Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 02/03/2014 16:45:23)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2013

 

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

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

  22102
(Address of principal executive office)   (Zip Code)

(703) 287-5800

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of January 31, 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 December 31 and September 30, 2013

    3   

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

    4   

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

    5   

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012

    6   

Condensed Consolidated Schedules of Investments as of December 31 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

    34   

Overview

    34   

Results of Operations

    38   

Liquidity and Capital Resources

    42   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    52   

Item 4. Controls and Procedures

    53   

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

    53   

Item 1A. Risk Factors

    53   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

    53   

Item 3. Defaults Upon Senior Securities

    53   

Item 4. Mine Safety Disclosures

    53   

Item 5. Other Information

    53   

Item 6. Exhibits

    54   

SIGNATURES

    55   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,     September 30,  
     2013     2013  

ASSETS

    

Investments at fair value

    

Non-Control/Non-Affiliate investments (Cost of $238,315 and $218,713, respectively)

   $ 203,566      $ 181,870   

Control investments (Cost of $93,962 and $104,113, respectively)

     69,008        64,221   

Affiliate investments (Cost of $9,440 )

     10,632        10,787   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $341,717 and $332,266, respectively)

     283,206        256,878   
  

 

 

   

 

 

 

Cash and cash equivalents

     9,090        13,900   

Restricted cash and cash equivalents

     869        1,176   

Interest receivable

     2,485        2,488   

Due from custodian

     2,129        16,473   

Deferred financing fees

     2,770        3,086   

Other assets

     913        1,090   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 301,462      $ 295,091   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $47,700 and $46,900, respectively)

   $ 47,908      $ 47,102   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 1,539,882 shares issued and outstanding

     38,497        38,497   

Accounts payable and accrued expenses

     492        494   

Interest payable

     148        170   

Fees due to Adviser (A)

     855        1,706   

Fee due to Administrator (A)

     203        126   

Other liabilities

     1,271        1,004   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 89,374      $ 89,099   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

   $ 212,088      $ 205,992   
  

 

 

   

 

 

 

ANALYSIS OF NET ASSETS

    

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

   $ 21      $ 21   

Capital in excess of par value

     322,936        322,936   

Note receivable from employee (A)

     (175     (175

Cumulative net unrealized depreciation of investments

     (58,511     (75,388

Cumulative net unrealized appreciation of other

     (267     (260

Overdistributed net investment income

     (100     (100

Accumulated net realized losses

     (51,816     (41,042
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 212,088      $ 205,992   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 10.10      $ 9.81   
  

 

 

   

 

 

 

 

(A)  

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

(B)

Refer to Note 11— Commitments and Contingencies for additional information.

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

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2013     2012  

INVESTMENT INCOME

    

Interest income:

    

Non-Control/Non-Affiliate investments

   $ 6,399      $ 7,314   

Control investments

     1,569        812   

Affiliate investments

     219        —     

Cash and cash equivalents

     —          1   

Notes receivable from employees (A)

     4        53   
  

 

 

   

 

 

 

Total interest income

     8,191        8,180   

Other income:

    

Non-Control/Non-Affiliate investments

     1        1,648   

Control investments

     200        —     
  

 

 

   

 

 

 

Total investment income

     8,392        9,828   
  

 

 

   

 

 

 

EXPENSES

    

Base management fee (A)

     1,456        1,432   

Incentive fee (A)

     974        1,215   

Administration fee (A)

     203        150   

Interest expense on borrowings

     615        856   

Dividend expense on mandatorily redeemable preferred stock

     686        686   

Amortization of deferred financing fees

     315        256   

Professional fees

     290        258   

Other general and administrative expenses

     321        317   
  

 

 

   

 

 

 

Expenses before credits from Adviser

     4,860        5,170   

Credits to fees from Adviser (A)

     (878     (201
  

 

 

   

 

 

 

Total expenses net of credits

     3,982        4,969   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,410        4,859   
  

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN

    

Net realized loss:

    

Non-Control/Non-Affiliate investments

     —          (641

Control investments

     (10,774     (2,407
  

 

 

   

 

 

 

Total net realized loss

     (10,774     (3,048

Net unrealized appreciation (depreciation):

    

Non-Control/Non-Affiliate investments

     2,094        (86

Control investments

     14,938        4,971   

Affiliate investments

     (155     —     

Other

     (7     1,670   
  

 

 

   

 

 

 

Total net unrealized appreciation

     16,870        6,555   
  

 

 

   

 

 

 

Net realized and unrealized gain

     6,096        3,507   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 10,506      $ 8,366   
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

    

Net investment income

   $ 0.21      $ 0.23   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 0.50      $ 0.40   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

    

Basic and Diluted

     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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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2013     2012  

OPERATIONS

    

Net investment income

   $ 4,410      $ 4,859   

Net realized loss on investments

     (10,774     (3,048

Net unrealized appreciation of investments

     16,877        4,885   

Net unrealized (appreciation) depreciation of other

     (7     1,670   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     10,506        8,366   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (4,410     (4,410

NET INCREASE IN NET ASSETS

     6,096        3,956   

NET ASSETS, BEGINNING OF PERIOD

     205,992        188,564   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 212,088      $ 192,520   
  

 

 

   

 

 

 

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

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 10,506      $ 8,366   

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

    

Purchase of investments

     (44,881     (51,818

Principal repayments on investments

     24,667        50,596   

Proceeds from sale of investments

     —          5,918   

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

     (53     —     

Net change in premiums, discounts and amortization

     84        474   

Net realized loss on investments

     10,732        3,162   

Net unrealized appreciation of investments

     (16,877     (4,885

Net unrealized appreciation (depreciation) of other

     7        (1,670

Decrease (increase) in restricted cash and cash equivalents

     307        (849

Amortization of deferred financing fees

     315        257   

Decrease in interest receivable

     3        32   

Decrease (increase) in due from custodian

     14,344        (688

Decrease in other assets

     177        254   

Decrease in accounts payable and accrued expenses

     (2     (80

Decrease in interest payable

     (22     (12

Decrease in fees due to Adviser (A)

     (851     (46

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

     77        (24

Increase (decrease) in other liabilities

     267        (45
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,200     8,942   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     42,400        44,000   

Repayments on borrowings

     (41,600     (47,000

Distributions paid to common stockholders

     (4,410     (4,410
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,610     (7,410
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (4,810     1,532   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     13,900        9,857   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 9,090      $ 11,389   
  

 

 

   

 

 

 

 

(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

DECEMBER 31, 2013

(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       $ 12,839       $ 13,065   
     

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

        1,000         —     
     

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

        244         —     
           

 

 

    

 

 

 
              14,083         13,065   

Allison Publications, LLC

  

Printing and publishing

  

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

     600         600         599   
     

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

     2,875         2,875         2,871   
     

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

     5,400         5,400         5,393   
           

 

 

    

 

 

 
              8,875         8,863   

Alloy Die Casting Co.

