Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 01/31/2012 16:32:35)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTER ENDED DECEMBER 31, 2011

 

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

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 200

MCLEAN, VIRGINIA 22102

(Address of principal executive office)

(703) 287-5800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨ .

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of January 27, 2012 was 21,000,160.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.   

FINANCIAL INFORMATION

  
Item 1.   

Financial Statements (Unaudited)

  
  

Condensed Consolidated Statements of Assets and Liabilities as of December  31, 2011 and September 30, 2011

     3   
  

Condensed Consolidated Statements of Operations for the three months ended December  31, 2011 and 2010

     4   
  

Condensed Consolidated Statements of Changes in Net Assets for the three months ended December  31, 2011 and 2010

     5   
  

Condensed Consolidated Statements of Cash Flows for the three months ended December  31, 2011 and 2010

     6   
  

Condensed Consolidated Schedules of Investments as of December 31, 2011 and September 30, 2011

     7   
  

Notes to Condensed Consolidated Financial Statements

     15   
Item 2.   

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

     33   
  

Overview

     33   
  

Results of Operations

     36   
  

Liquidity and Capital Resources

     40   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     50   
Item 4.   

Controls and Procedures

     50   
PART II.   

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     51   
Item 1A.   

Risk Factors

     51   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     51   
Item 3.   

Defaults Upon Senior Securities

     51   
Item 4.   

Removed and Reserved

     51   
Item 5.   

Other Information

     51   
Item 6.   

Exhibits

     51   

SIGNATURES

     52   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2011
    September 30,
2011
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $273,177 and $288,266, respectively)

   $ 248,832      $ 257,302   

Control investments (Cost of $97,293 and $94,549, respectively)

     44,014        45,645   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $370,470 and $382,815, respectively)

     292,846        302,947   

Cash

     5,772        6,732   

Restricted cash

     1,225          

Interest receivable – investments in debt securities

     2,921        3,066   

Interest receivable – employees (A)

     13          

Due from custodian

     1,669        2,547   

Deferred financing fees

     2,261        650   

Prepaid assets

     825        996   

Other assets

     584        686   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 308,116      $ 317,624   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $56,900 and $99,400, respectively)

   $ 57,213      $ 100,012   

Mandatorily redeemable preferred stock, $0.001 per share par value, $25 per share liquidation preference; 4,000,000 and no shares authorized; 1,539,882 and no shares issued and outstanding at December 31, 2011 and September 30, 2011, respectively

     38,497          

Accounts payable and accrued expenses

     524        513   

Interest payable

     205        289   

Fees due to Adviser (A)

     1,414        1,760   

Fee due to Administrator (A)

     195        194   

Other liabilities

     2,052        1,135   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 100,100      $ 103,903   
  

 

 

   

 

 

 

NET ASSETS

   $ 208,016      $ 213,721   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 and 50,000,000 shares authorized; 21,019,242 and 21,039,242 shares issued and outstanding at December 31, 2011 and September 30, 2011, respectively

   $ 21      $ 21   

Capital in excess of par value

     326,756        326,913   

Notes receivable – employees (A)

     (3,699     (3,858

Cumulative net unrealized depreciation on investments

     (77,624     (79,867

Cumulative net unrealized appreciation on borrowings

     (313     (612

Under distributed net investment income

     108        108   

Accumulated net realized losses

     (37,233     (28,984
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 208,016      $ 213,721   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 9.90      $ 10.16   
  

 

 

   

 

 

 

 

  (A)  

Refer to Note 4— Related Party Transactions for additional information.

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

 

3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
December 31,
 
     2011     2010  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 7,889      $ 6,926   

Control investments

     1,358        797   

Cash

     6          

Notes receivable from employees (A)

     67        122   
  

 

 

   

 

 

 

Total interest income

     9,320        7,845   

Other income

    

Non-Control/Non-Affiliate investments

            161   
  

 

 

   

 

 

 

Total other income

            161   
  

 

 

   

 

 

 

Total investment income

     9,320        8,006   
  

 

 

   

 

 

 

EXPENSES

    

Loan servicing fee (A)

     959        842   

Base management fee (A)

     597        505   

Incentive fee (A)

     1,035        1,159   

Administration fee (A)

     195        186   

Interest expense on borrowings

     1,139        (120

Dividend expense on mandatorily redeemable preferred stock

     434          

Amortization of deferred financing fees

     457        297   

Professional fees

     292        332   

Other expenses

     244        220   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     5,352        3,421   

Credits to fees from Adviser (A)

     (450     (52
  

 

 

   

 

 

 

Total expenses net of credits to fees

     4,902        3,369   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,418        4,637   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED (LOSS) GAIN:

    

Net realized loss on investments

     (8,249       

Net unrealized appreciation (depreciation) on investments

     2,243        (2,944

Net unrealized depreciation on borrowings

     299        439   
  

 

 

   

 

 

 

Net loss on investments and borrowings

     (5,707     (2,505

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (1,289   $ 2,132   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE:

    

Basic and Diluted

   $ (0.06   $ 0.10   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

    

Basic and Diluted

     21,038,590        21,039,242   

 

(A)  

Refer to Note 4— Related Party Transactions for additional information.

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2011     2010  

Operations:

    

Net investment income

   $ 4,418      $ 4,637   

Net realized loss on investments

     (8,249       

Net unrealized appreciation (depreciation) on investments

     2,243        (2,944

Net unrealized depreciation on borrowings

     299        439   
  

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (1,289     2,132   
  

 

 

   

 

 

 

Distributions:

    

Distributions to common stockholders

     (4,418     (4,418
  

 

 

   

 

 

 

Capital transactions:

    

Stock redemption for repayment of principal on employee note

     (155       

Repayment of principal on employee notes

     158          
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     3          
  

 

 

   

 

 

 

Total decrease in net assets

     (5,704     (2,286

Net assets at beginning of period

     213,720        249,246   
  

 

 

   

 

 

 

Net assets at end of period

   $ 208,016      $ 246,960   
  

 

 

   

 

 

 

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (decrease) increase in net assets resulting from operations

   $ (1,289   $ 2,132   

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

    

Purchase of investments

     (11,251     (11,794

Principal repayments on investments

     10,780        13,208   

Proceeds from sale of investments

     4,489        37   

Increase in investment balance due to paid-in-kind interest

            (4

Net change in premiums, discounts and amortization

     (74     213   

Net realized loss on investments

     8,400          

Net unrealized (appreciation) depreciation on investments

     (2,243     2,944   

Net unrealized depreciation on borrowings

     (299     (439

Increase in restricted cash

     (1,225       

Amortization of deferred financing fees

     457        297   

Decrease (increase) in interest receivable

     132        (82

Decrease (increase) in due from custodian

     877        (10,509

Decrease (increase) in prepaid assets

     171        (15

Decrease in other assets

     102        108   

Increase (decrease) in accounts payable and accrued expenses

     11        (373

Decrease in interest payable

     (84     (578

(Decrease) increase in fees due to Adviser (A)

     (346     1,143   

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

     1        (81

Increase (decrease) in other liabilities

     917        (207
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,526        (4,000
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     11,000        10,000   

Repayments on borrowings

     (53,500     (2,200

Proceeds from issuance of mandatorily redeemable preferred stock

     38,497          

Deferred financing fees

     (2,068     (682

Distributions paid to common stockholders

     (4,418     (4,418

Receipt of principal on employee notes

     3          
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (10,486     2,700   
  

 

 

   

 

 

 

NET DECREASE IN CASH

     (960     (1,300

CASH, BEGINNING OF PERIOD

     6,732        7,734   
  

 

 

   

 

 

 

CASH, END OF PERIOD

   $ 5,772      $ 6,434   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ 155      $   
  

 

 

   

 

 

 

 

(A)  

Refer to Note 4— Related Party Transactions for additional information.

(B)  

Redemption of 20,000 shares of common stock as consideration to reduce the principal balance of an employee loan by $155. Refer to Note 7— Common Stock for additional information.

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS

     

Non-syndicated Loans:

         

Access Television Network, Inc.

  Service-cable airtime (infomercials)   Senior Term Debt (14.0%, Due 2/2011) (D) (H)   $ 903      $ 903      $ 9   

Allison Publications, LLC

  Service-publisher of consumer oriented Magazines   Senior Term Debt (10.5%, Due 9/2012) (D)     8,314        8,325        7,763   

BAS Broadcasting

  Service-radio station operator   Senior Term Debt (11.5%, Due 7/2013) (D)     7,465        7,465        5,226   

Chinese Yellow Pages Company

  Service-publisher of Chinese language directories   Line of Credit, $0 available (7.3%, Due 11/2012) (D)     450        450        315   
    Senior Term Debt (7.3%, Due 11/2012) (D)     108        108        76   

CMI Acquisition, LLC

  Service-recycling   Senior Subordinated Term Debt (13.5%, Due 12/2016) (D)     14,265        14,265        14,354   

FedCap Partners, LLC

  Private equity fund   Class A Membership Units (80 units) (G)       1,200        1,153   
    Uncalled Capital Commitment ($800)      

GFRC Holdings, LLC

  Manufacturing-glass-fiber reinforced concrete   Senior Term Debt (11.5%, Due 12/2012) (D)     5,424        5,424        3,525   
    Senior Subordinated Term Debt (14.0%, Due 12/2012) (D)     6,598        6,598        4,289   

Global Materials Technologies, Inc.

  Manufacturing-steel wool products and metal fibers   Senior Term Debt (13.0%, Due 6/2012) (C) (I)     2,435        2,435        2,435   

Heartland Communications Group

  Service-radio station operator   Line of Credit, $43 available (5.0%, Due 3/2013) (D)     57        57        22   
    Line of Credit, $100 available (10.0%, Due 3/2013) (D)                     
    Senior Term Debt (5.0%, Due 3/2013) (D)     4,342        4,320        1,672   
    Common Stock Warrants (8.8% ownership) (F) (G)       66          

International Junior Golf Training Acquisition Company

  Service-golf training   Line of Credit, $0 available (11.0%, Due 5/2012) (D) (J)     1,500        1,500        1,088   
    Senior Term Debt (10.5%, Due 5/2012) (D) (J)     859        858        622   
    Senior Term Debt (12.5%, Due 5/2012) (C)(D) (J)     2,500        2,500        1,813   

Legend Communications of Wyoming, LLC

  Service-operator of radio stations   Senior Term Debt (16.0%, Due 6/2013) (D)     9,474        9,474        4,737   
    Senior Term Debt (18.0%, Due 7/2011) (D)     220        220        110   

North American Aircraft Services, LLC

 

Service - repairs and maintains aircraft fuel tanks and fuel systems

  Line of Credit, $750 available (6.5%, Due 8/2012) (D)     1,250        1,250        1,225   
    Senior Term Debt (7.5%, Due 8/2016) (D)     5,017        5,017        4,917   
    Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)     4,750        4,750        4,655   
    Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)     2,820        2,820        2,764   
    Common Stock Warrants (5.8% ownership) (F) (G)       350        420   

Northstar Broadband, LLC

  Service-cable TV franchise owner   Senior Term Debt (0.7%, Due 12/2012) (D)     65        57        53   

Ohana Media Group

  Service – AM/FM radio broadcast   Senor Term Debt (10.0%, Due 10/2016) (D)     1,590        1,590        1,439   

Precision Acquisition Group Holdings, Inc.

