Gladstone Capital Corporation
GLADSTONE CAPITAL CORP (Form: 497, Received: 09/21/2017 09:18:58)
Table of Contents

Filed Pursuant to Rule 497
File No. 333-208637

 

Prospectus Supplement

(To Prospectus Dated February 6, 2017)

1,800,000 Shares

 

LOGO

6.00% Series 2024 Term Preferred Stock

Liquidation Preference $25 per Share

 

 

Gladstone Capital Corporation, or the Company, is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. Generally, our investment objective is to generate current income by investing in debt securities of established businesses and provide our stockholders with long-term capital appreciation by investing in equity securities, generally in combination with the aforementioned debt securities.

We are offering 1,800,000 shares of our 6.00% Series 2024 term preferred stock, or the Series 2024 Term Preferred Stock. We will pay monthly dividends on the Series 2024 Term Preferred Stock at an annual rate of 6.00% of the $25 liquidation preference per share, or $1.50 per share of Series 2024 Term Preferred Stock per year, on the last business day of each month, commencing on October 31, 2017.

We are required to redeem all of the outstanding shares of the Series 2024 Term Preferred Stock on September 30, 2024 at a redemption price equal to $25 per share plus an amount equal to accumulated but unpaid dividends and distributions, if any, up to, but excluding, the date of redemption. We will also be required to redeem all of the outstanding shares of the Series 2024 Term Preferred Stock at a redemption price equal to $25 per share, plus an amount equal to accumulated but unpaid dividends and distributions, if any, up to, but excluding, the date of redemption upon the occurrence of certain events that constitute a change of control of the Company. If we fail to maintain an asset coverage, as defined in the 1940 Act, of at least 200%, we will redeem a sufficient number of shares of our Series 2024 Term Preferred Stock or any other series of shares of preferred stock then-outstanding, collectively, the Term Preferred Stock, in an amount at least equal to the lesser of (1) the minimum number of shares of Term Preferred Stock necessary to cause us to meet our required asset coverage ratio (provided, however, that if there is no such minimum number of shares of Series 2024 Term Preferred Stock or other shares of Term Preferred Stock then-outstanding, the redemption or retirement of which would have such result, all Series 2024 Term Preferred Stock and other shares of Term Preferred Stock then outstanding shall be redeemed) and (2) the maximum number of shares of Term Preferred Stock that we can redeem out of cash legally available for such redemption in accordance with the TP Articles Supplementary, as defined below, and applicable law. Also, at our sole discretion, we may redeem such number of shares of Term Preferred Stock (including shares of Term Preferred Stock required to be redeemed) that will result in our having an asset coverage ratio of up to and including 240%. At any time after the close of business on September 30, 2019, at our sole option, we may redeem the Series 2024 Term Preferred Stock at a redemption price per share equal to the sum of the $25 liquidation preference per share plus an amount equal to all unpaid dividends and distributions on the Series 2024 Term Preferred Stock accumulated to (but excluding) the date fixed for such redemption plus the optional redemption premium per share (if any) with respect to an optional redemption on the Series 2024 Term Preferred Stock that is effected on the date fixed for such redemption. We cannot effect any amendment, alteration or repeal of our obligation to redeem all of the shares of Series 2024 Term Preferred Stock on September 30, 2024 without the prior unanimous vote or consent of the holders of Series 2024 Term Preferred Stock.

Each holder of our Series 2024 Term Preferred Stock (and any other outstanding Term Preferred Stock we have issued or may issue in the future) will be entitled to one vote for each share held by such holder on any matter submitted to a vote of our stockholders, and, except as described below, the holders of all of our outstanding Term Preferred Stock and common stock will vote together as a single class. The holders of the Series 2024 Term Preferred Stock (together with our outstanding 6.75% Series 2021 Term Preferred Stock, $0.001 par value per share, or the Series 2021 Term Preferred Stock, and any other Term Preferred Stock we may issue in the future), voting separately as a class, will elect at all times two of our directors and, upon our failure to pay dividends for at least two years or as otherwise entitled under the 1940 Act, will elect a majority of our directors. The Series 2024 Term Preferred Stock will rank equally in right of payment with all other shares of outstanding Term Preferred Stock that we have issued or may issue in the future and will rank senior in right of payment to all of our common stock.

We have applied to list the Series 2024 Term Preferred Stock on the NASDAQ Global Select Market, or NASDAQ, under the symbol “GLADN.” We expect the Series 2024 Term Preferred Stock to begin trading on NASDAQ within 30 days of the date of this prospectus supplement, though there can be no assurance trading will commence within this timeframe, or at all. Our common stock is traded on NASDAQ under the symbol “GLAD” and shares of our Series 2021 Term Preferred Stock are traded on NASDAQ under the symbol “GLADO.” On September 18, 2017, the last sale price of our common stock as reported on NASDAQ was $9.33 per share and the last reported price of our Series 2021 Term Preferred Stock was $25.50 per share. The Series 2024 Term Preferred Stock has no trading history and will not be convertible into our common stock or any other security of our company.

The securities in which we invest generally would be rated below investment grade if they were rated by rating agencies. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and are illiquid.

 

 

Investing in our securities involves risks. You could lose some or all of your investment. You should carefully consider each of the factors described under “ Risk Factors ” beginning on page S-12 of this prospectus supplement and beginning on page 12 of the accompanying prospectus before you invest in the Series 2024 Term Preferred Stock.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our common stock, including information about risks. Please read it before you invest and retain it for future reference. Additional information about us, including our annual, quarterly and current reports, has been filed with the Securities and Exchange Commission, or the SEC, and can be accessed at its website at www.sec.gov. This information is also available free of charge by calling us collect at (703) 287-5893 or on our corporate website located at www.gladstonecapital.com. You may also call us collect at this number to request other information or to make a shareholder inquiry. See “ Where You Can Find More Information ” on page S-71 of this prospectus supplement.

 

 

The SEC has not approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total (2)  

Public offering price

   $ 25.00      $ 45,000,000  

Sales load (underwriting discounts and commissions)

   $ 0.7875      $ 1,417,500  

Proceeds, before expenses, to us (1)

   $ 24.2125      $ 43,582,500  

 

(1)   Total expenses of the offering payable by us, excluding underwriting discounts and commissions, are estimated to be $285,000.
(2)   We have granted the underwriters a 30-day option to purchase up to an additional 270,000 shares of Series 2024 Term Preferred Stock from us on the same terms and conditions set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total public offering price will be $51,750,000, the total underwriting discounts and commissions will be $1,630,125 and total proceeds, before expenses, to us would be $50,119,875. See “Underwriting” on page S-66 of this prospectus supplement.

The underwriters expect to deliver the Series 2024 Term Preferred Stock on or about September 27, 2017.

 

 

 

        Janney Montgomery Scott                   Ladenburg Thalmann        

FBR

a B. Riley Financial Company

BB&T Capital Markets   J.J.B. Hilliard, W.L. Lyons, LLC   Wedbush Securities   William Blair

Prospectus Supplement dated September 19, 2017


Table of Contents

ABOUT THE PROSPECTUS SUPPLEMENT

This prospectus supplement, together with the accompanying prospectus, sets forth the information that you should know before investing. You should read the prospectus supplement and accompanying prospectus, which contain important information, before deciding whether to invest in the Series 2024 Term Preferred Stock.

You may request a free copy of this prospectus supplement, the accompanying prospectus, our annual reports to stockholders and other information about us, and make stockholder inquiries by calling (866) 366-5745 or by writing to us at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, or from our website at www.gladstonecapital.com. The information contained in, or that can be accessed through, our website is not part of this prospectus supplement or the accompanying prospectus. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We also furnish to our stockholders annual reports, which include annual financial information that has been examined and reported on, with an opinion expressed, by our independent registered public accounting firm.

This prospectus supplement, which describes the specific terms of this offering, also adds to and updates information contained in the accompanying prospectus. The accompanying prospectus gives more general information, some of which may not apply to this offering. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement.

The shares of Series 2024 Term Preferred Stock do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus in making an investment decision. We have not authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell the Series 2024 Term Preferred Stock in any jurisdiction where such an offer or sale is not permitted. The information appearing in this prospectus supplement, the accompanying prospectus and any documents incorporated by reference herein or therein, is accurate only as of the respective dates of such information regardless of the time of delivery or any sale of the Series 2024 Term Preferred Stock. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

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TABLE OF CONTENTS

 

     Page  

Prospectus Supplement

  

ABOUT THE PROSPECTUS SUPPLEMENT

     i  

PROSPECTUS SUPPLEMENT SUMMARY

     S-1  

THE OFFERING

     S-6  

RISK FACTORS

     S-12  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     S-19  

USE OF PROCEEDS

     S-20  

RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS

     S-21  

CAPITALIZATION

     S-22  

CONSOLIDATED SELECTED FINANCIAL DATA

     S-23  

SELECTED QUARTERLY FINANCIAL DATA

     S-24  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     S-25  

SUPPLEMENTAL PORTFOLIO INFORMATION

     S-49  

DESCRIPTION OF THE SERIES 2024 TERM PREFERRED STOCK

     S-55  

UNDERWRITING

     S-66  

DIVIDEND REINVESTMENT PLAN

     S-70  

CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REDEMPTION  AND PAYING AGENT

     S-71  

MISCELLANEOUS

     S-71  

WHERE YOU CAN FIND MORE INFORMATION

     S-71  

LEGAL MATTERS

     S-71  

EXPERTS

     S-72  

INDEX TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     S-F-1  

Appendix: Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, 6.00% Series 2024

     SA-1  

Appendix: Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares

     SB-1  

Prospectus

  

Prospectus Summary

     1  

The Offering

     4  

Fees and Expenses

     7  

Additional Information

     11  

Risk Factors

     12  

Special Note Regarding Forward-Looking Statements

     35  

Use of Proceeds

     35  

Price Range of Common Stock and Distributions

     35  

Common Share Price Data

     36  

Ratio of Earnings to Fixed Charges

     37  

Consolidated Selected Financial Data

     38  

Selected Quarterly Data (Unaudited)

     40  

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

     41  

Senior Securities

     66  

Business

     68  

Portfolio Companies

     87  

Management

     94  

Control Persons and Principal Stockholders

     110  

Dividend Reinvestment Plan

     113  

Material U.S. Federal Income Tax Considerations

     114  

 

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     Page  

Regulation as a Business Development Company

     117  

Description of Our Securities

     119  

Certain Provisions of Maryland Law and of Our Articles of Incorporation and Bylaws

     124  

Share Repurchases

     128  

Plan of Distribution

     129  

Custodian, Transfer and Dividend Paying Agent and Registrar

     131  

Brokerage Allocation and Other Practices

     132  

Proxy Voting Policies and Procedures

     133  

Legal Matters

     134  

Experts

     134  

Index to Consolidated Financial Statements

     F-1  

 

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information included in the prospectus supplement and the accompanying prospectus. You should review the more detailed information contained elsewhere in this prospectus supplement and in the accompanying prospectus, including the Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares of Gladstone Capital Corporation, effective October 31, 2011 (the “TP Articles Supplementary”) and Appendix A thereto, the Company’s Articles Supplementary Establishing and Fixing the Rights and Preferences of 6.00% Series 2024 Term Preferred Stock and Exhibit A thereto (the “Series 2024 Term Preferred Stock Articles Supplementary,” together with the TP Articles Supplementary, the “Articles Supplementary”), the form of which is attached to this prospectus supplement, and especially the information set forth under the heading “Risk Factors” prior to making an investment in the Series 2024 Term Preferred Stock. In this prospectus supplement and the accompanying prospectus, except where the context suggests otherwise, the “Company,” “we,” us” or “our” refers to Gladstone Capital Corporation; “Adviser” refers to Gladstone Management Corporation; “Administrator” refers to Gladstone Administration, LLC; and “Gladstone Companies” refers to our Adviser and its affiliated companies. Capitalized terms used but not defined in this prospectus supplement or accompanying prospectus have the meanings given to such terms in the Articles Supplementary. Unless otherwise stated, the information in this prospectus supplement and the accompanying prospectus does not take into account the possible exercise by the underwriters of their over-allotment option.

Gladstone Capital Corporation

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for federal income tax purposes we have elected to be treated as a registered investment company (“RIC”) under Subchapter M of the Internal Revenue Code, as amended (the “Code”). As a BDC and a RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

As of June 30, 2017, our portfolio consisted of loans to 47 portfolio companies in 23 states in 22 different industries with an aggregate fair value of $345.5 million. From our initial public offering of common stock in August 2001 and through August 31, 2017, we have made 175 consecutive monthly or quarterly distributions on our common stock. Through August 31, 2017, we have made 40 consecutive monthly distributions on shares of our 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share, (the “Series 2021 Term Preferred Stock”). In each of June, July and August 2017, our monthly common stock distributions per share were $0.07 and our monthly distributions per share for the Series 2021 Term Preferred Stock were $0.140625.

As of June 30, 2017, we had outstanding 25,880,466 shares of common stock, par value $0.001 per share, and 2,440,000 shares of Series 2021 Term Preferred Stock.

Our principal executive offices are located at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, and our telephone number is (703) 287-5800. Our corporate website is located at  www.GladstoneCapital.com . Information that is contained in, or can be accessed from, our website is not incorporated into and is not a part of this prospectus supplement or the accompanying prospectus.

Investment Objectives and Strategy

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt

 



 

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securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2017, our investment portfolio was made up of approximately 90.9% debt investments and 9.1% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity, and have opportunistically made several co-investments with our affiliate, Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the Securities and Exchange Commission, or the SEC, to permit us greater flexibility to co-invest with certain of our affiliates. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

We expect that our target portfolio over time will primarily include the following four categories of investments in private U.S. companies:

 

    Senior Debt Securities : We seek to invest a portion of our assets in senior secured debt securities also known as senior loans, secured first lien loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses senior debt to cover a substantial portion of the funding needs of its business. The senior secured debt security usually takes the form of first priority liens on all, or substantially all, of the assets of the business. Senior secured debt securities may include investments sourced from the syndicated loan market.

 

    Senior Secured Subordinated Debt Securities : We seek to invest a portion of our assets in secured second lien debt securities, also known as senior subordinated loans and senior subordinated notes. These secured second lien debts rank junior to the borrowers’ senior debt and may be secured by a first priority lien on a portion of the assets of the business and may be designated as second lien notes (including our participation and investment in syndicated second lien loans). Additionally, we may receive other yield enhancements, such as success fees, in connection with these senior secured subordinated debt securities.

 

    Junior Subordinated Debt Securities : We seek to invest a portion of our assets in junior subordinated debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These junior subordinated debts may be secured by certain assets of the borrower or unsecured loans. Additionally, we may receive other yield enhancements in addition to or in lieu of success fees, such as warrants to buy common and preferred stock or limited liability interests in connection with these junior subordinated debt securities.

 



 

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    Preferred and Common Equity/Equivalents : In some cases we will purchase equity securities which consist of preferred and common equity or limited liability company interests, or warrants or options to acquire such securities, and are in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In some cases, we will own a significant portion of the equity and we may have voting control of the businesses in which we invest.

Additionally, pursuant to the 1940 Act, we must maintain at least 70.0% of our total assets in qualifying assets, which generally include each of the investment types listed above. Therefore, the 1940 Act permits us to invest up to 30.0% of our assets in other non-qualifying assets. See “ Regulation as a Business Development Company—Qualifying Assets ” in the accompanying prospectus for a discussion of the types of qualifying assets in which we may invest under Section 55(a) of the 1940 Act.

Because the majority of the loans in our portfolio consist of term debt in private companies that typically cannot or will not expend the resources to have their debt securities rated by a credit rating agency, we expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be rated below what is today considered “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered higher risk, as compared to investment-grade debt instruments. In addition, many of the debt securities we hold typically do not amortize prior to maturity.

Our Investment Adviser and Administrator

We are externally managed by the Adviser under an investment advisory and management agreement, or the Advisory Agreement. The Administrator, an affiliate of the Adviser, provides administrative services to us pursuant to a contractual agreement, or the Administration Agreement. Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including Gladstone Commercial Corporation, a publicly-traded real estate investment trust; Gladstone Investment Corporation, a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust. In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C. The Adviser also has offices in other states. 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.

 



 

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Recent Developments

Charter Amendment

At a special meeting held on August 29, 2017, our Board of Directors approved the reclassification and designation of 1,440,000 shares of authorized and unissued common stock as shares of Term Preferred Stock (as defined below), par value $0.001 per share, to be issued in one or more series. The Articles Supplementary reflecting such reclassification was filed with the Maryland Department of Assessments and Taxation on September 19, 2017.

Credit Facility Amendment No. 3

On August 24, 2017 we, through our wholly-owned subsidiary Gladstone Business Loan, LLC (“Business Loan”), entered into Amendment No. 3 (the “Amendment”) to our $170 million revolving credit facility (the “Credit Facility”) with KeyBank National Association, as administrative agent, swingline lender, managing agent and lead arranger, the Adviser, as servicer, and certain other lenders party thereto.

Primarily, the Amendment adjusted the calculation of the borrowing base of the Credit Facility and clarified the application of excess concentrations. The Amendment also, among other items, increases the excess concentration limits for paid-in-kind (“PIK”) loans and updated the commitment amounts for the lenders. As of August 23, 2017, prior to the closing of the Amendment, $76.5 million of borrowings were outstanding under the Credit Facility.

Portfolio Activity

In August 2017, we invested $12.5 million in El Academies, Inc. through secured first lien debt and equity.

In July 2017, our loan to SourceHOV, LLC was paid off for net proceeds of $4.8 million, resulting in a realized loss of $0.2 million.

