Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 02/02/2015 16:31:16)
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 DECEMBER 31, 2014

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 811-000000

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

  22102
(Address of principal executive office)   (Zip Code)
(703) 287-5800
(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 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 January 30, 2015 was 21,000,160.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.   

FINANCIAL INFORMATION

  
Item 1.   

Financial Statements (Unaudited)

  
  

Condensed Consolidated Statements of Assets and Liabilities as of December 31 and September 30, 2014

     3   
  

Condensed Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013

     4   
  

Condensed Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2014 and 2013

     5   
  

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and 2013

     6   
  

Condensed Consolidated Schedules of Investments as of December 31 and September 30, 2014

     7   
  

Notes to Condensed Consolidated Financial Statements

     15   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   
  

Overview

     36   
  

Results of Operations

     41   
  

Liquidity and Capital Resources

     45   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     54   
Item 4.   

Controls and Procedures

     55   
PART II.   

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     55   
Item 1A.   

Risk Factors

     55   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     55   
Item 3.   

Defaults Upon Senior Securities

     56   
Item 4.   

Mine Safety Disclosures

     56   
Item 5.   

Other Information

     56   
Item 6.   

Exhibits

     56   

SIGNATURES

     57   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     December 31,
2014
    September 30,
2014
 

ASSETS

    

Investments at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $283,539 and $225,845, respectively)

   $ 249,107      $ 198,926   

Affiliate investments (Cost of $60,275 and $61,281, respectively)

     55,747        57,006   

Control investments (Cost of $42,046 and $62,159, respectively)

     21,770        25,354   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $385,860 and $349,285, respectively)

  326,624      281,286   
  

 

 

   

 

 

 

Cash and cash equivalents

  6,380      6,314   

Restricted cash and cash equivalents

  974      675   

Interest receivable

  3,583      2,767   

Due from custodian

  1,999      6,022   

Deferred financing fees

  3,039      3,340   

Other assets

  1,382      1,025   
  

 

 

   

 

 

 

TOTAL ASSETS

$ 343,981    $ 301,429   
  

 

 

   

 

 

 

LIABILITIES

Borrowings at fair value (Cost of $83,500 and $36,700, respectively)

$ 84,078    $ 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

  590      462   

Interest payable

  207      146   

Fees due to Adviser (A)

  1,470      875   

Fee due to Administrator (A)

  281      218   

Other liabilities

  774      1,055   
  

 

 

   

 

 

 

TOTAL LIABILITIES

$ 148,400    $ 101,769   
  

 

 

   

 

 

 

Commitments and contingencies (B)

NET ASSETS

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

$ 21    $ 21   

Capital in excess of par value

  292,859      307,348   

Note receivable from employee (A)

  (100   (100

Cumulative net unrealized depreciation of investments

  (59,236   (67,999

Cumulative net unrealized appreciation of other

  (639   (1,374

Overdistributed net investment income

  (3,873   (1,928

Accumulated net realized losses

  (33,451   (36,308
  

 

 

   

 

 

 

TOTAL NET ASSETS

$ 195,581    $ 199,660   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE AT END OF PERIOD

$ 9.31    $ 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.

 

3


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GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2014     2013  

INVESTMENT INCOME

    

Interest income

    

Non-Control/Non-Affiliate investments

   $ 6,343      $ 6,399   

Affiliate investments

     1,121        219   

Control investments

     182        1,569   

Other

     2        4   
  

 

 

   

 

 

 

Total interest income

  7,648      8,191   

Other income

Non-Control/Non-Affiliate investments

  1,078      1   

Affiliate investments

  —        —     

Control investments

  —        200   
  

 

 

   

 

 

 

Total other income

  1,078      201   
  

 

 

   

 

 

 

Total investment income

  8,726      8,392   
  

 

 

   

 

 

 

EXPENSES

Base management fee (A)

  1,597      1,456   

Loan servicing fee (A)

  832      884   

Incentive fee (A)

  922      974   

Administration fee (A)

  281      203   

Interest expense on borrowings

  678      615   

Dividend expense on mandatorily redeemable preferred stock

  1,029      686   

Amortization of deferred financing fees

  302      315   

Professional fees

  374      290   

Other general and administrative expenses

  264      321   
  

 

 

   

 

 

 

Expenses before credits from Adviser

  6,279      5,744   

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

  (832   (884

Credits to fees from Adviser - other (A)

  (412   (878
  

 

 

   

 

 

 

Total expenses, net of credits

  5,035      3,982   
  

 

 

   

 

 

 

NET INVESTMENT INCOME

  3,691      4,410   
  

 

 

   

 

 

 

NET REALIZED AND UNREALIZED (LOSS) GAIN

Net realized (loss) gain:

Non-Control/Non-Affiliate investments

  1,578      —     

Control investments

  (14,459   (10,732

Escrows

  23      (42
  

 

 

   

 

 

 

Total net realized loss

  (12,858   (10,774

Net unrealized appreciation (depreciation):

Non-Control/Non-Affiliate investments

  (7,513   2,094   

Affiliate investments

  (252   (155

Control investments

  16,528      14,938   

Other

  735      (7
  

 

 

   

 

 

 

Total net unrealized appreciation

  9,498      16,870   
  

 

 

   

 

 

 

Net realized and unrealized (loss) gain

  (3,360   6,096   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

$ 331    $ 10,506   
  

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

Net investment income

$ 0.18    $ 0.21   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

$ 0.02    $ 0.50   
  

 

 

   

 

 

 

Distributions declared and paid

$ 0.21    $ 0.21   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

  21,000,160      21,000,160   

 

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

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

 

4


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2014     2013  

OPERATIONS

    

Net investment income

   $ 3,691      $ 4,410   

Net realized loss on investments

     (12,858     (10,774

Net unrealized appreciation of investments

     8,763        16,877   

Net unrealized depreciation (appreciation) of other

     735        (7
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     331        10,506   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders

     (4,410     (4,410
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS

     (4,079     6,096   

NET ASSETS, BEGINNING OF PERIOD

     199,660        205,992   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 195,581      $ 212,088   
  

 

 

   

 

 

 

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

 

5


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Three Months Ended December 31,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase in net assets resulting from operations

   $ 331      $ 10,506   

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

    

Purchase of investments

     (61,465     (44,881

Principal repayments on investments

     4,497        24,667   

Net proceeds from sale of investments

     7,713        —     

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

     (70     (53

Net change in premiums, discounts and amortization

     371        84   

Interest payments received on non-accrual loans

     (502     —     

Net realized loss on investments

     12,881        10,732   

Net unrealized appreciation of investments

     (8,763     (16,877

Net unrealized (depreciation) appreciation other

     (735     7   

(Increase) decrease in restricted cash and cash equivalents

     (299     307   

Amortization of deferred financing fees

     302        315   

(Increase) decrease in interest receivable

     (816     3   

Decrease in due from custodian

     4,023        14,344   

(Increase) decrease in other assets

     (357     177   

Increase (decrease) in accounts payable and accrued expenses

     128        (2

Increase (decrease) in interest payable

     61        (22

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

     595        (851

Increase in fee due to Administrator (A)

     63        77   

(Decrease) increase in other liabilities

     (281     267   
  

 

 

   

 

 

 

Net cash used in operating activities

  (42,323   (1,200
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings

  59,500      42,400   

Repayments on borrowings

  (12,700   (41,600

Deferred financing fees

  (1   —     

Distributions paid to common stockholders

  (4,410   (4,410
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  42,389      (3,610
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  66      (4,810

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  6,314      13,900   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 6,380    $ 9,090   
  

 

 

   

 

 

 

 

  (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

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2014

(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   Senior Subordinated Term Debt (13.3%, Due 3/2018) (D)   $ 13,000      $ 12,920      $ 12,805   
    Member Profit Participation (18.0% ownership) (F) (H)       1,000        —     
    Profit Participation Warrants (7.0% ownership) (F) (H)       244        —     
       

 

 

   

 

 

 
          14,164        12,805   

Allison Publications, LLC

  Printing and
publishing
  Line of Credit, $0 available (8.3%, Due 9/2016) (D)     600        600        596   
    Senior Term Debt (8.3%, Due 9/2018) (D)     2,875        2,875        2,853   
    Senior Term Debt (13.0%, Due 9/2018) (C) (D)     5,400        5,400        5,366   
       

 

 

   

 

 

 
          8,875        8,815   

Alloy Die Casting Co.

  Diversified/
conglomerate
Manufacturing
  Senior Term Debt (13.5%, Due 10/2018) (D)     5,235        5,235        5,183   
    Preferred Stock (1,742 units) (F) (H)       1,742        1,585   
    Common Stock (270 units) (F) (H)       18        —     
       

 

 

   

 

 

 
          6,995        6,768   

Behrens Manufacturing, LLC

  Diversified/
conglomerate
manufacturing
  Senior Term Debt (13.0%, Due 12/2018) (D)     4,275        4,275        4,232   
    Preferred Stock (1,252 shares) (F) (H) (K)       1,253        1,203   
       

 

 

   

 

 

 
          5,528        5,435   

B+T Group Acquisition Inc.

