497
Table of Contents

Filed pursuant to Rule 497
Registration Statement No. 333-208637

 

The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell and are not soliciting offers to buy these securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 1, 2018

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus Dated February 1, 2018)

Gladstone Capital Corporation

$            

    % Notes due 2023

 

 

We are an externally managed specialty finance company that provides capital to lower middle market U.S. businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $15 million). We operate as a closed-end, non-diversified management investment company and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). For federal income tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

We are offering $             in aggregate principal amount of     % notes due 2023 (the “Notes”). The Notes will mature on November 1, 2023. We will pay interest on the Notes on February 1, May 1, August 1 and November 1 of each year, beginning on February 1, 2019. We may redeem the Notes in whole or in part at any time or from time to time on or after November 1, 2020, at the redemption price as set forth under “Description of the Notes—Optional Redemption” in this prospectus supplement. Holders of the Notes will not have the option to have the Notes repaid prior to November 1, 2023. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct unsecured obligations and rank equal in right of payment with all outstanding and future unsecured, unsubordinated indebtedness issued by us. Because the Notes will not be secured by any of our assets, they will be effectively subordinated to all of our existing and future secured indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest) to the extent of the value of the assets securing such indebtedness. The Notes will be structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, since the Notes will be obligations exclusively of Gladstone Capital Corporation and not of any of our subsidiaries. The Notes will be senior in right of payment to any existing or future outstanding series of our preferred stock. None of our subsidiaries is a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. Our board of directors has approved the application to us of the modified asset coverage requirements established by the Small Business Credit Availability Act and, as a result, the asset coverage requirements applicable to us under the 1940 Act will decrease from 200% to 150%, effective April 10, 2019.

We intend to list the Notes on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “GLADD.” The Notes are expected to trade “flat,” which means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not reflected in the trading price.

 

 

Investing in our Notes involves a high degree of risk, including the risk of leverage. Before buying any Notes, you should read the material risks described in the “Risk Factors” section beginning on page S-13 of this prospectus supplement and beginning on page 12 of the accompanying prospectus.

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our Notes, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission (the “SEC”), and can be accessed free of charge at its website at www.sec.gov. This information is also available free of charge by calling us collect at (703) 287-5893 or on the investor relations section of our corporate website located at www.gladstonecapital.com, which is not incorporated by reference into this prospectus supplement nor the accompanying prospectus. You may also call us collect at this number to request other information or to make a shareholder inquiry. See “Where You Can Find More Information” on page S-71 of this prospectus supplement.

The SEC has not approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Note      Total(2)  

Public offering price

   $                    $                

Sales load (underwriting discounts and commissions)

   $        $    

Proceeds, before expenses, to us(1)

   $        $    

 

(1) 

Total expenses of the offering payable by us, excluding underwriting discounts and commissions, are estimated to be $            . See “Underwriting” on page S-50 of this prospectus supplement.

(2) 

We have granted the underwriters a 30-day option to purchase up to an additional $             total aggregate principal amount of Notes offered by this prospectus supplement and the accompanying prospectus, solely to cover overallotments, if any, within 30 days from the date of this prospectus supplement. If the underwriters exercise this option in full, the total public offering price will be $            , the total underwriting discount (sales load and commissions) paid by us will be $            , and total proceeds, before expenses, will be $            .

Delivery of the Notes in book-entry form only through The Depository Trust Company (“DTC”) will be made on or about                     , 2018.

 

 

 

Joint Book-Running Managers
Keefe, Bruyette & Woods, Inc.   Janney Montgomery Scott
                                          A Stifel Company  

Lead Manager

Ladenburg Thalmann

Co-Managers

 

William Blair   

J.J.B. Hilliard,

W.L. Lyons, LLC

  

National Securities

Corporation

   Wedbush Securities

The date of this prospectus supplement is                     , 2018


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Supplement

  

About this Prospectus Supplement

     S-1  

Prospectus Supplement Summary

     S-2  

The Offering

     S-7  

Risk Factors

     S-13  

Special Note Regarding Forward-Looking Statements

     S-20  

Use of Proceeds

     S-21  

Ratio of Earnings to Combined Fixed Charges and Mandatorily Redeemable Preferred Distributions

     S-22  

Consolidated Selected Financial Data

     S-23  

Selected Quarterly Financial Data

     S-25  

Capitalization

     S-26  

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

     S-27  

Underwriting

     S-50  

Description of the Notes

     S-54  

Certain United States Federal Income Tax Consequences

     S-66  

Custodian, Transfer Agent, Dividend Disbursing Agent and Paying Agent

     S-71  

Legal Matters

     S-71  

Experts

     S-71  

Where You Can Find More Information

     S-71  

Index to Interim Consolidated Financial Statements

     S-F-1  

Prospectus

  

Prospectus Summary

     1  

The Offering

     4  

Fees and Expenses

     7  

Additional Information

     11  

Risk Factors

     12  

Special Note Regarding Forward-Looking Statements

     35  

Use of Proceeds

     35  

Price Range of Common Stock and Distributions

     35  

Common Share Price Data

     36  

Ratios of Earnings to Fixed Charges

     37  

Consolidated Selected Financial Data

     38  

Selected Quarterly Data (Unaudited)

     40  

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

     41  

Senior Securities

     66  

Business

     68  

Portfolio Companies

     88  

Management

     96  

Control Persons and Principal Stockholders

     112  

Dividend Reinvestment Plan

     115  

Material U.S. Federal Income Tax Considerations

     116  

Regulation as a Business Development Company

     119  

Description of Our Securities

     121  

Certain Provisions of Maryland Law and of Our Charter and Bylaws

     126  

Share Repurchases

     130  

Plan of Distribution

     131  

Custodian, Transfer and Dividend Paying Agent and Registrar

     133  

Brokerage Allocation and Other Practices

     134  

Proxy Voting Policies and Procedures

     135  

Legal Matters

     136  

Experts

     136  

Index to Consolidated Financial Statements

     F-1  

 

i


Table of Contents

ABOUT THIS PROSPECTUS SUPPLEMENT

This prospectus supplement, together with the accompanying prospectus, sets forth the information that you should know before investing in the Notes. You should read the prospectus supplement and accompanying prospectus, which contain important information, before deciding whether to invest in the Notes.

This prospectus supplement, which describes the specific terms of this offering, also adds to and updates information contained in the accompanying prospectus. The accompanying prospectus gives more general information, some of which may not apply to this offering. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement. However, if any statement in one of these documents is inconsistent with a statement in another document having a later date, the statement in the document having the later date modifies or supersedes the earlier statement.

The Notes do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. Neither we nor the underwriters have authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. The information appearing in this prospectus supplement, the accompanying prospectus is accurate only as of the respective dates of such information regardless of the time of delivery or any sale of the Notes. Our business, financial condition, results of operations and prospects may have changed since those dates.

We are not, and the underwriters are not, making an offer to sell the Notes in any jurisdiction where such an offer or sale is not permitted.


Table of Contents

PROSPECTUS SUPPLEMENT SUMMARY

The following summary highlights some of the information included in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all the information that you may want to consider. You should review the more detailed information contained elsewhere in this prospectus supplement and in the accompanying prospectus prior to making an investment in our Notes, and especially the information set forth under the heading “Risk Factors” in this prospectus supplement and the accompanying prospectus.

In this prospectus supplement and the accompanying prospectus, except where the context suggests otherwise, the “Company,” “Gladstone Capital,” “we,” us” or “our” refer to Gladstone Capital Corporation; “Adviser” refers to Gladstone Management Corporation and “Administrator” refers to Gladstone Administration, LLC; and “Gladstone Companies” refers to our Adviser, the Administrator and its affiliated companies.

Gladstone Capital Corporation

We were incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed our initial public offering on August 24, 2001. We are externally managed and operate as a closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. For federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. We intend to continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment by meeting certain requirements, including minimum distribution requirements.

Our Investment Objectives and Strategy

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% in debt investments and 10.0% in equity investments, at cost. As of June 30, 2018, our investment portfolio was made up of approximately 90.7% debt investments and 9.3% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with annual EBITDA of $3 million to $15 million) in the United States that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the SEC in July 2012. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.



 

S-2


Table of Contents

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate, or “LIBOR”) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement, such as a success fee or deferred interest provision and are primarily interest only with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of the portfolio company. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid together with the principal at maturity. This form of deferred interest is often called paid-in-kind (“PIK”) interest. Typically, our equity investments take the form of preferred or common stock, limited liability company interests, or warrants or options to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

As of June 30, 2018, our investment portfolio consisted of investments in 50 portfolio companies located in 25 states in 18 different industries, with an aggregate fair value of $404.9 million. From our initial public offering in August 2001 through June 30, 2018, we have made 490 different loans to, or investments in, 226 companies for a total of approximately $1.8 billion, before giving effect to principal repayments on investments and divestitures. We expect that our investment portfolio will primarily include the following four categories of investments in private companies operating in the U.S.:

 

   

Senior Secured Debt Securities: We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, secured first lien loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of its business. The senior secured debt security usually takes the form of first priority liens on all, or substantially all, of the assets of the business. Senior secured debt securities may include investments sourced from the syndicated loan market.

 

   

Senior Secured Subordinated Debt Securities: We seek to invest a portion of our assets in secured second lien debt securities, also known as senior subordinated loans and senior subordinated notes. These secured second lien debts rank junior to the borrowers’ senior debt and may be secured by a first priority lien on a portion of the assets of the business and may be designated as second lien notes (including our participation and investment in syndicated second lien loans). Additionally, we may receive other yield enhancements, such as success fees, in connection with these senior secured subordinated debt securities.

 

   

Junior Subordinated Debt Securities: We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior subordinated debts may be secured by certain assets of the borrower or unsecured loans. Additionally, we may receive other yield enhancements in addition to or in lieu of success fees, such as warrants to buy common and preferred stock or limited liability interests in connection with these junior subordinated debt securities.

 

   

Preferred and Common Equity/Equivalents: In some cases we will purchase equity securities which consist of preferred and common equity or limited liability company interests, or warrants or options to acquire such securities, and are in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In some cases, we will own a significant portion of the equity and in other cases we may have voting control of the businesses in which we invest.

Additionally, pursuant to the 1940 Act, we must maintain at least 70.0% of our total assets in qualifying assets, under Section 55(a) of the 1940 Act, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30.0% of our assets in other non-qualifying assets. See “Regulation as a Business Development Company—Qualifying Assets” in the accompanying prospectus for a discussion of the types of qualifying assets in which we are permitted to invest pursuant to Section 55(a) of the 1940 Act.



 

S-3


Table of Contents

Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered higher risk, as compared to investment-grade debt instruments. In addition, many of the debt securities we hold typically do not amortize prior to maturity. With the exception of our policy to conduct our business as a BDC, our investment policies are not fundamental and may be changed without stockholder approval. See “Business—Investment Process” included in the accompanying prospectus for additional information on our investment practices.

Our Investment Adviser and Administrator

We are externally managed by the Adviser, an affiliate of ours, under an investment advisory and management agreement (the “Advisory Agreement”), and another of our affiliates, the Administrator provides administrative services to us pursuant to a contractual agreement (the “Administration Agreement”). Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to: Gladstone Commercial Corporation, a publicly-traded real estate investment trust; Gladstone Investment Corporation, a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is an SEC registered investment adviser under the Investment Advisers Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C. The Adviser also has offices in other states. We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services.

Recent Developments

Distributions and Dividends

On October 9, 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred stockholders:

 

Record Date

   Payment Date    Distribution
per Common
Share
     Distribution per
Series 2024
Term Preferred
Share
 

October 19, 2018

   October 31, 2018    $ 0.07      $ 0.125  

November 20, 2018

   November 30, 2018      0.07        0.125  

December 20, 2018

   December 31, 2018
     0.07        0.125  
     

 

 

    

 

 

 
   Total for the Quarter:    $ 0.21      $ 0.375  

Portfolio and Investment Activity

In July 2018, our investment in NetSmart Technologies, Inc. paid off for net cash proceeds of $3.7 million.



 

S-4


Table of Contents

In July 2018, an existing portfolio company, EL Academies, Inc., drew an additional $4.4 million on the unused portion of its secured first lien delayed draw term loan.

In July 2018, the holding company for Impact! Chemical Technologies, Inc. (“Impact”) merged with and into the holding company for WadeCo Specialties, Inc. (“WadeCo”) to form Chemical & Injection Holdings Company, LLC (“Chemical & Injection Holdings”). Our preferred equity ownership related to WadeCo Specialties, Inc. with a cost basis of $0.6 million, was converted into preferred equity ownership in the newly formed Chemical & Injection Holdings with the same cost basis. Our existing debt investments in Impact and WadeCo remained unchanged in conjunction with the merger.

In September 2018, we restructured our $30.0 million investment in Sunshine Media Holdings (“Sunshine”) resulting in a $28.2 million realized loss and a new $2.0 million investment in TNCP Intermediate HoldCo, LLC (“TNCP”).

At-the-Market Program

Subsequent to June 30, 2018 and through October 31, 2018, we sold an additional 844,313 shares of our common stock under our at-the-market program with Cantor Fitzgerald & Co, at a weighted-average price of $9.62 per share and raised $8.1 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $8.0 million.

Preliminary results for the three-month period and the fiscal year ended September 30, 2018

On November 1, 2018, we announced unaudited preliminary financial results for the fiscal year ended September 30, 2018, including:

The estimated net asset value (“NAV”) per share of our common stock at September 30, 2018 was $8.32, which represents the midpoint in our estimated NAV per share range as of such date of $8.27 and $8.37.

Net investment income per weighted average share of common stock outstanding is estimated to have totaled $0.85 for the year ended September 30, 2018.

Our total amount outstanding under our Fifth Amended and Restated Credit Agreement with KeyBank National Association (the “Credit Facility”) as of September 30, 2018 was approximately $110.0 million.

The information presented above should not be considered a substitute for full audited financial statements for the fiscal year ended September 30, 2018 and should not be regarded as a representation by us as to the actual financial results for the three-month period or the fiscal year ended September 30, 2018.

The preliminary estimated financial data included in this prospectus supplement as of and for the fiscal year ended September 30, 2018 has been prepared by and is the responsibility of our management. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary estimated financial information and does not express an opinion or any other form of assurance with respect thereto.



 

S-5


Table of Contents

We are currently preparing our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Our annual financial statements and the notes thereto, which will be included in such Annual Report on Form 10-K, will be audited by our independent registered public accounting firm. Our actual results may differ materially from the preliminary information described above due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for the fiscal year ended September 30, 2018 are finalized and publicly reported, and the completion of the audit by our independent registered public accounting firm, all of which will occur after this offering has been completed.



 

S-6


Table of Contents

THE OFFERING

This prospectus supplement sets forth certain terms of the Notes that we are offering pursuant to this prospectus supplement and supplements the accompanying prospectus that is attached to the back of this prospectus supplement. This section outlines the specific legal and financial terms of the Notes. You should read this section together with the section titled “Description of our Notes” and the more general description of our debt securities in the accompanying prospectus under the heading “Description of Our Securities—Debt Securities” before investing in the Notes.

 

Issuer

Gladstone Capital Corporation

 

Title of the securities

    % Notes due 2023

 

Initial aggregate principal amount being offered

$            

 

Overallotment option

The underwriters may also purchase from us up to an additional $             aggregate principal amount of Notes to cover overallotments, if any, within 30 days of the date of this prospectus supplement.

 

Initial public offering price

$25.00 per Note (Par)

 

Principal payable at maturity

100% of the aggregate principal amount. The outstanding principal amount of the Notes will be payable on the stated maturity date at the office of the trustee, paying agent, and security registrar for the Notes or at such other office as we may designate.

 

Type of Note

Fixed rate note

 

Listing

We intend to list the Notes on the Nasdaq, under the trading symbol “GLADD.”

 

Interest rate

    % per year

 

Day count basis

360-day year of twelve 30-day months

 

Original issue date

                    , 2018

 

Stated maturity date

November 1, 2023

 

Date interest starts accruing

                    , 2018

 

Interest payment dates

Each February 1, May 1, August 1 and November 1 commencing February 1, 2019. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

 

Interest periods

The initial interest period will be the period from and including                     , 2018, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.


 

S-7


Table of Contents

Regular record dates for interest

January 15, May 15, July 15 and October 15

 

Specified currency

U.S. Dollars

 

Place of payment

St. Paul, Minnesota and/or such other place(s) that may be specified in the indenture or a notice to holders.

 

Ranking of Notes

The Notes will be our direct unsecured obligations and will rank:

 

   

pari passu with our existing and future unsecured, unsubordinated indebtedness;

 

   

senior to our preferred stock, including our outstanding Series 2024 Term Preferred Stock and any series of preferred stock that we may issue in the future;

 

   

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

   

effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the $110.8 million in borrowings outstanding as of November 1, 2018 under the Credit Facility.

 

Denominations

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

 

Business day

Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City, Nashville, Tennessee or the place of payment are authorized or required by law or executive order to close.