  

Diversified/conglomerate manufacturing

  

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

     5,235         5,235         5,235   
     

Preferred Stock (1,742 shares) (G) (I)

        1,742         1,742   
     

Common Stock (270 shares) (G) (I)

        18         18   
           

 

 

    

 

 

 
              6,995         6,995   

BAS Broadcasting

  

Broadcasting and entertainment

  

Senior Term Debt (11.5%, Due 7/2013) (D)

     7,465         7,465         560   

Behrens Manufacturing, LLC

  

Diversified/conglomerate manufacturing

  

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

     4,275         4,275         4,275   
     

Preferred Stock (1,253 shares) (G) (I) (L)

        1,253         1,253   
           

 

 

    

 

 

 
              5,528         5,528   

Chinese Yellow Pages Company

  

Printing and publishing

  

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

     198         198         114   

Francis Drilling Fluids, Ltd.

  

Oil and gas

  

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

     15,000         15,000         14,700   
     

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

        999         73   
     

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

        1         —     
           

 

 

    

 

 

 
              16,000         14,773   

Funko, LLC

  

Personal and non-durable consumer products

  

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

     7,558         7,558         7,672   
     

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

        1,305         2,235   
           

 

 

    

 

 

 
              8,863         9,907   

GFRC Holdings, LLC

  

Buildings and real estate

  

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

     4,924         4,924         3,447   
     

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

     6,598         6,598         4,619   
           

 

 

    

 

 

 
              11,522         8,066   

Heartland Communications Group

  

Broadcasting and entertainment

  

Line of Credit, $0 available (5.0%, Due 3/2014) (D)

     100         100         12   
     

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

     100         100         12   
     

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

     4,342         4,342         521   
     

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

        66         —     
           

 

 

    

 

 

 
              4,608         545   

International Junior Golf Training Acquisition Company

  

Leisure, amusement, motion

  

Line of Credit, $0 available (11.0%, Due 5/2014) (D)

     2,250         2,250         1,125   
  

pictures and entertainment

  

Senior Term Debt (10.5%, Due 5/2014) (D)

     61         61         31   
     

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

     2,700         2,700         1,350   
           

 

 

    

 

 

 
              5,011         2,506   

J.America, Inc.

  

Personal and non-durable consumer products

  

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

     7,500         7,500         7,500   
     

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

     9,500         9,500         9,500   
           

 

 

    

 

 

 
              17,000         17,000   

Leeds Novamark Capital I, L.P.

  

Private equity fund – healthcare, education and childcare

  

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

        173         173   

Legend Communications of Wyoming, LLC

  

Broadcasting and entertainment

  

Senior Term Debt (12.0%, Due 12/2013) (D)

     6,874         6,874         1,203   

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(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) (I)    $ 4,140       $ 4,140       $ 4,140   
      Preferred Stock (1,449 shares) (G) (I)         1,449         1,449   
           

 

 

    

 

 

 
              5,589         5,589   

North American Aircraft Services, LLC

  

Aerospace and defense

   Senior Subordinated Term Debt (11.8%, Due 8/2016) (D)      4,750         4,750         4,797   
      Senior Subordinated Term Debt (12.5%, Due 8/2016) (D)      2,820         2,820         2,848   
      Common Stock Warrants (35,000 shares) (F) (G)         350         955   
           

 

 

    

 

 

 
              7,920         8,600   

Ohana Media Group

  

Broadcasting and entertainment

   Senior Term Debt (10.0%, Due 10/2016) (D)      1,453         1,453         1,422   

POP Radio, LLC

  

Broadcasting and entertainment

   Senior Term Debt (11.8%, Due 5/2017) (J)      7,134         7,134         7,134   
      Junior Subordinated Term Debt (11.0% PIK, Due 11/2017) (J)      556         496         556   
      Participation Unit (2.4% ownership) (G) (J)         75         145   
           

 

 

    

 

 

 
              7,705         7,835   

Precision Acquisition Group Holdings, Inc.

  

Machinery

   Equipment Note (13.0%, Due 3/2014) (D)      1,000         1,000         705   
      Senior Term Debt (13.0%, Due 3/2014) (D)      4,125         4,125         2,908   
      Senior Term Debt (13.0%, Due 3/2014) (C) (D)      4,053         4,053         2,857   
           

 

 

    

 

 

 
              9,178         6,470   

Saunders & Associates

  

Electronics

   Line of Credit, $0 available (11.3%, Due 5/2013) (D)      917         917         825   
      Senior Term Debt (11.3%, Due 5/2013) (D)      8,947         8,947         8,052   
           

 

 

    

 

 

 
              9,864         8,877   

Sunburst Media—Louisiana, LLC

  

Broadcasting and entertainment

   Senior Term Debt (10.5%, Due 2/2014) (D)      6,026         6,026         422   

Thibaut Acquisition Co.

  

Home and office furnishings, housewares and durable consumer products

   Line of Credit, $1,000 available (9.0%, Due 8/2014) (D)      —           —           —     
      Senior Term Debt (12.0%, Due 8/2014) (C) (D)      2,369         2,369         2,416   
           

 

 

    

 

 

 
              2,369         2,416   

Westland Technologies, Inc.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (7.5%, Due 4/2016) (D)      650         650         566   
      Senior Term Debt (12.5%, Due 4/2016) (D)      4,000         4,000         3,480   
      Common Stock Warrants (77,287 shares) (F) (G)         350         —     
           

 

 

    

 

 

 
              5,000         4,046   
           

 

 

    

 

 

 

Subtotal – Non-syndicated investments

         $ 168,299       $ 134,975   
           

 

 

    

 

 

 

Syndicated Investments:

              

Allied Security Holdings, LLC

  

Personal, food and miscellaneous services

   Senior Subordinated Term Debt (9.8%, Due 2/2018) (E)    $ 1,000       $ 993       $ 1,007   

Ameriqual Group, LLC

  

Beverage, food and tobacco

   Senior Term Debt (9.0% and 1.3% PIK, Due 3/2016) (E)      7,313         7,236         7,020   

Ardent Medical Services, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.0%, Due 1/2019) (E)      4,000         3,930         4,030   

ARSloane Acquisition, LLC

  

Printing and publishing

   Senior Subordinated Term Debt (11.8%, Due 9/2020) (E)      5,000         4,920         4,900   

Ascend Learning, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.5%, Due 12/2017) (E)      1,000         981         1,000   

Autoparts Holdings Limited

  

Automobile

   Senior Term Debt (10.5%, Due 1/2018) (E)      1,000         997         930   

Blue Coat Systems, Inc.

