Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 10-Q, Received: 08/03/2016 16:04:34)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one):

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100

MCLEAN, VIRGINIA

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

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of August 2, 2016 was 23,344,422.

 

 

 


Table of Contents

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I .

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
  Consolidated Statements of Assets and Liabilities as of June 30, 2016 and September 30, 2015      3   
  Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015      4   
  Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2016 and 2015      5   
  Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and 2015      6   
  Consolidated Schedules of Investments as of June 30, 2016 and September 30, 2015      7   
  Notes to Consolidated Financial Statements      16   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   
  Overview      38   
  Results of Operations      42   
  Liquidity and Capital Resources      50   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      56   

Item 4.

  Controls and Procedures      56   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      57   

Item 1A.

  Risk Factors      57   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      57   

Item 3.

  Defaults Upon Senior Securities      58   

Item 4.

  Mine Safety Disclosures      58   

Item 5.

  Other Information      58   

Item 6.

  Exhibits      58   

SIGNATURES

     59   

 

2


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     June 30,     September 30,  
     2016     2015  

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $259,811 and $287,055, respectively)

   $ 231,609      $ 277,411   

Affiliate investments (Cost of $84,639 and $81,427, respectively)

     60,695        66,029   

Control investments (Cost of $41,876 and $41,762 respectively)

     15,922        22,451   
  

 

 

   

 

 

 

Total investments at fair value (Cost of $386,326 and $410,244 respectively)

     308,226        365,891   
  

 

 

   

 

 

 

Cash and cash equivalents

     5,022        3,808   

Restricted cash and cash equivalents

     60        283   

Interest receivable, net

     2,654        5,581   

Due from custodian

     1,779        1,186   

Deferred financing fees, net

     3,434        4,161   

Other assets, net

     4,375        1,572   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 325,550      $ 382,482   
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $73,300 and $127,300, respectively)

   $ 73,300      $ 127,300   

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

     434        597   

Interest payable

     164        272   

Fees due to Adviser (A)

     1,364        904   

Fee due to Administrator (A)

     287        250   

Other liabilities

     3,487        715   
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 140,036      $ 191,038   
  

 

 

   

 

 

 

Commitments and contingencies (B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized; 23,344,422 and 21,131,622 shares issued and outstanding as of June 30, 2016 and September 30, 2015, respectively

   $ 23      $ 21   

Capital in excess of par value

     327,697        307,862   

Cumulative net unrealized depreciation of investments

     (78,100 )     (44,353

Cumulative net unrealized depreciation of other

     —          (61

Under (over) distributed net investment income

     4,599        (1,541

Accumulated net realized losses

     (68,705     (70,484
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 185,514      $ 191,444   
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 7.95      $ 9.06   
  

 

 

   

 

 

 

 

(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 CONSOLIDATED FINANCIAL STATEMENTS.

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

INVESTMENT INCOME

        

Interest income, net

        

Non-Control/Non-Affiliate investments

   $ 5,878      $ 7,003      $ $19,203      $ 20,199   

Affiliate investments

     2,069        1,793        5,980        4,492   

Control investments

     304        310        921        800   

Other

     2        1        3        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,253        9,107        26,107        25,495   

Other income

        

Non-Control/Non-Affiliate investments

     542        578        1,831        1,656   

Affiliate investments

     466        —          466        —     

Control investments

     583        250        958        733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     1,591        828        3,255        2,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,844        9,935        29,362        27,884   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee (A)

     1,369        1,859        4,258        5,257   

Loan servicing fee (A)

     896        1,015        2,876        2,802   

Incentive fee (A)

     1,187        1,021        3,369        2,866   

Administration fee (A)

     287        235        900        784   

Interest expense on borrowings

     648        1,033        2,066        2,735   

Dividend expense on mandatorily redeemable preferred stock

     1,029        1,029        3,088        3,087   

Amortization of deferred financing fees

     273        253        802        857   

Professional fees

     214        315        925        899   

Other general and administrative expenses

     426        222        1,106        893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     6,329        6,982        19,390        20,180   

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

     (896     (1,015     (2,876     (2,802

Credits to fees from Adviser - other (A)

     (496     (868     (1,736     (1,714
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     4,937        5,099        14,778        15,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     4,907        4,836        14,584        12,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized (loss) gain:

        

Non-Control/Non-Affiliate investments

     (153     (1,143     8,875        435   

Affiliate investments

     72        —          1,280        —     

Control investments

     (3     —          (318     (14,459

Other

     —          68        (64     (491
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized (loss) gain

     (84     (1,075     9,773        (14,515

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     4,176        7,920        (18,558     8,682   

Affiliate investments

     (2,012     (7,465     (8,546     (7,815

Control investments

     (1,471     (1,602     (6,643     13,295   

Other

     —          693        62        1,313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     693        (454     (33,685     15,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     609        (1,529     (23,912     960   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 5,516      $ 3,307      $ (9,328   $ 13,180   
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED PER COMMON SHARE:

        

Net investment income

   $ 0.21      $ 0.23      $ 0.63      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.24      $ 0.16      $ (0.40   $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared and paid

   $ 0.21      $ 0.21      $ 0.63      $ 0.63   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:   Basic and Diluted

     23,363,952        21,123,202        23,145,842        21,045,014   

 

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

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

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2016     2015  

OPERATIONS

    

Net investment income

   $ 14,584      $ 12,220   

Net realized gain (loss) on investments and other

     9,773        (14,515

Net unrealized (depreciation) appreciation of investments

     (33,747     14,162   

Net unrealized depreciation of other

     62        1,313   
  

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (9,328     13,180   
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income

     (11,395     (13,261

Distributions to common stockholders from realized gains

     (3,189     —     
  

 

 

   

 

 

 

Total distributions to common stockholders

     (14,584     (13,261
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     19,665        1,169   

Offering costs for issuance of common stock

     (1,111     (205

Repurchase of common stock

     (572     —     

Repayment of principal on employee note

     —          100   
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     17,982        1,064   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS

     (5,930     983   

NET ASSETS, BEGINNING OF PERIOD

     191,444        199,660   
  

 

 

   

 

 

 

NET ASSETS, END OF PERIOD

   $ 185,514      $ 200,643   
  

 

 

   

 

 

 

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

 

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Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Nine Months Ended June 30,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (decrease) increase in net assets resulting from operations

   $ (9,328   $ 13,180   

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

    

Purchase of investments

     (59,862     (93,765

Principal repayments on investments

     78,596        10,060   

Net proceeds from sale of investments

     19,829        18,541   

Net realized (gain) loss on investments

     (9,837     14,024   

Increase in investments due to paid-in-kind interest or other

     (4,311     (463

Net change in premiums, discounts and amortization

     (109     219   

Cost adjustments on non-accrual loans

     (388     (384

Net unrealized depreciation (appreciation) of investments

     33,747        (14,162

Net realized loss on other

     64        —     

Net unrealized depreciation of other

     (62     (1,313

Decrease in restricted cash and cash equivalents

     223        179   

Amortization of deferred financing fees

     802        857   

Decrease (increase) in interest receivable, net

     2,927        (2,407

(Increase) decrease in due from custodian

     (593     3,047   

Increase in other assets, net

     (2,803     (213

Decrease in accounts payable and accrued expenses

     (163     (45

(Decrease) increase in interest payable

     (108     85   

Increase in fees due to Adviser (A)

     460        343   

Increase in fee due to Administrator (A)

     37        16   

Increase (decrease) in other liabilities and other

     2,770        (137
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     51,891        (52,338
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     77,000        109,000   

Repayments on borrowings

     (131,000     (41,100

Deferred financing fees

     (75     (1,856

Proceeds from issuance of common stock

     19,665        1,169   

Offering costs for issuance of common stock

     (1,111     (205

Repurchases of common stock

     (572     —     

Distributions paid to common stockholders

     (14,584     (13,261

Receipt of principal on employee note

     —          100   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (50,677     53,847   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     1,214        1,509   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     3,808        6,314   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 5,022      $ 7,823   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES (B)

   $ 3,921      $ —     

 

(A)   Refer to Note 4— Related Party Transactions for additional information.
(B)   Significant non-cash operating activities consisted principally of the following transaction: In February 2016, our investment in Targus Group International, Inc. (“Targus”) was restructured. As part of the transaction, our secured first lien debt investment with a cost basis and fair value of $9.0 million and $6.9 million, respectively, was restructured resulting in a common stock investment with a cost basis of $2.3 million and a secured first lien debt investment with a cost basis of $2.1 million. We contributed $0.5 million in cash as part of the transaction. The restructure resulted in a net realized loss of $5.5 million and a new investment in Targus Cayman HoldCo Limited, which is listed on the accompanying Consolidated Statement of Investments as of June 30, 2016.

