Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 04/30/2013 16:32:51)

 

 

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 QUARTERLY PERIOD ENDED MARCH 31, 2013

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-00237

 

 

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   22102
MCLEAN, VIRGINIA   (Zip Code)
(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   ¨   (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   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 April 29, 2013 was 21,000,160.

 

 

 


GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements (Unaudited)   
  

Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2013 and September 30, 2012

     3   
  

Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012

     4   
  

Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2013 and 2012

     5   
  

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012

     6   
  

Condensed Consolidated Schedules of Investments as of March 31, 2013 and September 30, 2012

     7   
  

Notes to Condensed Consolidated Financial Statements

     13   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   
   Overview      33   
   Results of Operations      37   
   Liquidity and Capital Resources      47   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      57   
Item 4.    Controls and Procedures      57   
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings      58   
Item 1A.    Risk Factors      58   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      58   
Item 3.    Defaults Upon Senior Securities      58   
Item 4.    Mine Safety Disclosures      58   
Item 5.    Other Information      58   
Item 6.    Exhibits      58   
SIGNATURES      59   

 

2


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,
2013
    September 30,
2012
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $241,930 and $268,500, respectively)

   $ 211,316      $ 237,135   

Control investments (Cost of $119,360 and $96,521, respectively)

     56,164        36,825   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $361,290 and $365,021, respectively)

     267,480        273,960   

Cash and cash equivalents

     8,823        10,155   

Restricted cash and cash equivalents

     1,237        507   

Interest receivable

     3,177        2,696   

Due from custodian

     952        2,177   

Deferred financing fees

     3,033        2,957   

Other assets

     727        950   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 285,429      $ 293,402   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $55,400 and $58,800, respectively)

   $ 56,951      $ 62,451   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 1,539,882 shares issued and outstanding at March31, 2013 and September 30, 2012, respectively

     38,497        38,497   

Accounts payable and accrued expenses

     444        475   

Interest payable

     140        185   

Fees due to Adviser (A)

     1,036        1,830   

Fee due to Administrator (A)

     187        174   

Other liabilities

     1,027        1,226   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 98,282      $ 104,838   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 187,147      $ 188,564   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized and 21,000,160 shares issued and outstanding at March 31, 2013 and September 30, 2012, respectively

   $ 21      $ 21   

Capital in excess of par value

     324,714        324,714   

Notes receivable from employees (A)

     (1,224     (3,024

Cumulative net unrealized depreciation of investments

     (93,810     (91,061

Cumulative net unrealized appreciation of borrowings

     (1,551     (3,651

Overdistributed net investment income

     (474     (474

Accumulated net realized losses

     (40,529     (37,961
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 187,147      $ 188,564   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.91      $ 8.98   
  

 

 

   

 

 

 

 

(A)  

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

(B)

Refer to Note 10— Commitments and Contingencies for additional information.

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

 

3


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2013     2012     2013     2012  

INVESTMENT INCOME

        

Interest income:

        

Non-Control/Non-Affiliate investments

   $ 6,835      $ 7,840      $ 14,149      $ 15,729   

Control investments

     1,545        1,051        2,357        2,410   

Cash and cash equivalents

     1        —          2        6   

Notes receivable from employees (A)

     43        63        96        130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,424        8,954        16,604        18,275   

Other income:

        

Non-Control/Non-Affiliate investments

     —          2,042        1,648        2,042   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     8,424        10,996        18,252        20,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,419        1,538        2,851        3,094   

Incentive fee (A)

     953        1,304        2,168        2,339   

Administration fee (A)

     187        209        337        404   

Interest expense on borrowings

     803        999        1,659        2,138   

Dividend expense on mandatorily redeemable preferred stock

     686        686        1,372        1,120   

Amortization of deferred financing fees

     329        277        585        734   

Professional fees

     35        362        293        655   

Other general and administrative expenses

     241        528        558        773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     4,653        5,903        9,823        11,257   

Credits to fees from Adviser (A)

     (639     (123     (840     (574
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     4,014        5,780        8,983        10,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,410        5,216        9,269        9,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     30        37        (611     (8,212

Control investments

     —          —          (2,407     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     30        37        (3,018     (8,212

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (1,772     (3,351     (1,858     3,267   

Control investments

     (5,861     (3,818     (890     (8,193

Borrowings

     430        313        2,100        612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized depreciation

     (7,203     (6,856     (648     (4,314
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (7,173     (6,819     (3,666     (12,526
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (2,763   $ (1,603   $ 5,603      $ (2,892
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic and Diluted

   $ (0.13   $ (0.08   $ 0.27      $ (0.14
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and Diluted

     21,000,160        21,005,402        21,000,160        21,022,087   

 

(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


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2013     2012  

OPERATIONS

    

Net investment income

   $ 9,269      $ 9,634   

Net realized loss on investments

     (3,018     (8,212

Net unrealized depreciation of investments

     (2,748     (4,926

Net unrealized depreciation of borrowings

     2,100        612   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     5,603        (2,892
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (8,820     (8,830
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Stock redemption for repayment of principal on employee notes (A)

     —          (332

Repayment of principal on employee notes (A)

     1,800        335   
  

 

 

   

 

 

 

Net increase in net assets from capital transactions

     1,800        3   
  

 

 

   

 

 

 

NET DECREASE IN NET ASSETS

     (1,417     (11,719

NET ASSETS, BEGINNING OF PERIOD

     188,564        213,721   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 187,147      $ 202,002   
  

 

 

   

 

 

 

 

(A)  

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

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

 

5


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 5,603      $ (2,892

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

    

Purchase of investments

     (60,826     (29,609

Principal repayments on investments

     55,007        24,760   

Proceeds from sale of investments

     5,918        6,459   

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

     (39     —     

Net change in premiums, discounts and amortization

     526        (119

Net realized loss on investments

     3,146        8,363   

Net unrealized depreciation of investments

     2,748        4,926   

Net unrealized depreciation of borrowings

     (2,100     (612

Increase in restricted cash and cash equivalents

     (730     (1,225

Amortization of deferred financing fees

     585        734   

Increase in interest receivable

     (481     (51

Decrease (increase) in due from custodian

     1,225        (3,983

Decrease in other assets

     223        579   

Decrease in accounts payable and accrued expenses

     (31     (18

Decrease in interest payable

     (45     (63

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

     (794     303   

Increase in fee due to Administrator (A)

     13        17   

(Decrease) increase in other liabilities

     (199     882   
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,749        8,451   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     51,500        32,900   

Repayments on borrowings

     (54,900     (66,500

Proceeds from issuance of mandatorily redeemable preferred stock

     —          38,497   

Deferred financing fees

     (661     (3,560

Distributions paid to common stockholders

     (8,820     (8,830

Receipt of principal on employee notes

     1,800        3   
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,081     (7,490
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (1,332     961   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     10,155        6,732   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 8,823      $ 7,693   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ —        $ 332   
  

 

 

   

 

 

 

 

(A)  

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

(B)  

Redemption of 39,082 shares of common stock to reduce the principal balance of an employee loan by $332. Refer to Note 4— Related Party Transactions for additional information.