  Telecommunications   Line of Credit, $300 available (10.0%, Due 6/2015) (J)     300        300        300   
    Senior Term Debt (13.0%, Due 12/2019) (J)     6,000        6,000        6,000   
    Convertible Preferred Stock (5,503 units) (H) (J) (K)       1,799        1,799   
       

 

 

   

 

 

 
          8,099        8,099   

Chinese Yellow Pages Company

  Printing and
publishing
  Line of Credit, $0 available (7.3%, Due 2/2015) (D)     108        108        81   

Circuitronics, Inc.

  Diversified/
conglomerate
manufacturing
  Line of Credit, $1,500 available (6.5%, Due 12/2017) (J)     1,500        1,500        1,500   
    Senior Term Debt (9.5%, Due 12/2019) (J)     11,000        11,000        11,000   
    Common Stock (100 shares) (H) (J)       1,000        1,000   
       

 

 

   

 

 

 
          13,500        13,500   

Francis Drilling Fluids, Ltd.

  Oil and gas   Senior Subordinated Term Debt (11.4%, Due 4/2020) (D)     15,000        15,000        14,025   
    Senior Subordinated Term Debt (10.3%, Due 4/2020) (D)     7,000        7,000        6,545   
    Preferred Equity Units (999 units) (F) (H)       648        747   
    Common Equity Units (999 units) (F) H)       1        206   
       

 

 

   

 

 

 
          22,649        21,523   

Funko, LLC

  Personal and non-
durable consumer
products
  Senior Subordinated Term Debt (9.5%, Due 5/2019) (J)(G)     7,500        7,500        7,500   
    Senior Subordinated Term Debt (9.5%, Due 5/2019) (J)(G)       2,000        2,000   
    Preferred Equity Units (1,305 units) (F) (H)       1,305        9,511   
       

 

 

   

 

 

 
          10,805        19,011   

GFRC Holdings, LLC

  Buildings and real
estate
  Line of Credit, $130 available (10.5%, Due 12/2014) (D)     270        270        134   
    Senior Term Debt (10.5%, Due 6/2016) (D)     4,924        4,924        2,435   
    Senior Subordinated Term Debt (13.0%, Due 6/2016) (D)     6,598        6,598        1,064   
       

 

 

   

 

 

 
          11,792        3,633   

Heartland Communications Group

  Broadcasting and
entertainment
  Line of Credit, $0 available (5.0%, Due 9/2014) (D) (G) (I)     100        95        65   
    Line of Credit, $0 available (10.0%, Due 9/2014) (D) (G) (I)     100        91        65   
    Senior Term Debt (5.0%, Due 9/2014) (D) (G) (I)     4,342        4,141        824   
    Common Stock Warrants (8.8% ownership) (F) (H)       66        —     
       

 

 

   

 

 

 
          4,393        954   

J. America, Inc.

  Personal and non-
durable consumer
products
  Senior Subordinated Term Debt (10.4%, Due 12/2019) (D)(G)     7,500        7,500        7,125   
    Senior Subordinated Term Debt (11.5%, Due 12/2019) (D)(G)     9,500        9,500        8,978   
       

 

 

   

 

 

 
          17,000        16,103   

Leeds Novamark Capital I, L.P.

  Private equity fund
– healthcare,
education and
childcare
  Limited Partnership Interest (3.5% ownership, $2,778 uncalled capital commitment) (H) (M)       217        49   

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(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

   Senior Term Debt (11.0%, Due 11/2014) (D)   $ 6,699      $ 6,699      $ 3,724   

Meridian Rack & Pinion, Inc.

  

Automobile

   Senior Term Debt (13.5%, Due 12/2018) (D)     4,140        4,140        4,114   
      Convertible Preferred Stock (1,449 shares) (F) (H)       1,449        1,279   
         

 

 

   

 

 

 
            5,589        5,393   

Precision Acquisition Group Holdings, Inc.

  

Machinery

   Equipment Note (9.0%, Due 3/2015) (D)     1,000        1,000        890   
      Senior Term Debt (9.0%, Due 3/2015) (D)     4,125        4,125        1,096   
      Senior Term Debt (9.0%, Due 3/2015) (C) (D)     4,053        4,053        457   
         

 

 

   

 

 

 
            9,178        2,443   

Saunders & Associates

  

Electronics

   Line of Credit, $0 available (11.3%, Due 5/2013) (D)     917        917        275   
      Senior Term Debt (11.3%, Due 5/2013) (D)     8,947        8,947        2,684   
         

 

 

   

 

 

 
            9,864        2,959   

Southern Petroleum Laboratories, Inc.

  

Oil and gas

   Senior Subordinated Term Debt (11.5%, Due 2/2020) (D)     8,000        8,000        7,940   
      Common Stock (100 shares) (F) (H)       750        750   
         

 

 

   

 

 

 
            8,750        8,690   

Sunburst Media - Louisiana, LLC

  

Broadcasting and entertainment

   Senior Term Debt (8.5%, Due 2/2016) (F) (G)     6,026        6,026        1,600   

Vision Government Solutions, Inc.

  

Diversified/conglomerate service

   Line of Credit, $1,000 available (7.5%, Due 12/2017) (J)     1,000        1,000        1,000   
      Senior Term Debt (9.75%, Due 12/2019) (J)     9,000        9,000        9,000   
         

 

 

   

 

 

 
            10,000        10,000   

WadeCo Specialties, Inc.

  

Oil and gas

   Line of Credit, $3,526 available (8.0%, Due 3/2016) (D)     1,474        1,474        1,416   
      Senior Term Debt (8.0%, Due 3/2019) (D)     13,000        13,000        12,480   
      Senior Subordinated Term Debt (12.0%, Due 3/2019) (D)     7,000        7,000        6,685   
      Convertible Preferred Stock (1,000 shares) (F) (H)       313        516   
         

 

 

   

 

 

 
            21,787        21,097   

Westland Technologies, Inc.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (7.5%, Due 4/2016) (D)     50        50        50   
      Senior Term Debt (12.5%, Due 4/2016) (D)     4,000        4,000        3,728   
      Common Stock (58,333 shares) (F) (H)       408        58   
         

 

 

   

 

 

 
            4,458        3,836   
         

 

 

   

 

 

 

Subtotal – Proprietary Investments

    $ 206,476      $ 176,518   
         

 

 

   

 

 

 

Syndicated Investments:

           

Ameriqual Group, LLC

  

Beverage, food and tobacco

   Senior Term Debt (9.0% and 1.5% PIK, Due 3/2016) (E)   $ 7,344      $ 7,300      $ 6,243   

Ardent Medical Services, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (11.0%, Due 1/2019) (E)     7,143        7,135        7,107   

Autoparts Holdings Limited

  

Automobile

   Senior Term Debt (10.5%, Due 1/2018) (E)     700        697        684   

Blue Coat Systems, Inc.

  

Electronics

   Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)     3,000        2,975        2,925   

Envision Acquisition Company, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (9.8%, Due 11/2021) (E)     2,500        2,455        2,463   

First American Payment Systems, L.P.

  

Finance

   Senior Subordinated Term Debt (10.8%, Due 4/2019) (E)     4,195        4,168        4,158   

GTCR Valor Companies, Inc.

  

Electronics

   Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)     3,000        2,982        2,880   

New Trident Holdcorp, Inc.

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (10.3%, Due 7/2020) (E)     4,000        3,987        3,960   

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(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

   Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)   $ 5,000      $ 4,928      $ 4,250   

PSC Industrial Holdings Corp

  

Oil and gas

   Senior Subordinated Term Debt (10.5%, Due 12/2021) (E)     3,500        3,430        3,430   

RP Crown Parent, LLC

  

Electronics

   Senior Subordinated Term Debt (11.3%, Due 12/2019) (E)     2,000        1,968        1,660   

Sensus USA, Inc.

  

Electronics

   Senior Term Debt (8.5%, Due 5/2018) (E)     500        497        475   

SourceHOV LLC

  

Finance

   Senior Subordinated Term Debt (11.5%, Due 4/2020) (E)     5,000        4,803        4,762   

Targus Group International, Inc.

  

Textiles and leather

   Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016) (E)     9,031        8,964        7,496   

The Active Network

  

Electronics

   Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)     1,000        995        965   

Vertellus Specialties, Inc.

  

Chemicals, plastics and rubber

   Senior Term Debt (10.5%, Due 10/2019) (E)     3,990        3,853        3,751   

Vision Solutions, Inc.

  

Electronics

   Senior Term Debt (9.5%, Due 7/2017) (E)     11,000        10,957        10,559   

Vitera Healthcare Solutions, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (9.3%, Due 11/2021) (E)     4,500        4,474        4,342   

W3, Co.

  

Oil and gas

   Senior Subordinated Term Debt (9.3%, Due 9/2020) (E)     499        495        479   
         

 

 

   

 

 

 

Subtotal - Syndicated Investments

          $ 77,063      $ 72,589   
         

 

 

   

 

 

 
         

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 76.3% of total investments at fair value)

  

  $ 283,539      $ 249,107   
         

 

 

   

 

 

 

AFFILATE INVESTMENTS (O) :

           

Ashland Acquisition, LLC

  

Printing and publishing

   Line of Credit, $1,500 available (12.0%, Due 7/2016) (D) (G)   $ —        $ —        $ —     
      Senior Term Debt (12.0%, Due 7/2018) (D) (G)     7,000        7,000        7,018   
      Preferred Equity Units (4,400 units) (F) (H)       440        205   
      Common Equity Units (4,400 units) (F) (H)       —          —     
         

 

 

   

 

 

 
            7,440        7,223   

Edge Adhesives Holdings, Inc.