 

Optional redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after November 1, 2020, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption.

 

  You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the indenture and the 1940 Act, to the extent applicable.


 

S-8


Table of Contents
  If we redeem only some of the Notes, the trustee or, with respect to global securities, DTC, will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture and the 1940 Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

 

Sinking fund

The Notes will not be subject to any sinking fund.

 

Repayment at option of Holders

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

 

Defeasance and covenant defeasance

The Notes are subject to defeasance by us. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions required under the indenture relating to the Notes, we will be deemed to have been discharged from our obligations under the Notes. See “Description of the Notes—Defeasance” in this prospectus supplement.

 

  The Notes are subject to covenant defeasance by us. In the event of a “covenant defeasance,” upon depositing such funds and satisfying conditions similar to those for defeasance we would be released from certain covenants under the indenture relating to the Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the indenture, and while the Notes could not be accelerated for any reason, the holders of the Notes nonetheless could look to the Company for repayment of the Notes if there were a shortfall in the funds deposited with the trustee or the trustee is prevented from making a payment. See “Description of the Notes—Defeasance” in this prospectus supplement.

 

Form of Notes

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. Except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations which are participants in DTC.

 

Trustee, Paying Agent and Security Registrar

U.S. Bank National Association is the trustee, security registrar and paying agent. U.S. Bank National Association, in each of its capacities, including without limitation as trustee, security registrar and paying agent, assumes no responsibility for the accuracy or completeness of the information concerning us or our affiliates or any



 

S-9


Table of Contents
 

other party contained in this document or the related documents or for any failure by us or any other party to disclose events that may have occurred and may affect the significance or accuracy of such information, or for any information provided to it by us, including but not limited to settlement amounts and any other information.

 

  We may maintain banking relationships in the ordinary course of business with the trustee and its affiliates.

 

Other covenants

In addition to standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or the Notes may be surrendered for payment and related matters, the following covenants shall apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act. Currently, these provisions generally prohibit us from incurring additional debt or issuing additional debt or preferred securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% on and after April 10, 2019) after such incurrence or issuance.

 

   

We agree that for the period of time during which Notes are outstanding, we will not declare any dividend (except a dividend payable in stock of the issuer), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the 1940 Act) of at least the threshold specified under Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions thereto of the 1940 Act, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to any SEC no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a RIC under Subchapter M of the Code.

 

   

If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to file any periodic reports



 

S-10


Table of Contents
 

with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable Generally Accepted Accounting Principles in the United States of America (“GAAP”).

 

Events of default

The term “Event of Default” in respect of the Notes means any of the following:

 

   

We do not pay the principal of any Note when due and payable at maturity;

 

   

We do not pay interest on any Note when due and payable, and such default is not cured within 30 days of its due date;

 

   

We remain in breach of any other covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding Notes);

 

   

We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or

 

   

On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage of less than 100%.

 

Use of Proceeds

We estimate that the net proceeds we receive from the sale of the $            million aggregate principal amount of Notes in this offering will be approximately $            million (or approximately $            million if the underwriters fully exercise their overallotment option) after deducting the underwriting discount of approximately $            million (or approximately $            million if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $            million payable by us.

 

  We intend to use the net proceeds from this offering to repay a portion of the amount outstanding under the Credit Facility, to fund new investment opportunities, and for other general corporate purposes. As of November 1, 2018, we had approximately $110.8 million of debt outstanding under our Credit Facility. See “Use of Proceeds” on page S-21.

 

Global Clearance and Settlement Procedures

Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately



 

S-11


Table of Contents
 

available funds. None of the issuer, the Trustee or the paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

Governing Law

The Notes and the indenture will be governed by and construed in accordance with the laws of the State of New York.


 

S-12


Table of Contents

RISK FACTORS

Investing in the Notes involves a number of significant risks. You should carefully consider the risks described below and all other information contained in this prospectus supplement and the accompanying prospectus before making a decision to purchase our Notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, our net asset value and the trading price of our securities could decline and you may lose all or part of your investment.

Risks Related to the Offering

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by and us and our general liabilities (total liabilities, less debt).

The Notes will not be secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. In addition, the Notes will rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by us and our general liabilities (total liabilities, less debt).

The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes are obligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries will be a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. As of November 1, 2018, there was $110.8 million outstanding under the Credit Facility. Borrowings under the Credit Facility are the obligation of Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, and are structurally senior to the Notes. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which the Notes will be issued will contain limited protection for holders of the Notes.

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

   

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any

 

S-13


Table of Contents
 

indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, which generally prohibit us incurring additional debt or issuing additional debt or preferred securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% effective April 10, 2019) after such incurrance or issuance. See the risk factor “—Recently-enacted legislation allows us to incur additional leverage under the 1940 Act, distinct from certain of our obligations under our Credit Facility and our term preferred stock” below;

 

   

pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including our preferred stock and any subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause our asset coverage to fall below the threshold specified in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, giving effect to any no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar SEC no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time in order to maintain the BDC’s status as a RIC under Subchapter M of the Code;

 

   

sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

   

enter into transactions with affiliates;

 

   

create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

   

make investments; or

 

   

create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture and the Notes will not require us to make an offer to purchase the Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.

Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the Notes), and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the Notes.

 

S-14


Table of Contents

There is no existing trading market for the Notes and, even if Nasdaq approves the listing of the Notes, an active trading market for the Notes may not develop, which could limit your ability to sell the Notes and/or the market price of the Notes.

The Notes will be a new issue of debt securities for which there is no trading market. We intend to list the Notes on Nasdaq within 30 days of the original issue date under the symbol “GLADD.” However, there is no assurance that the Notes will be approved for listing on Nasdaq. Moreover, even if the listing of the Notes is approved, we cannot provide any assurances that an active trading market will develop or be maintained for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters have advised us that they intend to make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion.

Accordingly, we cannot assure you that the Notes will be approved for listing on Nasdaq, that a liquid trading market will develop or be maintained for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to refinance or restructure our debt, including the Notes, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes or our other debt. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default under the Credit Facility or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Credit Facility, could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes or the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

We may choose to redeem the Notes when prevailing interest rates are relatively low.

On or after November 1, 2020, we may choose to redeem the Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the Notes. If prevailing rates are lower at the time of redemption,

 

S-15


Table of Contents

and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our securities, could cause the liquidity or market value of the Notes to decline significantly.

Any credit rating assigned to us or the Notes represents an assessment by the assigning rating agency of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. Credit ratings are paid for by the issuer and are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion.

There are material limitations with making preliminary estimates of our financial results for the three months and year ended September 30, 2018 prior to the completion of our and our auditors’ financial review procedures for such period.

The preliminary financial estimates contained in “Prospectus Supplement Summary—Recent Developments are not a comprehensive statement of our financial results for the three months and year ended September 30, 2018 and have not been audited by our independent registered public accounting firm. Our consolidated financial statements for the year ended September 30, 2018 will not be available until after this offering is completed and, consequently, will not be available to you prior to investing in this offering. Our actual financial results for the three months and year ended September 30, 2018 may differ materially from the preliminary financial estimates we have provided as a result of the completion of our financial closing procedures, final adjustments and other developments arising between now and the time that our financial results for the three months and year ended September 30, 2018 are finalized. The preliminary financial data included herein have been prepared by, and are the responsibility of, management. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to such preliminary estimates. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

Our NAV may change significantly since our last valuation at June 30, 2018.

Generally, our Board of Directors reviews and approves the fair value of our portfolio of investments on a quarterly basis. The last such quarterly review occurred with respect to our portfolio of investments as of June 30, 2018. Further, our financial statements have not been audited by our independent registered public accounting firm as of or for any periods since September 30, 2017. The fair value of various individual investments in our portfolio and/or the aggregate fair value of our investments may have changed significantly since that time. We are currently in the process of determining the fair value of our portfolio as of September 30, 2018 and based on the preliminary assessment of our Board of Directors, the fair value has decreased since June 30, 2018. If our Board of Directors makes a final determination that the fair value of our investment portfolio at September 30, 2018 was less than such fair value at June 30, 2018, then we will record an unrealized loss on our investment portfolio and report a lower NAV per share as of such date than is reflected in the Consolidated Selected Financial Data and the financial statements as of June 30, 2018 included elsewhere in this prospectus supplement. If our Board of Directors determines that the fair value of our investment portfolio at September 30, 2018 was greater than such fair value at June 30, 2018, we will record an unrealized gain on our investment portfolio and report a greater NAV per share than so reflected elsewhere in this prospectus supplement. Upon publication of this information in connection with our announcement of operating results for our quarter and fiscal year ended September 30, 2018, the market price of our securities may fluctuate materially, and the trading price of the Notes may be substantially less than the price you pay for the Notes in this offering.

 

S-16


Table of Contents

Our management will have broad discretion in the use of the net proceeds from this offering and may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the use of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used in ways with which you may not agree or may not otherwise be considered appropriate. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure of our management to use these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

Risks Related to Our Business and Structure

Recently-enacted legislation allows us to incur additional leverage under the 1940 Act, distinct from certain of our obligations under our Credit Facility and our term preferred stock.

Historically, as a BDC, under the 1940 Act, we are generally required to maintain asset coverage of 200% for senior securities representing indebtedness (i.e., debt) or stock (i.e., preferred stock). On March 23, 2018, President Trump signed into legislation the Consolidated Appropriations Act of 2018, also known as the “omnibus spending package.” Included in Title VIII therein is the Small Business Credit Availability Act (the “SBCAA”) that includes certain amendments to federal securities laws impacting BDCs. Among other items, the SBCAA allows a BDC to increase the amount of debt it may incur by decreasing the asset coverage requirements applicable to BDCs from 200% to 150% (subject to specific approval and disclosure requirements).

On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a result, the Company’s asset coverage requirements for senior securities will be changed from 200% to 150%, effective one year after the date of the Board of Director’s approval, i.e. April 10, 2019. Under the current 200% asset coverage standard, we may borrow debt or issue senior securities in the amount of $1.00 for every $1.00 of equity in the Company. Starting from April 10, 2019, under the 150% asset coverage standard, we may borrow debt or issue senior securities in the amount of $2.00 for every $1.00 of equity in the Company. This reduction in the asset coverage ratio will allow us to double the amount of debt that we may incur and, therefore, your risk of an investment in us may increase. In addition, our management fee is based on our average gross assets, which include investments made with proceeds of borrowings, and, as a result, if we were to incur additional leverage, management fees paid to the Adviser would increase.

Notwithstanding the modified asset coverage ratio under the 1940 Act described above, we remain subject to a minimum asset coverage requirement of 200% with respect to certain provisions of our Credit Facility and our Series 2024 Term Preferred Stock. If we drop below the 200% minimum asset coverage requirement, we may under certain circumstances be required to repay all outstanding indebtedness under our Credit Facility and redeem our Series 2024 Term Preferred Stock. In addition, in the event we fall below the 200% minimum asset coverage requirement, we may need to renegotiate our Credit Facility and issue additional series of term preferred stock with a lower asset coverage requirement. Such events, if they were to occur, could have a significant adverse effect on our business, financial condition, results of operations, and cash flows.

In addition, the ability of BDCs to increase their leverage will increase the capital available to BDCs and thus competition for the investments that we seek to make. This may negatively impact pricing on the investments that we do make and adversely affect our net investment income and results of operations.

 

S-17


Table of Contents

Rising interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations, and cash flows.

Over the past year, the Federal Reserve has made gradual increases in the federal funds rate and we expect such gradual increases to continue. A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR with a floor, so an increase in interest rates above the applicable floor may make it more difficult for our portfolio companies to meet their debt servicing obligations to us, which could result in a default under their loan documents with us. To the extent that interest rates increase, this may negatively impact the operating performance of our portfolio companies as they shift cash from other productive uses to the payment of interest or may cause our portfolio companies to refinance or otherwise repay our debt investments earlier than they otherwise would, requiring us to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans. In addition, a decrease in interest rates may reduce our investment income with new investments made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. There can be no guarantee the Federal Reserve will continue to raise rates at the gradual pace they originally proposed.

Incurring additional leverage may magnify our exposure to risks associated with changes in interest rates, which could adversely affect our profitability.

If we incur additional leverage, general interest rate fluctuations may have a more significant negative impact on our investments and investment opportunities than they would have absent such additional incurrence, and, accordingly, may have a material adverse effect on our investment objectives and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. In connection with this offering, we may reborrow money after paying down a portion of our Credit Facility or issue additional debt securities, preferred stock or other securities to make additional investments, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these borrowed funds. Incurring additional leverage will magnify the impact of an increase to our cost of borrowings due to any increase in interest rates. To the extent our additional borrowings are in fixed-rate instruments, we may be required to invest in higher-yield securities in order to cover our interest expense and maintain our current level of return to stockholders, which may increase the risk of an investment in our securities.

Our use of borrowed funds to make investments exposes us to risks typically associated with leverage.

We borrow money and may issue additional debt securities or preferred stock to leverage our capital structure. As a result:

 

   

any depreciation in the value of our assets may magnify losses associated with an investment and could totally eliminate the value of an asset to us;

 

   

if we do not appropriately match the assets and liabilities of our business and interest or dividend rates on such assets and liabilities, adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage;

 

   

as is the case in this offering, such securities would be governed by an indenture or other instrument containing covenants restricting our operating flexibility or affecting our investment or operating policies, and may require us to pledge assets or provide other security for such indebtedness;

 

   

we, and indirectly our common stockholders, bear the entire cost of issuing and paying interest or any distributions on such securities;

 

   

any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common shares; and

 

S-18


Table of Contents
   

any custodial relationships associated with our use of leverage would conform to the requirements of the 1940 Act, and no creditor would have veto power over our investment policies, strategies, objectives or decisions except in an event of default or if our asset coverage was less than 200% (or 150% effective April 10, 2019).

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage ratio equals at least 200% (or 150% effective April 10, 2019) after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test and we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our senior securities at a time when such sales may be disadvantageous.

 

S-19


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate, among other things, to future events or our future performance or financial condition or future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts with our Adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include:

 

   

the recurrence of adverse events in the economy and the capital markets, including stock price volatility;

 

   

risks associated with negotiation and consummation of pending and future transactions;

 

   

the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte;

 

   

changes in our investment objective and strategy;

 

   

availability, terms (including the possibility of interest rate volatility) and deployment of capital;

 

   

changes in our industry, interest rates, exchange rates or the general economy;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the degree and nature of our competition;

 

   

changes in governmental regulations, tax rates and similar matters;

 

   

our ability to maintain our qualification as a RIC and as a BDC;

 

   

our ability to exit a controlled investment in a timely manner; and

 

   

those factors described in the “Risk Factors” section of this prospectus supplement and the accompanying prospectus.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement or the accompanying prospectus. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

S-20


Table of Contents

USE OF PROCEEDS

The net proceeds from the sale of $             aggregate principal amount of the Notes in this offering are approximately $             (or approximately $             if the underwriters fully exercise their overallotment option) after deducting the underwriting discounts and commissions of $             (or $             if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $             payable by us.

We intend to use the net proceeds from this offering to repay a portion of the amount outstanding under the Credit Facility, to fund new investment opportunities, and for other general corporate purposes. As of November 1, 2018, we had $110.8 million outstanding under the Credit Facility. Advances under the Credit Facility generally bear interest at a 30-day LIBOR plus 2.85% per annum, with an unused commitment fee of 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. The Credit Facility has a revolving period end date of January 15, 2021. If our Credit Facility is not renewed or extended by January 15, 2021, all principal and interest will be due and payable on or before April 15, 2022.

We intend to re-borrow under our Credit Facility to make investments in portfolio companies in accordance with our investment objectives depending on the availability of appropriate investment opportunities consistent with our investment objectives and market conditions.

Pending such uses, we will invest a portion of the net proceeds of this offering in short-term investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in accordance with our investment objectives.

 

S-21


Table of Contents

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND

MANDATORILY REDEEMABLE PREFERRED DISTRIBUTIONS

The following table contains our ratio of earnings to combined fixed charges and mandatorily redeemable preferred distributions for the periods indicated, computed as set forth below. You should read these ratios of earnings to combined fixed charges and mandatorily redeemable preferred distributions in connection with our consolidated financial statements, including the notes to those statements, included in this prospectus supplement and the accompanying prospectus.