  

Electronics

   Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)      3,000         2,971         3,060   

Envision Acquisition Company, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (9.8%, Due 11/2021) (E)      2,500         2,451         2,506   

First American Payment Systems, L.P.

  

Finance

   Senior Subordinated Term Debt (10.8%, Due 4/2019) (E)      4,500         4,470         4,264   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

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

        

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         4,916         5,000   

RP Crown Parent, LLC

  

Electronics

  

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

     2,000         1,964         2,020   

Sensus USA, Inc.

  

Electronics

  

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

     500         497         498   

Steinway Musical Instruments, Inc.

  

Personal and non-durable consumer products

  

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

     250         247         257   

SumTotal Systems, Inc.

  

Electronics

  

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

     4,000         3,930         3,930   

Targus Group International, Inc.

  

Textiles and leather

  

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

     9,322         9,213         7,598   

The Active Network, Inc.

  

Electronics

  

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

     1,000         995         1,015   

Vision Solutions, Inc.

  

Electronics

  

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

     11,000         10,942         11,055   

Vitera Healthcare Solutions, LLC

  

Healthcare, education and childcare

  

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

     500         493         503   

W3, Co.

  

Oil and gas

  

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

     499         494         501   

Wall Street Systems Holdings, Inc.

  

Electronics

  

Senior Term Debt (9.3%, Due 10/2020) (E)

     3,000         2,946         3,030   

WP Evenflo Group Holdings, Inc.

  

Diversified/conglomerate manufacturing

  

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

        333         467   
     

Junior Preferred Equity (111 shares) (F) (G)

        111         —     
     

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

        —           —     
           

 

 

    

 

 

 
              444         467   
           

 

 

    

 

 

 

Subtotal—Syndicated investments

         $ 70,016       $ 68,591   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 71.9% of total investments at fair value)

      $ 238,315       $ 203,566   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (O) :

              

Defiance Integrated Technologies, Inc.

  

Automobile

  

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

   $ 6,785       $ 6,785       $ 6,785   
     

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

        1         1,663   
           

 

 

    

 

 

 
              6,786         8,448   

Lindmark Acquisition, LLC

  

Broadcasting and entertainment

  

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

     —           —           —     
     

Success Fee on Senior Subordinated Term Debt (F)

        —           932   
     

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

        317         —     
           

 

 

    

 

 

 
              317         932   

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         18,098   
     

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

        2,175         —     
     

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

        138         —     
           

 

 

    

 

 

 
              20,594         18,098   

RBC Acquisition Corp.

  

Healthcare, education and childcare

  

Line of Credit, $0 available (9.0%, Due 6/2014) (F)

     4,000         4,000         4,000   
     

Mortgage Note (9.5%, Due 12/2014) (F)

     6,941         6,941         6,941   
     

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

     11,392         11,392         11,392   
     

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

     6,000         6,000         6,000   
     

Preferred Stock (2,299,000 shares) (F) (G) (L)

        2,299         2,519   
     

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

        370         3,367   
           

 

 

    

 

 

 
              31,002         34,219   

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (O) (Continued):

  

Sunshine Media Holdings

  

Printing and publishing

  

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

   $ 1,600       $ 1,600       $ 400   
     

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

     16,948         16,948         4,236   
     

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

     10,700         10,700         2,675   
     

Preferred Equity (15,270 shares) (F) (G) (L)

        5,275         —     
     

Common Stock (1,867 shares) (F) (G)

        740         —     
     

Common Stock Warrants (72 shares) (F) (G)

        —           —     
           

 

 

    

 

 

 
              35,263         7,311   
           

 

 

    

 

 

 

Total Control Investments (represented 24.4% of total investments at fair value)

      $ 93,962       $ 69,008   
           

 

 

    

 

 

 

AFFILATE INVESTMENTS (P) :

              

Ashland Acquisition, LLC

  

Printing and publishing

  

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

   $ —         $ —         $ —     
     

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

     7,000         7,000         7,062   
     

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

        440         223   
     

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

        —           —     
           

 

 

    

 

 

 
              7,440         7,285   

FedCap Partners, LLC

  

Private equity fund – aerospace and defense

  

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

        2,000         3,347   
           

 

 

    

 

 

 

Total Affiliate Investments (represented 3.7% of total investments at fair value)

  

   $ 9,440       $ 10,632   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 341,717       $ 283,206   
           

 

 

    

 

 

 

 

(A)  

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

(B)  

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

(C)  

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

(D)  

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

(E)  

Security valued based on the indicative bid price on or near December 31, 2013, offered by the respective syndication agent’s trading desk or secondary desk.

(F)  

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

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

(I)  

New proprietary portfolio investment valued at cost, as it was determined that the price paid during the three months ended December 31, 2013, best represents fair value as of December 31, 2013.

(J)  

Subsequent to December 31, 2013, our investment in Pop Radio, LLC paid off and therefore was valued at the pay off amount as of December 31, 2013.

(K)  

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity.

(L)

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.

(M)

There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.

(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)  

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.

(P)  

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.

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

  

  

Non-syndicated investments:

              

AG Transportation Holdings, LLC

  

Cargo transport

  

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

   $ 13,000       $ 12,818       $ 12,984   
     

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

        1,000         —     
     

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

        244         —     
           

 

 

    

 

 

 
              14,062         12,984   

Allen Edmonds Shoe Corporation

  

Personal and non-durable consumer products

  

Senior Subordinated Term Debt (11.3%, Due 12/2015) (D)

     19,483         19,483         19,604   

Allison Publications, LLC

  

Printing and publishing

  

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

     600         600         594   
     

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

     2,875         2,875         2,846   
     

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

     5,400         5,400         5,346   
           

 

 

    

 

 

 
              8,875         8,786   

BAS Broadcasting

  

Broadcasting and entertainment

  

Senior Term Debt (11.5%, Due 7/2013) (D)

     7,465         7,465         373   

Chinese Yellow Pages Company

  

Printing and publishing

  

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

     243         243         148   

Francis Drilling Fluids, Ltd.

