Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 07/30/2014 16:27:43)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one):

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

OR

 

¨ 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: 811-000000

 

 

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. (Check one):

 

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 July 30, 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 June 30, 2014 and September 30, 2013

     3   
 

Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2014 and 2013

     4   
 

Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2014 and 2013

     5   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013

     6   
 

Condensed Consolidated Schedules of Investments as of June 30, 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

     38   
 

Overview

     38   
 

Results of Operations

     43   
 

Liquidity and Capital Resources

     53   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     63   
Item 4.  

Controls and Procedures

     64   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     64   
Item 1A.  

Risk Factors

     64   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     64   
Item 3.  

Defaults Upon Senior Securities

     65   
Item 4.  

Mine Safety Disclosures

     65   
Item 5.  

Other Information

     65   
Item 6.  

Exhibits

     65   

SIGNATURES

     66   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,
2014
    September 30,
2013
 

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $226,781 and $218,713, respectively)

   $ 198,971      $ 181,870   

Affiliate investments (Cost of $60,802 and $9,440, respectively)

     40,625        10,787   

Control investments (Cost of $62,800 and $104,113, respectively)

     25,487        64,221   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $350,383 and $332,266, respectively)

     265,083        256,878   
  

 

 

   

 

 

 

Cash and cash equivalents

     7,775        13,900   

Restricted cash and cash equivalents

     798        1,176   

Interest receivable

     2,810        2,488   

Due from custodian

     1,815        16,473   

Deferred financing fees

     3,642        3,086   

Other assets

     764        1,090   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 282,687      $ 295,091   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $35,100 and $46,900, respectively)

   $ 36,560      $ 47,102   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 2,440,000 and 1,539,882 shares issued and outstanding as of June 30, 2014 and September 30, 2013, respectively

     61,000        38,497   

Accounts payable and accrued expenses

     550        494   

Interest payable

     145        170   

Fees due to Adviser (A)

     1,953        1,706   

Fee due to Administrator (A)

     219        126   

Other liabilities

     1,269        1,004   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 101,696      $ 89,099   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

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

     307,425        322,936   

Note receivable from employee (A)

     (175     (175

Cumulative net unrealized depreciation of investments

     (85,300     (75,388

Cumulative net unrealized appreciation of other

     (1,521     (260

Under/overdistributed net investment income

     2,197        (100

Accumulated net realized losses

     (41,656     (41,042
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 180,991      $ 205,992   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 8.62      $ 9.81   
  

 

 

   

 

 

 

 

(A)   Refer to Note 4— Related Party Transactions for additional information.
(B) Refer to Note 10— Commitments and Contingencies for additional information.

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

 

3


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2014     2013     2014     2013  

INVESTMENT INCOME

        

Interest income:

        

Non-Control/Non-Affiliate investments

   $ 6,105      $ 6,777      $ 18,831      $ 20,926   

Affiliate investments

     1,519        —          2,570        —     

Control investments

     556        1,551        3,133        3,908   

Other

     4        23        12        120   

Other income:

        

Non-Control/Non-Affiliate investments

     670        200        1,631        1,848   

Affiliate investments

     701        —          701        —     

Control investments

     625        —          1,025        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     10,180        8,551        27,903        26,802   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,461        1,382        4,421        4,233   

Loan servicing fee (A)

     917        941        2,628        2,707   

Incentive fee (A)

     1,266        998        3,361        3,167   

Administration fee (A)

     219        183        635        521   

Interest expense on borrowings

     710        756        1,994        2,415   

Dividend expense on mandatorily redeemable preferred stock

     937        686        2,309        2,057   

Amortization of deferred financing fees

     314        313        944        898   

Professional fees

     98        181        725        473   

Other general and administrative expenses

     179        197        828        754   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     6,101        5,637        17,845        17,225   

Credits to base management fee—loan servicing fee (A)

     (917     (941     (2,628     (2,707

Credits to fees from Adviser—other (A)

     (67     (555     (1,272     (1,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

     5,117        4,141        13,945        13,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,063        4,410        13,958        13,679   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     54        160        (2,556     (578

Control investments

     —          (2,906     (10,733     (5,314

Escrows

     —          358        30        486   

Extinguishment of debt

     (1,297     —          (1,297     —     

Net unrealized (depreciation) appreciation:

        

Non-Control/Non-Affiliate investments

     (3,203     (6,344     9,034        (8,202

Affiliate investments

     (18,246     384        (24,741     384   

Control investments

     (1,400     1,259        5,795        369   

Other

     (1,146     620        (1,261     2,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized loss

     (25,238     (6,469     (25,729     (10,135
  

 

 

   

 

 

   

 

 

   

 

 

 
NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS    $ (20,175   $ (2,059   $ (11,771   $ 3,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.24      $ 0.21      $ 0.66      $ 0.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (0.96   $ (0.10   $ (0.56   $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared and paid per share

   $ 0.21      $ 0.21      $ 0.63      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 
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.

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
June 30,
 
     2014     2013  

OPERATIONS

    

Net investment income

   $ 13,958      $ 13,679   

Net realized loss on investments

     (13,259     (5,406

Realized loss on extinguishment of debt

     (1,297     —     

Net unrealized depreciation of investments

     (9,912     (7,449

Net unrealized (appreciation) depreciation of other

     (1,261     2,720   
  

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (11,771     3,544   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (13,230     (13,230
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Repayment of principal on employee notes (A)

     —          1,800   
  

 

 

   

 

 

 

NET DECREASE IN NET ASSETS

     (25,001     (7,886

NET ASSETS, BEGINNING OF PERIOD

     205,992        188,564   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 180,991      $ 180,678   
  

 

 

   

 

 

 

 

(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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended
June 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (decrease) increase in net assets resulting from operations

   $ (11,771   $ 3,544   

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

    

Purchase of investments

     (83,161     (70,857

Principal repayments on investments

     47,333        69,424   

Net proceeds from sale of investments

     4,700        6,557   

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

     (208     (133

Net change in premiums, discounts and amortization

     (70     357   

Net realized loss on investments

     13,289        5,892   

Net unrealized depreciation of investments

     9,912        7,449   

Realized loss on extinguishment of debt

     1,297        —     

Net unrealized appreciation (depreciation) of other

     1,261        (2,720

Decrease (increase) in restricted cash and cash equivalents

     378        (326

Amortization of deferred financing fees

     944        898   

Increase in interest receivable

     (322     (213

Decrease in due from custodian

     14,658        1,147   

Decrease in other assets

     323        237   

Increase (decrease) in accounts payable and accrued expenses

     56        (94

Decrease in interest payable

     (25     (47

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

     247        (741

Increase in fee due to Administrator (A)

     93        9   

Increase (decrease) in other liabilities

     265        (570
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (801     19,813   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of mandatorily redeemable preferred stock

     61,000        —     

Redemption of previously issued mandatorily redeemable preferred stock

     (38,497     —     

Proceeds from borrowings

     91,000        68,500   

Repayments on borrowings

     (102,800     (68,700

Deferred financing fees

     (2,797     (1,334

Distributions paid to common stockholders

     (13,230     (13,230

Receipt of principal on employee notes

     —          1,800   
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,324     (12,964
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (6,125     6,849   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     13,900        9,857   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 7,775      $ 16,706   
  

 

 

   

 

 

 

 

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

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

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

     

Non-syndicated investments:

     

AG Transportation Holdings, LLC

 

Cargo transport

 

Senior Subordinated Term Debt (13.3%, Due 3/2018) (D)

  $ 13,000      $ 12,879      $ 12,903   
   

Member Profit Participation (18.0% ownership) (F) (G)

      1,000        —     
   

Profit Participation Warrants (7.0% ownership) (F) (G)

      244        —     
       

 

 

   

 

 

 
          14,123        12,903   

Allison Publications, LLC

 

Printing and publishing

 

Line of Credit, $0 available (8.3%, Due 9/2016) (D)

    600        600        600   
   

Senior Term Debt (8.3%, Due 9/2018) (D)

    2,875        2,875        2,875   
   

Senior Term Debt (13.0%, Due 9/2018) (C) (D)

    5,400        5,400        5,420   
       

 

 

   

 

 

 
          8,875        8,895   

Alloy Die Casting Co.

