Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 07/29/2015 16:54:28)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one):

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 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 12b-2 of the Exchange Act. (Check one):

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of July 28, 2015 was 21,131,622.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
  Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2015 and September 30, 2014      3   
  Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014      4   
  Condensed Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2015 and 2014      5   
  Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014      6   
  Condensed Consolidated Schedules of Investments as of June 30, 2015 and September 30, 2014      7   
  Notes to Condensed Consolidated Financial Statements      16   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   
  Overview      37   
  Results of Operations      42   
  Liquidity and Capital Resources      52   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      59   

Item 4.

  Controls and Procedures      59   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      60   

Item 1A.

  Risk Factors      60   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      60   

Item 3.

  Defaults Upon Senior Securities      60   

Item 4.

  Mine Safety Disclosures      60   

Item 5.

  Other Information      60   

Item 6.

  Exhibits      60   

SIGNATURES

     61   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,
2015
    September 30,
2014
 

ASSETS

    

Investments at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $266,122 and $225,845, respectively)

   $ 256,044      $ 198,926   

Affiliate investments (Cost of $80,525 and $61,281, respectively)

     68,435        57,006   

Control investments (Cost of $54,406 and $62,159, respectively)

     22,737        25,354   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $401,053 and $349,285, respectively)

     347,216        281,286   

Cash and cash equivalents

     7,823        6,314   

Restricted cash and cash equivalents

     496        675   

Interest receivable, net

     5,174        2,767   

Due from custodian

     2,975        6,022   

Deferred financing fees

     4,339        3,340   

Other assets, net

     1,238        1,025   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 369,261      $ 301,429   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings at fair value (Cost of $104,600 and $36,700, respectively)

   $ 104,600      $ 38,013   

Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 4,000,000 shares authorized and 2,440,000 shares issued and outstanding

     61,000        61,000   

Accounts payable and accrued expenses

     417        462   

Interest payable

     231        146   

Fees due to Adviser (A)

     1,218        875   

Fee due to Administrator (A)

     235        218   

Other liabilities

     918        1,055   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 168,618      $ 101,769   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized; 21,131,622 shares issued and outstanding as of June 30, 2015 and 21,000,160 shares issued and outstanding as of September 30, 2014

   $ 21      $ 21   

Capital in excess of par value

     294,144        307,348   

Note receivable from employee (A)

            (100

Cumulative net unrealized depreciation of investments

     (53,837     (67,999

Cumulative net unrealized (depreciation) (appreciation) of other

     (61     (1,374

Overdistributed net investment income

     (3,873     (1,928

Accumulated net realized losses

     (35,751     (36,308

TOTAL NET ASSETS

   $ 200,643      $ 199,660   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

   $ 9.49      $ 9.51   
  

 

 

   

 

 

 

 

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

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

 

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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2015     2014     2015     2014  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 7,003      $ 6,105      $ 20,199      $ 18,831   

Affiliate investments

     1,793        1,519        4,492        2,570   

Control investments

     310        556        800        3,133   

Other

     1        4        4        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     9,107        8,184        25,495        24,546   

Other income

        

Non-Control/Non-Affiliate investments

     578        670        1,656        1,631   

Affiliate investments

     —          701        —          701   

Control investments

     250        625        733        1,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     828        1,996        2,389        3,357   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,935        10,180        27,884        27,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,859        1,461        5,257        4,421   

Loan servicing fee (A)

     1,015        917        2,802        2,628   

Incentive fee (A)

     1,021        1,266        2,866        3,361   

Administration fee (A)

     235        219        784        635   

Interest expense on borrowings

     1,033        710        2,735        1,994   

Dividend expense on mandatorily redeemable preferred stock

     1,029        937        3,087        2,309   

Amortization of deferred financing fees

     253        314        857        944   

Professional fees

     315        98        899        725   

Other general and administrative expenses

     222        179        893        828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     6,982        6,101        20,180        17,845   

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

     (1,015     (917     (2,802     (2,628

Credits to fees from Adviser—other (A)

     (868     (67     (1,714     (1,272
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     5,099        5,117        15,664        13,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,836        5,063        12,220        13,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     (1,143     54        435        (2,556

Control investments

     —          —          (14,459     (10,733

Escrows

     68        —          (491     30   

Extinguishment of debt

     —          (1,297     —          (1,297
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized loss

     (1,075     (1,243     (14,515     (14,556

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     7,920        (3,203     8,682        9,034   

Affiliate investments

     (7,465     (18,246     (7,815     (24,741

Control investments

     (1,602     (1,400     13,295        5,795   

Other

     693        (1,146     1,313        (1,261
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized (depreciation) appreciation

     (454     (23,995     15,475        (11,173
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain

     (1,529     (25,238     960        (25,729
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 3,307      $ (20,175   $ 13,180      $ (11,771
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.23      $ 0.24      $ 0.58      $ 0.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.16      $ (0.96   $ 0.63      $ (0.56
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared and paid

   $ 0.21      $ 0.21      $ 0.63      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     21,123,202        21,000,160        21,045,014        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

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2015     2014  

OPERATIONS

    

Net investment income

   $ 12,220      $ 13,958   

Net realized loss on investments

     (14,515     (13,259

Realized loss on extinguishment of debt

     —          (1,297

Net unrealized appreciation (depreciation) of investments and escrows

     14,162        (9,912

Net unrealized depreciation (appreciation) of other

     1,313        (1,261
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     13,180        (11,771
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (13,261     (13,230
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Repayment of principal on employee note (A)

     100        —     

Issuance of common stock

     1,169        —     

Offering costs for issuance of common stock

     (205     —     
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     1,064        —     
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS

     983        (25,001

NET ASSETS, BEGINNING OF PERIOD

     199,660        205,992   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 200,643      $ 180,991   
  

 

 

   

 

 

 

 

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

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 13,180      $ (11,771

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

    

Purchase of investments

     (93,765     (83,161

Principal repayments on investments

     10,060        47,333   

Net proceeds from sale of investments

     18,541        4,700   

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

     (463     (208

Net change in premiums, discounts and amortization

     219        (70

Cost adjustments on non-accrual loans

     (384     —     

Net realized loss on investments

     14,024        13,289   

Net unrealized (appreciation) depreciation of investments

     (14,162     9,912   

Realized loss on extinguishment of debt

     —          1,297   

Net unrealized (depreciation) appreciation other

     (1,313     1,261   

Decrease in restricted cash and cash equivalents

     179        378   

Amortization of deferred financing fees

     857        944   

Increase in interest receivable

     (2,407     (322

Decrease in due from custodian

     3,047        14,658   

(Increase) decrease in other assets

     (213     323   

(Decrease) increase in accounts payable and accrued expenses

     (45     56   

Increase (decrease) in interest payable

     85        (25

Increase in fees due to Adviser (A)

     343        247   

Increase in fee due to Administrator (A)

     16        93   

(Decrease) increase in other liabilities

     (137     265   
  

 

 

   

 

 

 

Net cash used in operating activities

     (52,338     (801
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from issuance of mandatorily redeemable preferred stock

     —          61,000   

Redemption of previously issued mandatorily redeemable preferred stock

     —          (38,497

Proceeds from borrowings

     109,000        91,000   

Repayments on borrowings

     (41,100     (102,800

Deferred financing fees

     (1,856     (2,797

Proceeds from issuance of common stock

     1,169        —     

Offering costs for issuance of common stock

     (205     —     

Distributions paid to common stockholders

     (13,261     (13,230

Receipt of principal on employee note

     100        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     53,847        (5,324
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,509        (6,125

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     6,314        13,900   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 7,823      $ 7,775   
  

 

 

   

 

 

 

 

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

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

        

Proprietary Investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (D)    $ 13,000       $ 13,000       $ 13,000   
      Member Profit Participation (18.0% ownership) (F)(H)         960         293   
      Profit Participation Warrants (7.0% ownership) (F)(H)         244         —     
           

 

 

    

 

 

 
              14,204         13,293   

Allison Publications, LLC

   Printing and publishing    Secured First Lien Line of Credit, $150 available (8.3%, Due 9/2016) (D)      450         450         449   
      Secured First Lien Debt (8.3%, Due 9/2018) (D)      2,552         2,552         2,548   
      Secured First Lien Debt (13.0%, Due 9/2018) (C) (D)      5,400         5,400         5,400   
           

 

 

    

 

 

 
              8,402         8,397   

Alloy Die Casting Corp.

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.5%, Due 10/2018) (D)      5,235         5,235         5,170   
      Preferred Stock (1,742 shares) (F)(H)         1,742         1,223   
      Common Stock (270 shares) (F)(H)         18         —     
           

 

 

    

 

 

 
              6,995         6,393   

Behrens Manufacturing, LLC

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.0%, Due 12/2018) (D)      4,275         4,275         4,275   
      Preferred Stock (1,253 shares) (F)(H)(K)         1,253         1,764   
           

 

 

    

 

 

 
              5,528         6,039   

B+T Group Acquisition Inc.

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (D)      6,000         6,000         5,970   
      Preferred Stock (5,503 shares) (H)(F)(K)         1,799         —     
           

 

 

    

 

 

 
              7,799         5,970   

Chinese Yellow Pages Company

   Printing and publishing    Secured First Lien Line of Credit, $0 available (7.3%, Due 2/2015) (D)      108         108         46   

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.4%, Due 4/2020) (D)      15,000         15,000         14,175   
      Secured Second Lien Debt (10.3%, Due 4/2020) (D)      7,000         7,000         6,580   
      Preferred Equity Units (999 units) (F)(H)         648         747   
      Common Equity Units (999 units) (F)(H)         1         206   
           

 

 

    

 

 

 
              22,649         21,708   

Funko, LLC

   Personal and non-durable consumer products    Secured First Lien Debt (9.3%, Due 5/2019) (D)(G)      7,500         7,500         7,744   
      Secured First Lien Debt (9.3%, Due 5/2019) (D)(G)      2,000         2,000         2,065   
      Preferred Equity Units (1,305 units) (F)(H)         1,305         21,412   
           

 

 

    

 

 

 
              10,805         31,221   

Heartland Communications Group

   Broadcasting and entertainment    Secured First Lien Line of Credit, $0 available (5.0%, Due 6/2015) (D)(G)(I)      100         93         65   
      Secured First Lien Line of Credit, $0 available (10.0%, Due 6/2015) (D)(G)(I)      100         86         65   
      Secured First Lien Debt (5.0%, Due 6/2015) (D)(G)(I)      4,342         4,031         980   
      Common Stock Warrants (8.8% ownership) (F)(H)         66         —     
           

 

 

    

 

 

 
              4,276         1,110   

J.America, Inc.

   Personal and non-durable consumer products    Secured Second Lien Debt (10.4%, 2.0% PIK, Due 12/2019) (D)(G)      7,500         7,500         7,331   
      Secured Second Lien Debt (11.5%, 2.0% PIK, Due 12/2019) (D)(G)      9,500         9,500         9,239   
           

 

 

    

 

 

 
              17,000         16,570   

Leeds Novamark Capital I, L.P.

   Private equity fund–healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $2,362 uncalled capital commitment) (H)(M)         633         411   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

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

        

Legend Communications of Wyoming, LLC

   Broadcasting and entertainment    Secured First Lien Debt (11.0%, Due 11/2014) (D)    $ 6,699       $ 6,699       $ 3,822   

Meridian Rack & Pinion, Inc.

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)      4,140         4,140         4,124   
      Preferred Stock (1,449 shares) (F)(H)         1,449         800   
           

 

 

    

 

 

 
              5,589         4,924   

Precision Acquisition Group Holdings, Inc.

   Machinery    Equipment Note (11.0%, Due 4/2016) (D)      1,000         1,000         575   
      Secured First Lien Debt (11.0%, Due 4/2016) (D)      4,125         4,125         2,351   
      Secured First Lien Debt (11.0%, Due 4/2016) (C)(D)      4,053         4,053         2,290   
           

 

 

    

 

 

 
              9,178         5,216   

Saunders & Associates

   Electronics    Secured First Lien Line of Credit, $0 available (11.3%, Due 5/2013) (D)(I)      917         917         110   
      Secured First Lien Debt (11.3%, Due 5/2013) (D)(I)      8,947         8,947         1,074   
           

 

 

    

 

 

 
              9,864         1,184   

Southern Petroleum Laboratories, Inc.