  

Oil and gas

  

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

     15,000         15,000         14,475   
     

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

        999         192   
     

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

        1         —     
           

 

 

    

 

 

 
              16,000         14,667   

Funko, LLC

  

Personal and non-durable consumer products

  

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

     7,530         7,530         7,530   
     

Preferred Equity Units (1,250 units) (F) (G)

        1,250         1,646   
           

 

 

    

 

 

 
              8,780         9,176   

GFRC Holdings, LLC

  

Buildings and real estate

  

Line of Credit, $100 available (8.7%, Due 12/2013) (D) (I)

     100         100         55   
     

Senior Term Debt (10.5%, Due 12/2013) (D) (I)

     4,924         4,924         2,708   
     

Senior Subordinated Term Debt (13.0%, Due 12/2013) (D) (I)

     6,598         6,598         3,629   
           

 

 

    

 

 

 
              11,622         6,392   

Heartland Communications Group

  

Broadcasting and entertainment

  

Line of Credit, $0 available (5.0%, Due 3/2014) (D)

     100         100         20   
     

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

     100         100         20   
     

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

     4,342         4,342         868   
     

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

        66         —     
           

 

 

    

 

 

 
              4,608         908   

International Junior Golf Training Acquisition Company

  

Leisure, amusement, motion pictures and entertainment

  

Line of Credit, $0 available (11.0%, Due 5/2014) (D)

     2,250         2,250         1,238   
     

Senior Term Debt (10.5%, Due 12/2013) (D)

     261         261         144   
     

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

     2,500         2,500         1,375   
           

 

 

    

 

 

 
              5,011         2,757   

Leeds Novamark Capital I, L.P.

  

Private equity fund – healthcare, education and childcare

  

Limited Partnership Interest (8.4% ownership, $2,700 uncalled capital commitment) (G) (O)

        253         253   

Legend Communications of Wyoming, LLC

  

Broadcasting and entertainment

  

Senior Term Debt (11.0%, Due 12/2013) (D)

     6,874         6,874         1,203   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

  

     

North American Aircraft Services, LLC

  

Aerospace and defense

  

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

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

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

     2,820         2,820         2,834   
     

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

        350         774   
           

 

 

    

 

 

 
              7,920         8,382   

Ohana Media Group

  

Broadcasting and entertainment

  

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

     1,472         1,472         1,432   

POP Radio, LLC

  

Broadcasting and entertainment

  

Senior Term Debt (11.8%, Due 5/2017) (D)

     9,422         9,422         9,540   
     

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

     556         494         561   
     

Participation Unit (2.4% ownership) (F) (G)

        75         —     
           

 

 

    

 

 

 
              9,991         10,101   

Precision Acquisition Group Holdings, Inc.

  

Machinery

  

Equipment Note (11.0%, Due 3/2014) (D) (L)

     1,000         1,000         700   
     

Senior Term Debt (11.0%, Due 3/2014) (D) (L)

     4,125         4,125         2,888   
     

Senior Term Debt (11.0%, Due 3/2014) (C) (D) (L)

     4,053         4,053         2,837   
           

 

 

    

 

 

 
              9,178         6,425   

PROFIT Systems Acquisition Co.

  

Electronics

  

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

     1,950         1,950         1,950   

Saunders & Associates

  

Electronics

  

Line of Credit, $0 available (11.3%, Due 5/2013) (D)

     917         917         779   
     

Senior Term Debt (11.3%, Due 5/2013) (D)

     8,947         8,947         7,605   
           

 

 

    

 

 

 
              9,864         8,384   

Sunburst Media—Louisiana, LLC

  

Broadcasting and entertainment

  

Senior Term Debt (10.5%, Due 11/2013) (D)

     6,000         6,000         600   

Thibaut Acquisition Co.

  

Home and office furnishings, housewares and durable consumer products

  

Line of Credit, $875 available (9.0%, Due 1/2014) (D) (J)

     125         125         126   
     

Senior Term Debt (12.0%, Due 1/2014) (C) (D) (J)

     2,500         2,500         2,525   
           

 

 

    

 

 

 
              2,625         2,651   

Westland Technologies, Inc.

  

Diversified/conglomerate manufacturing

  

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

     850         850         723   
     

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

     4,000         4,000         3,400   
     

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

        350         18   
           

 

 

    

 

 

 
              5,200         4,141   
           

 

 

    

 

 

 

Subtotal – Non-syndicated investments

      $ 157,476       $ 121,317   
           

 

 

    

 

 

 

Syndicated Investments:

              

Allied Security Holdings, LLC

  

Personal, food and miscellaneous services

  

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

   $ 1,000       $ 992       $ 1,008   

Ameriqual Group, LLC

  

Beverage, food and tobacco

  

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

     7,331         7,248         7,038   

Ardent Medical Services, Inc.

  

Healthcare, education and childcare

  

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

     4,000         3,927         4,070   

Ascend Learning, LLC

  

Healthcare, education and childcare

  

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

     1,000         980         1,000   

Autoparts Holdings Limited

  

Automobile

  

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

     1,000         996         969   

Blue Coat Systems, Inc.

  

Electronics

  

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

     3,000         2,971         3,015   

First American Payment Systems, L.P.

  

Finance

  

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

     4,500         4,469         4,489   

New Trident Holdcorp, Inc.

  

Healthcare, education and childcare

  

Senior Subordinated Term Debt (10.3%, Due 7/2020) (E)

     4,000         3,985         4,025   

PLATO Learning, Inc.

  

Healthcare, education and childcare

  

Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)

     5,000         4,914         5,000   

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2013

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

  

     

RP Crown Parent, LLC

  

Electronics

  

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

   $ 2,000       $ 1,963       $ 2,025   

Sensus USA, Inc.

  

Electronics

  

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

     500         496         485   

Steinway Musical Instruments, Inc.

  

Personal and non-durable 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 Equity (333 shares) (F) (G)

        333         341   
     

Junior Preferred Equity (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   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (Q) :

              

Defiance Integrated Technologies, Inc.