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (13.5%, Due 10/2018) (D)

    5,235        5,235        5,242   
   

Preferred Stock (1,742 units) (F) (G)

      1,742        388   
   

Common Stock (270 units) (F) (G)

      18        —     
       

 

 

   

 

 

 
          6,995        5,630   

Behrens Manufacturing, LLC

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (13.0%, Due 12/2018) (D)

    4,275        4,275        4,302   
   

Preferred Stock (1,253 shares) (F) (G) (K)

      1,253        1,385   
       

 

 

   

 

 

 
          5,528        5,687   

Chinese Yellow Pages Company

 

Printing and publishing

 

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

    108        108        98   

Francis Drilling Fluids, Ltd.

 

Oil and gas

 

Senior Subordinated Term Debt (12.0%, Due 11/2017) (D)

    15,000        15,000        14,774   
   

Preferred Equity Units (999 units) (F) (G)

      892        903   
   

Common Equity Units (999 units) (F) G)

      1        —     
       

 

 

   

 

 

 
          15,893        15,677   

Funko, LLC

 

Personal and non-durable consumer products

 

Senior Subordinated Term Debt (12.0% and 1.5% PIK, Due 5/2019) (D)

    7,616        7,616        7,768   
   

Preferred Equity Units (1,305 units) (F) (G)

      1,305        2,595   
       

 

 

   

 

 

 
          8,921        10,363   

GFRC Holdings, LLC

 

Buildings and real estate

 

Line of Credit, $130 available (10.5%, Due 5/2014) (D)

    270        270        162   
   

Senior Term Debt (10.5%, Due 6/2016) (D)

    4,924        4,924        2,954   
   

Senior Subordinated Term Debt (13.0%, Due 6/2016) (D)

    6,598        6,598        4,091   
       

 

 

   

 

 

 
          11,792        7,207   

Heartland Communications Group

 

Broadcasting and entertainment

 

Line of Credit, $0 available (5.0%, Due 9/2014) (D) (H) (M)

    100        100        65   
   

Line of Credit, $0 available (10.0%, Due 9/2014) (D) (H) (M)

    100        100        65   
   

Senior Term Debt (5.0%, Due 9/2014) (D) (H) (M)

    4,342        4,342        928   
   

Common Stock Warrants (8.8% ownership) (F) (G)

      66        —     
       

 

 

   

 

 

 
          4,608        1,058   

International Junior Golf Training Acquisition Company

 

Leisure, amusement, motion pictures and entertainment

 

Line of Credit, $0 available (13.0%, Due 5/2014) (F)

    2,250        2,250        2,250   
   

Senior Term Debt (12.5%, Due 5/2014) (F)

    61        61        —     
   

Senior Term Debt (14.5%, Due 5/2014) (C) (F)

    2,700        2,700        500   
       

 

 

   

 

 

 
          5,011        2,750   

J.America, Inc.

 

Personal and non-durable consumer products

 

Senior Subordinated Term Debt (10.4%, Due 12/2019) (D) (M)

    7,500        7,500        7,509   
   

Senior Subordinated Term Debt (11.5%, Due 12/2019) (D) (M)

    9,500        9,500        9,536   
       

 

 

   

 

 

 
          17,000        17,045   

Leeds Novamark Capital I, L.P.

 

Private equity fund—healthcare, education and childcare

 

Limited Partnership Interest (3.5% ownership, $2,827 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        3,731   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair
Value
 

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

     

Meridian Rack & Pinion, Inc.

 

Automobile

 

Senior Term Debt (13.5%, Due 12/2018) (D)

  $ 4,140      $ 4,140      $ 4,150   
   

Preferred Stock (1,449 shares) (F) (G)

      1,449        1,522   
       

 

 

   

 

 

 
          5,589        5,672   

North American Aircraft Services, LLC

 

Aerospace and defense

 

Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)

    1,750        1,750        1,780   
   

Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)

    2,820        2,820        2,884   
   

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

      350        1,044   
       

 

 

   

 

 

 
          4,920        5,708   

Ohana Media Group

 

Broadcasting and entertainment

 

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

    1,433        1,433        1,418   

Precision Acquisition Group Holdings, Inc.

 

Machinery

 

Equipment Note (9.0%, Due 3/2015) (D)

    1,000        1,000        881   
   

Senior Term Debt (9.0%, Due 3/2015) (D)

    4,125        4,125        866   
   

Senior Term Debt (9.0%, Due 3/2015) (C) (D)

    4,053        4,053        847   
       

 

 

   

 

 

 
          9,178        2,594   

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 (8.5%, Due 2/2016) (F) (M)

    6,026        6,026        1,600   

WadeCo Specialties Inc.

 

Oil and gas

 

Line of Credit, $1,925 available (8.0%, Due 3/2015) (D)

    75        75        75   
   

Senior Term Debt (8.0%, Due 3/2019) (D)

    4,500        4,500        4,539   
   

Senior Subordinated Term Debt (12.0%, Due 3/2019) (D)

    4,500        4,500        4,534   
   

Common Stock (1,000 shares) (F) (G)

      250        402   
       

 

 

   

 

 

 
          9,325        9,550   

Westland Technologies, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Term Debt (7.5%, Due 4/2016) (D)

    450        450        410   
   

Senior Term Debt (12.5%, Due 4/2016) (D)

    4,000        4,000        3,658   
   

Common Stock Warrants (77,287 shares) (F) (G)

      350        —     
       

 

 

   

 

 

 
          4,800        4,068   
       

 

 

   

 

 

 

Subtotal—Non-syndicated investments

    $ 156,861      $ 130,106   
       

 

 

   

 

 

 

Syndicated Investments:

     

Ameriqual Group, LLC

 

Beverage, food and tobacco

 

Senior Term Debt (9.0% and 1.5% PIK, Due 3/2016) (E)

  $ 7,326      $ 7,266      $ 6,227   

Ardent Medical Services, Inc.

 

Healthcare, education and childcare

 

Senior Subordinated Term Debt (11.0%, Due 1/2019) (E)

    7,143        7,135        7,170   

ARSloane Acquisition, LLC

 

Printing and publishing

 

Senior Subordinated Term Debt (11.8%, Due 9/2020) (I)

    5,000        4,923        5,000   

Autoparts Holdings Limited

 

Automobile

 

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

    1,000        997        955   

Blue Coat Systems, Inc.

 

Electronics

 

Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)

    3,000        2,973        3,068   

Envision Acquisition Company, LLC

 

Healthcare, education and childcare

 

Senior Subordinated Term Debt (9.8%, Due 11/2021) (E)

    2,500        2,453        2,525   

First American Payment Systems, L.P.

 

Finance

 

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

    4,500        4,472        4,517   

GTCR Valor Companies, Inc.

 

Electronics

 

Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)

    2,000        1,980        1,980   

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        4,922        5,000   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair
Value
 

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

     

RP Crown Parent, LLC

 

Electronics

 

Senior Subordinated Term Debt (11.3%, Due 12/2019) (E)

  $ 2,000      $ 1,966      $ 2,015   

Sensus USA, Inc.

 

Electronics

 

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

    500        497        500   

SumTotal Systems, Inc.