  

Diversified/conglomerate manufacturing

   Line of Credit, $567 available (12.5%, Due 8/2015) (D)     433        433        431   
      Senior Term Debt (12.5%, Due 2/2019) (D)     6,200        6,200        6,184   
      Senior Subordinated Term Debt (13.8%, Due 2/2019) (D)     1,600        1,600        1,598   
      Convertible Preferred Stock (2,316 shares) (F) (H)       2,316        2,613   
         

 

 

   

 

 

 
            10,549        10,826   

FedCap Partners, LLC

  

Private equity fund – aerospace and defense

   Class A Membership Units (80 units) (H) (L)       1,634        1,996   

Lignetics, Inc.

  

Diversified natural resources, precious metals and minerals

   Senior Subordinated Term Debt (12.0%, Due 3/2020) (D)     6,000        6,000        6,000   
      Common Stock (100,000 shares) (F) (H)       1,000        1,419   
         

 

 

   

 

 

 
            7,000        7,419   

RBC Acquisition Corp.

  

Healthcare, education and childcare

   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   
      Senior Term Debt (12.0%, Due 12/2015) (C) (F)     11,392        11,392        11,392   
      Senior Subordinated Term Debt (12.5%, Due 12/2015) (F)(G)     6,000        6,000        6,000   
      Preferred Stock (4,999,000 shares) (F) (H) (K)       4,999        —     
      Common Stock (2,000,000 shares) (F) (H)       370        —     
         

 

 

   

 

 

 
            33,652        28,283   
         

 

 

   

 

 

 

Total Affiliate Investments (represented 17.0% of total investments at fair value)

  

  $ 60,275      $ 55,747   
         

 

 

   

 

 

 

CONTROL INVESTMENTS (P) :

           

Defiance Integrated Technologies, Inc.

  

Automobile

   Senior Subordinated Term Debt (11.0%, Due 4/2016) (C) (F)   $ 6,465      $ 6,465      $ 6,465   
      Common Stock (15,500 shares) (F) (H)       1        7,855   
         

 

 

   

 

 

 
            6,466        14,320   

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2014

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

  Principal     Cost     Fair Value  

CONTROL INVESTMENTS (P) (Continued):

     

Lindmark Acquisition, LLC

  

Broadcasting and entertainment

   Senior Subordinated Term Debt, $3,120 available (25.0%, Due Upon Demand) (F) (G)   $ —        $ —        $ —     
      Success Fee on Senior Subordinated Term Debt (F)       —          84   
      Common Stock (100 shares) (F) (H)       317        —     
         

 

 

   

 

 

 
  317      84   

Sunshine Media Holdings

Printing and publishing

Line of Credit, $400 available (4.8%, Due 5/2016) (D) (I)   1,600      1,600      400   
Senior Term Debt (4.8%, Due 5/2016) (D) (I)   16,948      16,948      4,237   
Senior Term Debt (5.5%, Due 5/2016) (C) (D) (I)   10,700      10,700      2,729   
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)   —        —     
         

 

 

   

 

 

 
  35,263      7,366   
         

 

 

   

 

 

 

Total Control Investments (represented 6.7% of total investments at fair value)

  

$ 42,046    $ 21,770   
         

 

 

   

 

 

 

    

         

 

 

   

 

 

 

TOTAL INVESTMENTS

$ 385,860    $ 326,624   
         

 

 

   

 

 

 

 

  (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 $268.6 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 December 31, 2014.
  (B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at December 31, 2014, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.
  (C)   Last out tranche (“LOT”) of debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after all other debt holders.
  (D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
  (E)   Fair value was based on the indicative bid price on or near December 31, 2014, offered by the respective syndication agent’s trading desk.
  (F)   Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
  (G) 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 December 31, 2014 best represents fair value as of December 31, 2014.
  (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.

 

10


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

   Senior Subordinated Term 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

   Line of Credit, $0 available (8.3%, Due 9/2016) (D)     600        600        598   
      Senior Term Debt (8.3%, Due 9/2018) (D)     2,875        2,875        2,864   
      Senior Term Debt (13.0%, Due 9/2018) (C) (D)     5,400        5,400        5,380   
         

 

 

   

 

 

 
            8,875        8,842   

Alloy Die Casting Co.

  

Diversified/conglomerate manufacturing

   Senior Term Debt (13.5%, Due 10/2018) (D)     5,235        5,235        5,228   
      Preferred Stock (1,742 units) (F) (H)       1,742        1,122   
      Common Stock (270 units) (F) (H)       18        —     
         

 

 

   

 

 

 
            6,995        6,350   

Behrens Manufacturing, LLC

  

Diversified/conglomerate manufacturing

   Senior Term 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

   Line of Credit, $0 available (7.3%, Due 2/2015) (D)     108        108        95   

Francis Drilling Fluids, Ltd.

  

Oil and gas

   Senior Subordinated Term Debt (12.4%, Due 11/2017) (D)     15,000        15,000        14,550   
      Senior Subordinated Term Debt (11.3%, Due 11/2017) (J)     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

   Senior Subordinated Term 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

   Line of Credit, $130 available (10.5%, Due 12/2014) (D)     270        270        149   
      Senior Term Debt (10.5%, Due 6/2016) (D)     4,924        4,924        2,708   
      Senior Subordinated Term Debt (13.0%, Due 6/2016) (D)     6,598        6,598        3,761   
         

 

 

   

 

 

 
            11,792        6,618   

Heartland Communications Group

  

Broadcasting and entertainment

   Line of Credit, $0 available (5.0%, Due 9/2014) (D) (G) (I)     100        97        65   
      Line of Credit, $0 available (10.0%, Due 9/2014) (D) (G) (I)     100        93        65   
      Senior Term 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 consumer products

   Senior Subordinated Term Debt (10.4%, Due 12/2019) (D)(G)     7,500        7,500        7,350   
      Senior Subordinated Term 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

   Senior Term Debt (12.0%, Due 1/2014) (D)     6,699        6,699        3,757   

 

11


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

   Senior Term Debt (13.5%, Due 12/2018) (D)   $ 4,140      $ 4,140      $ 4,135   
      Convertible Preferred Stock (1,449 shares) (F) (H)       1,449        1,549   
         

 

 

   

 

 

 
  5,589      5,684   

North American Aircraft Services, LLC

Aerospace and defense

Senior Subordinated Term Debt (12.5%, Due 8/2016) (F) (L)   2,115      2,115      2,115   
Success Fee on Senior Subordinated Term 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   
Senior Term Debt (9.0%, Due 3/2015) (D)   4,125      4,125      485   
Senior Term Debt (9.0%, Due 3/2015) (C) (D)   4,053      4,053      457   
         

 

 

   

 

 

 
  9,178      1,823   

Saunders & Associates

Electronics

Line of Credit, $0 available (11.3%, Due 5/2013) (D)   917      917      413   
Senior Term Debt (11.3%, Due 5/2013) (D)   8,947      8,947      4,026   
         

 

 

   

 

 

 
  9,864      4,439   

Southern Petroleum Laboratories, Inc.

Oil and gas

Senior Subordinated Term 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

Senior Term Debt (8.5%, Due 2/2016) (F) (G)   6,026      6,026      1,600   

WadeCo Specialties, Inc.

Oil and gas

Line of Credit, $526 available (8.0%, Due 3/2015) (D)   1,474      1,474      1,452   
Senior Term Debt (8.0%, Due 3/2019) (D)   4,500      4,500      4,433   
Senior Subordinated Term Debt (12.0%, Due 3/2019) (D)   4,500      4,500      4,421   
Convertible Preferred Stock (1,000 shares) (F) (H)   250      454   
         

 

 

   

 

 

 
  10,724      10,760   

Westland Technologies, Inc.

Diversified/conglomerate manufacturing

Senior Term Debt (7.5%, Due 4/2016) (D)   50      50      46   
Senior Term 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 – Proprietary Investments

$ 164,753    $ 139,439   
         

 

 

   

 

 

 

Syndicated Investments:

Ameriqual Group, LLC

Beverage, food and tobacco

Senior Term 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

Senior Subordinated Term Debt (11.0%, Due 1/2019) (E)   7,143      7,135      7,224   

Autoparts Holdings Limited

Automobile

Senior Term Debt (10.5%, Due 1/2018) (E)   833      830      800   

Blue Coat Systems, Inc.

Electronics

Senior Subordinated Term Debt (9.5%, Due 6/2020) (E)   3,000      2,974      3,038   

Envision Acquisition Company, LLC

Healthcare, education and childcare

Senior Subordinated Term Debt (9.8%, Due 11/2021) (E)   2,500      2,454      2,500   

First American Payment Systems, L.P.

Finance

Senior Subordinated Term Debt (10.8%, Due 4/2019) (E)   4,195      4,167      4,205   

GTCR Valor Companies, Inc.

Electronics

Senior Subordinated Term Debt (9.5%, Due 11/2021) (E)   3,000      2,982      2,970   

New Trident Holdcorp, Inc.

Healthcare, education and childcare

Senior Subordinated Term Debt (10.3%, Due 7/2020) (E)   4,000      3,987      4,000   

PLATO Learning, Inc.