 

     For the
Nine
Months
Ended
June 30,
2018
    For the Years Ended
September 30,
 
    2017     2016     2015     2014     2013  

Net investment income

   $ 17,186     $ 21,433     $ 19,487     $ 17,700     $ 18,368     $ 18,386  

Add: fixed charges and mandatorily redeemable preferred distributions

     7,461       8,319       8,092       9,050       7,213       7,137  

Less: mandatorily redeemable preferred distributions

     (2,328     (4,152     (4,118     (4,116     (3,338     (2,744
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings(1)

   $ 22,319     $ 25,600     $ 23,461     $ 22,634     $ 22,243     $ 22,779  

Fixed charges and mandatorily redeemable preferred distributions:

            

Interest expense

     4,356       3,073       2,899       3,828       2,628       3,182  

Amortization of deferred financing fees

     777       1,094       1,075       1,106       1,247       1,211  

Mandatorily redeemable preferred distributions

     2,328       4,152       4,118       4,116       3,338       2,744  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges and mandatorily redeemable preferred distributions

   $ 7,461     $ 8,319     $ 8,092     $ 9,050     $ 7,213     $ 7,137  

Ratio of net earnings to combined fixed charges and mandatorily redeemable preferred distributions

     3.0x       3.1x       2.9x       2.5x       3.1x       3.2x

 

(1) 

Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

The calculation of the ratio of net earnings to combined fixed charges and mandatorily redeemable preferred distributions is above. “Net earnings” consist of net investment income before fixed charges. “Fixed charges” consist of interest expense and amortization of deferred financing fees.

 

S-22


Table of Contents

CONSOLIDATED SELECTED FINANCIAL DATA

The following consolidated selected financial data for the fiscal years ended September 30, 2017, 2016, 2015, 2014 and 2013 are derived from our audited consolidated financial statements. The consolidated selected financial data for the nine months ended June 30, 2018 and 2017 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The other data included in the second table below is also unaudited. The data should be read in conjunction with our Consolidated Financial Statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus supplement and the accompanying prospectus.

(dollar amounts in thousands, except per share data)

 

    Nine Months Ended
June 30,
    Year Ended September 30,  
    2018     2017     2017     2016     2015     2014     2013  

Statement of Operations Data:

             

Total Investment Income

  $ 34,324     $ 28,399     $ 39,233     $ 39,112     $ 38,058     $ 36,585     $ 36,154  

Total Expenses, Net of Credits from Adviser

    17,138       12,454       17,800       19,625       20,358       18,217       17,768  

Net Investment Income

    17,186       15,945       21,433       19,487       17,700       18,368       18,386  

Net Realized and Unrealized (Loss) Gain on Investments, Borrowings and Other

    10,407       (784     (4,253     (8,120     (9,216     (7,135     13,833  

Net Increase (Decrease) in Net Assets Resulting from Operations

    28,557       11,735       17,180     $ 11,367     $ 8,484     $ 11,233     $ 32,219  

Per Share Data:

             

Net Investment Income per Common Share—Basic and Diluted(A)

  $ 0.64     $ 0.63     $ 0.84     $ 0.84     $ 0.84     $ 0.87     $ 0.88  

Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share—Basic and Diluted(A)

    1.07       0.46       0.67       0.49       0.40       0.53       1.53  

Distributions Declared Per Common Share(B)

    0.63       0.63       0.84       0.84       0.84       0.84       0.84  

Statement of Assets and Liabilities Data:

             

Total Assets

  $ 415,424     $ 361,345     $ 365,860     $ 337,178     $ 382,482     $ 301,429     $ 295,091  

Net Assets

    244,951       216,983       219,650       201,207       191,444       199,660       205,992  

Net Asset Value Per Common Share

    8.86       8.38       8.40       8.62       9.06       9.81       9.81  

Common Shares Outstanding

    27,660,432       25,880,466       26,160,684       23,344,422       21,131,622       21,000,160       21,000,160  

Weighted Common Shares Outstanding—Basic and Diluted

    26,788,172       25,288,289       25,495,117       23,200,642       21,066,844       21,000,160       21,000,160  

Senior Securities Data:

             

Borrowings under Credit Facility, at cost(C)

  $ 117,000     $ 82,271     $ 93,000     $ 71,300     $ 127,300     $ 36,700     $ 46,900  

Mandatorily redeemable preferred stock(C)(D)

    51,750       61,000       51,750       61,000       61,000       61,000       38,497  

 

(A) 

Per share data is based on the weighted average common stock outstanding for both basic and diluted.

(B) 

The tax character of distributions is determined on an annual basis in accordance with GAAP. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9—Distributions to Common Stockholders to our audited consolidated financial statements included in the accompanying prospectus.

(C) 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our level of indebtedness.

(D) 

Represents the aggregate liquidation preference of our mandatorily redeemable preferred stock.

 

S-23


Table of Contents
     Nine Months Ended
June 30,
    Year Ended September 30,  
         2018             2017         2017     2016     2015     2014     2013  

Other Unaudited Data:

              

Number of Portfolio Companies at Period End

     50       47       47       45       48       45       47  

Average Size of Portfolio Company Investment at Cost

   $ 9,073     $ 8,636     $ 8,754     $ 8,484     $ 8,547     $ 7,762     $ 7,069  

Principal Amount of New Investments

     67,436       85,241       99,241       79,401       102,299       81,731       80,418  

Proceeds from Loan Repayments and Investments Sold and Exits(E)

     58,397       71,081       83,444       121,144       40,273       72,560       117,048  

Weighted Average Yield on Investments, excluding loans on non-accrual status(F)

     11.75     11.48     11.57     11.08     10.93     11.47     11.63

Weighted Average Yield on Investments, including loans on non-accrual status(G)

     10.84       10.54       10.61       10.27       9.84       9.99       9.74  

Total Return(H)

     1.52       29.46       27.90       11.68       2.40       9.62       9.90  

 

(E) 

Includes non-cash reductions in cost basis.

(F) 

Weighted average yield on investments, excluding loans on non-accrual status, equals interest income on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year.

(G) 

Weighted average yield on investments, including loans on non-accrual status, equals interest income on investments divided by the weighted average total principal balance throughout the fiscal year.

(H) 

Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account dividends reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 9—Distributions to Common Stockholders elsewhere in the accompanying prospectus.

 

S-24


Table of Contents

SELECTED QUARTERLY FINANCIAL DATA

(UNAUDITED)

The following tables set forth certain quarterly financial information for each of the eight quarters in the two years ended September 30, 2017 and the first three quarters of the fiscal year ending September 30, 2018. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full fiscal year or for any future quarter.

(dollar amounts in thousands, except per share data)

 

     Quarter Ended  
     December 31,
2017
     March 31,
2018
     June 30,
2018
 

Total investment income

   $ 10,859      $ 11,086      $ 12,379  

Net investment income

     5,577        5,613        5,996  

Net increase (decrease) in net assets resulting from operations

     7,160        9,304        12,093  

Net increase (decrease) in Net Assets Resulting From Operations per Weighted Average Common Share (Basic and Diluted)

   $ 0.27      $ 0.35      $ 0.45  

 

     Quarter Ended  
     December 31,
2016
     March 31,
2017
     June 30,
2017
     September 30,
2017
 

Total investment income

   $ 9,974      $ 8,793      $ 9,632      $ 10,834  

Net investment income

     5,207        5,359        5,379        5,488  

Net Increase (decrease) in net assets resulting from operations

     916        4,656        6,163        5,445  

Net Increase (decrease) in Net Assets Resulting From Operations per Weighted Average Common Share (Basic and Diluted)

   $ 0.04      $ 0.18      $ 0.24      $ 0.21  

 

     Quarter Ended  
     December 31,
2015
    March 31,
2016
    June 30,
2016
     September 30,
2016
 

Total investment income

   $ 10,060     $ 9,456     $ 9,844      $ 9,750  

Net investment income

     4,759       4,917       4,907        4,905  

Net Increase (decrease) in net assets resulting from operations

     (8,704     (6,139     5,516        20,697  

Net Increase (decrease) in Net Assets Resulting From Operations per Weighted Average Common Share (Basic and Diluted)

   $ (0.38   $ (0.26   $ 0.24      $ 0.89  

 

S-25


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2018:

 

   

on an actual basis; and

 

   

on an as-adjusted basis to give effect to the sale of $             aggregate principal amount of the Notes and the application of the estimated net proceeds of the offering, after deducting underwriters’ discounts and commissions and estimated offering expenses of approximately $             and $            , respectively, payable by us (and assuming the underwriters’ overallotment option is not exercised). See “Use of Proceeds.

 

     As of June 30, 2018  
     Actual     As Adjusted**  
     (Unaudited)  
     (Dollars in thousands)  

Borrowings

    

Credit Facility at fair value (cost: $117,000, actual; $            , as adjusted)

   $ 117,000     $                

Term Preferred Stock

    

6.00% Series 2024 Term Preferred Stock, $0.001 par value per share; $25 liquidation preference per share; 3,000,000 shares authorized and 2,070,000 shares issued and outstanding, actual and as adjusted*

   $ 50,007     $ 50,007  

The Notes

   $ —       $    

Net Assets

    

Common stock, $0.001 par value per share, 44,560,000 shares authorized and 27,660,432 shares issued and outstanding, actual and as adjusted*

   $ 28     $ 28  

Capital in excess of par value

     361,549       361,549  

Net unrealized depreciation of investments

     (48,770     (48,770

Overdistributed net investment income

     (237     (237

Accumulated net realized losses

     (67,619     (67,619
  

 

 

   

 

 

 

Total Net Assets

   $ 244,951     $ 244,951  
  

 

 

   

 

 

 

Total Capitalization

   $ 411,958     $    
  

 

 

   

 

 

 

 

*

None of these outstanding shares are held by us or for our account.

**

Assumes a total of $             of aggregate underwriting discounts and commissions and $             of estimated offering costs payable by us in connection with this offering will be capitalized and amortized over the life of the Notes.

The following are our outstanding classes of securities as of June 30, 2018:

 

(1) Title of Class

   (2) Amount
Authorized
     (3) Amount Held
by us or for Our
Account
     (4) Amount
Outstanding
Exclusive of
Amounts Shown
Under (3)
 

Common Stock

     44,560,000        —          27,660,432  

Series 2024 Term Preferred Stock

     5,440,000        —          2,070,000  

 

S-26


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this prospectus supplement and the accompanying prospectus. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts or unless otherwise indicated, dollar amounts in the tables included herein are in thousands.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2018, our investment portfolio was made up of approximately 90.7% debt investments and 9.3% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with EBITDA of $3 million to $15 million) in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the SEC. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

 

S-27


Table of Contents

Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee.

Business

Portfolio and Investment Activity

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the one-month LIBOR) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called PIK interest.

Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

During the nine months ended June 30, 2018, we invested $67.4 million in nine new portfolio companies and extended $29.1 million of investments to existing portfolio companies. In addition, during the nine months ended June 30, 2018, we exited six portfolio companies through sales and early payoffs. We received a total of $58.4 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as existing portfolio companies during the nine months ended June 30, 2018. This activity resulted in a net increase in our overall portfolio by three portfolio companies to 50 and a net increase of $42.2 million in our portfolio at cost since September 30, 2017. From our initial public offering in August 2001 through June 30, 2018, we have made 490 different loans to, or investments in, 226 companies for a total of approximately $1.8 billion, before giving effect to principal repayments on investments and divestitures.

During the nine months ended June 30, 2018, the following significant transactions occurred:

 

   

In October 2017, we sold our investment in Flight Fit N Fun LLC for a realized gain of $0.6 million. In connection with the sale, we received net cash proceeds of approximately $9.4 million, including the repayment of our debt investment of $7.8 million at par.

 

   

In October 2017, we invested $11.0 million in Applied Voice & Speech Technologies, Inc. through secured first lien debt.

 

   

In October 2017, PSC Industrial Holdings, LLC paid off at par for net cash proceeds of $3.5 million.

 

   

In November 2017, we invested $7.5 million in Arc Drilling Holdings LLC through a combination of secured first lien debt and equity.

 

   

In November 2017, we invested $7.5 million in Gray Matter Systems, LLC through secured second lien debt. In March 2018, we invested an additional $3.6 million in Gray Matter Systems, LLC, through secured second lien debt.

 

   

In November 2017, DataPipe, Inc. paid off at par for net cash proceeds of $2.0 million.

 

   

In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt. In March 2018, we sold $2.0 million of this investment for net cash proceeds of $2.0 million.

 

   

In November 2017, we invested $4.0 million in Red Ventures, LLC through secured second lien debt.

 

S-28


Table of Contents
   

In November 2017, we invested $1.0 million in ABG Intermediate Holdings 2, LLC through secured second lien debt. In January 2018, we sold this investment for net cash proceeds of $1.0 million.

 

   

In December 2017, we invested $20.0 million in Impact! Chemical Technologies, Inc. through secured first lien debt.

 

   

In January 2018, we invested $8.1 million in XMedius Solutions Inc. through secured first lien debt.

 

   

In February 2018, we invested an additional $4.0 million in an existing portfolio company, Lignetics, Inc., through secured first lien debt.

 

   

In March 2018, an existing portfolio company, EL Academies, Inc., drew an additional $1.4 million on the unused portion of its secured first lien delayed draw term loan.

 

   

In March 2018, we sold our $1.0 million investment in Neustar, Inc. for net cash proceeds of $1.0 million.

 

   

In April 2018, we invested $3.0 million in CHA Holdings, Inc. through secured second lien debt.

 

   

In May 2018, our investment in TapRoot Partners, Inc. paid off, which resulted in prepayment fees of $0.5 million and success fee income of $0.4 million. In connection with the pay off, we received net cash proceeds of $22.9 million, including the repayment of our debt investment of $22.0 million at par.

 

   

In May 2018, we invested an additional $10.0 million in an existing portfolio company, Merlin International, Inc., through secured second lien debt.

 

   

In June 2018, we invested an additional $7.0 million in an existing portfolio company, IA Tech, LLC, through secured first lien debt.

Capital Raising

We have been able to meet our capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public equity offerings of common and preferred stock. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to January 2021, and currently have a total commitment amount of $190.0 million. Additionally, we issued 2.1 million shares of our 6.00% Series 2024 Term Preferred Stock, par value $0.001 per share (“Series 2024 Term Preferred Stock”) at a public offering price of $25 per share, for gross proceeds of $51.8 million in September 2017, inclusive of the overallotment, and approximately 2.2 million shares of our common stock for gross proceeds of $17.3 million in October 2016, inclusive of the November 2016 overallotment. Additionally, during the nine months ended June 30, 2018, we sold 1,499,748 shares of our common stock under our at-the-market program at a weighted-average price of $9.26 per share and raised $13.9 million of gross proceeds. Refer to “Liquidity and Capital Resources—Equity—Common Stock” and “Liquidity and Capital Resources—Equity—Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable preferred stock and “Liquidity and Capital Resources—Revolving Credit Facility” for further discussion of the Credit Facility.

Although we were able to access the capital markets historically and in recent years, we believe uncertain market conditions could affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. When our common stock trades below NAV per common share, as it has often done in previous years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV per share at our annual meeting of stockholders held on February 8, 2018. Should we decide to issue shares of common stock at a price below NAV per share in the future, we will seek the requisite approval of our stockholders at such time.

On July 30, 2018, the closing market price of our common stock was $9.34, a 5.4% premium to our June 30, 2018 NAV per share of $8.86.

 

S-29


Table of Contents

Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 200% (currently) or 150% (effective April 10, 2019) on our “senior securities representing indebtedness” and our “senior securities that are stock.”

On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset coverage requirements for senior securities will be changed from 200% to 150%, effective one year after the date of the Board of Directors’ approval; or April 10, 2019. Under the current 200% asset coverage standard, we may borrow debt or issue senior securities in the amount of $1.00 for every $1.00 of equity in the Company. Starting from April 10, 2019, under the 150% asset coverage standard, we may borrow debt or issue senior securities in the amount of $2.00 for every $1.00 of equity in the Company. Notwithstanding the modified asset coverage requirement under the 1940 Act described above, we are separately subject to a minimum asset coverage requirement of 200% with respect to certain provisions of our Credit Facility and our Series 2024 Term Preferred Stock.

As of June 30, 2018, our asset coverage on our “senior securities representing indebtedness” was 350.1% and our asset coverage on our “senior securities that are stock” was 242.9%.

Recent Developments

Distributions and Dividends

On October 9, 2018, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred stockholders:

 

Record Date

   Payment Date    Distribution
per Common
Share
     Distribution per
Series 2024
Term Preferred
Share
 

October 19, 2018

   October 31, 2018    $ 0.07      $ 0.125  

November 20, 2018

   November 30, 2018      0.07        0.125  

December 20, 2018

   December 31, 2018      0.07        0.125  
   Total for the Quarter:    $ 0.21      $ 0.375  

Portfolio and Investment Activity

In July 2018, our investment in NetSmart Technologies, Inc. paid off for net cash proceeds of $3.7 million.

In July 2018, an existing portfolio company, EL Academies, Inc., drew an additional $4.4 million on the unused portion of its secured first lien delayed draw term loan.

In July 2018, the holding company for Impact! Chemical Technologies, Inc. (“Impact”) merged with and into the holding company for WadeCo Specialties, Inc. (“WadeCo”) to form Chemical & Injection Holdings Company, LLC (“Chemical & Injection Holdings”). Our preferred equity ownership related to WadeCo Specialties, Inc. with a cost basis of $0.6 million, was converted into preferred equity ownership in the newly formed Chemical & Injection Holdings with the same cost basis. Our existing debt investments in Impact and WadeCo remained unchanged in conjunction with the merger.