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

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

        

Proprietary Investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (D)    $ 13,000       $ 13,000       $ 12,870   
      Member Profit Participation (18.0% ownership) (F)(H)         1,000         —     
      Profit Participation Warrants (7.0% ownership) (F)(H)         244         —     
           

 

 

    

 

 

 
              14,244         12,870   

Alloy Die Casting Corp. (T)

   Diversified/conglomerate    Secured First Lien Debt (13.5%, Due 10/2018) (D)      5,235         5,235         4,947   
   manufacturing    Secured First Lien Debt (13.5%, Due 4/2017) (D)      75         75         75   
      Preferred Stock (1,742 shares) (F)(H)         1,742         248   
      Common Stock (270 shares) (F)(H)         18         —     
           

 

 

    

 

 

 
              7,070         5,270   

Behrens Manufacturing, LLC (T)

   Diversified/conglomerate    Secured First Lien Debt (13.0%, Due 12/2018) (D)      4,275         4,275         4,302   
   manufacturing    Preferred Stock (1,253 shares) (F)(H)(K)         1,253         4,239   
           

 

 

    

 

 

 
              5,528         8,541   

B+T Group Acquisition Inc. (T)

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (D)      6,000         6,000         5,670   
      Preferred Stock (5,503 shares) (F)(H)(K)         1,799         —     
           

 

 

    

 

 

 
              7,799         5,670   

Chinese Yellow Pages Company

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

Drumcree, LLC

   Broadcasting and entertainment    Secured First Lien Debt (13.0% PIK, Due 1/2017) (F)(G)      4,680         4,680         4,680   

Flight Fit N Fun LLC

   Leisure, Amusement, Motion Pictures, Entertainment    Secured First Lien Debt (12.0%, Due 9/2020) (D)      7,800         7,800         7,761   
      Preferred Stock (700,000 units) (F)(H)         700         969   
           

 

 

    

 

 

 
              8,500         8,730   

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.4%, Due 4/2020) (D)      15,000         15,000         9,750   
      Secured Second Lien Debt (10.8%, Due 4/2020) (D)      7,000         7,000         4,550   
      Preferred Equity Units (999 units) (F)(H)         860         —     
      Common Equity Units (999 units) (F)(H)         1         —     
           

 

 

    

 

 

 
              22,861         14,300   

Funko Acquisition Holdings, LLC (T)

   Personal and non-durable    Preferred Equity Units (260 units) (H)(F)         260         326   
   consumer products    Common Stock (975 units) (H)(F)         —           —     
           

 

 

    

 

 

 
              260         326   

GFRC Holdings, LLC

   Buildings and real estate   

Secured First Lien Line of Credit, $295 available (9.0%,

Due 9/2018) (F)

     905         905         905   
      Secured First Lien Debt (9.0%, Due 9/2018) (F)      1,000         1,000         1,000   
      Preferred Stock (1,000 shares) (F)(H)         1,025         851   
      Common Stock Warrants (45.0% ownership) (F)(H)         —           —     
           

 

 

    

 

 

 
              2,930         2,756   

IA Tech, LLC

   Diversified/conglomerate    Secured First Lien Debt (12.0%, Due 6/2021) (J)      30,000         30,000         30,000   
   service            

LCR Contractors, LLC

   Buildings and Real Estate    Secured First Lien Debt (10.0%, Due 1/2021) (D)      8,500         8,500         8,479   

Leeds Novamark Capital I, L.P.

   Private equity fund–healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $2,004 uncalled capital commitment) (H)(M)(S)         991         759   

Meridian Rack & Pinion, Inc. (T)

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)      4,140         4,140         3,705   
      Preferred Stock (1,449 shares) (F)(H)         1,449         258   
           

 

 

    

 

 

 
              5,589         3,963   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (N) (Continued):                     

Mikawaya

   Beverage, Food and Tobacco    Secured Second Lien Debt (11.5%, Due 1/2021) (D)    $ 6,750       $ 6,750       $ 6,699   
      Common Stock (450 units) (F)(H)         450         219   
           

 

 

    

 

 

 
              7,200         6,918   

Precision Acquisition Group Holdings, Inc.

   Machinery    Secured First Lien Equipment Note (11.0%, Due 4/2016) (F)      1,000         1,000         368   
      Secured First Lien Debt (11.0%, Due 4/2016) (F)      4,125         4,125         1,516   
      Secured First Lien Debt (11.0%, Due 4/2016) (C)(F)      4,053         4,053         1,489   
           

 

 

    

 

 

 
              9,178         3,373   

Southern Petroleum Laboratories, Inc.

   Oil and gas    Secured Second Lien Debt (11.5%, Due 1/2020) (D)      8,000         8,000         8,000   
      Preferred Stock (4,135,127 shares) (F)(H)         831         1,826   
           

 

 

    

 

 

 
              8,831         9,826   

Travel Sentry, Inc.

   Diversified/conglomerate service    Secured First Lien Debt (9.5%, Due 12/2021) (D)      10,000         10,000         9,964   

Triple H Food Processors

   Beverage, Food and Tobacco    Secured First Lien Line of Credit, $1,500 available (7.8%, Due 8/2018) (D)      —           —           —     
      Secured First Lien Debt (9.8%, Due 8/2020) (D)      7,700         7,700         7,767   
      Common Stock (250,000 units) (F)(H)         250         633   
           

 

 

    

 

 

 
              7,950         8,400   

TWS Acquisition Corporation

   Healthcare, education and childcare    Secured First Lien Line of Credit, $1,500 available (9.0%, Due 7/2017) (D)      —           —           —     
      Secured First Lien Debt (9.0%, Due 7/2020) (D)      10,000         10,000         10,100   
           

 

 

    

 

 

 
              10,000         10,100   

United Flexible, Inc.

   Diversified/conglomerate manufacturing   

Secured Second Lien Debt (10.5%, 2.0% PIK,

Due 2/2022) (D)

     17,544         17,544         17,017   
      Preferred Stock (260 shares) (F)(H)         260         287   
      Common Stock (538 shares) (F)(H)         9         —     
           

 

 

    

 

 

 
              17,813         17,304   

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $0 available (7.5%, Due 1/2017) (D)      1,450         1,450         1,331   
      Secured First Lien Delayed Draw Term Loan, $1,300 available (10.0%, Due 1/2017) (D)(G)      1,200         1,200         1,084   
      Secured First Lien Debt (9.8%, Due 1/2017) (D)      9,000         9,000         8,130   
           

 

 

    

 

 

 
              11,650         10,545   

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $1,125 available (8.0%, Due 4/2017) (D)      1,875         1,875         1,758   
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      12,000         12,000         11,253   
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      7,000         7,000         6,475   
      Preferred Stock (1,000 shares) (F)(H)         617         144   
           

 

 

    

 

 

 
              21,492         19,630   

Westland Technologies, Inc.

   Diversified/conglomerate    Secured First Lien Debt (10.5%, Due 1/2017) (D)      4,000         4,000         4,000   
   manufacturing    Common Stock (58,333 shares) (F)(H)         408         1,275   
           

 

 

    

 

 

 
              4,408         5,275   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 227,582       $ 207,679   
        

 

 

    

 

 

 

Syndicated Investments:

              

Autoparts Holdings Limited

   Automobile    Secured Second Lien Debt (11.0%, Due 1/2018) (E)    $ 700       $ 698       $ 504   

NetSmart Technologies, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.5%, Due 10/2023) (E)      2,000         1,951         2,000   
              

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000         3,990         3,160   
              

 

8


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
Syndicated Investments (Continued):                     

PLATO Learning, Inc.

   Healthcare, education and childcare    Unsecured Debt (10.0% PIK, Due 6/2020) (D)(G)    $ 2,927       $ 2,885       $ 2,924   
      Common Stock (21,429 shares) (F)(H)         2,637         —     
           

 

 

    

 

 

 
              5,522         2,924   

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.3%, Due 12/2021) (E)      3,500         3,441         3,307   
              

RP Crown Parent, LLC

   Electronics    Secured Second Lien Debt (11.3%, Due 12/2019) (E)      2,000         1,976         1,648   

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.5%, Due 4/2020) (E)      5,000         4,845         2,649   

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      1,000         996         983   

Vertellus Specialties Inc.

   Chemicals, plastics and rubber    Secured First Lien Debt (10.5%, Due 10/2019) (E)(I)      3,940         3,837         2,640   

Vitera Healthcare Solutions, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.3%, Due 11/2021) (E)      4,500         4,478         3,915   
              

W3 Co.

   Oil and gas    Secured Second Lien Debt (9.3%, Due 9/2020) (E)      499         495         200   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Syndicated Investments

  

   $ 32,229       $ 23,930   
  

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 75.1% of total investments at fair value)

  

   $ 259,811       $ 231,609   
  

 

 

    

 

 

 

AFFILIATE INVESTMENTS (O) :

           

Proprietary Investments:

              

Edge Adhesives Holdings LLC (T)

   Diversified/conglomerate manufacturing    Secured First Lien Debt (12.5%, Due 2/2019) (D)    $ 6,200       $ 6,200       $ 5,983   
      Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600         1,600         1,548   
      Preferred Stock (2,516 units) (F)(H)         2,516         —     
           

 

 

    

 

 

 
              10,316         7,531   

FedCap Partners LLC

   Private equity fund – aerospace and defense    Class A Membership Units (80 units, $0 Uncalled         1,634         1,265   
      Commitment) (H)(L)(S)         

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals   

Secured Second Lien Debt (12.0%, Due 2/2021) (D)

 

     6,000         6,000         5,940   
      Secured Second Lien Debt (12.0%, Due 2/2021) (D)      8,000         8,000         7,920   
      Common Stock (152,603 shares) (F)(H)         1,856         1,640   
           

 

 

    

 

 

 
              15,856         15,500   

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $0 available (6.5%, Due 12/2017) (D)      2,450         2,450         2,301   
      Secured First Lien Debt (9.5%, Due 12/2019) (D)      10,632         10,632         7,838   
      Common Units (921,000 units) (F)(H)         921         —     
           

 

 

    

 

 

 
              14,003         10,139   

RBC Acquisition Corp.