Distributions and Dividends

On July 11, 2017, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred stockholders:

 

Record Date

   Payment Date      Distribution
per Common
Share
     Dividend per
share of

Series 2021
Term Preferred
Stock
 

July 21, 2017

     July 31, 2017      $ 0.07      $ 0.140625  

August 21, 2017

     August 31, 2017        0.07        0.140625  

September 20, 2017

     September 29, 2017        0.07        0.140625  
     

 

 

    

 

 

 

Total for the Quarter:

      $ 0.21      $ 0.421875  
     

 

 

    

 

 

 

Advisory Agreement Renewal

On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the Advisory Agreement through August 31, 2018. Mr. Gladstone, our chairman and chief executive officer, controls

 



 

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the Adviser. In reaching a decision to approve the Advisory Agreement, our Board of Directors reviewed a significant amount of information and considered, among other things:

 

    the nature, quality and extent of the advisory and other services to be provided to us by the Adviser;

 

    our investment performance and that of the Adviser;

 

    the costs of the services to be provided and profits to be realized by the Adviser from the relationship with us;

 

    the fee structures of comparable externally managed business development companies that engage in similar investing activities; and

 

    various other matters.

Based on the information reviewed and the considerations detailed above, our Board of Directors, including all of the directors who are not “interested persons” as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Advisory Agreement, as being in the best interests of our stockholders.

 



 

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THE OFFERING

The following is a brief summary of some of the terms of this offering. For a more complete description of the rights, preferences and other terms of the Series 2024 Term Preferred Stock, see “ Description of the Series  2024 Term Preferred Stock ” in this prospectus supplement and the Articles Supplementary.

 

Issuer    Gladstone Capital Corporation
Securities Offered    1,800,000 shares of 6.00% Series 2024 Term Preferred Stock (2,070,000 shares if the underwriters exercise their over-allotment option in full).
Listing    We have applied to list the Series 2024 Term Preferred Stock on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GLADN.” Trading on the Series 2024 Term Preferred Stock is expected to begin within 30 days of the date of this prospectus supplement, though there can be no assurance that trading will commence within this period, or at all. Prior to the expected commencement of trading on NASDAQ, the underwriters may make a market in the Series 2024 Term Preferred Stock, but they are not obligated to do so and may discontinue any market-making at any time without notice.
Liquidation Preference    $25 per share. In the event of any liquidation, dissolution or winding up of our affairs, holders of the Series 2024 Term Preferred Stock will be entitled to receive a liquidation distribution per share equal to $25 per share (which we refer to in this prospectus supplement as the Liquidation Preference), plus an amount equal to all unpaid dividends and distributions accumulated up to (but excluding) the date fixed for distribution or payment, whether or not earned or declared by us, but excluding interest thereon. See “ Description of the Series 2024 Term Preferred Stock—Liquidation Rights.
Dividends    The Series 2024 Term Preferred Stock will pay a monthly dividend at a fixed annual rate of 6.00% of the Liquidation Preference, or $1.50 per share per year, which we refer to as the Fixed Dividend Rate. The Fixed Dividend Rate is subject to adjustment under certain circumstances, but will not in any case be lower than $1.50 per share per year.
   Cumulative cash dividends or distributions on the Series 2024 Term Preferred Stock will be payable monthly, when, as and if declared, or under authority granted, by our Board of Directors out of funds legally available for such payment. The first dividend period for

 



 

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   the Series 2024 Term Preferred Stock will commence on the initial issuance date of such shares upon the closing of this offering, which we refer to as the Date of Original Issue, and will end on October 31, 2017.
Ranking   

The shares of Series 2024 Term Preferred Stock are senior securities that constitute capital stock of the Company. The Series 2024 Term Preferred Stock ranks:

 

•    senior to the common stock in priority of payment of dividends and as to the distribution of assets upon dissolution, liquidation or the winding-up of our affairs;

 

•    equal in priority with our Series 2021 Term Preferred Stock and all other future Term Preferred Shares we may issue (as such term is defined in the TP Articles Supplementary) (collectively, the “Term Preferred Stock”), as to priority of payment of dividends and as to distributions of assets upon dissolution, liquidation or the winding-up of our affairs; and

 

•    effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our Credit Facility.

 

We may issue additional shares of Term Preferred Stock, but pursuant to the 1940 Act, we may not issue additional classes of capital stock that rank senior or junior to the Series 2024 Term Preferred Stock (other than classes of common stock) as to priority of payment of dividends and as to distribution of assets. We may, however, borrow funds from banks and other lenders so long as the ratio of (1) the value of total assets less the total borrowed amounts to (2) the sum of all senior securities representing indebtedness and the number of shares of outstanding Series 2024 Term Preferred Stock and Series 2021 Term Preferred Stock (and any other classes of Term Preferred Stock) multiplied by $25 per share, is not less than 200%.

Mandatory Term Redemption    We are required to redeem all outstanding Series 2024 Term Preferred Stock on September 30, 2024 (the “Term Redemption Date”) at a redemption price equal to the Liquidation Preference plus an amount equal to all unpaid dividends and distributions on such shares (whether or not earned or declared, but excluding interest thereon) up to

 



 

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   (but excluding) the Term Redemption Date (the “Term Redemption Price”). If we fail to redeem the Series 2024 Term Preferred Stock pursuant to the mandatory redemption required on September 30, 2024, or in any other circumstance in which we are required to redeem the Series 2024 Term Preferred Stock, then the Fixed Dividend Rate will increase by four percent (4.00%) per annum for so long as such failure continues. We cannot effect any amendment, alteration or repeal of our obligation to redeem all of the Series 2024 Term Preferred Stock on September 30, 2024 without the prior unanimous vote or consent of holders of the Series 2024 Term Preferred Stock. See “ Description of the Series 2024 Term Preferred Stock—Redemption” and “—Voting Rights.
Mandatory Redemption for Asset Coverage    If we fail to maintain an Asset Coverage ratio (as defined below) of at least 200% as of the close of business on any Business Day, as defined in the Articles Supplementary, on which Asset Coverage is required to be calculated, and such failure is not cured by the date that is 30 days following the date of filing of our SEC Report with respect to such date on which Asset Coverage is required to be calculated (referred to in this prospectus supplement as an Asset Coverage Cure Date), then we are required to redeem, within 90 calendar days of the Asset Coverage Cure Date, shares of Term Preferred Stock equal to the lesser of (1) the minimum number of shares of Term Preferred Stock that will result in our having an Asset Coverage ratio of at least 200% and (2) the maximum number of shares of Term Preferred Stock that can be redeemed out of funds legally available for such redemption. Also, at our sole discretion, we may redeem such number of shares of Term Preferred Stock (including shares of Term Preferred Stock required to be redeemed) that will result in our having an Asset Coverage ratio of up to and including 240%. The Term Preferred Stock to be redeemed may include, at our sole option, any number or proportion of the Series 2024 Term Preferred Stock and other series of Term Preferred Stock, including the Series 2021 Term Preferred Stock. If shares of the Series 2024 Term Preferred Stock are to be redeemed in such an event, they will be redeemed at a redemption price equal to their Liquidation Preference per share plus an amount equal to all unpaid dividends and distributions on such shares (whether or not declared, but excluding interest thereon) accumulated to (but excluding) the date fixed for such redemption.

 



 

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   “Asset Coverage” for purposes of our Term Preferred Stock is a ratio calculated under Sections 18(h) and 61 of the 1940 Act, as in effect on the date of the Articles Supplementary, and is determined on the basis of values calculated as of a time within two days preceding each determination (excluding Sundays and holidays). We estimate that, on the Date of Original Issue, our Asset Coverage, based on the composition and value of our portfolio as of June 30, 2017, and after giving effect to (1) the issuance of shares of Series 2024 Term Preferred Stock offered in this offering; (2) redeeming all Series 2021 Term Preferred Stock upon completion of this offering; and (3) the payment of underwriting discounts and commissions of $1,417,500 and estimated related offering costs payable by us of $285,000, would have been approximately 246.7%. Our net investment income coverage, which is calculated by dividing our net investment income by the amount of distributions to holders of our common stock, was approximately 100.0% for the twelve months ended September 30, 2016 and approximately 100.0% for the nine months ended June 30, 2017. Net investment income coverage has varied each year since our inception, and there is no assurance that historical coverage levels will be maintained. See “ Description of the Series  2024 Term Preferred Stock—Asset Coverage.
Optional Redemption    At any time after the close of business on September 30, 2019 (any such date, an “Optional Redemption Date”), at our sole option, we may redeem the Series 2024 Term Preferred Stock in whole or from time to time, in part, out of funds legally available for such redemption, at a price per share equal to the sum of the Liquidation Preference all unpaid dividends and distributions on the Series 2024 Term Preferred Stock accumulated to (but excluding) the Optional Redemption Date plus the optional redemption premium per share (if any) with respect to an optional redemption on the Series 2024 Term Preferred Stock that is effected on the Optional Redemption Date. See “ Description of the Series 2024 Term Preferred Stock—Redemption—Optional Redemption.
Change of Control Redemption    If a Change of Control Triggering Event occurs, unless we have exercised our option to redeem the Series 2024 Term Preferred Stock, we will be required to redeem all of the outstanding Series 2024 Term Preferred Stock at the Liquidation Preference, plus an amount equal to all unpaid dividends on such shares (whether or not earned or

 



 

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   declared, but excluding interest thereon) accumulated to (but excluding) the date fixed for such redemption. See “ Description of the Series 2024 Term Preferred Stock ” for a definition of Change of Control Triggering Event and additional information concerning the redemption of the Series 2024 Term Preferred Stock in connection with such events.
Voting Rights    Except as otherwise provided in our charter or as otherwise required by law, (1) each holder of Term Preferred Stock (including the Series 2024 Term Preferred Stock) will be entitled to one vote for each share of Term Preferred Stock held by such holder on each matter submitted to a vote of our stockholders and (2) the holders of all outstanding Term Preferred Stock and common stock will vote together as a single class; provided, however, that holders of outstanding Term Preferred Stock, voting separately as a class, will elect at all times two of our directors and will be entitled to elect a majority of our directors if we fail to pay dividends on any outstanding shares of Term Preferred Stock in an amount equal to two full years of dividends and continuing until we correct that failure. Holders of Term Preferred Stock will also vote separately as a class on any matter that materially and adversely affects any preference, right or power of the Term Preferred Stock or the holders thereof. See “ Description of the Series  2024 Term Preferred Stock—Voting Rights .”
Conversion Rights    The Series 2024 Term Preferred Stock will have no conversion rights.
Use of Proceeds    We intend to use the net proceeds from this offering (after the payment of underwriting discounts and commissions of $1,417,500 and estimated expenses of the offering of approximately $285,000) plus borrowings under our Credit Facility to redeem all outstanding Series 2021 Term Preferred Stock at an aggregate redemption price of $61.0 million, plus accrued but unpaid dividends as further described in this prospectus supplement. See “ Use of Proceeds .”
U.S. Federal Income Taxes   

Prospective investors are urged to consult their own tax advisors regarding these matters in light of their personal investment circumstances.

 

We have elected to be treated, and intend to continue to so qualify each year, as a RIC under Subchapter M of the Code, and we generally do not expect to be subject to U.S. federal income tax.

 



 

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The dividends on the Series 2024 Term Preferred Stock generally will not qualify for the dividends received deduction or for taxation as qualified dividend income.

Risk Factors    Investing in the Series 2024 Term Preferred Stock involves risks. You should carefully consider the information set forth in the sections of this prospectus supplement and the accompanying prospectus entitled “ Risk Factors ” before deciding whether to invest in our Series 2024 Term Preferred Stock. See “ Risk Factors ” beginning on page S-12 of this prospectus supplement and page 12 of the accompanying prospectus.
Information Rights    During any period in which we are not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any shares of Series 2024 Term Preferred Stock are outstanding, we will provide holders of Series 2024 Term Preferred Stock, without cost, copies of the annual reports on Form 10-K and quarterly reports on Form 10-Q that we would have been required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if we were subject to such provisions or, alternatively, we will voluntarily file reports on Form 10-K and Form 10-Q as if we were subject to Section 13 or 15(d) of the Exchange Act.
Redemption and Paying Agent    Pursuant to the Transfer Agency and Service Agreement with Computershare, Inc., which we refer to as the Redemption and Paying Agent in this prospectus supplement, the Redemption and Paying Agent will serve as transfer agent and registrar, dividend disbursing agent and redemption and paying agent with respect to the Series 2024 Term Preferred Stock.

 



 

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RISK FACTORS

You should carefully consider the risks described below, and the risks described in “Risk Factors” beginning on page 12 of the accompanying prospectus, before deciding to invest in the Series 2024 Term Preferred Stock. The risks and uncertainties described below and in the accompanying prospectus are not the only ones we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance and the value of the Series 2024 Term Preferred Stock. If any of the following risks or the risks described in the accompanying prospectus actually occur, our business, financial condition or results of operations could be materially adversely affected, and the value of the Series 2024 Term Preferred Stock may be impaired. If that happens, the trading price of the Series 2024 Term Preferred Stock could decline, and you may lose all or part of your investment.

Risks of Investing in Term Preferred Stock

We may be unable to use the net proceeds from this offering to redeem the Series 2021 Term Preferred Stock within the time period that we anticipate or at all, which could adversely affect our financial condition and results of operations and increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act.

We intend to use the net proceeds from this offering plus borrowings under our Credit Facility to redeem all outstanding shares of our Series 2021 Term Preferred Stock. We anticipate that substantially all of the net proceeds of this offering will be utilized in this manner within three months of the completion of this offering. However, we cannot assure you that we will be able to redeem the Series 2021 Term Preferred Stock within this time period or at all. Any delay or failure to use the net proceeds from this offering to redeem the Series 2021 Term Preferred Stock could adversely affect our financial condition and results of operations and increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, as described below under “— Our amount of senior securities outstanding will increase as a result of this offering, which could adversely affect our business, financial condition and results of operations, our ability to meet our payment obligations under the Credit Facility and our ability to meet the asset coverage requirements of the 1940 Act.

An investment in term preferred stock with a fixed interest rate bears interest rate risk.

Term preferred stock, in general, pays dividends at a fixed dividend rate. Prices of fixed income investments vary inversely with changes in market yields. The market yields on securities comparable to the Series 2024 Term Preferred Stock may increase, which would likely result in a decline in the secondary market price of the Series 2024 Term Preferred Stock prior to the Term Redemption Date. This risk may be even more significant in light of low currently prevailing market interest rates. For additional information concerning dividends on the Series 2024 Term Preferred Stock, see “ Description of the Series  2024 Term Preferred Stock—Dividends and Dividend Periods.

There is no guarantee that the Series 2024 Term Preferred Stock will be approved for listing on NASDAQ, there may be no initial secondary trading market due to delayed listing, and even after listing a liquid secondary trading market may not develop.

We have applied to list the Series 2024 Term Preferred Stock on NASDAQ, and we do not know when the Series 2024 Term Preferred Stock will be approved for listing, if at all. If approved, we expect the Series 2024 Term Preferred Stock to begin trading on NASDAQ within 30 days of the date of this prospectus supplement, though there can be no assurance that the Series 2024 Term Preferred Stock will begin trading within this period, or at all. During the time the Series 2024 Term Preferred Stock is not listed on NASDAQ, the underwriters may make a market in the Series 2024 Term Preferred Stock, but they are not obligated to do so and may discontinue any market-making at any time without notice. Consequently, an investment in the Series 2024 Term Preferred Stock during this period may be illiquid, and holders of such shares may not be able to sell them during that period as it

 

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is unlikely that an active secondary market for the Series 2024 Term Preferred Stock will develop. If a secondary market does develop during this period, holders of the Series 2024 Term Preferred Stock may be able to sell such shares only at substantial discounts from the Liquidation Preference. We cannot accurately predict the trading patterns of the Series 2024 Term Preferred Stock, including the effective costs of trading the stock. Even if our Series 2024 Term Preferred Stock begins trading on NASDAQ, there is also a risk that such shares may be thinly traded, and the market for such shares may be relatively illiquid compared to the market for other types of securities, with the spread between the bid and asked prices considerably greater than the spreads of other securities with comparable terms and features. If an active trading market does develop, the Series 2024 Term Preferred Stock may trade at prices lower than the initial offering price. The trading price of the Series 2024 Term Preferred Stock would depend on many factors, including:

 

    prevailing interest rates;

 

    the market for similar securities;

 

    general economic and financial market conditions;

 

    our issuance of debt or preferred equity securities; and

 

    our financial condition, results of operations and prospects.

The Series 2024 Term Preferred Stock will not be rated.

We do not intend to have the Series 2024 Term Preferred Stock rated by any rating agency. Unrated securities usually trade at a discount to similar, rated securities. As a result, there is a risk that the Series 2024 Term Preferred Stock may trade at a price that is lower than they might otherwise trade if rated by a rating agency.

The Series 2024 Term Preferred Stock will bear a risk of early redemption by us.

We may voluntarily redeem some or all of the Series 2024 Term Preferred Stock on or after September 30, 2019, which is five years prior to its mandatory redemption date of September 30, 2024. We also may be forced to redeem some or all of the Series 2024 Term Preferred Stock to meet regulatory requirements and the Asset Coverage requirements of such shares. We are also required to redeem all of the Series 2024 Term Preferred Stock upon a Change of Control Triggering Event. Any such redemption may occur at a time that is unfavorable to holders of the Series 2024 Term Preferred Stock. We may have an incentive to redeem the Series 2024 Term Preferred Stock voluntarily before the Term Redemption Date if market conditions allow us to issue other Term Preferred Stock or debt securities at a rate that is lower than the Fixed Dividend Rate on the Series 2024 Term Preferred Stock. For further information regarding our ability to redeem the Series 2024 Term Preferred Stock, see “ Description of the Series 2024 Term Preferred Stock—Redemption ” and “—Asset Coverage.

Claims of holders of the Series 2024 Term Preferred Stock will be subject to a risk of subordination relative to holders of our debt instruments.

Rights of holders of the Series 2024 Term Preferred Stock will be subordinated to the rights of holders of our current and any future indebtedness. Even though the Series 2024 Term Preferred Stock will be classified as a liability for purposes of accounting principles generally accepted in the U.S. (“GAAP”) and considered senior securities under the 1940 Act, the shares of Series 2024 Term Preferred Stock are not debt instruments. Therefore, dividends, distributions and other payments to holders of the Series 2024 Term Preferred Stock in liquidation or otherwise may be subject to prior payments due to the holders of our indebtedness. In addition, under some circumstances the 1940 Act may provide debt holders with voting rights that are superior to the voting rights of holders of the Series 2024 Term Preferred Stock.