   Oil and gas    Secured Second Lien Debt (11.5%, Due 2/2020) (D)      8,000         8,000         7,950   
      Common Stock (100 shares) (F)(H)         750         1,301   
           

 

 

    

 

 

 
              8,750         9,251   

United Flexible, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $4,000 available (7.0%, Due 2/2018) (D)      —           —           —     
      Secured First Lien Debt (9.3%, Due 2/2020) (D)      21,000         21,000         21,000   
      Preferred Stock (245 shares) (F)(H)         245         254   
      Common Stock (500 shares) (F)(H)         5         80   
           

 

 

    

 

 

 
              21,250         21,334   

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $250 available (7.5%, Due 12/2017) (D)      1,750         1,750         1,754   
      Secured First Lien Debt (9.75%, Due 12/2019) (D)      9,000         9,000         9,023   
           

 

 

    

 

 

 
              10,750         10,777   

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $2,525 available (8.0%, Due 3/2016) (D)      2,475         2,475         2,400   
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      13,000         13,000         12,610   
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      7,000         7,000         6,720   
      Preferred Stock (1,000 shares) (F)(H)         313         443   
           

 

 

    

 

 

 
              22,788         22,173   

Westland Technologies, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Debt (12.5%, Due 4/2016) (D)      4,000         4,000         3,995   
      Common Stock
(58,333 shares) (F)(H)
        408         144   
           

 

 

    

 

 

 
              4,408         4,139   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 197,675       $ 193,978   
           

 

 

    

 

 

 

Syndicated Investments:

              

Ameriqual Group, LLC

   Beverage, food and tobacco    Secured First Lien Debt (9.0% and 1.3% PIK, Due 3/2016) (E)    $ 7,358       $ 7,330       $ 6,990   

Ardent Medical Services, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (11.0%, Due 1/2019) (J)      7,143         7,136         7,223   
              

Autoparts Holdings Limited

   Automobile    Secured Second Lien Debt (11.0%, Due 1/2018) (E)      700         698         637   

First American Payment Systems, L.P.

   Finance    Secured Second Lien Debt (10.8%, Due 4/2019) (D)      4,195         4,171         4,146   

GTCR Valor Companies, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      3,000         2,983         2,910   

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000         3,988         3,800   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

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

  

PLATO Learning, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.0% PIK, Due 6/2020) (F)    $ 2,652       $ 2,596       $ 1,750   
      Common Stock (21,429 shares) (F)(H)         2,636         —     
           

 

 

    

 

 

 
              5,232         1,750   

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.3%, Due 12/2021) (E)      3,500         3,434         3,465   

RP Crown Parent, LLC

   Electronics    Secured Second Lien Debt (11.3%, Due 12/2019) (E)      2,000         1,970         1,840   

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.5%, Due 4/2020) (E)      5,000         4,815         4,400   

Targus Group International, Inc.

   Textiles and leather    Secured First Lien Debt (12.8% and 2.0% PIK, Due 5/2016) (E)      8,953         8,917         7,431   

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      1,000         995         948   

Vertellus Specialties Inc.

   Chemicals, plastics and rubber    Secured First Lien Debt (10.5%, Due 10/2019) (E)      3,970         3,844         3,752   

Vision Solutions, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 7/2017) (E)      8,000         7,964         7,960   

Vitera Healthcare Solutions, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.3%, Due 11/2021) (E)      4,500         4,475         4,410   

W3 Co.

   Oil and gas    Secured Second Lien Debt (9.3%, Due 9/2020) (E)      499         495         404   
           

 

 

    

 

 

 

Subtotal—Syndicated Investments

            $ 68,447       $ 62,066   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 73.7% of total investments at fair value)

  

   $ 266,122       $ 256,044   
           

 

 

    

 

 

 

AFFILATE INVESTMENTS (O) :

              

Proprietary Investments:

              

Ashland Acquisition LLC

   Printing and publishing    Secured First Lien Line of Credit, $1,500 available (12.0%, Due 7/2016) (D)(G)    $ —         $ —         $ —     
      Secured First Lien Debt (12.0%, Due 7/2018) (D)(G)      7,000         7,000         7,044   
      Preferred Equity Units (4,400 units) (F)(H)         440         557   
      Common Equity Units (4,400 units) (F)(H)         —           63   
           

 

 

    

 

 

 
              7,440         7,664   

Edge Adhesives Holdings, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $7 available (12.5%, Due 2/2016) (D)      993         993         987   
      Secured First Lien Debt (12.5%, Due 2/2019) (D)      6,200         6,200         6,169   
      Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600         1,600         1,594   
      Preferred Stock (2,516 shares) (F)(H)         2,516         967   
           

 

 

    

 

 

 
              11,309         9,717   

FedCap Partners, LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units) (H)(L)         1,634         1,647   

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals    Secured Second Lien Debt (12.0%, Due 2/2021) (D)      6,000         6,000         5,985   
      Secured Second Lien Debt (12.0%, Due 2/2021) (D)      6,000         6,000         5,985   
      Common Stock (139,330 shares) (F)(H)         1,590         1,946   
           

 

 

    

 

 

 
              13,590         13,916   

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $1,600 available (6.5%, Due 12/2017) (D)      1,400         1,400         1,416   
      Secured First Lien Debt (9.5%, Due 12/2019) (D)      10,579         10,579         10,698   
      Common Stock (921,000 shares) (F)(H)         921         961   
           

 

 

    

 

 

 
              12,900         13,075   

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

AFFILATE INVESTMENTS (O) (Continued):

  

RBC Acquisition Corp.

   Healthcare, education and childcare    Secured First Lien Line of Credit, $0 available (9.0%, Due 12/2015) (F)      4,000         4,000         4,000   
      Mortgage Note (9.5%, Due 12/2015) (F)(G)      6,891         6,891         6,891   
      Secured First Lien Debt (12.0%, Due 12/2015) (C)(F)      11,392         11,392         11,392   
      Secured First Lien Debt (12.5%, Due 12/2015) (F)(G)      6,000         6,000         133   
      Preferred Stock (4,999,000 shares) (F)(H)(K)         4,999         —     
      Common Stock (2,000,000 shares) (F)(H)         370         —     
           

 

 

    

 

 

 
              33,652         22,416   
           

 

 

    

 

 

 

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

      $ 80,525       $ 68,435   
           

 

 

    

 

 

 
              

CONTROL INVESTMENTS (P) :

              

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 4/2016) (F)    $ 6,385       $ 6,385       $ 6,385   
      Common Stock (15,500 shares) (F)(H)         1         6,106   
           

 

 

    

 

 

 
              6,386         12,491   

GFRC Holdings, LLC

   Buildings and real estate    Secured First Lien Line of Credit, $0 available (10.5%, Due 12/2014) (F)(I)      986         986         160   
      Secured First Lien Debt (10.5%, Due 6/2016) (F)(I)      4,924         4,924         797   
      Secured First Lien Debt (13.0%, Due 6/2016) (F)(I)      6,598         6,598         1,068   
           

 

 

    

 

 

 
              12,508         2,025   

Lindmark Acquisition, LLC

   Broadcasting and entertainment    Secured First Lien Debt, $3,120 available (25.0%, Due Upon Demand) (F)(G)      —           —           —     
      Success Fee on Secured Second Lien Debt (F)      —           —           64   
      Common Stock (100 shares) (F)(H)         317         —     
           

 

 

    

 

 

 
              317         64   

Sunshine Media Holdings

   Printing and publishing    Secured First Lien Line of Credit, $468 available (8.0%, Due 5/2016) (F)(G)      1,532         1,532         428   
      Secured First Lien Debt (8.0%, Due 5/2016) (F)(G)      5,000         5,000         1,398   
      Secured First Lien Debt (4.8%, Due 5/2016) (F)(I)      11,948         11,948         3,340   
      Secured First Lien Debt (5.5%, Due 5/2016) (C)(F)(I)      10,700         10,700         2,991   
      Preferred Stock (15,270 shares) (F)(H)(K)         5,275         —     
      Common Stock (1,867 shares) (F)(H)         740         —     
      Common Stock Warrants (72 shares) (F)(H)         —           —     
           

 

 

    

 

 

 
              35,195         8,157   
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 6.6% of total investments at fair value)

      $ 54,406       $ 22,737   
           

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 401,053       $ 347,216   
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $292.3 million at fair value, are pledged as collateral to our Credit Facility, as described further in Note 5— Borrowings. Additionally, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the Investment Company Act of 1940, as amended, (the “1940 Act”) as of June 30, 2015.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at June 30, 2015, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates and any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on the assets of the underlying businesses.
(C)   Last out tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other debt and equity holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
(E)   Fair value was based on the indicative bid price (“IBP”) on or near June 30, 2015, offered by the respective syndication agent’s trading desk.
(F)   Fair value was based on the total enterprise value (“TEV”) of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(G) Debt security has a fixed interest rate.
(H)   Investment is non-income producing.
(I)   Investment is on non-accrual status.
(J)   Investment was exited subsequent to June 30, 2015, and, as such, was valued based on the exit price.

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

(K) Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
(L) There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(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 May, 9, 2024 or two years after all outstanding leverage has matured.
(N) Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(O)   Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between 5.0% and 25.0% of the issued and outstanding voting securities.
(P)   Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

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

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

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

  

Proprietary Investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (D)    $ 13,000       $ 12,899       $ 12,838   
      Member Profit Participation (18.0% ownership) (F)(H)         1,000         —     
      Profit Participation Warrants (7.0% ownership) (F)(H)         244         —     
           

 

 

    

 

 

 
              14,143         12,838   

Allison Publications, LLC

   Printing and publishing    Secured First Lien Line of Credit, $0 available (8.3%, Due 9/2016) (D)      600         600         598   
      Secured First Lien Debt (8.3%, Due 9/2018) (D)      2,875         2,875         2,864   
      Secured First Lien Debt (13.0%, Due 9/2018) (C) (D)      5,400         5,400         5,380   
           

 

 

    

 

 

 
              8,875         8,842   

Alloy Die Casting Corp.

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.5%, Due 10/2018) (D)      5,235         5,235         5,228   
      Preferred Stock (1,742 shares) (F)(H)         1,742         1,122   
      Common Stock (270 shares) (F)(H)         18         —     
           

 

 

    

 

 

 
              6,995         6,350   

Behrens Manufacturing, LLC

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.0%, Due 12/2018) (D)      4,275         4,275         4,280   
      Preferred Stock (1,253 shares) (F)(H)(M)         1,253         1,150   
           

 

 

    

 

 

 
              5,528         5,430   

Chinese Yellow Pages Company

   Printing and publishing    Secured First Lien Line of Credit, $0 available (7.3%, Due 2/2015) (D)      108         108         95   

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (12.4%, Due 11/2017) (D)(K)      15,000         15,000         14,550   
      Secured Second Lien Debt (11.3%, Due 11/2017) (J)(K)      7,000         7,000         7,000   
      Preferred Equity Units (999 units) (F)(H)         983         1,081   
      Common Equity Units (999 units) (F)(H)         1         206   
           

 

 

    

 

 

 
              22,984         22,837   

Funko, LLC

   Personal and non-durable consumer products    Secured First Lien Debt (12.0% and 1.5% PIK, Due 5/2019) (D)      7,645         7,645         7,817   
      Preferred Equity Units (1,305 units) (F)(H)         1,305         5,691   
           

 

 

    

 

 

 
              8,950         13,508   

GFRC Holdings, LLC

   Buildings and real estate    Secured First Lien Line of Credit, $130 available (10.5%, Due 12/2014) (D)      270         270         149   
      Secured First Lien Debt (10.5%, Due 6/2016) (D)      4,924         4,924         2,708   
      Secured First Lien Debt (13.0%, Due 6/2016) (D)      6,598         6,598         3,761   
           

 

 

    

 

 

 
              11,792         6,618   

Heartland Communications Group

   Broadcasting and entertainment    Secured First Lien Line of Credit, $0 available (5.0%, Due 9/2014) (D)(G)(I)      100         97         65   
      Secured First Lien Line of Credit, $0 available (10.0%, Due 9/2014) (D)(G)(I)      100         93         65   
      Secured First Lien Debt (5.0%, Due 9/2014) (D)(G)(I)      4,342         4,196         809   
      Common Stock Warrants (8.8% ownership) (F)(H)         66         —     
           

 

 

    

 

 

 
              4,452         939   

J.America, Inc.