 

Manufacturing-consumable components for the Aluminum industry

  Equipment Note (13.0%, Due 3/2013) (D)     1,000        1,000        887   
    Senior Term Debt (13.0%, Due 3/2013) (D)     4,125        4,125        3,661   
    Senior Term Debt (13.0%, Due 3/2013) (C) (D)     4,053        4,053        3,597   

PROFIT Systems Acquisition Co.

  Service-design and develop ERP Software   Line of Credit, $350 available (11.3%, Due 7/2012) (D)                     
    Senior Term Debt (10.5%, Due 7/2014) (C) (D)     3,000        3,000        2,865   

RCS Management Holding Co.

  Service-healthcare supplies   Senior Term Debt (9.5%, Due 1/2013) (D)     1,312        1,312        1,221   
    Senior Term Debt (11.5%, Due 1/2013) (C) (D)     3,060        3,060        2,846   

Reliable Biopharmaceutical Holdings, Inc.

 

Manufacturing-pharmaceutical and biochemical intermediates

  Line of Credit, $2,500 available (9.0%, Due 1/2013) (D)     1,500        1,500        1,472   
    Mortgage Note (9.5%, Due 12/2014) (D)     7,145        7,145        7,011   
    Senior Term Debt (12.0%, Due 12/2014) (C)(D)     11,543        11,543        10,922   
    Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)     6,000        6,000        5,678   
    Common Stock Warrants (764 shares) (F) (G)       209        587   

Saunders & Associates

  Manufacturing-equipment provider for frequency control devices   Line of Credit, $2,500 available (11.3%, Due 5/2013) (D)                     
    Senior Term Debt (11.3%, Due 5/2013) (D)     8,947        8,947        8,868   

Sunburst Media - Louisiana, LLC

  Service-radio station operator   Senior Term Debt (10.5%, Due 1/2012) (D)     6,000        6,000        3,300   

Thibaut Acquisition Co.

  Service-design and distribute wall covering   Line of Credit, $475 available (9.0%, Due 1/2014) (D)     525        525        513   
    Senior Term Debt (8.5%, Due 1/2014) (D)     419        419        409   
    Senior Term Debt (12.0%, Due 1/2014) (C) (D)     3,000        3,000        2,918   

Westlake Hardware, Inc.

  Retail-hardware and variety   Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)     12,000        12,000        11,685   
    Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)     8,000        8,000        7,730   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF DECEMBER 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Westland Technologies, Inc.

  Service-diversified conglomerate   Line of Credit, $1,000 available (6.5%, Due 4/2012) (D)   $      $      $   
    Senior Term Debt (7.5%, Due 4/2016) (D)     2,000        2,000        2,000   
    Senior Term Debt (12.5%, Due 4/2016) (D)     4,000        4,000        4,000   
    Common Stock Warrants (77,287 shares) (F) (G)       350        302   

Winchester Electronics

 

Manufacturing-high bandwidth connectors and cables

  Senior Term Debt (5.3%, Due 5/2012) (D)     1,250        1,250        1,239   
    Senior Term Debt (5.8%, Due 5/2013) (D)     1,669        1,669        1,650   
    Senior Subordinated Term Debt (14.0%, Due 6/2013) (D)     9,775        9,775        9,616   
       

 

 

   

 

 

 

Subtotal – Non-syndicated loans

      $ 182,884      $ 159,659   
       

 

 

   

 

 

 

Syndicated Loans:

         

Airvana Network Solutions, Inc.

  Service-telecommunications   Senior Term Debt (10.0%, Due 3/2015) (E)   $ 4,381      $ 4,267      $ 4,381   

Allied Security Holdings, LLC

  Service-contract security officer providers   Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)     1,000        991        970   

Allied Specialty Vehicles, Inc.

  Manufacturing-specialty vehicles   Senior Term Debt (9.5%, Due 2/2016) (E)     9,925        9,751        9,726   

Ameriqual Group, LLC

  Manufacturing-production and distribution of food products   Senior Term Debt (9.0%, Due 3/2016) (E)     7,462        7,332        7,313   

Applied Systems, Inc.

  Software for property & casualty insurance industry   Senior Subordinated Term Debt (9.3%, Due 6/2017) (E)     1,000        991        965   

Ascend Learning, LLC

  Service-technology-based learning solutions   Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)     1,000        973        998   

Attachmate Corporate

  Service-develops, implements and supports software   Senior Subordinated Term Debt (9.5%, Due 2/2017) (E)     4,000        3,963        3,800   

Autoparts Holdings Limited

  Supplier to the light and heavy-duty vehicle after market for replacement parts   Senior Term Debt (10.5%, Due 1/2018) (E)     1,000        995        960   

Covad Communications Group, Inc.

  Service-telecommunications   Senior Term Debt (12.0%, Due 11/2015) (E)     1,800        1,770        1,755   

Ernest Health, Inc.

  Service-post-acute care services   Senior Term Debt (10.3%, Due 5/2017) (E)     2,000        1,972        1,930   

Global Brass and Copper, Inc.

  Manufacturing - steel wool products and metal fibers   Senior Term Debt (10.3%, Due 8/2015) (E)     2,961        2,889        2,994   

HGI Holding, Inc

  Service - distributor of disposable medical products   Senior Term Debt (6.8%, Due 10/2016) (E)     1,757        1,724        1,739   

Hubbard Radio, LLC

  Service-radio station operator   Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)     500        495        495   

Keypoint Government Solutions, Inc.

  Service-security consulting services   Senior Term Debt (10.0%, Due 12/2015) (E)     6,930        6,900        6,791   

Mood Media Corporation

  Service-media and marketing solutions   Senior Term Debt (10.3%, Due 11/2018) (E)     8,000        7,925        7,320   

National Surgical Hospitals, Inc.

  Service-physician-partnered surgical facilities   Senior Term Debt (8.3%, Due 2/2017) (E)     1,690        1,655        1,597   

Sensus USA, Inc.

  Service-provider of utility communication Services   Senior Term Debt (8.5%, Due 5/2018) (E)     500        495        488   

Springs Window Fashions, LLC

  Manufacturing-window coverings   Senior Term Debt (11.3%, Due 11/2017) (E)     5,000        4,859        4,850   

SRAM, LLC

  Manufacturing-premium bicycle components   Senior Term Debt (8.5%, Due 12/2018) (E)     2,500        2,476        2,488   

Targus Group International, Inc.

  Manufacturing-carrying cases and accessories for notebook computers   Senior Term Debt (11.0%, Due 5/2016) (E)     9,950        9,769        9,602   

Ulterra Drilling Technologies, LP

  Manufacturing-oil field drill bits and slick-slip reduction tools   Senior Term Debt (9.5%, Due 6/2016) (E)     1,950        1,914        1,892   

Vision Solutions, Inc.

  Service-provider of information availability software   Senior Term Debt (9.5%, Due 7/2017) (E)     11,000        10,918        10,725   

Wall Street Systems Holdings, Inc.

  Service-software provider   Senior Term Debt (9.0%, Due 6/2018) (E)     3,000        2,972        2,850   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF DECEMBER 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

WP Evenflo Group Holdings, Inc.

  Manufacturing-infant and juvenile Products   Senior Term Debt (8.0%, Due 2/2013) (E)   $ 1,853      $ 1,853      $ 1,667   
    Senior Preferred Equity (333.3 shares) (F) (G)       333        429   
    Junior Preferred Equity (111.1 shares) (F) (G)       111        151   
    Common Stock (1,874 shares) (F) (G)              297   
       

 

 

   

 

 

 

Subtotal - Syndicated loans

      $ 90,293      $ 89,173   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 85.0% of total investments at fair value)

    $ 273,177      $ 248,832   
       

 

 

   

 

 

 

CONTROL INVESTMENTS

         

BERTL, Inc.

  Service-web-based evaluator of imaging products   Line of Credit, $69 available (6.5%, Due 4/2012) (F) (H)   $ 1,367      $ 1,367      $   
    Common Stock (100 shares) (F) (G)       424          

Defiance Integrated Technologies, Inc.

  Manufacturing-trucking parts   Senior Term Debt (11.0%, Due 4/2013) (C) (F)     7,425        7,425        7,425   
    Common Stock (15,500 shares) (F) (G)       1        8,681   

Kansas Cable Holdings, Inc.

  Service - cable, internet, voice provider   Line of Credit, $14 available (10.0%, Due 10/2012) (D) (H)     511        502        8   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,500        1,444        22   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,039        1,000        16   
    Common Stock (100 shares) (F) (G)                

Lindmark Acquisition, LLC

  Service-advertising   Senior Subordinated Term Debt (11.0%, Due 10/2012) (D) (H)     10,000        10,000        1,700   
    Senior Subordinated Term Debt (13.0%, Due 10/2012) (D) (H)     2,000        2,000        340   
    Senior Subordinated Term Debt (13.0%, Due Upon
Demand) (D) (H)
    1,909        1,909        324   
    Common Stock (100 shares) (F) (G)       317          

LocalTel, LLC

  Service-yellow pages publishing   Line of credit, $357 available (10.0%, Due 6/2012) (F) (H)     1,993        1,993        762   
    Line of Credit, $1,830 available (4.8%, Due 6/2012) (F) (H)     1,170        1,170          
    Senior Term Debt (12.5%, Due 2/2012) (F) (H)     325        325          
    Senior Term Debt (8.5%, Due 6/2012) (F) (H)     2,687        2,687          
    Senior Term Debt (10.5%, Due 6/2012) (C) (F) (H)     2,750        2,750          
    Common Stock Warrants (4,000 shares) (F) (G)                

Midwest Metal Distribution, Inc.