We are subject to risks related to a general credit crisis and related liquidity risks.

General market uncertainty and extraordinary conditions in the credit markets may impact the liquidity of our investment portfolio. In turn, during extraordinary circumstances, this uncertainty could impact our distributions

 

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and/or ability to redeem the Series 2024 Term Preferred Stock in accordance with its terms. Further, there may be market imbalances of sellers and buyers of Series 2024 Term Preferred Stock during periods of extreme illiquidity and volatility in the credit markets. Such market conditions may lead to periods of thin trading in any secondary market for the Series 2024 Term Preferred Stock and may make valuation of the Series 2024 Term Preferred Stock uncertain. As a result, the spread between bid and ask prices is likely to increase significantly such that a holder of shares of the Series 2024 Term Preferred Stock may have difficulty selling his or her shares. Less liquid and more volatile trading environments could also result in sudden and significant valuation declines in the Series 2024 Term Preferred Stock.

Holders of the Series 2024 Term Preferred Stock will be subject to inflation risk.

Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in the Series 2024 Term Preferred Stock or the income from that investment will be worth less in the future. As inflation occurs, the real value of the shares of Series 2024 Term Preferred Stock and dividends payable on such shares may decline.

Holders of the Series 2024 Term Preferred Stock will bear reinvestment risk.

Given the seven-year term and potential for early redemption of the Series 2024 Term Preferred Stock, holders of such shares may face an increased reinvestment risk, which is the risk that the return on an investment purchased with proceeds from the sale or redemption of the Series 2024 Term Preferred Stock may be lower than the return previously obtained from the investment in such shares.

Holders of Series 2024 Term Preferred Stock will bear dividend risk.

We may be unable to pay dividends on the Series 2024 Term Preferred Stock under some circumstances. The terms of our indebtedness, including the Credit Facility, preclude the payment of dividends in respect of equity securities, including the Series 2024 Term Preferred Stock, under certain conditions. See “ Liquidity and Capital Resources—Revolving Credit Facility .”

Our amount of senior securities outstanding will increase as a result of this offering, which could adversely affect our business, financial condition and results of operations, our ability to meet our payment obligations under the Credit Facility and our ability to meet the asset coverage requirements of the 1940 Act.

As of June 30, 2017, we had $61.0 million outstanding of Series 2021 Term Preferred Stock and $82.2 million of borrowings outstanding under our Credit Facility. We intend to use the net proceeds from this offering plus borrowings under our Credit Facility to redeem all outstanding shares of our Series 2021 Term Preferred Stock. We anticipate that substantially all of the net proceeds of this offering will be utilized in this manner within three months of the completion of this offering. However, until such time as the outstanding shares of Series 2021 Term Preferred Stock have been redeemed using the proceeds of this offering (and, to the extent that the aggregate amount of Series 2024 Term Preferred Stock issued in this offering exceeds the aggregate amount of Series 2021 Term Preferred Stock currently outstanding, following such redemption of the Series 2021 Term Preferred Stock), our amount of senior securities outstanding will increase as a result of this offering.

The issuance of additional senior securities could have significant consequences on our future operations, including:

 

    making it more difficult for us to meet our payment and other financial obligations under our Credit Facility;

 

    resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our Credit Facility, which event of default could result in all amounts outstanding under our Credit Facility becoming immediately due and payable;

 

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    reducing the availability of our cash flow to fund investments and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

 

    limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and

 

    increasing the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, as described below.

We face Asset Coverage risks in our investment activities.

The Asset Coverage ratio that we must maintain on our Term Preferred Stock, including the Series 2024 Term Preferred Stock, is based upon a calculation of the value of our portfolio holdings. A large percentage of our portfolio investments are, and we expect will continue to be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded is generally not readily determinable. Our Board of Directors has established an investment valuation policy and consistently applied valuation procedures to determine the fair value of these securities on a quarterly basis. The procedures for the determination of value of many of our debt securities rely on opinions of value submitted to us by Standard & Poor’s Securities Evaluations, Inc. (“SPSE”), the use of internally developed discounted cash flow (“DCF”), methodologies, or internal methodologies based on the total enterprise value (“TEV”), of the issuer, which we use for certain of our equity investments. SPSE will only evaluate the debt portion of investments for which we specifically request an evaluation, and SPSE may decline to provide requested evaluations for any reason in its sole discretion.

A portion of our assets are, and will continue to be, comprised of equity securities that are valued based on internal assessments using valuation methods approved by our Board of Directors, without the input of SPSE or any other third-party evaluator. While we believe that our equity valuation methods reflect those regularly used as standards by other professionals in our industry who value equity securities, the determination of fair value for securities that are not publicly traded necessarily involves an exercise of subjective judgment, whether or not we obtain the recommendations of an independent third-party evaluator.

Our use of these fair value methods is inherently subjective and is based on estimates and assumptions regarding each security. In the event that we are required to sell a security, we may ultimately sell for an amount materially less than the estimated fair value calculated by us or SPSE, or determined using TEV or the DCF methodology. As a result, a risk exists that the Asset Coverage attributable to the Term Preferred Stock, including the Series 2024 Term Preferred Stock, may be materially lower than what is calculated based upon the fair valuation of our portfolio securities in accordance with our valuation policies. See “Risk Factors—Risks Related to Our Investments— Because the loans we make and equity securities we receive when we make loans are not publicly traded, there is uncertainty regarding the value of our privately held securities that could adversely affect our determination of our net asset value (“NAV ”)” on page 16 of the accompanying prospectus.

There is a risk of delay in our redemption of the Series 2024 Term Preferred Stock, and we may fail to redeem such securities as required by their terms.

We will generally make investments in private companies whose securities are not traded in any public market. Substantially all of the investments we presently hold and the investments we expect to acquire in the future are, and will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments quickly if a need arises. If we are unable to obtain sufficient liquidity prior to the Term Redemption Date or a Change of Control Triggering Event, we may be forced to engage in a partial redemption or to delay a required redemption. If such a partial redemption or delay were to occur, the market price of the Series 2024 Term Preferred Stock might be adversely affected.

 

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We finance our investments with borrowed money and senior securities, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns on our portfolio, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

 

     Assumed Return on Our Portfolio (Net of Expenses)    

 

 
     (10 )%         (5 )%         0.0        5        10  
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Corresponding return to common stockholder (A)

     (19.92 )%         (11.59 )%         (3.26 )%         5.06        13.39  

 

(A)   The hypothetical return to common stockholders is calculated by multiplying our total assets as of June 30, 2017 by the assumed rates of return and subtracting all interest accrued on our debt as of June 30, 2017, adjusted for the assumed dividends declared on the shares of Series 2024 Term Preferred Stock to be issued in this offering (and assuming the Series 2021 Term Preferred Stock are redeemed in full); and then dividing the resulting difference by our total assets attributable to common stock. This calculation is based on $361.3 million in total assets, $82.2 million in debt outstanding at cost and $217.0 million in net assets as of June 30, 2017.

Based on (i) our outstanding indebtedness of $82.2 million at cost as of June 30, 2017 and (ii) an effective annual interest rate of 4.5% on such indebtedness as of that date, our investment portfolio at fair value would have been required to experience an annual return of at least 2.05% to cover annual interest payments on the outstanding indebtedness and dividends on the Series 2024 Term Preferred Stock to be issued in this offering (and assuming the Series 2021 Term Preferred Stock is redeemed in full).

Other Risks

In addition to regulatory limitations on our ability to raise capital, our Credit Facility contains various covenants which, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.

We will have a continuing need for capital to finance our investments. We are party to the Credit Facility, which provides us with a revolving credit line facility of $170.0 million, of which $82.2 million was drawn, at cost, as of June 30, 2017. The Credit Facility permits us to fund additional loans and investments as long as we are within the conditions set forth in the credit agreement. 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. The Credit Facility also limits payments of distributions to our stockholders on a fiscal year basis to the sum of our net investment income. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base in order to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, interest rate type, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage, and a required minimum number of 20 obligors in the borrowing base. Additionally, we are subject to a covenant that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our Term Preferred Stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015, which equates to $225.0 million as of June 30, 2017, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200.0%, in accordance with Sections 18 and 61 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, 2017, we were in compliance with all of our Credit Facility covenants; however, our continued compliance depends on many factors, some of which are beyond our control.

 

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Given the continued uncertainty in the capital markets, the cumulative unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.

We may authorize, establish, create, issue and sell shares of one or more series of a class of our senior securities while shares of Series 2024 Term Preferred Stock are outstanding without the vote or consent of the holders thereof.

While shares of Series 2024 Term Preferred Stock are outstanding, we may, without the vote or consent of the holders thereof, authorize, establish and create and issue and sell shares of one or more series of a class of our senior securities representing stock under Section 18, as modified by Section 61, of the 1940 Act, ranking on parity with the Series 2024 Term Preferred Stock as to payment of dividends and distribution of assets upon dissolution, liquidation or the winding up of our affairs, in addition to then outstanding shares of Series 2024 Term Preferred Stock, including additional series of Term Preferred Stock, and authorize, issue and sell additional shares of any such series of Term Preferred Stock then outstanding or so established and created, in each case in accordance with applicable law, provided that we will, immediately after giving effect to the issuance of such additional Term Preferred Stock and to our receipt and application of the proceeds thereof, including to the redemption of Term Preferred Stock with such proceeds, have Asset Coverage of at least 200%.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the Credit Facility and monthly dividend obligations or redemption obligations with respect to our Term Preferred Stock.

Our ability to meet our payment and other obligations under the Credit Facility and monthly dividend obligations with respect to our Term Preferred Stock depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under the Credit Facility or otherwise, in an amount sufficient to enable us to meet these obligations and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Credit Facility or monthly dividend obligations with respect to our Term Preferred Stock.

In addition, we may issue debt securities, other evidences of indebtedness (including borrowings under the Credit Facility), senior securities representing indebtedness and senior securities that are stock up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us, as a BDC, to issue senior securities representing indebtedness and senior securities that are stock (such as our Term Preferred Stock), in amounts such that our asset coverage, in accordance with Sections 18 and 61 of the 1940 Act, is at least 200% immediately after each issuance of such senior security. Notwithstanding Section 18(e) of the 1940 Act, the issuance of additional senior securities in this offering may increase the likelihood of our failing to meet the asset coverage requirements of the 1940 Act, especially prior to any redemption of the Series 2024 Term Preferred Stock. Our ability to pay distributions, issue senior securities or repurchase shares of our Common Stock would be restricted if the asset coverage on each of our senior securities is not at least 200%. If the aggregate value of our assets declines, we might be unable to satisfy that 200% requirement. To satisfy the 200% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue Common Stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will

 

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not be available for distributions to stockholders. Furthermore, if we have to issue common stock at a price below NAV per common share, upon obtaining the requisite stockholder and board approvals as we have done previously, any non-participating common stockholders will be subject to dilution.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus supplement or the accompanying prospectus, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with our Adviser and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (1) the recurrence or impact of adverse events in the economy and the capital markets, including stock price volatility; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described in the “Risk Factors” section of this prospectus supplement and the accompanying prospectus.

We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise or any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement or the accompanying prospectus. The forward-looking statements contained or incorporated by reference in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

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USE OF PROCEEDS

We estimate that the net proceeds to us of this offering will be approximately $43.3 million, after deducting the payment of underwriting discounts and commissions of $1,417,500 and estimated offering expenses of $285,000 payable by us. We intend to use the net proceeds from this offering plus borrowings under our Credit Facility to redeem all outstanding shares of the Series 2021 Term Preferred Stock at an aggregate redemption price of $61.0 million, plus accrued but unpaid dividends as further described below. Our Series 2021 Term Preferred Stock bears interest at an annual rate of 6.75% of the $25 liquidation preference per share, payable monthly, and we are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 at a redemption price equal to $25 per share plus an amount equal to accumulated but unpaid dividends, if any, up to, but excluding, the date of redemption. As is anticipated after the completion of this offering, at any time on or after June 30, 2017, at our sole option, we may redeem the Series 2021 Term Preferred Stock in whole or from time to time, in part, out of funds legally available for such redemption, at a price per share equal to the sum of the liquidation preference of $25 per share plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) to, but excluding, the date fixed for such redemption.

As of June 30, 2017, we had $82.2 million outstanding under our Credit Facility with a weighted average effective annual interest rate of 5.3% for the nine months ended June 30, 2017. The Credit Facility has a maturity date of May 1, 2020. The interest rates on advances under our Credit Facility generally bear interest at a 30-day LIBOR plus 3.25% per annum, with a commitment fee of 0.5% per annum on undrawn amounts. 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 April 19, 2020.

We have granted the underwriters the right to purchase up to 270,000 additional shares of Series 2024 Term Preferred Stock at the public offering price, less underwriting discounts and commissions, within 30 days of the date of this prospectus supplement solely to cover over-allotments, if any. If the underwriters exercise such option in full, the estimated net proceeds to us will be approximately $49.8 million. We anticipate that substantially all of the net proceeds of this offering will be utilized in the manner described above within three months of the completion of such offering. Pending such utilization, we intend to invest the net proceeds of the offering primarily in cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less from the date of investment, consistent with the requirements for continued qualification as a RIC for federal income tax purposes.

 

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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS

 

     For the Nine
Months Ended
June 30, 2017
    For the Year Ended September 30,  
       2016     2015     2014     2013     2012  
     (Dollars in thousands)  

Net investment income

   $ 15,945     $ 19,487     $ 17,700     $ 18,368     $ 18,386     $ 19,044  

Add: fixed charges and preferred dividends (A)

     5,955       8,092       9,050       7,213       7,137       8,108  

Less: preferred dividends (A)

     (3,087     (4,118     (4,116     (3,338     (2,744     (2,491
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings

   $ 18,813     $ 23,461     $ 22,634     $ 22,243     $ 22,779     $ 24,661  

Fixed charges and preferred dividends (A) :

            

Interest expense

   $ 2,047     $ 2,899     $ 3,828     $ 2,628     $ 3,182     $ 4,374  

Amortization of deferred financing fees

     821       1,075       1,106       1,247       1,211       1,243  

Preferred dividends (A)

     3,087       4,118       4,116       3,338       2,744       2,491  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges and preferred dividends (A)

   $ 5,955     $ 8,092     $ 9,050     $ 7,213     $ 7,137     $ 8,108  

Ratio of earnings to combined fixed charges and preferred dividends (A)

     3.2x     2.9x     2.5x     3.1x     3.2x     3.0x

Computation of Pro Forma Ratio of Earnings to Combined Fixed Charges and Preferred Dividends for the Nine Months Ended June 30, 2017 After Adjustment for Issuance of Series 2024 Term Preferred Stock

 

     For the
Nine Months
Ended
June 30,
2017
    For the
Year Ended
September 30,
2016
 
     (Dollars in thousands)  

Net investment income

   $ 15,945     $ 19,487  

Add: fixed charges and preferred dividends (A) , as above

     5,955       8,092  

Less: preferred dividends (A) , as above

     (3,087     (4,118

Adjustments:

    

Pro forma increase in interest expense and amortization of deferred financing fees

     887       1,044  
  

 

 

   

 

 

 

Pro forma fixed charges

     3,755       5,018  

Pro forma preferred dividends (B)

     2,025       2,700  
  

 

 

   

 

 

 

Total pro forma fixed charges and preferred dividends (B)

     5,780       7,718  

Pro forma earnings

   $ 19,700     $ 24,505  

Pro forma ratio of earnings to combined fixed charges and preferred dividends (B)

     5.2x       4.9x  

 

(A)   Preferred dividends on Series 2021 Term Preferred Stock.
(B)   Preferred dividends on Series 2024 Term Preferred Stock.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2017:

 

    on an actual basis; and

 

    on an as-adjusted basis to give effect to the completion of this offering and the application of the estimated net proceeds of the offering, after deducting underwriters’ discounts and commissions and estimated offering expenses payable by us (and assuming the underwriters’ over-allotment option is not exercised). See “Use of Proceeds.”

 

     As of June 30, 2017  
     Actual     As Adjusted**  
     (Unaudited)  
     (Dollars in thousands)  

Borrowings

    

Borrowings under line of credit, at cost

   $ 82,200     $ 99,903  
  

 

 

   

 

 

 

Term Preferred Stock

    

6.75% Series 2021 Term Preferred Stock, $0.001 par value per share; $25 liquidation preference per share; 2,460,118 shares authorized, and 2,200,000 issued and outstanding, actual; 0 shares authorized, 0 shares issued and outstanding, as adjusted*

   $ 61,000     $ —    
  

 

 

   

 

 

 

6.00% Series 2024 Term Preferred Stock, $0.001 par value per share; $25 liquidation preference per share; 0 shares authorized, issued and outstanding, actual; 3,000,000 shares authorized, 1,800,000 shares issued and outstanding, as adjusted*

   $ 0     $ 45,000  

Net Assets

    

Common stock, $0.001 par value per share, 46,000,000 shares authorized, actual, and 44,560,000 shares authorized, as adjusted; 25,880,466 shares issued and outstanding, actual and as adjusted*

   $ 26     $ 26  

Capital in excess of par value

     347,061       347,061  

Net unrealized depreciation of investments

     (60,400     (60,400

Net unrealized depreciation of other

     (71     (71

Overdistributed net investment income

     (313     (313

Accumulated net realized losses

     (69,320     (70,696
  

 

 

   

 

 

 

Total Net Assets

   $ 216,983     $ 215,607  
  

 

 

   

 

 

 

Total Capitalization

   $ 360,183     $ 360,510  
  

 

 

   

 

 

 

 

* None of these outstanding shares are held by us or for our account.
** Assumes a total of $1,417,500 of aggregate underwriting discounts and commissions and $285,000 of estimated offering costs payable by us in connection with this offering will be capitalized and amortized over the life of the Series 2024 Term Preferred Stock through September 30, 2024.

