Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 04/30/2014 16:16:52)
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 QUARTERLY PERIOD ENDED MARCH 31, 2014

 

¨ 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 100  
MCLEAN, VIRGINIA   22102
(Address of principal executive office)   (Zip Code)

(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 a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   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, 2014 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 March 31, 2014 and September 30, 2013      3   
  Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2014 and 2013      4   
  Condensed Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2014 and 2013      5   
  Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2014 and 2013      6   
  Condensed Consolidated Schedules of Investments as of March 31, 2014 and September 30, 2013      7   
  Notes to Condensed Consolidated Financial Statements      15   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   
  Overview      37   
  Results of Operations      41   
  Liquidity and Capital Resources      51   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      61   

Item 4.

  Controls and Procedures      62   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      62   

Item 1A.

  Risk Factors      62   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      63   

Item 3.

  Defaults Upon Senior Securities      63   

Item 4.

  Mine Safety Disclosures      63   

Item 5.

  Other Information      63   

Item 6.

  Exhibits      63   

SIGNATURES

     64   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,     September 30,  
     2014     2013  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $233,134 and $218,713, respectively)

   $ 208,527      $ 181,870   

Affiliate investments (Cost of $59,757 and $9,440, respectively)

     57,826        10,787   

Control investments (Cost of $62,880 and $104,113, respectively)

     26,967        64,221   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $355,771 and $332,266, respectively)

     293,320        256,878   
  

 

 

   

 

 

 

Cash and cash equivalents

     6,390        13,900   

Restricted cash and cash equivalents

     1,031        1,176   

Interest receivable

     2,326        2,488   

Due from custodian

     1,929        16,473   

Deferred financing fees

     2,531        3,086   

Other assets

     819        1,090   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 308,346      $ 295,091   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $60,200 and $46,900, respectively)

   $ 60,514      $ 47,102   

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

     38,497        38,497   

Accounts payable and accrued expenses

     345        494   

Interest payable

     191        170   

Fees due to Adviser (A)

     1,666        1,706   

Fee due to Administrator (A)

     213        126   

Other liabilities

     1,344        1,004   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 102,770      $ 89,099   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 205,576      $ 205,992   
  

 

 

   

 

 

 

COMPONENTS OF NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized and 21,000,160 shares issued and outstanding

   $ 21      $ 21   

Capital in excess of par value

     322,936        322,936   

Note receivable from employee (A)

     (175     (175

Cumulative net unrealized depreciation of investments

     (62,451     (75,388

Cumulative net unrealized appreciation of other

     (375     (260

Overdistributed net investment income

     (100     (100

Accumulated net realized losses

     (54,280     (41,042
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 205,576      $ 205,992   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 9.79      $ 9.81   
  

 

 

   

 

 

 

 

(A)   Refer to Note 4— Related Party Transactions for additional information.
(B) Refer to Note 11— Commitments and Contingencies 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 PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2014     2013     2014     2013  

INVESTMENT INCOME

        

Interest income:

        

Non-Control/Non-Affiliate investments

   $ 6,285      $ 6,835      $ 12,684      $ 14,149   

Affiliate investments

     874        —          1,093        —     

Control investments

     1,008        1,545        2,577        2,357   

Cash and cash equivalents

     —          1        —          2   

Notes receivable from employees (A)

     4        43        8        96   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,171        8,424        16,362        16,604   

Other income:

        

Non-Control/Non-Affiliate investments

     960        —          961        1,648   

Control investments

     200        —          400        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,331        8,424        17,723        18,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,504        1,419        2,960        2,851   

Incentive fee (A)

     1,121        953        2,095        2,168   

Administration fee (A)

     213        187        416        337   

Interest expense on borrowings

     669        803        1,284        1,659   

Dividend expense on mandatorily redeemable preferred stock

     686        686        1,372        1,372   

Amortization of deferred financing fees

     315        329        630        585   

Professional fees

     337        35        627        293   

Other general and administrative expenses

     328        241        649        558   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,173        4,653        10,033        9,823   

Credits to fees from Adviser (A)

     (327     (639     (1,205     (840
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     4,846        4,014        8,828        8,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,485        4,410        8,895        9,269   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED (LOSS) GAIN

        

Net realized (loss) gain:

        

Non-Control/Non-Affiliate investments

     (2,610     30        (2,610     (611

Control investments

     71        —          (10,703     (2,407
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (2,539     30        (13,313     (3,018

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     10,141        (1,772     12,237        (1,858

Affiliate investments

     (6,339     —          (6,495     —     

Control investments

     (7,742     (5,861     7,195        (890

Other

     (108     430        (115     2,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (4,048     (7,203     12,822        (648
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (6,587     (7,173     (491     (3,666
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (2,102   $ (2,763   $ 8,404      $ 5,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.21      $ 0.21      $ 0.42      $ 0.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (0.10   $ (0.13   $ 0.40      $ 0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared and paid per share

   $ 0.21      $ 0.21      $ 0.42      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

        

Basic and Diluted

     21,000,160        21,000,160        21,000,160        21,000,160   

 

(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)

 

     Six Months Ended March 31,  
     2014     2013  

OPERATIONS

    

Net investment income

   $ 8,895      $ 9,269   

Net realized loss on investments

     (13,313     (3,018

Net unrealized appreciation (depreciation) of investments

     12,937        (2,748

Net unrealized (appreciation) depreciation of other

     (115     2,100   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     8,404        5,603   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (8,820     (8,820
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Repayment of principal on employee notes (A)

     —          1,800   

NET DECREASE IN NET ASSETS

     (416     (1,417

NET ASSETS, BEGINNING OF PERIOD

     205,992        188,564   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 205,576      $ 187,147   
  

 

 

   

 

 

 

 

(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


Table of Contents

GLADSTONE CAPITAL CORPORATION

C ONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 8,404      $ 5,603   

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

    

Purchase of investments

     (79,801     (60,826

Principal repayments on investments

     38,415        55,007   

Net proceeds from sale of investments

     4,700        5,918   

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

     (128     (39

Net change in premiums, discounts and amortization

     (34     526   

Net realized loss on investments

     13,343        3,146   

Net unrealized (appreciation) depreciation of investments

     (12,937     2,748   

Net unrealized appreciation (depreciation) of other

     115        (2,100

Decrease (increase) in restricted cash and cash equivalents

     145        (657

Amortization of deferred financing fees

     630        585   

Decrease (increase) in interest receivable

     162        (481

Decrease in due from custodian

     14,544        1,225   

Decrease in other assets

     268        223   

Decrease in accounts payable and accrued expenses

     (149     (31

Increase (decrease) in interest payable

     21        (45

Decrease in fees due to Adviser (A)

     (40     (794

Increase in fee due to Administrator (A)

     87        13   

Increase (decrease) in other liabilities

     340        (199
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (11,915     9,822   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     77,200        51,500   

Repayments on borrowings

     (63,900     (54,900

Deferred financing fees

     (75     (661

Distributions paid to common stockholders

     (8,820     (8,820

Receipt of principal on employee notes

     —          1,800   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     4,405        (11,081
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (7,510     (1,259

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     13,900        9,857   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 6,390      $ 8,598   
  

 

 

   

 

 

 

 

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

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

 

6


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

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

     

Non-syndicated investments:

         

AG Transportation Holdings, LLC

 

Cargo transport

  Senior Subordinated Term Debt (13.3%, Due 3/2018) (D)   $ 13,000      $ 12,859      $ 13,016   
    Member Profit Participation (18.0% ownership) (F) (G)       1,000        —     
    Profit Participation Warrants (7.0% ownership) (F) (G)       244        —     
       

 

 

   

 

 

 
          14,103        13,016   

Allison Publications, LLC

 

Printing and publishing

  Line of Credit, $0 available (8.3%, Due 9/2016) (D)     600        600        601   
    Senior Term Debt (8.3%, Due 9/2018) (D)     2,875        2,875        2,879   
    Senior Term Debt (13.0%, Due 9/2018) (C) (D)     5,400        5,400        5,427   
       

 

 

   

 

 

 
          8,875        8,907   

Alloy Die Casting Co.

 

Diversified/conglomerate manufacturing

  Senior Term Debt (13.5%, Due 10/2018) (D)     5,235        5,235        5,255   
    Preferred Stock (1,742 shares) (D) (G)       1,742        835   
    Common Stock (270 shares) (F) (G)       18        —     
       

 

 

   

 

 

 
          6,995        6,090   

Behrens Manufacturing, LLC

 

Diversified/conglomerate manufacturing

  Senior Term Debt (13.0%, Due 12/2018) (D)     4,275        4,275        4,286   
    Preferred Stock (1,253 shares) (F) (G) (K)       1,253        1,180   
       

 

 

   

 

 

 
          5,528        5,466   

Chinese Yellow Pages Company

 

Printing and publishing

  Line of Credit, $0 available (7.3%, Due 2/2015) (D)     168        168        118   

Francis Drilling Fluids, Ltd.

 

Oil and gas

  Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)     15,000        15,000        14,812   
    Preferred Equity Units (999 units) (F) (G)       892        153   
    Common Equity Units (999 units) (F) G)       1        —     
       

 

 

   

 

 

 
          15,893        14,965   

Funko, LLC

 

Personal and non-durable consumer products

  Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019) (D)     7,587        7,587        7,729   
    Preferred Equity Units (1,305 units) (F) (G)       1,305        2,276   
       

 

 

   

 

 

 
          8,892        10,005   

GFRC Holdings, LLC

 

Buildings and real estate

  Line of Credit, $250 available (10.5%, Due 5/2014) (D)     150        150        108   
    Senior Term Debt (10.5%, Due 6/2016) (D)     4,924        4,924        3,496   
    Senior Subordinated Term Debt (13.0%, Due 6/2016) (D)     6,598        6,598        4,685   
       

 

 

   

 

 

 
          11,672        8,289   

Heartland Communications Group

 

Broadcasting and entertainment

  Line of Credit, $0 available (5.0%, Due 3/2014) (D) (H)     100        100        65   
    Line of Credit, $0 available (10.0%, Due 3/2014) (D) (H)     100        100        65   
    Senior Term Debt (5.0%, Due 3/2014) (D) (H)     4,342        4,342        781   
    Common Stock Warrants (8.8% ownership) (F) (G)       66        —     
       

 

 

   

 

 

 
          4,608        911   

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        956   
    Senior Term Debt (10.5%, Due 5/2014) (D)     61        61        25   
    Senior Term Debt (12.5%, Due 5/2014) (C) (D)     2,700        2,700        1,215   
       

 

 

   

 

 

 
          5,011        2,196   

J.America, Inc.

 

Personal and non-durable consumer products

  Senior Subordinated Term Debt (10.4%, Due 12/2019) (D)     7,500        7,500        7,556   
    Senior Subordinated Term Debt (11.5%, Due 12/2019) (D)     9,500        9,500        9,571   
       

 

 

   

 

 

 
          17,000        17,127   

Leeds Novamark Capital I, L.P.

 

Private equity fund – healthcare, education and childcare

  Limited Partnership Interest (8.4% ownership, $2,800 uncalled capital commitment) (G) (L)       173        68   

Legend Communications of Wyoming, LLC

 

Broadcasting and entertainment

  Senior Term Debt (12.0%, Due 1/2014) (D)     6,699        6,699        3,705   

 

7


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair
Value
 

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

  

Meridian Rack & Pinion, Inc.

 

Automobile

  Senior Term Debt (13.5%, Due 12/2018) (D)   $ 4,140      $ 4,140      $ 4,145   
    Preferred Stock (1,449 shares) (F) (G)       1,449        1,486   
       

 

 

   

 

 

 
          5,589        5,631   

North American Aircraft Services, LLC

 

Aerospace and defense

  Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)     1,750        1,750        1,773   
    Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)     2,820        2,820        2,873   
    Common Stock Warrants (35,000 shares) (F) (G)       350        1,185   
       

 

 

   

 

 

 
          4,920        5,831   

Ohana Media Group

 

Broadcasting and entertainment

  Senior Term Debt (10.0%, Due 10/2016) (D)     1,433        1,433        1,395   

Precision Acquisition Group Holdings, Inc.