Healthcare, education and childcare

Senior Subordinated Term Debt (11.3%, Due 5/2019) (E)   5,000      4,925      5,000   

 

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):

  

     

RP Crown Parent, LLC

  

Electronics

   Senior Subordinated Term Debt (11.3%, Due 12/2019) (E)    $ 2,000       $ 1,967       $ 1,898   

Sensus USA, Inc.

  

Electronics

   Senior Term Debt (8.5%, Due 5/2018) (E)      500         497         495   

Targus Group International, Inc.

  

Textiles and leather

   Senior Term Debt (11.0% and 1.0% PIK, Due 5/2016) (D)      9,034         8,956         8,171   

The Active Network

  

Electronics

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

Vision Solutions, Inc.

  

Electronics

   Senior Term Debt (9.5%, Due 7/2017) (E)      11,000         10,953         10,972   

Vitera Healthcare Solutions, LLC

  

Healthcare, education and childcare

   Senior Subordinated Term Debt (9.3%, Due 11/2021) (E)      500         493         495   

W3, Co.

  

Oil and Gas

   Senior Subordinated Term 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) :

              

Ashland Acquisition, LLC

  

Printing and publishing

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

   Line of Credit, $230 available (12.5%, Due 8/2015) (D)      770         770         768   
      Senior Term Debt (12.5%, Due 2/2019) (D)      6,200         6,200         6,208   
      Senior Subordinated Term Debt (13.8%, Due 2/2019) (D)      1,600         1,600         1,604   
      Senior Subordinated Term Debt (13.8%, Due 11/2014) (J)      585         585         585   
      Convertible 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

   Senior Subordinated Term 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

   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   
      Senior Term Debt (12.0%, Due 12/2014) (C) (F)      11,392         11,392         11,392   
      Senior Subordinated Term Debt (12.5%, Due 12/2014) (F)(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 Investments (represented 20.3% of total investments at fair value)

  

   $ 61,281       $ 57,006   
           

 

 

    

 

 

 

CONTROL INVESTMENTS (R) :

              

Defiance Integrated Technologies, Inc.

  

Automobile

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

   Senior Subordinated Term Debt, $3,120 available (25.0%, Due Upon Demand) (F) (G)      —           —           —     
      Success Fee on Senior Subordinated Term 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    Senior Subordinated Term 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 Line of Credit, $400 available (4.8%, Due 5/2016) (D) (I)   1,600      1,600      424   
Senior Term Debt (4.8%, Due 5/2016) (D) (I)   16,948      16,948      4,491   
Senior Term 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 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. Senior debt securities generally take the form of first priority liens on the assets of the underlying businesses.
  (C)   LOT of debt, meaning if the portfolio company is liquidated, the holder of the LOT is paid after all other debt holders.
  (D)   Fair value was based on an internal yield analysis or on estimates of value submitted by SPSE.
  (E)   Fair value was based on the indicative bid price on or near September 30, 2014, offered by the respective syndication agent’s trading desk.
  (F)   Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
  (G) 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)

DECEMBER 31, 2014

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the General Corporation Law of the State of Maryland on May 30, 2001, and completed an initial public offering on August 23, 2001. The terms “the Company,” “we,” “our,” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally-managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Our investment objectives are to (1) achieve and grow current income by investing in debt securities of established small and medium-sized businesses in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation 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 December 31 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 months ended December 31, 2014, are not necessarily indicative of results that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014, as filed with the SEC on November 12, 2014 and amended on December 29, 2014.

Our accompanying fiscal year-end Condensed Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

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Reclassifications

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

Revisions

Certain amounts in the prior year’s financial statements have been revised to correct the net presentation of certain fees in our results of operations. The Adviser services, administers and collects on the loans held by Business Loan, in return for which the Adviser receives a 1.5% annual fee from Business Loan. All such loan servicing fees are voluntarily and irrevocably credited back to us by the Advisor. Previously, we presented the loan servicing fee on a net basis, which is zero, because it is 100.0% credited back to us. We have revised our fee presentation related to these loan servicing fees to reflect the gross fee and related gross unconditional, non-contractual and irrevocable credit amounts for the three month period ended December 31, 2013. Management evaluated this error in presentation and concluded it was not material to the previously issued financial statements for the three months ended December 31, 2013. The impact of the revision is shown in the table below:

 

     Three Months Ended December 31, 2013  
     As Previously
Reported
     As Revised  

Expenses

     

Aggregate expenses

   $ 4,860       $ 4,860   

Loan servicing fee

     —           884   
  

 

 

    

 

 

 

Expenses before credits from Adviser

  4,860      5,744   

Credit to base management fee – loan servicing fee

  —        (884

Credits to fees from Adviser - other

  (878   (878
  

 

 

    

 

 

 

Total expenses, net of credits

$ 3,982    $ 3,982   
  

 

 

    

 

 

 

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 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 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. Currently, the sole third-party service provider, 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.

 

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Valuation Techniques

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

 

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

TEV is primarily calculated using EBITDA or revenue multiples; however, TEV may also be calculated using a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the 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.

 

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Refer to Note 3— Investments for additional information regarding fair value measurements and our application of ASC 820.

Interest Income Recognition

Interest income, adjusted for amortization of premiums, acquisition costs, and amendment fees and the accretion of original issue discounts (“OID”), is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest income is deemed to be collectible. As of December 31, 2014, two portfolio companies were on non-accrual status with an aggregate debt cost basis of approximately $33.6 million, or 9.4% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $8.3 million, or 2.8% 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.

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 December 31 and September 30, 2014, we had 20 and 17 original OID loans, respectively, primarily from the syndicated investments in our portfolio. We recorded OID income of $63 and $61 for the three months ended December 31, 2014 and 2013, respectively. The unamortized balance of OID investments as of December 31 and September 30, 2014, totaled $1.0 million and $0.6 million, respectively. As of December 31 and September 30, 2014, we had two and three investments, respectively, which had a PIK interest component. We recorded PIK income of $67 and $92 for the three months ended December 31, 2014 and 2013, respectively. We collected $0.2 million and $0 PIK interest in cash during each of the three months ended December 31, 2014 and 2013, respectively.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. We received an aggregate of $0.9 million in success fees during the three months ended December 31, 2014, which resulted from $0.6 million related to the early payoff of North American Aircraft Services, LLC at a realized gain and $0.3 million prepayment of success fees by Francis Drilling Fluids, LLC (“FDF”). We received $0.2 million in success fees during the three months ended December 31, 2013, which related to our sale of substantially all of the assets in Lindmark Acquisition, LLC and the ensuing pay down of our debt investments at par in September 2013.

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 three months ended December 31, 2014, we recorded $0.1 million of dividend income, net of return of capital cost basis adjustments, which resulted from our preferred equity investment in FDF. We did not record any dividend income during the three months ended December 31, 2013.

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

Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update 2014–15 (“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 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.

 

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In May 2014, the FASB issued ASU 2014-09, “ Revenue from Contracts with Customers ,” 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, 2016 and interim periods within those years. Early adoption is 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 December 31 and September 30, 2014, all of our investments were valued using Level 3 inputs and during the three months ended December 31, 2014 and 2013, there were no investments transferred into or out of Levels 1, 2 or 3.

 

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The following table presents our investments carried at fair value as of December 31 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)
 
    December 31, 2014     September 30, 2014  

Non-Control/Non-Affiliate Investments

   

Senior debt

  $ 112,356      $ 74,299   

Senior subordinated debt

    118,047        110,601   

Preferred equity

    16,124        10,593   

Common equity/equivalents

    2,580        3,433   
 

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

  $ 249,107      $ 198,926   
 

 

 

   

 

 

 

Affiliate Investments

   

Senior debt

  $ 35,916      $ 36,311   

Senior subordinated debt

    13,598        14,197   

Preferred equity

    2,613        2,885   

Common equity/equivalents

    3,620        3,613   
 

 

 

   

 

 

 

Total Affiliate Investments

  $ 55,747      $ 57,006   
 

 

 

   

 

 

 

Control Investments

   

Senior debt

  $ 7,366      $ 7,804   

Senior subordinated debt

    6,549        11,089   

Preferred equity

              —     

Common equity/equivalents

    7,855        6,461   
 

 

 

   

 

 

 

Total Control Investments

  $ 21,770      $ 25,354   
 

 

 

   

 

 

 

Total Investments at Fair Value

  $ 326,624      $ 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 December 31 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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     Quantitative Information about Level 3 Fair Value Measurements
                             Range / Weighted Average as of
     December 31,
2014
     September 30,
2014
     Valuation
Technique/
Methodology
   Unobservable
Input
   December 31,
2014
  September 30,
2014

Senior debt (A)

   $ 76,232       $ 54,410       Yield Analysis    Discount
Rate
   6.5% - 18.4% /
11.3%
  8.4% - 18.8% /
13.4%
     50,198         45,502       TEV    EBITDA
multiple
   4.0x - 11.9x /

6.6x

  4.0x - 7.6x /
6.1x
            EBITDA    $135 - $4,400 /
$1,248
  $247 - $3,700 /
$1,839
            Revenue
multiple
   0.6x - 0.8x /
0.7x
  0.6x - 0.8x /
0.7x
            Revenue    $2,452 - $5,419 /
$4,220
  $2,416 - $5,327 /
$4,151
     29,208         18,502       Market Quotes    IBP    83.0% - 97.8% /
89.7%
  85.0% - 99.8% /
94.1%