  Distribution-aluminum sheets and stainless steel   Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)     18,281        18,264        17,641   
    Common Stock (501 shares) (F) (G)       138          

Sunshine Media Holdings

  Service-publisher regional B2B trade magazines   Line of credit, $400 available (4.8%, Due 8/2014) (D)     1,600        1,600        320   
    Senior Term Debt (4.8%, Due 5/2016) (D)     16,948        16,948        3,390   
    Senior Term Debt (5.5%, Due 5/2016) (C) (D)     10,700        10,700        2,140   
    Junior Preferred Equity (8,310.8 shares) (F) (G)       3,075          
    Common Stock (934 shares) (F) (G)       740          

U.S. Healthcare Communications, Inc.

  Service-magazine publisher/operator   Line of credit, $131 available (6.0%, Due 12/2010) (F) (H)     269        269          
    Line of credit, $0 available (6.0%, Due 12/2010) (F) (H)     450        450          
    Common Stock (100 shares) (F) (G)       2,470          

Viapack, Inc.

  Manufacturing-polyethylene film   Line of Credit, $0 available (10.0%, Due 3/2013) (D)     2,800        2,800        476   
    Senior Real Estate Term Debt (10.0%, Due 3/2014) (D)     600        600        102   
    Senior Term Debt (13.0%, Due 3/2014) (C) (D)     3,925        3,925        667   
    Preferred Equity (100 shares) (F) (G)                
       

 

 

   

 

 

 

Total Control Investments (represented 15.0% of total investments at fair value)

    $ 97,293      $ 44,014   
       

 

 

   

 

 

 

Total Investments

        $ 370,470      $ 292,846   
       

 

 

   

 

 

 

 

(A)  

Certain of the securities listed in the above chart are issued by affiliate(s) of the indicated portfolio company.

(B)  

Percentage represents interest rates in effect at December 31, 2011, and due date represents the contractual maturity date.

(C)  

Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

(D)  

Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

(E)  

Security valued based on the indicative bid price on or near December 31, 2011, offered by the respective syndication agent’s trading desk or secondary desk.

(F)  

Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. The Company also considered discounted cash flow methodologies.

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF DECEMBER 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(I) Security was paid off, at par, subsequent to December 31, 2011, and was valued based on the payoff.

 

(J)  

In January 2012, the Company amended certain contractual provisions on its debt investments in International Junior Golf Training Acquisition Company, including the maturity date, which was extended to May 2014.

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS

     

Non-syndicated Loans:

         

Access Television Network, Inc.

  Service-cable airtime (infomercials)   Senior Term Debt (14.0%, Due 2/2011) (D) (H)   $ 903      $ 903      $ 45   

Allison Publications, LLC

  Service-publisher of consumer oriented magazines   Senior Term Debt (10.5%, Due 9/2012) (D)     8,463        8,478        7,861   

BAS Broadcasting

  Service-radio station operator   Senior Term Debt (11.5%, Due 7/2013) (D)     7,465        7,465        6,233   

Chinese Yellow Pages Company

  Service-publisher of Chinese language directories   Line of Credit, $250 available (7.3%, Due 11/2011) (D)     450        450        338   
    Senior Term Debt (7.3%, Due 11/2011) (D)     168        168        126   

CMI Acquisition, LLC

  Service-recycling   Senior Subordinated Term Debt (13.0%, Due 12/2016) (D)     14,265        14,265        14,336   

FedCap Partners, LLC

  Private equity fund   Class A Membership Units (80 units) (G)       1,200        1,153   
    Uncalled Capital Commitment ($800)      

GFRC Holdings, LLC

  Manufacturing-glass-fiber reinforced concrete   Senior Term Debt (11.5%, Due 12/2012) (D)     5,617        5,617        4,719   
    Senior Subordinated Term Debt (14.0%, Due 12/2012) (D)     6,615        6,615        5,557   

Global Materials Technologies, Inc.

  Manufacturing-steel wool products and metal fibers   Senior Term Debt (13.0%, Due 6/2012) (C) (D)     2,635        2,635        2,212   

Heartland Communications Group

  Service-radio station operator   Line of Credit, $0 available (5.0%, Due 3/2013) (D)     100        100        41   
    Line of Credit, $0 available (10.0%, Due 3/2013) (D)     100        100        41   
    Senior Term Debt (5.0%, Due 3/2013) (D)     4,342        4,316        1,780   
    Common Stock Warrants (8.8% ownership) (F) (G)       66          

International Junior Golf Training Acquisition Company

  Service-golf training   Line of Credit, $0 available (11.0%, Due 5/2012) (D)     1,500        1,500        1,275   
    Senior Term Debt (10.5%, Due 5/2012) (D)     861        861        732   
    Senior Term Debt (12.5%, Due 5/2012) (C)(D)     2,500        2,500        2,125   

KMBQ Corporation

  Service-AM/FM radio broadcaster   Line of Credit, $42 available (12.3%, Due 7/2010) (D) (H)     162        158        76   
    Senior Term Debt (12.3%, Due 7/2010) (D) (H)     2,081        2,038        984   

Legend Communications of Wyoming, LLC

  Service-operator of radio stations   Senior Term Debt (12.0%, Due 6/2013) (D)     9,745        9,745        5,408   
    Senior Term Debt (16.0%, Due 7/2011) (D)     220        220        123   

Newhall Holdings, Inc.

  Service-distributor of personal care products and supplements   Line of Credit, $0 available (8.0%, Due 12/2012) (D) (H)     1,985        1,985        98   
    Senior Term Debt (8.5%, Due 12/2012) (D) (H)     1,870        1,870        94   
    Senior Term Debt (3.5%, Due 12/2012) (C) (D) (H)     2,000        2,000        100   
    Senior Term Debt (3.5%, Due 12/2012) (C) (D) (H)     4,648        4,648        232   
    Preferred Equity (1,000,000 shares) (F) (G) (H)                
    Common Stock (688,500 shares) (F) (G)                

North American Aircraft Services LLC

 

Service - repairs and maintains aircraft fuel tanks and fuel systems

  Line of Credit, $1,500 available (6.5%, Due 8/2012) (D)     500        500        500   
    Senior Term Debt (7.5%, Due 8/2016) (D)     3,250        3,250        3,250   
    Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)     4,750        4,750        4,750   
    Common Stock Warrants (4.8% ownership) (F) (G)       350        350   

Northern Contours, Inc.

  Manufacturing-veneer and laminate components   Senior Subordinated Term Debt (13.0%, Due 9/2012) (D)     6,128        6,128        5,684   

Northstar Broadband, LLC

  Service-cable TV franchise owner   Senior Term Debt (0.7%, Due 12/2012) (D)     80        70        64   

Precision Acquisition Group Holdings, Inc.

  Manufacturing-consumable components for the Aluminum industry   Equipment Note (13.0%, Due 11/2011) (D)     1,000        1,000        948   
    Senior Term Debt (13.0%, Due 11/2011) (D)     4,125        4,125        3,908   
    Senior Term Debt (13.0%, Due 11/2011) (C) (D)     4,053        4,053        3,840   

PROFIT Systems Acquisition Co.

  Service-design and develop ERP software   Line of Credit, $350 available (11.25%, Due 7/2012) (D)                     
    Senior Term Debt (10.5%, Due 7/2014) (C) (D)     3,150        3,150        3,024   

RCS Management Holding Co.

  Service-healthcare supplies   Senior Term Debt (9.5%, Due 1/2013) (D)     1,438        1,438        1,367   
    Senior Term Debt (11.5%, Due 1/2013) (C) (D)     3,060        3,060        2,907   

Reliable Biopharmaceutical Holdings, Inc.

 

Manufacturing-pharmaceutical and biochemical intermediates

  Line of Credit, $2,800 available (9.0%, Due 1/2013) (D)     1,200        1,200        1,176   
    Mortgage Note (9.5%, Due 12/2014) (D)     7,168        7,168        7,025   
    Senior Term Debt (12.0%, Due 12/2014) (C)(D)     11,573        11,573        10,906   
    Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)     6,000        6,000        5,655   
    Common Stock Warrants (764 shares) (F) (G)       209        534   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Saunders & Associates

  Manufacturing-equipment provider for frequency control devices   Line of Credit, $2,500 available (11.3%, Due 5/2013) (D)   $      $      $   
    Senior Term Debt (11.3%, Due 5/2013) (D)     8,947        8,947        8,913   

Sunburst Media - Louisiana, LLC

  Service-radio station operator   Senior Term Debt (10.5%, Due 12/2011) (D)     6,100        6,103        3,964   

Thibaut Acquisition Co.

  Service-design and distribute wall covering   Line of Credit, $400 available (9.0%, Due 1/2014) (D)     600        600        585   
    Senior Term Debt (8.5%, Due 1/2014) (D)     550        550        536   
    Senior Term Debt (12.0%, Due 1/2014) (C) (D)     3,000        3,000        2,910   

Westlake Hardware, Inc.

  Retail-hardware and variety   Senior Subordinated Term Debt (12.3%, Due 1/2014) (D)     12,000        12,000        11,640   
    Senior Subordinated Term Debt (13.5%, Due 1/2014) (D)     8,000        8,000        7,700   

Westland Technologies, Inc.

  Service-diversified conglomerate   Line of Credit, $1,000 available (6.5%, Due 4/2012) (D)                     
    Senior Term Debt (7.5%, Due 4/2016) (D)     2,000        2,000        1,995   
    Senior Term Debt (12.5%, Due 4/2016) (D)     4,000        4,000        3,990   
    Common Stock Warrants (77,287 shares) (F) (G)       350        307   

Winchester Electronics

  Manufacturing-high bandwidth connectors and cables   Senior Term Debt (5.2%, Due 5/2012) (D)     1,250        1,250        1,238   
    Senior Term Debt (5.7%, Due 5/2013) (D)     1,677        1,677        1,656   
    Senior Subordinated Term Debt (14.0%, Due 6/2013) (D)     9,800        9,800        9,628   
       

 

 

   

 

 

 

Subtotal – Non-syndicated loans

      $ 196,204      $ 166,639   
       

 

 

   

 

 

 

Syndicated Loans:

         

Airvana Network Solutions, Inc.

  Service-telecommunications   Senior Term Debt (10.0%, Due 3/2015) (E)   $ 6,048      $ 5,912      $ 6,048   

Allied Security Holdings, LLC

  Service-contract security officer providers   Senior Subordinated Term Debt (8.5%, Due 2/2018) (E)     1,000        991        965   

Allied Specialty Vehicles, Inc.