 

Electronics

 

Senior Subordinated Term Debt (10.3%, Due 5/2019) (E)

    4,000        3,935        3,880   

Targus Group International, Inc.

 

Textiles and leather

 

Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016) (E)

    9,130        9,040        7,578   

The Active Network, Inc.

 

Electronics

 

Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)

    1,000        995        1,000   

Vision Solutions, Inc.

 

Electronics

 

Senior Term Debt (9.5%, Due 7/2017) (E)

    11,000        10,949        11,000   

Vitera Healthcare Solutions, LLC

 

Healthcare, education and childcare

 

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

    500        493        504   

W3, Co.

 

Oil and gas

 

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

    499        494        499   

WP Evenflo Group Holdings, Inc.

 

Diversified/conglomerate manufacturing

 

Senior Preferred Stock (333 shares) (I) (G)

      333        590   
   

Junior Preferred Stock (111 shares) (I) (G)

      111        225   
   

Common Stock (1,874 shares) (I) (G)

      —          632   
     

 

 

   

 

 

   

 

 

 
          444        1,447   
       

 

 

   

 

 

 

Subtotal—Syndicated investments

    $ 69,920      $ 68,865   
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 75.3% of total investments at fair value)

  

  $ 226,781      $ 198,971   
       

 

 

   

 

 

 

AFFILATE INVESTMENTS (O) :

     

Ashland Acquisition, LLC

 

Printing and publishing

 

Line of Credit, $1,500 available (12.0%, Due 7/2016) (D) (M)

  $ —        $ —        $ —     
   

Senior Term Debt (12.0%, Due 7/2018) (D) (M)

    7,000        7,000        7,079   
   

Preferred Equity Units (4,400 units) (F) (G)

      440        116   
   

Common Equity Units (4,400 units) (F) (G)

      —          —     
       

 

 

   

 

 

 
          7,440        7,195   

Edge Adhesives Holdings, Inc.

 

Diversified/Conglomerate manufacturing

 

Line of Credit, $230 available (12.5%, Due 8/2014) (D)

    770        770        771   
   

Senior Term Debt (12.5%, Due 2/2019) (D)

    6,200        6,200        6,223   
   

Senior Subordinated Term Debt (13.8%, Due 2/2019) (D)

    1,600        1,600        1,608   
   

Preferred Stock (2,316 shares) (F) (G)

      2,316        2,795   
       

 

 

   

 

 

 
          10,886        11,397   

FedCap Partners, LLC

 

Private equity fund—aerospace and defense

 

Class A Membership Units (80 units) (G) (J)

      1,824        2,238   

Lignetics, Inc.

 

Diversified natural resources, precious metals and minerals

 

Senior Subordinated Term Debt (12.0%, Due 3/2020) (D)

    6,000        6,000        6,030   
   

Common Stock (100,000 shares) (F) (G)

      1,000        1,269   
       

 

 

   

 

 

 
          7,000        7,299   

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) (M)

    6,891        6,891        6,891   
   

Senior Term Debt (12.0%, Due 12/2014) (C) (F)

    11,392        11,392        1,605   
   

Senior Subordinated Term Debt (12.5%, Due 12/2014) (F) (M)

    6,000        6,000        —     
   

Preferred Stock (4,999,000 shares) (F) (G) (K)

      4,999        —     
   

Common Stock (2,000,000 shares) (F) (G)

      370        —     
          33,652        12,496   
       

 

 

   

 

 

 

Total Affiliate Investments (represented 15.2% of total investments at fair value)

  

  $ 60,802      $ 40,625   
       

 

 

   

 

 

 

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

 

Industry

 

Investment (B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS (P) :

     

Defiance Integrated Technologies, Inc.

 

Automobile

 

Senior Subordinated Term Debt (11.0%, Due 4/2016) (C) (F)

  $ 6,625      $ 6,625      $ 6,625   
   

Common Stock (15,500 shares) (F) (G)

      1        5,508   
       

 

 

   

 

 

 
          6,626        12,133   

Lindmark Acquisition, LLC

 

Broadcasting and entertainment

 

Senior Subordinated Term Debt (25.0%, Due Upon Demand)(F) (M)

    —          —          —     
   

Success Fee on Senior Subordinated Term Debt (F) (M)

      —          804   
   

Common Stock (100 shares) (F) (G)

      317        —     
       

 

 

   

 

 

 
          317        804   

Midwest Metal Distribution, Inc.

 

Mining, steel, iron and non-precious metals

 

Senior Subordinated Term Debt (12.0%, Due 7/2015) (F) (H)

    18,281        18,281        4,454   
   

Preferred Stock (2,175 shares) (F) (G) (K)

      2,175        —     
   

Common Stock (501 shares) (F) (G)

      138        —     
       

 

 

   

 

 

 
          20,594        4,454   

Sunshine Media Holdings

 

Printing and publishing

 

Line of credit, $400 available (4.8%, Due 8/2014) (D) (H)

    1,600        1,600        440   
   

Senior Term Debt (4.8%, Due 5/2016) (D) (H)

    16,948        16,948        4,660   
   

Senior Term Debt (5.5%, Due 5/2016) (C) (D) (H)

    10,700        10,700        2,996   
   

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        8,096   
       

 

 

   

 

 

 

Total Control Investments (represented 9.5% of total investments at fair value)

  

  $ 62,800      $ 25,487   
       

 

 

   

 

 

 

TOTAL INVESTMENTS

    $ 350,383      $ 265,083   
       

 

 

   

 

 

 

 

(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 (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect as of June 30, 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 portfolio company.
(C)   Last out tranche (“LOT”) of debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after all other debt holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc.
(E)   Fair value was based on the indicative bid price on or near June 30, 2014, offered by the respective syndication agent’s trading desk.
(F)   Fair value was based on the total enterprise value of the portfolio company which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(G)   Investment is non-income producing.
(H)   Investment is on non-accrual status.
(I)   Investment was paid off, at or above par, subsequent to June 30, 2014, and was valued based on the payoff.
(J)   There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(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 May 9, 2014 (the closing date) or two years after all outstanding leverage has matured.
(M) Debt security has a fixed interest rate.
(N) 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.
(O) 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.
(P) 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 (Q) :

     

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) (P)

    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) P)

    100        100        20   
   

Line of Credit, $0 available (10.0%, Due 3/2014) (D) (P)

    100        100        20   
   

Senior Term Debt (5.0%, Due 3/2014) (D) (P)

    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 (Q) (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) (P)

    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) (P)

    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   

 

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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 (Q) (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 consumer products

 

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

    250        247        252   

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 Manufacturing

 

Senior Preferred Stock (333 shares) (F) (G)

      333        341   
   

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 (R) :

     

Ashland Acquisition, LLC

 

Printing and publishing

 

Line of Credit, $1,500 available (12.0%, Due 7/2016) (D) (P)

  $ —        $ —        $ —     
   

Senior Term Debt (12.0%, Due 7/2018) (D) (P)

    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 (S) :

     

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) (P)

     
   

Success Fee on Senior Subordinated Term Debt (F) (P)

      —          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   

 

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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 (S) (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) (P)

    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) (P)

    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 (T)

    $ 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 (which are generally indexed off of the 30-day LIBOR) 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 portfolio company.
(C)   LOT of debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after all other debt holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc.
(E)   Fair value was based on the indicative bid price on or near September 30, 2013, offered by the respective syndication agent’s trading desk.
(F)   Fair value was based on the total enterprise value of the portfolio company which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(G)   Investment is non-income producing.
(H)   Investment 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 payoff 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, withdraw or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(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 May 9, 2014 (the closing date) or two years after all outstanding leverage has matured.
(P) Debt security has a fixed interest rate.
(Q)   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.
(R)   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.
(S) 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.
(T)   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.