 

Machinery

  Equipment Note (13.0%, Due 3/2014) (D)     1,000        1,000        655   
    Senior Term Debt (13.0%, Due 3/2014) (D)     4,125        4,125        2,702   
    Senior Term Debt (13.0%, Due 3/2014) (C) (D)     4,053        4,053        2,645   
       

 

 

   

 

 

 
          9,178        6,002   

Saunders & Associates

 

Electronics

  Line of Credit, $0 available (11.3%, Due 5/2013) (D)     917        917        839   
    Senior Term Debt (11.3%, Due 5/2013) (D)     8,947        8,947        8,186   
       

 

 

   

 

 

 
          9,864        9,025   

Sunburst Media—Louisiana, LLC

 

Broadcasting and entertainment

  Senior Term Debt (8.5%, Due 2/2016) (F)     6,026        6,026        1,434   

Thibaut Acquisition Co.

 

Home and office furnishings, housewares and durable consumer products

  Line of Credit, $1,000 available (9.0%, Due 8/2014) (D)     —          —          —     
    Senior Term Debt (12.0%, Due 8/2014) (C) (D)     2,238        2,238        2,305   
       

 

 

   

 

 

 
          2,238        2,305   

WadeCo Specialties Inc.

 

Oil and gas

  Line of Credit, $1,825 available (8.0%, Due 3/2015) (I)     175        175        175   
    Senior Term Debt (8.0%, Due 3/2019) (I)     4,500        4,500        4,500   
    Senior Term Debt (12.0%, Due 3/2019) (I)     4,500        4,500        4,500   
    Common Stock (1,000 shares) (G) (I)       250        250   
       

 

 

   

 

 

 
          9,425        9,425   

Westland Technologies, Inc.

 

Diversified/conglomerate manufacturing

  Senior Term Debt (7.5%, Due 4/2016) (D)     450        450        351   
    Senior Term Debt (12.5%, Due 4/2016) (D)     4,000        4,000        3,200   
    Common Stock Warrants (77,287 shares) (F) (G)       350          
       

 

 

   

 

 

 
          4,800        3,551   
       

 

 

   

 

 

 

Subtotal – Non-syndicated investments

    $ 159,090      $ 135,462   
       

 

 

   

 

 

 

Syndicated Investments:

         

Ameriqual Group, LLC

 

Beverage, food and tobacco

  Senior Term Debt (9.0% and 1.5% PIK, Due 3/2016) (E)   $ 7,317      $ 7,248      $ 7,024   

Ardent Medical Services, Inc.

 

Healthcare, education and childcare

  Senior Subordinated Term Debt (11.0%, Due 1/2019) (E)     10,000        9,991        9,975   

ARSloane Acquisition, LLC

 

Printing and publishing

  Senior Subordinated Term Debt (11.8%, Due 9/2020) (E)     5,000        4,921        5,050   

Autoparts Holdings Limited

 

Automobile

  Senior Term Debt (10.5%, Due 1/2018) (E)     1,000        998        940   

Blue Coat Systems, Inc.

 

Electronics

  Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)     3,000        2,972        3,030   

Envision Acquisition Company, LLC

 

Healthcare, education and childcare

  Senior Subordinated Term Debt (9.8%, Due 11/2021) (E)     2,500        2,452        2,512   

First American Payment Systems, L.P.

 

Finance

  Senior Subordinated Term Debt (10.8%, Due 4/2019) (E)     4,500        4,471        4,556   

New Trident Holdcorp, Inc.

 

Healthcare, education and childcare

  Senior Subordinated Term Debt (10.3%, Due 7/2020) (E)     4,000        3,986        4,000   

PLATO Learning, Inc.

  Healthcare, education and childcare   Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)     5,000        4,919        5,000   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair
Value
 

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

  

RP Crown Parent, LLC

 

Electronics

  Senior Subordinated Term Debt (11.3%, Due 12/2019) (E)   $ 2,000      $ 1,965      $ 2,010   

Sensus USA, Inc.

 

Electronics

  Senior Term Debt (8.5%, Due 5/2018) (E)     500        497        501   

Steinway Musical Instruments, Inc.

 

Personal and non-durable consumer products

  Senior Subordinated Term Debt (9.3%, Due 9/2020) (E)     250        247        257   
         

SumTotal Systems, Inc.

 

Electronics

  Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)     4,000        3,932        3,950   

Targus Group International, Inc.

 

Textiles and leather

  Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016) (E)     9,226        9,126        7,658   

The Active Network, Inc.

 

Electronics

  Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)     1,000        995        1,020   

Vision Solutions, Inc.

 

Electronics

  Senior Term Debt (9.5%, Due 7/2017) (E)     11,000        10,946        11,055   

Vitera Healthcare Solutions, LLC

 

Healthcare, education and childcare

  Senior Subordinated Term Debt (9.3%, Due 11/2021) (E)     500        493        505   
         

W3, Co.

 

Oil and gas

  Senior Subordinated Term Debt (9.3%, Due 9/2020) (E)     499        494        499   

Wall Street Systems Holdings, Inc.

 

Electronics

  Senior Term Debt (9.3%, Due 10/2020) (E)     3,000        2,947        3,030   

WP Evenflo Group Holdings, Inc.

 

Diversified/conglomerate manufacturing

  Senior Preferred Stock (333 shares) (F) (G)       333        493   
    Junior Preferred Stock (111 shares) (F) (G)       111        —     
    Common Stock (1,874 shares) (F) (G)       —          —     
       

 

 

   

 

 

 
          444        493   
       

 

 

   

 

 

 

Subtotal - Syndicated investments

        $ 74,044      $ 73,065   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 71.1% of total investments at fair value)

  

  $ 233,134      $ 208,527   
       

 

 

   

 

 

 

AFFILATE INVESTMENTS (N) :

         

Ashland Acquisition, LLC

 

Printing and publishing

  Line of Credit, $1,500 available (12.0%, Due 7/2016) (D)   $ —        $ —        $ —     
    Senior Term Debt (12.0%, Due 7/2018) (D)     7,000        7,000        7,088   
    Preferred Equity Units (4,400 units) (F) (G)       440        —     
    Common Equity Units (4,400 units) (F) (G)       —          —     
       

 

 

   

 

 

 
          7,440        7,088   

Edge Adhesives Holdings, Inc.

 

Diversified/Conglomerate manufacturing

 

Line of Credit, $470 available (12.5%, Due

8/2014) (I)

    530        530        530   
    Senior Term Debt (12.5%, Due 2/2019) (I)     6,200        6,200        6,200   
    Senior Subordinated Term Debt (13.75%, Due 2/2019) (I)     1,600        1,600        1,600   
    Preferred Stock (2,316 share) (G) (I)       2,316        2,316   
       

 

 

   

 

 

 
          10,646        10,646   

FedCap Partners, LLC

 

Private equity fund – aerospace and defense

  Class A Membership Units (80 units) (G) (J)       2,000        3,347   
         

Lignetics, Inc.

 

Diversified natural resources, precious metals and minerals

  Senior Subordinated Term Debt (12.0%, Due 3/2020) (I)     6,000        6,000        6,000   
    Common Stock (100,000 shares) (G) (I)       1,000        1,000   
       

 

 

   

 

 

 
          7,000        7,000   

RBC Acquisition Corp.

 

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)     6,910        6,910        6,910   
    Senior Term Debt (12.0%, Due 12/2014) (C) (F)     11,392        11,392        11,392   
    Senior Subordinated Term Debt (12.5%, Due 12/2014) (F)     6,000        6,000        6,000   
    Preferred Stock (3,999,000 shares) (F) (G) (K)       3,999        1,443   
    Common Stock (2,000,000 shares) (F) (G)       370        —     
       

 

 

   

 

 

 
          32,671        29,745   
       

 

 

   

 

 

 

Total Affiliate Investments (represented 19.7% of total investments at fair value)

  

  $ 59,757      $ 57,826   
       

 

 

   

 

 

 

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair
Value
 

CONTROL INVESTMENTS (O) :

  

Defiance Integrated Technologies, Inc.

 

Automobile

  Senior Subordinated Term Debt (11.0%, Due
4/2016) (C) (F)
  $ 6,705      $ 6,705      $ 6,705   
    Common Stock (15,500 shares) (F) (G)       1        3,126   
       

 

 

   

 

 

 
          6,706        9,831   

Lindmark Acquisition, LLC

 

Broadcasting and entertainment

  Senior Subordinated Term Debt (25.0%, Due Upon Demand) (F)     —          —          —     
    Success Fee on Senior Subordinated Term Debt (F)       —          947   
    Common Stock (100 shares) (F) (G)       317        —     
          317        947   

Midwest Metal Distribution, Inc.

 

Mining, steel, iron and non- precious metals

  Senior Subordinated Term Debt (12.0%, Due 7/2015) (F)     18,281        18,281        7,947   
    Preferred Stock (2,175 shares) (F) (G) (K)       2,175        —     
    Common Stock (501 shares) (F) (G)       138        —     
       

 

 

   

 

 

 
          20,594        7,947   

Sunshine Media Holdings

 

Printing and publishing

  Line of credit, $400 available (4.8%, Due 8/2014) (D) (H)     1,600        1,600        448   
    Senior Term Debt (4.8%, Due 5/2016) (D) (H)     16,948        16,948        4,744   
    Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)     10,700        10,700        3,050   
    Preferred Stock (15,270 shares) (F) (G) (K)       5,275        —     
    Common Stock (1,867 shares) (F) (G)       740        —     
    Common Stock Warrants (72 shares) (F) (G)       —          —     
       

 

 

   

 

 

 
          35,263        8,242   
       

 

 

   

 

 

 

Total Control Investments (represented 9.2% of total investments at fair value)

  

  $ 62,880      $ 26,967   
       

 

 

   

 

 

 

TOTAL INVESTMENTS

        $ 355,771      $ 293,320   
       

 

 

   

 

 

 

 

(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 as of March 31, 2014, 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. We also considered discounted cash flow methodologies.
(E)   Security fair valued based on the indicative bid price on or near March 31, 2014, 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)   New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended March 31, 2014, best represents fair value as of March 31, 2014.
(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. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity
(K) Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
(L) There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.
(M) Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(N) Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(O) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

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, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

        

Non-syndicated investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Senior Subordinated Term Debt (13.3%, Due 3/2018) (D)    $ 13,000       $ 12,818       $ 12,984   
      Member Profit Participation (18.0% ownership) (F) (G)         1,000         —     
      Profit Participation Warrants (7.0% ownership) (F) (G)         244         —     
           

 

 

    

 

 

 
              14,062         12,984   

Allen Edmonds Shoe Corporation

   Personal and non-durable consumer products    Senior Subordinated Term Debt (11.3%, Due
12/2015) (D)
     19,483         19,483         19,604   

Allison Publications, LLC

   Printing and publishing    Line of Credit, $0 available (8.3%, Due 9/2016) (D)      600         600         594   
      Senior Term Debt (8.3% , Due 9/2018) (D)      2,875         2,875         2,846   
      Senior Term Debt (13.0% , Due 9/2018) (C) (D)      5,400         5,400         5,346   
           

 

 

    

 

 

 
              8,875         8,786   

BAS Broadcasting

   Broadcasting and entertainment    Senior Term Debt (11.5%, Due 7/2013) (D)      7,465         7,465         373   

Chinese Yellow Pages Company

   Printing and publishing    Line of Credit, $0 available (7.3%, Due 2/2015) (D)      243         243         148   

Francis Drilling Fluids, Ltd.