  Manufacturing-specialty vehicles   Senior Term Debt (9.5%, Due 2/2016) (E)     9,950        9,767        9,751   

Ameriqual Group, LLC

  Manufacturing-production and distribution of food products   Senior Term Debt (9.0%, Due 3/2016) (E)     7,481        7,344        7,332   

Applied Systems, Inc.

  Software for property & casualty insurance industry   Senior Subordinated Term Debt (9.3%, Due 6/2017) (E)     1,000        991        990   

Ascend Learning, LLC

  Service-technology-based learning solutions   Senior Subordinated Term Debt (11.53%, Due 12/2017) (E)     1,000        972        980   

Attachmate Corporate

  Service-develops, implements and supports software   Senior Subordinated Term Debt (9.5%, Due 2/2017) (E)     4,000        3,962        3,810   

Autoparts Holdings Limited

  Supplier to the light and heavy-duty vehicle after market for replacement parts   Senior Term Debt (10.5%, Due 1/2018) (E)     1,000        995        978   

Covad Communications Group, Inc.

  Service-telecommunications   Senior Term Debt (12.0%, Due 11/2015) (E)     1,850        1,818        1,795   

Ernest Health, Inc.

  Service-post-acute care services   Senior Term Debt (10.3%, Due 5/2017) (E)     2,000        1,971        1930   

Global Brass and Copper, Inc.

  Manufacturing - steel wool products and metal fibers   Senior Term Debt (10.3%, Due 8/2015) (E)     2,969        2,893        3,054   

HGI Holding, Inc

  Service - distributor of disposable medical products   Senior Term Debt (6.8%, Due 10/2016) (E)     1,757        1,723        1,687   

Hubbard Radio, LLC

  Service-radio station operator   Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)     500        495        488   

Keypoint Government Solutions, Inc.

  Service-security consulting services   Senior Term Debt (10.0%, Due 12/2015) (E)     6,948        6,916        6,670   

Mood Media Corporation

  Service-media and marketing solutions   Senior Term Debt (10.3%, Due 11/2018) (E)     8,000        7,923        7,370   

National Surgical Hospitals, Inc.

  Service-physician-partnered surgical facilities   Senior Term Debt (8.3%, Due 2/2017) (E)     1,694        1,658        1,627   

Sensus USA, Inc.

  Service-provider of utility communication services   Senior Term Debt (8.5%, Due 5/2018) (E)     500        495        483   

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued):

     

Springs Window Fashions, LLC

  Manufacturing-window coverings   Senior Term Debt (11.3%, Due 11/2017) (E)   $ 5,000      $ 4,855      $ 4,750   

SRAM, LLC

  Manufacturing-premium bicycle components   Senior Term Debt (8.5%, Due 12/2018) (E)     2,500        2,476        2,475   

Targus Group International, Inc.

  Manufacturing-carrying cases and accessories for notebook computers   Senior Term Debt (11.0%, Due 5/2016) (E)     9,975        9,785        9,626   

Ulterra Drilling Technologies, LP

  Manufacturing-oil field drill bits and slick-slip reduction tools   Senior Term Debt (9.5%, Due 6/2016) (E)     1,975        1,937        1,916   

Vision Solutions, Inc.

  Service-provider of information availability software   Senior Term Debt (9.5%, Due 7/2017) (E)     11,000        10,915        10,560   

Wall Street Systems Holdings, Inc.

  Service-software provider   Senior Term Debt (9.0%, Due 6/2018) (E)     3,000        2,971        2,880   

WP Evenflo Group Holdings Inc.

  Manufacturing-infant and juvenile products   Senior Term Debt (8.0%, Due 2/2013) (E)     1,853        1,853        1,723   
    Senior Preferred Equity (333.3 shares) (F) (G)       333        419   
    Junior Preferred Equity (111.1 shares) (F) (G)       111        146   
    Common Stock (1,874 shares) (F) (G)              210   
       

 

 

   

 

 

 

Subtotal - Syndicated loans

      $ 92,062      $ 90,663   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 84.9% of total investments at fair value)

    $ 288,266      $ 257,302   
       

 

 

   

 

 

 

CONTROL INVESTMENTS

         

BERTL, Inc.

  Service-web-based evaluator of imaging products   Line of Credit, $6 available (6.4%, Due 10/2011) (F) (H)   $ 1,427      $ 1,355      $   
    Common Stock (100 shares) (F) (G)       424          

Defiance Integrated Technologies, Inc.

  Manufacturing-trucking parts   Senior Term Debt (11.0%, Due 4/2013) (C) (F)     7,505        7,505        7,505   
    Common Stock (15,500 shares) (F) (G)       1        7,534   

Kansas Cable Holdings, Inc.

  Service - cable, internet, voice provider   Line of Credit, $179 available (10.0%, Due 10/2012) (D) (H)     346        337        14   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,500        1,444        60   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,039        1,000        42   
    Common Stock (100 shares) (F) (G)                

Lindmark Acquisition, LLC

  Service-advertising   Senior Subordinated Term Debt (11.0%, Due 10/2012)  (D) (H)     10,000        10,000        2,000   
    Senior Subordinated Term Debt (13.0%, Due 10/2012)  (D) (H)     2,000        2,000        400   
    Senior Subordinated Term Debt (13.0%, Due Upon Demand)  (D) (H)     1,908        1,908        383   
    Common Stock (100 shares) (F) (G)       317          

LocalTel, LLC

  Service-yellow pages publishing   Line of credit, $2 available (10.0%, Due 12/2011) (F) (H)     1,848        1,848        734   
    Line of Credit, $1,830 available (4.7%, Due 6/2012) (F) (H)     1,170        1,170          
    Senior Term Debt (12.5%, Due 2/2012) (F) (H)     325        325          
    Senior Term Debt (8.5%, Due 6/2012) (F) (H)     2,688        2,688          
    Senior Term Debt (10.5%, Due 6/2012) (C) (F) (H)     2,750        2,750          
    Common Stock Warrants (4,000 shares) (F) (G)                

Midwest Metal Distribution, Inc.

  Distribution-aluminum sheets and stainless steel   Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)     18,281        18,262        17,184   
    Common Stock (501 shares) (F) (G)       138          

Sunshine Media Holdings

  Service-publisher regional B2B trade magazines   Line of credit, $1,100 available (10.5%, Due 8/2014) (D)     900        900        270   
    Senior Term Debt (10.5%, Due 5/2016) (D)     16,948        16,948        5,084   
    Senior Term Debt (5.0%, Due 5/2016) (C) (D)     10,700        10,700        3,210   
    Junior Preferred Equity (6,689.2 shares) (F) (G)       2,475          
    Common Stock (934 shares) (F) (G)       740          

U.S. Healthcare Communications, Inc.

  Service-magazine publisher/operator   Line of credit, $131 available (6.0%, Due 12/2010) (F) (H)     269        269          
    Line of credit, $0 available (6.0%, Due 12/2010) (F) (H)     450        450          
    Common Stock (100 shares) (F) (G)       2,470          

Viapack, Inc.

  Manufacturing-polyethylene film   Line of Credit, $900 available (10.0%, Due 3/2013) (D)     1,600        1,600        320   
    Senior Real Estate Term Debt (10.0%, Due 3/2014) (D)     600        600        120   
    Senior Term Debt (13.0%, Due 3/2014) (C) (D)     3,925        3,925        785   
    Preferred Equity (100 shares) (F) (G)                
       

 

 

   

 

 

 

Total Control Investments (represented 15.1% of total investments at fair value)

    $ 94,549      $ 45,645   
       

 

 

   

 

 

 
Total Investments (I)         $ 382,815      $ 302,947   
       

 

 

   

 

 

 

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2011

(DOLLAR AMOUNTS IN THOUSANDS)

 

 

(A)  

Certain of the securities listed in the above chart are issued by affiliate(s) of the indicated portfolio company.

(B)  

Percentage represents interest rates in effect at September 30, 2011, and due date represents the contractual maturity date.

(C)  

Last Out Tranche (“LOT”) of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

(D)  

Fair value was primarily based on opinions of value submitted by Standard & Poor’s Securities Evaluations, Inc.

(E)  

Security valued based on the indicative bid price on or near September 30, 2011, offered by the respective syndication agent’s trading desk or secondary desk.

(F)  

Fair value was primarily based on the total enterprise value of the portfolio company using a liquidity waterfall approach. The Company also considered discounted cash flow methodologies.

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

(I)  

Cumulative gross unrealized depreciation for federal income tax purposes is $88,670; cumulative gross unrealized appreciation for federal income tax purposes is $8,566. Cumulative net unrealized depreciation is $80,104 based on a tax cost of $383,052.

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 31, 2011

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation (the “Company”) was incorporated under the General Corporation Laws of the State of Maryland on May 30, 2001 and completed an initial public offering on August 23, 2001. The Company is a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Company has elected to be treated for tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s investment objective is to achieve a high level of current income by investing in debt securities, consisting primarily of senior notes, senior subordinated notes and junior subordinated notes, with a particular focus on senior notes, of established private businesses in the United States that are substantially owned by leveraged buyout funds, individual investors or are family-owned businesses. In addition, the Company may acquire existing loans that meet this profile from other funds.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of the Company, was established on February 3, 2003 for the sole purpose of owning the Company’s portfolio of investments in connection with its line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of the Company, was established on November 21, 2006 for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial (previously known as Gladstone SSBIC Corporation) acquired this license in February 2007. The license enables the Company, through this subsidiary, to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies.

The financial statements of the subsidiaries are consolidated with those of the Company.

The Company is externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X under the Securities Act, and the authoritative accounting guidance provided by the AICPA Audit and Accounting Guide for Investment Companies, the Company is not permitted to consolidate any portfolio company investments, including those in which the Company has a controlling interest. In the opinion of the Company’s management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended December 31, 2011, are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (the “SEC”) on November 14, 2011.

The fiscal year-end Condensed Consolidated Statement of Assets and Liabilities was derived from audited financial statements but does not include all disclosures required by GAAP.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the presentation for the period ended December 31, 2011 with no effect to net (decrease) increase in net assets resulting from operations.

 

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Investment Valuation Policy

The Company carries its investments at fair value to the extent that market quotations are readily available and reliable and otherwise at fair value as determined in good faith by the Company’s board of directors (the “Board of Directors”). In determining the fair value of the Company’s investments, the Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by the Board of Directors, and each quarter the Board of Directors reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of the Company’s investment portfolio.