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 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 June 30, 2014 and September 30, 2013, we held no investments through Gladstone Financial.

The financial statements of the foregoing two subsidiaries are consolidated with ours. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 12— Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) 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 statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 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.

 

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Reclassifications

Certain amounts in the prior year’s financial statements have been reclassified to conform to the presentation for the three and nine months ended June 30, 2014, with no effect on our financial condition, results of operations or cash flows.

Revisions

Certain amounts in the prior year’s financial statements have been revised to correct the net presentation of certain fees in our results of operations. Our Adviser services, administers and collects on the loans held by Business Loan, in return for which our Adviser receives a 2% annual fee from Business Loan. All loan servicing fees are credited back to us by our Advisor. Previously, we presented the loan servicing fee on a net basis, which is zero because it is 100% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross credit amounts for the three and nine month periods ended June 30, 2013.

Management evaluated this error in presentation and concluded it was not material to the previously issued financial statements for the three and nine months ended June 30, 2013. The impact of the revision is shown in the table below:

 

     Three Months Ended
June 30, 2013
    Nine Months Ended
June 30, 2013
 
     As
Previously
Reported
    As
Revised
    As
Previously
Reported
    As
Revised
 

Expenses

        

Loan servicing fee

   $ —        $ 941      $ —        $ 2,707   

Expenses before credits from Adviser

     4,696        5,637        14,518        17,225   

Credits to base management fee—loan servicing fee

     —          (941     —          (2,707

Credits to fees from Adviser—other

     (555     (555     (1,395     (1,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses net of credits

   $ 4,141      $ 4,141      $ 13,123      $ 13,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflect the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are realized.

Board Responsibility

In accordance with the 1940 Act, our board of directors (our “Board of Directors”) has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our established investment valuation policy (the “Policy”). Our Board of Directors reviews valuation recommendations that are provided by professionals of the Adviser and Administrator with oversight and direction from the Valuation Officer, employed by the Administrator (the “Valuation Team”). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the Valuation Officer, uses the Policy, which 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 and also reviews whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments. Currently, the third-party service provider Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on our non-syndicated debt investments.

The Valuation Team generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimates of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, our Board of Directors reviews whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended valuation.

 

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Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

    Total Enterprise Value —In determining the fair value using a total enterprise value (“TEV”), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally references industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then allocates the TEV to the portfolio company’s securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Va luation Team uses the DCF to calculate the TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.

 

    Yield Analysis —The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Team’s own assumptions, including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.

 

    Market Quotes —For our syndicate investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar syndicated investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.

 

    Investments in Funds —For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our invested capital at the net asset value (“NAV”) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new non-syndicated debt and equity investments made during the three months ended June 30, 2014 are generally valued at original cost basis.

Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

 

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Table of Contents

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 June 30, 2014, three portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $52.1 million, or 16.2% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $13.6 million, or 5.6% 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 and therefore, 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 on either.

As of June 30, 2014 and September 30, 2013, we had 20 and 19 original OID loans, respectively, primarily from the syndicated investments in our portfolio. We recorded OID income of $59 and $0.2 million for the three and nine months ended June 30, 2014, respectively, as compared to $69 and $0.2 million for the three and nine months ended June 30, 2013, respectively. The unamortized balance of OID investments as of June 30, 2014 and September 30, 2013, totaled $0.8 million and $1.0 million, respectively. As of June 30, 2014, and September 30, 2013, we had three investments which had a PIK interest component. We recorded PIK income of $80 and $0.3 million for the three and nine months ended June 30, 2014, respectively, as compared to $62 and $0.2 million for the three and nine months ended June 30, 2013, respectively. We collected $0 PIK interest in cash during each of the nine months ended June 30, 2014 and 2013.

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, typically from an exit or sale. We received an aggregate of $1.6 million in success fees during the nine months ended June 30, 2014, which resulted from $0.5 million related to the early payoff of Thibaut Acquisition Co. at par in June 2014, $0.5 million prepayment by Francis Drilling Fluids Ltd. (“FDF”) in February 2014 and $0.6 million received as a result of 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 in success fees during the nine months ended June 30, 2013, which resulted from the early payoff of Westlake Hardware, Inc. at par in December 2012. As of June 30, 2014 and September 30, 2013, our aggregate off-balance sheet success fee receivable on our accruing debt investments totaled approximately $11.0 million and $16.9 million, respectively.

We 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 nine months ended June 30, 2014, we received an aggregate of $0.3 million in prepayment fees from the early payoffs at par of one of our proprietary investments and four of our syndicated investments (including one partial paydown). During the nine months ended June 30, 2013, we received an aggregate of $0.7 million of prepayment fees which resulted from the early payoffs of seven of our syndicated investments during the period.

Dividend income on 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 nine months ended June 30, 2014, we recorded an aggregate of $1.0 million of dividend income, net of estimated income taxes payable, which resulted from $0.2 million on our preferred equity investment in FDF, $0.7 million on our investment in FedCap Partners, LLC and $0.1 million on our preferred equity investment in Funko, LLC. We did not record any dividend income during the nine months ended June 30, 2013.

Success fees, prepayment fees and dividend income are all recorded in other income in our accompanying Condensed Consolidated Statements of Operations. In addition, we received $0.4 million in May 2014 from a legal settlement related to a previously exited portfolio company that was recorded in other income during the three months ended June 30, 2014.

 

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Recent Accounting Pronouncements

In June 2013, the FASB issued Accounting Standards Update 2013-08, “ Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ,” (“ASU 2013-08”) 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

Fair Value

In accordance with ASC 820, our investments’ fair value is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

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

 

    Level 2 —inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, 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 financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments 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 (or, 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. As of June 30, 2014 and September 30, 2013, all of our investments were valued using Level 3 inputs and during the nine months ended June 30, 2014 and 2013, there were no investments transferred into or out of Level 1, 2 or 3.

 

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The following table presents our investments carried at fair value as of June 30, 2014 and September 30, 2013, by caption on our accompanying Condensed Consolidated Statements of Assets and Liabilities and by security type and input level within the ASC 820 fair value hierarchy:

 

     Total Recurring Fair Value
Measurements Reported in

Condensed Consolidated
Statements of Assets and
Liabilities
Using Significant
Unobservable Inputs
(Level 3)
 
     June 30,
2014
     September 30,
2013
 

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 82,280       $ 82,923   

Senior subordinated debt

     106,936         95,162   

Junior subordinated debt

     —           561   

Preferred equity

     7,609         2,179   

Common equity/equivalents

     2,146         1,045   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 198,971       $ 181,870   
  

 

 

    

 

 

 

Affiliate Investments

     

Senior debt

   $ 26,569       $ 7,000   

Senior subordinated debt

     7,638         —     

Preferred equity

     2,794         —     

Common equity/equivalents

     3,624         3,787   
  

 

 

    

 

 

 

Total Affiliate Investments

   $ 40,625       $ 10,787   
  

 

 

    

 

 

 

Control Investments

     

Senior debt

   $ 8,097       $ 28,211   

Senior subordinated debt

     11,884         31,513   

Preferred equity

     —           2,447   

Common equity/equivalents

     5,506         2,050   
  

 

 

    

 

 

 

Total Control Investments

   $ 25,487       $ 64,221   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 265,083       $ 256,878   
  

 

 

    

 

 

 

In accordance with the FASB’s ASU 2011-04, “ Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (“IFRS”) , (“ASU 2011-04”), the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2014 and September 30, 2013. 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.