In September 2018, we restructured our $30.0 million investment in Sunshine Media Holdings (“Sunshine”) resulting in a $28.2 million realized loss and a new $2.0 million investment in TNCP Intermediate HoldCo, LLC (“TNCP”).

 

S-30


Table of Contents

At-the-Market Program

Subsequent to June 30, 2018 and through October 31, 2018, we sold an additional 844,313 shares of our common stock under our at-the-market program with Cantor Fitzgerald & Co, at a weighted-average price of $9.62 per share and raised $8.1 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $8.0 million.

Preliminary results for the three-month period and the fiscal year ended September 30, 2018

On November 1, 2018, we announced unaudited preliminary financial results for the fiscal year ended September 30, 2018, including:

The estimated NAV per share of our common stock at September 30, 2018 was $8.32, which represents the midpoint in our estimated NAV per share range as of such date of $8.27 and $8.37.

Net investment income per weighted average share of common stock outstanding is estimated to have totaled $0.85 for the year ended September 30, 2018.

Our total amount outstanding under our Fifth Amended and Restated Credit Agreement with KeyBank National Association (the “Credit Facility”) as of September 30, 2018 was approximately $110.0 million.

The information presented above should not be considered a substitute for full audited financial statements for the fiscal year ended September 30, 2018 and should not be regarded as a representation by us as to the actual financial results for the three-month period or the fiscal year ended September 30, 2018.

The preliminary estimated financial data included in this prospectus supplement as of and for the fiscal year ended September 30, 2018 has been prepared by and is the responsibility of our management. PricewaterhouseCoopers LLP, our independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary estimated financial information and does not express an opinion or any other form of assurance with respect thereto.

We are currently preparing our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Our annual financial statements and the notes thereto, which will be included in such Annual Report on Form 10-K, will be audited by our independent registered public accounting firm. Our actual results may differ materially from the preliminary information described above due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for the fiscal year ended September 30, 2018 are finalized and publicly reported, and the completion of the audit by our independent registered public accounting firm, all of which will occur after this offering has been completed.

 

S-31


Table of Contents

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2018, to the Three Months Ended June 30, 2017

 

     Three Months Ended June 30,  
     2018     2017     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 11,435     $ 9,629     $ 1,806       18.8

Other income

     944       3       941       NM  

Total investment income

     12,379       9,632       2,747       28.5  

EXPENSES

        

Base management fee

     1,801       1,480       321       21.7  

Loan servicing fee

     1,294       1,071       223       20.8  

Incentive fee

     1,499       1,116       383       34.3  

Administration fee

     310       272       38       14.0  

Interest expense on borrowings

     1,556       904       652       72.1  

Dividend expense on mandatorily redeemable preferred stock

     776       1,029       (253     (24.6

Amortization of deferred financing fees

     237       274       (37     (13.5

Other expenses

     466       453       13       2.9  

Expenses, before credits from Adviser

     7,939       6,599       1,340       20.3  

Credit to base management fee—loan servicing fee

     (1,294     (1,071     (223     (20.8

Credits to fees from Adviser—other

     (262     (1,275     1,013       79.5  

Total expenses, net of credits

     6,383       4,253       2,130       50.1  

NET INVESTMENT INCOME

     5,996       5,379       617       11.5  

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss) on investments

     199       (23     222       965.2  

Net unrealized appreciation of investments

     5,898       989       4,909       496.4  

Net unrealized depreciation of other

     —         (182     182       100.0  

Net realized and unrealized gain from investments and other

     6,097       784       5,313       677.7  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 12,093     $ 6,163     $ 5,930       96.2  

Investment Income

Interest income increased by 18.8% for the three months ended June 30, 2018, as compared to the prior year period. The increase was primarily due to a higher weighted average principal balance and an increase in the weighted average yield on our interest bearing portfolio for the three months ended June 30, 2018, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2018 was $389.1 million, compared to $333.2 million for the prior year period, an increase of 16.8%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 11.8% for the three months ended June 30, 2018, compared to 11.5% for the three months ended June 30, 2017, inclusive of any allowances on interest receivables made during those periods.

Other income increased by $0.9 million during the three months ended June 30, 2018, as compared to the prior year period, primarily due to $0.4 million in prepayment fees and $0.4 million in success fees recognized during the three months ended June 30, 2018, whereas no such amounts were recognized in the prior year period.

As of June 30, 2018, one portfolio company, Sunshine Media Holdings (“Sunshine”), was on non-accrual status, with an aggregate debt cost basis of approximately $22.6 million, or 5.5% of the cost basis of all debt investments in our portfolio. As of June 30, 2017, two portfolio companies, Sunshine and Alloy Die Casting Co. (“ADC”), were on non-accrual status, with an aggregate debt cost basis of approximately $27.9 million, or 7.6% of the cost basis of all debt investments in our portfolio.

 

S-32


Table of Contents

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

    As of June 30, 2018     Three Months Ended June 30, 2018  

Company

  Fair Value     % of Portfolio     Investment Income     % of Total
Income
 

IA Tech, LLC

  $ 30,000       7.4   $ 757       6.1

NetFortris Corp.

    24,549       6.1       667       5.4  

Lignetics, Inc.

    23,046       5.7       646       5.2  

Impact! Chemical Technologies, Inc.

    22,669       5.6       611       5.0  

Merlin International, Inc.

    20,650       5.1       408       3.3  

Subtotal—five largest investments

    120,914       29.9       3,089       25.0  

Other portfolio companies

    283,974       70.1       9,281       75.0  

Total Investment Portfolio

  $ 404,888       100.0   $ 12,370       100.0

 

    As of June 30, 2017     Three Months Ended June 30, 2017  

Company

  Fair Value     % of Portfolio     Investment Income     % of Total
Income
 

NetFortris Corp.

  $ 24,120       7.0   $ 637       6.6  

IA Tech, LLC

    23,518       6.8       699       7.3  

HB Capital Resources, Ltd.(A)

    22,000       6.4       462       4.8  

WadeCo Specialties, Inc.

    21,208       6.1       481       5.0  

Lignetics, Inc.

    18,746       5.4       482       5.0  

Subtotal—five largest investments

    109,592       31.7       2,761       28.7  

Other portfolio companies

    235,911       68.3       6,864       71.3  

Total Investment Portfolio

  $ 345,503       100.0   $ 9,625       100.0

 

(A) 

New investment during applicable period.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $2.1 million, or 50.1%, for the three months ended June 30, 2018 as compared to the prior year period. This increase was primarily due to a $1.7 million increase in our net base management and incentive fees to the Adviser and a $0.7 million increase in interest expense on borrowings, partially offset by a $0.3 million decrease in dividend expense on mandatorily redeemable preferred stock.

Interest expense increased by 72.1% during the three months ended June 30, 2018, as compared to the prior year period, due to an increase in the weighted average balance outstanding on our Credit Facility. The weighted average balance outstanding during the three months ended June 30, 2018, was $121.7 million, as compared to $72.6 million in the prior year period, an increase of 67.6%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 5.1% during the three months ended June 30, 2018, compared to 5.0% during the prior year period. The increase in the effective interest rate was driven by an increase in LIBOR as compared to the prior year period, offset by a decrease in unused commitment fees paid in the current year period and a decrease in the marginal interest rate on our Credit Facility effective March 9, 2018.

The net base management fee earned by the Adviser increased by $0.4 million, or 37.5%, during the three months ended June 30, 2018, as compared to the prior year period, resulting from an increase in average total assets subject to the base management fee and a decrease in credits from the Adviser year over year.

 

S-33


Table of Contents

The income-based incentive fee increased for the three months ended June 30, 2018, as compared to the prior year period, due to higher pre-incentive fee net investment income, partially offset by an increase in net assets, which drives the hurdle, over the respective periods. Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser of $0.9 million to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders during the three months ended June 30, 2017. There was no incentive fee credit during the three months ended June 30, 2018.

The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
June 30,
 
     2018     2017  

Average total assets subject to base management fee(A)

   $ 411,657     $ 338,286  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375

Base management fee(B)

   $ 1,801     $ 1,480  

Portfolio company fee credit

     (170     (261

Syndicated loan fee credit

     (92     (100

Net Base Management Fee

   $ 1,539     $ 1,119  

Loan servicing fee(B)

     1,294       1,071  

Credit to base management fee—loan servicing fee(B)

     (1,294     (1,071

Net Loan Servicing Fee

   $ —       $ —    

Incentive fee(B)

     1,499       1,116  

Incentive fee credit

     —         (914

Net Incentive Fee

   $ 1,499     $ 202  

Portfolio company fee credit

     (170     (261

Syndicated loan fee credit

     (92     (100

Incentive fee credit

     —         (914

Credits to Fees From Adviser—other(B)

   $ (262   $ (1,275

 

(A) 

Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B) 

Reflected, on a gross basis, as a line item on our accompanying Consolidated Statements of Operations.

Dividend expense on mandatorily redeemable preferred stock decreased by $0.3 million, or 24.6%, during the three months ended June 30, 2018 compared to the prior year period, due to the redemption of all of our $61.0 million 6.75% Series 2021 Term Preferred Stock and the issuance of $51.8 million 6.00% Series 2024 Term Preferred Stock in September 2017.

 

S-34


Table of Contents

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended June 30, 2018, we recorded net unrealized appreciation of investments in the aggregate amount of $5.9 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2018, were as follows:

 

     Three Months Ended June 30, 2018  

Portfolio Company

   Realized Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
(Appreciation)
Depreciation
    Net
Gain (Loss)
 

Francis Drilling Fluids, Ltd.

   $ —        $ 2,575     $ —       $ 2,575  

Edge Adhesives Holdings, Inc.

     —          1,551       —         1,551  

Alloy Die Casting Co.

     —          1,096       —         1,096  

Targus Cayman HoldCo, Ltd.

     —          852       —         852  

United Flexible, Inc.

     —          712       —         712  

AG Transportation Holdings, LLC

     —          684       —         684  

Funko Acquisition Holdings, LLC

     —          519       —         519  

LDiscovery, LLC

     —          395       —         395  

Merlin International, Inc.

     —          337       —         337  

PIC 360, LLC

     —          321       —         321  

The Mochi Ice Cream Company

     —          317       —         317  

EL Academies, Inc.

     —          242       —         242  

Sea Link International IRB, Inc.

     —          217       —         217  

Impact! Chemical Technologies, Inc.

     —          197       —         197  

Defiance Integrated Technologies, Inc.

     —          (339     —         (339

Travel Sentry, Inc.

     —          (345     —         (345

Vision Government Solutions, Inc.

     —          (355     —         (355

New Trident Holdcorp, Inc.

     —          (410     —         (410

TapRoot Partners, Inc.

     —          —         (440     (440

Meridian Rack & Pinion, Inc.

     —          (468     —         (468

Arc Drilling Holdings LLC

     —          (498     —         (498

Vacation Rental Pros Property Management, LLC

     —          (498     —         (498

IA Tech, LLC

     —          (805     —         (805

Other, net (<$250)

     199        41       —         240  

Total:

   $ 199      $ 6,338     $ (440   $ 6,097  

The primary driver of net unrealized appreciation for the three months ended June 30, 2018 was improvement in the financial and operational performance of certain portfolio companies, most notably Francis Drilling Fluids, Ltd. (“Francis”) and Edge Adhesives Holdings, Inc. (“Edge”), partially offset by the decline in the performance of certain of our other portfolio companies.

 

S-35


Table of Contents

During the three months ended June 30, 2017, we recorded net unrealized appreciation of investments in the aggregate amount of $1.0 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2017, were as follows:

 

     Three Months Ended June 30, 2017  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
     Net
Gain (Loss)
 

WadeCo Specialties, Inc.

   $ —         1,748     $ —          1,748  

B+T Group Acquisition, Inc.

     —         1,434       —          1,434  

LWO Acquisitions Company LLC

     —         1,163       —          1,163  

Defiance Integrated Technologies, Inc.

     —         693       —          693  

Lignetics, Inc.

     —         480       —          480  

United Flexible, Inc.

     —         311       —          311  

FedCap Partners, LLC

     —         297       —          297  

The Mochi Ice Cream Company

     —         246       —          246  

Flight Fit N Fun LLC

     —         205       —          205  

PSC Industrial Holdings Corp.

     —         (212     —          (212

Vertellus Specialties Inc.

     —         (220     —          (220

Targus Cayman HoldCo, Ltd.

     —         (279     —          (279

Sunshine Media Holdings

     —         (314     —          (314

New Trident Holdcorp, Inc.

     —         (621     —          (621

Alloy Die Casting Co.

     —         (660     —          (660

Meridian Rack & Pinion, Inc.

     —         (789     —          (789

Francis Drilling Fluids, Ltd.

     —         (1,037     —          (1,037

Edge Adhesives Holdings, Inc.

     —         (1,471     —          (1,471

Other, net (<$250)

     (23     15       —          (8

Total:

   $ (23   $ 989     $ —        $ 966  

The primary driver of net unrealized appreciation for the three months ended June 30, 2017 was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments, which more than offset the decline in performance of certain of our other portfolio companies.

Net Unrealized (Appreciation) Depreciation of Other

During the three months ended June 30, 2017, we recorded $0.2 million of net unrealized depreciation on our Credit Facility. There were no such amounts recorded during the three months ended June 30, 2018.

 

S-36


Table of Contents

Comparison of the Nine Months Ended June 30, 2018, to the Nine Months Ended June 30, 2017

 

     For the Nine Months Ended June 30,  
     2018     2017     $ Change     %
Change
 

INVESTMENT INCOME

        

Interest income

   $ 33,105     $ 26,850     $ 6,255       23.3

Other income

     1,219       1,549       (330     (21.3

Total investment income

     34,324       28,399       5,925       20.9  

EXPENSES

        

Base management fee

     5,261       4,217       1,044       24.8  

Loan servicing fee

     3,754       3,009       745       24.8  

Incentive fee

     4,082       3,479       603       17.3  

Administration fee

     894       858       36       4.2  

Interest expense on borrowings

     4,356       2,047       2,309       112.8  

Dividend expense on mandatorily redeemable preferred stock

     2,328       3,087       (759     (24.6

Amortization of deferred financing fees

     777       821       (44     (5.4

Other expenses

     1,573       1,439       134       9.3  

Expenses, before credits from Adviser

     23,025       18,957       4,068       21.5  

Credits to base management fee—loan servicing fee

     (3,754     (3,009     (745     (24.8

Credits to fees from Adviser—other

     (2,133     (3,494     1,361       39.0  

Total expenses, net of credits

     17,138       12,454       4,684       37.6  

NET INVESTMENT INCOME

     17,186       15,945       1,241       7.8  

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss) on investments

     1,097       (3,426     4,523       132.0  

Net realized loss on other

     (133     —         (133     NM  

Net unrealized appreciation (depreciation) of investments

     10,292       (713     11,005       1,543.5  

Net unrealized appreciation (depreciation) of other

     115       (71     186       262.0  

Net gain (loss) from investments and other

     11,371       (4,210     15,581       370.1  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 28,557     $ 11,735     $ 16,822       143.3

NM = Not Meaningful

Investment Income

Interest income increased by 23.3% for the nine months ended June 30, 2018, as compared to the prior year period, primarily due to a higher weighted average principal balance and an increase in the weighted average yield on our interest-bearing portfolio for the nine months ended June 30, 2018, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio during the nine months ended June 30, 2018 was $376.3 million, compared to $312.5 million for the prior year period, an increase of 20.4%. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments and increased to 11.8% for the nine months ended June 30, 2018, compared to 11.5% for the nine months ended June 30, 2017, inclusive of any allowances on interest receivables made during that period.

Other income decreased by 21.3% during the nine months ended June 30, 2018, as compared to the prior year period, primarily as a result of a $1.1 million decrease in success fees recognized in the current nine month period. For the nine months ended June 30, 2018, other income consisted primarily of prepayment fees received and success fees recognized. For the nine months ended June 30, 2017, other income consisted primarily of success fees recognized.

 

S-37


Table of Contents

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

     As of June 30, 2018     Nine Months Ended June 30, 2018  

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

IA Tech, LLC

   $ 30,000        7.4   $ 2,204        6.4

NetFortris Corp.

     24,549        6.1       1,886        5.5  

Lignetics, Inc.

     23,046        5.7       1,757        5.1  

Impact! Chemical Technologies, Inc.

     22,669        5.6       1,225        3.6  

Merlin International, Inc.

     20,650        5.1       987        2.9  

Subtotal—five largest investments

     120,914        29.9       8,059        23.5  

Other portfolio companies

     283,974        70.1       26,237        76.5  

Total Investment Portfolio

   $ 404,888        100.0   $ 34,296        100.0

 

     As of June 30, 2017     Nine Months Ended June 30, 2017  

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

NetFortris Corp.