  

Automobile

  

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

   $ 6,865       $ 6,865       $ 6,865   
     

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

        1         1,867   
           

 

 

    

 

 

 
              6,866         8,732   

Lindmark Acquisition, LLC

  

Broadcasting and entertainment

  

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

     —           —           —     
     

Success Fee on Senior Subordinated Term Debt (F)

        —           916   
     

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

        317         —     
           

 

 

    

 

 

 
              317         916   

LocalTel, LLC

  

Printing and publishing

  

Line of credit, $199 available (10.0%, Due 6/2014) (F) (H)

     3,285         3,285         —     
     

Line of Credit, $1,830 available (4.7%, Due 6/2014) (F) (H)

     1,170         1,170         —     
     

Senior Term Debt (12.5%, Due 6/2014) (F) (H)

     325         325         —     
     

Senior Term Debt (8.5%, Due 6/2014) (F) (H)

     2,688         2,688         —     
     

Senior Term Debt (10.5%, Due 6/2014) (C) (F) (H)

     2,750         2,750         —     
     

Common Stock Warrants (4,000 shares) (F) (G)

        —           —     
           

 

 

    

 

 

 
              10,218         —     

Midwest Metal Distribution, Inc.

  

Mining, steel, iron and non-precious metals

  

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

     18,281         18,281         17,733   
     

Preferred Stock (2,000 shares) (F) (G) (N)

        2,000         —     
     

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

        138         —     
           

 

 

    

 

 

 
              20,419         17,733   

RBC Acquisition Corp.

  

Healthcare, education and childcare

  

Line of Credit, $0 available (9.0%, Due 6/2014) (F)

     4,000         4,000         4,000   
     

Mortgage Note (9.5%, Due 12/2014) (F)

     6,969         6,969         6,969   
     

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

     11,392         11,392         11,392   
     

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

     6,000         6,000         6,000   
     

Preferred Stock (2,299,000 shares) (F) (G) (N)

        2,299         2,447   
     

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

        370         183   
           

 

 

    

 

 

 
              31,030         30,991   

 

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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 (Q) (Continued):

        

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 Equity (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   
           

 

 

    

 

 

 

AFFILATE INVESTMENTS (R) :

              

Ashland Acquisition, LLC

  

Printing and publishing

  

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

   $ —         $ —         $ —     
     

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

     7,000         7,000         7,000   
     

Common Equity Units (8,800 units) (F) (G) (N)

        440         440   
           

 

 

    

 

 

 
              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   
           

 

 

    

 

 

 

TOTAL INVESTMENTS (S)

            $ 332,266       $ 256,878   
           

 

 

    

 

 

 

 

(A)  

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

(B)  

Percentages represent cash interest rates in effect as of September 30, 2013, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.

(C)  

LOT of senior debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after the senior debt.

(D)  

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

(E)  

Security valued based on the indicative bid price on or near September 30, 2013, offered by the respective syndication agent’s trading desk or secondary desk.

(F)  

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

(G)  

Security is non-income producing.

(H)  

Debt security is on non-accrual status.

(I)  

Subsequent to September 30, 2013, the maturity on GFRC Holdings, LLC’s debt was extended until June 30, 2016 and the GFRC Holdings, LLC’s line of credit was repaid in full and terminated.

(J)

Subsequent to September 30, 2013, the maturity on Thibaut Acquisition Co.’s debt was extended until December 11, 2014.

(K)  

Subsequent to September 30, 2013, the investment was paid off at par and therefore was valued at the pay off amount as of September 30, 2013.

(L)

Effective October 1, 2013, Precision Acquisition Group Holdings, Inc.’s debt interest rates increased to 13.0%.

(M)  

There are certain limitations on our ability to transfer our units owned prior to dissolution of the entity, which must occur no later than May 3, 2020. No Class A member may withdraw or resign from the entity prior to the dissolution and winding up of the entity.

(N)

Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.

(O)

There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than ten years after the not yet determined final closing date or two years after all outstanding leverage has matured.

(P)  

Non-Control/Non-Affiliate investments, as defined by the Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(Q)  

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.

(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)  

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)

DECEMBER 31, 2013

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are 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 December 31 and September 30, 2013, we held no investments through Gladstone Financial.

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

We are externally managed by our investment adviser, Gladstone Management Corporation (the “Adviser”), a Securities and Exchange Commission (the “SEC”) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by our affiliate Gladstone Administration, LLC (the “Administrator”), a Delaware limited liability company, pursuant to an administration agreement (the “Administration Agreement”).

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have omitted certain disclosures accompanying annual financial statements prepared in accordance with GAAP. The accompanying Condensed Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the three months ended December 31, 2013, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 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 months ended December 31, 2013, with no effect on our financial condition, results of operations or cash flows.

Investment Valuation Policy

We carry our investments at fair value to the extent that market quotations are readily available and reliable and otherwise at fair value as determined in good faith by our board of directors (our “Board of Directors”). In determining the fair value of our investments, the Adviser has established an investment valuation policy (the “Policy”). The Policy has been approved by our Board of Directors, and each quarter our Board of Directors reviews the Policy to determine if changes thereto are advisable and also reviews whether the Adviser has applied the Policy consistently and votes whether to accept the recommended valuation of our investment portfolio. Such determination of fair values may involve subjective judgments and estimates.

The Adviser uses valuation techniques in accordance with GAAP to value our portfolio. From time to time, the Adviser may accept an appraisal of a business in which we hold securities. These appraisals are expensive and occur infrequently, but provide a third-party valuation opinion that may differ in results, techniques and scope used to value our investments. When the Adviser obtains these specific third-party appraisals, the Adviser uses estimates of value provided by such appraisals and its own assumptions, including estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date, to value our investments.

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

Publicly traded securities: The Adviser determines the value of a publicly traded security based on the closing price for the security on the exchange or securities market on which it is listed and primarily traded on the valuation date. To the extent that we own a restricted security that is not freely tradable, but for which a public market otherwise exists, the Adviser will use the market value of that security adjusted for any decrease in value resulting from the restrictive feature. As of December 31 and September 30, 2013, we did not have any investments in publicly traded securities.

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

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

As of December 31 and September 30, 2013, the Adviser determined that the IBPs were reliable indicators of fair value for our syndicate investments. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we determined that these valuation inputs were classified as Level 3 within the fair value hierarchy as defined in ASC 820.

