment if we were to
sell, or exit, the investment, assuming the highest and best use of the investment by market
participants. In addition, these valuation approaches consider the value associated with our
ability to influence the capital structure of the portfolio company, as well as the timing of a
potential exit.
For our Affiliate or Non-Control/Non-Affiliate equity investments, we use a combination
of market and income approaches as described above to determine the fair value. For our Affiliate
or Non-Control/Non-Affiliate debt investments, we generally use the yield approach to determine
fair value, as long as it is appropriate. If there is deterioration in credit quality or a debt
investment is in workout status, we may consider other factors 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.
Determination of fair value involves subjective judgments and estimates. Accordingly, the
notes to our financial statements express the uncertainties with respect to the possible effect of
such valuations, and any changes in such valuations, on the financial statements.
Revenue Recognition
The Funds 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, as determined by
our board of directors through the application of our 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 we expect 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. Distributions of earnings from portfolio companies are evaluated to
determine if the distribution is income or a return of capital.
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Table of Contents
We have investments in our portfolio that contain a payment-in-kind interest or dividends
provision, which represents contractual interest or dividends that are added to the principal
balance and is recorded as income. We stop accruing payment-in-kind interest when it is determined
that payment-in-kind interest is no longer collectible. To maintain RIC tax treatment,
substantially all of this income must be paid out to stockholders in the form of distributions,
even though we have not yet collected the cash.
In connection with our debt investments, we will sometimes receive warrants or other
equity-related securities (Warrants). We determine 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 are treated as original issue
discount (OID), and accreted into interest income based on the effective interest method over the
life of the debt security.
We also typically receive upfront debt origination or closing fees in connection with debt
investments. Such upfront debt origination and closing fees are capitalized as unearned income on
our balance sheet and amortized as additional interest income over the life of the investment.
Prior to the Formation Transactions, and in accordance with the prior limited partnership
agreement, we historically recorded transaction fees for structuring and advisory services provided
in connection with our investments as a direct offset to management fee expense. After completion
of the Formation Transactions, all structuring and advisory service fees received in connection
with our investments are recognized as income. Such fees typically include fees for services,
including structuring and advisory services, provided to portfolio companies. We recognize 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.
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
managements judgment. Non-accrual loans are restored to accrual status when past due principal,
interest or dividends are paid and, in managements judgment, are likely to remain current.
Recently Issued Accounting Standards
In May 2011 the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs. ASU 2011-04 represents the converged guidance of the FASB and the IASB (the Boards) on fair
value measurement. The collective efforts of the 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 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
U.S. 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 periods
beginning after December 15, 2011. Early application by public entities is not permitted. The
Fund is currently assessing the impact of ASU 2011-04 on its future consolidated financial
statements.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financial needs of our portfolio companies. As of June 30, 2011, we had one
off-balance sheet arrangement with a portfolio company consisting of $4.5 million of unfunded
commitments to provide debt financing. As of December 31, 2010, we had one off-balance sheet
arrangement with a different portfolio company consisting of $0.5 million of unfunded commitments
to provide debt financing. Such commitments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in our balance sheets.
Related Party Transactions
Concurrent with the Formation Transactions, we entered into a number of business relationships
with affiliated or related parties, including the following:
| Fidus Investment GP, LLC, our general partner, entered into a new limited partnership agreement with FIC, in its capacity as our sole limited partner, which allows for Fidus Investment Advisors, LLC to manage the day-to-day operating and investing activity of the Fund and receive a base management fee directly from the Fund. Edward Ross, our chairman and chief executive officer, Cary Schaefer, our chief financial officer and chief compliance officer, and Thomas Lauer, one of our directors, are all managers of Fidus Investment Advisors, LLC. | ||
| We received a capital contribution of $21.1 million from our parent company, FIC, from the proceeds of its initial public offering in June 2011. |
26
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In addition, we have adopted a formal joint code of ethics that governs the conduct of our and
Fidus Investment Advisors officers, directors and employees. Our officers and directors also
remain subject to the duties imposed by both the 1940 Act and the Delaware Partnership Law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates. Changes in
interest rates affect both our cost of funding and the valuation of our investment portfolio. Our
risk management systems and procedures are designed to identify and analyze our risk, to set
appropriate policies and limits and to continually monitor these risks and limits by means of
reliable administrative and information systems and other policies and programs. In the future, our
investment income may also be affected by changes in various interest rates, including LIBOR and
prime rates, to the extent of any debt investments that include floating interest rates. As of June
30, 2011, all of our debt investments bore interest at fixed rates and all of our pooled SBA
debentures bore interest at fixed rates. Assuming that the balance sheets as of June 30, 2011, and
December 31, 2010 were to remain constant, a hypothetical 1.0% change in interest rates would not
have a material effect on our level of interest income from debt investments.
Because we currently borrow, and plan to borrow in the future, money to make investments,
our net investment income is dependent upon the difference between the rate at which we borrow
funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance
that a significant change in market interest rates will not have a material adverse effect on our
net investment income. In periods of rising interest rates, our cost of funds would increase, which
could reduce our net investment income if there is not a corresponding increase in interest income
generated by our investment portfolio.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on the
evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective. It should
be noted that any system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the
design of any control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. There were no changes in our internal control over financial
reporting during the second quarter of 2011 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Although we may, from time to time, be involved in litigation arising out of our operations in
the normal course of business or otherwise, we are currently not a party to any pending material
legal proceedings.
Item 1A. Risk Factors.
In addition to other information set forth in this report, you should carefully consider the
Risk Factors discussed in our prospectus dated June 20, 2011 and filed with the SEC on June 22,
2011 which could materially affect our business, financial condition and/or operating results.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
27
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Item 3. Defaults Upon Senior Securities.
None
Item 4. [Removed and Reserved].
Item 5. Other Information.
None
28
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Item 6. Exhibits.
Number | Exhibit | |
31.1
|
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIDUS MEZZANINE CAPITAL, L.P. |
||||
Date: August 4, 2011 | /s/ EDWARD H. ROSS | |||
Edward H. Ross | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) |
||||
Date: August 4, 2011 | /s/ CARY L. SCHAEFER | |||
Cary L. Schaefer | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Number | Exhibit | |
31.1
|
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
31