   Oil and gas    Senior Subordinated Term Debt (12.0%, Due
11/2017) (D)
     15,000         15,000         14,475   
      Preferred Equity Units (999 units) (F) (G)         999         192   
      Common Equity Units (999 units) (F) G)         1         —     
           

 

 

    

 

 

 
              16,000         14,667   

Funko, LLC

   Personal and non-durable consumer products    Senior Subordinated Term Debt (12.0% and 1.5% PIK,
Due 5/2019) (D)
     7,530         7,530         7,530   
      Preferred Equity Units (1,250 units) (F) (G)         1,250         1,646   
           

 

 

    

 

 

 
              8,780         9,176   

GFRC Holdings, LLC

   Buildings and real estate    Line of Credit, $100 available (8.7%, Due 12/2013) (D) (I)      100         100         55   
      Senior Term Debt (10.5%, Due 12/2013) (D) (I)      4,924         4,924         2,708   
      Senior Subordinated Term Debt (13.0%, Due 12/2013) (D) (I)      6,598         6,598         3,629   
           

 

 

    

 

 

 
              11,622         6,392   

Heartland Communications Group

   Broadcasting and entertainment    Line of Credit, $0 available (5.0%, Due 3/2014) (D)      100         100         20   
      Line of Credit, $0 available (10.0%, Due 3/2014) (D)      100         100         20   
      Senior Term Debt (5.0%, Due 3/2014) (D)      4,342         4,342         868   
      Common Stock Warrants (8.8% ownership) (F) (G)         66         —     
           

 

 

    

 

 

 
              4,608         908   

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         1,238   
      Senior Term Debt (10.5%, Due 12/2013) (D)      261         261         144   
      Senior Term Debt (12.5%, Due 5/2014) (C) (D)      2,500         2,500         1,375   
           

 

 

    

 

 

 
              5,011         2,757   

Leeds Novamark Capital I, L.P.

   Private equity fund – healthcare, education and childcare    Limited Partnership Interest (8.4% ownership, $2,700 uncalled capital commitment) (G) (O)         253         253   

Legend Communications of Wyoming, LLC

   Broadcasting and entertainment    Senior Term Debt (11.0%, Due 12/2013) (D)      6,874         6,874         1,203   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

  

North American Aircraft Services, LLC

   Aerospace and defense   

Senior Subordinated Term Debt (11.8%, Due

8/2016) (D)

     $4,750       $ 4,750       $ 4,774   
     

Senior Subordinated Term Debt (12.5%, Due

8/2016) (D)

     2,820         2,820         2,834   
     

Common Stock Warrants (35,000 shares) (F) (G)

        350         774   
           

 

 

    

 

 

 
              7,920         8,382   

Ohana Media Group

   Broadcasting and entertainment   

Senior Term Debt (10.0%, Due 10/2016) (D)

     1,472         1,472         1,432   

POP Radio, LLC

   Broadcasting and entertainment    Senior Term Debt (11.8%, Due 5/2017) (D)      9,422         9,422         9,540   
     

Junior Subordinated Term Debt (11.0% PIK, Due 11/2017) (D)

     556         494         561   
      Participation Unit (2.4% ownership) (F) (G)         75         —     
           

 

 

    

 

 

 
              9,991         10,101   

Precision Acquisition Group Holdings, Inc.

   Machinery    Equipment Note (11.0%, Due 3/2014) (D) (L)      1,000         1,000         700   
      Senior Term Debt (11.0%, Due 3/2014) (D) (L)      4,125         4,125         2,888   
      Senior Term Debt (11.0%, Due 3/2014) (C) (D) (L)      4,053         4,053         2,837   
           

 

 

    

 

 

 
              9,178         6,425   

PROFIT Systems Acquisition Co.

   Electronics    Senior Term Debt (10.5%, Due 7/2014) (C) (D) (K)      1,950         1,950         1,950   

Saunders & Associates

   Electronics    Line of Credit, $0 available (11.3%, Due 5/2013) (D)      917         917         779   
      Senior Term Debt (11.3%, Due 5/2013) (D)      8,947         8,947         7,605   
              9,864         8,384   

Sunburst Media - Louisiana, LLC

   Broadcasting and entertainment    Senior Term Debt (10.5%, Due 11/2013) (D)      6,000         6,000         600   

Thibaut Acquisition Co.

  

Home and office furnishings, housewares and durable consumer products

  

Line of Credit, $875 available (9.0%, Due

1/2014) (D) (J)

     125         125         126   
      Senior Term Debt (12.0%, Due 1/2014) (C) (D) (J)      2,500         2,500         2,525   
           

 

 

    

 

 

 
              2,625         2,651   

Westland Technologies, Inc.

  

Diversified/conglomerate Manufacturing

   Senior Term Debt (7.5%, Due 4/2016) (D)      850         850         723   
      Senior Term Debt (12.5%, Due 4/2016) (D)      4,000         4,000         3,400   
      Common Stock Warrants (77,287 shares) (F) (G)         350         18   
           

 

 

    

 

 

 
              5,200         4,141   
           

 

 

    

 

 

 
Subtotal – Non-syndicated investments       $ 157,476       $ 121,317   
           

 

 

    

 

 

 

Syndicated Investments:

              

Allied Security Holdings, LLC

  

Personal, food and miscellaneous Services

  

Senior Subordinated Term Debt (9.8%, Due 2/2018) (E)

     $1,000       $ 992       $ 1,008   

Ameriqual Group, LLC

   Beverage, food and tobacco   

Senior Term Debt (9.0%, Due 3/2016) (E)

     7,331         7,248         7,038   

Ardent Medical Services, Inc.

   Healthcare, education and Childcare   

Senior Subordinated Term Debt (11.0%, Due

1/2019) (E)

     4,000         3,927         4,070   

Ascend Learning, LLC

   Healthcare, education and Childcare   

Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)

     1,000         980         1,000   

Autoparts Holdings Limited

   Automobile   

Senior Term Debt (10.5%, Due 1/2018) (E)

     1,000         996         969   

Blue Coat Systems, Inc.

   Electronics    Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)      3,000         2,971         3,015   

First American Payment Systems, L.P.

   Finance   

Senior Subordinated Term Debt (10.8%, Due

4/2019) (E)

     4,500         4,469         4,489   

New Trident Holdcorp, Inc.

   Healthcare, education and Childcare   

Senior Subordinated Term Debt (10.3%, Due

7/2020) (E)

     4,000         3,985         4,025   

PLATO Learning, Inc.

   Healthcare, education and Childcare   

Senior Subordinated Term Debt (11.3%, Due

5/2019) (E)

     5,000         4,914         5,000   
              

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

  

  

RP Crown Parent, LLC

   Electronics    Senior Subordinated Term Debt (11.3%, Due
12/2019) (E)
   $ 2,000       $ 1,963       $ 2,025   

Sensus USA, Inc.

   Electronics    Senior Term Debt (8.5%, Due 5/2018) (E)      500         496         485   

Steinway Musical Instruments, Inc.

   Personal and non-durable    Senior Subordinated Term Debt (9.3%, Due 9/2020) (E)      250         247         252   

consumer products

              

SumTotal Systems, Inc.

   Electronics    Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)      4,000         3,928         3,940   

Targus Group International, Inc.

   Textiles and leather    Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016) (E)      9,418         9,299         8,476   

Vision Solutions, Inc.

   Electronics    Senior Term Debt (9.5%, Due 7/2017) (E)      11,000         10,939         10,890   

W3, Co.

   Oil and gas    Senior Subordinated Term Debt (9.3%, Due 9/2020) (E)      499         494         507   

Wall Street Systems Holdings, Inc.

   Electronics    Senior Term Debt (9.3%, Due 10/2020) (E)      3,000         2,945         3,023   

WP Evenflo Group Holdings, Inc.

   Diversified/conglomerate    Senior Preferred Stock (333 shares) (F) (G)         333         341   

Manufacturing

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

 

 

    

 

 

 
              444         341   
           

 

 

    

 

 

 
Subtotal - Syndicated investments       $ 61,237       $ 60,553   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 70.8% of total investments at fair value)

  

   $ 218,713       $ 181,870   
           

 

 

    

 

 

 

AFFILATE INVESTMENTS (Q)  :

              

Ashland Acquisition, LLC

   Printing and publishing    Line of Credit, $1,500 available (12.0%, Due 7/2016) (D)    $ —         $ —         $ —     
      Senior Term Debt (12.0%, Due 7/2018) (D)      7,000         7,000         7,000   
      Preferred Equity Units (4,400 units) (F) (G)         440         440   
      Common Equity Units (4,400 units) (F) (G)         —           —     
           

 

 

    

 

 

 
              7,440         7,440   

FedCap Partners, LLC

  

Private equity fund – aerospace and defense

   Class A Membership Units (80 units) (G) (M)         2,000         3,347   
           

 

 

    

 

 

 

Total Affiliate Investments (represented 4.2% of total investments at fair value)

  

   $ 9,440$       $ 10,787   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (R) :

              

Defiance Integrated Technologies, Inc.

   Automobile    Senior Subordinated Term Debt (11.0%, Due
4/2016) (C) (F)
   $ 6,865       $ 6,865       $ 6,865   
      Common Stock (15,500 shares) (F) (G)         1         1,867   
           

 

 

    

 

 

 
              6,866         8,732   

Lindmark Acquisition, LLC

   Broadcasting and entertainment    Senior Subordinated Term Debt (25.0%, Due Upon Demand (F)      —           —           —     
      Success Fee on Senior Subordinated Term Debt (F)         —           916   
      Common Stock (100 shares) (F) (G)         317         —     
           

 

 

    

 

 

 
              317         916   

LocalTel, LLC

   Printing and publishing    Line of credit, $199 available (10.0%, Due 6/2014) (F) (H)      3,285         3,285         —     
      Line of Credit, $1,830 available (4.7%, Due
6/2014) (F) (H)
     1,170         1,170         —     
      Senior Term Debt (12.5%, Due 6/2014) (F) (H)      325         325         —     
      Senior Term Debt (8.5%, Due 6/2014) (F) (H)      2,688         2,688         —     
      Senior Term Debt (10.5%, Due 6/2014) (C) (F) (H)      2,750         2,750         —     
      Common Stock Warrants (4,000 shares) (F) (G)         —           —     
           

 

 

    

 

 

 
              10,218         —     

Midwest Metal Distribution, Inc.

  

Mining, steel, iron and non-precious metals

   Senior Subordinated Term Debt (12.0%, Due 7/2015) (D)      18,281         18,281         17,733   
      Preferred Stock (2,000 shares) (F) (G) (N)         2,000         —     
      Common Stock (501 shares) (F) (G)         138         —     
           

 

 

    

 

 

 
              20,419         17,733   

 

13


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (R) (Continued):

        

RBC Acquisition Corp.