Securities for which no market exists: The valuation methodology for securities for which no market exists falls into four categories: (A) portfolio investments comprised solely of debt securities; (B) portfolio investments in controlled companies comprised

 

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of a bundle of securities, which can include debt and equity securities; (C) portfolio investments in non-controlled companies comprised of a bundle of investments, which can include debt and equity securities; and (D) portfolio investments comprised of non-publicly traded, non-control equity securities of other funds.

 

(A) Portfolio investments comprised solely of debt securities: Debt securities that are not publicly traded on an established securities market, or for which a market does not exist (“Non-Public Debt Securities”), and that are issued by portfolio companies in which we have no equity or equity-like securities, are fair valued utilizing opinions of value submitted to the Adviser by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”) and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Adviser may also submit paid-in-kind (“PIK”) interest to SPSE for its evaluation when it is determined that PIK interest is likely to be received.

 

(B) Portfolio investments in controlled companies comprised of a bundle of securities, which can include debt and equity securities: The fair value of these investments is determined based on the total enterprise value (“TEV”) of the portfolio company, or issuer, utilizing a liquidity waterfall approach under ASC 820 for our Non-Public Debt Securities and equity or equity-like securities (e.g., preferred equity, common equity or other equity-like securities) that are purchased together as part of a package, where we control or could gain control through an option or warrant security; both the debt and equity securities of the portfolio investment would exit in the mergers and acquisitions market as the principal market, generally through a sale or recapitalization of the portfolio company. We generally exit the debt and equity securities of an issuer at the same time. Applying the liquidity waterfall approach to all of our investments in an issuer, the Adviser first calculates the TEV of the issuer by incorporating some or all of the following factors:

 

   

the issuer’s ability to make payments;

 

   

the earnings of the issuer;

 

   

recent sales to third parties of similar securities;

 

   

the comparison to publicly traded securities; and

 

   

DCF or other pertinent factors.

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

 

(C) Portfolio investments in non-controlled companies comprised of a bundle of securities, which can include debt and equity securities: The Adviser values Non-Public Debt Securities that are purchased together with equity or equity-like securities from the same portfolio company, or issuer, for which we do not control or cannot gain control as of the measurement date, using a hypothetical secondary market as our principal market. In accordance with ASC 820 (as amended by the FASB’s Accounting Standards Update No. 2011-04, “ Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS” ),” (“ASU 2011-04”)), the Adviser has defined our “unit of account” at the investment level (either debt or equity) and as such determines our fair value of these non-control investments assuming the sale of an individual security using the standalone premise of value. As such, the Adviser estimates the fair value of the debt component using estimates of value provided by SPSE and its own assumptions in the absence of observable market data, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. For equity or equity-like securities of investments for which we do not control or cannot gain control as of the measurement date, the Adviser estimates the fair value of the equity based on factors such as the overall value of the issuer, the relative fair value of other units of account, including debt, or other relative value approaches. Consideration is also given to capital structure and other contractual obligations that may impact the fair value of the equity. Furthermore, the Adviser may utilize comparable values of similar companies, recent investments and indices with similar structures and risk characteristics or DCF valuation techniques and, in the absence of other observable market data, its own assumptions.

 

(D) Portfolio investments comprised of non-publicly traded, non-control equity securities of other funds: The Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the net asset value (“NAV”) provided by the non-control fund.

 

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

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 December 31, 2013, one portfolio company was on non-accrual with a debt cost basis of approximately $29.2 million, or 9.2% of the cost basis of all debt investments in our portfolio, and a debt fair value of approximately $7.3 million, or 2.8% of the fair value of all debt investments in our portfolio. As of September 30, 2013, two portfolio companies were on non-accrual with an aggregate debt cost basis of approximately $39.5 million, or 12.6% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $5.8 million, or 2.4% of the fair value of all debt investments in our portfolio.

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

As of December 31 and September 30, 2013, we had 22 and 19 original OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $61 and $72 for the three months ended December 31, 2013 and 2012, respectively. The unamortized balance of OID investments as of December 31 and September 30, 2013 totaled $1.1 million and $1.0 million, respectively. As of December 31, 2013, we had four investments which had a PIK interest component, and as of September 30, 2013, we had three investments which had a PIK interest component. We recorded PIK income of $92 and $53 for the three months ended December 31, 2013 and 2012, respectively. We collected $0 PIK interest in cash during the three months ended December 31, 2013 and 2012, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company. We received $0.2 million of success fees during the three months ended December 31, 2013, which resulted from our sale of substantially all of the assets in Lindmark Acquisition, LLC and the ensuing pay down of our debt investments at par in September 2013. We received $1.1 million of success fees during the three months ended December 31, 2012, which resulted from our exit of Westlake Hardware, Inc. at par during the period. As of December 31 and September 30, 2013, we had an aggregate off-balance sheet success fee receivable of approximately $15.3 million and $14.8 million, respectively, on our accruing debt investments.

We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an investment’s exit, based on the prepayment fee schedule. During the three months ended December 31, 2013, we did not receive any prepayment fees. During the three months ended December 31, 2012, we received an aggregate of $0.5 million in prepayment fees, which resulted from the early payoffs of four of our syndicated loans during the period.

Dividend income on preferred equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. During the three months ended December 31, 2013 and 2012, we did not record or collect any dividend income on our preferred equity investments.

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

 

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Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08, “ Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements ,” which amends the criteria that define an investment company, clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we anticipate no impact on our financial position or results of operations from adopting this standard. We are currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.

NOTE 3. INVESTMENTS

ASC 820 defines fair value by focusing on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

   

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

 

   

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

 

   

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

As of December 31 and September 30, 2013, all of our investments were valued using Level 3 inputs. We transfer investments in and out of Level 1, 2 and 3 as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the three months ended December 31, 2013 and 2012, there were no transfers in or out of Level 1, 2 and 3.