The following are our outstanding classes of securities as of June 30, 2017:

 

(1) Title of Class

   (2) Amount
Authorized
     (3) Amount Held
by us or for Our
Account
     (4) Amount
Outstanding
Exclusive of
Amounts Shown
Under (3)
 
        
        

Common Stock

     46,000,000        —          25,880,466  

Series 2021 Term Preferred Stock

     5,440,000        —          2,440,000  

 

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CONSOLIDATED SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following consolidated selected financial data for the fiscal years ended September 30, 2016, 2015, 2014, 2013 and 2012 are derived from our audited consolidated financial statements. The consolidated selected financial data for the nine months ended June 30, 2017 and 2016 are derived from our unaudited consolidated financial statements included in this prospectus supplement. The “other data” included in the second table below are unaudited. The data should be read in conjunction with our accompanying consolidated financial statements and notes thereto and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included elsewhere in this prospectus supplement and the accompanying prospectus.

 

    Nine Months Ended
June 30,
    Year Ended September 30,  
    2017     2016     2016     2015     2014     2013     2012  
    (Unaudited)     (Unaudited)                                

Statement of Operations Data:

             

Total Investment Income

  $ 28,399     $ 29,362     $ 39,112     $ 38,058     $ 36,585     $ 36,154     $ 40,322  

Total Expenses, Net of Credits from Adviser

    12,454       14,778       19,625       20,358       18,217       17,768       21.278  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

    15,945       14,584       19,487       17,700       18,368       18,386       19,044  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized and Unrealized (Loss) Gain

    (4,210     (23,912     (8,120     (9,216     (7,135     13,833       (27,052
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

  $ 11,735     $ (9,328   $ 11,367     $ 8,484     $ 11,233     $ 32,219     $ (8,008
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Net Investment Income per Common Share—Basic and Diluted (A)

  $ 0.63     $ 0.63     $ 0.84     $ 0.84     $ 0.87     $ 0.88     $ 0.91  

Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share—Basic and Diluted (A)

    0.46       (0.40     0.49       0.40       0.53       1.53       (0.38

Distributions Declared and Paid Per Common Share

    0.63       0.63       0.84       0.84       0.84       0.84       0.84  

Statement of Assets and Liabilities Data:

             

Total Assets

  $ 361,345     $ 325,550     $ 337,178     $ 382,482     $ 301,429     $ 295,091     $ 293,402  

Net Assets

    216,983       185,514       201,207       191,444       199,660       205,992       188,564  

Net Asset Value Per Common Share

    8.38       7.95       8.62       9.06       9.51       9.81       8.98  

Common Shares Outstanding

    25,880,466       23,344,422       23,344,422       21,131,622       21,000,160       21,000,160       21,000,160  

Weighted Common Shares Outstanding—Basic and Diluted

    25,288,289       23,145,842       23,200,642       21,066,844       21,000,160       21,000,160       21,011,123  

Senior Securities Data:

             

Total borrowings, at cost (B)

  $ 82,200     $ 73,300     $ 71,300     $ 127,300     $ 36,700     $ 46,900     $ 58,800  

Mandatorily redeemable preferred stock (B)

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

 

(A)   Per share data is based on the weighted average common stock outstanding for both basic and diluted.

 

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(B)   See  “Management’s Discussion and Analysis of Financial Condition and Results of Operations”  in this prospectus supplement and the accompanying prospectus for more information regarding our level of indebtedness.

 

    Nine Months Ended
June 30,
    Year Ended September 30,  
        2017             2016         2016     2015     2014     2013     2012  

Other Unaudited Data:

             

Number of Portfolio Companies at Year End

    47       43       45       48       45       47       50  

Average Size of Portfolio Company Investment at Cost

  $ 8,636     $ 8,984     $ 8,484     $ 8,547     $ 7,762     $ 7,069     $ 7,300  

Principal Amount of New Investments

    99,048       64,173       79,401       102,299       81,731       80,418       45,050  

Proceeds from Loan Repayments, Investments Sold and Exits (C)

    71,081       98,425       121,144       40,273       72,560       117,048       73,857  

Weighted Average Yield on Investments (D)

    11.5     11.1     11.1     10.93     11.47     11.63     11.25

Total Return (E)

    29.46       (3.04     11.68       2.40       9.62       9.90       41.39  

 

(C)   Includes non-cash reductions in cost basis.
(D)   Weighted average yield on investments equals interest income on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year.
(E)   Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account dividends reinvested in accordance with the terms of the dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9— Distributions to Common Stockholders  in the notes to the accompanying Consolidated Financial Statements included elsewhere in this prospectus supplement and the accompanying prospectus.

SELECTED QUARTERLY FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth certain quarterly financial information for the first three quarters of the fiscal year ending September 30, 2017. The information was derived from our unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the past fiscal year or for any future quarter.

     Year Ending September 30, 2017  
     Quarter
Ended
December 31,
2016
     Quarter
Ended
March 31,
2017
     Quarter
Ended
June 30,
2017
 

Total investment income

   $ 9,974      $ 8,793      $ 9,632  

Net investment income

     5,207        5,359        5,379  

Net increase (decrease) in net assets resulting from operations

     916        4,656        6,163  

Net Increase (Decrease) in Net Assets Resulting From Operations per Weighted Average Common Share (Basic and Diluted)

   $ 0.04      $ 0.18      $ 0.24  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(The tables included in this section list dollar amounts in thousands, except per share data or unless otherwise indicated.)

You should read the following analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this prospectus supplement and in the accompanying prospectus.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for federal income tax purposes we have elected to be treated as a registered investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”). As a BDC and a RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2017, our investment portfolio was made up of approximately 90.9% debt investments and 9.1% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment Corporation, a BDC also managed by our Adviser, pursuant to an exemptive order granted by the SEC. We believe this ability to co-invest will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone.

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

 

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Additionally, since February 2011, 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.

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

Business

Portfolio and Investment Activity

During the nine months ended June 30, 2017, we invested $85.2 million in eight new portfolio companies and extended $13.8 million of investments to existing portfolio companies. In addition, during the nine months ended June 30, 2017, we exited six portfolio companies through sales and early payoffs. We received a total of $71.1 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as existing portfolio companies during the nine months ended June 30, 2017. This activity resulted in a net increase in our overall portfolio by two portfolio companies to 47 and a net increase of 6.3% in our portfolio at cost since September 30, 2016. We intend to continue to make new conservative investments in businesses with steady cash flows. We are focused on building our pipeline and making investments that meet our objectives and strategies and that provide appropriate returns, in light of the accompanying risks. From our initial public offering in August 2001 and through June 30, 2017, we have made 460 different loans to, or investments in, 214 companies for a total of approximately $1.6 billion, before giving effect to principal repayments on investments and divestitures.

During the nine months ended June 30, 2017, the following significant transactions occurred:

 

    In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.

 

    In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt investment in Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.

 

    In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. (“RBC”) for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In connection with the sale, we received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.

 

    In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.

 

    In December 2016, we sold our investment in Behrens Manufacturing, LLC (“Behrens”), which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the sale, we received net cash proceeds of $8.2 million, including the repayment of our debt investment of $4.3 million at par.

 

    In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.

 

    In December 2016, Autoparts Holdings Limited paid off at par for proceeds of $0.7 million.

 

    In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.

 

    In February 2017, we invested $10.0 million in Belnick, Inc. through secured second lien debt.

 

    In February 2017, we invested $29.0 million in NetFortris Corp. through secured first lien debt.

 

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    In February 2017, Vitera Healthcare Solutions, LLC paid off at par for proceeds of $4.5 million.

 

    In March 2017, LCR Contractors, LLC paid off at par for net cash proceeds of $8.6 million. In connection with the payoff, we received a prepayment fee of $0.2 million.

 

    In April 2017, we invested $22.0 million in HB Capital Resources, Ltd. through secured second lien debt.

 

    In May 2017, we invested an additional $4.1 million in an existing portfolio company, Lignetics, Inc., through secured second lien debt and equity, to support an acquisition.

 

    In May 2017, we invested $4.0 million in Keystone Acquisition Corp. through secured second lien debt.

 

    In June 2017, we invested $3.0 million in Medical Solutions Holdings, Inc. through secured second lien debt.

Capital Raising

We have been able to meet our capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public equity offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to January 2019, and currently have a total commitment amount of $170.0 million. Additionally, we issued 2.3 million shares of common stock for gross proceeds of $19.8 million in October 2015, inclusive of the November 2015 over-allotment, and we issued approximately 2.2 million shares of our common stock for gross proceeds of $17.3 million in October 2016, inclusive of the November 2016 over-allotment. During the three months ended June 30, 2017, we sold 362,600 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.89 per share and raised $3.6 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $3.4 million. Refer to “ —Liquidity and Capital Resources—Equity—Common Stock ” for further discussion of our common stock and “ —Liquidity and Capital Resources—Revolving Credit Facility ” for further discussion of our Credit Facility.

Although we were able to access the capital markets historically and in recent years, we believe uncertain market conditions continue to affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. During times of increased price volatility, our common stock may be more likely to trade at a price below our NAV per share, which is not uncommon for BDCs like us.

When our stock trades below NAV per common share, as it has often done over the last several years, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 11, 2016, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then current NAV per common share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale. We completed the abovementioned October 2016 common stock offering as a result of the stockholder approval of the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV at our annual meeting of stockholders held on February 9, 2017. Should we decide to issue shares of common stock at a price below NAV, we will seek the requisite approval of our stockholders at such time.

On September 18, 2017, the closing market price of our common stock was $9.33, a 11.33% premium to our June 30, 2017 NAV per share of $8.38.

 

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Regulatory Compliance

Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 200% on our “senior securities representing indebtedness” and our “senior securities that are stock.” As of June 30, 2017, our asset coverage on our “senior securities representing indebtedness” was 434.4% and our asset coverage on our “senior securities that are stock” was 249.6%.

Recent Developments

Charter Amendment

At a special meeting held on August 29, 2017, our Board of Directors approved the reclassification and designation of 1,440,000 shares of authorized and unissued common stock as shares of Term Preferred Stock, par value $0.001 per share, to be issued in one or more series. The Articles Supplementary reflecting such reclassification was filed with the Maryland Department of Assessments and Taxation on September 19, 2017.

Credit Facility Amendment No. 3

On August 24, 2017 we, through Business Loan, entered into Amendment No. 3 (the “Amendment”) to our Credit Facility with KeyBank National Association, as administrative agent, swingline lender, managing agent and lead arranger, the Adviser, as servicer, and certain other lenders party thereto.

Primarily, the Amendment adjusted the calculation of the borrowing base of the Credit Facility and clarified the application of excess concentrations. The Amendment also, among other items, increased the excess concentration limits for PIK loans and updated the commitment amounts for the lenders. As of August 23, 2017, prior to the closing of the Amendment, $76.5 million of borrowings were outstanding under the Credit Facility.

Portfolio Activity

In August 2017, we invested $12.5 million in El Academies, Inc. through secured first lien debt and equity.

In July 2017, our loan to SourceHOV, LLC was paid off for net proceeds of $4.8 million, resulting in a realized loss of $0.2 million.

Distributions and Dividends

On July 11, 2017, our Board of Directors declared the following monthly distributions to common stockholders and monthly dividends to preferred stockholders:

 

Record Date

   Payment Date      Distribution
per
Common

Share
     Dividend
per share of Series
2021 Term
Preferred

Stock
 

July 21, 2017

     July 31, 2017      $ 0.07      $ 0.140625  

August 21, 2017

     August 31, 2017        0.07        0.140625  

September 20, 2017

     September 29, 2017        0.07        0.140625  
     

 

 

    

 

 

 
Total for the Quarter:       $ 0.21      $ 0.421875  
     

 

 

    

 

 

 

Advisory Agreement Renewal

On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the

 

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Advisory Agreement through August 31, 2018. Mr. Gladstone, our chairman and chief executive officer, controls the Adviser. In reaching a decision to approve the Advisory Agreement, our Board of Directors reviewed a significant amount of information and considered, among other things:

 

    the nature, quality and extent of the advisory and other services to be provided to us by the Adviser;

 

    our investment performance and that of the Adviser;

 

    the costs of the services to be provided and profits to be realized by the Adviser from the relationship with us;

 

    the fee structures of comparable externally managed business development companies that engage in similar investing activities; and

 

    various other matters.

Based on the information reviewed and the considerations detailed above, our Board of Directors, including all of the directors who are not “interested persons” as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Advisory Agreement, as being in the best interests of our stockholders.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2017 to the Three Months Ended June 30, 2016

 

     Three Months Ended June 30,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income, net

   $ 9,629     $ 8,253     $ 1,376       16.7

Other income

     3       1,591       (1,588     (99.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     9,632       9,844       (212     (2.2
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     1,480       1,369       111       8.1  

Loan servicing fee

     1,071       896       175       19.5  

Incentive fee

     1,116       1,187       (71     (6.0

Administration fee

     272       287       (15     (5.2

Interest expense on borrowings

     904       648       256       39.5  

Dividend expense on mandatorily redeemable preferred stock

     1,029       1,029       —         —    

Amortization of deferred financing fees

     274       273       1       0.4  

Other expenses

     453       640       (187     (29.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     6,599       6,329       270       4.3  

Credit to base management fee—loan servicing fee

     (1,071     (896     (175     19.5  

Credits to fees from Adviser—other

     (1,275     (496     (779     157.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     4,253       4,937       (684     (13.9
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     5,379       4,907       472       9.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized loss on investments

     (23     (84     61       (72.6

Net realized gain on other

     —         —         —         —    

Net unrealized appreciation of investments

     989       693       296       42.7  

Net unrealized depreciation of other

     (182     —         (182     NM  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain from investments and other

     784       609       175       28.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 6,163     $ 5,516     $ 647       11.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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NM = Not Meaningful

Investment Income

Interest income increased by 16.7% for the three months ended June 30, 2017, as compared to the prior year period. The level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2017, was $333.2 million, compared to $303.6 million for the prior year period, an increase of 9.7%. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments which increased to 11.5% for the three months ended June 30, 2017, compared to 10.9% for the three months ended June 30, 2016, inclusive of any allowances on interest receivables made during those periods.

As of June 30, 2017, certain loans to two portfolio companies were on non-accrual status, with an aggregate debt cost basis of $27.9 million, or 7.6%, of the cost basis of all debt investments in our portfolio. As of June 30, 2016, certain loans to two portfolio companies were on non-accrual status, with an aggregate debt cost basis of $26.5 million, or 7.5%, of the cost basis of all debt investments in our portfolio.

For the three months ended June 30, 2017, other income decreased by 99.8% as compared to the prior year period. Other income for the three months ended June 30, 2016, consisted primarily of $1.5 million in success fees recognized and $0.1 million in prepayment fees received whereas there were no such amounts recognized in the current year period.

 

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

 

     As of June 30, 2017     Three Months Ended
June 30, 2017
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

NetFortris Corp.

   $ 24,120        7.0   $ 637        6.6  

IA Tech, LLC

     23,518        6.8       699        7.3  

HB Capital Resources, Ltd. (A)

     22,000        6.4       462        4.8  

WadeCo Specialties, Inc.

     21,208        6.1       481        5.0  

Lignetics, Inc.

     18,746        5.4       482        5.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     109,592        31.7       2,761        28.7  

Other portfolio companies

     235,911        68.3       6,871        71.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 345,503        100.0   $ 9,632        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of June 30, 2016     Three Months Ended
June 30, 2016
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

IA Tech, LLC (A)

   $ 30,000        9.7   $ 40        0.4

RBC Acquisition Corp.

     22,090        7.2       658        6.7  

WadeCo Specialties, Inc.

     19,630        6.4       528        5.4  

United Flexible, Inc.

     17,304        5.6       556        5.6  

Lignetics, Inc.

     15,499        5.0       425        4.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     104,523        33.9       2,207        22.4  

Other portfolio companies

     203,703        66.1       7,637        77.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 308,226        100.0   $ 9,844        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)   New investment during the applicable period.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, decreased by 13.9% for the three months ended June 30, 2017, as compared to the prior year period. This decrease was primarily due to a decrease in the net incentive fee and a decrease in professional fees, partially offset by an increase in interest expense on borrowings.

Interest expense on borrowings increased by $0.3 million, or 39.5%, during the three months ended June 30, 2017, as compared to the prior year period, due primarily to an increase in the borrowings outstanding under our Credit Facility during the period driven by a net increase in investments. The weighted average balance outstanding under our Credit Facility during the three months ended June 30, 2017, was $72.6 million, as compared to $52.5 million in the prior year period, an increase of 38.3%.

Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit of $0.9 million from the Adviser to reduce the income-based incentive fee to the extent net investment income for the quarter ended June 30, 2017 did not cover 100.0% of the distributions to common stockholders during the period. The credit granted for the quarter ended June 30, 2016, was $0.2 million. The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as

 

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described under  “Transactions with the Adviser”  in Note 4— Related Party Transactions  of the notes to our accompanying  Condensed Consolidated Financial Statements  and are summarized in the following table:

 

     Three Months Ended
June 30,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 338,286     $ 312,914  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375
  

 

 

   

 

 

 

Base management fee (B)

   $ 1,480     $ 1,369  

Portfolio company fee credit

     (261     (319

Syndicated loan fee credit

     (100     (17
  

 

 

   

 

 

 

Net Base Management Fee

   $ 1,119     $ 1,033  
  

 

 

   

 

 

 

Loan servicing fee (B)

     1,071       896  

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

     (1,071     (896
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee (B)

     1,116       1,187  

Incentive fee credit

     (914     (160
  

 

 

   

 

 

 

Net Incentive Fee

   $ 202     $ 1,027  
  

 

 

   

 

 

 

Portfolio company fee credit

     (261     (319

Syndicated loan fee credit

     (100     (17

Incentive fee credit

     (914     (160
  

 

 

   

 

 

 

Credits to Fees From Adviser—other (B)

   $ (1,275   $ (496
  

 

 

   

 

 

 

 

(A)   Average total assets subject to the base management fee is defined in the Advisory Agreement 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  Condensed Consolidated Statements of Operations .