   Personal and non-durable    Secured Second Lien Debt (10.4%, Due 12/2019) (D)(G)      7,500         7,500         7,350   
  

consumer products

   Secured Second Lien Debt (11.5%, Due 12/2019) (D)(G)      9,500         9,500         9,298   
           

 

 

    

 

 

 
              17,000         16,648   

Leeds Novamark Capital I, L.P.

   Private equity fund – healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $2,827 uncalled capital commitment) (H)(O)         173         36   

Legend Communications of Wyoming, LLC

   Broadcasting and entertainment    Secured First Lien Debt (12.0%, Due 1/2014) (D)      6,699         6,699         3,757   

 

12


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

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

  

Meridian Rack & Pinion, Inc.

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)    $ 4,140       $ 4,140       $ 4,135   
      Preferred Stock (1,449 shares) (F)(H)         1,449         1,549   
           

 

 

    

 

 

 
              5,589         5,684   

North American Aircraft Services, LLC

   Aerospace and defense    Secured Second Lien Debt (12.5%, Due 8/2016) (F)(L)      2,115         2,115         2,115   
      Success Fee on Secured Second Lien Debt (F)(L)         —           639   
      Common Stock Warrants (35,000 shares) (F)(H)(L)         350         1,928   
           

 

 

    

 

 

 
              2,465         4,682   

Precision Acquisition Group Holdings, Inc.

   Machinery    Equipment Note (9.0%, Due 3/2015) (D)      1,000         1,000         881   
      Secured First Lien Debt (9.0%, Due 3/2015) (D)      4,125         4,125         485   
      Secured First Lien Debt (9.0%, Due 3/2015) (C)(D)      4,053         4,053         457   
           

 

 

    

 

 

 
              9,178         1,823   

Saunders & Associates

   Electronics    Secured First Lien Line of Credit, $0 available (11.3%, Due 5/2013) (D)      917         917         413   
      Secured First Lien Debt (11.3%, Due 5/2013) (D)      8,947         8,947         4,026   
           

 

 

    

 

 

 
              9,864         4,439   

Southern Petroleum Laboratories, Inc.

   Oil and gas    Secured Second Lien Debt (11.5%, Due 2/2020) (J)      8,000         8,000         8,000   
      Common Stock (100 shares) (H)(J)         750         750   
           

 

 

    

 

 

 
              8,750         8,750   

Sunburst Media—Louisiana, LLC

   Broadcasting and entertainment    Secured First Lien Debt (8.5%, Due 2/2016) (F)(G)      6,026         6,026         1,600   

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $526 available (8.0%, Due 3/2015) (D)      1,474         1,474         1,452   
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      4,500         4,500         4,433   
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      4,500         4,500         4,421   
      Preferred Stock (1,000 shares) (F)(H)         250         454   
           

 

 

    

 

 

 
              10,724         10,760   

Westland Technologies, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Debt (7.5%, Due 4/2016) (D)      50         50         46   
      Secured First Lien Debt (12.5%, Due 4/2016) (D)      4,000         4,000         3,699   
      Common Stock (58,333 shares) (H)         408         58   
           

 

 

    

 

 

 
              4,458         3,803   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

  

   $ 164,753       $ 139,439   
           

 

 

    

 

 

 

Syndicated Investments:

              

Ameriqual Group, LLC

   Beverage, food and tobacco    Secured First Lien Debt (9.0% and 1.5% PIK, Due 3/2016) (E)    $ 7,335       $ 7,283       $ 6,235   

Ardent Medical Services, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (11.0%, Due 1/2019) (E)      7,143         7,135         7,224   

Autoparts Holdings Limited

   Automobile    Secured Second Lien Debt (10.5%, Due 1/2018) (E)      833         830         800   

Blue Coat Systems, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 6/2020) (E)      3,000         2,974         3,038   

Envision Acquisition Company, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.8%, Due 11/2021) (E)      2,500         2,454         2,500   

First American Payment Systems, L.P.

   Finance    Secured Second Lien Debt (10.8%, Due 4/2019) (E)      4,195         4,167         4,205   

GTCR Valor Companies, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      3,000         2,982         2,970   

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000         3,987         4,000   

PLATO Learning, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (11.3%, Due 5/2019) (E)      5,000         4,925         5,000   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2014

(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    Secured Second Lien Debt (11.3%, Due 12/2019) (E)    $ 2,000       $ 1,967       $ 1,898   

Sensus USA, Inc.

   Electronics    Secured Second Lien Debt (8.5%, Due 5/2018) (E)      500         497         495   

Targus Group International, Inc.

   Textiles and leather    Secured First Lien Debt (11.0% and 1.0% PIK, Due 5/2016) (D)      9,034         8,956         8,171   

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      1,000         995         1,000   

Vision Solutions, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 7/2017) (E)      11,000         10,953         10,972   

Vitera Healthcare Solutions, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.3%, Due 11/2021) (E)      500         493         495   

W3 Co.

   Oil and Gas    Secured Second Lien Debt (9.3%, Due 9/2020) (E)      499         494         484   
           

 

 

    

 

 

 

Subtotal—Syndicated Investments

            $ 61,092       $ 59,487   
           

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 70.7% of total investments at fair value)

      $ 225,845       $ 198,926   
           

 

 

    

 

 

 

AFFILATE INVESTMENTS (Q) :

              

Proprietary Investments:

              

Ashland Acquisition LLC

   Printing and publishing    Secured First Lien Line of Credit, $1,500 available (12.0%, Due 7/2016) (D)(G)    $ —         $ —         $ —     
      Secured First Lien Debt (12.0%, Due 7/2018) (D)(G)      7,000         7,000         7,053   
      Preferred Equity Units (4,400 units) (F)(H)         440         206   
      Common Equity Units (4,400 units) (F)(H)         —           —     
           

 

 

    

 

 

 
              7,440         7,259   

Edge Adhesives Holdings, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $230 available (12.5%, Due 8/2015) (D)      770         770         768   
      Secured First Lien Debt (12.5%, Due 2/2019) (D)      6,200         6,200         6,208   
      Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600         1,600         1,604   
      Secured First Lien Debt (13.8%, Due 11/2014) (J)      585         585         585   
      Preferred Stock (2,316 shares) (F)(H)         2,316         2,885   
           

 

 

    

 

 

 
              11,471         12,050   

FedCap Partners, LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units) (H)(N)         1,718         2,238   

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals    Secured Second Lien Debt (12.0%, Due 3/2020) (D)      6,000         6,000         6,007   
      Common Stock (100,000 shares) (F)(H)         1,000         1,169   
           

 

 

    

 

 

 
              7,000         7,176   

RBC Acquisition Corp.

   Healthcare, education and childcare    Secured First Lien 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)(G)      6,891         6,891         6,891   
      Secured First Lien Debt (12.0%, Due 12/2014) (C)(F)      11,392         11,392         11,392   
      Secured First Lien Debt (12.5%, Due 12/2014) (F)(G)      6,000         6,000         6,000   
      Preferred Stock (4,999,000 shares) (F)(H)(M)         4,999         —     
      Common Stock (2,000,000 shares) (F)(H)         370         —     
           

 

 

    

 

 

 
              33,652         28,283   
           

 

 

    

 

 

 

Total Affiliate Proprietary Investments (represented 20.3% of total investments at fair value)

      $ 61,281       $ 57,006   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (R) :

              

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 4/2016) (F)    $ 6,545       $ 6,545       $ 6,545   
      Common Stock (15,500 shares) (F)(H)         1         6,461   
           

 

 

    

 

 

 
              6,546         13,006   

Lindmark Acquisition, LLC

   Broadcasting and entertainment    Secured First Lien Debt, $3,120 available (25.0%, Due Upon Demand) (F)(G)      —           —           —     
      Success Fee on Secured Second Lien Debt (F)         —           89   
      Common Stock (100 shares) (F)(H)         317         —     
           

 

 

    

 

 

 
              317         89   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair Value  

CONTROL INVESTMENTS (R) (Continued):

        

Midwest Metal Distribution, Inc.

   Mining, steel, iron and non-precious metals    Secured Second Lien Debt (12.0%, Due 7/2015) (F)(I)      $18,281       $ 17,720       $ 4,455   
      Preferred Stock (2,000 shares) (F)(H)(M)         2,175         —     
      Common Stock (501 shares) (F)(H)         138         —     
           

 

 

    

 

 

 
              20,033         4,455   

Sunshine Media Holdings

   Printing and publishing    Secured First Lien Line of Credit, $400 available (4.8%, Due 5/2016) (D)(I)      1,600         1,600         424   
      Secured First Lien Debt (4.8%, Due 5/2016) (D)(I)      16,948         16,948         4,491   
      Secured First Lien Debt (5.5%, Due 5/2016) (C)(D)(I)      10,700         10,700         2,889   
      Preferred Stock (15,270 shares) (F)(H)(M)         5,275         —     
      Common Stock (1,867 shares) (F)(H)         740         —     
      Common Stock Warrants (72 shares) (F)(H)         —           —     
           

 

 

    

 

 

 
              35,263         7,804   
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 9.0% of total investments at fair value)

  

   $ 62,159       $ 25,354   
           

 

 

    

 

 

 

TOTAL INVESTMENTS (S)

            $ 349,285       $ 281,286   
           

 

 

    

 

 

 

 

(A)   Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $222.0 million at fair value, are pledged as collateral to our Credit Facility, as described further in Note 5— Borrowings. Additionally, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the 1940 Act as of September 30, 2014.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day LIBOR) in effect at September 30, 2014, and due dates represent the contractual maturity date. If applicable, PIK interest rates are noted separately from the cash interest rates. Secured first lien debt securities generally take the form of first priority liens on the assets of the underlying businesses.
(C)   LOT of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other debt and equity holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by SPSE.
(E)   Fair value was based on the IBP on or near September 30, 2014, offered by the respective syndication agent’s trading desk.
(F)   Fair value was based on the TEV of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(G) Debt security has a fixed interest rate.
(H)   Investment is non-income producing.
(I)   Investment is on non-accrual status.
(J)   New or follow-on proprietary investment valued at cost, as it was determined that the price paid during the three months ended September 30, 2014 best represents fair value as of September 30, 2014.
(K) Subsequent to September 30, 2014, the debt interest rates on Francis Drilling Fluids, Ltd. were decreased to approximately 11.9% and 10.8%, respectively, based on a leverage grid.
(L)   Subsequent to September 30, 2014, North American Aircraft Services, LLC debt and equity investment cost basis were paid off, resulting in a realized gain of $1.6 million and success fees of $0.6 million. As such, the fair value as of September 30, 2014 was based upon the payoff amount.
(M) 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.
(N) There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than May 3, 2020.
(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 May, 9, 2024 or two years after all outstanding leverage has matured.
(P)   Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(Q)   Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between 5.0% and 25.0% of the issued and outstanding voting securities.
(R)   Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(S)   Cumulative gross unrealized depreciation for federal income tax purposes is $84.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $15.6 million. Cumulative net unrealized depreciation is $68.7 million, based on a tax cost of $349.9 million.

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2015

(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 of 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 them 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 a portion of our portfolio of investments in connection with our revolving line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial acquired this license in February 2007. The license enables us to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies. As of June 30, 2015 and September 30, 2014, we held no investments through Gladstone Financial.

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

We are externally managed by our investment advisor, Gladstone Management Corporation (the “Adviser”), a Delaware corporation and 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 in consolidation. Under Article 6 of Regulation S-X, and the authoritative accounting guidance provided by the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, we are not permitted to consolidate any portfolio company investments, including those in which we have a controlling interest. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2015, 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, 2014, as filed with the SEC on November 12, 2014, and subsequently amended on December 29, 2014.

 

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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.

Reclassifications

Certain amounts in the prior year’s financial statements have been reclassified to conform to the presentation for the nine months ended June 30, 2015, with no effect on our financial condition, results of operations or cash flows.