 

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    Quantitative Information about Level 3 Fair Value Measurements  
    Fair Value as of             Range / Weighted Average as of  
    June 30,
2014
    September 30,
2013
    Valuation
Techniques
  Unobservable
Input
  June 30,
2014
    September 30,
2013
 

Senior debt (A)

  $ 73,840      $ 64,892      Yield analysis   Discount rate (D)     8% - 30% / 22%        6% - 30% / 24%   
    26,260        30,881      Market Quotes   IBP     83.0% - 100.0% / 90.7%        90.0% - 100.8% / 95.8%   
    16,846        22,361      TEV   EBITDA multiple     11.4x        —     
        EBITDA     $1,100        —     
        Revenue multiple     —          0.3x - 2.3x / 1.7x   
        Revenue     —          $2,451 - $13,905 / $10,312   

Senior subordinated debt (B)

    74,221        84,124      Yield analysis   Discount rate (D)     11% - 30% / 14%        11% - 30% / 14%   
    41,157        29,331      Market Quotes   IBP     97.0% - 102.3% / 100.0%        98.5% - 101.8% / 100.3%   
    11,080        13,781      TEV   EBITDA multiple     4.3x - 11.4x / 9.2x        4.5x   
        EBITDA     $1,100 - $3,923 / $2,540        $2,653   
        Revenue multiple     —          2.3x   
        Revenue     —          $13,905   

Preferred and common equity / equivalents (C)

    19,373        7,908      TEV   EBITDA multiple     3.9x - 22.4x / 7.4x        3.8x - 7.9x / 5.0x   
        EBITDA     $144 - $11,615 / $3,111        $84 - $8,724 / $3,107   
        Revenue multiple     —          0.3x - 2.3x / 2.3x   
        Revenue     —          $2,451 - $13,905 / $13,903   
    2,306        3,600      Investments in
Funds
     
 

 

 

   

 

 

         

Total Investments

  $ 265,083      $ 256,878           
 

 

 

   

 

 

         

 

(A) September 30, 2013 includes one new proprietary investment for $7.0 million, which was valued at cost.
(B) June 30, 2014 includes one proprietary investment that paid off at par in July 2014 and therefore was valued at the payoff amount of $5.0 million.
(C) June 30, 2014 includes one proprietary investment that paid off above par in July 2014 and therefore was valued at the payoff amount of $1.5 million. September 30, 2013 includes one new proprietary investment for $0.4 million, which was valued at cost.
(D) Discount rates capped at 30% for this table disclosure.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market yields, discounts rates, leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates or leverage or a decrease in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.

 

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The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2014 and 2013 for all investments for which we determine fair value using unobservable (Level 3) factors.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

FISCAL YEAR 2014:

Three Months Ended June 30, 2014

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

Fair Value as of March 31, 2014

   $ 136,081      $ 138,081      $ 10,182      $ 8,976      $ 293,320   

Total gains (losses):

          

Net realized gain (B)

     52        2        —          —          54   

Net unrealized (depreciation) appreciation (C)

     (13,916     (10,470     (779     2,476        (22,689

Reversal of prior period net appreciation on realization (C)

     (150     (10     —          —          (160

New investments, repayments and settlements: (D)

          

Issuances/originations

     411        2,029        1,000        —          3,440   

Settlements/repayments

     (5,532     (3,174     —          (176     (8,882
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2014

   $ 116,946      $ 126,458      $ 10,403      $ 11,276      $ 265,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine Months Ended June 30, 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)

     (13,445     87        —          69        (13,289

Net unrealized (depreciation) appreciation (C)

     (7,914     (18,443     (3,805     3,527        (26,635

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

     17,018        (225     —          (70     16,723   

New investments, repayments and settlements: (D)

          

Issuances/originations

     26,226        46,186        9,689        1,268        83,369   

Settlements/repayments

     (18,373     (28,383     (107     (400     (47,263

Net proceeds from sales

     (4,700     —          —          —          (4,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2014

   $ 116,946      $ 126,458      $ 10,403      $ 11,276      $ 265,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FISCAL YEAR 2013:

Three Months Ended June 30, 2013

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

Fair Value as of March 31, 2013

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

Total (losses) gains:

          

Net realized (loss) gain (B)

     (2,753     7        —          —          (2,746

Net unrealized depreciation (C)

     (4,306     (1,917     (46     (1,155     (7,424

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

     2,730        (7     —          —          2,723   

New investments, repayments and settlements: (D)

          

Issuances/originations

     493        8,129        1,250        253        10,125   

Settlements/repayments

     (13,208     (1,040     —          —          (14,248

Net proceeds from sales

     (639     —          —          —          (639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2013

   $ 118,730      $ 129,650      $ 1,460      $ 5,431      $ 255,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Nine Months Ended June 30, 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)

     (5,905     13        —          —          (5,892

Net unrealized depreciation (C)

     (2,665     (8,550     (2,892     (4,091     (18,198

Reversal of prior period net depreciation on realization (C)

     10,131        618        —          —          10,749   

New investments, repayments and settlements: (D)

          

Issuances/originations

     5,590        60,494        3,249        1,657        70,990   

Settlements/repayments

     (39,024     (30,757     —          —          (69,781

Net proceeds from sales

     (6,557     —          —          —          (6,557
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2013

   $ 118,730      $ 129,650      $ 1,460      $ 5,431      $ 255,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 nine months ended June 30, 2014 and 2013.
(C)   Included in net unrealized (depreciation) appreciation of investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 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.

Investment Activity

Non-Syndicated Investments

As of June 30, 2014 and September 30, 2013, we held 30 and 29 non-syndicated investments with an aggregate fair value of $196.2 million and $196.3 million, or 74.0% and 76.4% of the total aggregate portfolio at fair value, respectively. During the nine months ended June 30, 2014, we invested in seven new non-syndicated investments totaling $62.0 million; sold two non-syndicated investments for net proceeds of $4.7 million in the aggregate, resulting in a combined realized loss of $13.5 million; and had four non-syndicated investments pay off early at par, for which we received principal payments of $31.4 million and prepayment and success fees of $0.6 million in the aggregate. Additionally, during the nine months ended June 30, 2014, we funded a combined $4.2 million to existing non-syndicated portfolio companies through revolver draws and follow on investments, while scheduled and unscheduled principal repayments were $7.4 million in the aggregate from existing non-syndicated portfolio companies (exclusive of the aforementioned $31.4 million in combined early payoffs at par). The following significant non-syndicated investment transactions occurred during the nine months ended June 30, 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.

 

    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.

 

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Table of Contents
    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 19 syndicated investments with an aggregate fair value of $68.9 million, or 26.0% of our total investment portfolio at fair value, as of June 30, 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 nine months ended June 30, 2014, we invested in five new syndicated investments for a combined $11.0 million. Additionally, we had four syndicated investments pay off early at par, for which we received principal payments of $5.2 million and prepayment fees of $0.1 million in the aggregate during the nine months ended June 30, 2014.

Investment Concentrations

As of June 30, 2014, our investment portfolio consisted of investments in 49 companies located in 23 states across 18 different industries, with an aggregate fair value of $265.1 million. The five largest investments at fair value as of June 30, 2014, totaled $70.3 million, or 26.5% 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 June 30, 2014, our average investment by obligor was $7.2 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 June 30, 2014 and September 30, 2013:

 

    June 30, 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

  $ 173,855        49.6   $ 116,946        44.1   $ 184,146        55.4   $ 118,134        46.0

Senior subordinated debt (A)

    147,397        42.1        126,458        47.7        129,507        39.0     127,236        49.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Investments

    321,252        91.7        243,404        91.8        313,653        94.4        245,370        95.5   

Preferred equity

    21,849        6.2        10,403        3.9        12,268        3.7        4,626        1.8   

Common equity/equivalents

    7,282        2.1        11,276        4.3        6,345        1.9        6,882        2.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity Investments

    29,131        8.3        21,679        8.2        18,613        5.6        11,508        4.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 350,383        100.0   $ 265,083        100.0   $ 332,266        100.0   $ 256,878        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)   Includes a junior subordinated debt investment with a cost value of $0.5 million and 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.