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

We had no significant realized gains (losses) on investments for the three months ended June 30, 2017 and 2016.

 

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Net Unrealized Appreciation (Depreciation) of Investments

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2017, were as follows:

 

     Three Months Ended June 30, 2017  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
     Net
Gain (Loss)
 

WadeCo Specialties, Inc.

   $ —       $ 1,748     $ —        $ 1,748  

B+T Group Acquisition Inc.

     —         1,434       —          1,434  

LWO Acquisitions Company LLC

     —         1,163       —          1,163  

Defiance Integrated Technologies, Inc.

     —         693       —          693  

Lignetics, Inc.

     —         480       —          480  

United Flexible, Inc.

     —         311       —          311  

FedCap Partners, LLC

     —         297       —          297  

The Mochi Ice Cream Company

     —         246       —          246  

Flight Fit N Fun LLC

     —         205       —          205  

PSC Industrial Holdings Corp.

     —         (212     —          (212

Vertellus Specialties Inc.

     —         (220     —          (220

Targus Cayman HoldCo, Ltd.

     —         (279     —          (279

Sunshine Media Holdings

     —         (314     —          (314

New Trident Holdcorp, Inc.

     —         (621     —          (621

Alloy Die Casting, Corp.

     —         (660     —          (660

Meridian Rack & Pinion, Inc.

     —         (789     —          (789

Francis Drilling Fluids, Ltd.

     —         (1,037     —          (1,037

Edge Adhesives Holdings, Inc.

     —         (1,471     —          (1,471

Other, net (<$250)

     (23     15       —          (8
  

 

 

   

 

 

   

 

 

    

 

 

 

Total:

   $ (23   $ 989     $ —        $ 966  
  

 

 

   

 

 

   

 

 

    

 

 

 

The primary driver of net unrealized appreciation on investments of $1.0 million for the three months ended June 30, 2017, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments, which more than offset the decline in performance of certain of our other portfolio companies.

 

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The net realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2016, were as follows:

 

     Three Months Ended June 30, 2016  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net
Gain (Loss)
 

Southern Petroleum Laboratories, Inc.

   $ —       $ 1,906     $ —       $ 1,906  

RBC Acquisition Corp.

     —         1,232       —         1,232  

Vision Solutions, Inc.

     —         777       —         777  

Westland Technologies, Inc.

     —         683       —         683  

Flight Fit N Fun LLC

     —         633       —         633  

Precision Acquisition Group Holdings, Inc.

     —         597       —         597  

Behrens Manufacturing, LLC

     —         588       —         588  

Vitera Healthcare Solutions, LLC

     —         449       —         449  

Vertellus Specialties Inc.

     —         368       —         368  

Targus Cayman HoldCo, Ltd.

     —         (338     —         (338

SourceHOV, LLC

     —         (358     —         (358

Ashland Acquisitions, LLC

     72       —         (572     (500

New Trident Holdcorp, Inc.

     —         (600     —         (600

Lignetics, Inc.

     —         (622     —         (622

Sunshine Media Holdings

     —         (1,301     —         (1,301

LWO Acquisitions Company LLC

     —         (1,478     —         (1,478

Francis Drilling Fluids, Ltd.

     —         (1,565     —         (1,565

Other, net (<$250)

     (156     294       —         138  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   $ (84   $ 1,265     $ (572   $ 609  
  

 

 

   

 

 

   

 

 

   

 

 

 

The primary driver of net unrealized appreciation of $0.7 million for the three months ended June 30, 2016, was an improvement in the performance of certain portfolio companies and an increase in comparable multiples used to estimate the fair value of our investments, which more than offset the decreased performance of several of our portfolio companies.

Net Realized Loss on Other

During the three months ended June 30, 2016, we recorded a net realized loss of $0.1 million due to the expiration of our interest rate cap agreement in January 2016. No such amounts were incurred during the three months ended June 30, 2017.

Net Unrealized Depreciation on Other

During the three months ended June 30, 2017, we recorded $0.2 million of net unrealized depreciation on our Credit Facility. No such amounts were incurred in the prior year period.

 

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Comparison of the Nine Months Ended June 30, 2017 to the Nine Months Ended June 30, 2016

 

     For the Nine Months Ended June 30,  
     2017     2016     $ Change     % Change  

INVESTMENT INCOME

        

Interest income, net

   $ 26,850     $ 26,107     $ 743       2.8

Other income

     1,549       3,255       (1,706     (52.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     28,399       29,362       (963     (3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee

     4,217       4,258       (41     (1.0

Loan servicing fee

     3,009       2,876       133       4.6  

Incentive fee

     3,479       3,369       110       3.3  

Administration fee

     858       900       (42     (4.7

Interest expense on borrowings

     2,047       2,066       (19     (0.9

Dividend expense on mandatorily redeemable preferred stock

     3,087       3,088       (1     0.0  

Amortization of deferred financing fees

     821       802       19       2.4  

Other expenses

     1,439       2,031       (592     (29.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     18,957       19,390       (433     (2.2

Credits to base management fee—loan servicing fee

     (3,009     (2,876     (133     4.6  

Credits to fees from Adviser—other

     (3,494     (1,736     (1,758     101.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     12,454       14,778       (2,324     (15.7
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     15,945       14,584       1,361       9.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized (loss) gain on investments

     (3,426     9,837       (13,263     (134.8

Net realized loss on other

     —         (64     64       100.0  

Net unrealized depreciation of investments

     (713     (33,747     33,034       97.9  

Net unrealized depreciation (appreciation) of other

     (71     62       (133     (214.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from investments and other

     (4,210     (23,912     19,702       (82.4
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 11,735     $ (9,328   $ 21,063       (225.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

NM = Not Meaningful

Investment Income

Interest income, net increased by 2.8% for the nine months ended June 30, 2017, as compared to the prior year period. This increase was due primarily to a higher weighted average yield as the weighted average principal balance was relatively consistent period over period. The weighted average yield on our interest-bearing investment portfolio is based on the current stated interest rate on interest-bearing investments and increased to 11.5% for the nine months ended June 30, 2017 compared to 11.1% for the nine months ended June 30, 2016 inclusive of any allowances on interest receivables made during that period. The weighted average principal balance of our interest-bearing investment portfolio during the nine months ended June 30, 2017 was $312.5 million, compared to $313.5 million for the prior year period, a slight decrease of 0.3%.

Other income decreased by 52.4% during the nine months ended June 30, 2017, as compared to the prior year period. For the nine months ended June 30, 2017, other income consisted primarily of $1.5 million in success fees recognized. For the nine months ended June 30, 2016, other income consisted primarily of $2.8 million in success fees recognized, $0.3 million in dividend income received, and $0.2 million in prepayment fees received.

 

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

 

     As of June 30, 2017     Nine Months Ended
June 30, 2017
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

NetFortris Corp.

   $ 24,120        7.0   $ 928        3.3

IA Tech, LLC

     23,518        6.8       2,094        7.4  

HB Capital Resources, Ltd. (A)

     22,000        6.4       462        1.6  

WadeCo Specialties, Inc.

     21,208        6.1       1,435        5.0  

Lignetics, Inc.

     18,746        5.4       1,331        4.7  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     109,592        31.7       6,250        22.0  

Other portfolio companies

     235,911        68.3       22,149        78.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 345,503        100.0   $ 28,399        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 
     As of June 30, 2016     Nine Months Ended
June 30, 2016
 

Company

   Fair Value      % of Portfolio     Investment Income      % of Total
Income
 

IA Tech, LLC (A)

   $ 30,000        9.7   $ 40        0.1

RBC Acquisition Corp.

     22,090        7.2       2,159        7.3  

WadeCo Specialties, Inc.

     19,630        6.4       1,563        5.3  

United Flexible, Inc.

     17,304        5.6       1,544        5.3  

Lignetics, Inc.

     15,499        5.0       1,279        4.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal—five largest investments

     104,523        33.9       6,585        22.4  

Other portfolio companies

     203,703        66.1       22,777        77.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Portfolio

   $ 308,226        100.0   $ 29,362        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(A)   New investment during the applicable period.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, decreased for the nine months ended June 30, 2017 by 15.7%, as compared to the prior year period. This decrease was primarily due to decreases in professional fees and shareholder related costs.

Net base management fee earned by the Adviser decreased by $0.9 million, or 24.3%, during the nine months ended June 30, 2017, as compared to the prior year period, resulting from an increase in portfolio company fee credits due to new investments made in the current year period.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits totaling $2.0 million from the Adviser to reduce the income-based incentive fee to the extent that net investment income did not cover 100.0% of the distributions to common stockholders during the nine months ended June 30, 2017. The credits granted during the nine months ended June 30, 2016, totaled $1.1 million.

 

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Base management, loan servicing and incentive fees and associated non-contractual, unconditional and irrevocable credits are computed quarterly, as described under  “Transactions with the Adviser”  in Note 4— Related Party Transactions  of the notes to our accompanying  Condensed Consolidated Financial Statements  and are summarized in the following table:

 

     Nine Months Ended
June 30,
 
     2017     2016  

Average total assets subject to base management fee (A)

   $ 321,295     $ 324,419  

Multiplied by prorated annual base management fee of 1.75%

     1.3125     1.3125
  

 

 

   

 

 

 

Base management fee (B)

   $ 4,217     $ 4,258  

Portfolio company fee credit

     (1,344     (553

Syndicated loan fee credit

     (122     (73
  

 

 

   

 

 

 

Net Base Management Fee

   $ 2,751     $ 3,632  
  

 

 

   

 

 

 

Loan servicing fee (B)

     3,009       2,876  

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

     (3,009     (2,876
  

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —    
  

 

 

   

 

 

 

Incentive fee (B)

     3,479       3,369  

Incentive fee credit

     (2,028     (1,110
  

 

 

   

 

 

 

Net Incentive Fee

   $ 1,451     $ 2,259  
  

 

 

   

 

 

 

Portfolio company fee credit

     (1,344     (553

Syndicated loan fee credit

     (122     (73

Incentive fee credit

     (2,028     (1,110
  

 

 

   

 

 

 

Credit to Fees From Adviser—other (B)

   $ (3,494   $ (1,736
  

 

 

   

 

 

 

 

(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  Condensed Consolidated Statements of Operations .

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the nine months ended June 30, 2017, we recorded a net realized loss on investments of $3.4 million, which resulted primarily from the sale of substantially all the assets of RBC for a $2.3 million realized loss and the write-off of $5.0 million of our investment in Sunshine Media Holdings (“Sunshine”), partially offset by the sale of Behrens for a $2.5 million realized gain and a $1.2 million realized gain related to an additional earn-out from Funko, LLC (“Funko”), which was exited in the prior year.

For the nine months ended June 30, 2016, we recorded a net realized gain on investments of $9.8 million, which resulted primarily from a realized gain of $16.9 million from the sale of Funko, partially offset by a realized loss of $5.5 million recognized from the restructure of Targus Group International, Inc. (“Targus”) and a realized loss of $2.4 million from our sale of Heartland Communications Group, LLC during the period.

 

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Net Unrealized Appreciation (Depreciation) of Investments

The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2017, were as follows:

 

     Nine Months Ended June 30, 2017  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

WadeCo Specialties, Inc.

   $ —       $ 1,850     $ —       $ 1,850  

SourceHOV LLC

     —         1,756       —         1,756  

B+T Group Acquisition Inc.

     —         1,524       —         1,524  

Funko Acquisition Holdings, LLC

     1,235       (20     —         1,215  

Defiance Integrated Technologies, Inc.

     —         1,009       —         1,009  

The Mochi Ice Cream Company

     —         670       —         670  

LWO Acquisitions Company LLC

     —         467       —         467  

Vitera Healthcare Solutions, LLC

     —         213       115       328  

FedCap Partners, LLC

     —         297       —         297  

IA Tech, LLC

     —         288       —         288  

PIC 360, LLC

     —         173       —         173  

Drumcree, LLC

     —         169       —         169  

Travel Sentry, Inc.

     —         133       —         133  

Lignetics, Inc.

     —         (175     —         (175

Canopy Safety Brands, LLC

     —         (206     —         (206

PSC Industrial Holdings Corp.

     —         (269     —         (269

Flight Fit N Fun LLC

     —         (522     —         (522

Edge Adhesives Holdings, Inc.

     —         (546     —         (546

New Trident Holdcorp, Inc.

     —         (574     —         (574

Behrens Manufacturing, LLC

     2,544       —         (3,211     (667

Targus Cayman HoldCo, Ltd.

     —         (800     —         (800

Sunshine Media Holdings

     (5,000     449       3,612       (939

RBC Acquisition Corp.

     (2,330     —         1,119       (1,211

Vertellus Specialties Inc.

     108       (1,464     —         (1,356

Alloy Die Casting, Corp.

     —         (1,875     —         (1,875

Francis Drilling Fluids, Ltd.

     —         (5,583     —         (5,583

Other, net (<$250)

     17       718       (30     705  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   $ (3,426   $ (2,318   $ 1,605     $ (4,139
  

 

 

   

 

 

   

 

 

   

 

 

 

The largest driver of our net unrealized depreciation for the nine months ended June 30, 2017 was derived from a decline in financial and operation performance of certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably Francis Drilling Fluids, Ltd. of $5.6 million and Alloy Die Cast, Co. of $1.9 million. This depreciation was largely offset by the unrealized appreciation resulting from an increase in performance on certain portfolio companies, most notably WadeCo Specialties, Inc. of $1.9 million and SourceHOV LLC of $1.8 million and the reversal of previously recorded depreciation on our investment in Sunshine upon partial write-off.

 

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The net realized gain (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2016, were as follows:

 

     Nine Months Ended June 30, 2016  

Portfolio Company

   Realized Gain
(Loss)
    Unrealized
Appreciation
(Depreciation)
    Reversal of
Unrealized
Depreciation
(Appreciation)
    Net Gain
(Loss)
 

Legend Communications of Wyoming, LLC

   $ —       $ 2,857     $ 27     $ 2,884  

Behrens Manufacturing, LLC

     —         2,008       —         2,008  

Funko, LLC

     16,887       66       (16,009     944  

Southern Petroleum Laboratories, Inc.

     —         871       —         871  

Westland Technologies, Inc.

     —         622       —         622  

J. America, Inc.

     —         482       —         482  

Triple H Food Processors

     —         450       —         450  

Mikawaya

     —         (282     —         (282

Ashland Acquisitions, LLC

     72       183       (572     (317

United Flexible, Inc.

     —         (329     —         (329

FedCap Partners, LLC

     —         (381     —         (381

Vitera Healthcare Solutions, LLC

     —         (475     —         (475

New Trident Holdcorp, Inc.

     —         (561     —         (561

Lignetics, Inc.

     —         (573     —         (573

AG Transportation Holdings, LLC

     —         (584     —         (584

Vertellus Specialties Inc.

     —         (882     —         (882

Vision Government Solutions, Inc.

     —         (986     —         (986

WadeCo Specialties, Inc.

     —         (1,082     —         (1,082

Precision Acquisition Group Holdings, Inc.

     —         (1,282     —         (1,282

SourceHOV LLC

     —         (1,722     —         (1,722

RBC Acquisition Corp.

     1,207       (3,183     —         (1,976

Sunshine Media Holdings

     —         (2,593     —         (2,593

LWO Acquisitions Company LLC

     —         (3,474     —         (3,474

Targus Cayman HoldCo, Ltd.

     (5,500     (2,530     4,198       (3,832

Defiance Integrated Technologies, Inc.

     —         (4,348     —         (4,348

Francis Drilling Fluids, Ltd.

     —         (5,840     —         (5,840

Other, net (<$250)

     (2,829     (727     2,904       (652
  

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   $ 9,837     $ (24,295   $ (9,452   $ (23,910
  

 

 

   

 

 

   

 

 

   

 

 

 

The largest driver of our net unrealized depreciation for the nine months ended June 30, 2016 was derived from a decline in financial and operation performance of certain portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably Francis Drilling Fluids, Ltd. of $5.8 million and Defiance Integrated Technologies, Inc. of $4.3 million. The change was also driven by the reversal of $16.0 million of previously recorded unrealized appreciation on our investment in Funko upon exit. This depreciation was partially offset by the unrealized appreciation resulting from an increase in performance on certain portfolio companies, most notably Behrens of $2.9 million and the reversal of $4.1 million of previously recorded unrealized depreciation on our investment in Targus upon restructure.

Net Realized Loss on Other

During the nine months ended June 30, 2016, we recorded a net realized loss of $0.1 million, due to the expiration of our interest rate cap agreement in January 2016. No such amounts were incurred during the nine months ended June 30, 2017.

 

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Net Unrealized Depreciation of Other

During the nine months ended June 30, 2017, we recorded $0.1 million of net unrealized depreciation on our Credit Facility recorded at fair value. During the nine months ended June 30, 2016, we reversed $0.1 million of unrealized depreciation related to the expiration of our interest rate cap agreement in January 2016.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management fees to the Adviser, and for other operating expenses. Net cash used in operating activities for the nine months ended June 30, 2017 was $14.0 million as compared to net cash provided by operating activities of $51.9 million for the nine months ended June 30, 2016. The change was primarily due to the increase in purchases of investments and the decrease in net unrealized depreciation period over period. Purchases of investments were $95.4 million during the nine months ended June 30, 2017 compared to $59.9 million during the prior year period. Net unrealized depreciation totaled $0.7 million during the nine months ended June 30, 2017 compared to $33.7 million during the prior year period.

As of June 30, 2017, we had loans to, syndicated participations in or equity investments in 47 private companies, with an aggregate cost basis of approximately $405.9 million. As of June 30, 2016, we had loans to, syndicated participations in or equity investments in 43 private companies, with an aggregate cost basis of approximately $386.3 million.