Senior subordinated debt (B)

     81,200         79,470       Yield Analysis    Discount
Rate
   9.3% - 13.8% /
12.4%
  11.3% - 13.8% /
12.5%
     43,381         32,813       Market Quotes    IBP    83.0% - 99.5% /
97.0%
  94.9% - 101.3% /
99.9%
     13,613         23,604       TEV    EBITDA
multiple
   4.0x - 8.6x /

5.6x

  4.3x - 7.6x /
6.3x
            EBITDA    $600 - 4,790 /

$2,159

  $1,100 - $6,219 /
$3,403

Preferred and common equity / equivalents (C)

     30,747         24,711       TEV    EBITDA
multiple
   3.8x - 8.6x /

6.2x

  4.3x - 7.6x /
6.1x
            EBITDA    $1,038 - $27,865 /
$4,294
  $998 - $15,685 /
$4,135
     2,045         2,274       Investments in
Funds
       
  

 

 

    

 

 

            

Total Investments, at Fair Value

$ 326,624    $ 281,286   
  

 

 

    

 

 

            

 

  (A)   December 31, 2014 includes three new proprietary debt investments for $28.8 million, which were valued at cost.
  (B) December 31, 2014 includes two follow-on proprietary debt investments for $9.5 million and 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 valued at cost, and one proprietary investment, which was valued at payoff amounts totaling $2.8 million.
  (C) December 31, 2014 includes two new proprietary equity investments for $2.8 million, which were valued at cost. 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 in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.

The following tables provide the changes in fair value, broken out by security type, during the three months ended December 31, 2014 and 2013 for all investments for which we determine fair value using unobservable (Level 3) factors.

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR TO DATE 2015:          Senior           Common        
     Senior     Subordinated     Preferred     Equity/        

Three Months Ended December 31, 2014

   Debt     Debt     Equity     Equivalents     Total  

Fair Value as of September 30, 2014

   $ 118,414      $ 135,887      $ 13,478      $ 13,507      $ 281,286   

Total gains (losses):

          

Net realized (loss) gain (B)

     —          (12,146     (2,175     1,440        (12,881

Net unrealized (depreciation) appreciation (C)

     (3,430     (6,417     3,794        1,454        (4,599

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

     —          12,627        2,175        (1,440     13,362   

New investments, repayments and settlements: (D)

          

Issuances/originations

     41,611        17,019        1,799        1,106        61,535   

Settlements/repayments

     (957     (2,641     (334     (434     (4,366

Sales

     —          (6,135     —          (1,578     (7,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2014

$ 155,638    $ 138,194    $ 18,737    $ 14,055    $ 326,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
FISCAL YEAR TO DATE 2014:          Senior           Common        
     Senior     Subordinated     Preferred     Equity/        

Three Months Ended December 31, 2013

   Debt     Debt (A)     Equity     Equivalents     Total  

Fair Value as of September 30, 2013

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

Total (losses) gains:

          

Net realized (loss) (B)

     (10,732     —          —          —          (10,732

Net unrealized appreciation (C)

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

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

     10,263        (122     —          —          10,141   

New investments, repayments and settlements: (D)

          

Issuances/originations

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

Settlements/repayments

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of December 31, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (A)   Includes one junior subordinated debt investment with a fair value of $0.6 million as of December 31, 2013. During the quarter ended March 31, 2014, we exited our one junior subordinated debt investment at par.
  (B) Included in net realized (loss) gain on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013.
  (C)   Included in net unrealized (depreciation) appreciation of investments on our accompanying Condensed Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013.
  (D)   Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts, and PIK, as well as decreases in the costs basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Investment Activities

Proprietary Investments

As of December 31 and September 30, 2014, we held 30 and 29 proprietary investments with an aggregate fair value of $254.0 million and $221.8 million, or 77.8% and 78.9% of the total aggregate portfolio at fair value, respectively. During the three months ended December 31, 2014, we invested in three new proprietary investments totaling $31.6 million; sold one proprietary investment for net proceeds of $6.1 million, resulting in a realized loss of $14.5 million; and had one proprietary investment pay off early at $2.5 million of cost basis and a realized gain of $1.6 million, for which we received success fees of $0.6 million. Additionally, during the three months ended December 31, 2014, we funded a combined $13.4 million to existing proprietary portfolio companies through revolver draws and follow on investments, while scheduled and unscheduled principal repayments were $1.7 million in the aggregate from existing proprietary portfolio companies (exclusive of the aforementioned $2.5 million in early payoffs). The following significant proprietary investment transactions occurred during the three months ended December 31, 2014:

 

    B+T Holdings Inc. – In December 2014, we invested $8.4 million in B+T Holdings Inc. (“B+T”), through a combination of senior term 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.

 

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Table of Contents
    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 three months ended December 31, 2014. Midwest Metal had been on non-accrual status at the time of the sale.

 

    Circuitronics, Inc. – In December 2014, we invested $15.0 million in Circuitronics, Inc. (“Circuitronics”) through a combination of senior term debt and equity. Circuitronics, 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 $11.0 million in Vision Government Solutions, Inc. (“Vision”) through senior term 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.

Syndicated Investments

We held a total of 19 syndicated investments with an aggregate fair value of $72.6 million, or 22.2% of our total investment portfolio at fair value, as of December 31, 2014, 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 three months ended December 31, 2014, we invested in three new syndicated investments for a combined $12.5 million. Additionally, we funded an additional $4.0 million in Vitera Healthcare Solutions, LLC, an existing syndicated investment, during the three months ended December 31, 2014.

Investment Concentrations

As of December 31, 2014, our investment portfolio consisted of investments in 49 companies located in 21 states across 19 different industries, with an aggregate fair value of $326.6 million. The five largest investments at fair value as of December 31, 2014, totaled $106.0 million, or 32.5% 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 December 31, 2014, our average investment by obligor was $7.9 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 December 31 and September 30, 2014:

 

    December 31, 2014     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
 

Senior debt

  $ 208,678        54.1   $ 155,638        47.7   $ 168,023        48.1   $ 118,414        42.1

Senior subordinated debt

    147,879        38.3        138,194        42.3        151,782        43.5        135,887        48.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Investments

    356,557        92.4        293,832        90.0        319,805        91.6        254,301        90.4   

Preferred equity

    20,785        5.4        18,737        5.7        21,496        6.1        13,478        4.8   

Common equity/equivalents

    8,518        2.2        14,055        4.3        7,984        2.3        13,507        4.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity Investments

    29,303        7.6        32,792        10.0        29,480        8.4        26,985        9.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 385,860        100.0   $ 326,624        100.0   $ 349,285        100.0   $ 281,286        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     December 31, 2014     September 30, 2014  

Industry Classification

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

Oil and gas

   $ 55,219         16.9   $ 42,831         15.2

Healthcare, education and childcare

     46,474         14.2        47,538         16.9   

Diversified/conglomerate manufacturing

     40,366         12.4        27,634         9.8   

Personal and non-durable consumer products

     35,113         10.8        30,157         10.7   

Electronics

     26,404         8.1        24,811         8.8   

Printing and publishing

     23,485         7.2        23,999         8.5   

Automobile

     20,397         6.2        19,489         6.9   

Cargo transportation

     12,805         3.9        12,838         4.6   

Diversified/conglomerate services

     10,000         3.1        —           —     

Finance

     8,920         2.7        4,205         1.5   

Telecommunications

     8,099         2.5        —           —     

Textiles and leather

     7,496         2.3        8,171         2.9   

Diversified natural resources, precious metals and minerals

     7,419         2.3        7,176         2.6   

Broadcast and entertainment

     6,362         1.9        6,386         2.3   

Beverage, food and tobacco

     6,243         1.9        6,235         2.2   

Other, < 2.0% (A)

     6,194         1.9        6,279         2.2   

Buildings and real estate

     3,632         1.1        6,617         2.4   

Aerospace and defense

     1,996         0.6        6,920         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

$ 326,624      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.

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

 

     December 31, 2014     September 30, 2014  

Geographic Region

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

South

   $ 121,022         37.0   $ 92,355         32.8

Midwest

     111,131         34.0        107,387         38.2   

West

     83,787         25.7        80,744         28.7   

Northeast

     10,684         3.3        800         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

$ 326,624      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.

 

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Table of Contents

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2014:

 

For the Fiscal Years Ending September 30:

   Amount  

For the remaining nine months ending September 30:

  

2015

   $ 43,666   

2016

     93,777   

2017

     12,431   

2018

     31,789   

2019

     64,037   

Thereafter

     111,989   
  

 

 

 

Total contractual repayments

   $ 357,689   

Equity investments

     29,303   

Adjustments to cost basis on debt investments

     (1,132
  

 

 

 

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

   $ 385,860   
  

 

 

 

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 December 31 and September 30, 2014, we had gross receivables from portfolio companies of $0.3 million and $0.4 million, respectively. The allowance for uncollectible receivables was $0.1 million as of December 31 and September 30, 2014, which is reflected in other assets on our accompanying Condensed Consolidated Statements of Assets and Liabilities . In addition, as of December 31 and September 30, 2014, we recorded an allowance for uncollectible interest receivables of $0.9 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 an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined based upon management’s judgment that the portfolio company is unable to pay its obligations.