 

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

 

     June 30, 2014     September 30, 2013  

Industry Classification

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

Electronics

   $ 31,826         12.0   $ 33,711         13.1

Healthcare, education and childcare

     31,763         12.0        45,339         17.7   

Printing and publishing

     29,285         11.0        22,224         8.7   

Diversified/conglomerate manufacturing

     28,228         10.6        4,482         1.7   

Personal and non-durable consumer products

     27,408         10.4        29,032         11.3   

Oil and gas

     25,727         9.7        15,174         5.9   

Automobile

     18,759         7.1        9,701         3.8   

Cargo Transportation

     12,903         4.9        12,984         5.1   

Broadcast and entertainment

     8,611         3.2        15,534         6.0   

Aerospace and defense

     7,946         3.0        11,730         4.6   

Textiles and leather

     7,578         2.9        8,476         3.3   

Diversified natural resources, precious metals and minerals

     7,299         2.8        —           —     

Buildings and real estate

     7,207         2.7        6,392         2.5   

Beverage, food and tobacco

     6,227         2.3        7,038         2.7   

Finance

     4,517         1.7        4,489         1.7   

Mining, steel, iron and non-precious metals

     4,455         1.7        17,733         6.9   

Leisure, amusement, motion pictures and entertainment

     2,750         1.0        2,756         1.1   

Machinery

     2,594         1.0        6,425         2.5   

Home and office furnishing, housewares and durable consumer goods

     —           —          2,651         1.0   

Other, < 1.0% (A)

     —           —          1,007         0.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 265,083         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

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

 

     June 30, 2014     September 30, 2013  

Geographic Region

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

South

   $ 93,077         35.1   $ 67,467         26.2

Midwest

     92,741         35.0        118,570         46.2   

West

     73,310         27.7        62,939         24.5   

Northeast

     5,955         2.2        7,902         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 265,083         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.

 

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Table of Contents

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 June 30, 2014:

 

For the Fiscal Years Ending September 30:

   Amount  

For the remaining three months ending September 30:

  

2014

   $ 57,733   
  

2015

     29,023   
  

2016

     79,617   
  

2017

     27,431   
  

2018

     43,131   
  

Thereafter

     85,057   
     

 

 

 
  

Total contractual repayments

   $ 321,992   
  

Equity investments

     29,131   
  

Adjustments to cost basis on debt investments

     (740
     

 

 

 
   Total Cost Basis of Investments Held at June 30, 2014:    $ 350,383   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we have 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 when the receivable balance becomes 90 days or more past due or if it is determined based upon management’s judgment that the portfolio company is unable to pay its obligations. As of June 30, 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 $6 and $0.1 million as of June 30, 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 15, 2014, our Board of Directors approved the annual renewal of the Advisory Agreement through August 31, 2015.

 

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Table of Contents

The following table summarizes the base management fees, loan servicing fees, incentive fees and associated credits for the three and nine months ended June 30, 2014 and 2013, reflected in our accompanying Condensed Consolidated Statements of Operations :

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

Average total assets subject to base management fee (A)

   $ 292,200      $ 276,400      $ 294,700      $ 282,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

   $ 1,461      $ 1,382      $ 4,421      $ 4,233   

Portfolio company fee credit (C)

     (38     (95     (669     (235

Senior syndicated loan fee waiver (D)

     (29     (42     (88     (146
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,394      $ 1,245      $ 3,664      $ 3,852   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee (B)

     917        941        2,628        2,707   

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

     (917     (941     (2,628     (2,707
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee (B)

     1,266        998        3,361        3,167   

Incentive fee credit (E)

     —          (418     (515     (1,014
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 1,266      $ 580      $ 2,846      $ 2,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (38     (95     (669     (235

Senior syndicated loan fee waiver

     (29     (42     (88     (146

Incentive fee credit

     —          (418     (515     (1,014
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit to Fees From Adviser—other (B)

   $ (67   $ (555   $ (1,272   $ (1,395
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 quarter within the respective period and adjusted appropriately for any share issuances or repurchases during the period.
(B) Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations .
(C) 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.
(D) 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 nine months ended June 30, 2014 and 2013.
(E) 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 nine months ended June 30, 2014 and 2013.

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 (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In addition, the base management fee is adjusted by certain credits from the Adviser as explained in the notes to the table above.

Loan Servicing Fee

In addition, our Adviser services, administers and collects on the loans held by Business Loan, in return for which our Adviser receives a 2% annual fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with our line of credit. All loan servicing fees are credited back to us by our Adviser. Overall, the base management fee due to our Adviser cannot exceed 2% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.

 

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Table of Contents

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);

 

    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).

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 June 30, 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 June 30, 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, general counsel and secretary, who also serves as the President of the Administrator, 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 15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2015.

 

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Table of Contents

Related Party Fees Due

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

 

     June 30,
2014
     September 30,
2013
 

Net base management fee due to Adviser

   $ 687       $ 529   

Incentive fee due to Adviser

     1,266         1,177   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,953         1,706   
  

 

 

    

 

 

 

Fee due to Administrator

     219         126   
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 2,172       $ 1,832   
  

 

 

    

 

 

 

Other operating expenses due to the Adviser as of June 30, 2014 and September 30, 2013, totaled $8 and $18, respectively. In addition, as of June 30, 2014 and September 30, 2013, other net co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $0.1 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 June 30, 2014 and September 30, 2013, respectively .

Notes from Former Employees

During the nine months ended June 30, 2014 and 2013, we had one outstanding note receivable from 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 nine months ended June 30, 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 receivable was paid off as of September 30, 2013. We did not receive any principal repayments on the note receivable from the former employees during the nine months ended June 30, 2014. We recognized interest income from all employee notes of $3 and $11 for the three and nine months ended June 30, 2014, respectively and $22 and $0.1 million for the three and nine months ended June 30, 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 June 30, 2014 and September 30, 2013:

 

Issue

    Date    

     Original
Amount of
Employee
Note
    Outstanding
Balance of Employee Note
As of June 30, 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 June 30, 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 note totaling $0.2 million as of June 30, 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 June 30, 2014, we determined that this note was still recourse.

 

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Table of Contents

NOTE 5. BORROWINGS

Revolving Credit Facility

On April 26, 2013, we, through 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 June 30, 2014 and September 30, 2013 and during the three and nine months ended June 30, 2014 and 2013:

 

     June 30,
2014
     September 30,
2013
 

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding

     35,100         46,900   

Availability

     74,200         60,880   

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2014     2013     2014     2013  

Weighted average borrowings outstanding

   $ 49,389      $ 54,580      $ 43,086      $ 51,967   

Effective interest rate (A)

     5.7     5.5     6.2     6.2

Commitment (unused) fees incurred

   $ 221      $ 207      $ 707      $ 644   

 

(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 $220.5 million as of June 30, 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 June 30, 2014, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $242.0 million, asset coverage of 290% and an active status as a BDC and RIC. In addition, we had 31 obligors in the borrowing base of our Credit Facility as of June 30, 2014. As of June 30, 2014, we were in compliance with all of our Credit Facility covenants.

 

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Table of Contents

On July 15, 2013, we, through 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 is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of June 30, 2014 and September 30, 2013, the fair value of our interest rate cap agreement was $0 and $4, respectively.