The Company uses generally accepted valuation techniques to value its portfolio unless the Company has specific information about the value of an investment to determine otherwise. From time to time, the Company may accept an appraisal of a business in which the Company holds securities. These appraisals are expensive and occur infrequently, but provide a third-party valuation opinion that may differ in results, techniques and scope used to value the Company’s investments. When these specific third-party appraisals are obtained, the Company uses estimates of value provided by such appraisals and its own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value its investments.

The Policy, summarized below, applies to publicly traded securities, securities for which a limited market exists and securities for which no market exists.

Publicly traded securities: The Company determines the value of publicly traded securities based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that the Company owns restricted securities that are not freely tradable, but for which a public market otherwise exists, the Company will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature.

Securities for which a limited market exists: The Company values securities that are not traded on an established secondary securities market, but for which a limited market for the security exists, such as certain participations in, or assignments of, syndicated loans, at the quoted bid price, which are non-binding. In valuing these assets, the Company assesses trading activity in an asset class and evaluates variances in prices and other market insights to determine if any available quoted prices are reliable. If the Company concludes that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if a firm bid price is unavailable, the Company bases the value of the security upon the indicative bid price (“IBP”) offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. To the extent that the Company uses the IBP as a basis for valuing the security, the Adviser may take further steps to consider additional information to validate that price in accordance with the Policy.

In the event these limited markets become illiquid to a degree that market prices are no longer readily available, the Company will value its syndicated loans using alternative methods, such as estimated net present values of the future cash flows or discounted cash flows (“DCF”). The use of a DCF methodology follows that prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which provides guidance on the use of a reporting entity’s own assumptions about future cash flows and risk-adjusted discount rates when relevant observable inputs, such as quotes in active markets, are not available. When relevant observable market data does not exist, an alternative outlined in ASC 820 is the valuation of investments based on DCF. For the purposes of using DCF to provide fair value estimates, the Company considers multiple inputs, such as a risk-adjusted discount rate that incorporates adjustments that market participants would make both for nonperformance and liquidity risks. As such, the Company develops a modified discount rate approach that incorporates risk premiums including, among other things, increased probability of default, higher loss given default or increased liquidity risk. The DCF valuations applied to the syndicated loans provide an estimate of what the Company believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Company will apply the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.

As of December 31 and September 30, 2011, the Company determined that the indicative bid prices were reliable indicators of fair value for its syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded non-control equity securities of other funds.

 

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(A) Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a limited market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which the Company has no equity, or equity-like securities, are fair valued utilizing opinions of value submitted to the Company by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). The Company may also submit paid-in-kind (“PIK”) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.

 

(B) Portfolio investments in controlled companies comprised of a bundle of investments, which can include debt and equity securities: The fair value of these investments is determined based on the total enterprise value (“TEV”) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for the Company’s Non-Public Debt Securities and equity or equity-like securities (e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where the Company has control or could gain control through an option or warrant security; both the debt and equity securities of the portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale of the portfolio company. In accordance with ASC 820, the Company applies the in-use premise of value, which assumes the debt and equity securities are sold together. Under this liquidity waterfall approach, the Company first calculates the TEV of the issuer by incorporating some or all of the following factors:

 

   

the issuer’s ability to make payments;

 

   

the earnings of the issuer;

 

   

recent sales to third parties of similar securities;

 

   

the comparison to publicly traded securities; and

 

   

DCF or other pertinent factors.

In gathering the sales to third parties of similar securities, the Company may reference industry statistics and use outside experts. TEV is only an estimate of value and may not be the value received in an actual sale. Once the Company has estimated the TEV of the issuer, the Company will subtract the value of all the debt securities of the issuer, which are valued at the contractual principal balance. Fair values of these debt securities are discounted for any shortfall of TEV over the total debt outstanding for the issuer. Once the values for all outstanding senior securities, which include all the debt securities, have been subtracted from the TEV of the issuer, the remaining amount, if any, is used to determine the value of the issuer’s equity or equity-like securities. If, in the Adviser’s judgment, the liquidity waterfall approach does not accurately reflect the value of the debt component, the Adviser may recommend that the Company use a valuation by SPSE, or, if that is unavailable, a DCF valuation technique.

 

(C) Portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities: The Company values Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which the Company does not control or cannot gain control as of the measurement date, using a hypothetical secondary market as the Company’s principal market. In accordance with ASC 820, the Company determines its fair value of these debt securities of non-control investments assuming the sale of an individual debt security using the in-exchange premise of value. As such, the Company estimates the fair value of the debt component using estimates of value provided by SPSE and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which the Company does not control or cannot gain control as of the measurement date, the Company estimates the fair value of the equity using the in-exchange premise of value based on factors such as the overall value of the issuer, the relative fair value of other units of account including debt, or other relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, the Company may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, its own assumptions.

 

(D) Portfolio investments comprised of non-publicly traded non-control equity securities of other funds: The Company values any uninvested capital of the non-control fund at par value and values any invested capital at the value provided by the non-control fund.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly and materially from the values that would have been obtained had a ready market for the securities existed. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. There is no single standard for determining fair value in good faith, as fair value depends upon circumstances of each individual case. In general, fair value is the amount that the Company might reasonably expect to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

 

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Refer to Note 3 below for additional information regarding fair value measurements and the Company’s application of ASC 820.

Interest Income Recognition

Interest income, adjusted for amortization of premiums and acquisition costs, the accretion of discounts and the amortization of amendment fees, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if the Company’s qualitative assessment indicates that the debtor is unable to service its debt or other obligations, the Company will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, the Company remains contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectable. At December 31, 2011, six investments were on non-accrual with an aggregate debt cost basis of $28.8 million, or 8.0% of the cost basis of all debt investments in the Company’s portfolio, and an aggregate fair value of $3.2 million, or 1.1% of the fair value of all debt investments in the Company’s portfolio. At September 30, 2011, eight investments were on non-accrual with an aggregate debt cost basis of $41.1 million, or 11.0% of the cost basis of all debt investments in the Company’s portfolio, and an aggregate fair value of $5.3 million, or 1.8% of the fair value of all debt investments in the Company’s portfolio.

As of December 31 and September 30, 2011, the Company had 27 original issue discount (“OID”) loans, primarily from the syndicated loans in its portfolio. The Company recorded OID income of $82 and $25 for the three months ended December 31, 2011 and 2010, respectively. The unamortized balance of OID investments as of December 31 and September 30, 2011 totaled $1.4 million and $1.5 million, respectively.

As of December 31 and September 30, 2011, the Company had no investments that bore PIK interest. PIK interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though the Company has not yet collected the cash. The Company recorded PIK income of $0 and $4 for the three months ended December 31, 2011 and 2010, respectively.

Other Income Recognition

The Company records success fees upon receipt. Success fees are contractually due upon a change of control in a portfolio company and are recorded in other income in the accompanying Condensed Consolidated Statements of Operations . The Company did not record any success fees during the three months ended December 31, 2011. During the three months ended December 31, 2010, the Company received $0.2 million in success fees, which resulted from the exit and payoff of Interfilm Corp.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”) which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the potential impact that the adoption of ASU 2011-04 may have on the Company’s financial position and results of operations.

NOTE 3. INVESTMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820 provides a consistent definition of fair value that focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

 

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

 

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Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active or inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

 

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the asset or liability and can include the Company’s own assumptions based upon the best available information.

As of December 31 and September 30, 2011, all of the Company’s investments were valued using Level 3 inputs. The Company transfers investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended December 31, 2011 and 2010, there were no transfers in or out of Level 3.

The following tables present the investments carried at fair value as of December 31 and September 30, 2011, by caption on the accompanying Condensed Consolidated Statements of Assets and Liabilities , all of which are valued using level 3 inputs:

 

     Level 3 – Investments  
     Total Fair Value Reported in
Condensed Consolidated Statements of

Assets and Liabilities
 
     December 31, 2011      September 30, 2011  

Non-Control/Non-Affiliate Investments

     

Senior term debt

   $ 177,494       $ 182,002   

Senior subordinated term debt

     67,998         72,182   

Preferred equity

     581         566   

Common equity/equivalents

     2,759         2,552   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 248,832       $ 257,302   
  

 

 

    

 

 

 

Control Investments

     

Senior term debt

   $ 15,327       $ 18,143   

Senior subordinated term debt

     20,006         19,966   

Common equity/equivalents

     8,681         7,536   
  

 

 

    

 

 

 

Total Control Investments

   $ 44,014       $ 45,645   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 292,846       $ 302,947   
  

 

 

    

 

 

 

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide a roll-forward in the changes in fair value, broken out by major security type, during the three months ended December 31, 2011 and 2010 for all investments for which the Company determines fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, the Company categorizes all of the inputs as the lowest level input within the hierarchy. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

 

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Fair value measurements using significant unobservable inputs (Level 3)

 

Three months ended December 31, 2011:    Senior     Senior           Common         
     Term     Subordinated     Preferred     Equity/         
     Debt     Term Debt     Equity     Equivalents      Total  

Fair value as of September 30, 2011

   $ 200,145      $ 92,148      $ 566      $ 10,088       $ 302,947   

Total gains or losses

           

Net realized loss (a)

     (8,400                           (8,400

Net unrealized (depreciation) appreciation (b)

     (8,836     (1,244     (586     1,352         (9,314

Reversal of prior period net depreciation on realization (b)

     11,113        444                       11,557   

New investments, repayments and settlements (c)

           

Issuances/originations

     7,830        2,820        601                11,251   

Settlements/repayments

     (4,542     (6,164                    (10,706

Sales

     (4,489                           (4,489
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of December 31, 2011

   $ 192,821      $ 88,004      $ 581      $ 11,440       $ 292,846   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Three months ended December 31, 2010:    Senior     Senior            Common        
     Term     Subordinated     Preferred      Equity/        
     Debt     Term Debt     Equity      Equivalents     Total  

Fair value as of September 30, 2010

   $ 172,596      $ 81,899      $ 386       $ 2,228      $ 257,109   

Total gains or losses

           

Net unrealized (depreciation) appreciation (b)

     (5,949     (476     137         2,840        (3,448

Reversal of prior period net depreciation on realization (b)

     19        732                (247     504   

New investments, repayments and settlements (c)

           

Issuances/originations

     9,397        2,084                317        11,798   

Settlements/repayments

     (6,181     (7,240                    (13,421

Sales

                           (37     (37
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fair value as of December 31, 2010

   $ 169,882      $ 76,999      $ 523       $ 5,101      $ 252,505   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

  (a)  

Included in net realized loss on investments on the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2011.