NOTE 4. RELATED PARTY TRANSACTIONS

Investment Advisory and Management Agreement

In accordance with the Advisory Agreement, we pay the Adviser certain fees as compensation for its services, such fees consisting of a base management fee, loan servicing fee and an incentive fee. The Adviser is controlled by our chairman and chief executive officer. On July 15, 2014, 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, 2015.

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

 

     Three Months Ended
December 31,
 
     2014     2013  

Average total assets subject to base management fee (A)

   $ 319,400      $ 291,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee (B)

   $ 1,597      $ 1,456   

Portfolio company fee credit (C)

     (375     (333

Senior syndicated loan fee waiver (D)

     (37     (30
  

 

 

   

 

 

 

Net Base Management Fee

   $ 1,185      $ 1,093   
  

 

 

   

 

 

 

Loan servicing fee (B)

     832        884   

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

     (832     (884
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —        $ —     
  

 

 

   

 

 

 

Incentive fee (B)

     922        974   

Incentive fee credit (E)

     —          (515
  

 

 

   

 

 

 

Net Incentive Fee

   $ 922      $ 459   
  

 

 

   

 

 

 

Portfolio company fee credit (C)

     (375     (333

Senior syndicated loan fee waiver (D)

     (37     (30

Incentive fee credit (E)

     —          (515
  

 

 

   

 

 

 

Credit to Fees From Adviser - other (B)

   $ (412   $ (878
  

 

 

   

 

 

 

 

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Table of Contents
  (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. We credit 100.0% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a 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 and irrevocable voluntary waiver from the Adviser to reduce the annual 2.0% base management fee on senior syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for the three months ended December 31, 2014 and 2013.
  (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 100.0% cover distributions to common stockholders for the three months ended December 31, 2013. No such credit from the Adviser was granted for the three months ended December 31, 2014, due to a change in the assessment of distribution coverage of net investment income to a fiscal year end basis rather than a quarterly basis.

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 credits from the Adviser as explained in the notes to the table above.

Additionally, the Adviser services, administers and collects on the loans held by Business Loan, in return for which our Adviser receives a 1.5% annual loan servicing fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with our revolving line of credit. All loan servicing fees are voluntarily and irrevocably credited back to us by the Adviser. Overall, the base management fee due to the Adviser (including any loan servicing fees) cannot exceed 2.0% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year.

Incentive Fee

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

 

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capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate net unrealized capital depreciation, if any, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since our inception. The entire portfolio’s aggregate net unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate net unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded since our inception through December 31, 2014, as cumulative net unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate cumulative unrealized capital appreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded since our inception through December 31, 2014.

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, and general counsel and secretary (who also serves as the Administrator’s president). 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 under contractual agreements. 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 15, 2014, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2015.

Related Party Fees Due

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

 

     December 31, 2014      September 30, 2014  

Net base management fee due to Adviser

   $ 548       $ 604   

Net incentive fee due to Adviser

     922         271   
  

 

 

    

 

 

 

Total fees due to Adviser, net of credits

     1,470         875   
  

 

 

    

 

 

 

Fee due to Administrator

     281         218   
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,751       $ 1,093   
  

 

 

    

 

 

 

Other operating expenses due to the Adviser as of December 31 and September 30, 2014, totaled $23 and $20, respectively. In addition, other net co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $0 and $41 as of December 31 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 December 31 and September 30, 2014, respectively .

 

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Notes from Former Employees

During the three months ended December 31, 2014 and 2013, we had one outstanding note receivable from one former employee, who is now an employee of the Adviser. The note was for the exercise of options granted under the Amended and Restated 2001 Equity Incentive Plan, which has since been terminated. The note requires the quarterly payment of interest at the market rate in effect at the date of issuance, has a term of nine years and has been recorded as a reduction of net assets. The note was evidenced by a full recourse note that is due upon maturity or 60 days following termination of employment with the Adviser and the shares of common stock purchased with the proceeds of the note is posted as collateral. We did not receive any principal repayments on the note receivable from the former employee during the three months ended December 31, 2014 and 2013. We recognized interest income from this employee note of $2 and $4 for the three months ended December 31, 2014 and 2013, respectively.

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

 

Issue Date

   Original
Amount of
Employee
Note
    Outstanding
Balance of Employee Note
As of December 31

and September 30, 2014
     Maturity
Date
   Interest
Rate

on Note
 

Jul-06

   $ 275 (A)     $ 100       Jul-15      8.26
  

 

 

   

 

 

       

 

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

In accordance with ASC 505, “ Equity ,” receivables from employees for the issuance of capital stock to employees prior to the receipt of cash payment should be reflected in the balance sheet as a reduction to stockholders’ equity. Therefore, our remaining note totaling $0.1 million as of December 31, 2014 was recorded as a note receivable from employee and is included in the net assets section of our accompanying Condensed Consolidated Statements of Assets and Liabilities . As of December 31, 2014, we determined that this note was still recourse.

NOTE 5. BORROWINGS

Revolving Credit Facility

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

 

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

 

     December 31, 2014      September 30, 2014  

Commitment amount

   $ 137,000       $ 137,000   

Borrowings outstanding

     83,500         36,700   

Availability

     37,300         57,500   

 

     For the Three Months
Ended December 31,
 
     2014     2013  

Weighted average borrowings outstanding

   $ 44,804      $ 33,145   

Effective interest rate (A)

     6.1     7.4

Commitment (unused) fees incurred

   $ 222      $ 259   

 

  (A)   Excludes the impact of deferred financing fees.

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

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

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits payments on distributions to our stockholders to our aggregate net investment income for each of the twelve month periods ending September 30, 2015 and 2016. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $190.0 million plus 50.0% of all equity and subordinated debt raised after January 19, 2012, which equates to $220.5 million as of December 31, 2014, (ii) asset coverage with respect to senior securities representing indebtedness of at least 200.0%, in accordance with Section 18 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of December 31, 2014, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $256.6 million, asset coverage of 235.6% and an active status as a BDC and RIC. In addition, we had 32 obligors in the borrowing base of our Credit Facility as of December 31, 2014. As of December 31, 2014, 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 December 31 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 December 31 and 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 increase or decrease, respectively, in the fair value of our Credit Facility. As of December 31 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 December 31 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 months ended December 31, 2014 and 2013:

 

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

Credit Facility

   $ 84,078       $ 38,013   
  

 

 

    

 

 

 

 

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

 
     Three Months Ended December 31,  
     2014      2013  

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

   $ 38,013       $ 47,102   

Borrowings

     59,500         42,400   

Repayments

     (12,700      (41,600

Net unrealized appreciation (depreciation) (A)

     (735      6   
  

 

 

    

 

 

 

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

$ 84,078    $ 47,908   
  

 

 

    

 

 

 

 

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

The fair value of the collateral under our Credit Facility was approximately $268.6 million and $222.0 million in aggregate as of December 31 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 and 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 December 31, 2014, we have not redeemed any of our outstanding Series 2021 Term Preferred Stock.

 

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In November 2011, we completed a public offering of approximately 1.5 million shares of our Series 2016 Term Preferred Stock, at a public offering price of $25.00 per share. Gross proceeds totaled $38.5 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $36.4 million, a portion of which was used to repay a portion of outstanding borrowings under our Credit Facility. We incurred $2.1 million in total offering costs related to these transactions, which were recorded as deferred financing fees on our accompanying Condensed Consolidated Statements of Assets and Liabilities and were amortized over the redemption period ending December 31, 2016. In May 2014, when we voluntarily redeemed our Series 2016 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the realized loss on extinguishment of debt discussed above. Our Series 2016 Term Preferred Stock provided for a fixed dividend rate equal to 7.125% per year, payable monthly (which equated in total to approximately $2.7 million per year). The shares of our Series 2016 Term Preferred Stock were traded under the ticker symbol of “GLADP” on the NASDAQ. In connection with the voluntary redemption, shares of our Series 2016 Term Preferred Stock were removed from listing on May 22, 2014.

We paid the following monthly distributions on our Series 2016 Term Preferred Stock for the three months ended December 31, 2013:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Series 2016 Term
Preferred Share
 

2014

   October 8, 2013    October 22, 2013    October 31, 2013    $ 0.1484375   
   October 8, 2013    November 14, 2013    November 29, 2013      0.1484375   
   October 8, 2013    December 16, 2013    December 31, 2013      0.1484375   
           

 

 

 
     

Three Months Ended December 31, 2013:

   $ 0.4453125   
           

 

 

 

We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the three months ended December 31, 2014:

 

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   
           

 

 

 
     

Three Months Ended December 31, 2014:

   $ 0.4218750   
           

 

 

 

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 December 31 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 December 31 and September 30, 2014, was approximately $62.5 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 three months ended December 31, 2013, were approximately $0.7 million. Aggregate preferred stockholder distributions declared and paid on our Series 2021 Term Preferred Stock for the three months ended December 31, 2014, were approximately $1.0 million. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits.

NOTE 7. REGISTRATION STATEMENT

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 has declared effective as of 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. We have the ability to issue up to $239.0 million in securities under our Registration Statement. We issued approximately 2.4 million shares of our Series 2021 Term Preferred Stock under our Registration Statement in May 2014. No other securities have been issued to date under our Registration Statement.