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

 

6


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

   Principal      Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS:

        
Non-syndicated Loans:             

AG Transportation Holdings, LLC

  Cargo Transport   Senior Subordinated Term Debt (13.3%, Due 3/2018) ( D )    $ 13,000       $ 12,774       $ 13,016   
    Member Profit Participation (18% ownership) ( F ) (G)         1,000         273   
    Profit Participation Warrants (7% ownership) ( F ) (G)         244         —     
         

 

 

    

 

 

 
            14,018         13,289   

Allen Edmonds Shoe Corporation

  Personal and non-durable consumer products   Senior Subordinated Term Debt (11.3%, Due 12/2015) ( D )      19,483         19,483         19,580   
Allison Publications, LLC   Printing and publishing   Senior Term Debt (10.5% and 2.0% PIK, Due 9/2013) (D)      7,353         7,353         7,096   
BAS Broadcasting   Broadcasting and entertainment  

Senior Term Debt (11.5%,

Due 7/2013) (D)

     7,465         7,465         1,306   

Chinese Yellow Pages Company

  Printing and publishing   Line of Credit, $102 available (7.3%, Due 11/2013) (D)      348         348         216   
CMI Acquisition, LLC   Mining, steel, iron and non-precious metals   Senior Subordinated Term Debt (14.0%, Due 12/2016) (D)      14,265         14,265         13,480   
FedCap Partners, LLC   Private equity fund – aerospace and defense  

Class A Membership Units

(80 units) ( G) (J)

        2,000         2,963   
Francis Drilling Fluids, Ltd.   Oil and gas   Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)      15,000         15,000         14,550   
    Preferred Units (999 units) (F) (G)         999         —     
    Common Units (999 units) (F) G)         1         —     
         

 

 

    

 

 

 
            16,000         14,550   
GFRC Holdings, LLC   Buildings and real estate  

Senior Term Debt (10.5%,

Due 12/2013) (D)

     5,024         5,024         2,010   
    Senior Subordinated Term Debt (13.0%, Due 12/2013) (D)      6,598         6,598         2,639   
         

 

 

    

 

 

 
            11,622         4,649   

Heartland Communications Group

  Broadcasting and entertainment   Line of Credit, $0 available (5.0%, Due 3/2014) (D)      100         100         45   
    Line of Credit, $0 available (10.0%, Due 3/2014) (D)      100         100         45   
    Senior Term Debt (5.0%, Due 3/2014) (D)      4,343         4,342         1,954   
    Common Stock Warrants (8.8% ownership) (F) (G)         66         —     
         

 

 

    

 

 

 
            4,608         2,044   

International Junior Golf Training Acquisition Company

  Leisure, amusement, motion pictures and entertainment   Line of Credit, $0 available (11.0%, Due 5/2014) (D)      2,250         2,250         1,688   
   

Senior Term Debt (10.5%, Due

5/2014) (D)

     461         461         346   
   

Senior Term Debt (12.5%, Due

5/2014) (C) (D)

     2,500         2,500         1,875   
         

 

 

    

 

 

 
            5,211         3,909   
Legend Communications of Wyoming, LLC   Broadcasting and entertainment  

Senior Term Debt (12.0%,

Due 6/2013) (D)

     8,390         8,390         2,936   

North American Aircraft Services, LLC

  Aerospace and defense  

Senior Term Debt (7.5%,

Due 8/2016) (D)

     3,763         3,763         3,773   
    Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)      4,750         4,750         4,762   
    Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)      2,820         2,820         2,827   
   

Common Stock Warrants

(35,000 shares) (F) (G)

        350         268   
         

 

 

    

 

 

 
            11,683         11,630   

Ohana Media Group

  Broadcasting and entertainment  

Senior Term Debt (10.0%, Due

10/2016) (D)

     1,570         1,570         1,531   

POP Radio, LLC

  Broadcasting and entertainment  

Senior Term Debt (11.8%, Due

5/2017) (D)

     10,569         10,569         10,648   
    Junior Subordinated Term Debt (11.0% PIK, Due 11/2017) (D)      500         433         501   
   

Participation Unit (2.4%

ownership) (F) (G)

        75         —     
         

 

 

    

 

 

 
            11,077         11,149   

Precision Acquisition Group Holdings, Inc.

  Machinery   Equipment Note (13.0%, Due 3/2013) (D)      1,000         1,000         835   
   

Senior Term Debt (13.0%, Due

3/2013) (D)

     4,125         4,125         3,444   
   

Senior Term Debt (13.0%, Due

3/2013) (C) (D)

     4,053         4,053         3,384   
         

 

 

    

 

 

 
            9,178         7,663   

PROFIT Systems Acquisition Co.

  Electronics  

Senior Term Debt (10.5%,

Due 7/2014) (C) (D)

     2,250         2,250         2,244   

 

7


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

   Principal      Cost      Fair Value  

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

        

Saunders & Associates

  Electronics   Line of Credit, $0 available (11.3%, Due 5/2013) (D)    $ 917       $ 917       $ 820   
    Senior Term Debt (11.3%, Due 5/2013) (D)      8,947         8,947         8,007   
         

 

 

    

 

 

 
            9,864         8,827   

Sunburst Media - Louisiana, LLC

  Broadcasting and entertainment   Senior Term Debt (10.5%, Due 11/2013) (D)      6,000         6,000         2,100   

Thibaut Acquisition Co.

  Home and office furnishings, housewares   Line of Credit, $550 available (9.0%, Due 1/2014) (D)      450         450         452   
  and durable consumer products   Senior Term Debt (12.0%, Due 1/2014) (C) (D)      2,763         2,763         2,773   
         

 

 

    

 

 

 
            3,213         3,225   

Westland Technologies, Inc.

  Diversified/conglomerate manufacturing  

Senior Term Debt (7.5%,

Due 4/2016) (D)

     1,250         1,250         1,236   
   

Senior Term Debt (12.5%, Due

4/2016) (D)

     4,000         4,000         3,955   
    Common Stock Warrants (77,287 shares) (F) (G)         350         308   
         

 

 

    

 

 

 
            5,600         5,499   
         

 

 

    

 

 

 
Subtotal – Non-syndicated loans       $ 171,198       $ 139,886   
         

 

 

    

 

 

 
Syndicated Loans:             

Allied Security Holdings, LLC

  Personal, food and miscellaneous services   Senior Subordinated Term Debt (9.0%, Due 2/2018) (E)    $ 1,000         $992       $ 1,000   

Ameriqual Group, LLC

  Beverage, food and tobacco  

Senior Term Debt (9.0%, Due

3/2016) (E)

     7,369         7,272         7,221   

Applied Systems, Inc.

  Insurance   Senior Subordinated Term Debt (9.5%, Due 6/2017) ( I )      1,000         992         1,000   

Ardent Medical Services, Inc.