  (b)  

Included in net unrealized appreciation (depreciation) on investments on the accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2011 and 2010.

  (c)  

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, premiums and closing fees as well as decreases in the cost basis of investments resulting from principal repayments or sales.

Non-Control/Non-Affiliate Investments

As of December 31 and September 30, 2011, the Company held 48 and 50 Non-Control/Non-Affiliate investments in the aggregate of $248.8 million and $257.3 million, at fair value, respectively. Of these, the Company had a total of 24 syndicate loans in the aggregate of $89.2 million and $90.7 million, at fair value, as of December 31 and September 30, 2011, respectively. During the three months ended December 31, 2011, the Company funded $1.6 million to one new Non-Control/Non-Affiliate investment. Additionally, $6.4 million was funded to existing Non-Control/Non-Affiliate portfolio companies and there was one early payoff by a Non-Control/Non-Affiliate portfolio company totaling $6.1 million during the three months ended December 31, 2011. The following sales and restructures of Non-Control/Non-Affiliate investments occurred during the three months ended December 31, 2011:

 

   

KMBQ Corporation – In November 2011, the Company invested $1.6 million in Ohana Media Group (“Ohana”) to facilitate its purchase of certain of KMBQ Corporation’s (“KMBQ”) assets out of receivership. In connection with this transaction, the Company received net proceeds of $1.2 million and recorded a realized loss during the three months ended December 31, 2011 totaling $1.0 million. Ohana replaced KMBQ on the Company’s Condensed Consolidated Schedule of Investments as a Non-Control/Non-Affiliate investment at December 31, 2011.

 

   

Newhall Holdings, Inc. – In December 2011, the Company sold its investments in Newhall Holdings, Inc. (“Newhall”) for net proceeds of $3.3 million, which resulted in a realized loss of $7.4 million recorded in the three months ended December 31, 2011.

 

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Control Investments

As of December 31 and September 30, 2011, the Company held nine Control investments in the aggregate of $44.0 million and $45.6 million, at fair value, respectively. During the three months ended December 31, 2011, five Control investments made draws on their lines of credit, totaling $2.6 million. Effective October 1, 2011, the Company restructured Sunshine Media Holdings (“Sunshine”), by reducing the interest rates on the line of credit, senior term debt and LOT senior term debt to preserve capital at the portfolio company to further enable Sunshine to invest in new and existing initiatives. In addition, the Company funded $0.6 million to Sunshine through an additional preferred equity investment. The Company did not exit any Control investments during the three months ended December 31, 2011.

Investment Concentrations

As of December 31, 2011, the Company’s investment portfolio consisted of loans to 57 companies in 27 states in 23 different industries with an aggregate fair value of $292.8 million. As of December 31, 2011, there were 24 syndicated investments totaling $90.3 million at cost and $89.2 million at fair value, or 24.4% and 30.5% of the total aggregate portfolio, respectively.

The following table outlines the Company’s investments by security type as of December 31 and September 30, 2011:

 

     December 31, 2011     September 30, 2011  
     Cost     Fair Value     Cost     Fair Value  

Senior term debt

   $ 256,891         69.3   $ 192,821         65.8   $ 266,491         69.6   $ 200,145         66.1

Senior subordinated term debt

     103,795         28.0        88,004         30.1        107,140         28.0        92,148         30.4   

Common equity/equivalents

     6,264         1.7        11,440         3.9        7,999         2.1        10,088         3.3   

Preferred equity

     3,520         1.0        581         0.2        1,185         0.3        566         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 370,470         100.0   $ 292,846         100.0   $ 382,815         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications at December 31 and September 30, 2011:

 

     December 31, 2011     September 30, 2011  

Industry Classification

   Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Electronics

   $ 45,621         15.6   $ 45,752         15.1

Mining, steel, iron & non-precious metals

     34,430         11.8        33,734         11.1   

Healthcare, education & childcare

     34,261         11.7        34,106         11.3   

Automobile

     26,793         9.1        25,768         8.5   

Broadcast (TV & radio)

     23,855         8.1        28,194         9.3   

Retail stores

     19,415         6.6        19,340         6.4   

Aerospace & defense

     15,133         5.2        10,003         3.3   

Printing & publishing

     14,766         5.0        17,623         5.8   

Textiles & leather

     9,602         3.3        9,626         3.2   

Diversified/conglomerate manufacturing

     8,847         3.0        8,790         2.9   

Machinery

     8,145         2.8        8,696         2.9   

Buildings & real estate

     7,814         2.7        10,275         3.4   

Personal, food and miscellaneous services

     7,761         2.7        7,635         2.5   

Beverage, food & tobacco

     7,313         2.5        7,332         2.4   

Personal & non-durable consumer products

     6,589         2.2        6,962         2.3   

Leisure, amusement, movies & entertainment

     6,010         2.1        6,607         2.2   

Home & office furnishings

     3,840         1.3        9,715         3.2   

Diversified/conglomerate service

     3,800         1.3        3,810         1.3   

Diversified natural resources, precious metals & minerals

     2,994         1.0        3,054         1.0   

Other (A)

     5,857         2.0        5,925         1.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 292,846         100.0   $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

  (A)  

No individual industry within this category exceeds 1%.

 

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The investments at fair value were included in the following geographic regions of the United States at December 31 and September 30, 2011:

 

     December 31, 2011     September 30, 2011  

Geographic Region

   Fair Value      Percent of
Total
Investments
    Fair Value      Percentage  of
Total
Investments
 

Midwest

   $ 139,088         47.5 %     $ 144,292         47.6

West

     70,798         24.2        70,862         23.4   

South

     49,372         16.8        52,265         17.3   

Northeast

     26,268         9.0        28,158         9.3   

Other

     7,320         2.5        7,370         2.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 292,846         100.0 %     $ 302,947         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic region reflects the location of the headquarters of the Company’s portfolio companies. A portfolio company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of the Company’s investment portfolio by fiscal year, assuming no voluntary prepayments, at December 31, 2011:

 

          Amount  

For the remaining nine months ending September 30:

  

2012

   $ 41,749   

For the fiscal year ending September 30:

  

2013

     118,899   
  

2014

     34,488   
  

2015

     31,708   
  

2016

     75,867   
  

Thereafter

     59,427   
     

 

 

 
  

Total contractual repayments

   $ 362,138   
  

Investments in equity securities

     9,784   
  

Adjustments to cost basis on debt securities

     (1,452
     

 

 

 
  

Total cost basis of investments held at December 31, 2011:

   $ 370,470   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of portfolio companies and are included in other assets on the accompanying Condensed Consolidated Statements of Assets and Liabilities . The Company maintains an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. The Company charges the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of December 31 and September 30 2011, the Company had gross receivables from portfolio companies of $0.6 million and $0.8 million, respectively. The allowance for uncollectible receivables was $0.2 million and $0.4 million as of December 31 and September 30, 2011, respectively. In addition, the Company recorded an allowance for uncollectible interest receivable of $21 and $65 as of December 31 and September 30, 2011, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Loans to Former Employees

The Company has outstanding loans to certain employees of the Adviser, each of whom was a joint employee of the Adviser (or the Company’s previous adviser, Gladstone Capital Advisers, Inc.) and the Company at the time the loans were originally provided. The loans were extended to such employees to allow them to exercise options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The loans require the quarterly payment of interest at the market rate in effect at the date of issuance, have varying terms not exceeding ten years and have been recorded as a reduction of net assets. The loans are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment, and the shares of common stock purchased with the proceeds of the loans are posted as collateral. The Company received $3 and $0 of principal repayments during the three months ended December 31, 2011 and 2010, respectively. Additionally, one employee redeemed 20,000 shares to pay off $0.2 million of principal on his outstanding loan during the quarter ended December 31, 2011. The Company recognized interest income from all employee loans of $0.1 million for both the three months ended December 31, 2011 and 2010. Refer to Note 7– Common Stock for additional information related to these transactions.

 

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Investment Advisory and Management Agreement

The Company has entered into an investment advisory and management agreement with the Adviser (the “Advisory Agreement”), which is controlled by the Company’s chairman and chief executive officer. In accordance with the Advisory Agreement, the Company pays the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. On July 12, 2011, the Board of Directors approved the renewal of the Advisory Agreement through August 31, 2012.

The following table summarizes the management fees, incentive fees and associated credits reflected in the accompanying Condensed Consolidated Statements of Operations :

 

     Three Months Ended December 31,  
     2011     2010  

Average total assets subject to base management fee (A)

   $ 311,200      $ 269,408   

Multiplied by prorated annual base management fee of 2.0%

     0.5 %       0.5
  

 

 

   

 

 

 

Gross base management fee

     1,556        1,347   

Reduction for loan servicing fees (B)

     (959     (842
  

 

 

   

 

 

 

Base management fee (B)

     597        505   

Credit for fees received by Adviser from the portfolio companies

     (47       

Fee reduction for the voluntary, irrevocable waiver of 2% fee on senior syndicated loans to 0.5% per annum

     (125     (52
  

 

 

   

 

 

 

Net base management fee

   $ 425      $ 453   
  

 

 

   

 

 

 

Gross incentive fee (B)

   $ 1,035      $ 1,159   

Credit from voluntary, irrevocable waiver issued by Adviser’s board of directors

     (278       
  

 

 

   

 

 

 

Net incentive fee

   $ 757      $ 1,159   
  

 

 

   

 

 

 

Credit for fees received by Adviser from the portfolio companies

   $ (47   $   

Fee reduction for the voluntary, irrevocable waiver of 2% fee on senior syndicated loans to 0.5% per annum

     (125     (52

Incentive fee credit

     (278       
  

 

 

   

 

 

 

Credit to base management and incentive fees from Adviser (B)

   $ (450   $ (52
  

 

 

   

 

 

 

 

  (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 and cash equivalents resulting from borrowings, valued at the end of the four most recently completed quarters and appropriately adjusted for any share issuances or repurchases during the applicable year.

  (B)  

Reflected as a line item in the Condensed Consolidated Statements of Operations .

Base Management Fee

The base management fee is payable quarterly and assessed at an annual rate of 2.0%, computed on the basis of the value of the Company’s average gross assets at the end of the two most recently completed quarters, which are total assets, including investments made with proceeds of borrowings, less any cash or cash equivalents resulting from borrowings. In addition, the following three items are adjustments to the base management fee calculation.