 

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three months ended December 31, 2014 and 2013:

 

     Three Months Ended
December 31,
 
     2014      2013  

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

   $ 331       $ 10,506   

Denominator for basic and diluted weighted average common shares

     21,000,160         21,000,160   
  

 

 

    

 

 

 

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

   $ 0.02       $ 0.50   
  

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

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

The federal income tax characterization of all distributions 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 three months ended December 31, 2014 and 2013:

 

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   
           

 

 

 
      Three Months Ended December 31, 2014:    $ 0.21   
           

 

 

 

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   
           

 

 

 
      Three Months Ended December 31, 2013:    $ 0.21   
           

 

 

 

Aggregate distributions declared and paid to our common stockholders for the three months ended December 31, 2014 and 2013, were each approximately $4.4 million, 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 three months ended December 31, 2014, 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 three months ended December 31, 2014 and the year ended September 30, 2014, primarily resulted from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

 

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For the three months ended December 31, 2014 and the year ended September 30, 2014, we recorded the following adjustments for book-tax differences to reflect tax character.

 

     Three Months Ended
December 31, 2014
     Year Ended
September 30, 2014
 

Overdistributed net investment income

   $ (1,945    $ (2,556

Accumulated net realized losses

     16,434         18,144   

Capital in excess of par value

     (14,489      (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 that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on current knowledge, we do not believe such loss contingencies are probable and estimable and therefore, as of December 31, 2014, we have not established reserves for such loss contingencies.

Escrow Holdbacks

From time to time, we will enter into arrangements as it relates to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations as stipulated in the sales agreements. We record escrow amounts in restricted cash and cash equivalents on our accompanying Condensed Consolidated Statements of Assets and Liabilities and totaled $1.1 million and $0 as of December 31 and September 30, 2014, respectively. We establish a contingent liability against the escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not be ultimately received at the end of the escrow period. The aggregate contingent liabilities recorded against the escrow amounts was $0.6 million and $0 as of December 31 and September 30, 2014, respectively.

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 December 31 and September 30, 2014, we had uncalled capital commitments related to our partnership interest in Leeds Novamark Capital I, L.P.

The following table summarizes the amounts of our unused line of credit and uncalled capital commitments as of December 31 and September 30, 2014, which are not reflected as liabilities in the accompanying Condensed Consolidated Statements of Assets and Liabilities :

 

     December 31,
2014
     September 30,
2014
 

Unused line of credit commitments

   $ 12,042       $ 5,905   

Uncalled capital commitment

     2,778         2,827   
  

 

 

    

 

 

 

Total

$ 14,820    $ 8,732   
  

 

 

    

 

 

 

 

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NOTE 11. FINANCIAL HIGHLIGHTS

 

     Three Months Ended December 31,  
     2014     2013  

Per Common Share Data (A) :

    

Net asset value at beginning of period (A)

   $ 9.51      $ 9.81   
  

 

 

   

 

 

 

Net investment income (B)

  0.18      0.21   

Net realized loss on investments (B)

  (0.61   (0.51

Net unrealized appreciation of investments (B)

  0.41      0.80   

Net unrealized depreciation of other (B)

  0.03      —     

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

  (0.21   (0.21
  

 

 

   

 

 

 

Net asset value at end of period (A)

$ 9.31    $ 10.10   
  

 

 

   

 

 

 

Market value at beginning of period

$ 8.77    $ 8.73   

Market value at end of period

  8.27      9.57   

Total return (D)

  (3.45 )%    12.10

Common shares outstanding at end of period

  21,000,160      21,000,160   

Statement of Assets and Liabilities Data:

Net assets at end of period

$ 195,581    $ 212,088   

Average net assets (E)

  198,295      208,396   

Senior Securities Data:

Borrowings under Credit Facility, at cost

  83,500      47,700   

Mandatorily redeemable preferred stock

  61,000      38,497   

Asset coverage ratio (F)

  236   346

Asset coverage per unit (G)

$ 2,356    $ 3,459   

Ratios/Supplemental Data:

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

  12.67   11.02

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

  10.16      7.64   

Ratio of net investment income to average net assets-annualized

  7.44      8.46   

 

  (A)   Based on actual common shares outstanding at the end of the corresponding period.
  (B)   Based on weighted average basic per common share data.
  (C)   Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from income amounts determined under GAAP.
  (D)   Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account common stockholder distributions reinvested in accordance with the terms of 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.
  (E)   Average net assets are computed using the average of the balance of net assets at the end of each month of the reporting period.
  (F)   As a BDC, we are generally required to maintain an asset coverage ratio (as defined in Section 18(h) of the 1940 Act) of at least 200.0% on our senior securities representing indebtedness and our senior securities that are stock. Our mandatorily redeemable preferred stock is a senior security that is stock.
  (G)   Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
  (H)   Ratio of expenses to average net assets is computed using expenses before credits from the Adviser.
  (I)   Ratio of net expenses to average net assets is computed using total expenses net of credits from the Adviser.
  (J) The ratio of expenses to average net assets for the three months ended December 31, 2013 was revised from the previously reported ratio, which was 9.33%, to correct an error as discussed in Note 2— Summary of Significant Accounting Policies .

 

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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

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

 

     Three Months Ended
December 31,
 

Income Statement

   2014     2013  

Net sales

   $ 41,960      $ 36,557   

Gross profit

     7,825        7,375   

Net loss

     (305     (1,091

NOTE 13. SUBSEQUENT EVENTS

Distributions to Stockholders

In January 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
 

January 23, 2015

   February 3, 2015    $ 0.07       $ 0.140625   

February 18, 2015

   February 27, 2015      0.07         0.140625   

March 20, 2015

   March 31, 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. 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 expect that our investment portfolio over time will consist of approximately 95.0% debt investments and 5.0% equity investments, at cost. As of December 31, 2014, our investment portfolio was made up of approximately 92.4% debt investments and 7.6% equity investments, at cost.

 

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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 borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or 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 and/or management of the portfolio company, depending on the opportunity. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

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 Gladstone Management Corporation, our external investment adviser (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 three months ended December 31, 2014, as discussed under “— Investment Highlights .”

We are externally managed by 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 Environment

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

We believe several factors impacting commercial banks, including industry consolidation, capital constraints and regulatory changes, have benefited our fund and other lenders like us. There has been, however, increased competitive pressure in the middle market lending marketplace from other BDCs and investment companies, as well as small banks and some private investors, for senior and senior subordinated debt. We have seen an increase in refinancing and recapitalization transactions and there has been increased competitive pressures resulting in reduced investment yields and/or higher leverage and increasingly riskier investments in the middle market segment we focus on. In addition, there has been an increase in new entrants (financial services companies, BDCs and other investment funds) seeking to capitalize on middle market lending opportunities. Many of our competitors have lower cost of capital than we do and also may be willing to take on riskier investments than we are. We do not know if general economic conditions will continue to improve or if adverse conditions will recur and we do not know the full extent to which the inability of the U.S. government to address its fiscal condition in the near and long term will affect us. If market instability persists or intensifies, we may experience difficulty in successfully raising and investing capital. In summary, we believe we are in a prolonged economic recovery; however, we do not know the full extent to which the impact of the current economic conditions will affect us or our portfolio companies.

Portfolio Activity

While conditions remain somewhat challenging in the marketplace, we have seen many investment opportunities that are consistent with our investment objectives and strategies and whereby we can achieve attractive risk-adjusted returns. During the three months ended December 31, 2014, we invested an aggregate of $44.1 million in six new proprietary and syndicate investments, resulting in a net expansion in our overall portfolio of four portfolio companies, due to one portfolio company paying off early resulting in a realized gain of $1.6 million and the sale of one of our non-accrual portfolio companies for net proceeds of $6.1 million. We will continue to focus on exiting challenged and non-strategic investments in our portfolio over the next several quarters in an orderly manner.

 

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Capital Raising

Despite the challenges in the economy for the past several years, we met our capital needs through enhancements to our $137.0 million revolving line of credit (our “Credit Facility”) and by accessing the capital markets in the form of public offerings of preferred stock. For example, 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 primarily 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. In addition, in January 2013, we removed the LIBOR minimum of 1.5% on advances on our Credit Facility and in April 2013, we extended the revolving period end date for an additional year to January 19, 2016. Refer to “ 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 2014, 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, 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 like us.

On January 30, 2015, the closing market price of our common stock was $7.41, a 25.6% discount to our December 31, 2014, NAV per share of $9.31. 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 13, 2014, 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. At the upcoming annual stockholders meeting scheduled for February 12, 2015, our stockholders will again be asked to vote in favor of renewing this proposal for another year. Although we have not utilized this authorization to date, we may do so in the future.

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 December 31, 2014, 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, debt and equity capital may not be sufficient in the near term. However, we believe that our amendments to our Credit Facility to decrease the interest

 

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rate on advances and extend its maturity until 2016 (refer to “ Liquidity and Capital Resources — Revolving Credit Facility ” for further discussion of our revolving line of credit) and our ability to co-invest with Gladstone Investment and certain other affiliated investment funds, has increased our ability to make investments in businesses that we believe will be generally resistant to a recession and, as a result, will be likely to achieve attractive long-term returns for our stockholders.

During the quarter ended December 31, 2014, we continued to focus on building our pipeline with deals that we believe are generally recession resistant and are in businesses with steady cash flows, while providing appropriate returns, given the risks. We will also continue to work through some of the older investments in our portfolio to enhance overall returns to our stockholders.