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.0%, Due 1/2019) (E )      4,000         3,922         4,080   

Ascend Learning, LLC

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)      1,000         977         993   

Autoparts Holdings Limited

  Automobile   Senior Term Debt (10.5%, Due 1/2018) (E)      1,000         996         1,015   

First American Payment Systems, L.P.

  Finance   Senior Subordinated Term Debt (10.8%, Due 4/2019) (E)      4,500         4,467         4,523   

John Henry Holdings, Inc.

  Containers, packaging and glass   Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)      5,000         4,879         5,025   

National Surgical Hospitals, Inc.

  Healthcare, education and childcare  

Senior Term Debt (8.3%, Due

2/2017) (E)

     1,622         1,599         1,610   

PLATO Learning, Inc.

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)      5,000         4,908         4,850   

RP Crown Parent, LLC

  Diversified/conglomerate service   Senior Subordinated Term Debt (11.3%, Due 12/2019) (E )      2,000         1,961         2,080   

Sensus USA, Inc.

  Electronics  

Senior Term Debt (8.5%, Due

5/2018) (E)

     500         496         500   

Springs Window Fashions, LLC

  Personal and non-durable consumer products   Senior Term Debt (11.3%, Due 11/2017) (E)      7,000         6,864         7,035   

SRAM, LLC

  Leisure, amusement, motion pictures and entertainment   Senior Term Debt (8.5%, Due 12/2018) ( I )      2,500         2,479         2,500   

SumTotal Systems, Inc.

  Electronics   Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)      4,000         3,923         3,970   

Targus Group International, Inc.

  Textiles and leather   Senior Term Debt (11.0%, Due 5/2016) (E)      9,825         9,687         9,727   

Vision Solutions, Inc.

  Electronics  

Senior Term Debt (9.5%, Due

7/2017) (E)

     11,000         10,932         11,000   

Wall Street Systems Holdings, Inc.

  Electronics   Senior Term Debt (9.3%, Due 10/2020) (E)      3,000         2,942         3,045   

WP Evenflo Group Holdings, Inc.

  Diversified/conglomerate manufacturing  

Senior Preferred Equity (333

shares) (F) (G)

        333         256   
   

Junior Preferred Equity (111

shares) (F) (G)

        111         —     
    Common Stock (1,874 shares) (F) (G)         —           —     
         

 

 

    

 

 

 
            444         256   
         

 

 

    

 

 

 

Subtotal - Syndicated loans

          $ 70,732       $ 71,430   
         

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 79.0% of total investments at fair value)

  

   $ 241,930       $ 211,316   
         

 

 

    

 

 

 

 

8


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF MARCH 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS:

     

Defiance Integrated Technologies,

  Automobile  

Senior Term Debt (11.0%,

Due 4/2016) (C) (F)

  $ 7,025      $ 7,025      $ 7,025   

      Inc.

    Common Stock (15,500 shares) (F) (G)       1        2,521   
       

 

 

   

 

 

 
          7,026        9,546   

Kansas Cable Holdings, Inc.

  Broadcasting and entertainment   Line of Credit, $9 available (10.0%, Due 3/2013) ( H ) ( I )     1,007        997        147   
   

Senior Term Debt (10.0%, Due

3/2013) ( H ) ( I )

    1,500        1,444        219   
   

Senior Term Debt (10.0%, Due

3/2013) ( H ) ( I )

    1,039        1,000        152   
    Common Stock (100 shares) ( G ) ( I )       —          —     
       

 

 

   

 

 

 
          3,441        518   

Lindmark Acquisition, LLC

  Broadcasting and entertainment   Senior Subordinated Term Debt (11.0%, Due 10/2017) (D) (H)     10,000        10,000        400   
    Senior Subordinated Term Debt (13.0%, Due 10/2017) (D) (H)     2,000        2,000        80   
    Senior Subordinated Term Debt (13.0%, Due Upon Demand) (D) (H)     2,290        2,290        92   
    Common Stock (100 shares) (F) (G)       317        —     
       

 

 

   

 

 

 
          14,607        572   

LocalTel, LLC

  Printing and publishing   Line of credit, $106 available (10.0%, Due 6/2013) (F) (H)     2,894        2,894        562   
    Line of Credit, $1,830 available (4.7%, Due 6/2013) (F) (H)     1,170        1,170        —     
   

Senior Term Debt (12.5%, Due

6/2013) (F) (H)

    325        325        —     
   

Senior Term Debt (8.5%, Due

6/2013) (F) (H)

    2,688        2,688        —     
   

Senior Term Debt (10.5%, Due

6/2013) (C) (F) (H)

    2,750        2,750        —     
   

Common Stock Warrants (4,000

shares) (F) (G)

      —          —     
       

 

 

   

 

 

 
          9,827        562   

Midwest Metal Distribution, Inc.

  Mining, steel, iron and non-precious metals   Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)     18,281        18,277        18,007   
    Common Stock (501 shares) (F) (G)       138        —     
       

 

 

   

 

 

 
          18,415        18,007   

Reliable Biopharmaceutical Holdings, Inc.

  Healthcare, education and childcare   Line of Credit, $0 available (9.0%, Due 6/2014) ( F )     4,000        4,000        4,000   
   

Mortgage Note (9.5%, Due

12/2014) ( F )

    7,020        7,020        7,020   
   

Senior Term Debt (12.0%, Due

12/2014) (C) ( F )

    11,392        11,392        10,090   
    Senior Subordinated Term Debt (12.5%, Due 12/2014) ( F )     6,000        6,000        —     
    Preferred Stock (1,999,000 shares) (F) (G)       1,999        —     
    Common Stock (1,000 shares) (F) (G)       370        —     
       

 

 

   

 

 

 
          30,781        21,110   

Sunshine Media Holdings

  Printing and publishing   Line of credit, $400 available (4.8%, Due 8/2014) (D) (H)     1,600        1,600        319   
   

Senior Term Debt (4.8%, Due

5/2016) (D) (H)

    16,948        16,948        3,390   
   

Senior Term Debt (5.5%, Due

5/2016) (C) (D) (H)

    10,700        10,700        2,140   
    Preferred Equity (15,270 shares) (F) (G)       5,275        —     
    Common Stock (1,867 shares) (F) (G)       740        —     
    Common Stock Warrants (72 shares)       —          —     
       

 

 

   

 

 

 
          35,263        5,849   
       

 

 

   

 

 

 

Total Control Investments (represented 21.0% of total investments at fair value)

    $ 119,360      $ 56,164   
       

 

 

   

 

 

 

Total Investments

        $ 361,290      $ 267,480   
       

 

 

   

 

 

 

 

(A)  

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

(B)  

Percentages represent cash interest rates in effect at March 31, 2013, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

(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 March 31, 2013, 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. We also considered discounted cash flow methodologies.

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

(I)  

Security was exited, subsequent to March 31, 2013, and was valued based on the payoff.

(J )  

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

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

 

9


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2012

(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.