Investment Valuation Policy

Accounting Recognition

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

Board Responsibility

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

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments. Standard & Poor’s Securities Evaluation, Inc. (“SPSE”) provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns SPSE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates SPSE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimates of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, our Board of Directors reviews whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended value is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended valuation.

In addition, we began using a third party valuation firm starting with the March 31, 2015 quarter end to provide additional EBITDA multiple ranges, as well as other information, that may be incorporated into our total enterprise valuations of certain of our equity investments. Generally, at least once per year, we use an independent valuation firm to independently value or review our significant equity investments and provide additional information for us to consider in our total enterprise valuations. The Valuation Team reviews all information from the valuation firm and makes a recommendation to our Board of Directors as to valuations. Our Board of Directors then reviews the recommended value and whether it is reasonable in light of the Policy and other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended valuation.

Valuation Techniques

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

 

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

 

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

 

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

 

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

 

    Investments in Funds — For equity investments in other funds, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our invested capital at the net asset value (“NAV”) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

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

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

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 a loan’s status significantly improves regarding the debtor’s ability and intent to pay contractual amounts due, or 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 collectible. As of June 30, 2015, four portfolio companies were either fully or partially on non-accrual status with an aggregate debt cost basis of approximately $49.2 million, or 13.4% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $10.7 million, or 3.5% of the fair value of all debt investments in our portfolio. As of September 30, 2014, three portfolio companies were on non-accrual status with an aggregate debt cost basis of approximately $51.4 million, or 16.1% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $13.2 million, or 5.2% of the fair value of all debt investments in our portfolio.

 

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We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or paid-in-kind (“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. Therefore, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.

As of June 30, 2015 and September 30, 2014, we had 17 original OID loans, primarily from the syndicated investments in our portfolio. We recorded OID income of $0.1 and $0.2 million for the three and nine months ended June 30, 2015, respectively, as compared to $59 and $0.2 million for the three and nine months ended June 30, 2014, respectively. The unamortized balance of OID investments as of June 30, 2015 and September 30, 2014, totaled $0.8 million and $0.6 million, respectively. As of June 30, 2015 and September 30, 2014, we had four and three investments, respectively, with a PIK interest component. We recorded PIK income of $0.3 and $0.5 million for the three and nine months ended June 30, 2015, respectively, as compared to $80 and $0.3 million for the three and nine months ended June 30, 2014, respectively. We collected $0 PIK interest in cash during the nine months ended June 30, 2015 and 2014, respectively.

Other Income Recognition

We generally record success fees upon our receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. We recorded an aggregate of $1.7 million in success fees during the nine months ended June 30, 2015, which resulted from $0.6 million related to the early payoff of North American Aircraft Services, LLC (“NAAS”) at a realized gain, $0.3 million prepayment of success fees by Francis Drilling Fluids, LLC (“FDF”), $0.5 million prepayment of success fees by Defiance Integrated Technologies, Inc. (“Defiance”), $0.1 million prepayment of success fees by Southern Petroleum Laboratories, Inc. (“SPL”) and $0.2 million of success fees related to our sale of substantially all of the assets in Lindmark Acquisition, LLC (“Lindmark”) and the ensuing pay down of our debt investments in Lindmark at par in September 2013. We recorded an aggregate of $1.6 million in success fees during the nine months ended June 30, 2014, which resulted from $0.5 million related to the early payoff of Thibaut Acquisition Co. at par, $0.5 million prepayment by FDF and $0.6 million received as a result of our sale of substantially all of the assets in Lindmark in September 2013.

Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. During the nine months ended June 30, 2015, we recorded an aggregate of $0.6 million of dividend income, which resulted from $0.1 million from our preferred equity investment in FDF, $0.2 from our preferred equity investment in Funko, LLC (“Funko”) and $0.3 million from our preferred equity investment in SPL. During the nine months ended June 30, 2014, we recorded an aggregate of $1.0 million of dividend income, net of estimated income taxes payable, which resulted from $0.2 million on our preferred equity investment in FDF, $0.7 million on our investment in FedCap Partners, LLC and $0.1 million on our preferred equity investment in Funko.

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

Recent Accounting Pronouncements

In May 2015, the FASB issued Accounting Standards Update 2015-07, “ Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) ” (“ASU 2015-07”), which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measures at net asset value per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. We are currently assessing the impact of ASU 2015-07 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-07 is required to be adopted retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

In April 2015, the FASB issued ASU 2015-03, “ Simplifying the Presentation of Debt Issuance Costs ” (“ASU-2015-03”), which simplifies the presentation of debt issuance costs. We are currently assessing the impact of ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

In February 2015, the FASB issued ASU 2015-02, “ Amendments to the Consolidation Analysis ” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. The new standard changes the way a reporting entity evaluates whether a) limited partnerships and similar entities should be consolidated, b) fees paid to decision makers or service providers are variable interests in a variable interest entity (“VIE”), and c) variable interests in a VIE held by related parties require the reporting entity to consolidate the VIE. ASU 2015-02 also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. We are currently assessing the impact of ASU 2015-02 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

 

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In August 2014, the FASB issued ASU 2014–15, “ Presentation of Financial Statements – Going Concern (Subtopic 205 – 40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern ” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance is primarily around certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for the annual period ending after December 31, 2016 and for annual periods and interim periods thereafter, with early adoption permitted.

In May 2014, the FASB issued ASU 2014-09, “ Revenue from Contracts with Customers ” (“ASU 2014-09”), which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09 and anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2014-09 is effective for annual reporting periods that begin after December 15, 2017 and interim periods within those years, with early adoption not permitted.

NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

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

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of June 30, 2015 and September 30, 2014, all of our investments were valued using Level 3 inputs and during the nine months ended June 30, 2015 and 2014, there were no investments transferred into or out of Levels 1, 2 or 3.

 

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Table of Contents

The following table presents our investments carried at fair value as of June 30, 2015 and September 30, 2014, 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)
 
     June 30, 2015      September 30, 2014  

Non-Control/Non-Affiliate Investments

     

Secured first lien debt

   $ 124,798       $ 78,031   

Secured second lien debt

     102,167         106,869   

Preferred equity

     26,201         10,593   

Common equity/equivalents

     2,878         3,433   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 256,044       $ 198,926   
  

 

 

    

 

 

 

Affiliate Investments

     

Secured first lien debt

   $ 50,324       $ 43,915   

Secured second lien debt

     11,970         6,593   

Preferred equity

     1,445         3,091   

Common equity/equivalents

     4,696         3,407   
  

 

 

    

 

 

 

Total Affiliate Investments

   $ 68,435       $ 57,006   
  

 

 

    

 

 

 

Control Investments

     

Secured first lien debt

   $ 10,182       $ 7,804   

Secured second lien debt

     6,449         11,089   

Preferred equity

               

Common equity/equivalents

     6,106         6,461   
  

 

 

    

 

 

 

Total Control Investments

   $ 22,737       $ 25,354   
  

 

 

    

 

 

 

Total Investments at Fair Value

   $ 347,216       $ 281,286   
  

 

 

    

 

 

 

In accordance with the FASB’s ASU 2011-04, “ Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (“IFRS”) , (“ASU 2011-04”), the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2015 and September 30, 2014. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity-related calculations for the particular input.

 

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Table of Contents
     Quantitative Information about Level 3 Fair Value Measurements  
          Range / Weighted Average as of  
     June 30,
2015
     September 30,
2014
     Valuation
Technique/
Methodology
   Unobservable
Input
   June 30,
2015
     September 30,
2014
 

Secured first lien debt

   $ 134,533       $ 68,252       Yield Analysis    Discount
Rate
    

 

2.8% - 30.0%

/ 12.7%

  

  

    

 

8.4% - 18.8%

/ 13.3%

  

  

     32,598         55,263       TEV    EBITDA
multiple
    

 

6.5x – 6.5x

/6.5x

  

  

    

 

4.0x - 7.6x

/ 6.2x

  

  

            EBITDA     

 

$1,255 - $1,255

/ $1,255

  

  

    

 

$247 - $3,700

/ $1,906

  

  

            Revenue
multiple
    

 

0.3x – 1.0x

/ 0.8x

  

  

    

 

0.6x – 0.8x

/ 0.7x

  

  

            Revenue     

 

$7,977 - $11,391

/$10,344

  

  

    
 
$2,416 - $5,327
/ $4,151
  
  
     18,173         6,235       Market Quotes    IBP     

 

83.0% - 95.0%

/89.6%

  

  

    
 
85.0% - 85.0%
/ 85.0%
  
  

Secured second lien debt (A)

     74,391         65,628       Yield Analysis    Discount
Rate
    

 

11.0% - 13.3%

/12.5%

  

  

    
 
11.3% - 13.8%
/ 12.5%
  
  
     37,997         45,080       Market Quotes    IBP     

 

81.0% - 101.1%

/ 96.6%

  

  

    

 

94.9% - 101.3%

/ 99.8%

  

  

     8,198         13,843       TEV    EBITDA
multiple
    

 

4.4x – 7.5x

/5.3x

  

  

    

 

4.3x – 7.1x

/ 6.1x

  

  

            EBITDA     

 

$4,062 - $40,167

/ $14,658

  

  

    
 
$3,520 - $6,219
/ $3,901
  
  

Preferred and common equity / equivalents (B)

     39,269         24,711       TEV    EBITDA
multiple
    

 

3.7x – 7.6x

/ 6.4x

  

  

    

 

4.3x – 7.6x

/ 6.1x

  

  

            EBITDA     

 

$1,255 - $40,167

/ $9,771

  

  

    
 
$998 - $15,685
/ $4,135
  
  
     2,057         2,274       Investments in
Funds
        
  

 

 

    

 

 

             

Total Investments, at Fair Value

   $ 347,216       $ 281,286               
  

 

 

    

 

 

             

 

(A) June 30, 2015 includes one syndicated investment which was valued at the subsequent payoff amount of $7.2 million. September 30, 2014 includes one new proprietary debt investment for $8.0 million and two follow-on debt investments for a combined $7.6 million, which were all valued at cost. September 30, 2014 includes one proprietary investment, which was valued at the subsequent payoff amount totaling $2.8 million.
(C) September 30, 2014 includes one new proprietary equity investment for $0.8 million, which was valued at cost, and one proprietary equity investment, which was valued at payoff amount totaling $1.9 million.

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

 

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Table of Contents

The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2015 and 2014 for all investments for which we determine fair value using unobservable (Level 3) factors.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR 2015:                               
     Secured
First
    Secured
Second
    Preferred     Common
Equity/
       

Three Months Ended June 30, 2015

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of March 31, 2015

   $ 194,644      $ 128,777      $ 25,402      $ 14,817      $ 363,640   

Total gains (losses):

          

Net realized (loss) gain (A)

     (1,334     191        —          —          (1,143

Net unrealized (depreciation) appreciation (B)

     (4,700     3,172        2,123        (3,898     (3,303

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

     2,294        (138     —          —          2,156   

New investments, repayments and settlements: (C)

          

Issuances/originations

     1,045        289        200        125        1,659   

Settlements/repayments

     (1,953     (2,933     (79     —          (4,965

Net proceeds from sales

     (4,692     (6,136     —          —          (10,828

Transfers

     —          (2,636     —          2,636        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2015

   $ 185,304      $ 120,586      $ 27,646      $ 13,680      $ 347,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Secured
First
    Secured
Second
    Preferred     Common
Equity/
       

Nine Months Ended June 30, 2015

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of September 30, 2014

   $ 129,750      $ 124,551      $ 13,684      $ 13,301      $ 281,286   

Total gains (losses):

          

Net realized (loss) gain (A)

     (1,334     (11,955     (2,175     1,440        (14,024

Net unrealized (depreciation) appreciation (B)

     (8,321     (2,804     12,131        (2,362     (1,356

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

     2,294        12,489        2,175        (1,440     15,518   

New investments, repayments and settlements: (C)

          

Issuances/originations

     71,078        18,789        2,244        2,117        94,228   

Settlements/repayments

     (3,471     (5,577     (413     (434     (9,895

Net proceeds from sales

     (4,692     (12,271     —          (1,578     (18,541

Transfer

     —          (2,636     —          2,636        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2015