The following table summarizes our total portfolio investment activity during the nine months ended June 30, 2017 and 2016:

 

     Nine Months Ended
June 30,
 
     2017      2016  

Beginning investment portfolio, at fair value

   $ 322,114      $ 365,891  

New investments

     85,241        54,300  

Disbursements to existing portfolio companies

     10,208        5,562  

Scheduled principal repayments

     (3,196      (1,169

Unscheduled principal repayments

     (59,596      (77,427

Net proceeds from sales

     (8,289      (19,829

Net unrealized (depreciation) appreciation

     (2,318      (24,295

Reversal of prior period (appreciation) depreciation

     1,605        (9,452

Net realized gain (loss)

     (3,426      9,837  

Increase in investments due to PIK (A)  or other

     3,599        4,311  

Cost adjustments on non-accrual loans

     —          388  

Net change in premiums, discounts and amortization

     (439      109  
  

 

 

    

 

 

 

Investment Portfolio, at Fair Value

   $ 345,503      $ 308,226  
  

 

 

    

 

 

 

 

(A)   Paid-in-kind (“PIK”) interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.

 

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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2017:

 

     Amount  

For the remaining three months ending
September 30:

   2017    $ 6,499  

For the fiscal year ending September 30:

   2018      56,527  
   2019      57,209  
   2020      81,213  
   2021      60,973  
   Thereafter      112,663  
     

 

 

 
  

Total contractual repayments

   $ 375,084  
   Equity investments      36,786  
   Adjustments to cost basis on debt investments      (5,967
     

 

 

 
  

Cost basis of investments held at June 30, 2017:

   $ 405,903  
     

 

 

 

Financing Activities

Net cash provided by financing activities totaled $14.9 million for the nine months ended June 30, 2017 and consisted primarily of net borrowings on our Credit Facility of $10.9 million and $20.0 million in net proceeds from our common stock offerings, partially offset by $15.9 million of distributions to common shareholders. Net cash used in financing activities totaled $50.7 million for the nine months ended June 30, 2016 and consisted primarily of net repayments on our Credit Facility of $54.0 million and $14.6 million of distributions to common stockholders, partially offset by $18.5 million in net proceeds from our common stock offering during the nine months ended June 30, 2016.

Distributions and Dividends to Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our investment company taxable income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of $0.07 per common share for each month during the nine months ended June 30, 2017 and 2016, which totaled an aggregate of $15.9 million and $14.6 million, respectively. In July 2017, our Board of Directors declared a monthly distribution of $0.07 per common share for each of July, August, and September 2017. Our Board of Directors declared these distributions based on our estimates of our investment company taxable income for the fiscal year ending September 30, 2017.

For the year ended September 30, 2016, our current and accumulated earnings and profits (after taking into account mandatorily redeemable preferred stock dividends) exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.5 million of the first common distributions paid in fiscal year 2017 as having been paid in the prior year.

The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2017 will be determined 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.

 

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Preferred Stock Dividends

Our Board of Directors declared and we paid monthly cash dividends of $0.140625 per share to holders of our Series 2021 Term Preferred Stock for each of April, May and June 2017. In accordance with GAAP, we treat these monthly dividends as an operating expense. 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.

Equity

Registration Statement

We filed Post-Effective Amendment No. 2 to our current Registration Statement on Form N-2 (File

No. 333-208637) with the SEC on December 22, 2016, which was declared effective by the SEC on February 6, 2017. 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. As of June 30, 2017, we had the ability to issue up to $279.1 million in securities under the Registration Statement.

Common Stock

Pursuant to our current Registration Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their over-allotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

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 program expired on January 31, 2017. During the year ended September 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in aggregate gross purchases of $0.6 million. We did not repurchase any shares during the nine months ended June 30, 2017.

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. In November 2015, the underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

In February 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 had the ability to issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million of our common stock. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement remained unchanged. We did not sell any shares under the Sales Agreements during the year ended September 30, 2016 or the six months ended March 31, 2017. During the three months ended June 30, 2017, we sold 362,600 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.89 per share and raised $3.6 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $3.4 million. As of June 30, 2017, we had a remaining capacity to sell up to $45.2 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co.

 

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We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. We completed the abovementioned October 2016 common stock offering as a result of the stockholder approval of the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We did not request that our stockholders approve the Company’s ability to issue shares of common stock at a price below NAV at our annual meeting of stockholders held on February 9, 2017. Should we decide to issue shares of common stock at a price below NAV, we will seek the requisite approval of our stockholders.

On September 18, 2017, the closing market price of our common stock was $9.33, a 11.33% premium to our June 30, 2017 NAV per share of $8.38.

Term Preferred Stock

Pursuant to our prior registration statement on Form N-2, in May 2014, we completed a public offering of approximately 2.4 million shares of our Series 2021 Term Preferred Stock, par value $0.001 per share, at a public offering price of $25.00 per share and a 6.75% rate. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share, and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility.

Our Series 2021 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend rate equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on each such share accumulated to (but excluding) the date of redemption (the “Series 2021 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 Series 2021 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 of at least 200% on our “senior securities that are stock” (which, currently is only the 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 Series 2021 Redemption Price at any time after June 30, 2017. The asset coverage on our “senior securities that are stock” (thus, our Series 2021 Term Preferred Stock) as of June 30, 2017 was 249.6%.

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 4.00% for so long as such failure continues. As of June 30, 2017, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank, as administrative agent, lead arranger and a lender, which increased the commitment amount of our Credit Facility from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to 30-day LIBOR from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and

 

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amended other terms and conditions to among other items. 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 April 19, 2020. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 19, 2019. On June 19, 2015, we, through Business Loan, entered into certain joinder and assignment agreements with three new lenders to increase borrowing capacity on 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.

On October 9, 2015 and August 18, 2016, we entered into Amendments No. 1 and 2 to our Credit Facility, respectively, each of which clarified various constraints on available borrowings.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected 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 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50% 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 $225.0 million as of June 30, 2017, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

On August 24, 2017 we, through Business Loan, entered into Amendment No. 3 (the “Amendment”) to our Credit Facility with KeyBank National Association, as administrative agent, swingline lender, managing agent and lead arranger.

Primarily, the Amendment adjusted the calculation of the borrowing base of the Credit Facility and clarified the application of excess concentrations. The Amendment also, among other items, increased the excess concentration limits for PIK loans and updated the commitment amounts for the Lenders. As of August 23, 2017, prior to the closing of the Amendment, $76.5 million of borrowings were outstanding under the Credit Facility.

As of June 30, 2017, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $275.6 million, asset coverage on our “senior securities representing indebtedness” of 434.4% and an active

 

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status as a BDC and RIC. In addition, we had 32 obligors in our Credit Facility’s borrowing base as of June 30, 2017. As of June 30, 2017, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings  of the notes to our accompanying  Consolidated Financial Statements  included elsewhere in this prospectus supplement for additional information regarding our Credit Facility.

Off-Balance Sheet Arrangements

We generally recognize success fee income only when the payment has been received. As of June 30, 2017 and September 30, 2016, we had off-balance sheet success fee receivables on our accruing debt investments of $3.8 million and $3.4 million (or approximately $0.15 per common share and $0.14 per common share), respectively, that would be owed to us based on our current portfolio if fully paid off. Consistent with GAAP, we have not recognized our success fee receivable on our balance sheet or income statement. Due to our success fees’ contingent nature, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.

Contractual Obligations

We have lines of credit, delayed draw term loans, 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 loans and the uncalled capital commitment as of June 30, 2017 and September 30, 2016 to be immaterial. The following table shows our contractual obligations as of June 30, 2017, at cost:

 

     Payments Due by Fiscal Years  

Contractual Obligations (A)

   Less than
1 Year
     1-3 Years      4-5 Years      After 5 Years      Total  

Credit Facility (B)

   $ —        $ 82,200      $ —        $ —        $ 82,200  

Series 2021 Term Preferred Stock

     —          —          61,000        —          61,000  

Interest expense on debt obligations (C)

     2,076        17,933        3,088        —          23,097  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,076      $ 100,133      $ 64,088      $ —        $ 166,297  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A)   Excludes unused line of credit commitments, an unused delayed draw term loan and an uncalled capital commitment to our portfolio companies in the aggregate principal amount of $11.6 million as of June 30, 2017.
(B)   Principal balance of borrowings under our Credit Facility as of June 30, 2017, based on the current revolving period end date of January 19, 2019.
(C)   Includes estimated interest payments on our Credit Facility and distribution obligations on our Series 2021 Term Preferred Stock. The amount of interest expense calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2017. Dividend payments on our Series 2021 Term Preferred Stock assume quarterly declarations and monthly dividend payments through the date of mandatory redemption.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”) as our most critical accounting policy.

 

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Investment Valuation

Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Refer to Note 2— Summary of Significant Accounting Policies  and Note 3— Investments  in the notes to our accompanying  Consolidated Financial Statements  included elsewhere in this prospectus supplement for additional information regarding fair value measurements.

Credit Monitoring and Risk Rating

The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.

The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all proprietary loans in our portfolio at June 30, 2017 and September 30, 2016, representing approximately 90.0% of the principal balance of all debt investments in our portfolio at the end of each period:

 

    

As of

June 30,

    

As of

September 30,

 

Rating

   2017      2016  

Highest

     9.0        8.0  

Average

     5.4        5.3  

Weighted Average

     5.5        5.3  

Lowest

     1.0        1.0  

 

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The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO at June 30, 2017 and September 30, 2016, representing approximately 8.2% and 7.3%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

    

As of

June 30,

    

As of

September 30,

 

Rating

   2017      2016  

Highest

     5.0        5.0  

Average

     4.3        3.9  

Weighted Average

     4.2        4.0  

Lowest

     3.0        2.0  

The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO at June 30, 2017 and September 30, 2016, representing approximately 1.8% and 2.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

 

    

As of

June 30,

    

As of

September 30,

 

Rating

   2017      2016  

Highest

     6.0        5.0  

Average

     4.5        4.0  

Weighted Average

     4.1        3.5  

Lowest

     3.0        3.0  

Tax Status

We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 9— Distributions to Common Stockholders  in the notes to our accompanying  Consolidated Financial Statements  included elsewhere in this prospectus supplement for additional information regarding our tax status.

Revenue Recognition

Interest Income Recognition

Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of OID, and 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 debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. 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. We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an investment’s exit, based on the prepayment fee schedule. Success fees, prepayment fees and dividend income are all recorded in other income in our accompanying  Condensed Consolidated Statements of Operations .

Refer to Note 2— Summary of Significant Accounting Policies  in the notes to our accompanying  Consolidated Financial Statements  included elsewhere in this prospectus supplement for additional information regarding revenue recognition.

 

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Recent Accounting Pronouncements

Refer to Note 2— Summary of Significant Accounting Policies  in the notes to our accompanying  Consolidated Financial Statements  included elsewhere in this prospectus supplement for a description and our application of recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques from time to time to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

All of our variable-rate debt investments have rates generally associated with either the current LIBOR or prime rate. As of June 30, 2017, our portfolio of debt investments on a principal basis consisted of the following:

 

Variable rates

     89.3

Fixed rates

     10.7  
  

 

 

 

Total:

     100.0
  

 

 

 

There have been no material changes in the quantitative and qualitative market risk disclosures for the nine months ended June 30, 2017 from that disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016.

 

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SUPPLEMENTAL PORTFOLIO INFORMATION

The following table sets forth certain information as of June 30, 2017 regarding each portfolio company in which we held a debt or equity security as of such date. All such investments were made in accordance with our investment policies and procedures described in this prospectus supplement and in the accompanying prospectus.

(Dollars in thousands)

 

Company

 

Industry

 

Investment

  % of
Class Held on
a Fully
Diluted Basis
    Cost     Fair Value  
NON-CONTROL/NON-AFFILIATE INVESTMENTS                      

Non-syndicated Loans:

         

AG Transportation Holdings, LLC

  Cargo Transportation   Secured Second Lien Debt       13,000       13,065  

2430 Lincolnway East

    Member Profit Participation     18.00     1,000       0  

Goshen, IN 46526

    Profit Participation Warrants     7.00     244       0  

Alloy Die Casting Corp.

  Diversified / conglomerate manufacturing   Secured First Lien Debt       5,235       3,665  

6550 Caballero Blvd.

    Secured First Lien Debt       75       53  

Buena Park, Ca 90620

    Secured First Lien Debt       390       275  
    Preferred Stock     29.60     2,192       0  
    Common Stock     29.50     18       0  

B+T Group Acquistion Inc.

  Telecommunications   Secured First Lien Debt       6,000       5,940  

1717 Boulder Ave #3000

    Preferred Stock     13.94     1,799       1,374  

Tulsa, OK 74119

         

Belnick, Inc.

  Home and Office Furnishings, Housewares and Durable Consumer Products   Secured Second Lien Debt       10,000       10,025  

4350 Ball Ground Hwy

         

Canton, GA 30114

         

Canopy Safety Brands, LLC

  Personal and non-durable consumer products   Secured First Lien Line of Credit       0       0  

322 Industrial Court

    Secured First Lien Debt       6,850       6,859  

Concord, NC 28025

    Participation Warrant     5.94     500       286  

Chinese Yellow Pages Company

  Printing and publishing   Secured First Lien Line of Credit       107       0  

9550 Flair Drive Suite 200

         

El Monte, CA 91731

         

Drumcree, LLC

  Broadcasting and Entertainment   Secured First Lien Debt       6,177       6,192  

6805 Douglas Legum Drive, Suite 100

         

Elkridge, MD 21075

         

Flight Fit N Fun LLC

  Leisure, Amusement, Motion Pictures, Entertainment   Secured First Lien Debt       7,800       7,488  

7200 Fullerton Road

    Preferred Stock     28.00     700       759  

Springfield, VA 22150

         

Francis Drilling Fluids, Ltd.

  Oil and gas   Secured Second Lien Debt       16,103       5,685  

240 Jasmine Road

    Secured Second Lien Debt       7,459       2,634  

Crowley, LA 70526

    Preferred Equity Units     4.57     1,215       0  
    Common Equity Units     3.90     1       0  

Funko Acquisition Holdings, LLC

  Personal and non-durable consumer products   Preferred Equity Units     0.10     167       245  

1202 Shuksan Way

    Common Stock     0.40     0       0  

Everett, WA 98203

         

GFRC Holdings, LLC

  Buildings and real estate   Secured First Lien Line of Credit       1,105       1,105  

3615 Miller Park Dr.

    Secured First Lien Debt       1,000       1,000  

Garland, TX 75042

    Preferred Stock     100.00     1,025       869  
    Common Stock Warrants     45.00     0       0  

HB Capital Resources, Ltd.

 

Diversified/conglomerate

service

  Secured Second Lien Debt       22,000       22,000  

2999 Oak Road, Suite 710

         

Walnust Creek, CA 94597

         

 

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Company

 

Industry

 

Investment

  % of
Class Held on
a Fully
Diluted Basis
    Cost     Fair Value  
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued)                      

IA Tech, LLC

 

Diversified/conglomerate

service

  Secured First Lien Debt       23,000       23,518  

1690 Roberts Blvd, Suite 108

         

Kennesaw, GA 30144

         

Leeds Novamark Capital I, L.P.

  Private equity fund—healthcare, education and childcare   Limited Partnership Interest     3.46     1,414       1,303  

350 Park Avenue, 23 rd Floor

         

New York, NY 10022

         

Meridian Rack & Pinion, Inc.

  Automobile   Secured First Lien Debt       4,140       3,726  

6740 Cobra Way

    Preferred Stock     23.30     1,449       429  

San Diego, CA 92121

         

Merlin International, Inc

  Healthcare, education, and childcare   Secured Second Lien Debt       10,000       10,112  

8219 Leesburg Pike, Suite 400

         

Vienna, VA 22182

         

The Mochi Ice Cream Company

  Beverage, Food and Tobacco   Secured Second Lien Debt       6,750       6,885  

5563 Alcoa Avenue

    Common Stock     2.49     450       606  

Vernon, CA 90058

         

NetFortris Corp.

  Telecommunications   Secured First Lien Line of Credit       0       0  

800 S Michigan St

    Secured First Lien Debt       24,000       24,120  

Seattle, WA 98108

    Common Stock Warrant     0.00     1       0  

Precision International, LLC

  Machinery   Secured First Lien Debt       795       789  

435 Burt Street

    Membership Unit Warrant     33.33     0       0  

Sistersville, WV 26175

         

Sea Link International IRB, Inc.

  Automobile   Secured Second Lien Debt       5,000       5,037  

13151 66th St N.

Largo, FL 33773

    Secured Second Lien Delayed Draw Term Loan       0       0  
    Common Equity Units     1.70     240       177  

Travel Sentry, Inc

  Diversified/ conglomerate service   Secured First Lien Debt       8,902       9,047  

110 SE 6th Street, Suite 1754

         

Fort Lauderdale, FL 33301

         

Triple H Food Processor

  Beverage, Food and Tobacco   Secured First Lien Line of Credit       0       0  

5821 Wilderness Avenue

    Secured First Lien Debt       7,000       7,166  

Riverside, CA 92504

    Common Stock     5.69     250       452  

TWS Acquisition Corporation

  Healthcare, Education, and Childcare   Secured First Lien Line of Credit       0       0  

120 N. 44th Street, Suite 230

    Secured First Lien Debt       9,432       9,598  

Phoenix, AZ 85034

         

United Flexible, Inc

  Diversified/conglomerate manufacturing   Secured Second Lien Debt       17,815       17,723  

815 Forestwood Drive

    Preferred Stock     1.19     538       479  

Romeoville, IL 60446

    Common Stock     1.07     148       0  

Vacation Rental Pros Property Management, LLC

 

 

Hotels, motels, inns, and gaming

  Secured Second Lien Debt       7,091       7,091  

200 Executive Way #200

         

Ponte Vedra, FL 32082

         

Vision Government Solutions Inc.

  Diversified/conglomerate service   Secured First Lien Line of Credit       1,450       1,399  

44 Bearfoot Road

Northboro, MA 01532

    Secured First Lien Delayed Draw Term Loan       1,600       1,450  
    Secured First Lien Debt       9,000       8,261  

 

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Company

 

Industry

 

Investment

  % of
Class Held on
a Fully
Diluted Basis
    Cost     Fair Value  
NON-CONTROL/NON-AFFILIATE INVESTMENTS (Continued)                      

WadeCo Specialties, Inc.