   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)      6,969         6,969         6,969   
      Senior Term Debt (12.0%, Due 12/2014) (C) (F)      11,392         11,392         11,392   
      Senior Subordinated Term Debt (12.5%, Due 12/2014) (F)      6,000         6,000         6,000   
      Preferred Stock (2,299,000
shares) (F) (G) (N)
        2,299         2,447   
      Common Stock (2,000,000
shares) (F) (G)
        370         183   
           

 

 

    

 

 

 
              31,030         30,991   

Sunshine Media Holdings

   Printing and publishing    Line of credit, $400 available (4.8%, Due 8/2014) (D) (H)      1,600         1,600         320   
      Senior Term Debt (4.8%, Due 5/2016) (D) (H)      16,948         16,948         3,389   
      Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)      10,700         10,700         2,140   
      Preferred Stock (15,270
shares) (F) (G) (N)
        5,275         —     
      Common Stock (1,867 shares) (F) (G)         740         —     
      Common Stock Warrants (72 shares)         —           —     
           

 

 

    

 

 

 
              35,263         5,849   
           

 

 

    

 

 

 

Total Control Investments (represented 25.0% of total investments at fair value)

  

   $ 104,113       $ 64,221   
           

 

 

    

 

 

 

TOTAL INVESTMENTS (S)

         $ 332,266       $ 256,878   
           

 

 

    

 

 

 

 

(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 as of September 30, 2013, 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 fair valued based on the indicative bid price on or near September 30, 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)   Subsequent to September 30, 2013, the maturity on GFRC Holdings, LLC’s debt was extended until June 30, 2016 and the GFRC Holdings, LLC’s line of credit was repaid in full and terminated.
(J) Subsequent to September 30, 2013, the maturity on Thibaut Acquisition Co.’s debt was extended until December 11, 2014.
(K)   Subsequent to September 30, 2013, the investment was paid off at par and therefore was valued at the pay off amount as of September 30, 2013.
(L) Effective October 1, 2013, Precision Acquisition Group Holdings, Inc.’s debt interest rates increased to 13.0%.
(M)   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. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity.
(N) Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
(O) There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.
(P)   Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(Q)   Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(R) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(S)   Cumulative gross unrealized depreciation for federal income tax purposes is $83.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $5.5 million. Cumulative net unrealized depreciation is $78.2 million, based on a tax cost of $335.1 million.

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

 

14


Table of Contents

GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2014

(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 an externally-managed, 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”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). 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 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 revolving line of credit.

Gladstone Financial Corporation (previously known as Gladstone SSBIC Corporation and herein referred to as “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 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. As of March 31, 2014 and September 30, 2013, we held no investments through Gladstone Financial.

The financial statements of the foregoing two subsidiaries are consolidated with those of ours. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 13– Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), a Securities and Exchange Commission (the “SEC”) - registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by our affiliate Gladstone Administration, LLC (the “Administrator”), a Delaware limited liability company, pursuant to an administration agreement (the “Administration 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 Articles 6 and 10 of Regulation S-X. 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, 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, 2014, 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, 2013, as filed with the SEC on November 20, 2013.

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.

 

15


Table of Contents

Reclassifications

Certain amounts in the prior year’s financial statements have been reclassified to conform to the presentation for the three and six months ended March 31, 2014, with no effect on our financial condition, results of operations or cash flows.

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 the Policy to determine if changes thereto are advisable. In addition, 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 valuation techniques in accordance with GAAP to value our portfolio. 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, 2014 and September 30, 2013, 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, it 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 the Adviser 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, 2014 and September 30, 2013, 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), we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

 

16


Table of Contents

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.

 

(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 the Adviser by Standard & Poor’s Securities Evaluations, Inc. (“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. 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. Furthermore, the Adviser may utilize DCF valuation techniques and, in the absence of other observable market data, its own assumptions.

 

(B) Portfolio investments in controlled companies comprised of a bundle of securities, 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 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 at the same time. Applying the liquidity waterfall approach to all of our investments in 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 securities, 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, its 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.

 

17


Table of Contents

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. At times, the estimates of fair value calculated by the various valuation techniques (inclusive of the third-party valuations we receive) may materially differ from one another, resulting in a range of potential values. In these circumstances, the Adviser comes to its good faith valuation conclusion based on all facts and circumstances considered, which is then presented to the Board for review and ultimate approval. 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.

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, acquisition costs, and amendment fees and the accretion of original issue discounts (“OID”), 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 for financial reporting purposes 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, the interest income is deemed to be collectable. As of March 31, 2014, two portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $33.8 million, or 10.3% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $9.2 million, or 3.3% of the fair value of all debt investments in our portfolio. As of September 30, 2013, two portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $39.5 million, or 12.6% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $5.8 million, or 2.4% of the fair value of all debt investments in our portfolio.

We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. 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 over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash.

As of March 31, 2014 and September 30, 2013, we had 20 and 19 original OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $58 and $0.1 million for the three and six months ended March 31, 2014, respectively, as compared to $70 and $0.1 million for the three and six months ended March 31, 2013, respectively. The unamortized balance of OID investments as of March 31, 2014 and September 30, 2013, totaled $0.9 million and $1.0 million, respectively. As of March 31, 2014, and September 30, 2013, we had three investments which had a PIK interest component, respectively. We recorded PIK income of $80 and $0.2 million for the three and six months ended March 31, 2014, respectively, as compared to $51 and $0.1 million for the three and six months ended March 31, 2013, respectively. We collected $0 PIK interest in cash during the six months ended March 31, 2014 and 2013, 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 received an aggregate of $0.9 million in success fees during the six months ended March 31, 2014, which resulted from a $0.5 million prepayment by Francis Drilling Fluids Ltd. (“FDF”) in February 2014 and $0.4 million related to our sale of substantially all of the assets in Lindmark Acquisition, LLC (“Lindmark”) and the ensuing pay down of our debt investments in Lindmark at par in September 2013. We received $1.1 million of success fees during the six months ended March 31, 2013, which resulted from our exit of Westlake Hardware, Inc. at par in December 2012. As of March 31, 2014 and September 30, 2013, we had an aggregate off-balance sheet success fee receivable on our accruing debt investments of approximately $16.3 million and $16.9 million, respectively.

We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time we exit an investment, based on the respective investment’s prepayment fee schedule. During the six months ended March 31, 2014, we received an aggregate of $0.2 million of prepayment fees from the early payoffs at par of one of our proprietary investments and one of our syndicated investments. During the six months ended March 31, 2013, we received an aggregate of $0.5 million of prepayment fees which resulted from the early payoffs of four of our syndicated loans during the period.

 

18


Table of Contents

Dividend income on preferred equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. During the six months ended March 31, 2014, we received $0.2 million of dividend income from our preferred investment in FDF. We did not receive any dividend income during the six months ended March 31, 2013.

Success fees, prepayment fees and dividend income are all recorded in other income in our accompanying Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “ Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ,” which amends the criteria that define an investment company, clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we do not believe there is an impact on our financial position or results of operations from adopting this standard. We will continue to assess the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

NOTE 3. INVESTMENTS

ASC 820 defines fair value by focusing 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;

 

    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 Adviser’s assumptions based upon the best available information.

As of March 31, 2014 and September 30, 2013, 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, 2014 and 2013, 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, 2014 and September 30, 2013, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type:

 

19


Table of Contents
     Total Recurring Fair Value Measurements Reported in  
     Condensed Consolidated Statements of Assets and Liabilities
Using Significant  Unobservable Inputs (Level 3)
 
     March 31, 2014     September 30, 2013  

Non-Control/Non-Affiliate Investments

    

Senior debt

   $ 96,218      $ 82,923   

Senior subordinated debt

     104,382        95,162   

Junior subordinated debt

     —          561   

Preferred equity

     6,423        2,179   

Common equity/equivalents

     1,504        1,045   
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 208,527      $ 181,870   
  

 

 

   

 

 

 

Affiliate Investments

    

Senior debt

   $ 36,120      $ 7,000   

Senior subordinated debt

     13,600        —     

Preferred equity

     3,759        —     

Common equity/equivalents

     4,347        3,787   
  

 

 

   

 

 

 

Total Affiliate Investments

   $ 57,826      $ 10,787   
  

 

 

   

 

 

 

Control Investments

    

Senior debt

   $ 8,243      $ 28,211   

Senior subordinated debt

     15,599        31,513   

Preferred equity

     —          2,447   

Common equity/equivalents

     3,125        2,050   
  

 

 

   

 

 

 

Total Control Investments

   $ 26,967      $ 64,221   
  

 

 

   

 

 

 

Total Investments at Fair Value

   $ 293,320      $ 256,878   
  

 

 

   

 

 

 

In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2014 and September 30, 2013. 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 table below 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.

 

20


Table of Contents
     Quantitative Information about Level 3 Fair Value Measurements  
     Fair Value as of               Range / Weighted Average as of  
     March 31,
2014
     September 30,
2013
     Valuation
Techniques/
Methodologies
 

Unobservable
Input

   March 31,
2014
     September 30,
2013
 

Senior debt (G)

   $ 82,021       $ 64,892       SPSE (A)   EBITDA (B)    $ (985) - $5,259 /1,294       $ (80) - $4,754 / $1,463   
     Risk ratings (C)      3.0 – 10.0 / 5.6         3.0 - 10.0 / 6.0   
     30,209         30,881       Market Quotes   IBP (D)      83.0% - 101.0% / 94.3%         90.0% -100.8% / 95.8%   
     23,736         22,361       TEV   Revenue multiples (B)      2.0x         0.3x - 2.3 x / 1.7x   
     Revenue (B)    $ 14,802       $ 2,451 - $13,905 / $10,312   
     4,615         —         DCF (E)   Discount rate (E)      25.0% - 30.0% / 27.0%         —     

Senior subordinated debt (H)

     70,565         84,124       SPSE (A)   EBITDA (B)    $ 947 - $10,648 / $7,482       $ 1,220 -$15,891 / $7,797   
     Risk ratings (C)      3.0 – 8.0 / 4.6         2.0 - 7.0 / 5.0   
     42,365         29,331       Market Quotes   IBP (D)      98.8% - 103.0% / 100.3%         98.5% - 101.8% / 100.3%   
     20,651         13,781       TEV   EBITDA multiples (B)      4.2x – 9.3x / 7.9x         4.5x   
     EBITDA (B)    $ 2,705 - $3,114 / $2,815       $ 2,653   
     Revenue multiples (B)      2.0x         2.3x   
     Revenue (B)    $ 14,802       $ 13,905   

Preferred and common equity / equivalents (I)

     15,742         7,908       TEV   EBITDA multiples (B)      3.8x – 9.3 / 5.9         3.8x - 7.9x / 5.0x   
     EBITDA (B)    $ 88 - $10,648 / $3,115       $ 84 - $8,724 / $3,107   
     Revenue multiples (B)      2.0x         0.3x - 2.3x / 2.3x   
     Revenue (B)    $ 14,802       $ 2,451 - $13,905 / $13,903   
     3,416         3,600       Other (F)        
  

 

 

    

 

 

            

Total Investments

   $ 293,320       $ 256,878              
  

 

 

    

 

 

            

 

(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 (C) 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 the Adviser 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 of our 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 fators.
(E)   DCF calculations take into consideration assumptions about the future cash flows of a portfolio company and also an appropriately risk-adjusted discount rate. The discount rate takes into account adjustments for any nonperformance and liquidity risks and uses observable market data inputs, where available, so it approximates an appropriate rate of return market participants would require.
(F)   Includes private equity fund investments, where 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.
(G)   March 31, 2014 includes two new proprietary debt investments for a combined $15.9 million, which were valued at cost. September 30, 2013 includes one new proprietary investment for $7.0 million, which was valued at cost.
(H) March 31, 2014 includes two new proprietary investments for $7.6 million, which were valued at cost.
(I)   March 31, 2014 includes three new proprietary investments for a combined $3.6 million, which were valued at cost. September 30, 2013 includes one new proprietary investment for $0.4 million, which was valued at cost.

 

21


Table of Contents

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 TEV models. 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.