   $ 24,120        7.0   $ 928        3.3

IA Tech, LLC

     23,518        6.8       2,094        7.4  

HB Capital Resources, Ltd.(A)

     22,000        6.4       462        1.6  

WadeCo Specialties, Inc.

     21,208        6.1       1,435        5.0  

Lignetics, Inc.

     18,746        5.4       1,331        4.7  

Subtotal—five largest investments

     109,592        31.7       6,250        22.0  

Other portfolio companies

     235,911        68.3       22,135        78.0  

Total Investment Portfolio

   $ 345,503        100.0   $ 28,385        100.0

 

(A) 

New investment during applicable period.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased for the nine months ended June 30, 2018 by 37.6%, as compared to the prior year period. This increase was primarily due to a $3.0 million increase in the net base management fee and incentive fee earned by the Adviser and a $2.3 million increase in interest expense on borrowings, partially offset by a decline in dividend expense on mandatorily redeemable preferred stock of $0.8 million.

Interest expense increased by $2.3 million, or 112.8%, during the nine months ended June 30, 2018, as compared to the prior year period, primarily due to increased borrowings outstanding throughout the period on our Credit Facility. The weighted average balance outstanding under our Credit Facility during the nine months ended June 30, 2018, was approximately $116.0 million, as compared to $51.4 million in the prior year period, an increase of 125.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 5.0% during the nine months ended June 30, 2018, compared to 5.3% during the prior year period. The decrease in effective interest rate was driven by the decrease in unused commitment fees paid in the current year period and, to a lesser extent, a decrease in the marginal interest rate on our Credit Facility effective March 9, 2018, slightly offset by an increase in LIBOR.

The net base management fee earned by the Adviser increased by $1.2 million, or 44.8%, during the nine months ended June 30, 2018, as compared to the prior year period, primarily resulting from an increase in average total assets subject to the base management fee year over year.

The income-based incentive fee increased for the nine months ended June 30, 2018, as compared to the prior year period, due to higher pre-incentive fee net investment income, partially offset by an increase in net assets, which

 

S-38


Table of Contents

drives the hurdle, over the respective periods. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, which we define as total assets less liabilities and before taking into account any incentive fees payable or contractually due but not payable during the period (the “hurdle rate”), at the end of the immediately preceding calendar quarter. Our Board of Directors accepted non-contractual, unconditional and irrevocable credits totaling $0.9 million from the Adviser to reduce the income-based incentive fee to the extent that net investment income did not cover 100.0% of the distributions to common stockholders during the nine months ended June 30, 2018. The credits granted during the nine months ended June 30, 2017, totaled $2.0 million.

Base management, loan servicing and incentive fees and associated non-contractual, unconditional and irrevocable credits are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4—Related Party Transactions of the notes to our accompanying Consolidated Financial Statements and are summarized in the following table:

 

     Nine Months Ended
June 30,
 
     2018     2017  

Average total assets subject to base management fee(A)

   $ 400,838     $ 321,295  

Multiplied by prorated annual base management fee of 1.75%

     1.3125     1.3125

Base management fee(B)

   $ 5,261     $ 4,217  

Portfolio company fee credit

     (1,001     (1,344

Syndicated loan fee credit

     (276     (122

Net Base Management Fee

   $ 3,984     $ 2,751  

Loan servicing fee(B)

     3,754       3,009  

Credit to base management fee—loan servicing fee(B)

     (3,754     (3,009

Net Loan Servicing Fee

   $ —       $ —    

Incentive fee(B)

     4,082       3,479  

Incentive fee credit

     (856     (2,028

Net Incentive Fee

   $ 3,226     $ 1,451  

Portfolio company fee credit

     (1,001     (1,344

Syndicated loan fee credit

     (276     (122

Incentive fee credit

     (856     (2,028

Credits to Fees From Adviser—other(B)

   $ (2,133   $ (3,494

 

(A) 

Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B) 

Reflected, on a gross basis, as a line item on our accompanying Consolidated Statements of Operations.

Dividend expense on mandatorily redeemable preferred stock decreased by $0.8 million, or 24.6%, during the nine months ended June 30, 2018 compared to the prior year period due to the redemption of all of our $61.0 million 6.75% Series 2021 Term Preferred Stock and the issuance of $51.8 million 6.00% Series 2024 Term Preferred Stock in September 2017.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the nine months ended June 30, 2018, we recorded a net realized gain on investments of $1.1 million, which resulted primarily from the sale of our investment in Flight Fit N Fun LLC in October 2017 for a $0.6 million realized gain.

For the nine months ended June 30, 2017, we recorded a net realized loss on investments of $3.4 million, which resulted primarily from the sale of substantially all the assets of RBC Acquisition Corp. for a $2.3 million realized loss and the write-off of $5.0 million of our investment in Sunshine. These items were partially offset by

 

S-39


Table of Contents

the sale of Behrens Manufacturing, LLC for a $2.5 million realized gain and a $1.2 million realized gain related to an additional earn-out from Funko, LLC, which was exited in the prior year.

Net Unrealized Appreciation (Depreciation) of Investments

During the nine months ended June 30, 2018, we recorded net unrealized appreciation of investments in the aggregate amount of $10.3 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2018, were as follows:

 

     Nine Months Ended June 30, 2018  

Portfolio Company

   Realized Gain
(Loss)
     Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

Francis Drilling Fluids, Ltd.

   $ —        $ 5,385     $ —       $ 5,385  

Edge Adhesives Holdings, Inc.

     —          2,990       —         2,990  

Alloy Die Casting Co.

     —          1,809       —         1,809  

Targus Cayman HoldCo, Ltd.

     —          1,535       —         1,535  

AG Transportation Holdings, LLC

     —          1,351       —         1,351  

United Flexible, Inc.

     —          1,176       —         1,176  

PIC 360, LLC

     —          884       —         884  

Funko Acquisition Holdings, LLC

     —          555       —         555  

Merlin International, Inc.

     —          500       —         500  

NetFortris Corp.

     —          484       —         484  

WadeCo Specialties, Inc.

     —          463       —         463  

Vertellus Holdings LLC

     —          361       —         361  

Sea Link International IRB, Inc.

     —          356       —         356  

Leeds Novamark Capital I, L.P.

     —          354       —         354  

LWO Acquisitions Company LLC

     —          293       —         293  

The Mochi Ice Cream Company

     —          291       —         291  

EL Academies, Inc.

     —          218       —         218  

Triple H Food Processors, LLC

     —          217       —         217  

Precision International, LLC

     —          177       —         177  

Impact! Chemical Technologies, Inc.

     —          169       —         169  

Behrens Manufacturing, LLC

     138        —         —         138  

Funko, LLC

     127        —         —         127  

Red Ventures, LLC

     —          124       —         124  

Canopy Safety Brands, LLC

     —          119       —         119  

TapRoot Partners, Inc.

     —          330       (440     (110

Flight Fit N Fun LLC

     577        —         (725     (148

TWS Acquisition Corporation

     —          (178     —         (178

Travel Sentry, Inc.

     —          (267     —         (267

Frontier Financial Group Inc.

     —          (377     —         (377

Meridian Rack & Pinion, Inc.

     —          (464     —         (464

IA Tech, LLC

     —          (633     —         (633

GFRC Holdings, LLC

     —          (698     —         (698

New Trident Holdcorp, Inc.

     —          (976     —         (976

Vacation Rental Pros Property Management, LLC

     —          (1,088     —         (1,088

Arc Drilling Holdings LLC

     —          (1,173     —         (1,173

Sunshine Media Holdings

     —          (1,319     —         (1,319

Defiance Integrated Technologies, Inc.

     —          (1,456     —         (1,456

Other, net (<$250)

     255        50       (105     200  

Total:

   $ 1,097      $ 11,562     $ (1,270   $ 11,389  

 

S-40


Table of Contents

The largest driver of our net unrealized appreciation for the nine months ended June 30, 2018 was an improvement in financial and operational performance of certain portfolio companies, most notably Francis and Edge, partially offset by the decline in the performance of certain of our other portfolio companies.

During the nine months ended June 30, 2017, we recorded net unrealized depreciation of investments in the aggregate amount of $0.7 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2017, were as follows:

 

     Nine Months Ended June 30, 2017  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

WadeCo Specialties, Inc.

   $ —       $ 1,850     $ —       $ 1,850  

SourceHOV LLC

     —         1,756       —         1,756  

B+T Group Acquisition, Inc.

     —         1,524       —         1,524  

Funko Acquisition Holdings, LLC

     1,235       (20     —         1,215  

Defiance Integrated Technologies, Inc.

     —         1,009       —         1,009  

The Mochi Ice Cream Company

     —         670       —         670  

LWO Acquisitions Company LLC

     —         467       —         467  

Vitera Healthcare Solutions, LLC

     —         213       115       328  

FedCap Partners, LLC

     —         297       —         297  

IA Tech, LLC

     —         288       —         288  

PIC 360, LLC

     —         173       —         173  

Drumcree, LLC

     —         169       —         169  

Travel Sentry, Inc.

     —         133       —         133  

Lignetics, Inc.

     —         (175     —         (175

Canopy Safety Brands, LLC

     —         (206     —         (206

PSC Industrial Holdings Corp.

     —         (269     —         (269

Flight Fit N Fun LLC

     —         (522     —         (522

Edge Adhesives Holdings, Inc.

     —         (546     —         (546

New Trident Holdcorp, Inc.

     —         (574     —         (574

Behrens Manufacturing, LLC

     2,544       —         (3,211     (667

Targus Cayman HoldCo, Ltd.

     —         (800     —         (800

Sunshine Media Holdings

     (5,000     449       3,612       (939

RBC Acquisition Corp.

     (2,330     —         1,119       (1,211

Vertellus Specialties Inc.

     108       (1,464     —         (1,356

Alloy Die Casting Co.

     —         (1,875     —         (1,875

Francis Drilling Fluids, Ltd.

     —         (5,583     —         (5,583

Other, net (<$250)

     17       718       (30     705  

Total:

   $ (3,426   $ (2,318   $ 1,605     $ (4,139

The largest driver of our net unrealized depreciation for the nine months ended June 30, 2017 was derived from a decline in financial and operation performance of certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably Francis of $5.6 million and ADC of $1.9 million. This depreciation was largely offset by unrealized appreciation resulting from an increase in performance on certain portfolio companies, most notably WadeCo Specialties, Inc. of $1.9 million and SourceHOV LLC of $1.8 million and the reversal of previously recorded depreciation on our investment in Sunshine upon partial write-off.

 

S-41


Table of Contents

Net Unrealized Appreciation of Other

During the nine months ended June 30, 2018, we recorded $0.1 million of net unrealized appreciation on our Credit Facility recorded at fair value. During the nine months ended June 30, 2017, we recorded $0.1 million of net unrealized depreciation on our Credit Facility recorded at fair value.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash used in operating activities for the nine months ended June 30, 2018 was $22.0 million as compared to $14.0 million for the nine months ended June 30, 2017. The change was primarily due to a decrease in principal repayments and net proceeds from sale of investments as well as an increase in unrealized appreciation of investments period over period. Repayments and net proceeds from sales were $58.4 million during the nine months ended June 30, 2018 compared to $71.1 million during the nine months ended June 30, 2017. Net unrealized appreciation of investments was $10.3 million during the nine months ended June 30, 2018, compared to net unrealized depreciation of $0.7 million during the nine months ended June 30, 2017.

As of June 30, 2018, we had loans to, syndicated participations in or equity investments in 50 companies, with an aggregate cost basis of approximately $453.7 million. As of June 30, 2017, we had loans to, syndicated participations in or equity investments in 47 companies, with an aggregate cost basis of approximately $405.9 million.

The following table summarizes our total portfolio investment activity during the nine months ended June 30, 2018 and 2017:

 

     Nine Months Ended
June 30,
 
     2018      2017  

Beginning investment portfolio, at fair value

   $ 352,373      $ 322,114  

New investments

     67,436        85,241  

Disbursements to existing portfolio companies

     29,084        10,208  

Scheduled principal repayments on investments

     (5,528      (3,196

Unscheduled principal repayments on investments

     (51,568      (59,596

Net proceeds from sale of investments

     (1,301      (8,289

Net unrealized appreciation (depreciation)

     11,562        (2,318

Reversal of prior period (appreciation) depreciation

     (1,270      1,605  

Net realized gain (loss)

     600        (3,426

Increase in investments due to PIK(A)

     3,454        3,599  

Net change in premiums, discounts and amortization

     46        (439

Investment Portfolio, at Fair Value

   $ 404,888      $ 345,503  

 

(A) 

Paid-in-kind (“PIK”) interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.

 

S-42


Table of Contents

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2018:

 

       

Amount

For the remaining three months ending September 30:

 

2018

  $31,683

For the fiscal years ending September 30:

 

2019

  49,042
 

2020

  82,731
 

2021

  55,769
 

2022

  39,387
 

Thereafter

  158,592
 

Total contractual repayments

  $417,204
 

Adjustments to cost basis of debt investments

  (5,751)
 

Investments in equity securities

  42,205
 

Investments held as of June 30, 2018 at Cost:

  $453,658

Financing Activities

Net cash provided by financing activities for the nine months ended June 30, 2018 was $19.5 million, which consisted primarily of $24.0 million in net borrowings on our Credit Facility and $13.7 million in proceeds from the issuance of common stock, net of underwriting costs, partially offset by $16.9 million in distributions to common stockholders.

Net cash provided by financing activities totaled $14.9 million for the nine months ended June 30, 2017 and consisted primarily of net borrowings on our Credit Facility of $10.9 million and $20.0 million in net proceeds from our common stock offerings, partially offset by $15.9 million of distributions to common shareholders.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of $0.07 per common share for each month during the nine months ended June 30, 2018 and 2017, which totaled an aggregate of $16.9 million and $15.9 million, respectively. In July 2018, our Board of Directors declared a monthly distribution of $0.07 per common share for each of July, August, and September 2018. Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year ending September 30, 2018.

For the year ended September 30, 2017, our current and accumulated earnings and profits (after taking into account mandatorily redeemable preferred stock dividends) exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $0.3 million of the first common distributions paid in fiscal year 2018 as having been paid in the respective prior year.

Preferred Stock Dividends

Our Board of Directors declared and we paid a combined dividend for the pro-rated period from and including the issuance date, September 27, 2017, to and including September 30, 2017 and the full month of October 2017,

 

S-43


Table of Contents

which totaled $0.141667 per share, to the holders of our Series 2024 Term Preferred Stock and monthly cash dividends of $0.125 per share to holders of our Series 2024 Term Preferred Stock for each of the eight months from November 2017 through June 2018. In accordance with GAAP, we treat these monthly dividends as an operating expense.

Equity

Registration Statement

We filed Post-Effective Amendment No. 5 to our current universal shelf registration statement on Form N-2 (our “Registration Statement”) (File No. 333-208637) with the SEC on December 19, 2017, which was declared effective by the SEC on February 1, 2018. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As of June 30, 2018, we had the ability to issue up to $210.7 million in securities under the Registration Statement.

Common Stock

In February 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements” or the “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we had the ability to issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained unchanged. During the nine months ended June 30, 2018, we sold 1,499,748 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.26 per share and raised $13.9 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $13.7 million. As of June 30, 2018, we had a remaining capacity to sell up to $28.6 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co. During the nine months ended June 30, 2017, we sold 362,600 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.89 per share and raised $3.6 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $3.5 million.

Pursuant to our Registration Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV at our annual meeting of stockholders held on February 8, 2018. Should we decide to issue shares of common stock at a price below NAV in the future, we will seek the requisite approval of our stockholders at such time.

On July 30, 2018, the closing market price of our common stock was $9.34, a 5.4% premium to our June 30, 2018 NAV per share of $8.86.

 

S-44


Table of Contents

Term Preferred Stock

Pursuant to our Registration Statement, in September 2017, we completed a public offering of approximately 2.1 million shares of our Series 2024 Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period from issuance through September 30, 2024, the mandatory redemption date. The offering proceeds plus borrowings under our Credit Facility were used to voluntarily redeem all 2.4 million outstanding shares of our then existing 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share. In connection with the voluntary redemption of our Series 2021 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.3 million, which has been reflected in Realized loss on other in our accompanying Consolidated Statement of Operations and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

The shares of our Series 2024 Term Preferred Stock are traded under the ticker symbol “GLADN” on the Nasdaq Global Select Market. Our Series 2024 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.00% per year, payable monthly (which equates in total to approximately $3.1 million per year). We are required to redeem all of the outstanding Series 2024 Term Preferred Stock on September 30, 2024 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions per share accumulated to (but excluding) the date of redemption (the “Redemption Price”). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2024 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control, or (2) if we fail to maintain an asset coverage of at least 200% on our “senior securities that are stock” (which is currently only our Series 2024 Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. The asset coverage on our “senior securities that are stock” as of June 30, 2018 was 242.9%, calculated in accordance with Sections 18 and 61 of the 1940 Act.