   Healthcare, education and childcare    Secured First Lien Debt (8.0%, Due 2/2019) (F)    $ 6,954       $ 6,954       $ 6,954   
      Secured First Lien Line of Credit, $0 available (6.0%, 3% PIK, Due 12/2016) (F)(G)      4,594         4,594         4,594   
      Secured First Lien Debt (8.0%, 4.0% PIK, Due 12/2016) (C)(F)(G)      13,668         13,668         10,542   
      Secured First Lien Mortgage Note (Due 12/2017) (F)(Q)      7,704         7,704         —     
      Preferred Stock (4,999,000 shares) (F)(H)(K)         4,999         —     
      Common Stock (2,000,000 shares) (F)(H)         370         —     
           

 

 

    

 

 

 
              38,289         22,090   
           

 

 

    

 

 

 

Subtotal – Affiliate Proprietary Investments

  

   $ 80,098       $ 56,525   
           

 

 

    

 

 

 

 

9


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

JUNE 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
AFFILIATE INVESTMENTS (O) (Continued):                     
Syndicated Investments:                     

Targus Cayman HoldCo Limited

   Textiles and leather    Secured First Lien Debt (15.0% PIK, Due 12/2019) (D)(G)      2,198         2,198         2,182   
     

Common Stock (526,141 shares) (F)(H)

        2,343         1,988   
           

 

 

    

 

 

 
              4,541         4,170   
           

 

 

    

 

 

 

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

  

   $ 84,639       $ 60,695   
  

 

 

    

 

 

 

CONTROL INVESTMENTS (P) :

           

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 2/2019) (F)    $ 6,305       $ 6,305       $ 6,305   
      Common Stock (33,321 shares) (F)(H)         580         2,817   
           

 

 

    

 

 

 
            $ 6,885       $ 9,122   

Sunshine Media Holdings

   Printing and publishing    Secured First Lien Line of Credit, $672 available (8.0%, Due 5/2016) (F)(G)(R)      1,328         1,328         1,328   
      Secured First Lien Debt (8.0%, Due 5/2016) (F)(G)(R)      5,000         5,000         1,614   
      Secured First Lien Debt (4.8%, Due 5/2016) (F)(I)(R)      11,948         11,948         3,858   
      Secured First Lien Debt (5.5%, Due 5/2016) (C)(F)(I)(R)      10,700         10,700         —     
      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)         —           —     
           

 

 

    

 

 

 
              34,991         6,800   
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 5.2% of total investments at fair value)

  

   $ 41,876       $ 15,922   
  

 

 

    

 

 

 

TOTAL INVESTMENTS

            $ 386,326       $ 308,226   
           

 

 

    

 

 

 

 

(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 $259.4 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5— Borrowings.   Under the Investment Company Act of 1940, as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of June 30, 2016, 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. Such non-qualifying assets represent 0.7% of total investments, at fair value, as of June 30, 2016.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at June 30, 2016, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates and any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company businesses.
(C)   Last out tranche (“LOT”) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other debt and equity holders.
(D)   Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”).
(E)   Fair value was based on the indicative bid price on or near June 30, 2016, 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 investment valued at cost, as it was determined that the price paid during the quarter ended June 30, 2016 best represents fair value as of June 30, 2016.
(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 and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(P) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(Q) This investment does not have a stated interest rate that is payable thereon.
(R) Subsequent to June 30, 2016, the maturity dates of our loans to Sunshine Media Holdings were extended to May 2018.
(S) Fair value was based on net asset value provided by the fund as a practical expedient.
(T) One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

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

 

10


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 

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

        

Proprietary Investments:

              

AG Transportation Holdings, LLC

   Cargo transport    Secured Second Lien Debt (13.3%, Due 3/2018) (D)    $ 13,000       $ 12,980       $ 12,870   
      Member Profit Participation (18.0% ownership) (F)(H)         1,000         564   
      Profit Participation Warrants (7.0% ownership) (F)(H)         244         —     
           

 

 

    

 

 

 
              14,224         13,434   

Allison Publications, LLC

   Printing and publishing   

Secured First Lien Line of Credit, $250 available (8.3%,

Due 9/2016) (D)

     350         350         347   
      Secured First Lien Debt (8.3%, Due 9/2018) (D)      2,444         2,444         2,422   
      Secured First Lien Debt (13.0%, Due 9/2018) (C) (D)      5,400         5,400         5,360   
           

 

 

    

 

 

 
              8,194         8,129   

Alloy Die Casting Corp. (T)

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.5%, Due 10/2018) (D)      5,235         5,235         4,947   
      Preferred Stock (1,742 shares) (F)(H)         1,742         153   
      Common Stock (270 shares) (F)(H)         18         —     
           

 

 

    

 

 

 
              6,995         5,100   

Behrens Manufacturing, LLC (T)

   Diversified/conglomerate manufacturing    Secured First Lien Debt (13.0%, Due 12/2018) (D)      4,275         4,275         4,264   
      Preferred Stock (1,253 shares) (F)(H)(K)         1,253         2,268   
           

 

 

    

 

 

 
              5,528         6,532   

B+T Group Acquisition Inc. (T)

   Telecommunications    Secured First Lien Debt (13.0%, Due 12/2019) (D)      6,000         6,000         5,865   
      Preferred Stock (5,503 shares) (F)(H)(K)         1,799         —     
           

 

 

    

 

 

 
              7,799         5,865   

Chinese Yellow Pages Company

   Printing and publishing    Secured First Lien Line of Credit, $0 available (7.3%, Due 2/2015) (D)      108         108         32   

Flight Fit N Fun LLC

   Leisure, Amusement, Motion Pictures, Entertainment    Secured First Lien Debt (12.0%, Due 9/2020) (J)      7,800         7,800         7,800   
      Preferred Stock (700,000 units) (H)(J)         700         700   
           

 

 

    

 

 

 
              8,500         8,500   

Francis Drilling Fluids, Ltd.

   Oil and gas    Secured Second Lien Debt (11.4%, Due 4/2020) (D)      15,000         15,000         12,938   
      Secured Second Lien Debt (10.3%, Due 4/2020) (D)      7,000         7,000         6,037   
      Preferred Equity Units (999 units) (F)(H)         648         747   
      Common Equity Units (999 units) (F)(H)         1         206   
           

 

 

    

 

 

 
              22,649         19,928   

Funko, LLC (T)

   Personal and non-durable    Secured First Lien Debt (9.3%, Due 5/2019) (F)(G)      7,500         7,500         7,500   
   consumer products    Secured First Lien Debt (9.3%, Due 5/2019) (F)(G)      2,000         2,000         2,000   
      Preferred Equity Units (1,305 units) (L)(H)         1,305         17,314   
           

 

 

    

 

 

 
              10,805         26,814   

GFRC Holdings, LLC

   Buildings and real estate   

Secured First Lien Line of Credit, $840 available (9.0%,

Due 9/2018) (J)

     360         360         360   
      Secured First Lien Debt (9.0%, Due 9/2018) (J)      1,000         1,000         1,000   
      Preferred Stock (1,000 shares) (H)(J)         1,025         1,025   
      Common Stock Warrant (45% ownership) (H)(J)         —           —     
           

 

 

    

 

 

 
              2,385         2,385   

Heartland Communications Group

   Broadcasting and entertainment   

Secured First Lien Line of Credit, $0 available (5.0%,

Due 10/2015) (F)(G)(I)

     91         82         31   
     

Secured First Lien Line of Credit, $0 available (10.0%,

Due 10/2015) (F)(G)(I)

     91         74         31   
      Secured First Lien Debt (5.0%, Due 10/2015) (F)(G)(I)      3,931         3,568         1,338   
      Common Stock Warrants (8.8% ownership) (F)(H)         66         —     
           

 

 

    

 

 

 
              3,790         1,400   

 

11


Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (P) (Continued):                     

J.America, Inc.

   Personal and non-durable consumer products   

Secured Second Lien Debt (10.4%, 1.0% PIK,

Due 12/2019) (D)(G)

   $ 7,538       $ 7,538       $ 7,331   
     

Secured Second Lien Debt (11.5%, 1.0% PIK,

Due 12/2019) (D)(G)

     9,548         9,548         9,274   
           

 

 

    

 

 

 
              17,086         16,605   

Leeds Novamark Capital I, L.P.

   Private equity fund–healthcare, education and childcare    Limited Partnership Interest (3.5% ownership, $2,214 uncalled capital commitment) (H)(M)(O)      781         781         555   

Legend Communications of Wyoming, LLC

   Broadcasting and entertainment    Secured First Lien Debt (11.0%, Due 11/2014) (D)      6,699         6,699         3,816   

Meridian Rack & Pinion, Inc. (T)

   Automobile    Secured First Lien Debt (13.5%, Due 12/2018) (D)      4,140         4,140         4,036   
      Preferred Stock (1,449 shares) (F)(H)         1,449         —     
           

 

 

    

 

 

 
              5,589         4,036   

Mikawaya

   Beverage, Food and Tobacco    Secured Second Lien Debt (11.5%, Due 1/2021) (J)      6,750         6,750         6,750   
      Common Stock (450 units) (H)(J)         450         450   
           

 

 

    

 

 

 
              7,200         7,200   

Precision Acquisition Group Holdings, Inc.

   Machinery    Secured First Lien Equipment Note (11.0%, Due 4/2016) (D)      1,000         1,000         1,104   
      Secured First Lien Debt (11.0%, Due 4/2016) (D)      4,125         4,125         2,910   
      Secured First Lien Debt (11.0%, Due 4/2016) (C)(D)      4,053         4,053         640   
           

 

 

    

 

 

 
              9,178         4,654   

Southern Petroleum Laboratories, Inc.

   Oil and gas    Secured Second Lien Debt (11.5%, Due 1/2020) (D)      8,000         8,000         7,600   
      Preferred Stock (4,054,054 shares) (F)(H)         750         1,274   
           

 

 

    

 

 

 
              8,750         8,874   

Triple H Food Processors

   Beverage, Food and Tobacco    Secured First Lien Line of Credit, $1,500 available (7.8%, Due 8/2018) (J)      —           —           —     
      Secured First Lien Debt (9.8%, Due 8/2020) (J)      8,000         8,000         8,000   
      Common Stock (250,000 units) (H)(J)         250         250   
           

 

 

    

 

 

 
              8,250         8,250   

TWS Acquisition Corporation

   Healthcare, education and childcare    Secured First Lien Line of Credit, $1,500 available (10.0%, Due 7/2017) (J)      —           —           —     
      Secured First Lien Debt (10.0%, Due 7/2020) (J)      13,000         13,000         13,000   
           

 

 

    

 

 

 
              13,000         13,000   

United Flexible, Inc.