  Broadcasting and entertainment  

Senior Term Debt (14.0%, Due

2/2011) (D) (H)

  $ 903      $ 903      $ —     

Allison Publications, LLC

  Printing and publishing  

Senior Term Debt (10.5%, Due

9/2013) (D)

    7,864        7,864        7,510   

BAS Broadcasting

  Broadcasting and entertainment  

Senior Term Debt (11.5%, Due

7/2013) (D)

    7,465        7,465        1,866   

Chinese Yellow Pages Company

  Printing and publishing   Line of Credit, $12 available (7.3%, Due 11/2012) (D)     438        438        285   

CMI Acquisition, LLC

  Mining, steel, iron and non-precious metals   Senior Subordinated Term Debt (14.0%, Due 12/2016) (D)     14,265        14,265        13,766   

FedCap Partners, LLC

  Private equity fund – aerospace and defense  

Class A Membership Units

(80 units) (G) (J)

      2,000        2,964   

Francis Drilling Fluids, Ltd.

  Oil and gas   Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)     15,000        15,000        14,906   
    Preferred Units (999 units) (F) (G)       999        479   
    Common Units (999 units) (F) G)       1        —     
       

 

 

   

 

 

 
          16,000        15,385   

GFRC Holdings, LLC

  Buildings and real estate  

Senior Term Debt (10.5%, Due

12/2013) (D)

    5,124        5,124        2,587   
    Senior Subordinated Term Debt (13.0%, Due 12/2013) (D)     6,598        6,598        3,332   
       

 

 

   

 

 

 
          11,722        5,919   

Heartland Communications Group

  Broadcasting and entertainment   Line of Credit, $0 available (5.0%, Due 3/2013) (D)     100        100        40   
    Line of Credit, $55 available (10.0%, Due 3/2013) (D)     45        45        18   
    Senior Term Debt (5.0%, Due 3/2013) (D)     4,342        4,333        1,737   
    Common Stock Warrants (8.8% ownership) (F) (G)       66        —     
       

 

 

   

 

 

 
          4,544        1,795   

International Junior Golf Training Acquisition Company

  Leisure, amusement, motion pictures and entertainment   Line of Credit, $225 available (11.0%, Due 5/2014) (D)     2,025        2,025        1,154   
   

Senior Term Debt (10.5%, Due

5/2014) (D)

    461        461        263   
   

Senior Term Debt (12.5%, Due

5/2014) (C) (D)

    2,500        2,500        1,425   
       

 

 

   

 

 

 
          4,986        2,842   

Legend Communications of Wyoming, LLC

  Broadcasting and entertainment  

Senior Term Debt (12.0%, Due

6/2013) (D)

    8,661        8,661        4,547   

North American Aircraft Services, LLC

  Aerospace and defense   Line of Credit, $500 available (6.5%, Due 10/2012) (D)     1,500        1,500        1,489   
    Senior Term Debt (7.5%, Due 8/2016) (D)     4,265        4,265        4,233   
    Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)     4,750        4,750        4,714   
    Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)     2,820        2,820        2,799   
   

Common Stock Warrants (35,000

shares) (F) (G)

      350        399   
       

 

 

   

 

 

 
          13,685        13,634   

Northstar Broadband, LLC

  Broadcasting and entertainment  

Senior Term Debt (0.7%, Due

12/2012) (D)

    20        18        20   

Ohana Media Group

  Broadcasting and entertainment  

Senior Term Debt (10.0%, Due

10/2016) (D)

    1,590        1,590        1,463   

POP Radio, LLC

  Broadcasting and entertainment  

Senior Term Debt (11.8%, Due

5/2017) (D)

    11,500        11,500        11,486   
    Junior Subordinated Term Debt (11.0% PIK, Due      
    11/2017) (D)     500        428        498   
    Participation Unit (2.4% ownership) (F) (G)       75        —     
       

 

 

   

 

 

 
          12,003        11,984   

Precision Acquisition Group Holdings, Inc.

  Machinery   Equipment Note (13.0%, Due 3/2013) (D)     1,000        1,000        830   
    Senior Term Debt (13.0%, Due 3/2013) (D)     4,125        4,125        3,424   
    Senior Term Debt (13.0%, Due 3/2013) (C) (D)     4,053        4,053        3,364   
       

 

 

   

 

 

 
          9,178        7,618   

PROFIT Systems Acquisition Co.

  Electronics  

Senior Term Debt (10.5%, Due

7/2014) (C) (D)

    2,550        2,550        2,486   

Reliable Biopharmaceutical Holdings, Inc.

  Healthcare, education and childcare   Line of Credit, $1,100 available (9.0%, Due 1/2013) (D)     2,900        2,900        2,690   
    Mortgage Note (9.5%, Due 12/2014) (D)     7,074        7,074        6,562   
   

Senior Term Debt (12.0%, Due

12/2014) (C) (D)

    11,452        11,452        10,622   
    Senior Subordinated Term Debt (12.5%, Due 12/2014) (D)     6,000        6,000        5,565   
    Common Stock Warrants (764 shares) (F) (G)       209        —     
       

 

 

   

 

 

 
          27,635        25,439   

 

10


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

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

     

Saunders & Associates

  Electronics   Line of Credit, $0 available (11.3%, Due 5/2013) (D)   $ 917      $ 917      $ 807   
    Senior Term Debt (11.3%, Due 5/2013) (D)     8,947        8,947        7,873   
       

 

 

   

 

 

 
          9,864        8,680   

Sunburst Media - Louisiana, LLC

  Broadcasting and entertainment   Senior Term Debt (10.5%, Due 11/2013) (D)     6,000        6,000        2,250   

Thibaut Acquisition Co.

  Home and office furnishings, housewares   Line of Credit, $650 available (9.0%, Due 1/2014) (D)     350        350        347   
  and durable consumer products   Senior Term Debt (8.5%, Due 1/2014) (I)     25        25        25   
    Senior Term Debt (12.0%, Due 1/2014) (C) (D)     3,000        3,000        2,985   
       

 

 

   

 

 

 
          3,375        3,357   

Westlake Hardware, Inc.

  Retail store   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        7,720   
       

 

 

   

 

 

 
          20,000        19,360   

Westland Technologies, Inc.

  Diversified/conglomerate manufacturing   Senior Term Debt (7.5%, Due 4/2016) (D)     1,650        1,650        1,617   
    Senior Term Debt (12.5%, Due 4/2016) (D)     4,000        4,000        3,920   
    Common Stock Warrants (77,287 shares) (F) (G)       350        228   
       

 

 

   

 

 

 
          6,000        5,765   
       

 

 

   

 

 

 
Subtotal – Non-syndicated loans       $ 190,746      $ 158,935   
       

 

 

   

 

 

 
Syndicated Loans:          

Airvana Network Solutions, Inc.

  Telecommunications   Senior Term Debt (10.0%, Due 3/2015) (E)   $ 1,071      $ 1,036      $ 1,070   

Allied Security Holdings, LLC

  Personal, food and miscellaneous services   Senior Subordinated Term Debt (9.0%, Due 2/2018) (E)     1,000        992        990   

Ameriqual Group, LLC

  Beverage, food and tobacco   Senior Term Debt (9.0%, Due 3/2016) (E)     7,406        7,295        7,258   

Applied Systems, Inc.