We may also voluntarily redeem all or a portion of the Series 2024 Term Preferred Stock at our option at the Redemption Price at any time after September 30, 2019. If we fail to redeem our Series 2024 Term Preferred Stock pursuant to the mandatory redemption required on September 30, 2024, or in any other circumstance in which we are required to mandatorily redeem our Series 2024 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of June 30, 2018, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2024 Term Preferred Stock.

Revolving Credit Facility

On March 9, 2018, we, through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately 2 years to January 15, 2021, decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. If our Credit Facility is not renewed or extended by January 15, 2021, all principal and interest will be due and payable on or before April 15, 2022 (fifteen months after the revolving period end date). Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 15, 2021.

 

S-45


Table of Contents

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.

Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $228.7 million as of June 30, 2018, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of June 30, 2018, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $293.4 million, asset coverage on our “senior securities representing indebtedness” of 350.1% and an active status as a BDC and RIC. In addition, we had 33 obligors in our Credit Facility’s borrowing base as of June 30, 2018. As of June 30, 2018, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our accompanying Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding our Credit Facility.

Off-Balance Sheet Arrangements

We generally recognize success fee income when the payment has been received. As of June 30, 2018 and September 30, 2017, we had off-balance sheet success fee receivables on our accruing debt investments of $6.7 million and $4.6 million (or approximately $0.24 per common share and $0.18 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.

Contractual Obligations

We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans and the uncalled capital commitment as of June 30, 2018 and September 30, 2017 to be immaterial.

 

S-46


Table of Contents

The following table shows our contractual obligations as of June 30, 2018, at cost:

 

     Payments Due by Period  

Contractual Obligations(A)

   Less than
1 Year
     1-3 Years      3-5 Years      More than 5
Years
     Total  

Credit Facility(B)

   $ —        $ —        $ 117,000      $ —        $ 117,000  

Mandatorily Redeemable Preferred Stock

     —          —          —          51,750        51,750  

Interest expense on debt obligations(C)

     9,361        26,779        6,210        776        43,126  

Total

   $ 9,361      $ 26,779      $ 123,210      $ 52,526      $ 211,876  

 

(A) 

Excludes unused line of credit, unused delayed draw term loan, and uncalled capital commitments to our portfolio companies in an aggregate amount of $17.5 million, at cost, as of June 30, 2018.

(B) 

Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolving period end date.

(C) 

Includes estimated interest payments on our Credit Facility and dividend obligations on our Series 2024 Term Preferred Stock. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of June 30, 2018. Dividend payments on our Series 2024 Term Preferred Stock assume quarterly dividend declarations and monthly dividend payments through the date of mandatory redemption.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2—Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement. Additionally, refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2—Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this prospectus supplement.

Investment Valuation

Credit Monitoring and Risk Rating

The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.

The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating

 

S-47


Table of Contents

system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all proprietary loans in our portfolio (all of which were risk rated by our Adviser) at June 30, 2018 and September 30, 2017, representing approximately 91.9% of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
June 30,
2018
     As of
September 30,
2017
 

Highest

     10.0        9.0  

Average

     6.8        5.7  

Weighted Average

     6.8        5.8  

Lowest

     1.0        1.0  

The following table reflects the risk ratings for all syndicated loans in our portfolio that were risk rated by an NRSRO at June 30, 2018 and September 30, 2017, representing approximately 6.3% and 6.9%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
June 30,
2018
     As of
September 30,
2017
 

Highest

     6.0        6.0  

Average

     3.8        4.4  

Weighted Average

     4.0        4.6  

Lowest

     1.0        3.0  

The following table reflects the risk ratings for all syndicated loans in our portfolio that were not risk rated by an NRSRO (and thus were risk rated by our Adviser) at June 30, 2018 and September 30, 2017, representing approximately 1.8% and 1.2%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

Rating

   As of
June 30,
2018
     As of
September 30,
2017
 

Highest

     5.0        3.0  

Average

     4.3        3.0  

Weighted Average

     4.7        3.0  

Lowest

     3.0        3.0  

Tax Status

We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 9—Distributions to Common Stockholders in the notes to our accompanying Consolidated Financial Statements included elsewhere in this prospectus supplement for additional information regarding our tax status.

 

S-48


Table of Contents

Recent Accounting Pronouncements

Refer to Note 2—Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this prospectus supplement for a description and our application of recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques from time to time to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

All of our variable-rate debt investments have rates generally associated with either the current LIBOR or prime rate. As of June 30, 2018, our portfolio of debt investments on a principal basis consisted of the following:

 

Variable rates

     90.0

Fixed rates

     10.0  

Total:

     100.0

There have been no material changes in the quantitative and qualitative market risk disclosures for the nine months ended June 30, 2018 from that disclosed in “Management’s Discussion and Analysis of Financial condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk” in the accompanying prospectus.

 

S-49


Table of Contents

UNDERWRITING

Keefe, Bruyette & Woods, Inc. is acting as representative of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, the Adviser, the Administrator and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the principal amount of Notes set forth opposite its name below.

 

Underwriter    Principal
Amount of Notes
 

Keefe, Bruyette & Woods, Inc.

   $                

Janney Montgomery Scott LLC

  

Ladenburg Thalmann & Co. Inc.

  

William Blair & Company, L.L.C.

  

J.J.B. Hilliard, W.L. Lyons, LLC

  

National Securities Corporation

  

Wedbush Securities Inc.

  
  

 

 

 

Total

   $                
  

 

 

 

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the Notes sold under the underwriting agreement if any of the Notes are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

We, the Adviser and the Administrator have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriting agreement provides that the obligations of the underwriters to purchase the Notes are subject to approval of legal matters by counsel to the underwriters and certain other conditions, including the receipt by the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Investors must pay for the Notes purchased in this offering on or about                     , 2018.

Commissions and Discounts

An underwriting discount of     % per Note will be paid by us. This underwriting discount will also apply to any Notes purchased pursuant to the overallotment option.

The following table shows the total underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.

 

     Per Note      Without Option      With Option  

Public offering price

   $                    $                    $                

Underwriting discounts and commissions

   $        $        $    

Proceeds, before expenses

   $        $        $    

The expenses of the offering, not including the underwriting discount, are estimated at $             and are payable by us. We will pay the fees and expenses (including reasonable legal fees and disbursements) incident to securing any required review by the Financial Industry Regulatory Authority, Inc. of the terms of the sale of the Notes in this offering in an amount not to exceed $7,500.

 

S-50


Table of Contents

Overallotment Option

We have granted an option to the underwriters to purchase up to an additional $             aggregate principal amount of the Notes offered hereby at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus supplement solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional Notes proportionate to that underwriter’s initial principal amount reflected in the table above.

No Sales of Similar Securities

We have agreed not to directly or indirectly offer, sell, short sell or otherwise dispose of, or enter into any agreement to offer, sell, short sell or otherwise dispose of, any debt securities issued or guaranteed by us or other securities convertible into or exchangeable or exercisable for debt securities issued or guaranteed by us or derivative of debt securities issued or guaranteed by us for a period of 90 days after the date of this prospectus supplement without first obtaining the written consent of Keefe, Bruyette & Woods, Inc. This consent may be given at any time without public notice.

Listing

The Notes are a new issue of securities with no established trading market. We intend to list the Notes on the Nasdaq and will use our reasonable best efforts to maintain such listing. We expect trading in the Notes on the Nasdaq to begin within 30 days after the original issue date under the trading symbol “GLADD”. Currently there is no public market for the Notes.

We have been advised by certain of the underwriters that they presently intend to make a market in the Notes after completion of the offering as permitted by applicable laws and regulations. The underwriters are not obligated, however, to make a market in the Notes and any such market-making may be discontinued at any time in the sole discretion of the underwriters without any notice. Accordingly, no assurance can be given as to the liquidity of, or development of a public trading market for, the Notes. If an active public trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected.

Price Stabilization, Short Positions

In connection with the offering, the underwriters may purchase and sell Notes in the open market. These transactions may include overallotment, covering transactions and stabilizing transactions. Overallotment involves sales of securities in excess of the aggregate principal amount of securities to be purchased by the underwriters in the offering, which creates a short position for the underwriters. Covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of certain bids or purchases of securities made for the purpose of preventing or retarding a decline in the market price of the securities while the offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased Notes sold by or for the account of such underwriter in stabilizing or short covering transactions.

Any of these activities may cause the price of the Notes to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be affected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time without any notice relating thereto.

Other Relationships

Certain of the underwriters and their affiliates have provided in the past and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment

 

S-51


Table of Contents

banking and other services to us, our portfolio companies or our affiliates for which they have received or will be entitled to receive separate fees. In particular, the underwriters or their affiliates may execute transactions with us, on behalf of us, any of our portfolio companies or our affiliates. In addition, the underwriters or their affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to or whose loans are syndicated to us, our portfolio companies or our affiliates.

The underwriters or their affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to us, any of our portfolio companies or our affiliates.

After the date of this prospectus supplement, the underwriters and their affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the ordinary course of its business and not in connection with the offering of the Notes. In addition, after the offering period for the sale of the Notes, the underwriters or their affiliates may develop analyses or opinions related to us or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding us to our noteholders or any other persons.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The principal business addresses of the underwriters are: Keefe, Bruyette & Woods, Inc., 787 Seventh Avenue, 4th Floor, New York, NY 10019, Janney Montgomery Scott LLC, 1717 Arch Street, Philadelphia, PA 19103; Ladenburg Thalmann & Co. Inc., 277 Park Avenue, 26th Floor, New York, New York 10172; William Blair & Company, L.L.C., 150 North Riverside Plaza, Chicago, IL 60606; J.J.B. Hilliard, W.L. Lyons, LLC, 500 W. Jefferson Street, Louisville, KY 40202; National Securities Corporation, 200 Vesey Street, 25th Floor, New York, NY 10281; and Wedbush Securities Inc., 1000 Wilshire Boulevard, Los Angeles, CA 90017.

Alternative Settlement Cycle

It is expected that delivery of the notes will be made against payment therefor on or about                     , 2018, which is the              business day following the date hereof (such settlement cycle being referred to as “T+    ”). Under Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in two business days unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the notes on any date prior to the second business day before delivery thereof will be required, by virtue of the fact that the notes initially will settle in T+ , to specify an alternative settlement cycle at the time of any such trade to prevent failed settlement. Purchasers of the notes who wish to trade the notes prior to their date of delivery hereunder should consult their own advisors.

 

S-52


Table of Contents

Other Jurisdictions

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the Notes offered by this prospectus supplement in any jurisdiction where action for that purpose is required. The Notes offered by this prospectus supplement may not be offered or sold, directly or indirectly, nor may this prospectus supplement or any other offering material or advertisements in connection with the offer and sale of any such Notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus supplement comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus supplement. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy the Notes offered by this prospectus supplement and the accompanying prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

S-53


Table of Contents

DESCRIPTION OF THE NOTES

The Notes will be issued under a base indenture dated as                     , 2018 and a first supplemental indenture thereto, to be entered into between us and U.S. Bank National Association, as trustee. We refer to the indenture and the first supplemental indenture collectively as the “indenture” and to U.S. Bank National Association as the “trustee.” The Notes are governed by the indenture, as required by federal law for all bonds and notes of companies that are publicly offered. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “Events of Default—Remedies if an Event of Default Occurs” below. Second, the trustee performs certain administrative duties for us with respect to the Notes.

This section includes a summary description of the material terms of the Notes and the indenture. Because this section is a summary, however, it does not describe every aspect of the Notes and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of the Notes. The base indenture has been attached as an exhibit to the registration statement of which this prospectus supplement is a part and the first supplemental indenture will be attached as an exhibit to a post-effective amendment to the registration statement of which this prospectus supplement is a part, in each case, as filed with the SEC. See “Where You Can Find More Information” in this prospectus supplement for information on how to obtain a copy of the indenture.

General

The Notes will mature on November 1, 2023. The principal payable at maturity will be 100% of the aggregate principal amount. The interest rate of the Notes is     % per year and will be paid every February 1, May 1, August 1 and November 1, commencing February 1, 2019, and the regular record dates for interest payments will be every January 15, April 15, July 15 and October 15, commencing January 15, 2019. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. The initial interest period will be the period from and including                     , 2018, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof. The Notes will not be subject to any sinking fund and holders of the Notes will not have the option to have the Notes repaid prior to the stated maturity date.

The indenture does not limit the amount of debt (including secured debt) that may be issued by us or our subsidiaries under the indenture or otherwise, but does contain a covenant regarding our asset coverage that would have to be satisfied at the time of our incurrence of additional indebtedness. See “—Covenants” and “— Events of Default.” Other than as described under “—Covenants” below, the indenture does not restrict us from paying dividends or issuing or repurchasing our other securities. Other than restrictions described under “—Merger or Consolidation” below, the indenture does not contain any covenants or other provisions designed to afford holders of the Notes protection in the event of a highly leveraged transaction involving us or if our credit rating declines as the result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us that could adversely affect your investment in the Notes.

We may, without the consent of the holders of the Notes, issue additional notes under the indenture with the same terms (except for the issue date, public offering price, and if applicable, the initial interest payment date) and with the same CUSIP numbers as the Notes offered hereby in an unlimited aggregate principal amount; provided that such additional notes must be part of the same issue as the Notes offered hereby for federal income tax purposes.

 

S-54


Table of Contents

Covenants

In addition to standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment and related matters, the following covenants will apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act. Currently, these provisions generally prohibit us from incurring additional debt or issuing additional debt or preferred securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% on and after April 10, 2019) after such incurrence or issuance. See “Risk Factors—Risks Related to Our Business and Structure—Recently-enacted legislation allows us to incur additional leverage under the 1940 Act, distinct from certain of our obligations under our Credit Facility and our term preferred stock” in this prospectus supplement.

 

   

We agree that for the period of time during which Notes are outstanding, we will not declare any dividend (except a dividend payable in stock of the issuer), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the 1940 Act) of at least the threshold specified under Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions thereto of the 1940 Act, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to any SEC no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a RIC under Subchapter M of the Code.

 

   

If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable GAAP.

Optional Redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after November 1, 2020, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption.

You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are held in certificated form and are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the indenture and the 1940 Act, to the extent applicable.

 

S-55


Table of Contents

If we redeem only some of the Notes, the trustee or, with respect to global securities, DTC, will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture and the 1940 Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Global Securities

Each Note will be issued in book-entry form and represented by a global security that we deposit with and register in the name of DTC or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security. For more information about these arrangements, see “—Book-Entry Procedures” below.

Termination of a Global Security

If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.

Conversion and Exchange

The Notes are not convertible into or exchangeable for other securities.

Payment and Paying Agents

We will pay interest to the person listed in the trustee’s records as the owner of the Notes at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

Payments on Global Securities

We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants, as described under “—Book-Entry Procedures” below.

Payments on Certificated Securities

In the event the Notes become represented by certificated securities, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date to the holder of the Notes as shown on the trustee’s records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in St. Paul, Minnesota and/or at other offices that may be specified in the indenture or a notice to holders against surrender of the Note.

 

S-56


Table of Contents

Alternatively, if the holder asks us to do so, we will pay any amount that becomes due on the debt security by wire transfer of immediately available funds to an account at a bank in St. Paul, Minnesota, on the due date. To request payment by wire, the holder must give the applicable trustee or other paying agent appropriate transfer instructions at least 15 business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person who is the holder on the relevant regular record date. Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above.

Payment When Offices Are Closed

If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes.

Events of Default

You will have rights if an Event of Default occurs in respect of the Notes and the Event of Default is not cured, as described later in this subsection.

The term “Event of Default” in respect of the Notes means any of the following:

 

   

We do not pay the principal of any Note when due and payable at maturity;

 

   

We do not pay interest on any Note when due and payable, and such default is not cured within 30 days of its due date;

 

   

We remain in breach of any other covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding Notes);

 

   

We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or

 

   

On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage (as such term is defined in the 1940 Act) of less than 100%.

An Event of Default for the Notes may, but does not necessarily, constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the Notes may declare the entire principal amount of all the Notes to be due and immediately payable, but this does not entitle any holder of Notes to any redemption payout or redemption premium. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes if (1) we have deposited with the trustee all amounts due and owing with respect to the Notes (other than principal or any payment that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.

 

S-57


Table of Contents

Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee protection from expenses and liability reasonably satisfactory to it (called an “indemnity”). If indemnity reasonably satisfactory to the trustee is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

   

You must give the trustee written notice that an Event of Default has occurred and remains uncured;

 

   

The holders of at least 25% in principal amount of all the Notes must make a written request that the trustee take action because of the default and must offer the trustee indemnity, security, or both reasonably satisfactory to it against the cost and other liabilities of taking that action;

 

   

The trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/or security; and

 

   

The holders of a majority in principal amount of the Notes must not have given the trustee a direction inconsistent with the above notice during that 60-day period.

However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the Notes, or else specifying any default.

Waiver of Default

The holders of a majority in principal amount of the Notes may waive any past defaults other than a default:

 

   

in the payment of principal (or premium, if any) or interest; or

 

   

in respect of a covenant that cannot be modified or amended without the consent of each holder of the Notes.