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $4,000 available (7.0%, Due 2/2018) (D)      —           —           —     
      Secured First Lien Debt (9.3%, Due 2/2020) (D)      20,284         20,284         20,030   
      Preferred Stock (245 shares) (F)(H)         245         261   
      Common Stock (500 shares) (F)(H)         5         64   
           

 

 

    

 

 

 
              20,534         20,355   

Vision Government Solutions, Inc.

   Diversified/conglomerate service    Secured First Lien Line of Credit, $550 available (7.5%, Due 12/2017) (D)      1,450         1,450         1,434   
      Secured First Lien Debt (9.75%, Due 12/2019) (D)      9,000         9,000         8,899   
           

 

 

    

 

 

 
              10,450         10,333   

WadeCo Specialties, Inc.

   Oil and gas    Secured First Lien Line of Credit, $2,525 available (8.0%, Due 3/2016) (D)      2,475         2,475         2,388   
      Secured First Lien Debt (8.0%, Due 3/2019) (D)      12,750         12,750         12,307   
      Secured First Lien Debt (12.0%, Due 3/2019) (D)      7,000         7,000         6,748   
      Preferred Stock (1,000 shares) (F)(H)         477         477   
           

 

 

    

 

 

 
              22,702         21,920   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
NON-CONTROL/NON-AFFILIATE INVESTMENTS (P) (Continued):                     

Westland Technologies, Inc.

  

Diversified/conglomerate

manufacturing

   Secured First Lien Debt (12.5%, Due 4/2016) (D)    $ 4,000       $ 4,000       $ 4,013   
      Common Stock (58,333 shares) (F)(H)         408         639   
           

 

 

    

 

 

 
              4,408         4,652   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Proprietary Investments

      $ 225,604       $ 222,369   
        

 

 

    

 

 

 

Syndicated Investments:

              

Ameriqual Group, LLC

   Beverage, food and tobacco    Secured First Lien Debt (9.0% and 1.3% PIK, Due 3/2016) (E)    $ 7,367       $ 7,352       $ 7,367   

Autoparts Holdings Limited

   Automobile    Secured Second Lien Debt (11.0%, Due 1/2018) (E)      700         698         692   

First American Payment Systems, L.P.

   Finance    Secured Second Lien Debt (10.8%, Due 4/2019) (L)      4,195         4,172         4,006   

GTCR Valor Companies, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      3,000         2,984         2,940   

New Trident Holdcorp, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.3%, Due 7/2020) (E)      4,000         3,989         3,720   
              

PLATO Learning, Inc.

   Healthcare, education and childcare    Secured Second Lien Debt (10.0% PIK, Due 6/2020) (D)(G)      2,718         2,666         2,715   
      Common Stock (21,429 shares) (F)(H)         2,637         —     
           

 

 

    

 

 

 
              5,303         2,715   

PSC Industrial Holdings Corp.

   Diversified/conglomerate service    Secured Second Lien Debt (9.3%, Due 12/2021) (E)      3,500         3,436         3,430   

RP Crown Parent, LLC

   Electronics    Secured Second Lien Debt (11.3%, Due 12/2019) (E)      2,000         1,971         1,720   

SourceHOV LLC

   Finance    Secured Second Lien Debt (11.5%, Due 4/2020) (E)      5,000         4,822         4,350   

Targus Group International, Inc.

   Textiles and leather    Secured First Lien Debt (13.8% and 1.0% PIK, Due 5/2016) (E)      8,976         8,950         6,911   

The Active Network, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 11/2021) (E)      1,000         996         930   

Vertellus Specialties Inc.

   Chemicals, plastics and rubber    Secured First Lien Debt (10.5%, Due 10/2019) (E)      3,960         3,839         3,524   

Vision Solutions, Inc.

   Electronics    Secured Second Lien Debt (9.5%, Due 7/2017) (E)      8,000         7,968         7,960   

Vitera Healthcare Solutions, LLC

   Healthcare, education and childcare    Secured Second Lien Debt (9.3%, Due 11/2021) (E)      4,500         4,476         4,388   

W3 Co.

   Oil and gas    Secured Second Lien Debt (9.3%, Due 9/2020) (E)      499         495         389   
           

 

 

    

 

 

 

Subtotal – Non-Control/Non-Affiliate Syndicated Investments

      $ 61,451       $ 55,042   
        

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 75.8% of total investments at fair value)

  

   $ 287,055       $ 277,411   
  

 

 

    

 

 

 

AFFILIATE INVESTMENTS (Q) :

           

Proprietary Investments:

              

Ashland Acquisition LLC

   Printing and publishing    Secured First Lien Line of Credit, $1,500 available (12.0%, Due 7/2016) (D)(G)    $ —         $ —         $ —     
      Secured First Lien Debt (12.0%, Due 7/2018) (D)(G)      7,000         7,000         7,017   
      Preferred Equity Units (4,400 units) (F)(H)         440         574   
      Common Equity Units (4,400 units) (F)(H)         —           238   
           

 

 

    

 

 

 
              7,440         7,829   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
AFFILIATE INVESTMENTS (Q) (Continued):                     

Edge Adhesives Holdings LLC (T)

   Diversified/conglomerate manufacturing    Secured First Lien Debt (12.5%, Due 2/2019) (D)    $ 6,200       $ 6,200       $ 6,123   
      Secured First Lien Debt (13.8%, Due 2/2019) (D)      1,600         1,600         1,582   
      Preferred Stock (2,516 units) (F)(H)         2,516         —     
           

 

 

    

 

 

 
              10,316         7,705   

FedCap Partners, LLC

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

Lignetics, Inc.

   Diversified natural resources, precious metals and minerals    Secured Second Lien Debt (12.0%, Due 2/2021) (D)      6,000         6,000         5,940   
      Secured Second Lien Debt (12.0%, Due 2/2021) (D)      8,000         8,000         7,920   
      Common Stock (152,603 shares) (F)(H)         1,855         2,211   
           

 

 

    

 

 

 
              15,855         16,071   

LWO Acquisitions Company LLC

   Diversified/conglomerate manufacturing    Secured First Lien Line of Credit, $1,950 available (6.5%, Due 12/2017) (D)      1,050         1,050         1,049   
      Secured First Lien Debt (9.5%, Due 12/2019) (D)      10,579         10,579         10,566   
      Common Units (921,000 units) (F)(H)         921         545   
           

 

 

    

 

 

 
              12,550         12,160   

RBC Acquisition Corp.

   Healthcare, education and childcare    Secured First Lien Line of Credit, $0 available (9.0%, Due 12/2015) (F)      4,000         4,000         4,000   
      Secured First Lien Mortgage Note (9.5%, Due 12/2015) (F)(G)      6,871         6,871         6,871   
      Secured First Lien Debt (12.0%, Due 12/2015) (C)(F)      11,392         11,392         9,746   
      Secured First Lien Debt (12.5%, Due 12/2015) (F)(G)      6,000         6,000         —     
      Preferred Stock (4,999,000 shares) (F)(H)(K)         4,999         —     
      Common Stock (2,000,000 shares) (F)(H)         370         —     
           

 

 

    

 

 

 
              33,632         20,617   
           

 

 

    

 

 

 

Total Affiliate Proprietary Investments (represented 18.1% of total investments at fair value)

  

   $ 81,427       $ 66,029   
  

 

 

    

 

 

 

CONTROL INVESTMENTS (R) :

           

Proprietary Investments:

              

Defiance Integrated Technologies, Inc.

   Automobile    Secured Second Lien Debt (11.0%, Due 2/2019) (F)    $ 6,385       $ 6,385       $ 6,384   
      Common Stock (15,500 shares) (F)(H)         1         6,586   
           

 

 

    

 

 

 
              6,386         12,970   

Lindmark Acquisition, LLC

   Broadcasting and entertainment    Secured First Lien Debt, $0 available (25.0%, Due Upon Demand) (F)(G)      —           —           —     
      Success Fee on Secured Second Lien Debt (F)      —           —           20   
      Common Stock (100 shares) (F)(H)         317         —     
           

 

 

    

 

 

 
              317         20   

 

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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2015

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company (A)

  

Industry

  

Investment (B)

   Principal      Cost      Fair
Value
 
CONTROL INVESTMENTS (R) (Continued):                     

Sunshine Media Holdings

  

Printing and publishing

   Secured First Lien Line of Credit, $604 available (8.0%, Due 5/2016) (F)(G)    $ 1,396       $ 1,396       $ 1,396   
      Secured First Lien Debt (8.0%, Due 5/2016) (F)(G)      5,000         5,000         2,379   
      Secured First Lien Debt (4.8%, Due 5/2016) (F)(I)      11,948         11,948         5,686   
      Secured First Lien Debt (5.5%, Due 5/2016) (C)(F)(I)      10,700         10,700         —     
      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)         —           —     
           

 

 

    

 

 

 
              35,059         9,461   
           

 

 

    

 

 

 

Total Control Proprietary Investments (represented 6.1% of total investments at fair value)

  

   $ 41,762       $ 22,451   
           

 

 

    

 

 

 

TOTAL INVESTMENTS (S)

            $ 410,244       $ 365,891   
           

 

 

    

 

 

 

 

(A) Certain of the securities listed in the above schedule are issued by affiliate(s) of the indicated portfolio company. Additionally, the majority of the securities listed above, totaling $312.0 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5— Borrowings.   Under the Investment Company Act of 1940, as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2015, 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. Such non-qualifying assets represent 0.5% of total investments, at fair value, as of September 30, 2015.
(B)   Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (“LIBOR”)) in effect at September 30, 2015, and due dates represent the contractual maturity date. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rates. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company 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 September 30, 2015, 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 restructured proprietary investment valued at cost, as it was determined that the price paid during the quarter ended September 30, 2015 best represents fair value as of September 30, 2015.
(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)   Subsequent to September 30, 2015, the investment was sold, and as such the fair value as of September 30, 2015 was based upon the sales amount.
(M) Fair value was based on net asset value provided by the fund as a practical expedient.
(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 Investment Company Act of 1940, as amended, (the “1940 Act”), are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(Q) Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(R) Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(S) Cumulative gross unrealized depreciation for federal income tax purposes is $70.4 million; cumulative gross unrealized appreciation for federal income tax purposes is $25.7 million. Cumulative net unrealized depreciation is $44.7 million, based on a tax cost of $410.6 million.
(T) One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

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

 

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GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2016

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

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 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”) and is applying the guidance of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 946 “ Financial Services-Investment Companies .” In addition, we have elected to be treated for 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 operating in the United States (“U.S”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established small and medium-sized businesses in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of owning a portion of our portfolio of investments in connection with our revolving line of credit.