  Insurance   Senior Subordinated Term Debt (9.5%, Due 6/2017) (E)     1,000        992        995   

Ascend Learning, LLC

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)     1,000        975        998   

Autoparts Holdings Limited

  Automobile   Senior Term Debt (10.5%, Due 1/2018) (E)     1,000        996        870   

Blue Coat Systems, Inc.

  Electronics   Senior Subordinated Term Debt (11.5%, Due 8/2018) (E) (I)     8,500        8,497        8,500   

HGI Holding, Inc.

  Personal and non-durable consumer   Senior Term Debt (6.8%, Due 10/2016) (E)     1,566        1,539        1,574   
  products        

Hubbard Radio, LLC

  Broadcasting and entertainment   Senior Subordinated Term Debt (8.8%, Due 4/2018) (E)     500        496        508   

Keypoint Government Solutions, Inc.

  Personal, food and miscellaneous services   Senior Term Debt (10.0%, Due 12/2015) (E)     6,364        6,340        6,364   

Mood Media Corporation

  Electronics   Senior Term Debt (10.3%, Due 11/2018) (E) (I)     8,000        7,930        8,000   

National Surgical Hospitals, Inc.

  Healthcare, education and childcare   Senior Term Debt (8.3%, Due 2/2017) (E)     1,662        1,596        1,581   

PLATO Learning, Inc.

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)     5,000        4,903        4,850   

Sensus USA, Inc.

  Electronics   Senior Term Debt (8.5%, Due 5/2018) (E)     500        496        500   

Springs Window Fashions, LLC

  Personal and non-durable consumer   Senior Term Debt (11.3%, Due 11/2017) (E)     7,000        6,853        6,825   
  products        

SRAM, LLC

  Leisure, amusement, motion pictures and   Senior Term Debt (8.5%, Due 12/2018) (E)     2,500        2,478        2,538   
  entertainment        

Targus Group International, Inc.

  Textiles and leather   Senior Term Debt (11.0%, Due 5/2016) (E)     9,875        9,719        9,776   

Vision Solutions, Inc.

  Electronics   Senior Term Debt (9.5%, Due 7/2017) (E)     11,000        10,926        10,945   

Wall Street Systems Holdings, Inc.

  Electronics   Senior Term Debt (9.0%, Due 6/2018) (E) (I)     3,000        2,974        3,000   

WP Evenflo Group Holdings, Inc.

  Diversified/conglomerate manufacturing   Senior Term Debt (8.0%, Due 2/2013) (E)     277        277        274   
    Senior Preferred Equity (333 shares) (F) (G)       333        460   
    Junior Preferred Equity (111 shares) (F) (G)       111        164   
    Common Stock (1,874 shares) (F) (G)       —          160   
       

 

 

   

 

 

 
          721        1,058   

Subtotal - Syndicated loans

        $ 77,754      $ 78,200   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 86.6% of total investments at fair value)

  

  $ 268,500      $ 237,135   
       

 

 

   

 

 

 

 

11


GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

AS OF SEPTEMBER 30, 2012

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS:

     

Defiance Integrated Technologies,

  Automobile   Senior Term Debt (11.0%, Due 4/2016) (C) (F)   $ 7,185      $ 7,185      $ 7,185   

Inc.

    Common Stock (15,500 shares) (F) (G)       1        4,113   
       

 

 

   

 

 

 
          7,186        11,298   

Kansas Cable Holdings, Inc.

  Broadcasting and entertainment   Line of Credit, $56 available (10.0%, Due 10/2012) (D) (H)     919        910        8   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,500        1,444        13   
    Senior Term Debt (10.0%, Due 10/2012) (D) (H)     1,039        1,000        9   
    Common Stock (100 shares) (F) (G)       —          —     
       

 

 

   

 

 

 
          3,354        30   

Lindmark Acquisition, LLC

  Broadcasting and entertainment   Senior Subordinated Term Debt (11.0%, Due 10/2017) (D) (H)     10,000        10,000        750   
    Senior Subordinated Term Debt (13.0%, Due 10/2017) (D) (H)     2,000        2,000        150   
    Senior Subordinated Term Debt (13.0%, Due Upon Demand) (D) (H)     1,909        1,909        143   
    Common Stock (100 shares) (F) (G)       317        —     
       

 

 

   

 

 

 
          14,226        1,043   

LocalTel, LLC

  Printing and publishing   Line of credit, $226 available (10.0%, Due 6/2013) (F) (H)     2,624        2,624        548   
    Line of Credit, $1,830 available (4.7%, Due 6/2013) (F) (H)     1,170        1,170        —     
    Senior Term Debt (12.5%, Due 6/2013) (F) (H)     325        325        —     
    Senior Term Debt (8.5%, Due 6/2013) (F) (H)     2,688        2,688        —     
    Senior Term Debt (10.5%, Due 6/2013) (C) (F) (H)     2,750        2,750        —     
    Common Stock Warrants (4,000 shares) (F) (G)       —          —     
       

 

 

   

 

 

 
          9,557        548   

Midwest Metal Distribution, Inc.

  Mining, steel, iron and non-precious metals   Senior Subordinated Term Debt (12.0%, Due 7/2013) (D)     18,281        18,272        17,824   
    Common Stock (501 shares) (F) (G)       138        —     
       

 

 

   

 

 

 
          18,410        17,824   

Sunshine Media Holdings

  Printing and publishing   Line of credit, $200 available (4.8%, Due 8/2014) (D) (H)     1,800        1,800        270   
    Senior Term Debt (4.8%, Due 5/2016) (D) (H)     16,948        16,948        2,542   
    Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)     10,700        10,700        1,605   
    Preferred Equity (15,270 shares) (F) (G)       5,275        —     
    Common Stock (1,867 shares) (F) (G)       740        —     
       

 

 

   

 

 

 
          35,463        4,417   

Viapack, Inc.

  Chemicals, plastics and rubber   Line of Credit, $0 available (6.5%, Due 3/2013) (D)     3,800        3,800        760   
    Senior Real Estate Term Debt (5.0%, Due 3/2014) (D)     600        600        120   
    Senior Term Debt (6.2%, Due 3/2014) (C) (D) (H)     3,925        3,925        785   
    Preferred Equity (100 shares) (F) (G)       —          —     
    Guarantee ($300)      
       

 

 

   

 

 

 
          8,325        1,665   
       

 

 

   

 

 

 

Total Control Investments (represented 13.4% of total investments at fair value)

    $ 96,521      $ 36,825   
       

 

 

   

 

 

 

Total Investments (K)

        $ 365,021      $ 273,960   
       

 

 

   

 

 

 

 

(A)  

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

(B)  

Percentages represent cash interest rates in effect at September 30, 2012, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

(C)  

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, 2012, 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. We also considered discounted cash flow methodologies.

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

(I)  

Security was paid off, at par, subsequent to September 30, 2012, and was valued based on the payoff.

(J)  

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020.