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

 

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

Non-Control/Non-Affiliate Investments

     

Senior debt

   $ 91,805       $ 82,923   

Senior subordinated debt

     102,696         95,162   

Junior subordinated debt

     556         561   

Preferred equity

     7,218         2,179   

Common equity/equivalents

     1,291         1,045   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 203,566       $ 181,870   
  

 

 

    

 

 

 

Control Investments

     

Senior debt

   $ 29,645       $ 28,211   

Senior subordinated debt

     31,814         31,513   

Preferred equity

     2,519         2,447   

Common equity/equivalents

     5,030         2,050   
  

 

 

    

 

 

 

Total Control Investments

   $ 69,008       $ 64,221   
  

 

 

    

 

 

 

Affiliate Investments

     

Senior debt

   $ 7,062       $ 7,000   

Common equity/equivalents

     3,570         3,787   
  

 

 

    

 

 

 

Total Affiliate Investments

   $ 10,632       $ 10,787   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 283,206       $ 256,878   
  

 

 

    

 

 

 

 

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

Quantitative Information about Level 3 Fair Value Measurements

 

     Fair Value as of               Range / Weighted Average as of  
     December 31,
2013
     September 30,
2013
     Valuation
Techniques/
Methodologies
 

Unobservable

Input

   December 31,
2013
     September 30,
2013
 

Senior debt (F)

   $ 93,049       $ 64,892       SPSE (A)   EBITDA (B)     
 
$66 - $4,700 /
$617
  
  
    
 
$(80) - $4,754 /
$1,463
  
  
          

Risk

ratings (C)

     3.0 - 10.0 / 5.3         3.0 - 10.0 / 6.0   
     30,130         30,881       Market
Quotes
  IBP (D)     
 
81.5% - 101.0% /
93.8%
  
  
    
 
90.0% - 100.8% /
95.8%
  
  
     22,333         22,361       TEV   Revenue multiples (B)      2.4x        
 
0.3x - 2.3 x /
1.7x
  
  
           Revenue (B)      $15,283        
 
$2,451 - $13,905 /
$10,312
  
  

Senior subordinated debt (G)

     66,356         84,124       SPSE (A)   EBITDA (B)     
 
$1,201 - $9,703 /
$4,590
  
  
    

 

$1,220 - $15,891 /

$7,797

  

  

          

Risk

ratings (C)

     2.0 - 6.0 / 4.0         2.0 - 7.0 / 5.0   
     37,994         29,331       Market
Quotes
  IBP (D)     
 
94.8% - 103.3% /
99.3%
  
  
    
 
98.5% - 101.8% /
100.3%
  
  
     13,716         13,781       TEV   EBITDA multiples (B)      4.2x         4.5x   
           EBITDA (B)      $2,646         $2,653   
           Revenue multiples (B)      2.4x         2.3x   
           Revenue (B)      $15,283         $13,905   

Preferred and common equity /
equivalents
(H)

     16,107         7,908       TEV   EBITDA multiples (B)     
 
3.5x - 7.4x /
4.7x
  
  
    

 

3.8x - 7.9x /

5.0x

  

  

           EBITDA (B)     
 
$66 - $9,703 /
$3,085
  
  
    
 
$84 - $8,724 /
$3,107
  
  
           Revenue multiples (B)      2.4x        

 

0.3x - 2.3x /

2.3x

  

  

           Revenue (B)      $15,283        
 
$2,451 - $13,905 /
$13,903
  
  
     3,521         3,600       Other (E)        
  

 

 

    

 

 

            

Total Investments

   $ 283,206       $ 256,878              
  

 

 

    

 

 

            

 

(A)  

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

(B)  

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

(C)  

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

(D)  

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

(E)  

Includes private equity fund investments, where the Adviser generally values any uninvested capital of the non-control fund at par value and values any invested capital at the NAV provided by the non-control fund.

(F)  

December 31, 2013 includes four new proprietary debt investments for a combined $30.7 million, which were valued at cost and includes $7.1 million in one proprietary investment, which subsequently paid off and, as such, was valued based on the payoff. September 30, 2013 includes one new proprietary investment for $7.0 million, which was valued at cost.

 

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(G)

December 31, 2013 includes $0.6 million in one junior subordinated proprietary investment, which subsequently paid off and, as such, was valued based on the payoff.

(H)  

December 31, 2013 includes three new proprietary investments for a combined $4.5 million, which were valued at cost and includes $0.2 million in one proprietary investment, which subsequently paid off and, as such, was valued based on the payoff. September 30, 2013 includes one new proprietary investment for $0.4 million, which was valued at cost.

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

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three month periods ended December 31, 2013 and 2012 for all investments for which we determine fair value using unobservable (Level 3) factors. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). In these cases, we categorize the fair value measurement in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Accordingly, the gains and losses in the tables below include changes in fair value, due in part to observable factors that are part of the valuation methodology.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

Three months ended December 31, 2013

   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 (B)

     (10,732     —          —           —          (10,732

Net unrealized appreciation (C)

     1,637        1,591        438         3,070        6,736   

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

     10,263        (122     —           —          10,141   

New investments, repayments and settlements: (D)

           

Issuances/originations

     14,214        26,029        4,673         18        44,934   

Settlements/repayments

     (5,004     (19,668     —           (79     (24,751
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fair value as of December 31, 2013

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Three months ended December 31, 2012

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

Fair value as of September 30, 2012

   $ 157,160      $ 107,832      $ 1,103       $ 7,865      $ 273,960   

Total (losses) gains:

           

Net realized (loss) gain (B)

     (3,165     3        —           —          (3,162

Net unrealized (depreciation) appreciation (C)

     (1,141     (950     83         (1,155     (3,163

Reversal of prior period net depreciation on realization (C)

     7,411        637        —           —          8,048   

New investments, repayments and settlements: (D)

           

Issuances/originations

     4,392        46,183        —           1,243        51,818   

Settlements/repayments

     (22,018     (29,052     —           —          (51,070

Proceeds from sales

     (5,918     —          —           —          (5,918
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fair value as of December 31, 2012

   $ 136,721      $ 124,653      $ 1,186       $ 7,953      $ 270,513   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(A)  

Includes a junior subordinated debt investment totaling $0.6 million in fair value as of December 31 and September 30, 2013 and $0.5 million in fair value as of December 31 and September 30, 2012.

(B)

Included in net realized loss on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012.

(C)  

Included in net unrealized (depreciation) appreciation of investments on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012.

(D)  

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

 

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Table of Contents

Non-Syndicated Investments

As of December 31 and September 30, 2013, we held 30 and 29 non-syndicated investments with an aggregate fair value of $214.6 million and $196.3 million, or 75.8% and 76.4% of the total aggregate portfolio at fair value, respectively. During the three months ended December 31, 2013, we invested in four new non-syndicated investments for an aggregate of $35.1 million; sold one non-syndicated investment for a realized loss of $10.8 million; and had two non-syndicated investments pay off early at par, for which we received total principal payments of $21.5 million. Additionally, during the three months ended December 31, 2013, we funded $0.8 million in the aggregate to existing non-syndicated portfolio companies through revolver draws and add-on investments, while scheduled and unscheduled principal repayments totaled $3.1 million in the aggregate from existing non-syndicated portfolio companies (exclusive of the aforementioned $21.5 million in early payoffs at par). The following significant non-syndicated investment transactions occurred during the three months ended December 31, 2013:

 

   

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.