Gladstone Financial Corporation (“Gladstone Financial”), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial acquired this license in February 2007. The license enables us to make investments in accordance with the United States Small Business Administration guidelines for specialized small business investment companies. As of June 30, 2016 and September 30, 2015, we held no investments in portfolio companies through Gladstone Financial.

The financial statements of Business Loan and Gladstone Financial are consolidated with ours. We also have significant subsidiaries whose financial statements are not consolidated with ours. Refer to Note 12— Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), a Delaware corporation and a U.S. 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”). Refer to Note 4— Related Party Transactions for additional information regarding these arrangements.

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 not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in FASB Accounting Standards Codification 946 (“ASC 946”), Financial Services- Investment Companies, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and nine months ended June 30, 2016, 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, 2015, as filed with the SEC on November 23, 2015, as amended on December 29, 2015.

Our accompanying fiscal year-end 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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Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with 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 investment valuation policy, which has been approved by our Board of Directors (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, our Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from our chief valuation officer, who reports directly to our Board of Directors (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors, comprised entirely of independent directors, meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and our chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors and, after discussion, the Board of Directors ultimately approves the value of our portfolio of investments.

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 our chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors reviews the Policy to determine if changes are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.

Standard & Poor’s Securities Evaluation, Inc. (“SPSE”), a valuation specialist, generally 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 estimate of value on a specific debt investment may significantly differ from SPSE’s. When this occurs, the Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, whether it is reasonable in light of the Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Team’s recommended fair value.

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, inputs provided by an independent valuation firm, if any, and other pertinent factors. The Valuation Team generally reviews industry

 

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

In addition to the above valuation techniques, the Valuation Team may also consider other factors when determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates. If applicable, new and follow-on proprietary debt and equity investments made during the current reporting quarter (the quarter ended June 30, 2016) 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 and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the Adviser’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

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

Revenue Recognition Policy

Interest Income Recognition

Interest income, including the amortization of premiums, acquisition costs, and amendment fees, the accretion of original issue discounts (“OID”), and paid-in-kind (“PIK”) interest, 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 borrower is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when a loan’s status significantly improves regarding the debtor’s ability and intent to pay contractual amounts due, or past due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest

 

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income is deemed to be collectible. As of June 30, 2016, two portfolio companies were either fully or partially on non-accrual status with an aggregate debt cost basis of approximately $26.5 million, or 7.5% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $6.5 million, or 2.3% of the fair value of all debt investments in our portfolio. As of September 30, 2015, two portfolio companies were either fully or partially on non-accrual status with an aggregate debt cost basis of approximately $26.4 million, or 7.1% of the cost basis of all debt investments in our portfolio, and an aggregate debt fair value of approximately $7.1 million, or 2.2% 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 PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Therefore, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.

As of June 30, 2016 and September 30, 2015, we had 11 and 17 original OID loans, respectively, primarily from the syndicated investments in our portfolio. We recorded OID income of $0.1 million during the three and nine months ended June 30, 2016, respectively, as compared to $0.1 and $0.2 million for the three and nine months ended June 30, 2015, respectively. The unamortized balance of OID investments as of June 30, 2016 and September 30, 2015, totaled $0.5 million and $0.6 million, respectively. As of June 30, 2016 and September 30, 2015, we had five and four investments, respectively, with PIK interest. We recorded PIK income totaling $0.6 million and $1.6 million during the three and nine months ended June 30, 2016, respectively and $0.3 and $0.5 million during the three and nine months ended June 30, 2015, respectively. We collected $0 and $0.1 million PIK interest in cash during the three and nine months ended June 30, 2016, respectively, and $0 during the nine months ended June 30, 2015.

Other Income Recognition

We record success fees when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically from an exit or sale. During the nine months ended June 30, 2016 and 2015, we recorded success fee income of $2.8 million and $1.7 million, respectively.

Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. During the nine months ended June 30, 2016 and 2015, we recorded dividend income of $0.3 million and $0.6 million, respectively.

We generally record prepayment fees upon our receipt of cash. Prepayment fees are contractually due at the time of an investment’s exit, based on the prepayment fee schedule. During the nine months ended June 30, 2016, we recorded $0.2 million in prepayment fees. During the nine months ended June 30, 2015, we did not receive any prepayment fees.

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

Recent Accounting Pronouncements

In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial liabilities when the fair value option is elected.

In April 2015, the FASB issued Accounting Standards Update 2015-03, “ Simplifying the Presentation of Debt Issuance Costs ” (“ASU-2015-03”), which simplifies the presentation of debt issuance costs. In August 2015, the FASB issued Accounting Standards Update 2015-15, “ Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ” (“ASU 2015-15”), which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. We are currently assessing the impact of ASU 2015-03 and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted. ASU 2015-15 was effective immediately.

In February 2015, the FASB issued Accounting Standards Update 2015-02, “ Amendments to the Consolidation Analysis ” (“ASU 2015-02”), which amends or supersedes the scope and consolidation guidance under existing GAAP. We do not anticipate ASU-2015-02 to have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those years, with early adoption permitted.

 

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

In May 2014, the FASB issued Accounting Standards Update 2014-09, “ Revenue from Contracts with Customers ” (“ASU 2014-09”), as amended in March 2016 by FASB Accounting Standards Update 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”) and as amended in April 2016 by FASB Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), and in May 2016 by FASB Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which supersede or replace 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 the new guidance and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting these standards. In July 2015, the FASB issued Accounting Standards Update 2015-14, “ Deferral of the Effective Date, ” which deferred the effective date of ASU 2014-09. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12, is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after December 15, 2016 and interim periods within those years.

NOTE 3. INVESTMENTS

Fair Value

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

 

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

 

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

 

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

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of June 30, 2016 and September 30, 2015, all of our investments were valued using Level 3 inputs and during the three and nine months ended June 30, 2016 and 2015, 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 June 30, 2016 and September 30, 2015, by caption on our accompanying 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  
    Consolidated Statements of Assets and Liabilities  Using
Significant Unobservable Inputs (Level 3)
 
    June 30, 2016     September 30, 2015  

Non-Control/Non-Affiliate Investments

   

Secured first lien debt

  $ 139,400      $ 150,426   

Secured second lien debt

    77,253        100,039   

Unsecured debt

    2,924        —     

Preferred equity

    9,335        23,741   

Common equity/equivalents

    2,697        3,205   
 

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

  $ 231,609      $ 277,411   
 

 

 

   

 

 

 

Affiliate Investments

   

Secured first lien debt

  $ 41,943      $ 46,953   

Secured second lien debt

    13,860        13,860   

Preferred equity

    —          574   

Common equity/equivalents

    4,892        4,642   
 

 

 

   

 

 

 

Total Affiliate Investments

  $ 60,695      $ 66,029   
 

 

 

   

 

 

 

Control Investments

   

Secured first lien debt

  $ 6,800      $ 9,461   

Secured second lien debt

    6,304        6,404   

Common equity/equivalents

    2,818        6,586   
 

 

 

   

 

 

 

Total Control Investments

  $ 15,922      $ 22,451   
 

 

 

   

 

 

 

Total Investments, at Fair Value

  $ 308,226      $ 365,891   
 

 

 

   

 

 

 

 

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In accordance with the FASB’s ASU 2011-04, “ Fair Value Measurement (Topic 820):   Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards ( IFRS ) , (“ASU 2011-04”), the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2016 and September 30, 2015. The table below is not intended to be all-inclusive, but rather provides information on the significant unobservable Level 3 inputs as they relate to our fair value measurements.

 

     Quantitative Information about Level 3 Fair Value Measurements  
                         Range / Weighted Average (D)  as of  
     June 30,
2016
     September 30,
2015
     Valuation
Technique/
Methodology
    Unobservable
Input
     June 30,
2016
     September 30,
2015
 

Secured first lien debt (A)

     $142,652         $130,900         Yield Analysis        Discount Rate        

 

8.7% - 18.9%

/ 12.0%

  

  

    
 
6.6% - 30.0% /
13.0%
  
  
     42,851         58,138         TEV        EBITDA multiple        

 

6.2x – 8.2x

/6.4x

  

  

    

 

2.4x - 7.4x

/ 6.3x

  

  

             EBITDA        

 

$1,093 - $4,394

/ $1,385

  

  

    
 
$1,333 - $55,042 /
$7,895
  
  
             Revenue multiple        

 

0.4x – 0.4x

/ 0.4x

  

  

    

 

0.3x – 0.8x

/ 0.7x

  

  

             Revenue        

 

$7,814 - $7,814

/$7,814

  

  

    
 
$1,838 - $6,387 /
$2,968
  
  
             Discount Rate        

 

13.8% - 13.8%

/ 13.8%

  

  

     —     
     2,640         17,802         Market Quote        IBP        

 

67.0% - 67.0%

/67.0%

  

  

    
 
77.0% - 100.0% /
87.7%
  
  

Secured second lien debt (B)

     72,746         72,624         Yield Analysis        Discount Rate        

 

11.5% - 26.7%

/16.4%

  

  

    
 
10.2% - 16.2% /
13.9%
  
  
     18,366         34,525         Market Quote        IBP        

 

40.0% - 100.0%

/ 79.2%

  

  

    
 
78.0% -99.5%/
94.9%
  
  
     6,305         13,154         TEV        EBITDA multiple        

 

4.8x – 4.8x

/4.8x

  