( K )

Cumulative gross unrealized depreciation for federal income tax purposes is $98.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $6.1 million. Cumulative net unrealized depreciation is $92.6 million, based on a tax cost of $366.6 million.

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

 

12


GLADSTONE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2013

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are 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, we have elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). Our investment objectives are to (1) achieve and grow current income by investing in debt securities of established small and medium-sized businesses in the United States (U.S.) that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

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

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, 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 us, 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 foregoing two subsidiaries are consolidated with those of ours.

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), an affiliate of ours, pursuant to an investment advisory and management agreement.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“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, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All 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 American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2013, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended September 30, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on November 13, 2012.

Our accompanying 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.

 

13


Investment Valuation Policy

We carry our 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 our board of directors (our “Board of Directors”). In determining the fair value of our investments, the Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarter our Board of Directors reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

The Adviser uses generally accepted valuation techniques to value our portfolio unless it has specific information about the value of an investment to determine otherwise. From time to time, the Adviser may accept an appraisal of a business in which we hold 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 our investments. When the Adviser obtains these specific third-party appraisals, the Adviser 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 our 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 Adviser determines the value of a publicly traded security 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 we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of March 31, 2013 and September 30, 2012, we did not have any investments in publicly traded securities.

Securities for which a limited market exists: The Adviser 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 Adviser 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. In general, if the Adviser concludes that quotes based on active markets or trading activity may be relied upon, firm bid prices are requested; however, if firm bid prices are unavailable, the Adviser 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 Adviser 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, including but not limited to reviewing a range of indicative bids to the extent it has ready access to such qualified information.

In the event these limited markets become illiquid such that market prices are no longer readily available, the Adviser will value our 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 (the “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 Adviser 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 Adviser 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 Adviser believes a market participant would pay to purchase a syndicated loan in an active market, thereby establishing a fair value. The Adviser applies the DCF methodology in illiquid markets until quoted prices are available or are deemed reliable based on trading activity.

As of March 31, 2013 and September 30, 2012, the Adviser determined that the IBPs were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported); the Adviser 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.

 

14


(A) Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”). The Adviser 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 our 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 we have 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 or recapitalization of the portfolio company. We generally exit the debt and equity securities of an issuer together. Applying the liquidity waterfall approach to all of the investments of an issuer, the Adviser 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 Adviser generally references industry statistics and may use outside experts. TEV is only an estimate of value and may not be the value received in an actual sale. Once the Adviser has estimated the TEV of the issuer, it 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 we 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 Adviser values Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our principal market. In accordance with ASC 820 (as amended by the FASB’s 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 International Financial Reporting Standards (“IFRS”),” (“ASU 2011-04”)), the Adviser has defined our “unit of account” at the investment level (either debt or equity) and as such determines our fair value of these non-control investments assuming the sale of an individual security using the standalone premise of value. As such, the Adviser 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 we do not control or cannot gain control as of the measurement date, the Adviser estimates the fair value of the equity 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 Adviser 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, our own assumptions.

 

(D) Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the net asset value (“NAV”) 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 Adviser might reasonably expect us to receive upon the current sale of the security in an orderly transaction between market participants at the measurement date.

 

15


Refer to Note 3— Investments for additional information regarding fair value measurements and our 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 our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we 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, we remain 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 March 31, 2013, four portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $56.8 million, or 16.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $7.5 million, or 2.9% of the fair value of all debt investments in our portfolio. At September 30, 2012, six portfolio companies were either fully or partially on non-accrual with an aggregate debt cost basis of approximately $61.1 million, or 17.3% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.8 million, or 2.6% of the fair value of all debt investments in our portfolio.

As of March 31, 2013 and September 30, 2012, we had 22 and 24 original issue discount (“OID”) loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $70 and $0.1 million for the three and six months ended March 31, 2013, respectively, as compared to $74 and $0.2 million for the three and six months ended March 31, 2012. The unamortized balance of OID investments as of March 31, 2013 and September 30, 2012 totaled $1.4 million and $1.1 million, respectively.

As of March 31, 2013, we had two investments which had a PIK interest component and as of September 30, 2012, we had one investment which had a PIK interest component. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income. To maintain our status as a RIC, this non-cash source of income must be paid out to common stockholders in the form of distributions, even though we have not yet collected the cash. We recorded PIK income of $51 and $0.1 million for the three and six months ended March 31, 2013, respectively as compared to no PIK income during the three and six months ended March 31, 2012, respectively. We collected $0 PIK interest in cash during the six months ended March 31, 2013 and 2012, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We recorded $1.1 million of success fees during the six months ended March 31, 2013, which resulted from our exit of Westlake Hardware, Inc. in December 2012. We recorded a combined $2.0 million of success fees during the six months ended March 31, 2012, which resulted from our exits of Global Materials Technologies, Inc. and RCS Management Holding Co. in January and March 2012, respectively. As of March 31, 2013, we have an aggregate off-balance sheet success fee receivable of approximately $12.9 million on our accruing debt securities.

During the six months ended March 31, 2013, we recognized an aggregate of $0.5 million in prepayment fees which resulted from the early payoffs of four of our syndicated loans during the period. We did not recognize any prepayment fees for the six months ended March 31, 2012.

Both success and prepayment fees are recorded in other income in our accompanying Condensed Consolidated Statements 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;

 

16


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 reflect assumptions that market participants would use when pricing the asset or liability. Level 3 inputs can include the Adviser’s own assumptions based upon the best available information.

As of March 31, 2013 and September 30, 2012, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 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 six months ended March 31, 2013 and 2012, there were no transfers in or out of Level 1, 2 and 3.

The following table presents the investments carried at fair value as of March 31, 2013 and September 30, 2012, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type, all of which are valued using Level 3 inputs:

 

     Total Recurring Fair Value Measurements
Reported in
 
     Condensed Consolidated Statements of
Assets and Liabilities  Using Significant
Unobservable Inputs (Level 3)
 
     March 31, 2013      September 30, 2012  

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 108,372       $ 150,500   

Senior subordinated debt

     98,375         81,282   

Junior subordinated debt

     501         498   

Preferred equity

     256         1,103   

Common equity/equivalents

     3,812         3,752   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 211,316       $ 237,135   
  

 

 

    

 

 

 

Control Investments

     

Senior debt

   $ 35,065       $ 13,845   

Senior subordinated debt

     18,578         18,867   

Common equity/equivalents

     2,521         4,113   
  

 

 

    

 

 

 

Total Control Investments

   $ 56,164       $ 36,825   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 267,480       $ 273,960   
  

 

 

    

 

 

 

In accordance with ASU 2011-04, which was effective for us beginning January 1, 2012, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2013 and September 30, 2012. In addition to the techniques and inputs noted in the table below, according to our Policy, the Adviser may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity-related calculations for the particular input.