 

   

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.

Syndicated Investments

We held a total of 22 syndicate investments with an aggregate fair value of $68.6 million, or 24.2% of our total investment portfolio at fair value, as of December 31, 2013, as compared to 18 syndicate 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 three months ended December 31, 2013, we invested in four new syndicated investments for an aggregate of $9.0 million.

 

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Table of Contents

Investment Concentrations

As of December 31, 2013, our investment portfolio consisted of investments in 52 companies located in 26 states across 20 different industries, with an aggregate fair value of $283.2 million. The five largest investments at fair value as of December 31, 2013, totaled $97.2 million, or 34.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2013, which totaled $96.0 million, or 37.4% of our total investment portfolio. As of December 31, 2013, our average investment by obligor was $6.6 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 December 31 and September 30, 2013:

 

     December 31, 2013     September 30, 2013  
     Cost     Fair Value     Cost     Fair Value  

Senior debt

   $ 182,625         53.4   $ 128,512         45.4   $ 184,146         55.4   $ 118,134         46.0

Senior subordinated debt

     135,372         39.6        134,510         47.5        129,013         38.8        126,675         49.3   

Junior subordinated debt

     496         0.2        556         0.2        494         0.2        561         0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     318,493         93.2        263,578         93.1        313,653         94.4        245,370         95.5   

Preferred equity

     16,941         5.0        9,737         3.4        12,268         3.7        4,626         1.8   

Common equity/equivalents

     6,283         1.8        9,891         3.5        6,345         1.9        6,882         2.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     23,224         6.8        19,628         6.9        18,613         5.6        11,508         4.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 341,717         100.0   $ 283,206         100.0   $ 332,266         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     December 31, 2013     September 30, 2013  

Industry Classification

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

Healthcare, education and childcare

   $ 51,431         18.2   $ 45,339         17.7

Electronics

     33,485         11.8        33,711         13.1   

Personal and non-durable consumer products

     27,165         9.6        29,032         11.3   

Printing and publishing

     23,574         8.3        22,224         8.7   

Mining, steel, iron and non-precious metals

     18,098         6.4        17,733         6.9   

Diversified/conglomerate manufacturing

     17,034         6.0        4,482         1.7   

Oil and gas

     15,275         5.4        15,174         5.9   

Automobile

     14,966         5.3        9,701         3.8   

Cargo Transportation

     13,065         4.6        12,984         5.1   

Broadcast and entertainment

     12,918         4.6        15,534         6.0   

Aerospace and defense

     11,948         4.2        11,730         4.6   

Buildings and real estate

     8,065         2.8        6,392         2.5   

Textiles and leather

     7,598         2.7        8,476         3.3   

Beverage, food and tobacco

     7,020         2.5        7,038         2.7   

Machinery

     6,471         2.3        6,425         2.5   

Diversified/conglomerate services

     4,900         1.7        —           —     

Finance

     4,264         1.5        4,489         1.7   

Leisure, amusement, motion pictures and entertainment

     2,506         0.9        2,756         1.1   

Home and office furnishing, housewares and durable consumer goods

     2,416         0.9        2,651         1.0   

Other, < 1.0% (A)

     1,007         0.3        1,007         0.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 283,206         100.0   $ 256,878         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)  

No individual 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 December 31 and September 30, 2013:

 

     December 31, 2013     September 30, 2013  

Geographic Region

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

Midwest

   $ 127,210         44.9   $ 118,570         46.2

South

     71,943         25.4        68,669         26.7   

West

     71,511         25.3        61,737         24.0   

Northeast

     12,542         4.4        7,902         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 283,206         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 December 31, 2013:

 

For the fiscal years ending September 30:

        Amount  

For the remaining nine months ending September 30:

   2014    $ 58,916   
   2015      44,603   
   2016      75,747   
   2017      16,657   
   2018      46,145   
   Thereafter      77,458   
     

 

 

 
  

Total contractual repayments

   $ 319,526   
   Equity investments      23,224   
  

Adjustments to cost basis on debt investments

     (1,033
     

 

 

 
  

Total Cost Basis of Investments Held at December 31, 2013:

   $ 341,717   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . We generally maintain an allowance for uncollectible receivables from portfolio companies, which is determined based on historical experience and management’s expectations of future losses. We charge the accounts receivable to the established provision when collection efforts have been exhausted and the receivables are deemed uncollectible. As of December 31 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 $0 and $0.1 million as of December 31 and September 30, 2013, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee. The Adviser is controlled by our Chairman and Chief Executive Officer.

On July 9, 2013, our Board of Directors approved the annual renewal of the Advisory Agreement through August 31, 2014.

The following table summarizes the management fees, incentive fees and associated credits for the three months ended December 31, 2013 and 2012, reflected in our accompanying Condensed Consolidated Statements of Operations :

 

     Three Months Ended
December 31,
 
     2013     2012  

Average total assets subject to base management fee (A)

   $ 291,200      $ 286,400   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee (B)

   $ 1,456      $ 1,432   

Credit for fees received by Adviser from the portfolio companies

     (333     (140

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

     (30     (61
  

 

 

   

 

 

 

Net Base Management Fee

   $ 1,093      $ 1,231   
  

 

 

   

 

 

 

Incentive fee (B)

     974        1,215   

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

     (515     —     
  

 

 

   

 

 

 

Net Incentive Fee

   $ 459      $ 1,215   
  

 

 

   

 

 

 

Credit for fees received by Adviser from the portfolio companies

     (333     (140

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

     (30     (61

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

     (515     —     
  

 

 

   

 

 

 

Credit to Fees from Adviser (B)

   $ (878   $ (201
  

 

 

   

 

 

 

 

(A)  

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

(B)

Reflected as a line item on our accompanying Condensed Consolidated Statements of Operations .

 

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Table of Contents

Base Management Fee

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

 

   

Senior Syndicated Loan Fee Waiver

Our Board of Directors accepted an unconditional and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the three months ended December 31, 2013 and 2012.