  

    

 

5.0x – 6.4x

/ 5.7x

  

  

             EBITDA        

 

$2,437 - $2,437

/ $2,437

  

  

    
 
$3,740 -$6,878 /
$5,353
 
  

Unsecured debt

     2,924         —           Yield Analysis        Discount Rate        

 

10.1% - 10.1%

/ 10.1%

  

  

     —     

Preferred and common equity / equivalents (C)

     17,719         36,547         TEV        EBITDA multiple        

 

4.0x – 8.2x /

6.3x

  

  

     2.4x – 7.7x / 6.3x   
             EBITDA        

 

$1,093 -$79,086

/$5,459

  

  

    
 
$249 - $55,042 /
$9,258
  
  
     2,023         2,201        
 
Investments in
Funds (E)
  
  
       
  

 

 

    

 

 

            

Total Investments, at Fair Value

     $308,226         $365,891              
  

 

 

    

 

 

            

 

(A) Fair value as of June 30, 2016 includes one new proprietary debt investment for $30.0 million that was valued at cost. Fair value as of September 30, 2015 includes three new proprietary debt investments totaling $28.8 million and one restructured proprietary debt investment for $2.4 million, which were all valued at cost, and two proprietary investments, which were valued at payoff amounts totaling $28.2 million.
B)   Fair value as of September 30, 2015 includes one new proprietary debt investment for $6.8 million, which was valued at cost, and one syndicated investment which was valued at the payoff amount of $4.0 million.
(C) Fair value as of September 30, 2015 includes three new proprietary equity investments totaling $1.4 million, which were all valued at cost.
(D) The weighted average calculations 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.
(E) Fair value as of June 30, 2016 and September 30, 2015 is based on net asset value as a practical expedient and is not subject to leveling within the fair value hierarchy.

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

 

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The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2016 and 2015 for all investments for which we determine fair value using unobservable (Level 3) inputs.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
FISCAL YEAR 2016:    Secured     Secured                  Common        

Three Months Ended June 30, 2016

   First Lien
Debt
    Second
Lien Debt
    Unsecured
Debt
     Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of March 31, 2016

   $ 182,660      $ 91,955      $ —         $ 7,263      $ 11,550      $ 293,428   

Total gains (losses):

             

Net realized loss (A)

     —          —          —           (80     (4     (84

Net unrealized (depreciation) appreciation (B)

     (28     454        4         1,962        (1,128     1,264   

Reversal of prior period net depreciation on realization (B)

     (390     —          —           (169     (13     (572

New investments, repayments and settlements: (C)

             

Issuances/originations

     31,733        2,044        71         137        580        34,565   

Settlements/repayments

     (8,944     (11,078     3         (440     —          (20,459

Net proceeds from sales

     —          —          —           80        4        84   

Transfers

     (16,888     14,042        2,846         582        (582     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2016

   $ 188,143      $ 97,417      $ 2,924       $ 9,335      $ 10,407      $ 308,226   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 
     Secured     Secured                  Common        

Nine Months Ended June 30, 2016

   First Lien
Debt
    Second
Lien Debt
    Unsecured
Debt
     Preferred
Equity
    Equity/
Equivalents
    Total  

Fair Value as of September 30, 2015

   $ 206,840      $ 120,303      $ —         $ 24,315      $ 14,433      $ 365,891   

Total gains (losses):

             

Net realized (loss) gain (A)

     (6,568     (167     —           16,959        (387     9,837   

Net unrealized (depreciation) appreciation (B)

     (12,405     (6,979     4         1,762        (6,677     (24,295

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

     6,209        147        —           (16,178     370        (9,452

New investments, repayments and settlements: (C)

             

Issuances/originations

     62,157        2,280        71         339        3,246        68,093   

Settlements/repayments

     (49,380     (32,202     3         (440     —          (82,019

Net proceeds from sales

     (1,822     (7     —           (18,004     4        (19,829

Transfers

     (16,888     14,042        2,846         582        (582     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2016

   $ 188,143      $ 97,417      $ 2,924       $ 9,335      $ 10,407      $ 308,226   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

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

Three Months Ended June 30, 2015

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of March 31, 2015

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

Total gains (losses):

          

Net realized (loss) gain (A)

     (1,334     191        —          —          (1,143

Net unrealized (depreciation) appreciation (B)

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

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

     2,294        (138     —          —          2,156   

New investments, repayments and settlements: (C)

          

Issuances/originations

     1,045        289        200        125        1,659   

Settlements/repayments

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

Net Proceeds from Sales

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

Transfers

     —          (2,636     —          2,636        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Secured
First
    Secured
Second
    Preferred     Common
Equity/
       

Nine Months Ended June 30, 2015

   Lien Debt     Lien Debt     Equity     Equivalents     Total  

Fair Value as of September 30, 2014

   $ 118,414      $ 135,887      $ 13,684      $ 13,301      $ 281,286   

Total gains (losses):

          

Net realized (loss) gain (A)

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

Net unrealized (depreciation) appreciation (B)

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

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

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

New investments, repayments and settlements: (C)

          

Issuances/originations

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

Settlements/repayments

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

Net proceeds from sales

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

Transfers

     —          (2,636     —          2,636        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of June 30, 2015

   $ 173,968      $ 131,922      $ 27,646      $ 13,680      $ 347,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Included in net realized gain (loss) on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015.
(B)   Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015.
(C)   Includes increases in the cost basis of investments resulting from new portfolio investments, the accretion of discounts, and PIK interest, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Investment Activity

Proprietary Investments

As of June 30, 2016 and September 30, 2015, we held 31 and 33 proprietary investments with an aggregate fair value of $280.1 million and $310.9 million, or 90.9% and 85.0% of the total portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the nine months ended June 30, 2016:

 

    In October 2015, Allison Publications, LLC paid off at par for proceeds of $8.2 million.

 

    In October 2015, we sold our investment in Funko, which resulted in dividend and prepayment fee income of $0.3 million and a realized gain of $16.9 million. In connection with the sale, we received net cash proceeds of $15.3 million, full repayment of our debt investment of $9.5 million, receivables of $3.1 million, recorded within other assets, net on the accompanying Consolidated Statement of Assets and Liabilities , and a continuing preferred and common equity investment in Funko Acquisition Holdings, LLC, with a combined cost basis and fair value of $0.3 million at the close of the transaction. Additionally, we recorded a tax liability for the net unrealized built-in gain of $9.8 million that was realized upon the sale, of which $6.3 million has been subsequently paid. The remaining tax liability of $3.5 million is included within other liabilities on the accompanying Consolidated Statement of Assets and Liabilities as of June 30, 2016.

 

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    In November 2015, we restructured our investment in Legend Communications of Wyoming, LLC (“Legend”) resulting in a $2.7 million pay down on the existing loan and a new $3.8 million investment in Drumcree, LLC, which is listed separately on the accompanying Consolidated Statement of Investments as of December 31, 2015. In March 2016, Legend paid off at par for proceeds of $4.0 million.

 

    In December 2015, we sold our investment in Heartland Communications Group (“Heartland”) for net proceeds of $1.5 million, which resulted in a realized loss of $2.4 million. Heartland was on non-accrual status at the time of the sale.

 

    In January 2016, we invested $8.5 million in LCR Contractors, Inc. through secured first lien debt.

 

    In March 2016, we invested $10.0 million in Travel Sentry, Inc. through secured first lien debt.

 

    In March 2016, J. America paid off at par for proceeds of $5.1 million.

 

    In April 2016, we received net proceeds of $8.0 million related to the sale of Ashland Acquisition LLC, which resulted in a realized gain of approximately $0.1 million.

 

    In June 2016, we invested $30.0 million in IA Tech, LLC through secured first lien debt.

Syndicated Investments

As of June 30, 2016 and September 30, 2015, we held 12 and 15 syndicated investments with an aggregate fair value of $28.1 million and $55.0 million, or 9.1% and 15.0% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the nine months ended June 30, 2016:

 

    In October 2015, Ameriqual Group, LLC paid off at par for proceeds of $7.4 million.

 

    In October 2015, we sold our investment in First American Payment Systems, L.P. for net proceeds of $4.0 million, which resulted in a net realized loss of $0.2 million.

 

    In February 2016, our investment in Targus Group International, Inc. (“Targus”) was restructured, which resulted in a realized loss of $5.5 million and a new investment in Targus Cayman HoldCo Limited, which is listed on the accompanying Consolidated Statement of Investments as of June 30, 2016.

 

    In May 2016, we invested $2.0 million in Netsmart Technologies, Inc. through secured second lien debt.

 

    In June 2016, Vision Solutions, Inc. paid off at par for proceeds of $8.0 million.

 

    In June 2016, GTCR Valor Companies, Inc. paid off at par for proceeds of $3.0 million.