 

17


Quantitative Information about Level 3 Fair Value Measurements

 

    Fair Value
as of
March 31,
2013
    Fair Value
as of
September 30,
2012
    Valuation
Technique/

Methodology
    Unobservable
Input
    Range / Weighted
Average as of
March 31, 2013
    Range / Weighted Average as of
September 30, 2012
 

Non-syndicated debt only investments

  $ 78,763      $ 99,768        SPSE (A)       EBITDA (B)       ($156) - $14,853 / $4,012        ($310) - $14,055 / $4,074   
         

 

Risk

Ratings

  

(C)  

    2.0 – 10.0 / 6.1        2.0 – 10.0 / 5.9   

Syndicated debt only investments

    67,673        57,642       
 
Market
Quotes
  
  
    IBP (D)       97.0% - 104.0% / 99.8%        87.0% - 101.5% / 98.7%   

Bundled debt and equity investments

    114,062        94,062        SPSE (A)       EBITDA (B)       $282 - $7,582 / $3,165        ($1,164) - $9,753 / $2,206   
         

 

Risk

Ratings

  

(C)  

    2.0 – 8.0 / 3.5        3.0 – 8.0 / 4.4   
        TEV       
 
EBITDA
multiples
  
(B)  
    3.9 – 10.0 / 8.6        4.2 – 9.2 / 5.5   
          EBITDA (B)       $199 - $7,582 / $4,276        ($1,164) - $10,967 / $4,555   
        TEV       

 

Revenue

multiples

  

(B)  

    0.2 – 1.9 / 0.6        0.2 – 2.2 / 0.2   
          Revenue (B)       $2,493 - $11,109 / $9,024        $1,057 - $2,474 / $2,474   

Fund of fund investments

    2,964        2,963        NAV (E)        

Other

    4,018        19,525        Payoff (F)        
 

 

 

   

 

 

         

Total Fair Value for Level 3 Investments

  $ 267,480      $ 273,960           
 

 

 

   

 

 

         

 

( A )  

SPSE makes an independent assessment of the data the Adviser submits to them (which includes the financial and operational performance, as well as the Adviser’s internally assessed risk ratings of the portfolio companies – see footnote (D) below) and its own independent data to form an opinion as to what they consider to be the market values for our securities. With regard to its work, SPSE has stated that the data submitted to us is proprietary in nature.

( B )  

Adjusted earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) is an unobservable input, which is generally based on the most recently available trailing twelve month financial statements submitted to the Adviser from the portfolio companies. EBITDA multiples, generally indexed, represent the Adviser’s estimate of where market participants might price these investments. For our bundled debt and equity investments, the EBITDA and EBITDA multiple inputs are used in the TEV fair value determination and the issuer’s debt, equity, and/or equity-like securities are valued in accordance with the Adviser’s liquidity waterfall approach. In limited cases, the revenue from the most recently available trailing twelve month financial statements submitted to the Adviser from the portfolio companies and the related revenue multiples, generally indexed, are used to provide a TEV fair value determination of our bundled debt and equity investments.

( C )  

As part of the Adviser’s valuation procedures, it risk rates all of our investments in debt securities. The Adviser uses the Nationally Recognized Statistical Rating Organization’s risk rating system for generally all syndicated loans and a proprietary risk rating system for all other debt securities. The Adviser’s risk rating system uses a scale of 0 to 10, with 10 being the lowest probability of default. The risk rating system covers both qualitative and quantitative aspects of the portfolio company business and the securities we hold.

( D )  

The Adviser generally bases the value of our syndicated debt securities on the IBP offered by the respective originating syndication agent’s trading desk, or secondary desk, on or near the valuation date. These bid prices are non-binding and are generally based on the underlying company performance and security characteristics, as well as other market conditions and credit risk factors.

( E )

The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the NAV provided by the non-control fund.

(F)  

Includes two syndicated debt only investments and one bundled debt and equity investment as of March 31, 2013 and three syndicated debt only investments as of September 30, 2012, which subsequently paid off at par after those period ends and, as such, were valued based on the payoff.

A portfolio company’s EBITDA and EBITDA multiples are the significant unobservable inputs generally included in the Adviser’s internally assessed TEV models used to value our proprietary debt and equity investments. Holding all other factors constant, increases (decreases) in the EBITDA and/or the EBITDA multiples inputs would result in a higher (lower) fair value measurement. Per our Policy, the Adviser generally uses an indexed EBITDA multiple in these TEVs. EBITDA and EBITDA multiple inputs do not have to directionally correlate since EBITDA is a company performance metric and EBITDA multiples can be influenced by market, industry, company size and other factors.

 

18


Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six month periods ended March 31, 2013 and 2012 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such 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, we categorize the fair value measurement in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. 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.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

FISCAL YEAR 2013:

 

           Senior           Common        
     Senior     Subordinated     Preferred     Equity/        

Three months ended March 31, 2013

   Debt     Debt (A)     Equity     Equivalents     Total  

Fair value as of December 31, 2012

   $ 143,825      $ 117,549      $ 1,186      $ 7,953      $ 270,513   

Total gains (losses):

          

Net realized gain (B)

     13        3        —          —          16   

Net unrealized appreciation (depreciation) (C)

     2,782        (5,683     (2,929     (1,781     (7,611

Reversal of prior period net appreciation on realization (C)

     (10     (12     —          —          (22

New investments, repayments and settlements: (D)

          

Issuances/originations

     706        6,181        1,999        161        9,047   

Settlements/repayments

     (3,879     (584     —          —          (4,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2013

   $ 143,437      $ 117,454      $ 256      $ 6,333      $ 267,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           Senior           Common        
     Senior     Subordinated     Preferred     Equity/        

Six months ended March 31, 2013

   Debt     Debt (A)     Equity     Equivalents     Total  

Fair value as of September 30, 2012

   $ 164,345      $ 100,647      $ 1,103      $ 7,865      $ 273,960   

Total (losses) gains:

          

Net realized (loss) gain (B)

     (3,152     6        —          —          (3,146

Net unrealized appreciation (depreciation) (C)

     1,641        (6,633     (2,846     (2,936     (10,774

Reversal of prior period net depreciation on realization (C)

     7,401        625        —          —          8,026   

New investments, repayments and settlements: (D)

          

Issuances/originations

     5,098        52,364        1,999        1,404        60,865   

Settlements/repayments

     (25,978     (29,555     —          —          (55,533

Sales

     (5,918     —          —          —          (5,918
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2013

   $ 143,437      $ 117,454      $ 256      $ 6,333      $ 267,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
FISCAL YEAR 2012:           
     Senior     Senior           Common        
     Term     Subordinated     Preferred     Equity/        

Three months ended March 31, 2012

   Debt     Term Debt     Equity     Equivalents     Total  

Fair value as of December 31, 2011

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

Total gains (losses):

          

Net realized gain ( B )

     37        —          —          —          37   

Net unrealized (depreciation) appreciation ( C )

     (6,292     (784     (986     435        (7,627

Reversal of prior period net depreciation on realization ( C )

     458        —          —          —          458   

New investments, repayments and settlements: ( D )

          

Issuances/originations

     8,858        8,500        1,000        —          18,358   

Settlements/repayments

     (13,912     (23     —          —          (13,935

Sales

     (1,970     —          —          —          (1,970
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value as of March 31, 2012