 

 

Loan Servicing Fees

The Adviser also services the loans held by Business Loan, in return for which it receives a 1.5% annual fee, based on the monthly aggregate outstanding balance of loans pledged under the Company’s line of credit. Since the Company owns these loans, all loan servicing fees paid to the Adviser are treated as reductions directly against the 2.0% base management fee under the Advisory Agreement.

 

 

Senior Syndicated Loan Fee Waiver

The Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the three months ended December 31, 2011 and 2010.

 

 

Portfolio Company Fees

Under the Advisory Agreement, the Adviser has also provided, and continues to provide, managerial assistance and other services to the Company’s portfolio companies and may receive fees for services other than managerial assistance. 50% of certain of these fees, and 100% of other fees are credited against the base management fee that the Company would otherwise be required to pay to the Adviser.

 

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Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if the Company’s quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of the Company’s net assets (the “hurdle rate”). The Company will pay the Adviser an income-based incentive fee with respect to the Company’s pre-incentive fee net investment income in each calendar quarter as follows:

 

 

no incentive fee in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);

 

 

100% of the Company’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

 

20% of the amount of the Company’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

The Company’s Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover all distributions to common stockholders for the three months ended December 31, 2011 and 2010.

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20% of the Company’s realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, the Company will calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since the Company’s inception, and the aggregate unrealized capital depreciation as of the date of the calculation, as applicable, with respect to each of the investments in the Company’s portfolio. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since the Company’s inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since the Company’s inception. Aggregate unrealized capital depreciation equals the sum of the difference, if negative, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable year, the amount of capital gains that serves as the basis for the Company’s calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less aggregate unrealized capital depreciation, with respect to the Company’s portfolio of investments. If this number is positive at the end of such year, then the capital gains-based incentive fee for such year equals 20% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of the Company’s portfolio in all prior years. No capital gains-based incentive fee has recorded for the Company from its inception through December 31, 2011, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, the Company did not accrue a capital gains-based incentive fee. This GAAP accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a relevant period, then GAAP requires the Company to record a capital gains-based incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded for the Company from its inception through December 31, 2011.

As a BDC, the Company makes available significant managerial assistance to its portfolio companies and provides other services to such portfolio companies. Although neither the Company nor its Adviser receive fees in connection with managerial assistance, the Adviser provides other services to the Company’s portfolio companies and receives fees for these other services.

Administration Agreement

The Company has entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of the Adviser, whereby it pays separately for administrative services. The Administration

 

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Agreement provides for payments equal to the Company’s allocable portion of the Administrator’s overhead expenses in performing its obligations under the Administration Agreement, including, but not limited to, rent and the salaries and benefits expenses of the Company’s chief financial officer, chief compliance officer, treasurer, internal counsel and their respective staffs. The Company’s allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of the Company’s total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all companies managed by the Adviser under similar agreements. On July 12, 2011, the Board of Directors approved the renewal of the Administration Agreement through August 31, 2012.

Related Party Fees Due

Amounts due to related parties on the accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:

 

     As of December 31, 2011      As of September 30, 2011  

Base management fee due to Adviser

   $ 425       $ 330   

Incentive fee due to Adviser

     757         1,203   

Loan servicing fee due to Adviser

     232         227   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,414         1,760   
  

 

 

    

 

 

 

Fee due to Administrator

     195         194   
  

 

 

    

 

 

 

Total related party fees due

   $ 1,609       $ 1,954   
  

 

 

    

 

 

 

NOTE 5. BORROWINGS

Line of Credit

On March 15, 2010, the Company, through its wholly-owned subsidiary, Business Loan, entered into a fourth amended and restated credit agreement, which provided for a $127.0 million revolving line of credit arranged by Key Equipment Finance Inc. (“Keybank”) as administrative agent (the “Credit Facility”). Branch Banking and Trust Company (“BB&T”) and ING Capital LLC (“ING”) also joined the Credit Facility as committed lenders. Subject to certain terms and conditions, the Credit Facility may be expanded to a maximum of $202.0 million through the addition of other committed lenders to the facility. On November 22, 2010 (the “Amendment Date”), the Company amended its Credit Facility. Prior to the Amendment Date, advances under the Credit Facility bore interest at a 30-day London Interbank Offered Rate (“LIBOR”) subject to a minimum rate of 2.0%, plus 4.5% per annum, with a commitment fee of 0.5% per annum on undrawn amounts. As of the Amendment Date, advances under the Credit Facility bear interest at a 30-day LIBOR or commercial paper rate (subject to a minimum rate of 1.5%), plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when the facility is drawn more than 50% and 1.0% per annum on undrawn amounts when the facility is drawn less than 50%. During the three months ended December 31, 2010, the Company reversed the projected annual minimum earnings shortfall fee of $0.6 million that had been accrued as of September 30, 2010. The Company paid a $0.7 million fee in connection with the November 2010 amendment. On August 9, 2011, ING, increased its commitment by $10.0 million, bring the total revolving line of credit to $137.0 million. All other terms of the existing line of credit remained the same.

The following tables summarize noteworthy information related to the Credit Facility at cost:

 

     As of December  31,
2011
     As of September  30,
2011
 

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding (A)

     56,900         99,400   

Availability

     61,900         24,700   

 

     Three Months Ended
December 31,
 
     2011     2010  

Weighted average borrowings outstanding

   $ 74,263      $ 19,883   

Effective interest rate (B)

     6.0     6.7

Commitment fees incurred

   $ 141      $ 184   

 

  (A)  

The December 31, 2011 balance decreased significantly due to repayments with the proceeds of the Term Preferred Stock offering in November.

  (B)  

Excludes the impact of deferred financing fees.

Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints imposed under the 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.

 

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The administrative agent also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with Keybank as custodian. Keybank, who also serves as the trustee of the account, generally remits the collected funds to the Company once a month.

The 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 the Company’s credit and collection policies. The Credit Facility also limits payments on distributions to the aggregate net investment income for each of the twelve month periods ended September 30, 2012 and 2011. Business Loan is also subject to certain limitations on the type of loan investments it can apply toward availability credit in the borrowing base, including restrictions on geographic concentrations, sector concentrations, loan size, dividend payout, payment frequency and status, average life and lien property. The 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 obligors required in the borrowing base of the credit agreement. Additionally, the Company is subject to a performance guaranty that requires it to maintain (i) a minimum net of $200.0 million plus 50.0% of all equity and subordinated debt raised after May 15, 2009, (ii) “asset coverage” with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) its status as a BDC under the 1940 Act and as a RIC under the Code. The facility requires a minimum of 20 obligors in the borrowing base and as of December 31, 2011, Business Loan had 40 obligors. As of December 31, 2011, the Company was in compliance with all of the facility covenants.

Refer to Note 12— Subsequent Events , for subsequent renewal of the Credit Facility in January 2012 and the new maturity date of January 18, 2015.

Fair Value

The Company elected to apply ASC 825, “Financial Instruments,” specifically for the Credit Facility, which was consistent with its application of ASC 820 to its investments. Generally, the Company estimates the fair value of its Credit Facility using estimates of value provided by an independent third party and its own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of December 31 and September 30, 2011, the Company’s Credit Facility was valued using Level 3 inputs.

The following tables present the Credit Facility carried at fair value as of December 31 and September 30, 2011, by caption on the accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and a roll-forward in the changes in fair value of the Credit Facility during the three months ended December 31, 2011 and 2010:

 

     Level 3 – Borrowings under Credit Facility  
     Total Fair Value Reported in  
     Condensed Consolidated Statements of
Assets and Liabilities
 
     December 31, 2011      September 30, 2011  

Credit Facility

   $ 57,213       $ 100,012   
  

 

 

    

 

 

 

Total Fair value Reported in Condensed Consolidated Statements of Assets and Liabilities

 

     Three Months Ended December 31,  
     2011     2010  

Fair value as of September 30, 2011 and 2010, respectively

   $ 100,012      $ 17,940   

Net unrealized depreciation (A)

     (299     (439

Borrowings

     11,000        10,000   

Repayments

     (53,500     (2,200
  

 

 

   

 

 

 

Fair value as of December 31, 2011 and 2010, respectively

   $ 57,213      $ 25,301   
  

 

 

   

 

 

 

 

  (A)  

Included in cumulative net unrealized appreciation on borrowings on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of December 31 and September 30, 2011.

The fair value of the collateral under the Credit Facility was approximately $242.7 million and $256.9 million at December 31 and September 30, 2011, respectively.

 

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NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

On November 4, 2011, the Company completed a public offering of 1.4 million shares of 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share (“Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $35.0 million and net proceeds, after deducting underwriting discounts and offering expenses borne by the Company, were $33.0 million and were used to repay a portion of outstanding borrowings under the Credit Facility. In connection with the offering, the underwriters exercised their option to purchase an additional 139,882 shares of the Company’s Term Preferred Stock to cover over-allotments, which resulted in gross proceeds of $3.5 million and net proceeds, after deducting underwriting discounts, of $3.4 million. These proceeds were also used to repay a portion of the outstanding borrowings under the Credit Facility. The Company incurred $2.1 million in total offering costs related to these transactions, which have been recorded as deferred financing fees on the Condensed Consolidated Statements of Assets and Liabilities and will be amortized over the redemption period ending December 31, 2016.

The shares have a redemption date of December 31, 2016 and are traded under the ticker symbol of GLADPRA on the New York Stock Exchange. The Term Preferred Stock is not convertible into the Company’s common stock or any other security of the Company. The Term Preferred Stock provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates to approximately $2.7 million per year). The Company is required to redeem all of the outstanding Term Preferred Stock on December 31, 2016 for cash at a redemption price equal to $25.00 per share plus an amount equal to accumulated but unpaid dividends, if any, to the date of redemption. In addition, there are two other potential redemption triggers: 1) if the Company fails to maintain an asset coverage ratio of at least 200%, it is required to redeem a portion of the outstanding Term Preferred Stock or has to cure the ratio redemption trigger and 2) at any time on or after December 31, 2012, at the Company’s sole option, it may redeem the Term Preferred Stock.

The Board of Directors declared the following monthly distributions to preferred stockholders for the three months ended December 31, 2011:

 

Fiscal Year                         

 

Time Period

 

Declaration Date

 

Record Date

 

Payment Date

 

Distribution

per Term

Preferred

Share

2012

  November 4 - 30  (A)   December 6, 2011   December 16, 2011   December 30, 2011   $0.13359375
  December 1 - 31   December 6, 2011   December 16, 2011   December 30, 2011   0.14843750
         

 

      Three Months Ended December 31, 2011:   $0.28203125
         

 

 

(A)  

November was prorated from the time the Term Preferred Stock was issued and outstanding as per the Company’s final prospectus supplement dated October 28, 2011.