Investment Concentrations

As of June 30, 2016, our investment portfolio consisted of investments in 43 companies located in 20 states across 20 different industries, with an aggregate fair value of $308.2 million. The five largest investments at fair value as of June 30, 2016, totaled $104.5 million, or 33.9% of our total investment portfolio as of June 30, 2016, as compared to $109.6 million, or 30.0% of our total investment portfolio as of September 30, 2015. Our average investment by obligor was $9.0 million at cost as of June 30, 2016, compared to $8.5 million at cost as of September 30, 2015. The following table outlines our investments by security type as of June 30, 2016 and September 30, 2015:

 

    June 30, 2016     September 30, 2015  
    Cost     Percentage
of Total
Investments
    Fair Value     Percentage
of Total
Investments
    Cost     Percentage
of Total
Investments
    Fair Value     Percentage
of Total
Investments
 

Secured first lien debt

  $ 235,548        61.0   $ 188,143        61.0   $ 248,050        60.5   $ 206,840        56.5

Secured second lien debt

    109,822        28.4        97,417        31.6        125,875        30.7        120,303        32.9   

Unsecured debt

    2,919        0.8        2,924        1.0        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Investments

    348,289        90.2        288,484        93.6        373,925        91.2        327,143        89.4   

Preferred equity

    23,581        6.1        9,335        3.0        24,145        5.8        24,315        6.6   

Common equity/equivalents

    14,456        3.7        10,407        3.4        12,174        3.0        14,433        4.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity Investments

    38,037        9.8        19,742        6.4        36,319        8.8        38,748        10.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 386,326        100   $ 308,226        100   $ 410,244        100.0   $ 365,891        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Investments at fair value consisted of the following industry classifications as of June 30, 2016 and September 30, 2015:

 

     June 30, 2016     September 30, 2015  

Industry Classification

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

Diversified/conglomerate manufacturing

   $ 54,061         17.5   $ 56,504         15.4

Diversified/conglomerate service

     53,816         17.4        13,763         3.8   

Healthcare, education, and childcare

     44,947         14.6        44,994         12.3   

Oil and gas

     43,954         14.3        51,110         14.0   

Diversified natural resources, precious metals and minerals

     15,499         5.0        16,072         4.4   

Beverage, food, and tobacco

     15,318         5.0        22,817         6.2   

Automobile

     13,590         4.4        17,699         4.8   

Cargo transportation

     12,870         4.2        13,434         3.7   

Buildings and real estate

     11,235         3.6        2,385         0.6   

Leisure, Amusement, Motion Pictures, Entertainment

     8,730         2.8        8,500         2.3   

Printing and publishing

     6,800         2.2        25,452         7.0   

Telecommunications

     5,670         1.8        5,865         1.6   

Broadcast and entertainment

     4,682         1.5        5,235         1.4   

Textiles and leather

     4,170         1.4        6,911         1.9   

Machinery

     3,373         1.1        —           —     

Finance

     2,650         0.9        8,356         2.3   

Electronics

     2,630         0.9        13,550         3.7   

Personal and non-durable consumer products

     326         0.1        43,418         11.9   

Other, < 1.0% (A)

     3,905         1.3        9,826         2.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 308,226         100.0   $ 365,891         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A) No individual industry within this category exceeds 1.0% 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 June 30, 2016 and September 30, 2015:

 

     June 30, 2016     September 30, 2015  

Geographic Region

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

South

   $ 142,285         46.2   $ 117,367         32.1

Midwest

     80,864         26.2        124,924         34.1   

West

     64,064         20.8        112,575         30.8   

Northeast

     21,013         6.8        11,025         3.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 308,226         100.0   $ 365,891         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2016:

 

     Amount (A)  

For the remaining three months ending September 30:

   2016    $ 38,702   

For the fiscal year ending September 30:

   2017      43,464   
   2018      28,833   
   2019      45,661   
   2020      91,225   
   Thereafter      100,877   
     

 

 

 
  

Total contractual repayments

   $ 348,762   
  

Equity investments

     38,036   
  

Adjustments to cost basis on debt investments

     (472
     

 

 

 
  

Cost basis of investments held at June 30, 2016:

   $ 386,326   
     

 

 

 

 

(A)   Subsequent to June 30, 2016, one debt investment with a principal balance of $29.0 million which previously had a maturity date during the fiscal year ending September 30, 2016, was extended to mature during the fiscal year ended September 30, 2018.

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, net on our accompanying Consolidated Statements of Assets and Liabilities . As of June 30, 2016 and September 30, 2015, we had gross receivables from portfolio companies of $0.8 million and $0.6 million, respectively. There was no allowance for uncollectible receivables from portfolio companies as of June 30, 2016 and September 30, 2015, respectively. In addition, as of September 30, 2015, we recorded an allowance for uncollectible interest receivables of $1.2 million, which is reflected in interest receivable, net on our accompanying Consolidated Statements of Assets and Liabilities . There was no allowance for uncollectible interest receivables as of June 30, 2016. We generally maintain allowances for uncollectible interest or other receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined based upon management’s judgment that the portfolio company is unable to pay its obligations.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006 and at the same time we entered into the Administration Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable under the agreement from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 12, 2016, our Board of Directors unanimously approved the annual renewal of the Advisory Agreement through August 31, 2017.

In addition to the base management fee and incentive fee paid pursuant to the Advisory Agreement, we pay the Adviser a loan servicing fee for its role of servicer pursuant to our revolving line of credit. The entire loan servicing fee paid to the Adviser by Business Loan is voluntarily, irrevocably and unconditionally credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year pursuant to the Advisory Agreement.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as an executive managing director of the Adviser.

 

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The following table summarizes fees paid to the Adviser, including the base management fee, incentive fee, and loan servicing fee and associated voluntary, unconditional and irrevocable credits reflected in our accompanying Consolidated Statements of Operations :

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2016     2015     2016     2015  

Average total assets subject to base management fee (A)

   $ 312,914      $ 371,800      $ 324,419      $ 350,450   

Multiplied by prorated annual base management fee of 1.75%-2.0%

     0.4375     0.5     1.3125     1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee (B)

   $ 1,369      $ 1,859      $ 4,258      $ 5,257   

Portfolio company fee credit

     (319     (73     (553     (840

Senior syndicated loan fee credit

     (17     (41     (73     (120
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,033      $ 1,745      $ 3,632      $ 4,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee (B)

     896        1,015        2,876        2,802   

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

     (896     (1,015     (2,876     (2,802
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee (B)

     1,187        1,021        3,369        2,866   

Incentive fee credit

     (160     (754     (1,110     (754
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 1,027      $ 267      $ 2,259      $ 2,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (319     (73     (553     (840

Senior syndicated loan fee credit

     (17     (41     (73     (120

Incentive fee credit

     (160     (754     (1,110     (754
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Fees From Adviser - other (B)

   $ (496   $ (868   $ (1,736   $ (1,714
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Base Management Fee

On October 13, 2015, we amended our existing advisory agreement with the Adviser to reduce the base management fee under the agreement from 2.0% per annum (0.5% per quarter) of average total assets (excluding cash or equivalents) to 1.75% per annum (0.4375% per quarter) effective July 1, 2015. All other terms of the advisory agreement remained unchanged. The amendment was approved unanimously by our Board of Directors.

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, 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 and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% 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, totaling $35 and $0.1 million for the three and nine months ended June 30, 2016 and $44 and $93 for the three and nine months ended June 30, 2015, respectively, is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.

Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to reduce the annual 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 each of the nine months ended June 30, 2016 and 2015.

 

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Table of Contents

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is 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% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, 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% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized).

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolio’s aggregate unrealized capital depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through June 30, 2016, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded or paid since our inception through June 30, 2016.

Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of the distributions to common stockholders during the nine months ended June 30, 2016 and 2015.

Loan Servicing Fee

The Adviser also services the loans held by Business Loan (the borrower pursuant to our line of credit), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our line of credit. As discussed above, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee otherwise due to the Adviser under the Advisory Agreement. These loan servicing fees are 100% voluntarily, irrevocably and unconditionally credited back to us (against the base management fee) by the Adviser.

Transactions with the Administrator

We pay the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrator’s expenses are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president) and their respective staffs.

 

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Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone.

Our portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter to the Administrator. On July 12, 2016, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2017.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the voluntary, unconditional, and irrevocable credits against the base management fee. Gladstone Securities received fees from portfolio companies totaling $0.3 million and $0.4 million during the three and nine months ended June 30, 2016, respectively, and $0.3 million and $0.7 million during the three and nine months ended June 30, 2015, respectively.

Related Party Fees Due

Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:

 

     June 30, 2016      September 30, 2015  

Base management fee

   $ 137       $ 60   

Loan servicing fee

     200         241   

Net incentive fee

     1,027         603   
  

 

 

    

 

 

 

Total fees due to Adviser

     1,364         904   

Fee due to Administrator

     287         250   
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 1,651       $ 1,154   
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of June 30, 2016 and September 30, 2015, totaled $3 and $7, respectively. In addition, other net co-investment expenses (for reimbursement purposes) receivable from or payable to Gladstone Investment Corporation, one of our affiliated funds, totaled a receivable of $0.1 million and a payable of $0.1 million as of June 30, 2016 and September 30, 2015, respectively. These amounts were received or paid in full in the quarter subsequent to being incurred and have been included in other assets, net and other liabilities, as appropriate, on the accompanying Consolidated Statements of Assets and Liabilities as of June 30, 2016 and September 30, 2015, respectively .  

NOTE 5. BORROWINGS

Revolving Credit Facility

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

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

 

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The following tables summarize noteworthy information related to our Credit Facility (at cost) as of June 30, 2016 and September 30, 2015 and during the three and nine months ended June 30, 2016 and 2015:

 

     June 30, 2016      September 30, 2015  

Commitment amount

   $ 170,000       $ 170,000   

Borrowings outstanding, at cost

     73,300         127,300   

Availability (A)

     19,397         22,360   

 

     For the Three Months
Ended June 30,
    For the Nine Months
Ended June 30,
 
     2016     2015     2016     2015  

Weighted average borrowings outstanding, at cost

   $ 52,481      $ 109,792      $ 59,824      $ 84,748   

Weighted average interest rate (B)

     4.9     3.8     4.6     4.3

Commitment (unused) fees incurred

   $ 147      $ 42      $ 417      $ 314   

 

(A)   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.
(B) Includes unused commitment fees and excludes the impact of deferred financing fees.

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 distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.

Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $214.5 million as of June 30, 2016, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Section 18 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of June 30, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $244.8 million, asset coverage on our “senior securities representing indebtedness” of 430.9%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 31 obligors in our Credit Facility’s borrowing base as of June 30, 2016. As of June 30, 2016, we were in compliance with all of our Credit Facility covenants.

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. At each of June 30, 2016 and September 30, 2015, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. At each of June 30, 2016 and September 30, 2015, our Credit Facility was valued using Level 3 inputs and any changes in our credit facility’s fair value is recorded in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations .

 

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The following tables present our Credit Facility carried at fair value as of June 30, 2016 and September 30, 2015, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and nine months ended June 30, 2016 and 2015:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements of
Assets and Liabilities  Using Significant Unobservable Inputs
(Level 3)
 
     June 30, 2016      September 30, 2015  

Credit Facility

   $ 73,300       $ 127,300   
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant

Unobservable Data Inputs (Level 3)

 
     Three Months Ended June 30,  
     2016      2015  

Fair value as of March 31, 2016 and 2015, respectively

   $ 57,300       $ 114,793   

Borrowings

     41,000         15,500   

Repayments

     (25,000      (25,000

Net unrealized depreciation (A)

     —           (693
  

 

 

    

 

 

 

Fair Value as of June 30, 2016 and 2015, respectively

   $ 73,300       $ 104,600   
  

 

 

    

 

 

 
     Nine Months Ended June 30,  
     2016      2015  

Fair value as of September 30, 2015 and 2014, respectively

   $ 127,300       $ 38,013   

Borrowings

     77,000         109,000   

Repayments

     (131,000      (41,100

Net unrealized depreciation (A)

     —           (1,313
  

 

 

    

 

 

 

Fair Value as of June 30, 2016 and 2015, respectively

   $ 73,300       $ 104,600   
  

 

 

    

 

 

 

 

(A) Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015.

The fair value of the collateral under our Credit Facility totaled approximately $259.4 million and $312.0 million as of June 30, 2016 and September 30, 2015, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

Pursuant to our prior registration statement, 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 approximately $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 and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility. 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 Consolidated Statements of Assets and Liabilities and are being amortized over the redemption period ending June 30, 2021.

The shares of our Series 2021 Term Preferred Stock have a mandatory redemption date of June 30, 2021, and are traded under the ticker symbol “GLADO” on the NASDAQ Global Select Market. Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date of redemption (the “Redemption Price”). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon the occurrence of certain events that would constitute a change in control, and (2) if we fail to maintain an asset coverage ratio of at least 200% on our “senior securities that are stock” (which is currently only our Series 2021 Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our option at the Redemption Price at any time on or after June 30, 2017.

The asset coverage on our “senior securities that are stock” as of June 30, 2016 was 235.4%, calculated in accordance with Section 18 of the 1940 Act. If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of June 30, 2016, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

 

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

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Series 2021 Term
Preferred Share
 

2015

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

 

 

 
      Nine Months Ended June 30, 2015:    $ 1.2656250   
        

 

 

 

We paid the following monthly dividends on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2016:

 

Fiscal Year

   Declaration Date    Record Date    Payment Date    Distribution per
Series 2021 Term
Preferred Share
 

2016

   October 13, 2015    October 26, 2015    November 4, 2015    $ 0.1406250   
   October 13, 2015    November 17, 2015    November 30, 2015      0.1406250   
   October 13, 2015    December 18, 2015    December 31, 2015      0.1406250   
   January 12, 2016    January 22, 2016    February 2, 2016      0.1406250   
   January 12, 2016    February 18, 2016    February 29, 2016      0.1406250   
   January 12, 2016    March 21, 2016    March 31, 2016      0.1406250   
   April 12, 2016    April 22, 2016    May 2, 2016      0.1406250   
   April 12, 2016    May 19, 2016    May 31, 2016      0.1406250   
   April 12, 2016    June 17, 2016    June 30, 2016      0.1406250   
           

 

 

 
      Nine Months Ended June 30, 2016:    $ 1.2656250   
        

 

 

 

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 mandatorily redeemable preferred stock at cost as of June 30, 2016 and September 30, 2015. The related distribution payments to preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value, based on the last quoted closing price for our Series 2021 Term Preferred Stock, as of June 30, 2016 and September 30, 2015, was approximately $61.4 million and $62.4 million, respectively. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred Stock for the nine months ended June 30, 2016 and 2015, was $3.1 million. For federal income tax purposes, dividends 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, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES

Registration Statement

We filed a universal shelf registration statement (our “Registration Statement”) on Form N-2 (File No. 333-208637) with the SEC on December 18, 2015, and subsequently filed Pre-Effective Amendment No. 1 on March 17, 2016 and Pre-Effective Amendment No. 2 on March 29, 2016, which the SEC declared effective on March 29, 2016. 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, preferred stock or debt securities.

Common Stock Offerings

Pursuant to our prior registration statement, on February 27, 2015, we entered into equity distribution agreements (commonly referred to as “at-the-market agreements” or the “Sales Agreements”) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a “Sales Agent,” under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. During the year ended September 30, 2015, we sold an aggregate of 131,462 shares of our common stock under the Sales Agreements, for net proceeds, after deducting underwriting discounts and offering costs borne by us, of approximately $1.0 million. We did not sell any shares under the Sales Agreements during the nine months ended June 30, 2016.

Pursuant to our prior registration statement, on October 27, 2015, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $8.55 per share, which was below our then current NAV per share. Gross proceeds totaled $17.1 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.0 million. In

 

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connection with the offering, in November 2015, the underwriters exercised their option to purchase an additional 300,000 shares at the public offering price to cover over-allotments, which resulted in gross proceeds of $2.6 million and net proceeds, after deducting underwriting discounts and offering expenses borne by us, were approximately $2.4 million.

Share Repurchases

In January 2016, our Board of Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Company’s common stock. The repurchases are intended to be implemented through open market transactions on U.S. exchanges or in privately negotiated transactions, in accordance with applicable securities laws, and any market purchases will be made during open trading window periods or pursuant to any applicable Rule 10b5-1 trading plans. The timing, prices, and amounts of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate us to acquire any particular number of shares of common stock. The termination date is the earlier of repurchasing the total authorized amount of $7.5 million or January 31, 2017. During the nine months ended June 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in gross purchases of $0.6 million.

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

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and nine months ended June 30, 2016 and 2015:

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2016      2015      2016     2015  

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

   $ 5,516       $ 3,307       $ (9,328   $ 13,180   

Denominator for basic and diluted weighted average common shares

     23,363,952         21,123,202         23,145,842        21,045,014   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 0.24       $ 0.16       $ (0.40   $ 0.63   
  

 

 

    

 

 

    

 

 

   

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute on an annual basis to our stockholders 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. The amount to be paid out as distributions to our common stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of our investment company taxable income. 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 twelve months ended December 31, 2015, 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, 2014, 100.0% of our common distributions were deemed to be paid from a return of capital and for each of the three months ended December 31, 2014, 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 the 2014 calendar year for Form 1099 reporting purposes resulted primarily from GAAP realized losses being recognized as ordinary losses for federal income tax purposes.

We paid the following monthly distributions to common stockholders for the nine months ended June 30, 2016 and 2015:

 

Fiscal Year

   Declaration
Date
   Record Date    Payment Date    Distribution per
Common Share
 

2016

   October 13, 2015    October 26, 2015    November 4, 2015    $ 0.07   
   October 13, 2015    November 17, 2015    November 30, 2015      0.07   
   October 13, 2015    December 18, 2015    December 31, 2015      0.07   
   January 12, 2016    January 22, 2016    February 2, 2016      0.07   
   January 12, 2016    February 18, 2016    February 29, 2016      0.07   
   January 12, 2016    March 21, 2016    March 31, 2016      0.07   
   April 12, 2016    April 22, 2016    May 2, 2016      0.07   
   April 12, 2016    May 19, 2016    May 31, 2016      0.07   
   April 12, 2016    June 17, 2016    June 30, 2016      0.07   
           

 

 

 
      Nine Months Ended June 30, 2016:    $ 0.63   
        

 

 

 

 

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Fiscal Year

   Declaration
Date
   Record Date    Payment Date    Distribution per
Common Share
 

2015

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

 

 

 
      Nine Months Ended June 30, 2015:    $ 0.63   
        

 

 

 

Aggregate distributions declared and paid to our common stockholders for the nine months ended June 30, 2016 and 2015, were each approximately $14.6 million and $13.3 million, respectively, and were declared based on estimates of investment company taxable 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 investment company 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. For the fiscal year ended September 30, 2015, our current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred stock distributions), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $2.2 million of the first common distributions paid in fiscal year 2016 as having been paid in the respective prior year.

For the nine months ended June 30, 2016 and the fiscal year ended September 30, 2015, we recorded the following adjustments for book-tax differences to reflect tax character.

 

     Nine Months Ended
June 30,
2016
     Year Ended
September 30,

2015
 

Under distributed net investment income

   $ 6,140       $ 387   

Accumulated net realized losses

     (7,995      (387

Capital in excess of par value

     1,855         —     

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal proceedings incidental to the normal course of our business. 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 operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of June 30, 2016 and September 30, 2015, we have not established reserves for such loss contingencies.

Financial Commitments and Obligations

We have lines of credit, a delayed draw term loan, and an uncalled capital commitment 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. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loan and the uncalled capital commitment as of June 30, 2016 and September 30, 2015 to be immaterial.

The following table summarizes the amounts of our unused lines of credit and delayed draw term loan and uncalled capital commitment, at cost, as of June 30, 2016 and September 30, 2015, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities :

 

     June 30, 2016      September 30, 2015  

Unused line of credit commitments and delayed draw term loan

   $ 6,392       $ 14,655   

Uncalled capital commitment

     1,979         2,214   
  

 

 

    

 

 

 

Total

   $ 8,371       $ 16,869   
  

 

 

    

 

 

 

 

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NOTE 11. FINANCIAL HIGHLIGHTS

 

    Three Months Ended June 30,     Nine Months Ended June 30,  
    2016     2015     2016     2015  

Per Common Share Data (A) :

       

Net asset value at beginning of period (A)

  $ 7.92      $ 9.55      $ 9.06      $ 9.51   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (B)

    0.21        0.23        0.63        0.58   

Net realized (loss) gain on investments (B)

    —          (0.05     0.42        (0.69

Net unrealized appreciation (depreciation) of investments (B)

    0.03        (0.06     (1.46