Merger or Consolidation

Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:

 

   

where we merge out of existence or convey or transfer our assets substantially as an entirety, the resulting entity must agree to be legally responsible for our obligations under the Notes;

 

   

immediately after giving effect to the transaction, no default or Event of Default shall have occurred and be continuing; and

 

   

we must deliver certain certificates and documents to the trustee.

An assumption by any person of obligations under the Notes and the indenture might be deemed for federal income tax purposes to be an exchange of the Notes for new Notes by the holders thereof, resulting in recognition of gain or loss for such purposes and possibly other adverse tax consequences to the holders. Holders should consult their own tax advisors regarding the tax consequences of such an assumption.

 

S-58


Table of Contents

Modification or Waiver

There are three types of changes we can make to the indenture and the Notes issued thereunder.

Changes Requiring Your Approval

First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:

 

   

change the stated maturity of the principal of (or premium, if any, on) or any installment of principal of or interest on the Notes;

 

   

reduce any amounts due on the Notes or reduce the rate of interest on the Notes;

 

   

reduce the amount of principal payable upon acceleration of the maturity of a Note following a default;

 

   

change the place or currency of payment on a Note;

 

   

impair your right to sue for payment;

 

   

reduce the percentage of holders of Notes whose consent is needed to modify or amend the indenture; and

 

   

reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults or reduce the percentage of holders of Notes required to satisfy quorum or voting requirements at a meeting of holders of the Notes.

Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect.

Changes Requiring Majority Approval

Any other change to the indenture and the Notes would require the following approval:

 

   

if the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes; and

 

   

if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

In each case, the required approval must be given by written consent. The holders of a majority in principal amount of all of the series of debt securities issued under the indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Your Approval.

Further Details Concerning Voting

When taking a vote, we will use the following rules to decide how much principal to attribute to the Notes:

The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if we or any affiliate of ours own any Notes. The Notes will also not be eligible to vote if they have been fully defeased as described later under “—DefeasanceFull Defeasance” below.

 

S-59


Table of Contents

We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under the indenture. However, the record date may not be earlier than 30 days before the date of the first solicitation of holders to vote on or take such action and not later than the date such solicitation is completed. If we set a record date for a vote or other action to be taken by holders of the Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record date.

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the Notes or request a waiver.

Satisfaction and Discharge

The indenture will be discharged and will cease to be of further effect with respect to the Notes when:

 

   

Either

 

   

all the Notes that have been authenticated have been delivered to the trustee for cancellation; or

 

   

all the Notes that have not been delivered to the trustee for cancellation:

 

   

have become due and payable, or

 

   

will become due and payable at their stated maturity within one year, or

 

   

are to be called for redemption within one year,

 

   

and we, in the case of the first, second and third sub-bullets above, have irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts as will be sufficient, to pay and discharge the entire indebtedness (including all principal, premium, if any, and interest) on such Notes not previously delivered to the trustee for cancellation (in the case of Notes that have become due and payable on or prior to the date of such deposit) or to the stated maturity or redemption date, as the case may be;

 

   

we have paid or caused to be paid all other sums payable by us under the indenture with respect to the Notes; and

 

   

we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all conditions precedent provided for in the indenture relating to the satisfaction and discharge of the indenture and the Notes have been complied with.

Defeasance

The following provisions will be applicable to the Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from certain covenants under the indenture relating to the Notes.

 

S-60


Table of Contents

Covenant Defeasance

Under the indenture, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your Notes. In order to achieve covenant defeasance, the following must occur:

 

   

Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of cash and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;

 

   

We must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;

 

   

We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;

 

   

Defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our other material agreements or instruments; and

 

   

No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. In fact, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

Full Defeasance

 

The Notes are subject to full defeasance. Full defeasance means that we can legally release ourselves from all payment and other obligations on the Notes, subject to the satisfaction of certain conditions, including, but not limited to that (a) we have received from, or there has been published by, the Internal Revenue Service (the “IRS”) a ruling, or (b) there is a change in U.S. federal income tax law, in either case to the effect that the holders of the Notes and any coupons appertaining thereto will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred (called “full defeasance”), and that we put in place the following other arrangements for you to be repaid:

 

   

Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;

 

   

We must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an Internal Revenue Service (“IRS”) ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;

 

   

We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;

 

S-61


Table of Contents
   

Defeasance must not result in a breach or violation of, or constitute a default under, the indenture or any of our other material agreements or instruments; and

 

   

No default or Event of Default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent.

Form, Exchange and Transfer of Certificated Registered Securities

If registered Notes cease to be issued in book-entry form, they will be issued:

 

   

only in fully registered certificated form;

 

   

without interest coupons; and

 

   

unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.

Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.

Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering Notes in the names of holders transferring Notes. We may appoint another entity to perform these functions or perform them ourselves.

Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax (including a withholding tax) or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

If any certificated securities of a particular series are redeemable and we redeem less than all the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be partially redeemed.

If registered Notes are issued in book-entry form, only the depositary will be entitled to transfer and exchange the Notes as described in this subsection, since it will be the sole holder of the Notes.

Resignation of Trustee

The trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

 

S-62


Table of Contents

Governing Law

The indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York.

Indenture Provisions—Ranking

The Notes will be our direct unsecured obligations and will rank:

 

   

pari passu with our existing and future unsecured, unsubordinated indebtedness;

 

   

senior to our preferred stock, including our outstanding Series 2024 Term Preferred Stock and any series of preferred stock that we may issue in the future;

 

   

senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; and

 

   

effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

   

structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and any other future subsidiaries of the Company, including, without limitation, borrowings under the Credit Facility.

The Trustee under the Indenture

U.S Bank National Association serves as the trustee, paying agent, and security registrar under the indenture. Separately, our securities are held by U.S. Bank National Association pursuant to a custody agreement.

Book-Entry Procedures

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each issuance of the Notes, in the aggregate principal amount thereof, and will be deposited with DTC. Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the trustee or the paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between

 

S-63


Table of Contents

Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s Ratings Services’ rating of AA+. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Notes, except in the event that use of the book-entry system for the Notes is discontinued.

To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Redemption proceeds, distributions, and interest payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

 

S-64


Table of Contents

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for its accuracy.

 

S-65


Table of Contents

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following discussion summarizes certain material U.S. federal income tax consequences of acquiring, owning and disposing of the Notes. The discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”); current, temporary and proposed U.S. Treasury Regulations issued thereunder (the “Treasury Regulations”); the legislative history of the Code; Internal Revenue Service (“IRS”) rulings, pronouncements, interpretations and practices; and judicial decisions now in effect, all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a holder of the Notes. This discussion is limited to persons purchasing the Notes for cash at original issue and at the offering price on the cover page of this prospectus supplement. Furthermore, this discussion assumes that each holder holds the Notes as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). It does not reflect every possible tax outcome or consequence that could result from acquiring, owning or disposing of the Notes. For example, special rules not discussed here may apply to you if you are:

 

   

a broker-dealer, dealer or trader in securities or currencies;

 

   

a controlled foreign corporation;

 

   

a passive foreign investment company;

 

   

an S corporation;

 

   

a bank, thrift or other financial institution;

 

   

a regulated investment company, a real estate investment trust or other financial conduit entity (or shareholder of such entity);

 

   

an accrual method taxpayer subject to special tax accounting rules as a result of its use of financial statements;

 

   

an insurance company;

 

   

a tax-exempt organization, retirement plan, individual retirement account or tax deferred account;

 

   

subject to the alternative minimum tax provisions of the Code;

 

   

holding the Notes as part of a hedge, straddle, conversion, integrated or other risk reduction or constructive sale transaction;

 

   

holding the Notes through a partnership or other pass-through entity;

 

   

a “United States person” (within the meaning of the Code) whose “functional currency” is not the U.S. dollar; or

 

   

a U.S. expatriate or former long-term resident.

In addition, this discussion does not reflect state, local or non-U.S. tax consequences that may apply to you based on your particular circumstances and residence. This discussion also does not address any U.S. federal tax consequences, such as the estate tax or gift tax, other than U.S. federal income tax consequences. You should consult your own tax advisors to determine the tax consequences particular to your situation, including any applicable state, local or foreign income and other tax consequences, which may result from your acquisition, ownership or disposition of the Notes.

As used herein, “U.S. holder” means a beneficial owner of the Notes that is, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

S-66


Table of Contents
   

a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of the Code) that have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a United States person.

If any entity treated as a partnership for U.S. federal income tax purposes holds the Notes, the tax treatment of an owner of such entity generally will depend upon the status of the owner and the activities of the entity. If you are an owner of an entity treated as a partnership for U.S. federal income tax purposes, you should consult your tax advisor regarding the tax consequences of the entity’s purchase, ownership and disposition of the Notes. This discussion does not address the special treatment under U.S. federal income tax law that could result if we invested in tax-exempt securities or certain other investment assets. For purposes of this discussion, “non-U.S. holder” means a beneficial owner of the Notes that is neither a U.S. holder nor an entity treated as a partnership for U.S. federal income tax purposes.

Prospective holders considering purchasing the Notes should consult their own tax advisors concerning the application of the U.S. federal tax laws to their individual circumstances, as well as any consequences to such holders relating to purchasing, owning and disposing of the Notes under the laws of any other taxing jurisdiction.

U.S. Holders

If you are not a U.S. holder, this section does not apply to you.

Interest. The following discussion assumes that the Notes will be issued with no original issue discount or a de minimis amount of original issue discount for U.S. federal income tax purposes. A U.S. holder generally will be required to recognize and include in gross income any stated interest as ordinary income at the time it is paid or accrued on the Notes in accordance with such U.S. holder’s method of accounting for U.S. federal income tax purposes.

Sale or other taxable disposition of the Notes. A U.S. holder will recognize gain or loss on the sale, exchange, redemption, retirement or other taxable disposition of a Note equal to the difference between the sum of the cash and the fair market value of any property received in exchange therefor (less a portion allocable to any accrued and unpaid stated interest, which generally will be taxable as ordinary income if not previously included in such U.S. holder’s income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note (or a portion thereof) generally will be the U.S. holder’s cost therefor. This gain or loss generally will be long-term capital gain or loss if the U.S. holder has held the Notes for more than one year at the time of such disposition.

Additional tax on net investment income. An additional surtax at a rate of 3.8% is imposed on the amount of “net investment income,” in the case of an individual, or undistributed “net investment income,” in the case of an estate or trust (other than a charitable trust), which exceeds certain threshold amounts. “Net investment income” as defined for this purpose generally includes interest payments and gain recognized from the sale or other taxable disposition of the Notes. U.S. holders should consult their own tax advisors regarding the effect, if any, of this surtax on their ownership and disposition of the Notes.

Information reporting and backup withholding. A U.S. holder may be subject to information reporting and backup withholding when such U.S. holder receives interest and principal payments on the Notes or proceeds upon the sale or other disposition of such Notes (including a redemption or retirement of the Notes). Certain U.S. holders (including, among others, corporations and certain tax-exempt organizations) generally are not subject to information reporting or backup withholding. A U.S. holder will be subject to backup withholding if such holder is not otherwise exempt and any of the following is true:

 

   

such U.S. holder fails to furnish its taxpayer identification number, or “TIN,” which, for an individual is ordinarily his or her social security number;

 

S-67


Table of Contents
   

the IRS notifies the payor that such U.S. holder furnished an incorrect TIN;

 

   

such U.S. holder is notified by the IRS of a failure to properly report payments of interest or dividends; or

 

   

such U.S. holder fails to certify, under penalties of perjury, that such holder has furnished a correct TIN and that the IRS has not notified such U.S. holder that it is subject to backup withholding.

A U.S. holder should consult its tax advisor regarding its qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. holder generally will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.

Non-U.S. Holders

If you are not a non-U.S. holder, this section does not apply to you.

Interest. Interest paid to a non-U.S. holder on its Notes that is not effectively connected with such non-U.S. holder’s conduct of a United States trade or business (and, if any applicable treaty so provides, is not attributable to the conduct of a trade or business through a permanent establishment or fixed base in the United States) will not be subject to U.S. federal withholding tax, provided that:

 

   

such holder does not directly or indirectly, actually or constructively, own 10% or more of the total combined voting power of all classes of our voting stock;

 

   

such holder is not a controlled foreign corporation that is related to us through actual or constructive stock ownership;

 

   

such holder is not a bank that received such Note on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and

 

   

either (1) the non-U.S. holder certifies in a statement provided to us or the paying agent generally on IRS Form W-8BEN, under penalties of perjury, that it is not a “United States person” (within the meaning of the Code) and provides its name and address, (2) a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business and holds the Note on behalf of the non-U.S. holder certifies to us or the paying agent under penalties of perjury that it, or the financial institution between it and the non-U.S. holder, has received from the non-U.S. holder a statement generally on IRS Form W-8BEN, under penalties of perjury, that such holder is not a United States person and provides us or the paying agent with a copy of such statement or (3) the non-U.S. holder holds its Note directly through a “qualified intermediary” and certain conditions are satisfied.

A non-U.S. holder generally will also be exempt from withholding tax on interest if such amount is effectively connected with such non-U.S. holder’s conduct of a United States trade or business and the non-U.S. holder provides us with appropriate certification (as discussed below under the caption “—United States trade or business”).

Subject to the discussion below under “—United States trade or business,” if a non-U.S. holder does not satisfy the requirements above, interest paid to such non-U.S. holder generally will be subject to a 30% U.S. federal withholding tax. Such rate may be reduced or eliminated under a tax treaty between the United States and the non-U.S. holder’s country of residence. To claim a reduction or exemption under a tax treaty, a non-U.S. holder must generally complete an IRS Form W-8BEN or an IRS Form W-8BEN-E (or applicable successor form) and claim the reduction or exemption on the form.

 

S-68


Table of Contents

Sale or other taxable disposition of the Notes. A non-U.S. holder generally will not be subject to U.S. federal income tax or withholding tax on gain recognized on the sale, exchange, redemption, retirement or other taxable disposition of a note so long as (i) the gain is not effectively connected with the conduct by the non-U.S. holder of a United States trade or business (or, if a tax treaty applies, the gain is not attributable to a United States permanent establishment maintained by such non-U.S. holder) and (ii) in the case of a non-U.S. holder who is an individual, such non-U.S. holder is not present in the United States for 183 days or more in the taxable year of disposition and certain other requirements are not met. A non-U.S. holder who is an individual and does not meet this exemption should consult his or her tax advisor regarding the potential liability for U.S. federal income tax on such holder’s gain realized on a note.

United States trade or business. If interest paid on a note or gain from a disposition of a note is effectively connected with a non-U.S. holder’s conduct of a United States trade or business (and, if an income tax treaty applies, the non-U.S. holder maintains a United States permanent establishment to which such amounts are generally attributable), the non-U.S. holder generally will be subject to U.S. federal income tax on the interest or gain on a net basis in the same manner as if it were a U.S. holder. If a non-U.S. holder is subject to U.S. federal income tax on the interest on a net basis, the 30% withholding tax described above will not apply (assuming an appropriate certification is timely provided, generally on IRS Form W-8ECI). A non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to certain adjustments, unless it qualifies for a lower rate under an applicable income tax treaty. For this purpose, interest on a note or gain from a disposition of a note will be included in earnings and profits if the interest or gain is effectively connected with the conduct by the corporation of a United States trade or business.

Backup withholding and information reporting. A non-U.S. holder generally will not be subject to backup withholding and information reporting with respect to payments that we make to the non-U.S. holder, provided that we do not have actual knowledge or reason to know that such holder is a “United States person,” within the meaning of the Code, and the holder has given us the statement described above under “Non-U.S. Holders—Interest.” In addition, a non-U.S. holder will not be subject to backup withholding or information reporting with respect to the proceeds of the sale or other disposition of the Notes (including a retirement or redemption of such Notes) within the United States or conducted through certain U.S.-related brokers, if the payor receives the statement described above and does not have actual knowledge or reason to know that such holder is a United States person or the holder otherwise establishes an exemption. However, we may be required to report annually to the IRS and to the non-U.S. holder the amount of, and the tax withheld with respect to, any interest paid to the non-U.S. holder, regardless of whether any tax was actually withheld. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides.

A non-U.S. holder generally will be entitled to credit any amounts withheld under the backup withholding rules against the holder’s U.S. federal income tax liability or may claim a refund provided that the required information is furnished to the IRS in a timely manner.