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 ended March 31, 2014 and 2013 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). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value 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 2014:          Senior           Common        

Three Months Ended March 31, 2014

   Senior
Debt
    Subordinated
Debt (A)
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of December 31, 2013

   $ 128,512      $ 135,066      $ 9,737      $ 9,891      $ 283,206   

Total (losses) gains:

          

Net realized (loss) gain (B)

     (2,765     85        —          69        (2,611

Net unrealized appreciation (depreciation) (C)

     4,365        (9,564     (3,464     (2,019     (10,682

Reversal of prior period net depreciation (appreciation) on realization (C)

     6,905        (93     —          (70     6,742   

New investments, repayments and settlements: (D)

          

Issuances/originations

     16,101        13,628        4,016        1,250        34,995   

Settlements/repayments

     (7,837     (5,541     (107     (145     (13,630

Net proceeds from sales

     (4,700     —          —          —          (4,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2014

   $ 140,581      $ 133,581      $ 10,182      $ 8,976      $ 293,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Six Months Ended March 31, 2014

   Senior
Debt
    Senior
Subordinated
Debt (A)
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of September 30, 2013

   $ 118,134      $ 127,236      $ 4,626      $ 6,882      $ 256,878   

Total (losses) gains:

          

Net realized (loss) gain (B)

     (13,497     85        —          69        (13,343

Net unrealized appreciation (depreciation) (C)

     6,002        (7,973     (3,026     1,051        (3,946

Reversal of prior period net depreciation (appreciation) on realization (C)

     17,168        (215     —          (70     16,883   

New investments, repayments and settlements: (D)

          

Issuances/originations

     30,315        39,657        8,689        1,268        79,929   

Settlements/repayments

     (12,841     (25,209     (107     (224     (38,381

Net proceeds from sales

     (4,700     —          —          —          (4,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2014

   $ 140,581      $ 133,581      $ 10,182      $ 8,976      $ 293,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents
FISCAL YEAR 2013:          Senior           Common        

Three Months Ended March 31, 2013

   Senior
Debt
    Subordinated
Debt (A)
    Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of December 31, 2012

   $ 136,721      $ 124,653      $ 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

     (3,799     (664     —          —          (4,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2013

   $ 136,413      $ 124,478      $ 256      $ 6,333      $ 267,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Six Months Ended March 31, 2013

   Senior
Debt
    Senior
Subordinated
Debt (A)
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of September 30, 2012

   $ 157,160      $ 107,832      $ 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

     (25,817     (29,716     —          —          (55,533

Sales

     (5,918     —          —          —          (5,918
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2013

   $ 136,413      $ 124,478      $ 256      $ 6,333      $ 267,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)   Includes a junior subordinated debt investment with a fair value of $0.6 million as of September 30, 2013. During the quarter ended March 31, 2014, we exited our one junior subordinated debt investment at par.
(B) Included in net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2014 and 2013.
(C)   Included in net unrealized (depreciation) appreciation of investments on our accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2014 and 2013.
(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, 2014 and September 30, 2013, we held 31 and 29 non-syndicated investments with an aggregate fair value of $220.3 million and $196.3 million, or 75.1% and 76.4% of the total aggregate portfolio at fair value, respectively. During the six months ended March 31, 2014, we invested in seven new non-syndicated investments totaling $62.0 million; sold two non-syndicated investments for a combined realized loss of $13.5 million; and had three non-syndicated investments pay off early at par, for which we received principal payments of $29.3 million in the aggregate. Additionally, during the six months ended March 31, 2014, we funded a combined $2.8 million to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal repayments were $6.9 million in the aggregate from existing non-syndicated portfolio companies (exclusive of the aforementioned $29.3 million in combined early payoffs at par). The following significant non-syndicated investment transactions occurred during the six months ended March 31, 2014:

 

    Alloy Die Casting Co. – In October 2013, we invested $7.0 million in Alloy Die Casting Co. (“ADC”), through a combination of senior term debt and equity. ADC, headquartered in Buena Park, California, is a manufacturer of aluminum and zinc metal components for a diverse range of end markets. This was a co-investment with one of our affiliated funds, Gladstone Investment Corporation (“Gladstone Investment”). Gladstone Investment invested an additional $16.3 million under the same terms as us.

 

23


Table of Contents
    Behrens Manufacturing, LLC – In December 2013, we invested $5.5 million in Behrens Manufacturing, LLC (“Behrens”) through a combination of senior term debt and equity. Behrens, headquartered in Winona, Minnesota, is a manufacturer and marketer of high quality, classic looking, utility products and containers. Gladstone Investment participated as a co-investor by investing an additional $12.9 million under the same terms as us.

 

    J.America, Inc. – In December 2013, we invested $17.0 million in J.America, Inc. (“J.America”) through senior subordinated term debt. J.America, headquartered in Webberville, Michigan, is a supplier of licensed decorated and undecorated apparel and headwear to collegiate, resort and military markets, wholesale distributors and apparel decorators.

 

    Meridian Rack & Pinion, Inc. – In December 2013, we invested $5.6 million in Meridian Rack & Pinion, Inc. (“Meridian”) through a combination of senior term debt and equity. Meridian, headquartered in San Diego, CA, is a provider of aftermarket and OEM replacement automotive parts, which it sells through both wholesale channels and online at www.BuyAutoParts.com. Gladstone Investment participated as a co-investor by investing $13.0 million under the same terms as us.

 

    LocalTel, LLC - In December 2013, we sold our investment in LocalTel, LLC (“LocalTel”) for net proceeds that are contingent on an earn-out agreement, which resulted in a realized loss of $10.8 million recorded in the three months ended December 31, 2013. LocalTel had been on non-accrual status at the time of the sale.

 

    Edge Adhesives Holdings, Inc. – In February 2014, we invested $11.1 million in Edge Adhesives Holdings, Inc. (“Edge”) through a combination of senior term debt, senior subordinated term debt and equity. Edge, headquartered in Fort Worth, TX, is a leading developer and manufacturer of innovative adhesives, sealants, tapes and related solutions used in building products, transportation, electrical and HVAC, among other markets. Gladstone Investment participated as a co-investor by investing $16.7 million under the same terms as us.

 

    WadeCo Specialties Inc. – In March 2014, we invested $11.3 million in WadeCo Specialties, Inc. (“WadeCo”) through a combination of senior term debt and equity. Headquartered in Midland, TX, WadeCo provides production well chemicals to oil well operators used for corrosion prevention; separating oil, gas and water once extracted; bacteria growth management; and conditioning water utilized for hydraulic fracturing.

 

    Lignetics, Inc. – In March 2014, we invested $7.0 million in Lignetics, Inc. (“Lignetics”) through a combination of senior subordinated term debt and equity. Lignetics, headquartered in Sandpoint, ID, is a manufacturer and distributor of branded wood pellets, which are used as a renewable fuel source for home and industrial heating, animal bedding, moisture absorption products used in fluid management in the energy production industry, and fire logs and fire starters.

 

    BAS Broadcasting – In March 2014, we sold our investment in BAS Broadcasting (“BAS”) for net proceeds of $4.7 million, which resulted in a realized loss of $2.8 million recorded in the three months ended March 31, 2014.

Syndicated Investments

We held a total of 20 syndicated investments with an aggregate fair value of $73.1 million, or 24.9% of our total investment portfolio at fair value, as of March 31, 2014, as compared to 18 syndicated investments with an aggregate fair value of $60.6 million, or 23.6% of our total investment portfolio at fair value, as of September 30, 2013. During the six months ended March 31, 2014, we invested in four new syndicated investments for a combined $9.0 million. Additionally, we had two syndicated investments pay off early at par, for which we received principal payments of $2.0 million in the aggregate during the six months ended March 31, 2014.

Investment Concentrations

As of March 31, 2014, our investment portfolio consisted of investments in 51 companies located in 24 states across 20 different industries, with an aggregate fair value of $293.3 million. The five largest investments at fair value as of March 31, 2014, totaled $85.9 million, or 29.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2013, which totaled $96.0 million, or 37.4% of our total investment portfolio. As of March 31, 2014, our average investment by obligor was $7.0 million at cost, compared to $7.1 million at cost as of September 30, 2013. The following table outlines our investments by security type as of March 31, 2014 and September 30, 2013:

 

24


Table of Contents
     March 31, 2014     September 30, 2013  
     Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
    Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Senior debt

   $ 183,424         51.5   $ 140,581         47.9   $ 184,146         55.4   $ 118,134         46.0

Senior subordinated debt

     144,040         40.5        133,581         45.5        129,013         38.8        126,675         49.3   

Junior subordinated debt

     —           —          —           —          494         0.2        561         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     327,464         92.0        274,162         93.4        313,653         94.4        245,370         95.5   

Preferred equity

     20,849         5.9        10,182         3.5        12,268         3.7        4,626         1.8   

Common equity/equivalents

     7,458         2.1        8,976         3.1        6,345         1.9        6,882         2.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     28,307         8.0        19,158         6.6        18,613         5.6        11,508         4.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 355,771         100.0   $ 293,320         100.0   $ 332,266         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of March 31, 2014 and September 30, 2013:

 

     March 31, 2014     September 30, 2013  

Industry Classification

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

Healthcare, education and childcare

   $ 51,806         17.7   $ 45,339         17.7

Electronics

     33,621         11.5        33,711         13.1   

Personal and non-durable consumer products

     27,390         9.3        29,032         11.3   

Diversified/conglomerate manufacturing

     26,245         9.0        4,482         1.7   

Oil and gas

     24,889         8.5        15,174         5.9   

Printing and publishing

     24,355         8.3        22,224         8.7   

Automobile

     16,402         5.6        9,701         3.8   

Cargo Transportation

     13,016         4.4        12,984         5.1   

Aerospace and defense

     9,180         3.1        11,730         4.6   

Broadcast and entertainment

     8,391         2.9        15,534         6.0   

Buildings and real estate

     8,288         2.8        6,392         2.5   

Mining, steel, iron and non-precious metals

     7,946         2.7        17,733         6.9   

Textiles and leather

     7,658         2.6        8,476         3.3   

Beverage, food and tobacco

     7,024         2.4        7,038         2.7   

Diversified/conglomerate services

     7,000         2.4        —           —     

Machinery

     6,002         2.0        6,425         2.5   

Diversified/conglomerate service

     5,050         1.7        —           —     

Finance

     4,556         1.6        4,489         1.7   

Leisure, amusement, motion pictures and entertainment

     2,196         0.7        2,756         1.1   

Home and office furnishing, housewares and durable consumer goods

     2,305         0.8        2,651         1.0   

Other, < 1.0% (A)

     —           —          1,007         0.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 293,320         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)   No industry within this category exceeds 1% of the total fair value as of the respective periods.

 

25


Table of Contents

Investments at fair value were included in the following geographic regions of the U.S. as of March 31, 2014 and September 30, 2013:

 

     March 31, 2014     September 30, 2013  

Geographic Region

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

Midwest

   $ 112,161         38.2   $ 118,570         46.2

South

     100,000         34.1        68,669         26.7   

West

     69,577         23.7        61,737         24.0   

Northeast

     11,582         4.0        7,902         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 293,320         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic region indicates the location of the headquarters of our 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 our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2014:

 

For the Fiscal Years Ending September 30:

   Amount  

For the remaining six months ending September 30:

   2014    $ 44,596   
   2015      43,877   
   2016      78,532   
   2017      13,665   
   2018      44,589   
   Thereafter      103,035   
     

 

 

 
       Total contractual repayments    $ 328,294   
   Equity investments      28,307   
   Adjustments to cost basis on debt investments      (830
     

 

 

 
  

    Total Cost Basis of Investments Held at March 31, 2014:

   $ 355,771   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . We generally maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of March 31, 2014 and September 30, 2013, we had gross receivables from portfolio companies of $0.3 million and $0.7 million, respectively. The allowance for uncollectible receivables was $9 and $0.1 million as of March 31, 2014 and September 30, 2013, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. The Adviser is controlled by our Chairman and Chief Executive Officer. On July 9, 2013, our Board of Directors approved the annual renewal of the Advisory Agreement through August 31, 2014.

 

26


Table of Contents

The following table summarizes the management fees, incentive fees and associated credits for the three and six months ended March 31, 2014 and 2013, reflected in our accompanying Condensed Consolidated Statements of Operations :

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2014     2013     2014     2013  

Average total assets subject to base management fee (A)

   $ 300,800      $ 283,800      $ 296,000      $ 285,100   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

   $ 1,504      $ 1,419      $ 2,960      $ 2,851   

Credit for fees received by Adviser from the portfolio companies

     (298     —          (631     (140

Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum

     (29     (43     (59     (104
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,177      $ 1,376      $ 2,270      $ 2,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee (B)

     1,121        953        2,095        2,168   

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

     —          (596     (515     (596
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 1,121      $ 357      $ 1,580      $ 1,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit for fees received by Adviser from the portfolio companies

     (298     —          (631     (140

Fee reduction for the voluntary, irrevocable waiver of 2.0% fee on senior syndicated loans to 0.5% per annum

     (29     (43     (59     (104

Incentive fee credit

     —          (596     (515     (596
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit to Fees From Adviser (B)

   $ (327   $ (639   $ (1,205   $ (840
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B) Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations .

Base Management Fee

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

 

    Senior Syndicated Loan Fee Waiver

Our 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 six months ended March 31, 2014 and 2013.

 

    Portfolio Company Fees

Pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. We credit 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a percentage of certain of such fees is retained by the Adviser.

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 our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the “hurdle rate”). We will pay the Adviser an income-based incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

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

 

27


Table of Contents
    100.0% of our 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

 

    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).

Our 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 100.0% cover distributions to common stockholders for the six months ended March 31, 2014 and 2013.

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 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate net unrealized capital depreciation, if any, as of the date of the calculation. 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 our 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 our inception. The entire portfolio’s aggregate net unrealized capital depreciation, if any, equals the sum of the difference, 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 fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate net unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through March 31, 2014, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee 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 period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% 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 period. 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 since our inception through March 31, 2014.

Administration Agreement

The Administration Agreement provides that we pay separately for administrative services equal to our 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 our chief financial officer, treasurer, chief compliance officer, internal counsel and secretary and their respective staffs. Our allocable portion of administrative expenses is generally derived by multiplying the Administrator’s total allocable expenses by the percentage of our total assets at the beginning of the quarter in comparison to the total assets at the beginning of the quarter of all funds managed by the Adviser and administered by the Administrator under similar agreements. On July 9, 2013, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2014.

 

28


Table of Contents

Related Party Fees Due

Fees due to related parties as of March 31, 2014 and September 30, 2013 on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:

 

     March 31, 2014      September 30, 2013  

Base management fee due to Adviser

   $ 545       $ 529   

Incentive fee due to Adviser

     1,121         1,177   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,666         1,706   
  

 

 

    

 

 

 

Fee due to Administrator

     213         126   
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,879       $ 1,832   
  

 

 

    

 

 

 

Other operating expenses due to the Adviser as of March 31, 2014 and September 30, 2013, totaled $4 and $18, respectively. In addition, as of March 31, 2014 and September 30, 2013, other net co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $1 and $0.2 million, respectively. These expenses were paid in full in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of March 31, 2014 and September 30, 2013, respectively .

Notes to Former Employees

During the six months ended March 31, 2014 and 2013, we had one outstanding note receivable to one former employee, who is now an employee of the Adviser. The note was for the exercise of options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The note requires the quarterly payment of interest at the market rate in effect at the date of issuance, has a term of nine years and has been recorded as a reduction of net assets. The note was evidenced by a full recourse note that is due upon maturity or 60 days following termination of employment with the Adviser and the shares of common stock purchased with the proceeds of the note is posted as collateral. Additionally, during the six months ended March 31, 2013, we received $1.8 million in principal repayments on another note receivable from a former employee, who is now an employee of the Adviser. That note was paid off as of September 30, 2013. We did not receive any principal repayments during the six months ended March 31, 2014. We recognized interest income from all employee notes of $4 and $8 for the three and six months ended March 31, 2014, respectively and $43 and $0.1 million for the three and six months ended March 31, 2013, respectively.

The following table is a summary of the remaining note issued to a current employee of the Adviser for the exercise of stock options as of March 31, 2014 and September 30, 2013:

 

Issue Date

   Original
Amount of
Employee
Note
    Outstanding
Balance of Employee Note
As of March 31, 2014 and
September 30, 2013
     Maturity
Date
   Interest
Rate
on Note

Jul-06

     275 (A)       175       Jul-15    8.26%
  

 

 

   

 

 

       

 

(A) On September 7, 2010, we entered into a redemption agreements (the “Redemption Agreement”) with Laura Gladstone, a Managing Director of the Adviser and the daughter of Mr. Gladstone, in connection with the maturity of secured promissory notes executed by Ms. Gladstone on July 13, 2006, in the principal amount of $0.3 million (the “Note”). Ms. Gladstone originally executed the Notes to facilitate her payment of the exercise price of certain stock options (the “Options”) to acquire shares of our common stock. Concurrently with the execution of the Note, we, together with Ms. Gladstone entered into a stock pledge agreement (the “Pledge Agreement”), pursuant to which Ms. Gladstone granted to us a first priority security interest in the Pledged Collateral (as defined in the respective Pledge Agreements), which included 18,334 shares of our common stock that Ms. Gladstone acquired pursuant to the exercise of the Options (collectively, the “Pledged Shares”). The Redemption Agreement provides that, pursuant to the terms and conditions thereof, we will automatically accept and retire the Pledged Shares in partial or full satisfaction, as applicable, of Ms. Gladstone’s obligations to us under the Notes at such time, if ever, that the trading price of our common stock reaches $15 per share. In entering into the Redemption Agreement, we reserved all of our existing rights under the Note and the Pledge Agreement, including, but not limited to, the ability to foreclose on the Pledged Collateral at any time. During the year ended September 30, 2013, Ms. Gladstone paid down $0.1 million of the principal of her Note, leaving a principal balance of $0.2 million outstanding as of March 31, 2014 and September 30, 2013. In connection with Ms. Gladstone’s pay downs of principal, we have not released any of our first priority security interests on her Pledged Shares.

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, our remaining recourse note totaling, in aggregate, $0.2 million as of March 31, 2014 was recorded as a note receivable from employee and is included in the net assets section of our accompanying Condensed Consolidated Statements of Assets and Liabilities . As of March 31, 2014, we determined that this note was still recourse.

 

29


Table of Contents

NOTE 5. BORROWINGS

Revolving Credit Facility

On April 26, 2013, we, through our wholly-owned subsidiary, Business Loan, entered into Amendment No. 6 to the fourth amended and restated credit agreement (our “Credit Facility”) to extend the revolver period end date for one year to January 19, 2016. Our $137.0 million revolving Credit Facility was arranged by Key Equipment Finance Inc. (effective January 1, 2014, now known as Key Equipment Finance, a division of KeyBank National Association) (“Key Equipment”) as administrative agent. Keybank National Association (“Keybank”), Branch Banking and Trust Company and ING Capital LLC also joined our Credit Facility as committed lenders. Subject to certain terms and conditions, our Credit Facility may be expanded from $137.0 million to a maximum of $237.0 million through the addition of other committed lenders to the facility. The interest rates on advances under our Credit Facility generally bear interest at a 30-day London Interbank Offered Rate (“LIBOR”) plus 3.75% per annum, with a commitment fee of 0.5% per annum on undrawn amounts when our facility is drawn more than 50% and 1.0% per annum on undrawn amounts when our facility is drawn less than 50%. If our Credit Facility is not renewed or extended by January 19, 2016, all principal and interest will be due and payable on or before November 30, 2016. Prior to the April 26, 2013 amendment, on January 29, 2013, we, through Business Loan, amended our Credit Facility to remove the LIBOR minimum of 1.5% on advances. We incurred fees of $0.7 million in April 2013 and $0.6 million in January 2013 in connection with these amendments, which are being amortized through our Credit Facility’s revolver period end date of January 19, 2016. All other terms of our Credit Facility remained generally unchanged at the time of these amendments.

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of March 31, 2014 and September 30, 2013 and during the three and six months ended March 31, 2014 and 2013:

 

     March 31, 2014      September 30, 2013  

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding

     60,200         46,900   

Availability

     60,149         60,880   

 

     For the Three Months
Ended March 31,
    For the Six Months
Ended March 31,
 
     2014     2013     2014     2013  

Weighted average borrowings outstanding

   $ 46,877      $ 55,424      $ 39,935      $ 50,660   

Effective interest rate (A)

     4.9     5.4     4.9     5.8

Commitment (unused) fees incurred

   $ 226      $ 206      $ 486      $ 437   

 

(A)   Excludes the impact of deferred financing fees.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with Key Equipment as custodian. Key Equipment, which also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits payments on distributions to our stockholders to our aggregate net investment income for each of the twelve month periods ending September 30, 2014, 2015 and 2016. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2012, which equates to $190.0 million as of March 31, 2014, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200.0%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of March 31, 2014, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $244.1 million, asset coverage of 308% and an active status as a BDC and RIC. In addition, we had 33 obligors in the borrowing base of our Credit Facility as of March 31, 2014. As of March 31, 2014, we were in compliance with all of our Credit Facility covenants.

 

30


Table of Contents

Fair Value

We elected to apply the fair value option of ASC 825, “ Financial Instruments ,” specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, we estimate the fair value of our Credit Facility using estimates of value provided by an independent third party and our 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 March 31, 2014 and September 30, 2013, our Credit Facility was valued using Level 3 inputs and any changes in its fair value is recorded in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations .

The following tables present our Credit Facility carried at fair value as of March 31, 2014 and September 30, 2013, on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three months ended March 31, 2014 and 2013:

 

     Total Recurring Fair Value
Measurement Reported in
 
     Condensed Consolidated Statements of
Assets and Liabilities Using Significant
Unobservable Inputs (Level 3)
 
     March 31, 2014      September 30, 2013  

Credit Facility

   $ 60,514       $ 47,102   
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)

 
     Three Months Ended March 31,  
     2014     2013  

Fair value as of December 31, 2013 and 2012, respectively

   $ 47,908      $ 57,781   

Borrowings

     34,800        7,500   

Repayments

     (22,300     (7,900

Net unrealized appreciation (depreciation) (A)

     106        (430
  

 

 

   

 

 

 

Fair Value as of March 31, 2014 and 2013, respectively

   $ 60,514      $ 56,951   
  

 

 

   

 

 

 

 

     Six Months Ended March 31,  
     2014     2013  

Fair value as of September 30, 2013 and 2012, respectively

   $ 47,102      $ 62,451   

Borrowings

     77,200        51,500   

Repayments

     (63,900     (54,900

Net unrealized appreciation (depreciation) (A)

     112        (2,100
  

 

 

   

 

 

 

Fair Value as of March 31, 2014 and 2013, respectively

   $ 60,514      $ 56,951   
  

 

 

   

 

 

 

 

(A)   Included in net unrealized appreciation (depreciation) of other on our accompanying C ondensed Consolidated Statements of Operations for the three and six months ended March 31, 2014 and 2013.

The fair value of the collateral under our Credit Facility was approximately $246.9 million and $229.3 million in aggregate as of March 31, 2014 and September 30, 2013, respectively.

NOTE 6. INTEREST RATE CAP AGREEMENTS

On July 15, 2013, we, through our wholly-owned subsidiary, Business Loan, entered into an interest rate cap agreement with Keybank, effective July 9, 2013 and expiring January 19, 2016, for a notional amount of $35.0 million that effectively limits the interest rate on a portion of our borrowings under our revolving line of credit pursuant to the terms of our Credit Facility. The one month LIBOR cap is set at 5.0%. We incurred a premium fee of $62 in conjunction with this agreement, which was recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . As of March 31, 2014 and September 30, 2013, the fair value of our interest rate cap agreement was $0 and $4, respectively. We record changes in the fair value of our interest rate cap agreement at quarter end based on the current market valuation at quarter end in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations .

 

31


Table of Contents

Generally, we will estimate the fair value of our interest rate cap agreement using estimates of value provided by the counterparty and our 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 March 31, 2014 and September 30, 2013, our interest rate cap agreement was valued using Level 3 inputs.

NOTE 7. MANDATORILY REDEEMABLE PREFERRED STOCK

In November 2011, we completed a public offering of 1.5 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 $38.5 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were $36.4 million, a portion of which was used to repay a portion of outstanding borrowings under our Credit Facility. We incurred $2.1 million in total offering costs related to these transactions, which have been recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending December 31, 2016.