   $ 180,000      $ 95,697      $ 595      $ 11,875      $ 288,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


     Senior     Senior           Common         
     Term     Subordinated     Preferred     Equity/         

Six months ended March 31, 2012

   Debt     Term Debt     Equity     Equivalents      Total  

Fair value as of September 30, 2011

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

Total (losses) gains:

           

Net realized loss ( B )

     (8,363     —          —          —           (8,363

Net unrealized (depreciation) appreciation ( C )

     (15,128     (2,028     (1,572     1,787         (16,941

Reversal of prior period net depreciation on realization ( C )

     11,571        444        —          —           12,015   

New investments, repayments and settlements: ( D )

           

Issuances/originations

     16,688        11,320        1,601        —           29,609   

Settlements/repayments

     (18,454     (6,187     —          —           (24,641

Sales

     (6,459     —          —          —           (6,459
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value as of March 31, 2012

   $ 180,000      $ 95,697      $ 595      $ 11,875       $ 288,167   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

( A )  

Includes a junior subordinated debt investment totaling $0.5 million in fair value as of March 31, 2013 and September 30, 2012, respectively. There were no junior subordinated debt investments as of March 31, 2012 or September 30, 2011, respectively.

(B)

Included in net realized gain (loss) on Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012.

( C )  

Included in net unrealized (depreciation) appreciation of Non-Control/Non-Affiliate and Control investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012.

( D )  

Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, and PIK, as well as decreases in the costs basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Non-Syndicated Investments

As of March 31, 2013 and September 30, 2012, we held 28 and 30 non-syndicated investments with an aggregate fair value of $196.1 million and $195.8 million, respectively. During the six months ended March 31, 2013, we invested in two new non-syndicated investments for an aggregate of $33.7 million; we sold one non-syndicated investment; wrote off one non-syndicated investment for a realized loss of $0.9 million and had one non-syndicated investment pay off early, for which we received a principal payment of $20.0 million and a success fee of $1.1 million. Additionally, during the six months ended March 31, 2013, we funded $4.6 million to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal payments totaled $25.6 million from existing non-syndicated portfolio companies. The following significant non-syndicated investment transactions occurred during the six months ended March 31, 2013:

 

   

Viapack, Inc. – In November 2012, we sold our investment in Viapack, Inc. (“Viapack”) for net proceeds of $5.9 million, which resulted in a realized loss of $2.4 million recorded in the three months ended December 31, 2012. Viapack had partially been on non-accrual status at the time of the sale.

 

   

AG Transportation Holdings, LLC. – In December 2012, we invested $14.0 million in AG Transportation Holdings, LLC (“AG Trucking”) through a combination of senior subordinated term debt and equity. AG Trucking, headquartered in Goshen, Indiana, is a regional food-grade liquid and dry bulk carrier providing a variety of bulk transportation services, including liquid transportation, dry bulk dumps, freight brokering, private fleet conversion and project runs to large international agricultural and food manufacturing firms.

 

   

Allen Edmonds Shoe Corporation – In December 2012, we invested $19.5 million in Allen Edmonds Shoe Corporation (“Allen Edmonds”) through senior subordinated term debt that we purchased from one of Allen Edmonds’ existing lenders. Allen Edmonds, headquartered in Port Washington, Wisconsin, manufactures premium men’s footwear and accessories, which it sells through its retail stores, catalogs and internet site and also through its wholesale and e-commerce channels.

 

   

Reliable Biopharmaceutical Holdings, Inc. – In March 2013, we acquired a controlling equity position in Reliable Biopharmaceutical Holdings, Inc. (“Reliable”) and infused $2.0 million in additional equity capital in the form of preferred equity. In addition, we invested $1.1 million in line of credit draws to Reliable during the six months ended March 31, 2013. As of March 31, 2013, we have classified Reliable as a Control portfolio company on our accompanying Condensed Consolidated Schedule of Investments .

Syndicated Investments

We held a total of 19 syndicate loans with an aggregate fair value of $71.4 million, or 26.7% of our total investment portfolio, as of March 31, 2013, as compared to 20 syndicate loans with an aggregate fair value of $78.2 million, or 28.5% of our total investment portfolio, as of September 30, 2012. During the six months ended March 31, 2013, we had eight early payoffs of syndicated investments for a combined total of $28.4 million and six new syndicated investments for a combined total of $22.5 million. We received an aggregate of $0.5 million in prepayment fees related to four of these early payoffs of syndicated investments during the six months ended March 31, 2013.

 

20


Investment Concentrations

As of March 31, 2013, our investment portfolio consisted of loans to 47 companies located in 28 states across 22 different industries, with an aggregate fair value of $267.5 million. The five largest investments at fair value as of March 31, 2013, totaled $86.7 million, or 32.4% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2012, which totaled $91.8 million, or 33.5% of our total investment portfolio. As of March 31, 2013, our average investment by obligor was $7.7 million at cost, compared to $7.3 million at cost as of September 30, 2012. The following table outlines our investments by security type as of March 31, 2013 and September 30, 2012:

 

     March 31, 2013     September 30, 2012  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 205,209         56.8   $ 143,437         53.6   $ 235,158         64.4   $ 164,345         60.0

Senior subordinated debt

     141,279         39.1        116,953         43.7        118,469         32.5        100,149         36.5   

Junior subordinated debt

     433         0.1        501         0.2        428         0.1        498         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     346,921         96.0        260,891         97.5        354,055         97.0        264,992         96.7   

Preferred equity

     8,717         2.4        256         0.1        6,719         1.8        1,103         0.4   

Common equity/equivalents

     5,652         1.6        6,333         2.4        4,247         1.2        7,865         2.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     14,369         4.0        6,589         2.5        10,966         3.0        8,968         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 361,290         100.0   $ 267,480         100.0   $ 365,021         100.0   $ 273,960         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications at March 31, 2013 and September 30, 2012:

 

     March 31, 2013     September 30, 2012  

Industry Classification

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

Healthcare, education and childcare

   $ 32,643         12.2   $ 32,867         12.0

Mining, steel, iron and non-precious metals

     31,487         11.8        31,590         11.5   

Electronics

     29,587         11.1        42,111         15.4   

Personal and non-durable consumer products

     26,615         10.0        8,399         3.1   

Broadcast and entertainment

     22,157         8.3        25,505         9.3   

Aerospace and defense

     14,593         5.5        16,597         6.0   

Oil and gas

     14,550         5.4        15,386         5.6   

Printing and publishing

     13,723         5.1        12,760         4.6   

Cargo Transportation

     13,289         5.0        —           —     

Automobile

     10,560         3.9        12,168         4.4   

Textiles and leather

     9,727         3.6        9,776         3.6   

Machinery

     7,664         2.9        7,618         2.8   

Beverage, food and tobacco

     7,221         2.7        7,258         2.6   

Leisure, amusement, motion pictures and entertainment

     6,408         2.4        5,380         2.0   

Diversified/conglomerate manufacturing

     5,754         2.1        6,824         2.5   

Containers, packaging and glass