   $ 185,304      $ 120,586      $ 27,646      $ 13,680      $ 347,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR 2014:                               
     Secured
First
    Secured
Second
    Preferred     Common
Equity/
       

Three Months Ended June 30, 2014

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of March 31, 2014

   $ 148,098      $ 126,064      $ 10,182      $ 8,976      $ 293,320   

Total gains (losses):

          

Net realized gain (A)

     52        2        —          —          54   

Net unrealized (depreciation) appreciation (B)

     (20,413     (3,973     (662     2,359        (22,689

Reversal of prior period net appreciation on realization (B)

     (150     (10     —          —          (160

New investments, repayments and settlements: (C)

          

Issuances/originations

     440        2,000        1,000        —          3,440   

Settlements/repayments

     (5,536     (3,170     —          (176     (8,882
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2014

   $ 122,491      $ 120,913      $ 10,520      $ 11,159      $ 265,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Secured
First
    Secured
Second
    Preferred     Common
Equity/
       

Nine Months Ended June 30, 2014

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of September 30, 2013

   $ 122,949      $ 122,421      $ 5,066      $ 6,442      $ 256,878   

Total gains (losses):

          

Net realized (loss) gain (A)

     (13,445     87        —          69        (13,289

Net unrealized (depreciation) appreciation (B)

     (13,358     (12,999     (4,128     3,850        (26,635

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

     17,018        (225     —          (70     16,723   

New investments, repayments and settlements: (C)

          

Issuances/originations

     32,412        40,000        9,689        1,268        83,369   

Settlements/repayments

     (18,385     (28,371     (107     (400     (47,263

Net proceeds from sales

     (4,700     —          —          —          (4,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2014

   $ 122,491      $ 120,913      $ 10,520      $ 11,159      $ 265,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014.
(B)   Included in net unrealized appreciation (depreciation) of investments on our accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014.
(C)   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 cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Investment Activities

Proprietary Investments

As of June 30, 2015 and September 30, 2014, we held 30 and 29 proprietary investments with an aggregate fair value of $285.2 million and $221.8 million, or 82.1% and 78.9% of the total aggregate portfolio at fair value, respectively. During the nine months ended June 30, 2015, we invested in four new proprietary investments totaling $52.8 million; sold two proprietary investments for combined net proceeds of $10.8 million, resulting in a combined realized loss of $15.8 million; and had one proprietary investment pay off early generating net proceeds of $2.5 million and a realized gain of $1.6 million, for which we received success fees of $0.6 million. Additionally, during the nine months ended June 30, 2015, we funded a combined $24.4 million to existing proprietary portfolio companies through revolver draws and follow on investments, while scheduled and unscheduled principal repayments totaled $4.2 million from existing proprietary portfolio companies (exclusive of the aforementioned combined $13.3 million in net proceeds). The following significant proprietary investment transactions occurred during the nine months ended June 30, 2015:

 

    B+T Holdings Inc . – In December 2014, we invested $8.1 million, along with an unfunded line of credit of $0.3 million, in B+T Holdings Inc. (“B+T”), through a combination of secured first lien debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. This was a co-investment with one of our affiliated funds, Gladstone Investment Corporation (“Gladstone Investment”). Gladstone Investment invested an additional $19.6 million under the same terms as us.

 

    Midwest Metal Distribution, Inc . – In December 2014, we sold our investment in Midwest Metal Distribution, Inc. (“Midwest Metal”) for net proceeds of $6.1 million, which resulted in a realized loss of $14.5 million recorded in the nine months ended June 30, 2015. Midwest Metal had been on non-accrual status at the time of the sale.

 

    LWO Acquisitions Company, LLC , – In December 2014, we invested $13.5 million, along with an unfunded line of credit of $1.5 million, in LWO Acquisitions Company, LLC, (“LWO Acquisitions”) through a combination of secured first lien debt and equity. LWO Acquisitions, headquartered in Dallas, Texas, is a premier electronic manufacturing services company focused on the design and production of specialized printed circuit board assemblies and related services.

 

    Vision Government Solutions, Inc. – In December 2014, we invested $10.0 million, along with an unfunded line of credit of $1.0 million, in Vision Government Solutions, Inc. (“Vision”) through secured first lien debt. Vision, headquartered in Northboro, Massachusetts, is a leading provider of land parcel management software technology and appraisal services to local government organizations, enabling efficient assessment, billing, collections, mapping, and permitting.

 

    United Flexible, Inc. – In February 2015, we invested $21.2 million, along with an unfunded line of credit of $4.0 million, in United Flexible, Inc. (formerly known as Precision Metal Hose, Inc.) (“United Flexible”) through a combination of secured first lien debt and equity. United Flexible, headquartered in Romeoville, IL, is a global leader in the design, development, manufacture and support of performance critical flexible engineered solutions for the transfer of fluids and gasses in extreme environments.

 

    Sunburst Media – Louisiana, LLC – In June 2015, we exited our investment in Sunburst Media – Louisiana, LLC (“Sunburst”) for net proceeds of $4.7 million, which resulted in a realized loss of $1.3 million recorded in the quarter ended June 30, 2015.

 

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Table of Contents

Syndicated Investments

We held a total of 16 syndicated investments with an aggregate fair value of $62.1 million or 17.9% of our total investment portfolio at fair value, as of June 30, 2015, as compared to 16 syndicated investments with an aggregate fair value of $59.5 million, or 21.1% of our total investment portfolio at fair value, as of September 30, 2014. During the nine months ended June 30, 2015, we invested in three new syndicated investments for a combined $12.5 million and also invested an additional $4.0 million in an existing syndicated portfolio company. Additionally during the nine months ended June 30, 2015, we sold three syndicated investments for combined net proceeds of $6.1 million, resulting in a combined realized gain of $0.2 million.

Investment Concentrations

As of June 30, 2015, our investment portfolio consisted of investments in 46 companies located in 20 states across 19 different industries, with an aggregate fair value of $347.2 million. The five largest investments at fair value as of June 30, 2015, totaled $118.9 million, or 34.2% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2014, which totaled $94.3 million, or 33.5% of our total investment portfolio. As of June 30, 2015, our average investment by obligor was $8.7 million at cost, compared to $7.8 million at cost as of September 30, 2014. The following table outlines our investments by security type as of June 30, 2015 and September 30, 2014:

 

     June 30, 2015     September 30, 2014  
     Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
    Cost      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Secured first lien debt

   $ 243,669         60.8   $ 185,304         53.4   $ 182,086         52.1   $ 129,750         46.1

Secured second lien debt

     124,068         30.9        120,586         34.7        137,719         39.5        124,551         44.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Investments

     367,737         91.7        305,890         88.1        319,805         91.6        254,301         90.4   

Preferred equity

     21,591         5.4        27,646         8.0        21,936         6.2        13,684         4.9   

Common equity/equivalents

     11,725         2.9        13,680         3.9        7,544         2.2        13,301         4.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Equity Investments

     33,316         8.3        41,326         11.9        29,480         8.4        26,985         9.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 401,053         100.0   $ 347,216         100.0   $ 349,285         100.0   $ 281,286         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Investments at fair value consisted of the following industry classifications as of June 30, 2015 and September 30, 2014:

 

     June 30, 2015     September 30, 2014  

Industry Classification

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

Diversified/conglomerate manufacturing

   $ 60,698         17.5   $ 27,634         9.8

Oil and gas

     53,536         15.4        42,831         15.2   

Personal and non-durable consumer products

     47,791         13.8        30,157         10.7   

Healthcare, education and childcare

     36,030         10.4        47,538         16.9   

Printing and publishing

     24,265         7.0        23,999         8.5   

Electronics

     18,821         5.4        24,811         8.8   

Automobile

     18,052         5.2        19,489         6.9   

Other, < 2.0% (A)

     14,938         4.3        6,279         2.2   

Diversified/conglomerate services

     14,242         4.1        —           —     

Diversified natural resources, precious metals and minerals

     13,916         4.0        7,176         2.6   

Cargo transportation

     13,293         3.8        12,838         4.6   

Finance

     8,546         2.5        4,205         1.5   

Textiles and leather

     7,431         2.1        8,171         2.9   

Beverage, food and tobacco

     6,990         2.0        6,235         2.2   

Broadcast and entertainment

     4,996         1.4        6,386         2.3   

Buildings and real estate

     2,025         0.6        6,617         2.4   

Aerospace and defense

     1,646         0.5        6,920         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 347,216         100.0   $ 281,286         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)   No industry within this category exceeds 2.0% of the total fair value as of the respective periods.

 

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Investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2015 and September 30, 2014:

 

     June 30, 2015     September 30, 2014  

Geographic Region

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

Midwest

   $ 125,515         36.1   $ 107,387         38.2

South

     115,253         33.2        92,355         32.8   

West

     95,034         27.4        80,744         28.7   

Northeast

     11,414         3.3        800         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 347,216         100.0   $ 281,286         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic region indicates the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2015:

 

For the Fiscal Years Ending September 30:

        Amount  

For the remaining three months ending September 30:

  

2015

   $ 22,478   
  

2016

     110,493   
  

2017

     10,271   
  

2018

     32,989   
  

2019

     62,740   
  

Thereafter

     129,793   
     

 

 

 
  

Total contractual repayments

   $ 368,764   
   Equity investments      33,316   
  

Adjustments to cost basis on debt investments

     (1,027
     

 

 

 
  

Total Cost Basis of Investments Held at June 30, 2015:

   $ 401,053   
     

 

 

 

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs that we have incurred on behalf of portfolio companies and are included in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . As of June 30, 2015 and September 30, 2014, we had gross receivables from portfolio companies totaling $0.7 million and $0.4 million, respectively. The allowance for uncollectible receivables from portfolio companies totaled $0.2 million and $0.1 million as of June 30, 2015 and September 30, 2014, respectively, which is reflected in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . In addition, as of June 30, 2015 and September 30, 2014, we recorded an allowance for uncollectible interest receivables totaling $1.4 million and $0.4 million, respectively, which is reflected in interest receivable on our accompanying Condensed Consolidated Statements of Assets and Liabilities . We generally maintain allowances for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined based upon management’s judgment that the portfolio company is unable to pay its obligations.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee and an incentive fee, as provided for in the Advisory Agreement and of a loan servicing fee, for the Adviser’s role as servicer pursuant to our revolving line of credit, each as described below. The Adviser is controlled by our chairman and chief executive officer. On July 14, 2015, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the annual renewal of the Advisory Agreement through August 31, 2016.

 

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The following table summarizes the base management, loan servicing, and incentive fees and associated voluntary and irrevocable fee credits for the three and nine months ended June 30, 2015 and 2014, reflected in our accompanying Condensed Consolidated Statements of Operations :

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2015     2014     2015     2014  

Average total assets subject to base management fee (A)

   $ 371,800      $ 292,200      $ 350,450      $ 294,700   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5     1.5     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

   $ 1,859      $ 1,461      $ 5,257      $ 4,421   

Portfolio company fee credit (C)

     (73     (38     (840     (669

Senior syndicated loan fee credit (D)

     (41     (29     (120     (88
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,745      $ 1,394      $ 4,297      $ 3,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee (B)

     1,015        917        2,802        2,628   

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

     (1,015     (917     (2,802     (2,628
  

 

 

       

 

 

 

Net Loan Servicing Fee

   $ —        $ —        $ —        $ —     
  

 

 

       

 

 

 

Incentive fee (B)

     1,021        1,266        2,866        3,361   

Incentive fee credit (E)

     (754     —          (754     (515
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 267      $ 1,266      $ 2,112      $ 2,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit (C)

     (73     (38     (840     (669

Senior syndicated loan fee credit (D)

     (41     (29     (120     (88

Incentive fee credit (E)

     (754     —          (754     (515
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit to Fees From Adviser—other (B)

   $ (868   $ (67   $ (1,714   $ (1,272
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarter within the respective period and adjusted appropriately for any share issuances or repurchases during the period.
(B) Reflected, on a gross basis, as a line item on our accompanying Condensed Consolidated Statements of Operations .
(C) As a BDC, we make available significant managerial assistance to our portfolio companies through the personnel of the Adviser. The Adviser may also provide other services to our portfolio companies under other agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. At the end of each quarter, the Adviser voluntarily, irrevocably and unconditionally credits 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, primarily for valuation of portfolio companies, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser.
(D) Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5% for the quarter, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the three and nine months ended June 30, 2015 and 2014.
(E) Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of the distributions to common stockholders for the three and nine months ended June 30, 2015 and for the nine months ended June 30, 2014.