The shares of our Term Preferred Stock have a redemption date of December 31, 2016, and are currently traded under the ticker symbol of “GLADP” on the NASDAQ Global Select Market. Our Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 7.125% per year, payable monthly (which equates in total to approximately $2.7 million per year). We are 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, as of the date of redemption. In addition, the two other potential redemption triggers are as follows: (1) if we fail to maintain an asset coverage ratio of at least 200.0%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger and (2) at our sole option, at any time on or after December 31, 2012, we may redeem part or all of the Term Preferred Stock. No redemptions of our outstanding Term Preferred Stock have been made as of March 31, 2014.

Our Board of Directors declared and paid the following monthly distributions to preferred stockholders for the six months ended March 31, 2014 and 2013, respectively:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Term Preferred
Share
 

2014

   October 8, 2013    October 22, 2013    October 31, 2013    $ 0.14843750   
   October 8, 2013    November 14, 2013    November 29, 2013      0.14843750   
   October 8, 2013    December 16, 2013    December 31, 2013      0.14843750   
   January 7, 2014    January 22, 2014    January 31, 2014      0.14843750   
   January 7, 2014    February 19, 2014    February 28, 2014      0.14843750   
   January 7, 2014    March 17, 2014    March 31, 2014      0.14843750   
           

 

 

 
      Six Months Ended March 31, 2014:    $ 0.89062500   
           

 

 

 

2013

   October 10, 2012    October 22, 2012    October 31, 2012    $ 0.14843750   
   October 10, 2012    November 19, 2012    November 30, 2012      0.14843750   
   October 10, 2012    December 19, 2012    December 31, 2012      0.14843750   
   January 8, 2013    January 18, 2013    January 31, 2013      0.14843750   
   January 8, 2013    February 15, 2013    February 28, 2013      0.14843750   
   January 8, 2013    March 15, 2013    March 28, 2013      0.14843750   
           

 

 

 
      Six Months Ended March 31, 2013:    $ 0.89062500   
           

 

 

 

In accordance with ASC 480, “ Distinguishing Liabilities from Equity ,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded this liability at cost as of March 31, 2014 and September 30, 2013. The related distribution payments to preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value of our Term Preferred Stock based on the last quoted closing price as of March 31, 2014 and September 30, 2013, was approximately $40.0 million, respectively, and we consider our Term Preferred Stock to be a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder distributions declared and paid for the three and six months ended March 31, 2014 and 2013, were each approximately $0.7 million and $1.4 million, respectively. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

 

32


Table of Contents

NOTE 8. COMMON STOCK

We filed Post-effective Amendment No. 1 to our universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) with the SEC on December 23, 2013, and subsequently filed Post-effective Amendment No. 2 on February 14, 2014, which the SEC declared effective on February 21, 2014. Our Registration Statement will permit us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock, including through a combined offering of such securities. We have not issued any securities to date under our Registration Statement.

NOTE 9. 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 and six months ended March 31, 2014 and 2013:

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2014     2013     2014      2013  

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

   $ (2,102   $ (2,763   $ 8,404       $ 5,603   

Denominator for basic and diluted weighted average common shares

     21,000,160        21,000,160        21,000,160         21,000,160   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ (0.10   $ (0.13   $ 0.40       $ 0.27   
  

 

 

   

 

 

   

 

 

    

 

 

 

NOTE 10. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on the fiscal year earnings estimated by management. Based on that estimate, three monthly distributions are declared each quarter.

The federal income tax characterization of all distributions will be reported to our stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For each of the nine months ended September 30, 2013, approximately 92.0% of our common distributions were deemed to be paid from ordinary income, with the remainder of approximately 8.0% deemed to be from a return of capital. For each of October, November and December 2013, approximately 100.0% of our common distributions were deemed to be paid from ordinary income. For the calendar year ended December 31, 2012, approximately 92.0% of our common distributions were deemed to be paid from ordinary income with the remainder of approximately 8.0% deemed to be from a return of capital. The return of capital in both the 2013 and 2012 calendar years resulted primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

 

33


Table of Contents

Our Board of Directors declared and paid the following monthly distributions to common stockholders for the six months ended March 31, 2014 and 2013:

 

Fiscal Year

   Declaration Date      Record Date      Payment Date      Distribution
per Common
Share
 

2014

     October 8, 2013         October 22, 2013         October 31, 2013       $ 0.07   
     October 8, 2013         November 14, 2013         November 29, 2013         0.07   
     October 8, 2013         December 16, 2013         December 31, 2013         0.07   
     January 7, 2014         January 22, 2014         January 31, 2014         0.07   
     January 7, 2014         February 19, 2014         February 28, 2014         0.07   
     January 7, 2014         March 17, 2014         March 31, 2014         0.07   
           

 

 

 
        Six Months Ended March 31, 2014:       $ 0.42   
           

 

 

 

2013

     October 10, 2012         October 22, 2012         October 31, 2012       $ 0.07   
     October 10, 2012         November 19, 2012         November 30, 2012         0.07   
     October 10, 2012         December 19, 2012         December 31, 2012         0.07   
     January 8, 2013         January 18, 2013         January 31, 2013         0.07   
     January 8, 2013         February 15, 2013         February 28, 2013         0.07   
     January 8, 2013         March 15, 2013         March 28, 2013         0.07   
           

 

 

 
        Six Months Ended March 31, 2013:       $ 0.42   
           

 

 

 

Aggregate distributions to our common stockholders declared and paid for the six months ended March 31, 2014 were each approximately $8.8 million, which were declared based on estimates of net investment income for the respective fiscal years. The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2014 will be determined at fiscal year end and cannot be determined at this time. For the fiscal year ended September 30, 2013, common stockholder distributions declared and paid exceeded our accumulated earnings and profits (after taking into account Term Preferred Stock dividends), which resulted in a partial return of capital equal to approximately $1.3 million. The return of capital primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are 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, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of March 31, 2014, we have not established reserves for such loss contingencies.

Escrow Holdbacks

From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying Condensed Consolidated Statements of Assets and Liabilities . We establish a contingent liability against the escrow amounts if we determine 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 liabilities recorded against the escrow amounts was $0 as of March 31, 2014 and September 30, 2013, respectively, and are recorded in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities .

Financial Commitments and Obligations

We have lines of credit with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements.

 

34


Table of Contents

For our investments in certain private equity funds, we may have uncalled capital commitments, depending on the agreed upon terms of our committed ownership interest. These capital commitments usually have a specific date in the future set as a closing date, at which time the commitment is either funded or terminates. As of March 31, 2014 and September 30, 2013, we had uncalled capital commitments related to our partnership interest in Leeds Novamark Capital I, L.P.

The following table summarizes the dollar balances of our unused line of credit and uncalled capital commitments as of March 31, 2014 and September 30, 2013:

 

     March 31,      September 30,  
     2014      2013  

Unused line of credit commitments

   $ 8,565       $ 6,524   

Uncalled capital commitment

     2,827         2,700   
  

 

 

    

 

 

 

Total

   $ 11,392       $ 9,224   
  

 

 

    

 

 

 

NOTE 12. FINANCIAL HIGHLIGHTS

 

     Three Months Ended
March 31,
    Six Months Ended March 31,  
     2014     2013     2014     2013  

Per Common Share Data (A) :

        

Net asset value at beginning of period (A)

   $ 10.10      $ 9.17      $ 9.81      $ 8.98   
  

 

 

     

 

 

   

Net investment income (B)

     0.21        0.21        0.42        0.44   

Net realized loss on investments (B)

     (0.12     —          (0.63     (0.14

Net unrealized (depreciation) appreciation of investments (B)

     (0.18     (0.36     0.62        (0.13

Net unrealized (appreciation) depreciation of other (B)

     (0.01     0.02        (0.01     0.10   

Distributions to common stockholders from net investment income (A)(C)

     (0.21     (0.21     (0.42     (0.42

Repayment of principal on employee note receivable

     —          0.08        —          0.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period (A)

   $ 9.79      $ 8.91      $ 9.79      $ 8.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value at beginning of period

   $ 9.57      $ 8.16      $ 8.73      $ 8.75   

Market value at end of period

     10.08        9.20        10.08        9.20   

Total return (D)

     7.56     15.36     20.57     10.29

Common shares outstanding at end of period

     21,000,160        21,000,160        21,000,160        21,000,160   

Statement of Assets and Liabilities Data:

        

Net assets at end of period

   $ 205,576      $ 187,147      $ 205,576      $ 187,147   

Average net assets (E)

     210,489        191,188        209,443        191,521   

Senior Securities Data:

        

Borrowings under Credit Facility, at cost

     60,200        55,400        60,200        55,400   

Mandatorily redeemable preferred stock

     38,497        38,497        38,497        38,497   

Asset coverage ratio (F)

     308     301     308     301

Asset coverage per unit (G)

   $ 3,082      $ 3,007      $ 3,082      $ 3,007   

Ratios/Supplemental Data:

        

Ratio of expenses to average net assets-annualized (H)

     9.83     9.73     9.58     10.26

Ratio of net expenses to average net assets-annualized (I)

     9.21        8.40        8.43        9.38   

Ratio of net investment income to average net assets-annualized

     8.52        9.23        8.49        9.68   

 

(A)   Based on actual shares outstanding at the end of the corresponding period.
(B)   Based on weighted average basic per share data.
(C)   Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP.
(D)   Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account common stockholder distributions reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account common stockholder distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 10— Distributions to Common Stockholders . Total return is not annualized.
(E)   Average net assets are computed using the average of the balance of net assets at the end of each month of the reporting period.
(F)   As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
(G)   Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(H)   Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.
(I)   Ratio of net expenses to average net assets is computed using total expenses net of credits from the Adviser.

 

35


Table of Contents

NOTE 13. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. We have certain unconsolidated subsidiaries, specifically Defiance Integrated Technologies, Inc., Midwest Metal Distribution, Inc., RBC Acquisition Corp., and Sunshine Media Holdings as of March 31, 2014 and September 30, 2013 and for the six months ended March 31, 2014 and 2013, that met at least one of the significance conditions of the SEC’s Regulation S-X. Accordingly, pursuant to Regulation S-X, summarized, comparative financial information, in aggregate, is presented below for the six months ended March 31, 2014 and 2013 for our significant unconsolidated subsidiaries.

 

     Six Months Ended
March 31,
 

Income Statement

   2014     2013  

Net sales

   $ 75,865      $ 74,288   

Gross profit

     13,595        10,878   

Net loss

     (3,165     (4,491

NOTE 14. SUBSEQUENT EVENTS

Portfolio Activity

Subsequent to March 31, 2014, we invested $0.6 million in follow on investments to existing portfolio companies. We also received $0.4 million in scheduled and unscheduled principal repayments from existing portfolio companies.

Distributions to Stockholders

In April 2014, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Record Date

   Payment Date      Distribution
per Common
Share
     Distribution per
Term Preferred
Share
 

April 21, 2014

     April 30, 2014       $ 0.07       $ 0.1484375   

May 20, 2014

     May 30, 2014         0.07         0.1484375   

June 19, 2014

     June 30, 2014         0.07         0.1484375   
     

 

 

    

 

 

 
     Total for the Quarter:       $ 0.21       $ 0.4453125   
     

 

 

    

 

 

 

 

36


Table of Contents

I TEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands, except per share amounts and as otherwise indicated)

All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (1) the recurrence of adverse events in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone or Terry Lee Brubaker; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on November 20, 2013. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the SEC on November 20, 2013. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We aim to maintain a portfolio consisting of approximately 95.0% debt investment and 5.0% equity investment, at cost.