Investment Highlights

During the three months ended December 31, 2014, we invested an aggregate of $44.1 million in six new portfolio companies and an aggregate of $17.4 million in existing portfolio companies. In addition, during the three months ended December 31, 2014, we sold our investment in one portfolio company for net proceeds of $6.1 million and we received scheduled and unscheduled principal repayments of approximately $4.5 million from existing portfolio companies. Since our initial public offering in August 2001, we have made 385 different loans to, or investments in, 191 companies for a total of approximately $1.4 billion, before giving effect to principal repayments on investments and divestitures.

Investment Activity

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

Issuances and Originations

During the three months ended December 31, 2014, we extended an aggregate of $31.6 million of investments in three new proprietary portfolio companies and an aggregate of $12.5 million in three new syndicated portfolio companies (PSC Industrial Holdings Corp, SourceHOV, LLC and Vertellus Specialties, Inc.). Below are significant issuances and originations during the three months ended December 31, 2014:

 

    In December 2014, we invested $8.4 million in B+T Holdings Inc. (“B+T”), through a combination of senior term 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 $15.0 million in Circuitronics, Inc. (“Circuitronics”) through a combination of senior term debt and equity. Circuitronics, 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.

 

    In December 2014, we invested $11.0 million in Vision Government Solutions, Inc. (“Vision”) through senior term 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.

Repayments and Sales:

During the three months ended December 31, 2014, ten borrowers made principal repayments totaling $4.5 million in the aggregate, consisting of $4.4 million of unscheduled principal and revolver repayments, as well as $0.1 million in contractual principal amortization. Below are the significant repayments and exits during the three months ended December 31, 2014.

 

    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. The resulting IRR 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 three months ended December 31, 2014. Midwest Metal had been on non-accrual status at the time of the sale.

 

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Recent Developments

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 was declared effective as of 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. We currently have the ability to issue up to $239.0 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 December 31, 2014, to the Three Months Ended December 31, 2013

 

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

INVESTMENT INCOME

           

Interest income

   $ 7,648       $ 8,191       $ (543      (6.6 )% 

Other income

     1,078         201         877         436.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

  8,726      8,392      334      4.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES

Base management fee

  1,597      1,456      141      9.7   

Loan servicing fee

  832      884      (52   (5.9

Incentive fee

  922      974      (52   (5.3

Administration fee

  281      203      78      38.4   

Interest expense on borrowings

  678      615      63      10.2   

Dividend expense on mandatorily redeemable preferred stock

  1,029      686      343      50.0   

Amortization of deferred financing fees

  302      315      (13   (4.1

Other expenses

  638      611      27      4.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses before credits from Adviser

  6,279      5,744      535      9.3   

Credits to base management fee – loan servicing fee

  (832   (884   52      5.9   

Credits to fees from Adviser - other

  (412   (878   466      53.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses net of credits

  5,035      3,982      1,053      26.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT INCOME

  3,691      4,410      (719   (16.3
  

 

 

    

 

 

    

 

 

    

 

 

 

NET REALIZED AND UNREALIZED (LOSS) GAIN

Net realized loss on investments and escrows

  (12,858   (10,774   2,084      19.3   

Net unrealized appreciation of investments

  8,763      16,877      (8,114   (48.1

Net unrealized depreciation (appreciation) of other

  735      (7   742      NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) gain from investments and other

  (3,360   6,096      (9,456   NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

$ 331    $ 10,506    $ (10,175   (96.8 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

NM = Not Meaningful

Investment Income

Total interest income decreased by 6.6% for the three months ended December 31, 2014, as compared to the prior year period. This decrease was due primarily to the increase in early payoffs at par during the year, resulting in a lower weighted average principal balance of interest-bearing investments compared to the prior period. This was partially offset by six new investments that we funded during the three months ended December 31, 2014. In addition, we recorded an allowance on certain interest receivables totaling $0.5 million, which reduces interest income, during the three months ended December 31, 2014, which resulted in a lower weighted average yield on the portfolio. The level of interest income from investments is directly related to the principal balance of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2014, was $283.0 million, compared to $299.6 million for the prior year period, a decrease of 5.5%. The annualized weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments and decreased to 10.8% for the three months ended December 31, 2014 compared to 11.6% for the three months ended December 31, 2013. The weighted average yield on our interest-bearing investments for the three months ended December 31, 2014 includes any allowances on interest receivables made during that period.

As of December 31, 2014, two portfolio companies were on non-accrual status, with an aggregate debt cost basis of approximately $33.6 million, or 9.4%, of the cost basis of all debt investments in our portfolio. As of December 31, 2013, one portfolio company was on non-accrual status, with an aggregate debt cost basis of approximately $29.2 million, or 9.2%, of the cost basis of all debt investments in our portfolio. During the three months ended December 31, 2014, one non-accrual portfolio company was sold. See “ Overview – Investment Highlights ” for more information. There were no new non-accruals added and no non-accruals placed on accrual status during the three months ended December 31, 2014 and 2013.

 

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For the three months ended December 31, 2014, other income consisted primarily of $0.6 million in success fees received from the early payoff of NAAS, $0.3 million in success fees prepaid by Francis Drilling Fluids, Ltd. (“FDF”), $0.1 million in dividend income and $0.1 million in other fees, both received from FDF. Other income for the three months ended December 31, 2013, consisted of $0.2 million in success fees received related to the sale of substantially all of the assets of Lindmark Acquisition, LLC (“Lindmark”) and the ensuing pay down of our debt investments at par in September 2013.

The following tables list the investment income for our five largest portfolio company investments at fair value during the respective periods:

 

     As of December 31, 2014     Three Months Ended December 31, 2014  

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

RBC Acquisition Corp.

   $ 28,283         8.7   $ 433         5.0

Francis Drilling Fluids, Ltd.

     21,523         6.6        1,075         12.3   

WadeCo Specialties, Inc. (A)

     21,097         6.5        324         3.7   

Funko, LLC

     19,011         5.8        249         2.9   

J.America, Inc. (B)

     16,103         4.9        478         5.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

  106,017      32.5      2,559      29.4   

Other portfolio companies

  220,607      67.5      6,165      70.6   

Other non-portfolio company revenue

  —        —        2      —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

$ 326,624      100.0 $ 8,726      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     As of December 31, 2013     Three Months Ended December 31, 2013  

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

RBC Acquisition Corp.

   $ 34,219         12.1   $ 817         9.7

Midwest Metal Distribution, Inc. (C)

     18,098         6.4        561         6.7   

J.America, Inc. (B)

     17,000         6.0        26         0.3   

Francis Drilling Fluids, Ltd.

     14,773         5.2        462         5.5   

AG Transportation Holdings, LLC

     13,065         4.6        461         5.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

  97,155      34.3      2,327      27.7   

Other portfolio companies

  186,051      65.7      6,061      72.2   

Other non-portfolio company revenue

  —        —        4      0.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

$ 283,206      100.0 $ 8,392      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

  (A) Investment added in March 2014.
  (B) Investment added in December 2013.
  (C) Investment exited in December 2014.

Expenses

Expenses, excluding any voluntary, irrevocable and non-contractual credits from the Adviser to the base management, loan servicing, and incentive fees, increased for the three months ended December 31, 2014, by 26.4%, as compared to the prior year period. This increase was primarily due to the increases in the net incentive fee and dividend expense on our mandatorily redeemable preferred stock during the three months ended December 31, 2014.

The increase of $0.5 million in the net incentive fee earned by the Adviser during the three months ended December 31, 2014, as compared to the prior year period, was due to the partial incentive fee credit taken in the prior year period. There was no incentive fee credit granted by the Adviser during the three months ended December 31, 2014, due to a change in the assessment of distribution coverage of net investment income to a fiscal year end basis rather than a quarterly basis.

 

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Table of Contents

The base management fee, loan servicing fee and incentive fee, and associated unconditional and irrevocable voluntary credits, are computed quarterly, as described under “Investment Advisory and Management Agreement” in Note 4 of the notes to our accompanying Condensed Consolidated Financial Statements and are summarized in the following table:

 

     Three Months Ended
December 31,
 
     2014     2013  

Average total assets subject to base management fee (A)

   $ 319,400      $ 291,200   

Multiplied by prorated annual base management fee of 2.0%

     0.5     0.5
  

 

 

   

 

 

 

Base management fee (B)

$ 1,597    $ 1,456   

Portfolio company fee credit

  (375   (333

Senior syndicated loan fee waiver

  (37   (30
  

 

 

   

 

 

 

Net Base Management Fee

$ 1,185    $ 1,093   
  

 

 

   

 

 

 

Loan servicing fee (B)

  832      884   

Credit to base management fee - loan servicing fee (B)

  (832   (884
  

 

 

   

 

 

 

Net Loan Servicing Fee

$ —      $ —     
  

 

 

   

 

 

 

Incentive fee (B)

  922      974   

Incentive fee credit

          (515
  

 

 

   

 

 

 

Net Incentive Fee

$ 922    $ 459   
  

 

 

   

 

 

 

Portfolio company fee credit

  (375   (333

Senior syndicated loan fee waiver

  (37   (30

Incentive fee credit

  —        (515
  

 

 

   

 

 

 

Credits to Fees From Adviser - other (B)

$ (412 $ (878
  

 

 

   

 

 

 

 

  (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 Consol