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, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of June 30, 2014 and September 30, 2013, the discount rate used to determine the fair value of our Credit Facility was 4.03% and 4.31%, respectively. Generally, an increase or decrease in the discount rate used in the DCF calculation, may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of June 30, 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 June 30, 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 June 30, 2014 and 2013:

 

     Total Recurring Fair Value
Measurement Reported in

Condensed Consolidated
Statements of

Assets and Liabilities Using
Significant Unobservable
Inputs (Level 3)
 
     June 30,
2014
     September 30,
2013
 

Credit Facility

   $ 36,560       $ 47,102   
  

 

 

    

 

 

 

 

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

 
     Three Months Ended
June 30,
 
     2014     2013  

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

   $ 60,514      $ 56,951   

Borrowings

     13,800        17,000   

Repayments

     (38,900     (13,800

Net unrealized appreciation (depreciation) (A)

     1,146        (620
  

 

 

   

 

 

 

Fair Value as of June 30, 2014 and 2013, respectively

   $ 36,560      $ 59,531   
  

 

 

   

 

 

 

 

     Nine Months Ended
June 30,
 
     2014     2013  

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

   $ 47,102      $ 62,451   

Borrowings

     91,000        68,500   

Repayments

     (102,800     (68,700

Net unrealized appreciation (depreciation) (A)

     1,258        (2,720
  

 

 

   

 

 

 

Fair Value as of June 30, 2014 and 2013, respectively

   $ 36,560      $ 59,531   
  

 

 

   

 

 

 

 

(A)   Included in net unrealized appreciation (depreciation) of other on our accompanying C ondensed Consolidated Statements of Operations for the three and nine months ended June 30, 2014 and 2013.

The fair value of the collateral under our Credit Facility was approximately $223.1 million and $229.3 million in aggregate as of June 30, 2014 and September 30, 2013, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In May 2014, we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (“Series 2021 Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016

 

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Term Preferred Stock, par value $0.001 per share (“Series 2016 Term Preferred Stock”) and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility. In connection with the voluntary redemption of our Series 2016 Term Preferred Stock, we recognized a realized loss on extinguishment of debt of $1.3 million, which has been reflected on the accompanying Condensed Consolidated Statement of Operations and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

We incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which are recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending June 30, 2021. The shares of our Series 2021 Term Preferred Stock have a redemption date of June 30, 2021, and are traded under the ticker symbol “GLADO” on the NASDAQ Global Select Market. Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date of redemption (the “Redemption Price”). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Series 2021 Term Preferred Stock and (2) if we fail to maintain an asset coverage ratio of at least 240.0%, we are required to redeem a portion of the outstanding Term Preferred Stock or otherwise cure the ratio redemption trigger. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our option at the Redemption Price, at any time on or after June 30, 2017. If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of June 30, 2014, we have not redeemed any of our outstanding Series 2021 Term Preferred Stock.

In November 2011, we completed a public offering of approximately 1.5 million shares of our Series 2016 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, commissions 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 were recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and were amortized over the redemption period ending December 31, 2016. In May 2014, when we voluntarily redeemed our Series 2016 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the realized loss on extinguishment of debt discussed above. Our Series 2016 Term Preferred Stock provided for a fixed dividend equal to 7.125% per year, payable monthly (which equated in total to approximately $2.7 million per year). The shares of our Series 2016 Term Preferred were traded under the ticker symbol of “GLADP” on the NASDAQ Global Select Market. In connection with the voluntary redemption, shares of our Series 2016 Term Preferred Stock were removed from listing on May 22, 2014.

 

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Our Board of Directors declared and paid the following monthly distributions on our Series 2016 Term Preferred Stock for the nine months ended June 30, 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   
   April 8, 2014    April 21, 2014    April 30, 2014      0.14843750   
   April 8, 2014    May 20, 2014    May 23, 2014 (A)      0.14843750   
           

 

 

 
      Nine Months Ended June 30, 2014:    $ 1.18750000   
           

 

 

 

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   
   April 9, 2013    April 22, 2013    April 30, 2013      0.14843750   
   April 9, 2013    May 20, 2013    May 31, 2013      0.14843750   
   April 9, 2013    June 19, 2013    June 28, 2013      0.14843750   
           

 

 

 
      Nine Months Ended June 30, 2013:    $ 1.33593750   
           

 

 

 

 

(A) We redeemed all of the outstanding shares of our Series 2016 Term Preferred Stock on May 23, 2014 and at that time, we paid the May dividends in full for record holders as of May 20, 2014.

Our Board of Directors declared and paid the following monthly distributions on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2014 (no distributions were made on our Series 2021 Term Preferred Stock prior to June 30, 2014):

 

Fiscal Year

  

Declaration
Date

  

Record Date

  

Payment Date

   Distribution per
Series 2021
Term Preferred
Share
 

2014

   May 29, 2014    June 19, 2014    June 30, 2014 (B)    $ 0.19687500   
           

 

 

 
      Nine Months Ended June 30, 2014:    $ 0.19687500   
           

 

 

 

 

(B) The dividend declared on May 29, 2014 on our Series 2021 Term Preferred Stock covers the partial period from May 20, 2014 through May 31, 2014 and also covers the June 2014 dividend.

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 our term preferred stock at cost as of June 30, 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, based on the last quoted closing price, for our Series 2021 Term Preferred Stock as of June 30, 2014, was approximately $63.6 million and for our Series 2016 Term Preferred Stock as of September 30, 2013, was approximately $40.0 million. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder distributions declared and paid on our Series 2016 Term Preferred Stock for the three and nine months ended June 30, 2014, were approximately $0.5 million and $1.8 million, respectively, and for the three and nine months ended June 30, 2013, were approximately $0.7 million and $2.1 million, respectively. Aggregate preferred stockholder distributions declared and paid on our Series 2021 Term Preferred Stock for the three and nine months ended June 30, 2014, were each approximately $0.5 million. 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.

NOTE 7. 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 registers an aggregate of $300.0 million in

 

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securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. We currently have the ability to issue up to $239.0 million in securities under our Registration Statement, through one or more transactions. We issued approximately 2.4 million shares of our Series 2021 Term Preferred Stock under our Registration Statement in May 2014. No other securities have been issued to date under our Registration Statement.

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

The following table sets forth the computation of basic and diluted net (decrease) increase in net assets resulting from operations per weighted average common share for the three and nine months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  

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

   $ (20,175   $ (2,059   $ (11,771   $ 3,544   

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

   $ (0.96   $ (0.10   $ (0.56   $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 9. 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 management’s estimate of the fiscal year earnings. Based on that estimate, our Board of Directors declares three monthly distributions 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 from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

 

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Our Board of Directors declared and paid the following monthly distributions to common stockholders for the nine months ended June 30, 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   
  

April 8, 2014

   April 21, 2014    April 30, 2014      0.07   
  

April 8, 2014

   May 20, 2014    May 30, 2014      0.07   
  

April 8, 2014

   June 19, 2014    June 30, 2014      0.07   
           

 

 

 
      Nine Months Ended June 30, 2014:    $ 0.63   
           

 

 

 

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   
  

April 9, 2013

   April 22, 2013    April 30, 2013      0.07   
  

April 9, 2013

   May 20, 2013    May 31, 2013      0.07   
  

April 9, 2013

   June 19, 2013    June 28, 2013      0.07   
           

 

 

 
      Nine Months Ended June 30, 2013:    $ 0.63   
           

 

 

 

Aggregate distributions declared and paid to our common stockholders for the nine months ended June 30, 2014 and June 30, 2013, were each approximately $13.2 million, and were declared based on estimates of net investment income for the respective periods. The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2014 will be determined at fiscal yearend based upon our taxable income for the full year and distributions paid during the full year. Such a characterization made on a quarterly basis may not be representative of the actual full year characterization. If we characterized our common stockholder distributions as of June 30, 2014, 100.0% would be a return of capital and 0.0% would be from ordinary income, primarily due to GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

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), resulting in a partial return of capital of approximately $1.3 million. The return of capital primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

For the nine months ended June 30, 2014 and the year ended September 30, 2013, we recorded the following adjustments for book-tax differences to reflect tax character.