We focus on investing in small and medium-sized private businesses in the U.S. that meet certain criteria, including, but not limited to, the following: the potential for growth in cash flow, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, profitable operations based on the borrower’s cash flow, reasonable capitalization of the borrower (usually by leveraged buyout funds or venture capital funds) and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds to finance growth, restructure their balance sheets or effect a change of control. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

 

37


Table of Contents

We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for federal income tax purposes we have elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC and RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

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

Our shares of common stock and mandatorily redeemable preferred stock are traded on the NASDAQ Global Select Market under the trading symbols “GLAD” and “GLADP,” respectively.

Business Environment

The strength of the global economy and the U.S. economy in particular, continues to be uncertain, although economic conditions generally appeare to be improving, albeit slowly. The impacts from the 2008 recession in general, and the resulting disruptions in the capital markets in particular, have had lingering effects on our liquidity options and have increased our cost of debt and equity capital. Many of our portfolio companies, as well as those small and medium-sized companies that we evaluate for prospective investment, remain vulnerable to the impacts of the uncertain economy. Concerns linger over the ability of the U.S. Congress to pass additional debt ceiling legislation prior to March 2015, given the budget impasse that resulted in the partial shutdown of the U.S. government in October 2013. Uncertain political and economic conditions could disproportionately impact some of the industries in which we have invested, causing us to be more vulnerable to losses in our portfolio, resulting in the number of our non-performing assets to increase and the fair market value of our portfolio to decrease.

In addition, there has been increased competitive pressure in the BDC and investment company marketplace for senior and senior subordinated debt, resulting in lower yields for increasingly riskier investments. We do not know if market conditions will continue to improve or if adverse conditions will recur and we do not know the full extent to which the inability of the U.S. government to address its fiscal condition in the near and long term will affect us. If market instability persists or intensifies, we may experience difficulty in raising capital. In summary, we believe we are in a protracted economic recovery; however, we do not know the full extent to which the impact of the lingering recessionary economic conditions will affect us or our portfolio companies.

Portfolio Activity

While conditions remain somewhat challenging in the marketplace, we are seeing a number of new investment opportunities that are consistent with our investment objectives and strategies. During the six months ended March 31, 2014, we invested an aggregate of $71.0 million in 11 new proprietary and syndicate investments, resulting in a net expansion in our overall portfolio of four portfolio companies, due to five portfolio companies paying off early at par for an aggregate of $31.3 million and our sale of two of our portfolio companies for combined net proceeds of $4.7 million.

In addition, in July 2012, the SEC granted us an exemptive order that expands our ability to co-invest with certain of our affiliates by permitting us, under certain circumstances, to co-invest with Gladstone Investment Corporation (“Gladstone Investment”) and any future BDC or closed-end management investment company that is advised by the Adviser (or sub-advised by the Adviser if it controls the fund) or any combination of the foregoing subject to the conditions in the SEC’s order. We believe this ability to co-invest has enhanced and will continue to enhance our ability to further our investment objectives and strategies. We co-invested with Gladstone Investment in four new proprietary investments during the six months ended March 31, 2014, as discussed under “— Investment Highlights .”

Regulatory Compliance

Challenges in the current market are intensified for us by certain regulatory limitations under the Code and the 1940 Act, as well as contractual restrictions under the agreement governing our $137.0 million revolving line of credit (our “Credit Facility,” described more fully under “ Liquidity and Capital Resources — Revolving Credit Facility ”) that further constrain our ability to access the capital markets. To qualify to be taxed as a RIC, we must distribute to our stockholders at least 90.0% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. Because we are required to satisfy the RIC annual stockholder distribution requirement, and because the illiquidity of many of our investments makes it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. Our external financing sources include the issuance of equity securities,

 

38


Table of Contents

debt securities or other leverage, such as borrowings under our Credit Facility. Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act that require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock.

We believe that market conditions have affected the trading price of our common stock and our ability to finance new investments through the issuance of equity. On April 29, 2014, the closing market price of our common stock was $9.68, a 1.1% discount to our March 31, 2014, net asset value (“NAV”) per common share of $9.79. When our common stock trades below NAV per share, as it has consistently over the last four years, the 1940 Act restricts our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our then current NAV per share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors. At our Annual Meeting of Stockholders held on February 13, 2014, our stockholders approved a proposal authorizing us to sell shares of our common stock at a price below our then current NAV per share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale.

The current uncertain economic conditions may also continue to cause the value of the collateral securing some of our loans to fluctuate, as well as the value of our equity investments, which has impacted and may continue to impact our ability to borrow under our Credit Facility. Additionally, our Credit Facility contains covenants regarding the maintenance of certain minimum loan concentrations and net worth covenants, which are affected by the decrease in value of our portfolio. Failure to meet these requirements would result in a default which, if we are unable to obtain a waiver from our lenders, would cause an acceleration of our repayment obligations under our Credit Facility. As of March 31, 2014, we were in compliance with all of our Credit Facility’s covenants.

We expect that, given these regulatory and contractual constraints in combination with current market conditions, debt and equity capital may be costly for us to access in the near term. However, we believe that our recent Credit Facility amendments which decreased the interest rate on advances by removing the London Interbank Offered Rate (“LIBOR”) floor of 1.5% and extended the maturity one year until 2016 along with our ability to co-invest with Gladstone Investment and certain other affiliated investment funds, should increase our ability to make investments in businesses that we believe will help us achieve attractive long-term returns for our stockholders. Curing the first half of the 2014 fiscal year, we have continued to focus on building our pipeline with deals that we believe are generally recession resistant and making investments that meet our objectives and strategies and provide appropriate returns, given the risks.

Investment Highlights

During the six months ended March 31, 2014, we invested an aggregate of $71.0 million in 11 new portfolio companies and an aggregate of $8.8 million to existing portfolio companies. In addition, during the six months ended March 31, 2014, we sold our investments in two portfolio companies and we received scheduled and unscheduled contractual principal repayments of approximately $38.4 million from existing portfolio companies, including five early payoffs. Since our initial public offering in August 2001, we have made 365 different loans to, or investments in, 183 companies for a total of approximately $1.3 billion, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the six months ended March 31, 2014, we executed the following transactions with certain of our portfolio companies:

Issuances and Originations

During the six months ended March 31, 2014, we extended an aggregate of $62.0 million of investments to seven new proprietary portfolio companies and an aggregate of $9.0 million to four new syndicated portfolio companies (The Active Network, Inc., ARSloane Acquisition, LLC, Envision Acquisition Company, LLC and Vitera Healthcare Solutions, LLC). Below are significant issuances and originations during the six months ended March 31, 2014:

 

    In October 2013, we invested $7.0 million in Alloy Die Casting Co. (“ADC”) through a combination of senior term debt and equity. ADC, headquartered in Buena Park, California, is a manufacturer of high quality, finished aluminum and zinc metal components for a diverse range of end markets. This was a co-investment with one of our affiliated funds, Gladstone Investment. Gladstone Investment invested an additional $16.3 million under the same terms as us.

 

39


Table of Contents
    In December 2013, we invested $5.5 million in Behrens Manufacturing, LLC (“Behrens”) through a combination of senior term debt and equity. Behrens, headquartered in Winona, Minnesota, is a manufacturer and marketer of high quality, classic looking, utility products and containers. Gladstone Investment participated as a co-investor by investing an additional $12.9 million under the same terms as us.

 

    In December 2013, we invested $17.0 million in senior subordinated term debt in J.America, Inc. (“J.America”). J.America, headquartered in Webberville, Michigan, is a supplier of licensed decorated and undecorated apparel and headwear to collegiate, resort and military markets, wholesale distributors and apparel decorators.

 

    In December 2013, we invested $5.6 million in Meridian Rack & Pinion, Inc. (“Meridian”) through a combination of senior term debt and equity. Meridian, headquartered in San Diego, CA, is a provider of aftermarket and OEM replacement automotive parts, which it sells through both wholesale channels and online at www.BuyAutoParts.com. Gladstone Investment participated as a co-investor by investing an additional $13.0 million under the same terms as us.

 

    In March 2014, we invested $11.3 million in WadeCo Specialties Inc. (“WadeCo”) through a combination of senior term debt and equity. WadeCo, headquartered in Midland, TX, provides production well chemicals to oil well operators used for corrosion prevention; separating oil, gas and water once extracted; bacteria growth management; and conditioning water utilized for hydraulic fracturing.

 

    In March 2014, we invested $11.1 million in Edge Adhesives Holdings, Inc. (“Edge”) through a combination of senior term debt, senior subordinated term debt and equity. Edge, headquartered in Fort Worth, TX, is a leading developer and manufacturer of innovative adhesives, sealants, tapes and related solutions used in building products, transportation, electrical and HVAC, among other markets. Gladstone Investment participated as a co-investor by investing an additional $16.7 million under the same terms as us.

 

    In March 2014, we invested $7.0 million in Lignetics, Inc. (“Lignetics”) through a combination of senior subordinated term debt and equity. Lignetics, headquartered in Sandpoint, ID, is a manufacturer and distributor of branded wood pellets, which are used as a renewable fuel for home and industrial heating, animal bedding, moisture absorption products used in fluid management in the energy production industry, and fire logs and fire starters.

Repayments and Sales:

During the six months ended March 31, 2014, 14 borrowers made principal repayments totaling $38.4 million in the aggregate, consisting of $36.7 million of unscheduled principal and revolver repayments, as well as $1.7 million in contractual principal amortization. Below are the significant repayments and exits during the six months ended March 31, 2014.

 

    Included in the unscheduled principal payments were the net proceeds received from early payoffs at par of the following proprietary investments: Allen Edmonds Shoe Corporation (“Allen Edmonds”) of $19.5 million, POP Radio, LLC (“POP”) of $7.8 million and Profit Systems Acquisition Co. (“Profit Systems”) of $2.0 million.

 

    In December 2013, we sold our investment in LocalTel, LLC (“LocalTel”) for net proceeds that are contingent on an earn-out agreement, which resulted in a realized loss of $10.8 million recorded in the three months ended December 31, 2013. LocalTel had been on non-accrual status at the time of the sale.

 

    In March 2014, we sold our investment in BAS Broadcasting (“BAS”) for net proceeds of $4.7 million, which resulted in a realized loss of $2.8 million recorded in the three months ended March 31, 2014.

Refer to Note 14— Subsequent Events in the accompanying Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for investment activity occurring subsequent to March 31, 2014.

Recent Developments

Executive Officers

On January 7, 2014, our Board of Directors appointed Robert L. Marcotte as the Company’s President. David Gladstone, the Company’s prior Interim President, will remain Chief Executive Officer and Chairman of the Company.

 

40


Table of Contents

Registration Statement

On December 23, 2013, we filed Post-effective Amendment No. 1 to our universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) and subsequently filed Post-effective Amendment No. 2 on February 14, 2014, which the SEC declared effective on February 21, 2014. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock, including through a combined offering of such securities.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2014, to the Three Months Ended March 31, 2013

 

     Three Months Ended March 31,  
     2014     2013     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 8,171      $ 8,424      $ (253     (3.0 )% 

Other income

     1,160        —          1,160        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,331        8,424        907        10.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,504        1,419        85        6.0   

Incentive fee

     1,121        953        168        17.6   

Administration fee

     213        187        26        13.9   

Interest expense on borrowings

     669        803        (134     (16.7

Dividend expense on mandatorily redeemable preferred stock

     686        686        —          —     

Amortization of deferred financing fees

     315        329        (14     (4.3

Other expenses

     665        276        389        140.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     5,173        4,653        520        11.2   

Credits to fees from Adviser

     (327     (639     312        48.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     4,846        4,014        832        20.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,485        4,410        75        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED LOSS

        

Net realized (loss) gain on investments

     (2,539     30        (2,569     NM   

Net unrealized depreciation of investments

     (3,940     (7,633     3,693        48.4   

Net unrealized (appreciation) depreciation of other

     (108     430        (538     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from investments and other

     (6,587     (7,173     586        8.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ (2,102