Base Management Fee

The base management fee is computed and payable quarterly and is assessed at an annual rate of 2.0%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. The base management fee is then adjusted by certain voluntary, irrevocable and unconditional credits from the Adviser as explained in the notes to the table above.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of

 

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our net assets (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:

 

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

 

    100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); and

 

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

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate unrealized capital depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through June 30, 2015, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through June 30, 2015.

Loan Servicing Fee

The Adviser also services the loans held by Business Loan (the borrower under our line of credit), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our line of credit. Since Business Loan is a consolidated subsidiary of ours, and the total base management fee paid to the Adviser pursuant to the Advisory Agreement, cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given calendar year, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% voluntarily, irrevocably and unconditionally credited back to us by the Adviser.

Administration Agreement

The Administration Agreement provides for payments equal to our portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president) and their respective staffs. Prior to July 1, 2014, our portion of the expenses were generally derived by multiplying that portion of the Administrator’s expenses allocable to all funds managed by the Adviser by the percentage of our total assets at the beginning of each quarter in comparison to the total assets at the beginning of each quarter of all funds managed by the Adviser.

Effective July 1, 2014, our portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter to the Administrator. On July 14, 2015, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2016.

 

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Related Party Fees Due

Fees due to related parties as of June 30, 2015 and September 30, 2014 on our accompanying Condensed Consolidated Statements of Assets and Liabilities were as follows:

 

     June 30, 2015      September 30, 2014  

Net base management fee due to Adviser

   $ 951       $ 604   

Net incentive fee due to Adviser

     267         271   
  

 

 

    

 

 

 

Total fees due to Adviser, net of credits

     1,218         875   
  

 

 

    

 

 

 

Fee due to Administrator

     235         218   
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,453       $ 1,093   
  

 

 

    

 

 

 

Other operating expenses due to the Adviser as of June 30, 2015 and September 30, 2014, totaled $13 and $20, respectively. In addition, other net co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $0.1 million and $41 as of June 30, 2015 and September 30, 2014, respectively. These expenses were paid in full in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2015 and September 30, 2014, respectively .

Note Receivable from Former Employee

During the nine months ended June 30, 2015, our employee note receivable was repaid in full and all shares of common stock that were held as collateral were released. During the nine months ended June 30, 2015, we received $0.1 million in principal repayments from the former employee, who paid off the note in full. We did not receive any principal repayments during the nine months ended June 30, 2014. We recognized interest income from the employee note of $1 and $4 for the three and nine months ended June 30, 2015, respectively and $3 and $11 for the three and nine months ended June 30, 2014, respectively.

NOTE 5. BORROWINGS

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Facility (the “Credit Facility”), which increased the commitment amount from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to 30-day LIBOR from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended certain other terms and conditions. Our Credit Facility was arranged by KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be due and payable on or before May 1, 2020. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 19, 2019.

On June 19, 2015, we through Business Loan, entered into certain joinder and assignment agreements with three new lenders to increase borrowing capacity under our Credit Facility by $30.0 million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being amortized through our Credit Facility’s revolving period end date of January 19, 2019.

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of June 30, 2015 and September 30, 2014 and during the three and nine months ended June 30, 2015 and 2014:

 

     June 30, 2015      September 30, 2014  

Commitment amount

   $ 170,000       $ 137,000   

Borrowings outstanding

     104,600         36,700   

Availability

     33,470         57,500   

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2015     2014     2015     2014  

Weighted average borrowings outstanding

   $ 109,792      $ 49,389      $ 84,748      $ 43,086   

Effective interest rate (A)

     3.8     5.7     4.3     6.2

Commitment (unused) fees incurred

   $ 42      $ 221      $ 314      $ 707   

 

(A)   Excludes the impact of deferred financing fees.

 

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

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits payments on distributions to our stockholders to our aggregate net investment income and capital gains for each of the twelve month periods ending September 30, 2015, 2016, 2017, and 2018. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015, which equates to $205.0 million as of June 30, 2015, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200.0%, in accordance with Section 18 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of June 30, 2015, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $259.4 million, asset coverage of 221.0% and an active status as a BDC and RIC. In addition, we had 33 obligors in our Credit Facility’s borrowing base as of June 30, 2015. As of June 30, 2015, we were in compliance with all of our Credit Facility covenants.

Pursuant to the terms of our Credit Facility, on July 15, 2013, we, through Business Loan, entered into an interest rate cap agreement with KeyBank, effective July 9, 2013 and expiring January 19, 2016, for a notional amount of $35.0 million that effectively limits the interest rate on a portion of our borrowings under our Credit Facility. The one month LIBOR cap is set at 5.0%. We incurred a premium fee of $62 in conjunction with this agreement, which is recorded in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities. As of June 30, 2015 and September 30, 2014, the fair value of our interest rate cap agreement was $0.

Fair Value

We elected to apply the fair value option of ASC 825, “ Financial Instruments ,” specifically for our Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and also takes into account the Valuation Team’s own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of June 30, 2015, due to the recent amendment of our Credit Facility and comparable market factors, the fair value of our Credit Facility was determined to approximate cost. As of September 30, 2014, the discount rate used to determine the fair value of our Credit Facility was 4.0%. Generally, an increase or decrease in the discount rate used in the DCF calculation, may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. As of June 30, 2015 and September 30, 2014, our Credit Facility was valued using Level 3 inputs and any changes in its fair value is recorded in net unrealized appreciation (depreciation) of other on our accompanying Condensed Consolidated Statements of Operations .

 

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The following tables present our Credit Facility carried at fair value as of June 30, 2015 and September 30, 2014, on our accompanying Condensed Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and nine months ended June 30, 2015 and 2014:

 

     Total Recurring Fair Value Measurement Reported in
Condensed Consolidated Statements  of
Assets and Liabilities Using Significant Unobservable Inputs
(Level 3)
 
     June 30, 2015     September 30, 2014  

Credit Facility

   $ 104,600      $ 38,013   
  

 

 

   

 

 

 

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

 
     Three Months Ended June 30,  
     2015     2014  

Fair value as of March 31, 2015 and 2014, respectively

   $ 114,793      $ 60,514   

Borrowings

     15,500        13,800   

Repayments

     (25,000     (38,900

Net unrealized (depreciation) appreciation (A)

     (693     1,146   
  

 

 

   

 

 

 

Fair Value as of June 30, 2015 and 2014, respectively

   $ 104,600      $ 36,560   
  

 

 

   

 

 

 
     Nine Months Ended June 30,  
     2015     2014  

Fair value as of September 30, 2014 and 2013, respectively

   $ 38,013      $ 47,102   

Borrowings

     109,000        91,000   

Repayments

     (41,100     (102,800

Net unrealized (depreciation) appreciation (A)

     (1,313     1,258   
  

 

 

   

 

 

 

Fair Value as of June 30, 2015 and 2014, respectively

   $ 104,600      $ 36,560   
  

 

 

   

 

 

 

 

(A)   Included in net unrealized appreciation (depreciation) of other on our accompanying C ondensed Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014.

The fair value of the collateral under our Credit Facility was approximately $292.3 million and $222.0 million in aggregate as of June 30, 2015 and September 30, 2014, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In May 2014, we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (“Series 2021 Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share (“Series 2016 Term Preferred Stock”) and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility. In connection with the voluntary redemption of our Series 2016 Term Preferred Stock, we recognized a realized loss on extinguishment of debt of $1.3 million, which was reflected on our statement of operations for the three months ended June 30, 2014 and which was primarily comprised of the unamortized deferred issuance costs at the time of redemption.

We incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which are recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending June 30, 2021. The shares of our Series 2021 Term Preferred Stock are traded under the ticker symbol “GLADO” on the NASDAQ Global Select Market (“NASDAQ”). Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend rate equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date of redemption (the “Redemption Price”). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of the outstanding Series 2021 Term Preferred Stock and (2) if we fail to maintain an asset coverage ratio of at least 200.0% and do not take steps to cure such asset coverage amount within a specified period of time. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at the Redemption Price in our sole discretion to have an asset coverage ratio of up to and including 240.0% and at any time on or after June 30, 2017. If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of June 30, 2015, we have not redeemed any of our outstanding Series 2021 Term Preferred Stock.

In November 2011, we completed a public offering of approximately 1.5 million shares of our Series 2016 Term Preferred Stock, at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $36.4 million, a portion of which was used to repay a portion of outstanding borrowings under our Credit Facility. In May 2014, when we voluntarily redeemed our Series 2016 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the realized loss on extinguishment of debt discussed above. Our Series 2016 Term Preferred Stock provided for a fixed dividend rate equal to 7.125% per year, payable monthly (which equated in total to approximately $2.7 million per year).

 

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We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2015:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

  

Distribution per

Series 2021 Term

Preferred Share

2015

   October 7, 2014    October 22, 2014    October 31, 2014    $0.1406250
   October 7, 2014    November 17, 2014    November 26, 2014    0.1406250
   October 7, 2014    December 19, 2014    December 31, 2014    0.1406250
   January 13, 2015    January 23, 2015    February 3, 2015    0.1406250
   January 13, 2015    February 18, 2015    February 27, 2015    0.1406250
   January 13, 2015    March 20, 2015    March 31, 2015    0.1406250
   April 14, 2015    April 24, 2015    May 5, 2015    0.1406250
   April 14, 2015    May 19, 2015    May 29, 2015    0.1406250
   April 14, 2015    June 19, 2015    June 30, 2015    0.1406250
           

 

     

Nine Months Ended June 30, 2015:

   $1.2656250
           

 

We paid the following monthly distributions on our Series 2016 Term Preferred Stock for the nine months ended June 30, 2014:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

  

Distribution per

Term Preferred

Share

2014

   October 8, 2013    October 22, 2013    October 31, 2013    $0.14843750
   October 8, 2013    November 14, 2013    November 29, 2013    0.14843750
   October 8, 2013    December 16, 2013    December 31, 2013    0.14843750
   January 7, 2014    January 22, 2014    January 31, 2014    0.14843750
   January 7, 2014    February 19, 2014    February 28, 2014    0.14843750
   January 7, 2014    March 17, 2014    June 30, 2014    0.14843750
   April 8, 2014    April 21, 2014    April 30, 2014    0.14843750
   April 8, 2014    May 20, 2014    May 23, 2014 (A)    0.14843750
           

 

      Nine Months Ended June 30, 2014:    $1.18750000
           

 

 

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

In accordance with ASC 480, “ Distinguishing Liabilities from Equity ,” mandatorily redeemable financial instruments should be classified as liabilities in the balance sheet and we have recorded our term preferred stock at cost as of June 30, 2015 and September 30, 2014. The related distribution payments to preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value, based on the last quoted closing price, for our Series 2021 Term Preferred Stock as of June 30, 2015 and September 30, 2014, was approximately $61.0 million and $63.0 million, respectively. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder distributions declared and paid on our Series 2016 Term Preferred Stock for the nine months ended June 30, 2014, were approximately $1.8 million. Aggregate preferred stockholder distributions declared and paid on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2015 and 2014, were approximately $3.1 million and $0.5 million, respectively. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

We filed Post-Effective Amendment No. 4 to our universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) with the SEC on December 1, 2014, and subsequently filed Post-Effective Amendment No. 5 on January 29, 2015, which the SEC declared effective January 30, 2015. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock.

 

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In addition, on February 27, 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements or the “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock.

As of June 30, 2015, we had the ability to issue up to $237.8 million in securities under our Registration Statement. We sold approximately 2.4 million shares, or $61.0 million in gross proceeds, of Series 2021 Term Preferred Stock under our Registration Statement in May 2014 and an aggregate of 131,462 shares, or $1.2 million in gross proceeds, of common stock under the Sales Agreements during the nine months ended June 30, 2015. No other securities had been sold under our Registration Statement as of June 30, 2015.