 

     June 30,
2014
    September 30,
2013
 

Overdistributed net investment income

   $ (2,297 )     $ (373

Accumulated net realized losses

     13,214        2,151   

Capital in excess of par value

     (15,511 )       (1,778

NOTE 10. 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 June 30, 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 June 30, 2014 and September 30, 2013, respectively, and are recorded in other liabilities on our accompanying Condensed Consolidated Statements of Assets and Liabilities .

 

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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.

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 June 30, 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 amounts of our unused line of credit and uncalled capital commitments as of June 30, 2014 and September 30, 2013, which are not reflected as a liability in the accompanying Condensed Consolidated Statements of Assets and Liabilities :

 

     June 30,
2014
     September 30,
2013
 

Unused line of credit commitments

   $ 7,305       $ 6,524   

Uncalled capital commitment

     2,827         2,700   
  

 

 

    

 

 

 

Total

   $ 10,132       $ 9,224   
  

 

 

    

 

 

 

NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2014     2013     2014     2013  

Per Common Share Data (A) :

        

Net asset value at beginning of period (A)

   $ 9.79      $ 8.91      $ 9.81      $ 8.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (B)

     0.24        0.21        0.66        0.65   

Net realized loss on investments (B)

     —          (0.11     (0.63     (0.26

Realized loss on extinguishment of debt (B)

     (0.06     —          (0.06     —     

Net unrealized depreciation of investments (B)

     (1.09     (0.23     (0.47     (0.35

Net unrealized (appreciation) depreciation of other (B)

     (0.05     0.03        (0.06     0.13   

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

     (0.21     (0.21     (0.63     (0.63

Repayment of principal on employee note receivable (B)

     —          —          —          0.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period (A)

   $ 8.62      $ 8.60      $ 8.62      $ 8.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value at beginning of period

   $ 10.08      $ 9.20      $ 8.73      $ 8.75   

Market value at end of period

     10.06        8.17        10.06        8.17   

Total return (D)

     1.94     (9.01 )%      22.91     0.35

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

   $ 180,991      $ 180,678      $ 180,991      $ 180,678   

Average net assets (E)

     197,391        185,257        205,425        189,433   

Senior Securities Data:

        

Borrowings under Credit Facility, at cost

     35,100        58,600        35,100        58,600   

Mandatorily redeemable preferred stock

     61,000        38,497        61,000        38,497   

Asset coverage ratio (F)

     290     287     290     287

Asset coverage per unit (G)

   $ 2,896      $ 2,868      $ 2,896      $ 2,868   

Ratios/Supplemental Data:

        

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

     12.37     12.17     11.58     12.12

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

     10.37        8.94        9.05        9.24   

Ratio of net investment income to average net assets-annualized

     10.26        9.52        9.06        9.63   

 

(A)   Based on actual common shares outstanding at the end of the corresponding period.
(B)   Based on weighted average basic per common share data.
(C)   Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from income 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 9— 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.
(J)   The ratio of expenses to average net assets for the three and nine months ended June 30, 2013 was revised from the previously reported ratio, which was 10.14%% and 10.22%, to correct an error as discussed in Note 2— Summary of Significant Accounting Policies .

 

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NOTE 12. 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 had certain unconsolidated subsidiaries, specifically Defiance Integrated Technologies, Inc., Lindmark, Midwest Metal Distribution, Inc., RBC Acquisition Corp., Sunshine Media Holdings and Viapack, Inc. (“Viapack”) as of June 30, 2014 and September 30, 2013 and for the nine months ended June 30, 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 nine months ended June 30, 2014 and 2013 for our significant unconsolidated subsidiaries.

 

     Nine Months Ended
June 30,
 

Income Statement

   2014 (A)     2013 (B)  

Net sales

   $ 117,473      $ 123,587   

Gross profit

     20,001        21,978   

Net loss

     (7,189     (6,939

 

(A) Lindmark was substantially exited in September 2013 and the financial information presented is for the wind-down period.
(B) Viapack was exited in November 2012 and the financial information presented is through the date of sale.

NOTE 13. SUBSEQUENT EVENTS

Portfolio Activity

Subsequent to June 30, 2014, we invested $8.1 million in follow on investments to existing portfolio companies, which included an additional $7.1 million in a combination of subordinated term debt and equity in FDF. We also received $5.8 million in scheduled and unscheduled principal repayments from existing portfolio companies, which included the early payoffs of ARSloane Acquisition, LLC at par for prepayment fees of $0.2 million and the early payoff of WP Evenflo Group Holdings, Inc. for a realized gain, both in July 2014.

Distributions to Stockholders

In July 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
Series 2021
Term Preferred
Share
 

July 25, 2014

   August 5, 2014    $ 0.07       $ 0.140625   

August 20, 2014

   August 29, 2014      0.07         0.140625   

September 19, 2014

   September 30, 2014      0.07         0.140625   
     

 

 

    

 

 

 
   Total for the Quarter:    $ 0.21       $ 0.421875   
     

 

 

    

 

 

 

 

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ITEM 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, Terry Lee Brubaker or Bob Marcotte; (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 middle market 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.

 

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

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

Business Environment

The strength of the global economy and the U.S. economy in particular, continues to be uncertain, although economic conditions generally appear 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, regulatory 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.

Additionally, there has been increased competitive pressure in the middle market lending marketplace from other BDCs and investment companies, as well as small banks for senior and senior subordinated debt. We have seen an increase in refinancing and recapitalization transactions; however, there is increased yield compression on higher leveraged and increasingly riskier investments in the middle market segment we focus on. 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 nine months ended June 30, 2014, we invested an aggregate of $73.0 million in 12 new proprietary and syndicate investments, resulting in a net expansion in our overall portfolio of two portfolio companies, due to eight portfolio companies paying off early at par for an aggregate of $36.6 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 nine months ended June 30, 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

 

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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, 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 and may continue to affect the trading price of our common stock and our ability to finance new investments through the issuance of equity. On July 29, 2014, the closing market price of our common stock was $10.13, a 17.5% premium to our June 30, 2014, net asset value (“NAV”) per common share of $8.62. During the last six months, our common stock has generally traded at a premium to our NAV, however from time to time over the last four years, our common stock has traded below NAV per share. When our common stock trades below NAV per share, 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. To date, we have never issued common stock below our then current NAV per share. 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 (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 June 30, 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 issuance of 6.75% Series 2021 Term Preferred Stock (our “Series 2021 Term Preferred Stock,” described more fully under “ Liquidity and Capital Resources—Equity—Term Preferred Stock ”), our 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. During the first nine months 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 nine months ended June 30, 2014, we invested an aggregate of $73.0 million in 12 new portfolio companies and an aggregate of $10.2 million to existing portfolio companies. In addition, during the nine months ended June 30, 2014, we sold our investments in two portfolio companies and we received scheduled and unscheduled contractual principal repayments of approximately $47.3 million from existing portfolio companies, including eight early payoffs at par. Since our initial public offering in August 2001, we have made 366 different loans to, or investments in, 184 companies for a total of approximately $1.3 billion, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the nine months ended June 30, 2014, we executed the following transactions with certain of our portfolio companies:

Issuances and Originations

During the nine months ended June 30, 2014, we extended an aggregate of $62.0 million of investments to seven new proprietary portfolio companies and an aggregate of $11.0 million to five new syndicated portfolio companies (The Active Network, Inc., ARSloane Acquisition, LLC, Envision Acquisition Company, LLC, GTCR Valor Companies, Inc. and Vitera Healthcare Solutions, LLC). Below are significant issuances and originations during the nine months ended June 30, 2014:

 

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