Foreign Account Tax Compliance Act. Sections 1471 through 1474 of the Code and the Treasury Regulations and other published guidance promulgated thereunder (which are commonly referred to as “FATCA”) generally impose withholding taxes on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless additional certification, information reporting and other specified requirements are satisfied. Failure to comply with the FATCA reporting requirements could result in withholding tax being imposed on payments of interest and sales proceeds to foreign intermediaries and certain non-U.S. holders. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts and withhold 30% on payments to non-compliant foreign financial institutions and certain other account holders. An

 

S-69


Table of Contents

intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. Accordingly, the entity through which the Notes are held will affect the determination of whether such withholding is required. Final Treasury Regulations and other published guidance provide that this withholding tax currently applies to payments of interest and will apply to payments of gross proceeds from the sale or other disposition of the Notes on or after January 1, 2019. The FATCA withholding tax will apply to all withholdable payments without regard to whether the beneficial owner of the payment would otherwise be entitled to an exemption from imposition of withholding tax pursuant to an applicable tax treaty with the United States or U.S. domestic law. If payment of this withholding tax is made, holders that are otherwise eligible for an exemption from, or reduction of, U.S. federal withholding taxes with respect to such interest or proceeds will be required to seek a credit or refund from the IRS to obtain the benefit of such exemption or reduction, if any. We will not pay additional amounts to holders of the Notes in respect of any amounts withheld. Prospective holders should consult their own tax advisors regarding the potential application of withholding under FATCA to their investment in the Notes.

 

S-70


Table of Contents

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PAYING AGENT

The custodian of our assets is The Bank of New York Mellon Corp. The custodian’s address is: 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Our assets are held under bank custodianship in compliance with the 1940 Act. Securities held through our wholly owned subsidiary, Gladstone Business Loan, are held under a custodian agreement with The Bank of New York Mellon Corp., which acts as collateral custodian pursuant to the Credit Facility with KeyBank and certain other parties. The address of the collateral custodian is 500 Ross Street, Suite 935, Pittsburgh, PA 15262. Computershare acts as our transfer and dividend paying agent and registrar. The principal business address of Computershare Inc. is 250 Royall Street, Canton, Massachusetts 02021, telephone number 781-575-2000. Computershare also maintains an internet website at www.computershare.com.

LEGAL MATTERS

Certain legal matters will be passed upon for us by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain matters of Maryland law, including matters regarding the securities offered by this prospectus supplement, will be passed upon for us by Venable LLP, Baltimore, Maryland. Certain legal matters will be passed upon for the underwriters by Proskauer Rose LLP, Washington, D.C. Bass, Berry  & Sims PLC and Proskauer Rose LLP may rely as to certain matters of Maryland law upon the opinion of Venable LLP.

EXPERTS

The financial statements as of September 30, 2017 and September 30, 2016 and for each of the three years in the period ended September 30, 2017 and management’s assessment of the effectiveness of internal control over financial reporting (which is included in Management’s Annual Report on Internal Control over Financial Reporting) as of September 30, 2017 included in the accompanying prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act, and are required to file reports, proxy statements and other information with the SEC. These documents may be inspected and copied for a fee at the SEC’s public reference room, 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.

This prospectus supplement and the accompanying prospectus do not contain all of the information in our registration statement, including amendments, exhibits and schedules. Statements in this prospectus supplement and in the accompanying prospectus about the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by this reference.

Additional information about the Company may be found in our registration statement on Form N-2 (including the related amendments, exhibits and schedules thereto) filed with the SEC. The SEC maintains a web site (http://www.sec.gov) that contains our registration statement, other documents incorporated by reference in the registration statement and other information that we have filed electronically with the SEC, including proxy statements and reports filed under the Exchange Act.

 

S-71


Table of Contents

INDEX TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Consolidated Statements of Assets and Liabilities as of June  30, 2018 and September 30, 2017

     S-F-2  

Consolidated Statements of Operations for the three and nine months ended June 30, 2018 and 2017

     S-F-3  

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2018 and 2017

     S-F-4  

Consolidated Statements of Cash Flows for the nine months ended June  30, 2018 and 2017

     S-F-5  

Consolidated Schedules of Investments as of June  30, 2018 and September 30, 2017

     S-F-6  

Notes to Consolidated Financial Statements

     S-F-25  

 

S-F-1


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     September 30,  
     2018     2017  

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $357,598 and $318,952, respectively)

   $ 336,772     $ 290,860  

Affiliate investments (Cost of $54,195 and $49,868, respectively)

     51,892       42,648  

Control investments (Cost of $41,865 and $42,615 respectively)

     16,224       18,865  

Cash and cash equivalents

     2,421       5,012  

Restricted cash and cash equivalents

     186       258  

Interest receivable, net

     2,699       1,699  

Due from administrative agent

     3,236       3,086  

Deferred financing fees

     1,531       853  

Other assets, net

     463       2,579  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 415,424     $ 365,860  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $117,000 and $93,000, respectively)

   $ 117,000     $ 93,115  

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 5,440,000 and 5,440,000 shares authorized, respectively, and 2,070,000 and 2,070,000 shares issued and outstanding, respectively

     50,007       49,849  

Accounts payable and accrued expenses

     281       522  

Interest payable

     319       264  

Fees due to Adviser(A)

     2,004       1,292  

Fee due to Administrator(A)

     310       244  

Other liabilities

     552       924  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 170,473     $ 146,210  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

    

Common stock, $0.001 par value, 44,560,000 and 44,560,000 shares authorized, respectively, and 27,660,432 and 26,160,684 shares issued and outstanding, respectively

   $ 28     $ 26  

Capital in excess of par value

     361,549       348,248  

Cumulative net unrealized depreciation of investments

     (48,770     (59,062

Cumulative net unrealized depreciation of other

     —         (115

Over distributed net investment income

     (237     (139

Accumulated net realized losses

     (67,619     (69,308
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 244,951     $ 219,650  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.86     $ 8.40  
  

 

 

   

 

 

 

 

(A) 

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

(B)

Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2018     2017     2018     2017  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 8,675     $ 6,885     $ 24,642     $ 18,651  

Affiliate investments

     1,243       1,042       3,531       3,176  

Control investments

     375       371       1,438       1,249  

Cash and cash equivalents

     9       7       28       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     10,302       8,305       29,639       23,090  

PIK interest income

        

Non-Control/Non-Affiliate investments

     1,063       1,162       3,257       3,223  

Affiliate investments

     70       162       209       537  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     1,133       1,324       3,466       3,760  

Total interest income

     11,435       9,629       33,105       26,850  

Success fee income

        

Non-Control/Non-Affiliate investments

     430       —         430       391  

Affiliate investments

     —         —         —         1,142  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     430       —         430       1,533  

Other income

     514       3       789       16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,379       9,632       34,324       28,399  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     1,801       1,480       5,261       4,217  

Loan servicing fee(A)

     1,294       1,071       3,754       3,009  

Incentive fee(A)

     1,499       1,116       4,082       3,479  

Administration fee(A)

     310       272       894       858  

Interest expense on borrowings

     1,556       904       4,356       2,047  

Dividend expense on mandatorily redeemable preferred stock

     776       1,029       2,328       3,087  

Amortization of deferred financing fees

     237       274       777       821  

Professional fees

     200       223       745       665  

Other general and administrative expenses

     266       230       828       774  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     7,939       6,599       23,025       18,957  

Credit to base management fee - loan servicing fee(A)

     (1,294     (1,071     (3,754     (3,009

Credits to fees from Adviser - other(A)

     (262     (1,275     (2,133     (3,494
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     6,383       4,253       17,138       12,454  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,996       5,379       17,186       15,945  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     158       (23     984       3,903  

Affiliate investments

     41       —         145       (2,330

Control investments

     —         —         (32     (4,999

Other

     —         —         (133     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     199       (23     964       (3,426

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     3,755       283       7,266       (6,320

Affiliate investments

     2,252       190       4,917       364  

Control investments

     (109     516       (1,891              5,243  

Other

     —         (182     115       (71
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     5,898                   807              10,407       (784
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

             6,097       784       11,371       (4,210
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 12,093     $ 6,163     $ 28,557     $ 11,735  
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.22     $ 0.21     $ 0.64     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.45     $ 0.24     $ 1.07     $ 0.46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared and paid

   $ 0.21     $ 0.21     $ 0.63     $ 0.63  
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     27,134,305       25,576,149       26,788,172       25,288,289  

 

(A) 

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
             2018                     2017          

OPERATIONS

    

Net investment income

   $ 17,186     $ 15,945  

Net realized gain (loss) on investments

     1,097       (3,426

Realized loss on other

     (133     —    

Net unrealized appreciation (depreciation) of investments

     10,292       (713

Net unrealized appreciation (depreciation) of other

     115       (71
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     28,557       11,735  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (16,898     (15,945
  

 

 

   

 

 

 

Total distributions to common stockholders

     (16,898     (15,945
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     13,893       20,932  

Discounts, commissions and offering costs for issuance of common stock

     (251     (946
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     13,642       19,986  
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS

     25,301       15,776  

NET ASSETS, BEGINNING OF PERIOD

     219,650       201,207  
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 244,951     $ 216,983  
  

 

 

   

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
             2018                     2017          

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 28,557     $ 11,735  

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

    

Purchase of investments

     (96,520 )      (95,449

Principal repayments on investments

     57,096       62,792  

Net proceeds from sale of investments

     1,567       8,289  

Increase in investments due to paid-in-kind interest or other

     (3,454 )      (3,599

Net change in premiums, discounts and amortization

     (45 )      439  

Net realized (gain) loss on investments

     (1,097 )      3,426  

Net unrealized (appreciation) depreciation of investments

     (10,292 )      713  

Net unrealized (appreciation) depreciation of other

     (115 )      71  

Changes in assets and liabilities:

    

Decrease in restricted cash and cash equivalents

     72       133  

Amortization of deferred financing fees

     777       821  

(Increase) decrease in interest receivable, net

     (1,000 )      49  

Increase in due from administrative agent

     (150 )      (693

Decrease (increase) in other assets, net

     2,105       (1,539

Decrease in accounts payable and accrued expenses

     (241 )      (800

Increase in interest payable

     55       34  

Increase (decrease) in fees due to Adviser(A)

     712       (762

Increase (decrease) in fee due to Administrator(A)

     66       (10

(Decrease) increase in other liabilities

     (141     334  
  

 

 

   

 

 

 

Net cash used in operating activities

     (22,048     (14,016
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     109,600       108,000  

Repayments on borrowings

     (85,600     (97,100

Deferred financing fees

     (1,329     (75

Proceeds from issuance of common stock

     13,893       20,932  

Discounts, commissions and offering costs for issuance of common stock

     (209     (946

Distributions paid to common stockholders

     (16,898     (15,945
  

 

 

   

 

 

 

Net cash provided by financing activities

     19,457       14,866  
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (2,591     850  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     5,012       6,152  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,421     $ 7,002  
  

 

 

   

 

 

 

 

(A) 

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(M) – 137.5%

        

Secured First Lien Debt – 71.1%

        

Automobile – 1.4%

        

Meridian Rack & Pinion, Inc.(S) – Term Debt (L + 11.5%, 13.6% Cash, Due 6/2019)(C)

   $ 4,140      $ 4,140      $ 3,312  

Beverage, Food, and Tobacco – 2.6%

        

Triple H Food Processors, LLC - Line of Credit, $1,500 available (L + 6.8%, 8.8% Cash, Due 8/2018)(C)

     —          —          —    

Triple H Food Processors, LLC – Term Debt (L + 8.3%, 10.3% Cash, Due 8/2020)(C)

     6,200        6,200        6,324  
     

 

 

    

 

 

 
        6,200        6,324  

Buildings and Real Estate – 0.9%

        

GFRC Holdings, LLC – Line of Credit, $50 available (L + 8.0%, 10.1% Cash, Due 9/2018)(E)

     1,150        1,150        1,150  

GFRC Holdings, LLC – Term Debt (L + 8.0%, 10.1% Cash, Due 9/2018)(E)

     1,000        1,000        1,000  
     

 

 

    

 

 

 
        2,150        2,150  

Diversified/Conglomerate Service – 20.3%

        

IA Tech, LLC – Term Debt (L + 11.0%, 13.1% Cash, Due 6/2023)(C)

     30,000        30,000        30,000  

Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.3% Cash, Due 12/2021)(Q)(U)

     8,415        8,415        8,415  

Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.8% Cash, Due 1/2019)(C)

     1,450        1,450        1,431  

Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 1/2019)(C)(F)

     1,600        1,600        1,414  

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 1/2019)(C)

     9,000        9,000        8,344  
     

 

 

    

 

 

 
        50,465        49,604  

Healthcare, education, and childcare – 7.4%

        

EL Academies, Inc. – Line of Credit, $2,000 available (L + 8.8%, 10.8% Cash, Due 8/2020)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $8,560 available (L + 8.8%, 10.8% Cash, Due 8/2022)(C)

     1,440        1,440        1,460  

EL Academies, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 8/2022)(C)

     12,000        12,000        12,165  

TWS Acquisition Corporation – Term Debt (L + 8.0%, 10.1% Cash, Due 7/2020)(Q)

     4,500        4,500        4,500  
     

 

 

    

 

 

 
        17,940        18,125  

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-6


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

Machinery – 2.6%

        

Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 10.1% Cash, Due 11/2020)(C)

     —          —          —    

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.6% Cash, 3.0% PIK, Due 11/2022)(C)

     5,915        5,915        5,752  

Precision International, LLC – Term Debt (10.0%, Due 9/2021)(C)(F)

     836        836        834  
     

 

 

    

 

 

 
        6,751        6,586  

Oil and Gas – 16.3%

        

Impact! Chemical Technologies, Inc. – Line of Credit, $0 available (L + 8.8%, 10.8% Cash, Due 12/2020)(C)

     2,500        2,500        2,519  

Impact! Chemical Technologies, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 12/2020)(C)

     20,000        20,000        20,150  

WadeCo Specialties, Inc. – Term Debt (L + 7.0%, 9.1% Cash, Due 3/2019)(C)

     9,941        9,941        10,090  

WadeCo Specialties, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 3/2019)(C)

     7,000        7,000        7,070  
     

 

 

    

 

 

 
        39,441        39,829  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 9.0% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 19.6%

        

Applied Voice & Speech Technologies, Inc. – Term Debt (L + 9.3%, 11.3% Cash, Due 10/2022)(C)

     10,450        10,450        10,346  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.1% Cash, Due 12/2019)(C)

     6,000        6,000        5,985  

NetFortris Corp. – Term Debt (L + 8.4%, 10.5% Cash, Due 2/2021)(C)

     23,700        23,700        24,174  

XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.3% Cash, Due 10/2022)(C)

     7,695        7,695        7,714  
     

 

 

    

 

 

 
        47,845        48,219  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 175,039      $ 174,149  
     

 

 

    

 

 

 

Secured Second Lien Debt – 59.5%

        

Automobile – 2.1%

        

Sea Link International IRB, Inc. – Term Debt (11.3% Cash, Due 3/2023)(C)(F)

   $ 5,000      $ 4,979      $ 5,063  

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

Beverage, Food, and Tobacco – 2.8%

        

The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.6% Cash, Due 12/2023)(C)

     6,750        6,725        6,818  

Cargo Transportation– 5.4%

        

AG Transportation Holdings, LLC. – Term Debt (L + 10.0%, 13.3% Cash, Due 3/2020)(C)

     13,000        13,000        13,163  

Chemicals, Plastics, and Rubber – 0.4%

        

Vertellus Holdings LLC – Term Debt (L + 12.0%, 14.0% Cash, Due 10/2021)(C)

     1,099        1,099        1,098  

Diversified/Conglomerate Manufacturing – 8.5%

        

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     5,235        5,235        4,712  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     75        75        68  

Alloy Die Casting Co.(S) – Term Debt (L + 4.0%, 6.1% Cash, Due 4/2021)(C)

     390        390        353  

United Flexible, Inc. – Term Debt (L + 9.3%, 11.3% Cash, Due 2/2022)(C)

     15,300        15,227        15,663  
     

 

 

    

 

 

 
        20,927        20,796  

Diversified/Conglomerate Service – 11.8%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 4/2026)(D)

     3,000        2,941        3,030  

DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.1% Cash, Due 10/2025)(D)

     3,000        2,977        2,940  

Gray Matter Systems, LLC – Delayed Draw Term Loan, $2,000 available (12.0% Cash, Due 11/2023)(C)(F)

     —          —          —    

Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 11/2023)(C)(F)

     11,100        11,100        11,128  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 11.6% Cash, Due 5/2025)(D)(U)

     4,000        3,927        4,010  

LDiscovery, LLC – Term Debt (L + 10.0%, 12.1% Cash, Due 12/2023)(D)

     5,000        4,830        4,500  

Red Ventures, LLC – Term Debt (L + 8.0%, 10.1% Cash, Due 11/2025)(D)

     3,313        3,256        3,379  
     

 

 

    

 

 

 
        29,031        28,987  

Healthcare, education, and childcare – 11.9%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 10.3% Cash, Due 6/2025)(D)

     3,000        2,959        3,000  

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

S-F-8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS  (Continued)

JUNE 30, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

Merlin International, Inc. – Term Debt (L + 10.0%, 12.1% Cash, Due 10/2022)(C)

     20,000        20,000        20,650  

NetSmart Technologies, Inc. – Term Debt (L + 9.5%, 11.6% Cash, Due 10/2023)(Q)

     3,660        3,613        3,696