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

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and nine months ended June 30, 2015 and 2014:

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2015      2014      2015      2014  

Numerator for net increase (decrease) in net assets resulting from operations per weighted average common share

   $ 3,307       $ (20,175    $ 13,180       $ (11,771

Denominator for net increase (decrease) in net assets resulting from operations per weighted average common share

     21,123,202         21,000,160         21,045,014         21,000,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations per weighted average common share

   $ 0.16       $ (0.96    $ 0.63       $ (0.56
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

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

The federal income tax characterization of all distributions is reported to our stockholders on the Internal Revenue Service Form 1099 at the end of each calendar year. For each of the nine months ended September 30, 2014, approximately 100.0% of our common distributions were deemed to be paid from a return of capital and for each of October, November and December 2014, approximately 100.0% of our common distributions were deemed to be paid from ordinary income for Form 1099 reporting purposes. For each of the nine months ended September 30, 2013, approximately 92.0% of our common distributions were deemed to be paid from ordinary income, with the remainder of approximately 8.0% deemed to be from a return of capital and for each of October, November and December 2013, approximately 100.0% of our common distributions were deemed to be paid from ordinary income for Form 1099 reporting purposes. In determining the characterization of distributions, the Internal Revenue Code Section 316(b)(4) allows RICs to apply current earnings and profits first to distributions made during the portion of the tax year prior to January 1, which in our case would be the three months ended December 31. The return of capital in both the 2014 and 2013 calendar years for Form 1099 reporting purposes resulted primarily from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

We paid the following monthly distributions to common stockholders for the nine months ended June 30, 2015 and 2014:

 

Fiscal Year

  

Declaration
Date

  

Record Date

  

Payment Date

   Distribution
per Common
Share
 

2015

   October 7, 2014    October 22, 2014    October 31, 2014    $ 0.07   
   October 7, 2014    November 17, 2014    November 26, 2014      0.07   
   October 7, 2014    December 19, 2014    December 31, 2014      0.07   
   January 13, 2015    January 23, 2015    February 3, 2015      0.07   
   January 13, 2015    February 18, 2015    February 27, 2015      0.07   
   January 13, 2015    March 20, 2015    March 31, 2015      0.07   
   April 14, 2015    April 24, 2015    May 5, 2015      0.07   
   April 14, 2015    May 19, 2015    May 29, 2015      0.07   
   April 14, 2015    June 19, 2015    June 30, 2015      0.07   
           

 

 

 

Nine Months Ended June 30, 2015:

   $ 0.63   
           

 

 

 

 

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Fiscal Year

  

Declaration
Date

  

Record Date

  

Payment Date

   Distribution
per Common
Share
 

2014

   October 8, 2013    October 22, 2013    October 31, 2013    $ 0.07   
   October 8, 2013    November 14, 2013    November 29, 2013      0.07   
   October 8, 2013    December 16, 2013    December 31, 2013      0.07   
   January 7, 2014    January 22, 2014    January 31, 2014      0.07   
   January 7, 2014    February 19, 2014    February 28, 2014      0.07   
   January 7, 2014    March 17, 2014    June 30, 2014      0.07   
   April 8, 2014    April 21, 2014    April 30, 2014      0.07   
   April 8, 2014    May 20, 2014    May 30, 2014      0.07   
   April 8, 2014    June 19, 2014    June 30, 2014      0.07   
           

 

 

 

Nine Months Ended June 30, 2014:

   $ 0.63   
           

 

 

 

Aggregate distributions declared and paid to our common stockholders for the nine months ended June 30, 2015 and 2014, were each approximately $13.3 million and $13.2 million, respectively, and were declared based on estimates of net investment income for the respective periods. For our federal income tax reporting purposes, we determine the tax characterization of our common stockholder distributions at fiscal year-end based upon our taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization. If we characterized our common stockholder distributions for the nine months ended June 30, 2015, 100.0% would be a return of capital, primarily due to GAAP realized losses being recognized as ordinary losses for federal income tax purposes. For the fiscal year ended September 30, 2014, common stockholder distributions declared and paid exceeded our accumulated earnings and profits (after taking into account term preferred stock dividends), resulting in a partial return of capital of approximately $15.2 million. The return of capital for the nine months ended June 30, 2015 and the year ended September 30, 2014, primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

For the nine months ended June 30, 2015 and the year ended September 30, 2014, we recorded the following adjustments for book-tax differences to reflect tax character.

 

     Nine Months Ended
June 30,
2015
     Year Ended
September 30, 2014
 

Overdistributed net investment income

   $ (1,945    $ (2,556

Accumulated net realized losses

     16,113         18,144   

Capital in excess of par value

     (14,168      (15,588

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of June 30, 2015, we have not established reserves for such loss contingencies. Additionally, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows.

Financial Commitments and Obligations

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

When investing in certain private equity funds, we may have uncalled capital commitments, depending on the agreed upon terms of our committed ownership interest. These capital commitments usually have a specific date in the future set as a closing date, at which time the commitment is either funded or terminates. As of June 30, 2015 and September 30, 2014, we had uncalled capital commitments related to our partnership interest in Leeds Novamark Capital I, L.P.

 

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The following table summarizes the amounts of our unused line of credit and uncalled capital commitments as of June 30, 2015 and September 30, 2014, which are not reflected as liabilities in the accompanying Condensed Consolidated Statements of Assets and Liabilities :

 

     June 30,
2015
     September 30,
2014
 

Unused line of credit commitments

   $ 13,620       $ 5,905   

Uncalled capital commitment

     2,362         2,827   
  

 

 

    

 

 

 

Total

   $ 15,982       $ 8,732   
  

 

 

    

 

 

 

NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2015     2014     2015     2014  

Per Common Share Data (A) :

        

Net asset value at beginning of period (A)

   $ 9.55      $ 9.79      $ 9.51      $ 9.81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (B)

     0.23        0.24        0.58        0.66   

Net realized loss on investments and escrows (B)

     (0.05     —          (0.69     (0.63

Realized loss on extinguishment of debt (B)

     —          (0.06     —          (0.06

Net unrealized (depreciation) appreciation of investments (B)

     (0.06     (1.09     0.67        (0.47

Net unrealized depreciation (appreciation) of other (B)

     0.04        (0.05     0.07        (0.06

Distributions to common stockholders (A)(C)

     (0.21     (0.21     (0.63     (0.63

Issuance of common stock (B)

     0.03        —          0.06        —     

Offering costs for issuance of common stock (B)

     —          —          (0.01     —     

Dilutive effect of common stock issuance (B)

     (0.03     —          (0.06     —     

Other, net (D)

     (0.01     —          (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period (A)

   $ 9.49      $ 8.62      $ 9.49      $ 8.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value at beginning of period

   $ 8.27      $ 10.08      $ 8.77      $ 8.73   

Market value at end of period

     7.90        10.06        7.90        10.06   

Total return (E)

     (8.01 )%      1.94     (5.40 )%      22.91

Common shares outstanding at end of period

     21,131,622        21,000,160        21,131,622        21,000,160   

Statement of Assets and Liabilities Data:

        

Net assets at end of period

   $ 200,643      $ 180,991      $ 200,643      $ 180,991   

Average net assets (F)

     201,891        197,391        199,206        205,425   

Senior Securities Data:

        

Borrowings under Credit Facility, at cost

     104,600        35,100        104,600        35,100   

Mandatorily redeemable preferred stock

     61,000        61,000        61,000        61,000   

Asset coverage ratio (G)

     221     290     221     290

Asset coverage per unit (H)

   $ 2,210      $ 2,896      $ 2,210      $ 2,896   

Ratios/Supplemental Data:

        

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

     9.25     8.39     9.04     8.18

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

     5.51        6.40        6.01        5.65   

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

     10.10        10.37        10.49        9.05   

Ratio of net investment income to average net assets-annualized

     9.58        10.26        8.18        9.06   

 

(A)   Based on actual common shares outstanding at the end of the corresponding period.
(B)   Based on weighted average basic per common share data.
(C)   Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from income amounts determined under GAAP.
(D)   Represents the impact of the different share amounts (weighted average shares outstanding during the period and shares outstanding at the end of the period) in the per share data calculations and rounding impacts.
(E)   Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account common stockholder distributions reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account common stockholder distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9— Distributions to Common Stockholders . Total return is not annualized.
(F)   Average net assets are computed using the average of the balance of net assets at the end of each month of the reporting period.
(G)   As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
(H)   Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(I)   Ratio of operating expenses to average net assets is computed using total expenses, excluding interest expense on borrowings, dividend expense on mandatorily redeemable preferred stock and amortization of deferred financing fees. If these expenses were not excluded the ratios for the three and nine months ended June 30, 2015 and 2014 would have been 13.83% and 13.51% and 12.37% and 11.58%, respectively.
(J)   Ratio of net operating expenses to average net assets is computed using total expenses, net of credits from the Adviser, and excluding interest expense on borrowings, dividend expense on mandatorily redeemable preferred stock and amortization of deferred financing fees.
(K)   Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser.

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SEC’s Regulation S-X and GAAP, we are not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which we have a controlling interest. We had certain unconsolidated subsidiaries, specifically Defiance, Midwest Metal, RBC Acquisition Corp., and GFRC Holdings, LLC, as of June 30, 2015 and September 30, 2014 and for the nine months ended June 30, 2015 and 2014, that met at least one of the significance conditions of the SEC’s Regulation S-X. Accordingly, pursuant to Regulation S-X, summarized, comparative financial information, in aggregate, is presented below for the nine months ended June 30, 2015 and 2014 for our significant unconsolidated subsidiaries.

 

     Nine Months Ended
June 30,
 

Income Statement

   2015 (A)      2014  

Net sales

   $ 114,557       $ 114,295   

Gross profit

     13,417         16,238   

Net loss

     (18,769      (5,634

 

(A)   We exited Midwest Metal in December 2014 and as such its financial results are included only through the date of exit.

NOTE 13. SUBSEQUENT EVENTS

Portfolio Activity

Subsequent to June 30, 2015, we invested an aggregate $0.5 million in follow-on investments to existing portfolio companies. In addition, in July 2015, we invested $7.2 million in Mikawaya, Inc. (“Mikawaya”) through a combination of secured second lien debt and equity and $13.0 million in StrataTech Education Group (“StrataTech”) through secured first lien debt. Mikawaya, headquartered in Vernon, California, is a producer of Japanese pastries and specialty frozen desserts. StrataTech, headquartered in Phoenix, AZ, operates post-secondary skilled trade institutions through its subsidiaries.

We also received $8.5 million in aggregate scheduled and unscheduled principal repayments from existing portfolio companies, including $7.2 million from the sale of our investment in Ardent Medical Services, Inc.

Distributions to Stockholders

In July 2015, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:

 

Record Date

  

Payment Date

   Distribution
per Common
Share
     Distribution per
Series 2021
Term Preferred
Share
 

July 24, 2015

   August 4, 2015    $ 0.07       $ 0.140625   

August 20, 2015

   August 31, 2015      0.07         0.140625   

September 21, 2015

   September 30, 2015      0.07         0.140625   
     

 

 

    

 

 

 
   Total for the Quarter:    $ 0.21       $ 0.421875   
     

 

 

    

 

 

 

 

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

All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (1) the recurrence of adverse events in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described herein and in Item 1A. “Risk Factors” herein and in the “Risk Factors” section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 12, 2014, and subsequently amended on December 29, 2014. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise or any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014, filed with the SEC on November 12, 2014, and subsequently amended on December 29, 2014. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for federal income tax purposes we have elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a BDC and RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $5 million to $25 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We intend for our investment portfolio to consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2015, our investment portfolio was made up of approximately 91.7% debt investments and 8.3% equity investments, at cost.

We focus on investing in small and medium-sized middle market private businesses in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the business, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser

 

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extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital, to finance acquisitions, or recapitalize or refinance their existing debt facilities. We typically avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

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

Our shares of common stock and 6.75% Series 2021 Term Preferred Stock (our “Series 2021 Term Preferred Stock”) are traded on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbols “GLAD” and “GLADO,” respectively.