  Oil and gas   Secured First Lien Line of Credit       2,575       2,510  

480 Frelinghuysen Avenue

    Secured First Lien Debt       10,671       10,424  

Newark, NJ 07114

    Secured First Lien Debt       7,000       6,720  
    Preferred Stock     3.13     618       1554  

Subtotal – Non-syndicated loans

          273,491       250,095  

Syndicated Investments:

         

DataPipe, Inc

  Diversified/conglomerate service   Secured Second Lien Debt       1,962       2,005  

10 Exchange Place

         

Jersey City, NJ 07302

         

Keystone Acquisition Corp.

  Diversified/conglomerate service   Secured Second Lien Debt       3,921       3,960  

3204 McKnight E Drive

         

Pittsburgh, PA 15237

         

LDiscovery, LLC

  Diversified/conglomerate service   Secured Second Lien Debt       4,810       4,700  

8201 Greensboro Drive, Suite 717

         

McLean, VA 22102-3810

         

Medical Solutions Holdings, Inc.

  Healthcare, education and childcare   Secured Second Lien Debt       2,955       3,000  

1010 North 102nd Street, Suite 300

         

Omaha, NE 68114

         

NetSmart Technologies, Inc

  Healthcare, education and childcare   Secured Second Lien Debt       3,607       3,642  

4950 College Boulevard

         

Overland Park, KS 66211

         

New Trident Holdcorp, Inc.

  Healthcare, education and childcare   Secured Second Lien Debt       3,984       2,700  

920 Ridgebrook Road, 2 nd Floor

         

Sparks, MD 21152

         

Edmentum Ultimate Holdings, LLC

  Healthcare, education and childcare   Unsecured Debt       3,241       3,249  

5600 W 83 rd Street

    Common Stock     2.10     2,636       0  

Bloomington, MN 55437

         

PSC Industrial Holdings Corp

  Diversified/conglomerate services   Secured Second Lien Debt       3,450       3,010  

5151 San Felipe, Suite 1100

         

Houston, TX 77056

         

SourceHOV LLC

  Finance   Secured Second Lien Debt       4,879       4,781  

2701 E. Grauwyler Road

         

Irving, TX 75061

         

The Active Network, Inc.

  Electronics   Secured Second Lien Debt       519       517  

10182 Telesis Court, Suite 100

         

Irevie, CA 92618

         

Vertellus Holdings LLC

  Chemicals, Plastics and Rubber   Secured Second Lien Debt       1,099       923  

1500 S Tibbs Ave

    Common Stock Units     0.88     3,018       440  

Indianapolis, IN 46241

         

W3 Co.

  Oil and gas  

Common Equity

      499       139  

11111 Wilcrest Green Drive #300

         

Houston, TX 77042

         
       

 

 

   

 

 

 

Subtotal – Syndicated loans

        $ 40,580     $ 33,066  
       

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments (represented 81.9% of total investments at fair value)

    $ 314,071     $ 283,161  
   

 

 

   

 

 

 

 

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Company

 

Industry

 

Investment

  % of
Class Held on
a Fully
Diluted Basis
    Cost     Fair Value  
AFFILIATE INVESTMENTS                      

Edge Adhesives Holdings, Inc.

  Diversified/conglomerate manufacturing   Secured First Lien Debt       6,200       5,642  

30 Amberwood Parkway

    Secured First Lien Debt       1,600       1,464  

Ashland, OH 44805

    Preferred Stock     25.16     2,516       0  

FedCap Partners, LLC

  Private equity fund – aerospace and defense   Class A Membership Units     6.67     1,634       1,562  

11951 Freedom Drive, 13th Fl

         

Reston, VA 20190

         

Lignetics, Inc.

  Diversified/natural resources, precious metals and minerals   Secured Second Lien Debt       6,000       6,000  

11951 Freedom Drive, 13th Fl

    Secured Second Lien Debt       8,000       8,000  

Reston, VA 20190

    Secured Second Lien Debt       3,300       3,300  
    Preferred Stock       800       809  
    Common Stock     9.10     1,855       637  

LWO Acquisitions Company LLC

  Diversified/conglomerate manufacturing   Secured First Lien Line of Credit       2,632       2,206  

1920 Hurd Drive

    Secured First Lien Debt       10,863       9,117  

Irving, TX 75038

    Common Stock     9.99     921       0  

Syndicated Investments:

         

Targus Cayman HoldCo Limited

  Textiles and leather   Secured First Lien Debt       2,553       2,563  

1211 North Miller Street

    Common Stock     5.26     2,343       741  

Anaheim, CA 92806

         
       

 

 

   

 

 

 

Total Affiliate Investments (represented 12.2% of total investments at fair value)

    $ 51,217     $ 42,041  
       

 

 

   

 

 

 
CONTROL INVESTMENTS                      

Defiance Integrated Technologies, Inc.

  Automobile   Secured Second Lien Debt       6,065       6,065  

1090 Perry Street

    Common Stock     76.20     580       4,990  

Defiance, OH 43512

         

PIC 360, LLC

  Machinery   Secured First Lien Debt       4,000       4,000  

843 N Cleveland Massillon Rd

    Common Equity Units     75.00     1       173  

Akron, OH 44333

         

Sunshine Media Holdings

  Printing and publishing   Secured First Lien Line of Credit       1,328       1,328  

735 Broad St, Suite 708

    Secured First Lien Debt       3,525       1,105  

Chattanooga, TN 37402

    Secured First Lien Debt       8,401       2,640  
    Secured First Lien Debt       10,700       0  
    Preferred Stock     97.07     5,275       0  
    Common Stock     74.29     740       0  
    Common Stock Warrants     74.29     0       0  
       

 

 

   

 

 

 

Total Control Proprietary Investments (represented 5.9% of total investments at fair value)

    $ 40,615     $ 20,301  
       

 

 

   

 

 

 

Total Investments

    $ 405,903     $ 345,503  
       

 

 

   

 

 

 

 

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Investment Concentrations

As of June 30, 2017, our portfolio consisted of investments in 47 portfolio companies located in 23 states in 22 different industries, with an aggregate fair value of $345.5 million. The five largest investments at fair value totaled $109.6 million, or 31.7% of our total investment portfolio as of June 30, 2017, as compared to $112.1 million, or 34.8% of our total investment portfolio as of September 30, 2016. As of June 30, 2017 and September 30, 2016, our average investment by obligor was $8.6 million at cost. The following table outlines our investments by security type as of June 30, 2017 and September 30, 2016:

 

    June 30, 2017     September 30, 2016  
    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

  $ 196,107       48.3   $ 171,369       49.6   $ 227,439       59.6   $ 198,721       61.7

Secured second lien debt

    169,769       41.8       152,861       44.2       113,796       29.8       100,320       31.2  

Unsecured debt

    3,241       0.8       3,249       1.0       2,995       0.8       3,012       0.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Investments

    369,117       90.9       327,479       94.8       344,230       90.2       302,053       93.8  

Preferred equity

    18,293       4.5       6,519       1.9       22,988       6.0       10,262       3.2  

Common equity/equivalents

    18,493       4.6       11,505       3.3       14,583       3.8       9,799       3.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity Investments

    36,786       9.1       18,024       5.2       37,571       9.8       20,061       6.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 405,903       100.0   $ 345,503       100.0   $ 381,801       100.0   $ 322,114       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Our investments at fair value consisted of the following industry classifications at June 30, 2017 and September 30, 2016:

 

     June 30, 2017     September 30, 2016  

Industry Classification

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

Diversified/Conglomerate Service

   $ 79,349        23.0   $ 48,898        15.2

Diversified/Conglomerate Manufacturing

     40,624        11.8       50,106        15.6  

Healthcare, education, and childcare

     33,603        9.7       70,577        21.9  

Telecommunications

     31,434        9.1       5,790        1.8  

Oil and gas

     29,666        8.6       31,279        9.7  

Automobile

     20,425        5.9       14,837        4.6  

Diversified natural resources, precious metals and minerals

     18,746        5.4       14,821        4.6  

Beverage, food and tobacco

     15,110        4.3       15,022        4.7  

Cargo Transportation

     13,065        3.8       13,000        4.0  

Home and Office Furnishings, Housewares and Durable Consumer Products

     10,025        2.9       —          —    

Leisure, Amusement, Motion Pictures, Entertainment

     8,247        2.4       8,769        2.7  

Personal and non-durable consumer products

     7,389        2.1       7,858        2.4  

Hotels, motels, inns, and gaming

     7,091        2.1       —          —    

Broadcast and entertainment

     6,192        1.8       4,682        1.5  

Printing and publishing

     5,073        1.5       6,033        1.9  

Machinery

     4,962        1.4       5,597        1.7  

Finance

     4,782        1.4       3,000        0.9  

Textiles and leather

     3,304        1.0       3,836        1.2  

Buildings and real estate

     2,974        0.9       11,223        3.5  

Electronics

     517        0.1       2,980        0.9  

Other, < 2.0%

     2,925        0.8       3,806        1.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 345,503        100.0   $ 322,114        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2017 and September 30, 2016:

 

     June 30, 2017     September 30, 2016  

Geographic Region

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

South

   $ 141,545        41.0   $ 131,181        40.8

West

     104,486        30.2       57,786        17.9  

Midwest

     58,537        16.9       100,142        31.1  

Northeast

     40,935        11.9       33,005        10.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 345,503        100.0   $ 322,114        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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DESCRIPTION OF THE SERIES 2024 TERM PREFERRED STOCK

The following is a brief description of the terms of our Term Preferred Stock, including specific terms of the Series 2024 Term Preferred Stock. This is not a complete description and is subject to, and entirely qualified by reference to, our Articles of Amendment and Restatement, the Articles Supplementary and the exhibits thereto. The form of the Series 2024 Term Preferred Stock Articles Supplementary, and Exhibit A thereto and the TP Articles Supplementary, are attached to this prospectus supplement and the final form of the Series 2024 Term Preferred Stock Articles Supplementary will be filed with the SEC as an exhibit to our registration statement of which this prospectus supplement and the accompanying prospectus are a part. The TP Articles Supplementary, and Appendix A thereto, are filed with the SEC as an exhibit to our registration statement of which this prospectus supplement and the accompanying prospectus are a part. You may obtain copies of these documents as described under “Where You Can Find More Information.” Capitalized terms used, but not defined herein, have the meanings attributed to them in the Articles Supplementary.

General

We are authorized to issue 5,440,000 shares of Term Preferred Stock. 1,610,000 of these shares were classified and designated as 7.125% Series 2016 Term Preferred Stock and we issued 1,539,882 of those shares, which were redeemed in full May 2014 with the offering proceeds from the issuance and sale of our Series 2021 Term Preferred Stock. In connection with such offering, we reclassified and designated 70,188 authorized but unissued shares of Series 2016 Term Preferred Stock as well as 2,390,000 unissued shares of Term Preferred Stock as our Series 2021 Term Preferred Stock and issued 2,200,000 of those shares, which are currently outstanding and anticipated to be redeemed with the proceeds of this offering plus borrowings under our Credit Facility. See “ Use of Proceeds .” On August 29, 2017, we reclassified and designated 20,118 authorized but unissued shares of Series 2021 Term Preferred Stock, and also classified and designation 2,979,882 authorized but unissued shares of Term Preferred Stock of the Company without designation as to series, as shares of Series 2024 Term Preferred Stock. Terms of the Series 2024 Term Preferred Stock are set forth in the Series 2024 Term Preferred Stock Articles Supplementary and Exhibit A attached thereto.

At the time of issuance, any Term Preferred Stock, including the Series 2024 Term Preferred Stock, will be fully paid and non-assessable and will have no preemptive, conversion, or exchange rights or rights to cumulative voting. The Term Preferred Stock will rank equally with shares of all our other preferred stock (collectively, “Preferred Stock”) that might be issued in the future, as to payment of dividends and the distribution of our assets upon dissolution, liquidation or winding up of our affairs. The Term Preferred Stock is, and all other Preferred Stock that we may issue in the future will be, senior as to dividends and distributions to the common stock. We may issue additional series of Term Preferred Stock or other Preferred Stock in the future.

Except in certain limited circumstances, holders of the Term Preferred Stock will not receive certificates representing their ownership interest in such shares, and the shares of Term Preferred Stock will be represented by a global certificate to be held by the Securities Depository for the Term Preferred Stock. The Depository Trust Company will initially act as Securities Depository with respect to the Term Preferred Stock.

Dividends and Dividend Periods

General.  The holders of the Term Preferred Stock will be entitled to receive cumulative cash dividends and distributions on such shares, when, as and if declared by, or under authority granted by, our Board of Directors out of funds legally available for payment and in preference to dividends and distributions on Common Stock, calculated separately for each Dividend Period for such Term Preferred Stock at the Dividend Rate for such Term Preferred Stock in effect during such Dividend Period, in an amount equal to the Liquidation Preference for such Term Preferred Stock. The Dividend Rate is computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends so declared and payable will be paid to the extent permitted under state law and our charter, and to the extent available, in preference to and priority over any dividend declared and payable on the Common Stock.

 

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Fixed Dividend Rate.  The Fixed Dividend Rate is an annual rate of 6.00% for the Series 2024 Term Preferred Stock. The Fixed Dividend Rate for Series 2024 Term Preferred Stock may be adjusted in certain circumstances, including upon the occurrence of certain events resulting in a Default Period (as defined below).

Payment of Dividends and Dividend Periods.  The first Dividend Period for the Series 2024 Term Preferred Stock will commence on September 27, 2017 and end on October 31, 2017 and each subsequent Dividend Period will be a calendar month (or the portion thereof occurring prior to the redemption of such Series 2024 Term Preferred Stock). Dividends will be payable monthly in arrears on the Dividend Payment Date—the last Business Day of the month of the Dividend Period and upon redemption of the Series 2024 Term Preferred Stock. Except for the first Dividend Period, dividends with respect to any monthly Dividend Period will be declared and paid to holders of record of Series 2024 Term Preferred Stock as their names shall appear on our registration books at the close of business on the applicable record date, which shall be such date designated by our Board of Directors that is not more than 20, nor less than 10, calendar days prior to such Dividend Payment Date. We anticipate that dividends with respect to the first Dividend Period of the Series 2024 Term Preferred Stock will be declared in October 2017 and paid on October 31, 2017 to holders of record of such Series 2024 Term Preferred Stock as their names appear on our registration books at the close of business on such date as the Company’s Board of Directors determines.

Only holders of Series 2024 Term Preferred Stock on the record date for a Dividend Period will be entitled to receive dividends and distributions payable with respect to such Dividend Period, and holders of Series 2024 Term Preferred Stock who sell shares before such a record date and purchasers of Series 2024 Term Preferred Stock who purchase shares after such a record date should take the effect of the foregoing provisions into account in evaluating the price to be received or paid for such Series 2024 Term Preferred Stock.

Although dividends will accrue and be paid monthly, the record date for holders of Series 2024 Term Preferred Stock entitled to receive dividend payments may vary from month-to-month. We will notify holders of the Series 2024 Term Preferred Stock of each record date by issuance of a quarterly press release.

Mechanics of Payment of Dividends.  Not later than 12:00 noon, New York City time, on a Dividend Payment Date, we are required to deposit with the Redemption and Paying Agent sufficient funds for the payment of dividends in the form of Deposit Securities. Deposit Securities will generally consist of (1) cash or cash equivalents; (2) direct obligations of the United States or its agencies or instrumentalities that are entitled to the full faith and credit of the United States, which we refer to as the U.S. Government Obligations; (3) any Short-Term Money Market Instrument; (4) investments in money market funds registered under the 1940 Act that qualify under Rule 2a-7 under the 1940 Act or similar investment vehicle described in Rule 12d1-1(b)(2) under the 1940 Act, that invests principally in Short-Term Money Market Instruments or U.S. Government Obligations or any combination thereof; or (5) any letter of credit from a bank or other financial institution that has a credit rating from at least one ratings agency that is the highest applicable rating generally ascribed by such ratings agency to bank deposits or short-term debt of similar banks or other financial institutions, in each case either that is a demand obligation payable to the holder on any Business Day or that has a maturity date, mandatory redemption date or mandatory payment date, preceding the relevant Redemption Date, Dividend Payment Date or other payment date. We do not intend to establish any reserves for the payment of dividends.

All Deposit Securities paid to the Redemption and Payment Agent for the payment of dividends will be held in trust for the payment of such dividends to the holders of Term Preferred Stock. Dividends will be paid by the Redemption and Payment Agent to the holders of Term Preferred Stock as their names appear on our registration books. Dividends that are in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date. Such payments are made to holders of Term Preferred Stock as their names appear on our registration books on such date, not exceeding 20 nor less than 10 calendar days preceding the payment date thereof, as may be fixed by our Board of Directors. Any payment of dividends in arrears will first be credited against the earliest accumulated but unpaid dividends. No interest or sum of money in lieu of interest will be payable in respect of any dividend payment or payments on any Term Preferred Stock which may be in arrears. See “— Adjustment to Fixed Dividend Rate—Default Period .”

 

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Upon failure to pay dividends for at least two years, the holders of Term Preferred Stock will acquire certain additional voting rights or as otherwise entitled under the 1940 Act. See “ —Voting Rights ” below. Such rights shall be the exclusive remedy of the holders of Term Preferred Stock upon any failure to pay dividends on Term Preferred Stock.

Adjustment to Fixed Dividend Rate—Default Period.  Subject to the cure provisions below, a Default Period with respect to Term Preferred Stock will commence on a date we fail to deposit the Deposit Securities as required as described above. A Default Period with respect to a Dividend Default or a Redemption Default shall end on the Business Day on which, by 12:00 noon, New York City time, an amount equal to all unpaid dividends and any unpaid redemption price shall have been deposited irrevocably in trust in same-day funds with the Redemption and Paying Agent. In the case of a Default, the applicable dividend rate for each day during the Default Period will be equal to the Default Rate. The “Default Rate” for any calendar day for the Series 2024 Term Preferred Stock will be equal to the applicable Dividend Rate in effect on such day plus four percent (4.00%) per annum.