In accordance with ASC 480, “Distinguishing Liabilities from Equity,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and therefore the related dividend payments are treated as dividend expense on the statement of operations as of the ex-dividend date.

NOTE 7. COMMON STOCK

Registration Statement

On October 20, 2009, the Company filed a registration statement on Form N-2 (File No. 333-162592) that was amended on December 9, 2009 and which the SEC declared effective on January 28, 2010, and the Company filed post-effective amendments to such registration statement on April 7, 2011, June 15, 2011, and July 13, 2011, which were declared effective by the SEC on July 15, 2011. The registration statement permits the Company 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, including through a combined offering of such securities .

On May 17, 2010, the Company and the Adviser entered into an equity distribution agreement (the “Agreement”) with BB&T Capital Markets, a division of Scott & Stringfellow, LLC (the “Agent”), under which the Company may, from time to time, issue and sell through the Agent, as sales agent, up to 2.0 million shares (the “Shares”) of the Company’s common stock, par value $0.001 per share, based upon instructions from the Company (including, at a minimum, the number of shares to be offered, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in any one day and any minimum price below which sales may not be made). Sales of Shares through the Agent, if any, will be executed by means of either ordinary brokers’ transactions on the NASDAQ Global Select Market in accordance with Rule 153 under the Securities Act of 1933, as amended, or such other sales of the Shares as shall be agreed by the Company and the Agent. The compensation payable to the Agent for sales of Shares with respect to which the Agent acts as sales agent shall be equal to 2.0% of the gross sales price of the Shares for amounts of Shares sold pursuant to the Agreement. To date, the Company has not issued any shares pursuant to this Agreement.

 

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During the quarter ended December 31, 2011, pursuant to the terms of the articles of incorporation, as amended, the Company’s Board of Directors approved reclassifying 4.0 million shares from common stock to preferred stock.

Employee Notes

The following table is a summary of all outstanding notes issued to employees of the Adviser for the exercise of stock options:

 

Issue Date

 

Number of Options
Exercised

 

Strike Price of
Options Exercised

 

Amount of
Promissory Note
Issued to Employees

 

Outstanding Balance
of Employee Loans
at 12/31/11

 

Maturity Date

 

Interest Rate

on Note

Aug-01

  393,334   15.00   $5,900 (A)   $2,749   Aug-10   4.90% (B)

Aug-01

  18,334   15.00   275 (A)   200   Aug-10   4.90 (B)

Aug-01

  18,334   15.00   275 (C)   77   Aug-11   4.90 (D)

Sep-04

  13,332   15.00   200   198   Sep-13   5.00

Jul-06

  13,332   15.00   200   200   Jul-15   8.26

Jul-06

  18,334   15.00   275   275   Jul-15   8.26
 

 

   

 

 

 

   
  475,000     $7,125   $3,699    
 

 

   

 

 

 

   

 

(A)

On September 7, 2010, the Company entered into redemption agreements (the “Redemption Agreements”) with David Gladstone, the Company’s Chairman and Chief Executive Officer, and Laura Gladstone, the daughter of Mr. Gladstone and an officer of the Adviser and one of the Company’s Managing Directors, in connection with the maturity of secured promissory notes executed by Mr. Gladstone and Ms. Gladstone in favor of the Company on August 23, 2001, in the principal amounts of $5.9 million and $0.3 million, respectively (collectively, the “Notes”). Mr. and Ms. Gladstone executed the Notes in payment of the exercise price of certain stock options (the “Options”) to acquire shares of the Company’s common stock. Concurrently with the execution of the Notes, the Company and Mr. and Ms. Gladstone entered into stock pledge agreements (collectively, the “Pledge Agreements”), pursuant to which Mr. and Ms. Gladstone granted to the Company a first priority security interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which included 393,334 and 18,334 shares, respectively, of the Company’s common stock that Mr. and Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the “Pledged Shares”). An event of default was triggered under the Notes by virtue of Mr. and Ms. Gladstone’s failure to repay the amounts outstanding under the Notes within five business days of August 23, 2010. The Redemption Agreements provide that, pursuant to the terms and conditions thereof, the Company will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Mr. and Ms. Gladstone’s obligations to the Company under the Notes at such time, if ever, that the trading price of the Company’s common stock reaches $15 per share. In entering into the Redemption Agreements, the Company reserved all of its existing rights under the Notes and the Pledge Agreements, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. On March 30, 2011, June 27, 2011 and September 26, 2011, Mr. Gladstone paid down in the aggregate $3.2 million of the principal balance of his note, leaving a principal balance of $2.7 million outstanding as of December 31, 2011. In connection with these payments, the Company released its first priority security interest on 280,000 shares of Mr. Gladstone’s Pledged Shares, leaving a balance of 183,334 shares in Pledged Collateral from Mr. Gladstone as of December 31, 2011. On September 28, 2011, Ms. Gladstone paid down $0.1 million of the principal balance of her 2001 note, leaving a principal balance of $0.2 million outstanding on this note as of December 31, 2011. The principal balances under her 2006 notes remain unchanged at an aggregate balance of $0.5 million as of December 31, 2011.

(B)  

An event of default was triggered under these Notes by virtue of Mr. and Ms. Gladstone’s failure to repay the amounts outstanding within five business days of August 23, 2010. As such, the Company charges a default rate of an additional 2% per annum under these Notes for all periods following default.

(C)  

On December 20, 2011, the Company entered into an amended and restated redemption agreement with an employee of the Adviser in connection with the maturity of a secured promissory note executed by the employee in favor of the Company on August 23, 2001, in the principal amount of $0.3 million. Pursuant to the redemption agreement, on December 29, 2011, the Company redeemed 20,000 shares of the Company’s common stock that had been pledged as collateral on the employee note, resulting in a reduction of $0.2 million on the employee note, leaving a principal balance of $0.1 million as of December 31, 2011.

(D)  

An event of default was triggered under the note by virtue of an employee of the Adviser’s failure to repay the amounts outstanding within five business days of August 23, 2011. As such, the Company charges a default rate of an additional 2% per annum under the note for all periods following default.

In accordance with ASC 505, “Equity,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, these recourse notes were recorded as loans to employees and are included in the equity section of the accompanying Condensed Consolidated Statements of Assets and Liabilities . As of December 31, 2011, the Company determined that these notes were still recourse.

 

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NOTE 8. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three months ended December 31, 2011 and 2010:

 

     Three Months Ended December 31,  
     2011     2010  

Numerator for basic and diluted net (decrease) increase in net assets resulting from operations per common share

   $ (1,289   $ 2,132   

Denominator for basic and diluted weighted average common shares

     21,038,590        21,039,242   
  

 

 

   

 

 

 

Basic and diluted net (decrease) increase in net assets resulting from operations per common share

   $ (0.06   $ 0.10   
  

 

 

   

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

The Board of Directors declared the following monthly distributions to common stockholders for the three months ended December 31, 2011 and 2010:

 

Fiscal Year                                

 

Declaration Date

 

Record Date

 

Payment Date

 

Distribution per Common
Share

2012

  October 11, 2011   October 21, 2011   October 31, 2011   $0.07
  October 11, 2011   November 17, 2011   November 30, 2011   0.07
  October 11, 2011   December 21, 2011   December 30, 2011   0.07
       

 

    Three Months Ended December 31, 2011:   $0.21
       

 

2011

  October 5, 2010   October 21, 2010   October 29, 2010   $0.07
  October 5, 2010   November 19, 2010   November 30, 2010   0.07
  October 5, 2010   December 23, 2010   December 31, 2010   0.07
       

 

    Three Months Ended December 31, 2010:   $0.21
       

 

Aggregate distributions declared and paid for the three months ended December 31, 2011 and 2010 were each approximately $4.4 million, which were declared based on estimates of net investment income for the respective fiscal years. The characterization of the distributions declared and paid for the fiscal year ended September 30, 2012 will be determined at year end and cannot be determined at this time. For the fiscal year ended September 30, 2011, taxable income available for distributions exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, the Company elected to treat a portion of the first distribution paid in fiscal year 2012 as having been paid in the prior year.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. The Company is required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Company does not establish reserves. Based on current knowledge, the Company does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on the Company’s financial condition or results of operation.

Escrow Holdbacks

The Company from time to time will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow in order to be used to satisfy potential obligations as stipulated in the sales agreements. The Company records escrow amounts in restricted cash on the accompanying Condensed Consolidated Statements of Assets and Liabilities . The Company establishes a contingent liability against the escrow amounts if the Company determines that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liability amounted recorded against the escrow amounts was $1.2 million and $0 as of December 31 and September 30, 2011, respectively, and is located in other liabilities on the accompanying Condensed Consolidated Statements of Assets and Liabilities .

 

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Financial Commitments and Obligations

At December 31 and September 30, 2011, the Company was not party to any signed commitments for potential investments. However, the Company has lines of credit and capital commitments with certain of its portfolio companies that have not been fully drawn or called. Since these commitments have expiration dates and the Company expects many will never be fully drawn or called, the total commitment amounts do not necessarily represent future cash requirements.

In addition to the lines of credit and capital commitments with portfolio companies, the Company also extends certain guaranties on behalf of some of its portfolio companies during the normal course of business. At December 31 and September 30, 2011, the Company was not party to any signed guaranties.

The Company estimated the fair value of its unused line of credit and uncalled capital commitments as of December 31 and September 30, 2011 to be minimal; and therefore, they are not recorded on the accompanying Condensed Consolidated Statements of Assets and Liabilities .

The following table summarizes the dollar balances of unused line of credit commitments and uncalled capital commitments as of December 31 and September 30, 2011:

 

     As of December 31,
2011
     As of September 30,
2011
 

Unused line of credit commitments

   $ 10,519       $ 12,990   

Uncalled capital commitment

     800         800   
  

 

 

    

 

 

 

Total

   $ 11,319       $ 13,790   
  

 

 

    

 

 

 

The following table shows the Company’s contractual obligations as of December 31, 2011 at cost:

 

     Payments Due by Period  

Contractual Obligations (A)

   Less than
1 Year
     1-3 Years      4-5 Years      After 5 Years      Total  

Credit Facility (B)

   $ 56,900       $       $       $       $ 56,900   

Term Preferred Stock, $0.001 par value, $25 liquidation preference; 4,000,000 authorized and 1,539,882 shares issued and outstanding

                     38,497                 38,497