Business

Portfolio Activity

During the nine months ended June 30, 2015, we invested an aggregate of $65.3 million in seven new proprietary and syndicate investments, resulting in a net expansion in our overall portfolio of one portfolio company, due to one portfolio company paying off early that resulted in a realized gain of $1.6 million, the sale of three syndicated investments for combined proceeds of $6.1 million, and the sale of two of our portfolio companies, one of which was on non-accrual at the time of sale, for net combined proceeds of $10.8 million. We will continue to focus on exiting challenged and non-strategic investments in our portfolio in an orderly manner over the next several quarters.

In July 2012, the SEC granted us an exemptive order that expanded our ability, under certain circumstances, to co-invest with Gladstone Investment Corporation (“Gladstone Investment”) and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser or any combination of the foregoing subject to the conditions in the SEC’s order. We believe this ability to co-invest has enhanced and will continue to enhance our ability to further our investment objectives and strategies. Pursuant to this exemptive order, we co-invested with Gladstone Investment in one new proprietary investment during the nine months ended June 30, 2015, as discussed under “— Investment Highlights .”

Capital Raising

Despite the challenges in the economy for the past several years, we have met our capital needs through enhancements to our revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of preferred stock. In May 2014, we issued approximately 2.4 million shares of our Series 2021 Term Preferred Stock (for gross proceeds of $61.0 million), which we used to redeem our previously issued 7.125% Series 2016 Term Preferred Stock (“Series 2016 Term Preferred Stock”) issued in November 2011 and also to repay outstanding borrowings on our Credit Facility. Refer to “ Liquidity and Capital Resources — Equity — Term Preferred Stock ” for further discussion of our term preferred stock. Additionally, in May 2015, we amended and restated our Credit Facility, which included, among other amended terms, decreasing the interest rates on advances, extending the revolving period end date for three years, and expanding the scope of eligible collateral. In June 2015, we increased the total number of committed lenders in our Credit Facility by three and increased the capacity of the Credit Facility from $140.0 million to $170.0 million. Refer to “ Recent Developments — Expansion of Revolving Credit Facility and —Amendment and Extension of Revolving Credit Facility” and “ Liquidity and Capital Resources — Revolving Credit Facility ” for further discussion of our revolving line of credit.

Although we were able to access the capital markets in May 2014 with our term preferred stock offering and in February through April 2015 with our at-the-market program (refer to “ Recent Developments — At-the-Market Program ” for further discussion of this program), we believe uncertain market conditions continue to affect the trading price of our capital stock and thus may challenge our ability to finance new investments through the issuance of equity. The current volatility in the credit market and the uncertainty surrounding the U.S. economy have led to significant stock market fluctuations over the last year, particularly with respect to the stock of financial services companies like ours. During times of increased price volatility, our common stock may be more likely to trade at a price below our net asset value (“NAV”) per share, which is not uncommon for BDCs.

On July 28, 2015, the closing market price of our common stock was $7.74, a 18.4% discount to our June 30, 2015, NAV per share of $9.49. When our stock trades below NAV per common share, as it has at times traded over the last several years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 12, 2015, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per common share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our board of directors (our “Board of Directors”) makes certain determinations prior to any such sale.

 

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The current uncertain and volatile economic conditions may also continue to cause the value of the collateral securing some of our loans to fluctuate, as well as the value of our equity investments, which has impacted and may continue to impact our ability to borrow under our Credit Facility. Additionally, our Credit Facility contains covenants regarding the maintenance of certain minimum loan concentrations and net worth, which are affected by the decrease in the aggregate value of our portfolio. Failure to meet these requirements would result in a default which, if we are unable to obtain a waiver from our lenders, would cause an acceleration of our repayment obligations under our Credit Facility. As of June 30, 2015, we were in compliance with all of our Credit Facility’s covenants.

Regulatory Compliance

Challenges in the current market are intensified for us by certain regulatory limitations under the Code and the 1940 Act that may further constrain our ability to access the capital markets. To qualify to be taxed as a RIC, we must distribute at least 90.0% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses. Because we are required to satisfy the RIC annual stockholder distribution requirement, and because the illiquidity of many of our investments makes it difficult for us to finance new investments through the sale of current investments, our ability to make new investments is highly dependent upon external financing. Our external financing sources may include the issuance of equity securities, debt securities or other leverage, such as borrowings under our Credit Facility. Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act that require us to have an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock, (collectively, our “Senior Securities”).

We expect that, given these regulatory and contractual constraints in combination with current market conditions, the debt and equity capital available to us may not be sufficient in the near term. However, we believe that the amendments to our Credit Facility to decrease the interest rate on advances and extend its revolving period end date until 2019, our expansion of our Credit Facility and our ability to co-invest with Gladstone Investment and certain other affiliated investment funds, has increased our ability to make investments in middle market businesses that we believe will help us achieve attractive long-term returns for our stockholders.

During the quarter ended June 30, 2015, while we did not close any new originations, we have focused on building our pipeline with deals that we believe are generally recession resistant, have steady cash flows, and have strong management teams which can ultimately provide appropriate returns, given the investment risks. As we have demonstrated this quarter and in the past few quarters, we continue to work through some of the older, more challenged investments in our portfolio to enhance overall returns to our stockholders.

Investment Highlights

During the nine months ended June 30, 2015, we invested an aggregate of $65.3 million in seven new portfolio companies and an aggregate of $28.4 million in existing portfolio companies. In addition, during the nine months ended June 30, 2015, we sold our investments in two portfolio companies for combined net proceeds of $10.8 million and we received scheduled and unscheduled principal repayments of approximately $10.1 million in aggregate from existing portfolio companies. Since our initial public offering in August 2001, we have made 391 different loans to, or investments in, 192 companies for a total of approximately $1.4 billion, before giving effect to principal repayments on investments and divestitures.

Investment Activity

During the nine months ended June 30, 2015, we executed the following transactions with certain of our portfolio companies:

Issuances and Originations

During the nine months ended June 30, 2015, we invested an aggregate of $52.8 million in four new proprietary portfolio companies and an aggregate of $12.5 million in three new syndicated portfolio companies. Below are significant issuances and originations during the nine months ended June 30, 2015:

 

    In December 2014, we invested $8.1 million, along with an unfunded line of credit of $0.3 million, in B+T Holdings Inc. (“B+T”), through a combination of secured first lien debt and equity. B+T, headquartered in Tulsa, Oklahoma, is a full-service provider of structural engineering, construction, and technical services to the wireless tower industry for tower upgrades and modifications. This was a co-investment with Gladstone Investment, which invested an additional $19.6 million under the same terms as us.

 

    In December 2014, we invested $13.5 million, along with an unfunded line of credit of $1.5 million, in LWO Acquisitions Company LLC, (“LWO Acquisitions”) through a combination of secured first lien debt and equity. LWO Acquisitions, headquartered in Dallas, Texas, is a premier electronic manufacturing services company focused on the design and production of specialized printed circuit board assemblies and related services.

 

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    In December 2014, we invested $10.0 million, along with unfunded line of credit of $1.0 million, in Vision Government Solutions, Inc. (“Vision”) through secured first lien debt. Vision, headquartered in Northboro, Massachusetts, is a leading provider of land parcel management software technology and appraisal services to local government organizations, enabling efficient assessment, billing, collections, mapping, and permitting.

 

    In February 2015, we invested $21.2 million, along with an unfunded line of credit of $4.0 million, in United Flexible, Inc. (formerly known as Precision Metal Hose, Inc.) (“United Flexible”) through a combination of secured first lien debt and equity. United Flexible, headquartered in Romeoville, IL, is a global leader in the design, development, manufacture and support of performance critical flexible engineered solutions for the transfer of fluids and gasses in extreme environments.

Repayments and Sales:

During the nine months ended June 30, 2015, we received principal repayments totaling $10.1 million in the aggregate, consisting of $9.3 million of aggregated unscheduled principal and revolver repayments, as well as $0.8 million in aggregated contractual principal amortization. Below are the significant repayments and exits during the nine months ended June 30, 2015.

 

    In October 2014, North American Aircraft Services, LLC (“NAAS”) paid off early resulting in a $1.6 million realized gain and success fees of $0.6 million recorded in the three months ended December 31, 2014. The resulting internal rate of return at payoff was 18.0%.

 

    In December 2014, we sold our investment in Midwest Metal Distribution, Inc. (“Midwest Metal”) for net proceeds of $6.1 million, which resulted in a realized loss of $14.5 million recorded in the nine months ended June 30, 2015. Midwest Metal had been on non-accrual status at the time of the sale.

 

    In June 2015, we exited our investment in Sunburst Media – Louisiana, LLC (“Sunburst”) for net proceeds of $4.7 million, which resulted in a realized loss of $1.3 million.

Refer to Note 13— Subsequent Events in the accompanying Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q for portfolio activity occurring subsequent to June 30, 2015. Below are the significant originations and exits which occurred subsequent to June 30, 2015:

 

    In July 2015, we invested $7.2 million in Mikawaya, Inc. (“Mikawaya”) through a combination of secured second lien debt and equity. Mikawaya, headquartered in Vernon, California, is a producer of Japanese pastries and specialty frozen desserts.

 

    In July 2015, we invested $13.0 million in StrataTech Education Group (“StrataTech”) through a secured first lien debt. StrataTech, headquartered in Phoenix, AZ, operates post-secondary skilled trade institutions through its subsidiaries.

 

    In July 2015, we received $7.2 million from the sale of our syndicated investment in Ardent Medical Services, Inc.

Recent Developments

Expansion of Revolving Credit Facility

On June 19, 2015, we through Gladstone Business Loan, LLC (“Business Loan”), a wholly owned subsidiary of ours, we entered into certain joinder and assignment agreements with three new lenders to increase borrowing capacity on our Credit Facility by $30.0 million to $170.0 million. Refer to “ Liquidity and Capital Resources — Revolving Credit Facility ” for further discussion of our revolving line of credit.

Amendment and Extension of Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Agreement (our “Credit Facility”). The amendment included increasing the commitment amount from $137.0 million to $140.0 million, extending the revolving period end date by three years to January 19, 2019, decreasing the marginal interest rate added to 30-day London Interbank Offered Rate (“LIBOR”) from 3.75% to 3.25% per annum, setting the unused commitment fee at 0.50% on all undrawn amounts and expanding the scope of eligible collateral, among other amended terms and conditions. Our Credit Facility was arranged by KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be due and payable on or before May 1, 2020. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through commitments of new or existing lenders. Refer to “ Liquidity and Capital Resources — Revolving Credit Facility ” for further discussion of our Credit Facility.

 

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At-the-Market Program

On February 27, 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements” or our “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. During the nine months ended June 30, 2015, we sold an aggregate of 131,462 shares of our common stock for gross proceeds of $1.2 million. No other shares of common stock have been sold under these Sales Agreements subsequent to June 30, 2015.

Executive Officers

On January 9, 2015, David Watson resigned as the Company’s treasurer. On January 13, 2015, our Board of Directors accepted Mr. Watson’s resignation and appointed Melissa Morrison, the Company’s then-current assistant treasurer, as the Company’s treasurer.

Registration Statement

On December 1, 2014, we filed Post-effective Amendment No. 4 to our universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-185191) and subsequently filed Post-effective Amendment No. 5 on January 29, 2015, which the SEC declared effective January 30, 2015. Our Registration Statement registers an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of June 30, 2015, we had the ability to issue up to $237.8 million in securities under our Registration Statement through one or more transactions.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2015, to the Three Months Ended June 30, 2014

 

                                                               
     Three Months Ended June 30,  
     2015     2014     $ Change     % Change  

INVESTMENT INCOME

        

Interest income

   $ 9,107      $ 8,184      $ 923        11.3

Other income

     828        1,996        (1,168     (58.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,935        10,180        (245     (2.4
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,859        1,461        398        27.2   

Loan servicing fee

     1,015        917        98        10.7   

Incentive fee

     1,021        1,266        (245     (19.4

Administration fee

     235        219        16        7.3   

Interest expense on borrowings

     1,033        710        323        45.5   

Dividend expense on mandatorily redeemable preferred stock

     1,029        937        92        9.8   

Amortization of deferred financing fees

     253        314        (61     (19.4

Other expenses

     537        277        260        93.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before credits from Adviser

     6,982        6,101        881        14.4   

Credits to base management fee – loan servicing fee

     (1,015     (917     (98     (10.7

Credits to fees from Adviser – other

     (868     (67     (801     NM