No Default Period with respect to a Dividend Default or Redemption Default will be deemed to commence if the amount of any dividend or any redemption price due (if such Default is not solely due to our willful failure) is deposited irrevocably in trust, in same-day funds with the Redemption and Paying Agent by 12:00 noon, New York City time, on a Business Day that is not later than three (3) Business Days after the applicable Dividend Payment Date or Redemption Date, together with an amount equal to the Default Rate applied to the amount and period of such non-payment based on the actual number of calendar days comprising such period divided by 360.

Restrictions on Dividend, Redemption, Other Payments and Issuance of Debt

No full dividends and distributions will be declared or paid on Series 2024 Term Preferred Stock for any Dividend Period, or a part of a Dividend Period, unless the full cumulative dividends and distributions due through the most recent dividend payment dates for all outstanding shares of Preferred Stock (including any shares of other series of Term Preferred Stock) have been, or contemporaneously are, declared and paid through the most recent dividend payment dates for each share of Preferred Stock. If full cumulative dividends and distributions due have not been paid on all outstanding shares of Preferred Stock of any series, any dividends and distributions being declared and paid on Term Preferred Stock will be declared and paid as nearly pro rata as possible in proportion to the respective amounts of dividends and distributions accumulated but unpaid on the shares of each such series of Preferred Stock on the relevant dividend payment date. No holders of Term Preferred Stock will be entitled to any dividends and distributions in excess of full cumulative dividends and distributions as provided in the Articles Supplementary.

For so long as any shares of Term Preferred Stock are outstanding, we will not: (x) declare any dividend or other distribution (other than a dividend or distribution paid in Common Stock) in respect of the Common Stock, (y) call for redemption, redeem, purchase or otherwise acquire for consideration any such Common Stock, or (z) pay any proceeds of the liquidation of the Company in respect of such Common Stock, unless, in each case, (A) immediately thereafter, we will be in compliance with the 200% Asset Coverage limitations set forth under the 1940 Act after deducting the amount of such dividend or distribution or redemption or purchasing price or liquidation proceeds, (B) all cumulative dividends and distributions of shares of all series of Term Preferred Stock and all other series of Preferred Stock, if any, ranking on parity with the Term Preferred Stock due on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition shall have been declared and paid (or shall have been declared and sufficient funds or Deposit Securities as permitted by the terms of such Preferred Stock for the payment thereof shall have been deposited irrevocably with the applicable paying agent) and (C) we have deposited Deposit Securities with the Redemption and Paying Agent in accordance with the requirements described herein with respect to outstanding Term Preferred Stock of any series to be redeemed pursuant to a Term Redemption (as defined below) or Asset Coverage mandatory redemption resulting from the failure to comply with the Asset Coverage as described below for which a Notice of Redemption shall have been given or shall have been required to be given in accordance with the terms described herein on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition.

 

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Except as required by law, we will not redeem any shares of Series 2024 Term Preferred Stock unless all accumulated and unpaid dividends and distributions on all outstanding shares of Term Preferred Stock and other series of Preferred Stock, if any, ranking on parity with the Term Preferred Stock with respect to dividends and distributions for all applicable past dividend periods (whether or not earned or declared by us) (x) will have been or are contemporaneously paid or (y) will have been or are contemporaneously declared and Deposit Securities or sufficient funds (in accordance with the terms of such Preferred Stock) for the payment of such dividends and distributions will have been or are contemporaneously deposited with the Redemption and Paying Agent or other applicable paying agent, provided, however, that the foregoing will not prevent the purchase or acquisition of outstanding shares of Term Preferred Stock pursuant to an otherwise lawful purchase or exchange offer made on the same terms to holders of all outstanding shares of Term Preferred Stock and any other series of Preferred Stock, if any, for which all accumulated and unpaid dividends and distributions have not been paid.

We may issue debt in one or more classes or series. Under the 1940 Act, we may not (1) declare any dividend with respect to any Preferred Stock if, at the time of such declaration (and after giving effect thereto), Asset Coverage with respect to any of our borrowings that are senior securities representing indebtedness (as defined in the 1940 Act), would be less than 200% (or such other percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a closed-end investment company as a condition of declaring dividends on its Preferred Stock) or (2) declare any other distribution on the Preferred Stock or purchase or redeem Preferred Stock if at the time of the declaration or redemption (and after giving effect thereto), Asset Coverage with respect to such borrowings that are senior securities representing indebtedness would be less than 200% (or such higher percentage as may in the future be specified in or under the 1940 Act as the minimum Asset Coverage for senior securities representing indebtedness of a closed-end investment company as a condition of declaring distributions, purchases or redemptions of its shares). “Senior securities representing indebtedness” generally means any bond, debenture, note or similar obligation or instrument constituting a security (other than shares of capital stock) and evidencing indebtedness and could include our obligations under any borrowings. For purposes of determining Asset Coverage for senior securities representing indebtedness in connection with the payment of dividends or other distributions on or purchases or redemptions of stock, the term senior security does not include any promissory note or other evidence of indebtedness issued in consideration of any loan, extension or renewal thereof, made by a bank or other person and privately arranged, and not intended to be publicly distributed. The term senior security also does not include any such promissory note or other evidence of indebtedness in any case where such a loan is for temporary purposes only and in an amount not exceeding 5% of the value of our total assets at the time when the loan is made; a loan is presumed under the 1940 Act to be for temporary purposes if it is repaid within 60 calendar days and is not extended or renewed; otherwise such loan is presumed not to be for temporary purposes. For purposes of determining whether the 200% statutory Asset Coverage requirements described above apply in connection with dividends or distributions on or purchases or redemptions of Preferred Stock, such Asset Coverage may be calculated on the basis of values calculated as of a time within 48 hours (only including Business Days) next preceding the time of the applicable determination.

Asset Coverage

If we fail to maintain Asset Coverage of at least 200% as of the close of business on the last Business Day of a Calendar Quarter, the Term Preferred Stock may become subject to mandatory redemption as provided below. “Asset Coverage” means asset coverage of a class of senior security which is a stock, as defined for purposes of Sections 18(h) and 61 of the 1940 Act as in effect on the date of the Articles Supplementary, determined on the basis of values calculated as of a time within two days (excluding Sundays and holidays) next preceding the time of such determination. For purposes of this determination, no shares of Series 2021 Term Preferred Stock, if any, will be deemed to be outstanding for purposes of the computation of Asset Coverage if, prior to or concurrently with such determination, either sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Series 2021 Term Preferred Stock) to pay the full redemption price for such Series 2021 Term Preferred Stock (or the portion thereof to be redeemed) will have been deposited in trust with the paying agent for such Series 2021 Term Preferred Stock and the requisite notice of redemption for such Series 2021 Term

 

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Preferred Stock (or the portion thereof to be redeemed) will have been given or sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Series 2021 Term Preferred Stock) to pay the full redemption price for such Series 2021 Term Preferred Stock (or the portion thereof to be redeemed) will have been segregated by us and our custodian from our assets, by means of appropriate identification on the custodian’s books and records or otherwise in accordance with the custodian’s normal procedures. In such event, the Deposit Securities or other sufficient funds so deposited or segregated will not be included as our assets for purposes of the computation of Asset Coverage.

Redemption

Term Redemption.  We are required to provide for the mandatory redemption, or the Term Redemption, of all of the Series 2024 Term Preferred Stock on September 30, 2024, which we refer to as the Term Redemption Date, at a redemption price equal to the Liquidation Preference per share plus an amount equal to all unpaid dividends and distributions on such shares (whether or not earned or declared but excluding interest thereon) up to (but excluding) the Term Redemption Date, which we refer to as the Term Redemption Price.

Mandatory Redemption for Asset Coverage.  If we fail to have Asset Coverage of at least 200% as provided in the Articles Supplementary and such failure is not cured as of the close of business on the Asset Coverage Cure Date, we will fix a redemption date and proceed to redeem the number of shares of Preferred Stock as described below at a price per share equal to the liquidation price per share of the applicable Preferred Stock, which in the case of the Term Preferred Stock is equal to the Liquidation Preference per share plus all unpaid dividends and distributions thereon (whether or not earned or declared but excluding interest thereon) to (but excluding) the date fixed for redemption by our Board of Directors. We will redeem out of funds legally available the number of shares of Preferred Stock (which may include at our sole option any number or proportion of Term Preferred Stock) equal to the lesser of (i) the minimum number of shares of Preferred Stock, the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Asset Coverage Cure Date, would result in us having Asset Coverage of at least 200% (provided, however, that if there is no such minimum number of shares of Preferred Stock the redemption or retirement of which would have such result, all Term Preferred Stock and other shares of Preferred Stock then outstanding shall be redeemed) and (ii) the maximum number of shares of Preferred Stock that can be redeemed out of funds expected to be legally available in accordance with our charter and applicable law. Notwithstanding the foregoing sentence, in the event that shares of Preferred Stock are redeemed pursuant to the Articles Supplementary, we may at our sole option, but are not required to, redeem a sufficient number of shares of Series 2024 Term Preferred Stock that, when aggregated with other shares of Preferred Stock redeemed by us, permits us to have with respect to the shares of Preferred Stock (including Term Preferred Stock) remaining outstanding after such redemption, Asset Coverage on such Asset Coverage Cure Date up to and including 240%. We will effect a redemption on the date fixed by us, which date will not be later than ninety (90) calendar days after the Asset Coverage Cure Date, except that if we do not have funds legally available for the redemption of all of the required number of shares of Series 2024 Term Preferred Stock which have been designated to be redeemed or we otherwise are unable to effect such redemption on or prior to ninety (90) calendar days after the Asset Coverage Cure Date, we will redeem those shares of Series 2024 Term Preferred Stock which we were unable to redeem on the earliest practicable date on which we are able to effect such redemption.

Optional Redemption.  On or after September 30, 2019 (any such date, an Optional Redemption Date), we may redeem in whole or from time to time in part outstanding Series 2024 Term Preferred Stock, at a redemption price equal to the Liquidation Preference,  plus  an amount equal to all unpaid dividends and distributions accumulated up to (but excluding) the Optional Redemption Date plus the optional redemption premium per share (if any) with respect to an optional redemption on the Series 2024 Term Preferred Stock that is effected on the Optional Redemption Date (whether or not earned or declared by us, but excluding interest thereon) (the “Optional Redemption Price”).

 

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Subject to the provisions of the Articles Supplementary and applicable law, our Board of Directors will have the full power and authority to prescribe the terms and conditions upon which shares of Series 2024 Term Preferred Stock will be redeemed from time to time.

We may not on any date deliver a notice of redemption to redeem any shares of Term Preferred Stock pursuant to the optional redemption provisions described above unless on such date we have available Deposit Securities for the Optional Redemption Date contemplated by such notice of redemption having a Market Value not less than the amount due to holders of shares of Term Preferred Stock by reason of the redemption of such shares of Term Preferred Stock on such Optional Redemption Date.

Mandatory Redemption upon Change of Control.  If a Change of Control Triggering Event (as defined below) occurs with respect to the Series 2024 Term Preferred Stock, unless we have exercised our option to redeem such Series 2024 Term Preferred Stock as described above, we will be required to redeem all of the outstanding Series 2024 Term Preferred Stock at a price equal to the Liquidation Preference, plus an amount equal to all unpaid dividends accumulated to (but excluding) the date of redemption (whether or not earned or declared by us, but excluding interest thereon), which we refer to as the Change of Control Redemption Price.

For purposes of the foregoing discussion of the Change of Control Redemption, the following definitions are applicable:

“Change of Control Triggering Event” means the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more series of related transactions, of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole, to any Person, other than us or one of our subsidiaries; (2) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any Person becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock or other Voting Stock into which our Voting Stock is reclassified, consolidated, exchanged or changed, measured by voting power rather than number of shares; (3) we consolidate with, or merge with or into, any Person, or any Person consolidates with, or merges with or into, us, in any such event pursuant to a transaction in which any of our outstanding Voting Stock or the Voting Stock of such other Person is converted into or exchanged for cash, securities or other property, other than any such transaction where the shares of our Voting Stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving Person or any direct or indirect parent company of the surviving Person immediately after giving effect to such transaction; or (4) the adoption of a plan relating to our liquidation or dissolution. Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control Triggering Event under clause (2) above if (i) we become a direct or indirect wholly-owned subsidiary of a holding company and (ii)(A) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (B) immediately following that transaction no Person (other than a holding company satisfying the requirements of this sentence) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company.

“Person” means and includes an individual, a partnership, a trust, a corporation, a limited liability company, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.

“Voting Stock” means, with respect to any specified Person that is a corporation as of any date, the capital stock of such Person that is at the time entitled to vote generally in the election of the directors of such Person.

Redemption  Procedures.  We will file a notice of our intention to redeem with the SEC so as to provide the 30 calendar day notice period contemplated by Rule 23c-2 under the 1940 Act, or such shorter notice period as may be permitted by the SEC or its staff.

 

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If we shall determine or be required to redeem, in whole or in part, shares of Term Preferred Stock, we will deliver a notice of redemption, or a Notice of Redemption, by overnight delivery, by first class mail, postage prepaid or by electronic means to the holders of record of such shares of Term Preferred Stock to be redeemed, or request the Redemption and Paying Agent, on our behalf, to promptly do so by overnight delivery, by first class mail, postage prepaid or by electronic means. A Notice of Redemption will be provided not more than forty five (45) calendar days prior to the date fixed for redemption in such Notice of Redemption, which we refer to as the Redemption Date, provided, however, that, in the event of a Change of Control Redemption for the Series 2024 Term Preferred Stock, the Notice of Redemption will, if mailed prior to the date of consummation of the Change of Control Triggering Event, state that the Change of Control Redemption is conditioned on the Change of Control Triggering Event occurring and, provided further, that if, by the date that is three Business Days prior to the date fixed for redemption in such Notice of Redemption, the Change of Control Triggering Event shall not have occurred, the Redemption Date shall be extended until a date that is no more than three Business Days after the date on which the Change of Control Triggering Event occurs. If fewer than all of the outstanding shares of Series 2024 Term Preferred Stock are to be redeemed pursuant to either the Asset Coverage mandatory redemption provisions or the optional redemption provisions, the shares of Series 2024 Term Preferred Stock to be redeemed will be selected either (1) pro rata among Series 2024 Term Preferred Stock, (2) by lot or (3) in such other manner as our Board of Directors may determine to be fair and equitable. If fewer than all shares of Series 2024 Term Preferred Stock held by any holder are to be redeemed, the Notice of Redemption delivered to such holder shall also specify the number of shares of Series 2024 Term Preferred Stock to be redeemed from such holder or the method of determining such number. We may provide in any Notice of Redemption relating to a redemption contemplated to be effected pursuant to the Articles Supplementary that such redemption is subject to one or more conditions precedent and that we will not be required to effect such redemption unless each such condition has been satisfied at the time or times and in the manner specified in such Notice of Redemption. No defect in any Notice of Redemption or delivery thereof will affect the validity of redemption proceedings except as required by applicable law.

If we give a Notice of Redemption, then at any time from and after the giving of such Notice of Redemption and prior to 12:00 noon, New York City time, on the Redemption Date (so long as any conditions precedent to such redemption have been met or waived by us), we will (i) deposit with the Redemption and Paying Agent Deposit Securities having an aggregate Market Value at the time of deposit no less than the redemption price of the shares of Series 2024 Term Preferred Stock to be redeemed on the Redemption Date and (ii) give the Redemption and Paying Agent irrevocable instructions and authority to pay the applicable redemption price to the holders of shares of Series 2024 Term Preferred Stock called for redemption on the Redemption Date. Notwithstanding the foregoing, if the Redemption Date is the Term Redemption Date, then such deposit of Deposit Securities will be made no later than 15 calendar days prior to the Term Redemption Date.

Upon the date of the deposit of Deposit Securities by us for purposes of redemption of shares of Series 2024 Term Preferred Stock, all rights of the holders of Series 2024 Term Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Term Redemption Price, Mandatory Redemption Price, Optional Redemption Price or Change of Control Redemption Price thereof, as applicable (any of the foregoing referred to in this prospectus supplement as the Redemption Price, and such shares of Series 2024 Term Preferred Stock will no longer be deemed outstanding for any purpose whatsoever (other than the transfer thereof prior to the applicable Redemption Date and other than the accumulation of dividends on such stock in accordance with the terms of the Series 2024 Term Preferred Stock up to (but excluding) the applicable Redemption Date, which accumulated dividends, unless previously or contemporaneously declared and paid as contemplated by the Articles Supplementary, shall be payable only as part of the applicable Redemption Price on the date of redemption). We will be entitled to receive, promptly after the Redemption Date, any Deposit Securities in excess of the aggregate Redemption Price of shares of Series 2024 Term Preferred Stock called for redemption on the Redemption Date. Any Deposit Securities so deposited that are unclaimed at the end of ninety (90) calendar days from the Redemption Date will, to the extent permitted by law, be repaid to us, after which the holders of shares of Series 2024 Term Preferred Stock so called

 

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for redemption shall look only to us for payment of the Redemption Price. We will be entitled to receive, from time to time after the Redemption Date, any interest on the Deposit Securities so deposited.

On or after a Redemption Date, each holder of shares of Series 2024 Term Preferred Stock in certificated form (if any) that are subject to redemption will surrender the certificate(s) evidencing such shares of Series 2024 Term Preferred Stock to us at the place designated in the Notice of Redemption and will then be entitled to receive the Redemption Price, without interest, and in the case of a redemption of fewer than all shares of Series 2024 Term Preferred Stock represented by such certificate(s), a new certificate representing shares of Series 2024 Term Preferred Stock that were not redeemed.

If any redemption for which a Notice of Redemption has been provided is not made by reason of the absence of our legally available funds in accordance with the Articles Supplementary and applicable law, such redemption shall be made as soon as practicable to the extent such funds become available. No Redemption Default will be deemed to have occurred if we have failed to deposit in trust with the Redemption and Paying Agent the applicable Redemption Price with respect to any shares whe